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ED
IT
OR
IA
L
It giv
es me im
men
se pleasu
re to p
lace the m
aiden
issue o
f our jo
urn
al ‘Vig
nan
a Jyoth
i Journ
al of
Man
agem
ent’ in
your h
ands.
A research
journ
al of an
y B
school is its in
tellectual cap
ital. Lately, B
schools are b
eing ju
dged
not
only
on th
e basis o
f quality
of teach
ing b
ut also
on th
e basis o
f enco
urag
emen
t that th
ey g
ive to
research.
This o
ften g
ets man
ifested in
the q
uality
research u
ndertak
en b
y th
e faculty
and also
in th
e platfo
rm
that is created
to sh
are the research
undertak
en b
y th
e faculty
of o
ther p
restigio
us B
schools. T
he
journ
al is a hum
ble attem
pt m
ade b
y th
e institu
te to en
courag
e quality
research am
ong th
e mem
bers o
f
teachin
g fratern
ity o
f B sch
ools. It is an
attempt to
build
a storeh
ouse o
f articles which
are hig
hly
info
rmativ
e, touch
ing th
e vario
us facets o
f areas of m
anag
emen
t. It is expected
that th
e journ
al would
facilitate dissem
inatio
n o
f know
ledge related
to th
e latest dev
elopm
ents in
vario
us areas o
f man
agem
ent
educatio
n. W
e would
constan
tly striv
e to in
clude em
pirical an
d co
ncep
tual p
apers o
f hig
h stan
dard
s in
our fu
ture issu
es also. It is ex
pected
that in
futu
re, the jo
urn
al would
be lo
oked
upon as a p
latform
to
brin
g to
geth
er the b
est thin
k tan
ks in
our co
untry
who are research
orien
ted.
We h
ope, th
e articles inclu
ded
in th
e journ
al would
go a lo
ng w
ay in
enhan
cing th
e know
ledge o
f the
faculty
about th
e research th
at is bein
g u
ndertak
en in
the area o
f their in
terest. This w
ould
furth
er
enhan
ce their sk
ills to tak
e up q
uality
research.
Edito
r
Vig
nan
a Jyoth
i
Journ
al of M
anag
emen
t
Volu
me 1
Issue 1
July
-Decem
ber 2
009
Modellin
g S
trategies fo
r Corp
orate G
row
th:
Kam
al Ghosh
Ray
1
The A
rchitectu
re of V
alue C
reating M
argers &
Acq
usitio
ns
Trad
e Disp
utes in
Practice
Win
ston C
han
g3
3
Em
plo
yee E
ngag
emen
t : The O
nly
Way
Ahead
Kak
oli S
en4
6
Expan
din
g th
e Valu
e Horizo
n o
f HR
: An E
nab
ler and
Dim
ple G
rover
55
Facilitato
r to B
uild
ing C
orp
orate G
overn
ance P
ractices
Serv
ice Quality
and C
usto
mer S
atisfaction: A
Case S
tudy in
Lew
lyn L
. R. R
odrig
ues
63
Gen
eral Insu
rance u
sing C
usto
mized
SE
RV
PE
RF
Instru
men
tG
opalak
rishna B
K. V
. M. V
arambally
Why sh
ould
we S
tudy H
um
an R
esources M
anag
emen
t?S
.R. T
ulasi
72
Chan
ge G
ender R
ole A
ttitudes an
d F
amily
Purch
ase Decisio
ns
Pin
ni V
asanth
a Lak
shm
i7
9
Dep
osits R
epay
able b
y B
anks th
rough E
quated
Month
ly In
stallmen
ts:V
ipin
Desai
91
A P
rop
osal fo
r an In
no
vativ
e Pro
du
ct and
its Po
tentiality
Stu
dy
Resistan
ce over S
hift S
ystem
R.K
rishn
aven
i1
01
Rav
i Chin
nath
ambi
Mod
elling S
trateg
ies for C
orp
ora
te Gro
wth
: Th
e Arch
itecture o
f
Valu
e Crea
ting M
ergers &
Acq
uisitio
ns
Kam
al Ghosh
Ray
*
Ab
stract
Today, co
mpan
ies are under p
ressure to
increase sh
arehold
er valu
e at the fastest p
ossib
le time. T
he C
EO
s
are on th
e run to
gen
erate and d
eliver it. T
he cu
t thro
at com
petitio
n is n
ot h
elpin
g th
e CE
Os to
achiev
e faster
gro
wth
. They
are either ally
ing w
ith o
r grab
bin
g th
e smaller co
mpetito
rs or su
rrenderin
g to
the b
igger p
layers
for th
e purp
ose. M
ergers an
d acq
uisitio
ns (M
&A
) are believ
ed to
be th
e fastest way
s of ap
peasin
g th
e shareh
old
ers.
Most o
f the b
oard
s and C
EO
s can n
ot th
ink o
f any o
ther altern
atives b
ut fo
r M&
As, b
ecause M
&A
s are consid
ered
to b
e dom
inan
t strategies fo
r surv
ival an
d g
row
th all o
ver th
e corp
orate w
orld
. At th
e same tim
e, there are fears
of b
reachin
g th
e ‘agen
cy co
ntracts’ an
d th
e conseq
uen
tial impacts (Jen
sen, 1
986). T
he m
anag
ers are strivin
g fo
r
achiev
ing q
uick
success fro
m M
&A
s. As a resu
lt, com
pan
ies are form
ulatin
g M
&A
strategies an
d alig
nin
g w
ith
the co
rporate strateg
ies to ach
ieve g
row
th th
rough th
e pow
erful to
ol o
f ‘synerg
y’. T
his p
aper m
akes a m
odest
attempt to
form
ulate an
d d
esign a m
odel fo
r mak
ing a v
alue creatin
g an
d su
ccessful M
&A
decisio
n.
Key
Word
s: Agen
cy C
ontracts, R
egim
e shift, M
ergers an
d A
cquisitio
ns, S
ynerg
y.
Intro
du
ction
In b
usin
ess, there are co
nsid
erable ‘reg
ime sh
ifts’1 h
appen
ing alm
ost at reg
ular in
tervals. M
&A
s are rampan
t
in in
dustries w
hich
are experien
cing ‘reg
ime sh
ifts’ in term
s of reg
ulatio
n, p
ractice or tech
nolo
gy. In
ord
er to
cope w
ith th
e regim
e shifts, th
e man
agers m
ake ap
pro
priate strateg
ies to m
axim
ize their firm
valu
e thro
ugh th
e
route o
f org
anic g
row
th o
r acquisitio
n. G
orto
n, et.al. (2
006) p
ropose a th
eory
of m
ergers w
hich
connects m
erger
motiv
es and a reg
ime sh
ift leadin
g to
som
e valu
e enhan
cing M
&A
opportu
nities. T
hey
opin
e that an
y an
ticipatio
n
of th
e regim
e shift can
lead to
merg
ers, either fo
r defen
sive o
r positio
nin
g reaso
ns. D
efensiv
e merg
ers occu
r
wh
en m
anag
ers acqu
ire oth
er firms to
avo
id b
eing
acqu
ired th
emselv
es. Merg
ers may
also allo
w a firm
to
positio
n itself as a m
ore attractiv
e takeo
ver targ
et and earn
a takeo
ver p
remiu
m. T
he id
entity
of acq
uirers an
d
targets an
d th
e pro
fitability
of acq
uisitio
ns d
epen
d, am
ong o
ther facto
rs, on th
e distrib
utio
n o
f firm sizes w
ithin
an in
dustry. In
any m
erger an
d acq
uisitio
n (M
&A
) deal, th
e buyer is p
rimarily
driv
en b
y co
mm
ercial consid
erations
rather th
an fin
ancial co
nsid
eration
s. Th
e ration
ale beh
ind
each ty
pe o
f acqu
isition
is differen
t. Fin
ancial
acquisitio
ns are o
ften o
pportu
nistic d
eals that d
o n
ot fit in
to an
y b
road
strategy fo
r dev
elopin
g th
e busin
ess. In
a ‘merg
er’ strategy tw
o firm
s agree to
integ
rate their o
peratio
ns o
n a relativ
ely co
-equal b
asis so th
at their
com
bin
ed reso
urces an
d cap
abilities create a stro
nger co
mpetitiv
e advan
tage. T
he R
eckitt &
Colem
an, U
.K. an
d
Ben
ckiser, N
etherlan
ds jo
ined
han
ds to
form
‘Reck
itt-Ben
ckiser’ w
ith co
mplem
entary
pro
ducts an
d g
eograp
hical
pen
etration. B
ecause th
e merg
er created th
e world
’s leadin
g h
ouseh
old
cleanin
g p
roducts g
roup, th
e new
firm
had
substan
tial mark
et pow
er with
significan
t cost red
uctio
ns an
d im
pro
ved
pro
fitability. W
ith an
‘acquisitio
n’
strategy a firm
buys a co
ntro
lling o
r hundred
percen
t interests in
anoth
er firm w
ith th
e inten
tion o
f apply
ing co
re
com
peten
ce more effectiv
ely b
y m
akin
g th
e acquired
firm a su
bsid
iary b
usin
ess house w
ithin
its pro
duct p
ortfo
lio.
Most o
f the m
ergers are frien
dly
transactio
ns, w
hereas acq
uisitio
ns m
ay in
clude u
nfrien
dly
takeo
vers also
. A
‘takeo
ver’ b
id can
be a p
art of an
acquisitio
n strateg
y, where th
e target firm
does n
ot so
licit the acq
uirin
g firm
’s
bid
. For ex
ample, in
2008, Y
ahoo receiv
ed an
unso
licited tak
eover b
id fro
m G
oogle co
rporatio
ns, w
hich
was
finally
defen
ded
by th
e form
er. In all th
e cases like m
erger, acq
uisitio
n o
r takeo
vers o
r alliance, th
e philo
sophy
that w
ork
s beh
ind is g
row
th. A
cquisitio
n b
ased g
row
th an
d o
rgan
ic gro
wth
are the tw
in altern
atives o
f a large
*P
rofesso
r-Fin
ance &
Risk
Man
agem
ent an
d D
irector-V
ign
ana Jy
oth
i Institu
te of M
anag
emen
t, Hy
derab
ad.
E-m
ail: dr.k
amalg
ho
shray
@v
jim.ed
u.in
/ kg
ho
shray
@y
aho
o.co
.in
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
1
com
pan
y’s strateg
ic appro
ach to
busin
ess gro
wth
. The M
&A
strategy is su
pposed
to b
e consisten
t with
the
com
pan
y’s o
verall m
ission, o
bjectiv
es and g
oals to
gro
w eith
er thro
ugh n
ew in
vestm
ents in
pro
jects or a b
usin
ess
com
bin
ation. A
com
pan
y is ex
pected
to set o
ut its b
usin
ess objectiv
es and g
row
th strateg
y in
a clear, rational
and fin
ancial n
um
ber o
riented
way. T
his is n
ot ju
st a boss’s d
irective to
beco
me a so
much
billio
n d
ollar co
mpan
y
in so
man
y y
ears. The T
op ex
ecutiv
es must estab
lish sp
ecific criteria based
on th
e objectiv
es they
hav
e set and
the strateg
y o
f gro
wth
they
hav
e form
ulated
(Agraw
al and M
andelk
er, 1987). T
he criteria sh
ould
be ex
pressed
in clear term
s of g
oals lik
e: (1) d
iversificatio
n o
f pro
ducts an
d serv
ices in th
e related o
r unrelated
areas, (2)
vertical in
tegratio
n b
y ex
pan
din
g in
acquisitio
n o
f input an
d in
distrib
utio
n, (3
) the co
nseq
uen
tial busin
ess risk,
(4) ex
pan
sion o
f mark
et share b
y fu
rther in
vestm
ents o
r acquirin
g th
e com
petito
rs, (5) g
eograp
hical access, n
ew
pro
ducts o
r technolo
gies, to
p lin
e (the rev
enues), b
otto
m lin
e (the p
rofits), R
OI, E
VA
, etc.
Motiv
atio
nal H
yp
oth
eses for M
&A
The p
rimary
motiv
es of alm
ost all M
&A
s and th
e resultan
t busin
ess com
bin
ations are co
ngru
ent w
ith th
e
main
purp
ose fo
r the ex
istence in
the b
usin
ess as well as m
axim
ising sh
arehold
er valu
e. The in
crease in th
e
shareh
old
er’s wealth
of th
e com
bin
ed en
tity eith
er could
be a resu
lt of v
alue created
by th
e M&
A d
eal or b
y
transfer o
f wealth
from
bondhold
ers to sh
arehold
ers with
no ch
ange in
the to
tal mark
et capitalisatio
n o
f the
com
bin
ed en
tity. When
two en
tities com
bin
e, the m
erged
entity
is expected
to m
ake m
ore m
oney. T
his can
be
achiev
ed b
y:
1.
Impro
vin
g th
e efficiency
and effectiv
eness o
f the co
mbin
ed in
stitutio
ns th
rough eco
nom
ies of scale an
d
cost sav
ing;
2.
Increasin
g th
eir mark
et pow
er, expan
din
g o
peratio
ns an
d territo
ry, leadersh
ip in
selling p
rices and serv
ice
fees, reven
ue im
pro
vem
ent, etc.
3.
Increasin
g th
eir access to th
e safety n
et.
Sev
eral hypoth
eses hav
e been
advan
ced to
explain
the m
otiv
es for b
usin
ess com
bin
ations th
rough M
&A
s.
These h
ypoth
eses are presen
ted in
Tab
le-1. M
any o
f these h
ypoth
eses attempt to
explain
the cap
ital mark
et
reaction to
target an
d acq
uirin
g firm
s. Som
e of th
ese hypoth
eses assum
e a non-w
ealth creatin
g b
ehav
iour o
n th
e
part o
f acquirers (e.g
., hubris h
ypoth
esis2) an
d p
redict th
at the sh
are price o
f target firm
s will rise an
d th
ose th
us
assum
e wealth
-creating b
ehav
iour p
redictin
g th
at the sh
are prices o
f target firm
s will rise w
ith n
o im
pact o
n
share p
rices of acq
uirers (R
oll, 1
986). T
he recen
t meg
a M&
A d
eals hav
e thro
wn ch
allenges, w
hich
should
be
pro
perly
addressed
to en
sure su
ccess of th
ese deals. T
he ch
allenges to
execu
te an M
&A
deal in
clude b
oth
the
opportu
nities to
achiev
e a pro
fitable M
&A
deal (e.g
., finan
cial ben
efits to b
oth
shareh
old
ers of th
e acquirer an
d
target in
stitutio
n) an
d rem
ov
ing
ob
stacles du
ring
the co
mb
inatio
n p
rocess w
here b
oth
hu
man
and
ph
ysical
resources are ev
entu
ally fo
rced to
join
. Thus, b
oth
finan
cial opportu
nities an
d th
e related o
bstacles (e.g
., differen
t
corp
orate cu
ltures) sh
ould
be ex
amin
ed an
d assessed
when
contem
platin
g an
M&
A d
eal. It is practically
impossib
le
to id
entify
all causes an
d effects o
f the M
&A
s. But attem
pts can
be m
ade to
attribute sev
eral factors to
the
curren
t rapid
pace o
f M&
As. T
he ex
traord
inary
dev
elopm
ent in
the eq
uity
and d
ebt m
arkets, h
as enco
urag
ed th
e
ever-in
creasing m
erger w
ave. T
he ex
cess capital h
as gone in
to sto
cks, w
hich
has p
ush
ed th
eir valu
es to a h
igh
level in
the p
ast decad
e and en
courag
ed sh
arehold
ers of b
oth
the acq
uirer an
d targ
et to tak
e advan
tages o
f M&
A
deals. T
he g
lobally
abundan
t finan
cial capital resu
lted fro
m g
lobalizatio
n o
f econom
ies and b
usin
esses, low
er
trade b
arriers, technolo
gical ad
van
ces, and p
rivatizatio
n, w
hich
are consid
ered o
ther im
portan
t forces d
rivin
g
M&
A tran
sactions.
Man
y co
mpan
ies use acq
uisitio
ns to
pursu
e a strategy fo
r gro
wth
in tu
rnover, m
arket sh
are and p
rofits. In
som
e cases, the b
uyer acq
uires m
ore b
usin
esses than
it wan
ts to k
eep. In
such
circum
stances it w
ill try to
sell off
unw
anted
busin
esses, retainin
g o
nly
those th
at fit its strategic o
bjectiv
es. Defen
sive reaso
ns fo
r acquisitio
ns
inclu
de th
e need
for reo
rgan
ization w
ithin
an in
dustry
and a m
erger o
r acquisitio
n can
help
to elim
inate o
ver-
capacity
(Ericso
n an
d P
akes, 1
995).
Modellin
g S
trategies fo
r Corp
orate G
row
th
2.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Fin
ancial o
pportu
nities o
ccasionally
can en
courag
e merg
ers or acq
uisitio
ns. W
hile d
ecidin
g acq
uisitio
n o
f oth
ers’
busin
ess, a distin
ction n
eeds to
be m
ade b
etween
(a) com
pan
ies that seek
acquisitio
ns to
add v
alue to
their
busin
ess by ach
ievin
g a b
etter rate of g
row
th an
d (b
) com
pan
ies that id
entify
takeo
ver targ
ets where th
ey can
captu
re and ex
plo
it the v
alue th
at already ex
ists in th
e busin
ess, with
out n
ecessarily creatin
g m
ore g
row
th.
Com
pan
ies can m
ake a d
istinctio
n b
etween
acquisitio
ns fo
r strategic (o
r com
mercial) reaso
ns an
d acq
uisitio
ns
for in
vestm
ent reaso
ns. C
orp
orate raid
ers prim
arily are co
ncern
ed w
ith th
e poten
tial finan
cial ben
efits of tak
eovers.
They
look fo
r underv
alued
com
pan
ies to b
uy ch
eaply, an
d u
nlo
ck th
e valu
e quick
ly, perh
aps b
y b
reakin
g u
p th
e
acquired
com
pan
y in
to sm
aller div
isions th
at can b
e resold
at a pro
fit.
Mod
els for G
row
th S
trateg
y th
rou
gh
New
Pro
jects or M
&A
s
The first co
nsid
eration in
dev
elopin
g an
appro
priate strateg
y fo
r gro
wth
is to d
ecide w
heth
er the co
mpan
y
will set u
p a n
ew p
roject o
r will g
o fo
r an acq
uisitio
n o
r even
a merg
er. Merg
ers and acq
uisitio
ns are u
ndoubted
ly
the to
ols fo
r corp
orate g
row
th. E
ven
two d
ecades earlier, m
any w
ell know
n co
rporate h
ouses lik
e the T
atas used
to b
elieve in
div
ersification an
d g
row
th o
nly
thro
ugh n
ew g
reen field
and g
rey field
pro
jects. Today, M
&A
has
taken
the fo
refront b
ecause it is relativ
ely easy
and q
uick
meth
od to
gro
w. B
ut it req
uires m
ore o
f com
plex
and
intellectu
al decisio
ns rath
er than
clear-cut lo
ng-term
pro
ject decisio
n startin
g w
ith fo
rmulatio
n an
d en
din
g w
ith
implem
entatio
n. In
the case o
f M&
A, it is v
ery clear th
at there is h
ardly
any o
pportu
nity
for in
creasing th
e
overall p
roductio
n cap
acity w
hereas; a n
ew p
roject g
ives rise to
gen
eration o
f new
capacity. W
hich
decisio
n
man
agem
ent w
ill take; n
ew p
roject o
r M&
A? T
he au
thor su
ggests th
e follo
win
g m
odels fo
r this p
urp
ose an
d
initiates fu
rther d
iscussio
ns in
the fo
llow
ing p
aragrap
hs.
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
3
Fin
an
cial M
od
el in th
e Case o
f a N
ew P
roject
In th
e case of a n
ew p
roject, th
e pro
ject cost an
d th
e mean
s of fin
ance are estim
ated as u
nder:
Total p
roject co
st (TP
C) =
IFA +
WC
M+
PE
,
wh
ere,
Investm
ent in
fixed
assets = I
FA
(land, p
lant an
d m
achin
eries,
build
ings, fu
rnitu
re, etc.)
Work
ing cap
ital marg
in =
WC
M
Pre-o
perativ
e expen
ses = P
E
and
Mean
s of fin
ance =
Sources o
f total p
roject fin
ance (T
PF
) = E
P + D
P ,
wh
ere,
Issue o
f Equity
shares =
EP
Raisin
g o
f Deb
t = D
P
Hen
ce, Initial in
vestm
ent fo
r the n
ew p
roject (I
New
pro
ject ) = C
ash o
utflo
w n
eeded
for b
usin
ess gro
wth
thro
ugh
green
field p
roject. In
oth
er word
s, IN
ew p
roject
= T
PC
= T
PF
= E
P + D
P = I
FA +
WC
M+
PE
Cash
inflo
w fro
m th
e new
pro
ject is disco
unted
presen
t valu
e of th
e free cashflo
w to
be g
enerated
by th
e
pro
ductio
n an
d sales o
f the g
oods an
d serv
ices from
the p
roject fo
r a finite p
eriod, g
enerally
an ex
plicit p
eriod,
for w
hich
the p
rojectio
ns can
be m
ade w
ith h
igh d
egree o
f certainty. T
herefo
re, the p
resent v
alue o
f the fu
ture
cash flo
w fro
m p
roject is g
iven
by:
PV
FC
FP =
[FC
FP
t /(1+
WA
CC
)t], w
here,
FC
FP
= F
ree cash flo
w3,
WA
CC
= W
eighted
averag
e cost o
f capital
t = 1
,2,3
……
n y
ears for w
hich
disco
untin
g w
ould
be d
one
n=
explicit p
eriod fo
r which
pro
jected free cash
flow
can b
e ascertained
with
reasonab
ly h
igh d
egree o
f certainty.
In a p
roject ‘n
’ can b
e as short as p
ossib
le. In case o
f pro
ject evalu
ation o
r pro
ject appraisal, fin
ancial
institu
tions co
nsid
er 5 to
7 y
ears as the reaso
nab
le perio
d d
epen
din
g u
pon th
e natu
re of th
e pro
duct an
d th
e type
of th
e mark
ets. With
in th
is perio
d, th
e busin
ess is expected
to attain
matu
rity an
d stab
ilize the u
ncertain
ty.
Hen
ce,
PV
FC
FP =
[FC
FP
1 /(1+
WA
CC
)1]+
[FC
FP
2 /(1+
WA
CC
)2]+
[FC
FP
3 /(1+
WA
CC
)3]+
……
……
……
…
+ [F
CF
Pn /(1
+W
AC
C)
n]
Goin
g b
y th
e simple cap
ital budgetin
g tech
niq
ues, th
e net p
resent v
alue (N
PV
) of th
e new
pro
ject is giv
en as:
NP
VN
ew p
roject =
[FC
FP
t /(1+
WA
CC
)t] –
[IN
ew p
roject ], o
r
NP
VN
ew p
roject =
[FC
FP
t /(1+
WA
CC
)t] –
[IFA +
WC
M+
PE ], o
r
NP
VN
ew p
roject =
[FC
FP
t /(1+
WA
CC
)t] –
[EP +
DP ].
Modellin
g S
trategies fo
r Corp
orate G
row
th
4.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Fin
an
cial M
od
el in th
e Case o
f Ou
trigh
t Acq
uisitio
n o
f a C
om
pan
y
For o
btain
ing an
equal g
row
th th
rough o
utrig
ht acq
uisitio
n o
f a com
pan
y, the acq
uirer p
ays fo
r what h
e
gets. H
e receives fro
m th
e target co
mpan
y: fix
ed assets (F
A), w
ork
ing cap
ital (WC
), i.e. [curren
t assets (CA
)
less curren
t liabilities (C
L)] an
d in
tangib
le assets (I) like g
oodw
ill, bran
ds, w
ork
force, cu
stom
er relationsh
ips,
etc. The acq
uirer p
ays a p
rice for th
e net assets h
e gets p
lus a p
remiu
m (P
R ), if any d
epen
din
g u
pon h
is barg
ainin
g
pow
er. Therefo
re, the ag
reed p
rice of an
acquisitio
n is g
iven
by:
Pacq
uisitio
n = F
A+
WC
+I+
PR
A carefu
l acquirer also
need
s to co
nsid
er two v
ery im
portan
t aspects im
med
iately o
n acq
uisitio
n. T
hese are:
1.
Som
e capital ex
pen
ditu
res (ER ) are to
be in
curred
for th
e org
anizatio
nal restru
cturin
g in
cludin
g d
ow
nsizin
g
of su
rplu
s work
force o
r revam
pin
g an
y p
lant an
d m
achin
eries, etc.
2.
Imm
inen
t div
estitures o
f SB
Us (strateg
ic busin
ess units) n
ot fallin
g u
nder co
re com
peten
cy an
d n
ot b
eing
finan
cially v
iable. U
nder su
ch situ
ations, th
e acquirer g
ains so
me cash
flow
(CF
Div
estitures ) an
d reso
rts to
assets strippin
g b
y co
nvertin
g so
me o
f the assets in
to cash
and red
ucin
g th
e effective b
uyin
g co
st
Th
e acqu
irer also in
curs ex
pen
ses (EX ) to
ward
s vario
us ad
viso
ry serv
ices, execu
tive trav
el, legal an
d
regulato
ry m
atters, etc. Hen
ce, the cash
out flo
w n
eeded
for b
usin
ess gro
wth
thro
ugh acq
uisitio
n is n
oth
ing b
ut
the acq
uirer’s n
et investm
ent (I
Acq
uisitio
n ). This is g
iven
by th
e expressio
n as b
elow
:
IA
cquisitio
n = P
acquisitio
n - CF
Div
estitures +
EX , o
r
IA
cquisitio
n = [F
A+
WC
+I+
PR ] - C
FD
ivestitu
res + E
X
Lik
e the n
ew p
rojects, th
e cash in
flow
from
the acq
uisitio
n is th
e disco
unted
presen
t valu
e of th
e free cash
flow
from
acquisitio
n to
be o
btain
ed fro
m th
e acquired
com
pan
y fo
r a finite p
eriod, g
enerally
an ex
plicit p
eriod,
for w
hich
the p
rojectio
ns can
be m
ade w
ith h
igh d
egree o
f certainty. T
herefo
re, the p
resent v
alue o
f the fu
ture
cash flo
w fro
m acq
uisitio
n (P
VF
CFA ) is g
iven
by:
PV
FC
FA =
[FC
FPA
t /(1+
WA
CC
)t], w
here,
FC
FPA
= F
ree cash flo
w fro
m acq
uisitio
n,
WA
CC
= W
eighted
averag
e cost o
f capital
t = 1
,2,3
……
n =
the ex
plicit n
um
ber o
f years fo
r which
disco
untin
g w
ould
be d
one
n=
explicit p
eriod fo
r which
pro
jected free cash
flow
can b
e ascertained
with
reasonab
ly h
igh d
egree o
f certainty.
In case o
f acquisitio
n ev
aluatio
n, id
entical tim
e horizo
n o
f 5 to
7 y
ears (like p
roject ev
aluatio
n) is as th
e
reasonab
le perio
d fo
r ‘n’. U
nlik
e busin
ess valu
ation o
f the targ
et, ‘contin
uin
g v
aluatio
n’ is n
ot d
esirable fo
r
finan
cial evalu
ation fo
r com
pariso
n w
ith th
e alternativ
e strategy w
ith a n
ew p
roject.
Hen
ce,
PV
FC
FA =
[FC
FA
1 /(1+
WA
CC
)1]+
[FC
FA
2 /(1+
WA
CC
)2]+
[FC
FA
3 /(1+
WA
CC
)3]+
……
…..
+ [F
CFA
n /(1+
WA
CC
)n].
Goin
g b
y th
e simple cap
ital budgetin
g tech
niq
ues, th
e Net P
resent V
alue (N
PV
) from
the acq
uisitio
n is g
iven
by
:
NP
VA
cquisitio
n = [F
CFA
t /(1+
WA
CC
)t] –
[IA
cquisitio
n ], o
r
NP
VA
cquisitio
n = [F
CFA
t /(1+
WA
CC
)t] –
[Pacq
uisitio
n - CF
Div
estitures +
EX ], o
r
NP
VA
cquisitio
n = [F
CFA
t /(1+
WA
CC
)t] –
[[FA
+W
C+
I+P
R ] - CF
Div
estitures +
EX ].
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
5
Modellin
g S
trategies fo
r Corp
orate G
row
th
Th
e Th
um
b R
ules fo
r Ch
oosin
g fro
m N
ew P
rojects a
nd
M&
A A
lternativ
es
The fo
llow
ing th
um
b ru
les can b
e mad
e for th
e choice b
etween
acquirin
g a co
mpan
y as a g
oin
g co
ncern
or
initiatin
g a n
ew g
reen field
or g
rey field
pro
ject:
1.
If, NP
VA
cquisitio
n > N
PV
New
pro
ject , acquisitio
n is p
referred o
ver n
ew p
roject.
2.
If, NP
VA
cquisitio
n < N
PV
New
pro
ject , new
pro
ject is preferred
over acq
uisitio
n.
3.
If, NP
VA
cquisitio
n = N
PV
New
pro
ject , acquisitio
n o
r new
pro
ject is indifferen
t choice.
A C
om
pariso
ns o
f Gro
wth
strateg
ies thro
ugh
New
Pro
ject an
d M
&A
Com
pan
ies all over p
refer M&
A ro
ute to
gro
w b
ut th
at is not th
e only
way
to fo
llow
. A n
ew p
roject m
ay
som
etimes b
e a much
superio
r meth
od fo
r gro
wth
. The fo
llow
ing co
mpariso
n in
Tab
le-2 can
thro
w so
me m
ore
lights o
n th
is.
6.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
New
Pro
ject Strateg
y
Decid
ing B
etween
Acq
uisitio
n a
nd
Org
an
ic Gro
wth
Som
etimes, acq
uisitio
ns are fo
und to
be th
e best m
ethod o
f achiev
ing strateg
ic aims o
f gro
wth
and ex
pan
sion.
At so
me o
ther tim
es, in-h
ouse o
rgan
ic dev
elopm
ent is m
ore ap
t than
the o
ther. T
he ch
oice b
etween
acquisitio
n
and o
rgan
ic gro
wth
for n
ew p
roduct-m
arket d
evelo
pm
ents d
epen
ds o
n a n
um
ber o
f key
factors. A
fundam
ental
distin
ction b
etween
acquisitio
n b
ased S
trategy an
d o
rgan
ic gro
wth
strategy is d
rawn in
Tab
le-3.
Valu
e Crea
ting M
od
els in M
&A
In an
acquisitio
n, th
e acquirer b
uys a b
undle o
f tangib
le and in
tangib
le assets off th
e shelf alo
ng w
ith th
e
capab
ilities in an
y fo
rm o
f M&
A. A
n acq
uisitio
n also
brin
gs to
geth
er two b
undles o
f reven
ue g
eneratin
g cap
acities
and cap
abilities. S
ustain
able co
mpetitiv
e advan
tage is created
when
there is n
o m
ismatch
betw
een th
e resources,
capab
ilities and o
pportu
nities av
ailable to
the tw
o firm
s4. A
firm’s d
istinctiv
e capab
ilities can b
e a source o
f
sustain
able co
mpetitiv
e advan
tages an
d th
at may
inclu
de th
e firm’s m
anag
emen
t architectu
re & sty
le, capacity
for in
novatio
n an
d rep
utatio
n, as d
istinct fro
m th
e reputatio
n o
f its pro
ducts etc. V
alue created
in m
ergers an
d
acquisitio
ns can
be d
ifferentiated
by th
e sources o
f that v
alue. T
here are th
ree bro
ad g
eneric m
odels o
f valu
e
creation in
M&
A an
d th
ese are:
1.
Donor-recip
ient m
odel
2.
Particip
ative m
odel an
d
3.
Collu
sive m
odel
Don
or-recip
ient m
od
el: In th
is model, reso
urces an
d o
r capab
ilities are transferred
of fro
m th
e acquirer to
the
acquired
firm. V
alue is created
when
such
a transfer im
pro
ves th
e strategic an
d fin
ancial p
erform
ance o
f the
acquired
. Under th
is meth
od, V
alue creatio
n tak
es place w
hen
the p
oorly
perfo
rmin
g firm
is taken
over b
y an
acquirer w
ith a su
perio
r and rep
uted
firm. O
f course, th
e acquirer m
ust g
uard
again
st the tran
splan
t rejection
syndro
me, i.e. th
e acquired
firm b
eing resistan
t to th
e transfer.
Particip
ativ
e mod
el: Under
this m
odel, th
ere is a poolin
g o
f the reso
urces an
d cap
abilities o
f the co
mbin
ing
firms, w
hich
is a two-w
ay ex
chan
ge p
rocess an
d as a resu
lt good an
d h
ealthy in
teractions an
d m
utu
al learnin
g
betw
een th
e firms tak
e place. S
uch
poolin
g m
akes m
ore effectiv
e use o
f the tw
o firm
s’ resources an
d en
han
ces
their jo
int cap
abilities. E
conom
ies of sco
pe an
d scale are ex
pected
to b
e achiev
ed th
rough p
articipativ
e mode o
f
po
olin
g.
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
7
Collu
sive m
od
el: This m
odel n
ecessitates poolin
g o
f strategic assets
5. The co
min
g to
geth
er of th
e two firm
s in
an acq
uisitio
n creates o
r strength
ens th
ose strateg
ic assets. Cartels, v
ertical integ
ration an
d licen
sing are th
e
good ex
amples o
f collu
sive m
ode. A
ugm
entatio
n o
f the strateg
ic assets is a great so
urce o
f sustain
able co
mpetitiv
e
advan
tage an
d v
alue ad
ditio
n.
Corp
ora
te Ob
jectives a
nd
Stra
tegy fo
r M&
A
A co
mpan
y’s p
rimary
objectiv
e is finan
cial and can
be ex
pressed
in g
eneral term
s, as max
imisin
g sh
arehold
er
valu
e. The o
bjectiv
e can also
be m
ore sp
ecific like in
creasing earn
ings p
er share ev
ery y
ear or ach
ievin
g a
return
on cap
ital emplo
yed
in ex
cess of th
e target set. C
om
pan
ies must h
ave co
mpatib
le busin
ess objectiv
es that
support th
eir prim
ary fin
ancial o
bjectiv
es, which
are as follo
ws:
1.
Pro
vid
ing a h
igh q
uality
pro
duct o
r service
2.
Mark
et leadersh
ip in
the fo
rm o
f geo
grap
hical m
arket lead
ership
, with
in a co
untry, a g
roup o
f countries o
r
glo
bally.
3.
Tech
nolo
gical lead
ership
.
4.
Inn
ov
ation
.
5.
Bein
g th
e low
est cost p
roducer in
the in
dustry.
There are also
finan
cial policy
constrain
ts on b
usin
ess objectiv
es. For ex
ample, a co
mpan
y m
ight h
ave th
e
objectiv
e of av
oid
ing ex
cessive fin
ancial risk
s and as a co
nseq
uen
ce, it mig
ht d
ecide to
limit its b
orro
win
gs to
main
tain an
optim
al gearin
g o
r leverag
e. This m
ay affect its p
lans fo
r expan
sion an
d g
row
th. A
s a result, M
&A
activity
may
be ab
sent in
such
com
pan
ies or th
ere can b
e limited
efforts fo
r achiev
ing co
rporate g
row
th. A
strategy is a b
road
based
form
ula fo
r how
an o
rgan
isation in
tends to
achiev
e its objectiv
es. Objectiv
es alone d
o
not g
ive a co
mpan
y an
y sen
se of d
irection o
r scope. S
trategy estab
lishes th
e rules o
r guid
elines an
d sp
ecific
steps o
n h
ow
objectiv
es should
be ach
ieved
. Pro
duct/m
arket strateg
ies, for ex
ample, create a fram
ework
for
decisio
n m
akin
g b
y in
dicatin
g h
ow
the co
mpan
y in
tends to
com
pete in
its mark
ets, and w
hat its g
oals sh
ould
be
for each
of its p
roducts an
d m
arkets. T
he o
bjectiv
es of p
roduct-m
arket strateg
y are to
:
1.
Increase m
arket sh
are in o
rder to
achiev
e econom
ies of scale an
d b
etter pro
fit marg
ins
2.
Obtain
low
er cost p
roductio
n facilities
3.
Div
ersify in
to n
ew m
arkets, b
ecause ex
isting m
arkets are n
ot larg
e enough to
support fu
ture g
row
th.
4.
Div
ersify in
to n
ew p
roducts o
r services, b
ecause th
e com
pan
y’s ex
isting p
roduct ran
ges is in
declin
e or is
insu
fficient to
sustain
futu
re gro
wth
.
Any M
&A
deal d
ecision is b
asically m
eant to
achiev
e certain strateg
ic objectiv
es of th
e acquirer. T
hese
strategic o
bjectiv
es are varied
: gro
wth
of th
e firm, g
ainin
g co
mpetitiv
e advan
tage in
existin
g p
roduct-m
arkets,
mark
et for p
roduct ex
tensio
n o
r risk red
uctio
n, etc. L
ike all o
ther strateg
ic decisio
ns, m
ergers an
d acq
uisitio
ns
are supposed
to satisfy
the criterio
n o
f valu
e additio
n to
all. Lynch
and L
ind (2
002) su
ggest th
at M&
As are o
ne
of th
e central tech
niq
ues fo
r org
anisatio
nal g
row
th, w
hile H
urtt, K
reuze an
d L
ang
sam (2
00
0) g
o fu
rther to
suggest th
at gro
wth
is the p
rimary
reason fo
r M&
As.
Perry
and H
erd (2
004) o
bserv
ed th
e importan
t role p
layed
by strateg
ic plan
nin
g w
hen
consid
ering M
&A
s
for g
row
th o
f an o
rgan
isation. T
hey
also o
bserv
ed th
at that sin
ce the 1
990s, co
mpan
ies shifted
the fo
cus fro
m a
cost sav
ing p
erspectiv
e to u
ndertak
ing M
&A
s as a strategic v
ehicles fo
r corp
orate g
row
th. A
study co
nducted
by H
ardin
g an
d R
ovit (2
004) rev
ealed th
e importan
ce of alig
nin
g co
rporate strateg
y to
plan
nin
g fo
r merg
ers and
acquisitio
ns. T
hey
studied
more th
an 1
,700 M
&A
s and in
terview
ed 2
50 C
EO
s and th
ey fo
und th
at almost o
ne
third
of th
e CE
Os in
terview
ed h
ad clear strateg
ic rationales fo
r the M
&A
, or th
ey u
ndersto
od th
e long-term
finan
cial contrib
utio
ns th
e deals w
ould
mak
e to th
eir com
pan
ies. Interestin
gly, th
e study also
found th
at over
Modellin
g S
trategies fo
r Corp
orate G
row
th
8.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
half o
f these co
mpan
ies, who claim
ed to
had
clear rationales fo
r their M
&A
s, came to
post-M
&A
conclu
sions
that th
eir rationales h
ad b
een w
rong.
Morck
, Shleifer an
d V
ishny,(1
988) o
bserv
ed th
at man
agers d
erive a p
rivate b
enefit fro
m o
peratin
g a firm
in ad
ditio
n to
the v
alue o
f any o
wnersh
ip sh
are of th
e firm th
ey h
ave, if an
y. In o
ther w
ord
s, the self-in
terested
man
agers m
ay h
ave a p
reference fo
r keep
ing th
eir firms in
dep
enden
t as in th
e new
com
bin
ed firm
they
may
lose p
rivate b
enefits o
r they
are likely
to p
lay su
bo
rdin
ated ro
les or lo
se their jo
bs. W
hen
man
agers m
ake
decisio
ns in
their o
wn in
terests, the ad
ded
valu
e is appro
priated
by m
anag
ers to th
e detrim
ent o
f shareh
old
ers.
When
they
act in in
terest of th
e shareh
old
ers the ad
ded
valu
e is reflected in
shareh
old
ers’ wealth
. For certain
types o
f strategy su
ch as m
arket o
r pro
duct ex
tensio
n, acq
uisitio
n m
ay b
e one o
f several altern
atives fo
r achiev
ing
the sam
e objectiv
es. The o
ther altern
atives in
clude o
rgan
ic gro
wth
, join
t ven
tures an
d co
-operativ
e alliances.
Preferen
ce for acq
uisitio
n o
ver th
e alternativ
es should
be ju
stified b
y th
eir relative b
enefits an
d co
sts. Acq
uisitio
ns
are to b
e understo
od in
the co
ntex
t of th
e firm’s b
road
er corp
orate an
d b
usin
ess strategy fram
ework
. Differen
t
typ
es of acq
uisitio
ns are co
nsid
ered b
y th
e com
pan
y’s strateg
ic cho
ices and
imp
eratives. A
cqu
isition
s are
differen
tiated b
y th
e source o
f valu
e creation in
each. A
particu
lar type o
f acquisitio
n is th
e outco
me o
f the
strategic th
inkin
g o
f the acq
uisitio
n lo
gic, targ
et pro
file, the fram
ework
for th
e evalu
ation o
f targets an
d th
e
post-acq
uisitio
n in
tegratio
n. M
ergers an
d acq
uisitio
ns are g
enerally
follo
wed
by ch
anges in
the o
rgan
ization
structu
re of a firm
. In a m
ajor h
orizo
ntal m
erger th
e acquired
firm is in
tegrated
into
the o
rgan
ization stru
cture o
f
the acq
uirin
g firm
. In an
M&
A, each
firm h
as a set of cap
abilities an
d o
pportu
nities an
d th
ey m
ust ex
plo
it these
effectively
in relatio
n to
chan
gin
g en
viro
nm
ents. T
he d
ynam
ics of co
mpetitio
n an
d eco
nom
ic chan
ge h
ave a
bearin
g o
n th
e strategic d
ecision o
f M&
A. It req
uires co
ntin
uous reassessm
ent o
f the p
ositio
n an
d realig
nm
ent
with
the n
ew ch
allenges an
d o
pportu
nities. A
ccord
ingly, th
e acquirin
g firm
is required
to m
ake strateg
ic decisio
ns
in resp
ect of u
ncertain
ty an
d risk
, especially
with
respect to
post m
ergers ev
ents.
Stra
tegies fo
r Increa
sed M
ark
et Pow
er
One o
f the p
rimary
reasons fo
r merg
ers and acq
uisitio
ns is to
achiev
e greater m
arket p
ow
er, which
exists
when
a firm is ab
le to sell its g
oods o
r services ab
ove co
mpetitiv
e levels o
f prices o
r when
the co
sts of its
prim
ary o
r sup
po
rt activities are b
elow
levels o
f its com
petito
rs. Th
ere are com
pan
ies wh
o m
ay h
ave co
re
com
peten
cies, but th
ey lack
the size to
exercise th
eir mark
et pow
er. Mark
et pow
er is deriv
ed fro
m th
e size of
the firm
and its reso
urces &
capab
ilities to co
mpete in
the m
arketp
lace (Westo
n, C
hung an
d S
iu, 1
998). H
ence,
most o
f the m
ergers an
d acq
uisitio
ns are strateg
ically d
esigned
to ach
ieve g
reater mark
et pow
er, thro
ugh b
uyin
g
a com
petito
r, a supplier, a d
istributo
r, or so
me o
ne’s b
usin
ess in th
e related in
dustry
so as to
exercise co
re
com
peten
ce and g
ain co
mpetitiv
e advan
tage in
the m
arket. C
om
pan
ies use h
orizo
ntal o
r vertical M
&A
s6 in
ord
er to in
crease their m
arket p
ow
er, which
are briefly
discu
ssed in
the fo
llow
ing p
aragrap
hs:
Corp
ora
te an
d B
usin
ess Stra
tegies
Corp
orate strateg
y relates to
arrangin
g th
e busin
ess activities o
f the co
rporates as a w
hole, w
ith a v
iew to
achiev
ing certain
pred
etermin
ed o
bjectiv
es at the co
rporate lev
el. These o
bjectiv
es inclu
de o
rderly
redirectio
n
of th
e firm’s activ
ities, dep
loyin
g su
rplu
s cash fro
m o
ne b
usin
ess to fin
ance p
rofitab
le gro
wth
in an
oth
er, explo
iting
interd
epen
den
ce among p
resent o
r pro
spectiv
e busin
esses with
in th
e corp
orate p
ortfo
lio, an
d risk
reductio
n.
Corp
orate strateg
y also
aims at d
evelo
pin
g a n
um
ber o
f distin
ctive cap
abilities i.e. co
re com
peten
cies, which
the firm
can tran
slate into
sustain
able co
mpetitiv
e advan
tage an
d ad
d v
alue. T
hese d
istinctiv
e capab
ilities inclu
de
the firm
’s architectu
re, reputatio
n an
d in
novatio
n. A
rchitectu
re com
prises th
e intern
al relations b
etween
the
firm an
d its em
plo
yees, th
e extern
al relations b
etween
the firm
and its su
ppliers o
r custo
mers, an
d n
etwork
s
with
in g
roups o
f collab
oratin
g firm
s.
Busin
ess strategy is co
ncern
ed w
ith im
pro
vin
g th
e com
petitiv
e positio
n o
f an in
div
idual b
usin
ess, with
a
view
to m
axim
izing th
e contrib
utio
n th
at the in
div
idual b
usin
ess mak
es to th
e corp
orate o
bjectiv
es. It also aim
s
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
9
at exp
loitin
g th
e strategic assets th
at the b
usin
ess has accu
mu
lated. T
he strateg
ic assets inclu
de: n
atural
monopolies, b
arriers to en
try in
the fo
rm o
f sunk co
sts, the ex
perien
ce curv
e effect, reputatio
n, ad
vertisin
g an
d
mark
et know
ledge, an
d ex
clusiv
ity th
rough licen
sing. C
orp
orate strateg
y h
as an all-firm
enco
mpassin
g fo
cus
and ex
plo
its the d
epen
den
cies amongst v
arious co
mponen
ts of b
usin
ess, whereas b
usin
ess strategy fo
cuses o
n
a narro
w ran
ge o
f mark
ets. The d
istinctiv
e capab
ilities that th
e firm h
as built at th
e corp
orate lev
el, such
as
reputatio
n o
r innovato
ry flair, are av
ailable to
be ex
plo
ited to
geth
er with
the strateg
ic assets to en
han
ce the
com
petitiv
e advan
tage o
f the b
usin
esses.
Hard
ing an
d R
ovit (2
004) su
ggest th
e need
for alig
nm
ent b
etween
corp
orate strateg
y an
d M
&A
strategy.
Som
e CE
Os lam
ent after th
e failed M
&A
deal th
at they
did
not lin
k th
eir merg
er and acq
uisitio
n strateg
y w
ith
their co
rporate p
lan. M
any firm
s believ
e that ju
st by en
tering in
the em
ergin
g m
arkets lik
e Chin
a and In
dia,
thro
ugh acq
uisitio
ns, th
ey can
achiev
e substan
tial gro
wth
. This is an
d ‘ad
hoc’ d
ecision, m
ay n
ot b
e aligned
with
the strateg
ic fit. After in
itially ad
optin
g an
‘ad h
oc’ ap
pro
ach to
acquisitio
ns m
any O
rgan
isations feel th
at
they
sho
uld
hav
e un
dertak
en m
ore fo
cused
app
roach
es, draw
ing
detailed
strategic p
lann
ing
pro
cess so th
at
M&
A b
ecom
es more d
riven
by strateg
ic merit rath
er than
transactio
n d
riven
. Firm
s try to
mak
e acquisitio
ns as
a strategy to
quick
ly p
ositio
n th
emselv
es for ch
anges th
at occu
r in th
e info
rmatio
n tech
nolo
gy m
arket an
d to
reduce p
roduct tim
e to m
arket. It m
ay b
e emphasised
that m
any o
rgan
izations feel th
at M&
As are o
nly
meth
ods
of realisin
g strateg
ic objectiv
es rather th
an strateg
ic plan
nin
g p
rocess, w
hich
the au
thor d
eclines to
accept.
Stra
tegies fo
r En
tering a
New
Mark
et
A firm
selects a particu
lar mark
et to serv
e and th
e mark
et entry
mode is a ch
oice am
ongst sev
eral alternativ
es
like o
rgan
ic gro
wth
, acquisitio
n o
r strategic allian
ce. The ch
oice o
f entry
mode d
epen
ds o
n th
e follo
win
g facto
rs:
1.
Deg
ree of co
mpetitio
n in
the h
ost m
arket
2.
Risk
s in g
reen field
investm
ents fo
r org
anic g
row
th
3.
Availab
ility o
f org
anizatio
nal reso
urces fo
r org
anic g
row
th
4.
Poten
tials for ap
pro
priate v
alue ad
ditio
n
5.
Advan
tages o
f fast entry
In th
e host m
arket, h
igh lev
el of co
mpetitio
n g
ives rise to
excess cap
acity. Therefo
re, any effo
rts mad
e to
build
new
capacity
will in
vite retaliatio
n fro
m th
e existin
g p
layers. In
such
cases, acquisitio
n o
f an ex
isting firm
will red
uce th
e risk o
f retaliation
. Mo
reov
er, a new
ven
ture is o
ften m
ore risk
y th
an th
e acqu
isition
of an
existin
g g
oin
g co
ncern
even
though it m
ay av
oid
the p
roblem
s of in
tegratio
n w
ith an
acquisitio
n. A
firm m
ay n
ot
hav
e all the n
ecessary reso
urces an
d cap
abilities to
com
pete effectiv
ely in
the h
ost m
arket b
ut it can
access all
the reso
urces an
d cap
abilities th
rough acq
uisitio
n o
r strategic allian
ce. The ab
ility o
f a firm to
add ap
pro
priate
valu
e from
the n
ew m
arket en
try w
ill dep
end o
n th
e org
anizatio
nal fo
rm o
f that en
try. The ab
ility is m
axim
ized
with
entry
thro
ugh o
rgan
ic gro
wth
and b
ecom
es more d
ifficult w
ith acq
uisitio
n, strateg
ic alliance an
d jo
int
ven
ture. A
t times m
ergers an
d acq
uisitio
ns are th
e quick
est mean
s of en
try in
to n
ew m
arkets w
ith m
ore o
f
strategic ad
van
tages. It is w
ell know
n h
ow
ever, M
&A
are more ex
pen
sive d
ue to
the co
ntro
l prem
ium
that th
e
acquirer h
as to p
ay to
the sh
arehold
ers of th
e target co
mpan
y. Acq
uisitio
n m
ay also
not b
e possib
le if suitab
le
targets are n
ot av
ailable. T
herefo
re, the ch
oice o
f entry
mode is in
fluen
ced b
y p
roper ev
aluatio
n o
f the ab
ove
alternativ
es.
Rev
isiting B
usin
ess Stra
tegy fo
r M&
A D
ecision
s
There are certain
gen
eric analy
tical framew
ork
s which
can b
e revisited
in th
e contex
t of strateg
ic decisio
ns
for m
ergers an
d acq
uisitio
ns. T
hese strateg
ic framew
ork
s are based
on B
CG
matrix
, Anso
ff matrix
, pro
duct life
cycle an
alysis, v
alue ch
ain an
alysis an
d P
orter’s fiv
e force an
alysis. A
brief an
alysis o
f these strateg
y fram
ework
s
are done in
the fo
llow
ing p
aragrap
hs.
Modellin
g S
trategies fo
r Corp
orate G
row
th
10.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
BC
G M
atrix
An
aly
sis: The B
CG
(Bosto
n C
onsu
lting G
roup) m
atrix, as sh
ow
n in
Fig
ure-1
classifies a firm’s
busin
ess portfo
lio in
two d
imen
sions: m
arket g
row
th rate o
f pro
ducts an
d th
e com
pan
y’s relativ
e share o
f that
mark
et. When
dem
and fo
r the p
roducts rises rap
idly, firm
s hav
e more p
rofitab
le opportu
nities, im
ply
ing th
e
attractiven
ess of th
e mark
et. Mark
et share rep
resents th
e firm’s co
mpetitiv
e strength
in th
at mark
et. A ‘cash
cow
’ is a matu
re busin
ess with
low
gro
wth
opportu
nities, b
ut w
here th
e firm h
as a hig
h m
arket sh
are. A ‘star’ is
a pro
du
ct with
hig
h g
row
th o
pp
ortu
nities an
d w
here th
e firm co
mm
and
s a hig
h m
arket sh
are. A ‘d
og
’ is a
busin
ess in w
hich
the m
arket g
row
th is lo
w an
d th
e firm’s m
arket sh
are is also lo
w. A
‘questio
n m
ark’ is y
oung
busin
ess with
plen
ty o
f gro
wth
pro
spects, b
ut w
here th
e firms h
as a low
mark
et share an
d faces h
eavy co
mpetitio
n.
The fo
ur ty
pes o
f busin
esses or p
roducts h
ave d
ifferent p
rofiles in
terms o
f pro
fitability, in
vestm
ent n
eeds an
d
free cash flo
ws. T
he ‘cash
cow
’ is a pro
fitable, lo
w-in
vestm
ent b
usin
ess with
hig
h free cash
flow
. Sin
ce the
busin
ess is matu
re and p
robab
ly o
ligopolistic, in
vestm
ent in
mark
et dev
elopm
ent, research
and d
evelo
pm
ent
(R&
D) o
r additio
nal p
roductio
n cap
acity is n
o lo
nger n
eeded
. Thus a ‘cash
cow
’ thro
ws o
ff surp
lus cash
. The
‘star’ is a hig
h-p
rofit, h
igh-in
vestm
ent b
usin
ess with
low
free cash flo
w. T
he h
igh p
rofits are retain
ed to
mak
e
additio
nal in
vestm
ents in
ord
er to m
aintain
the h
igh m
arket sh
ares held
by th
e firm in
a fast-gro
win
g m
arket. A
‘do
g’ is a lo
w-p
rofit, p
ossib
ly lo
ss-mak
ing
bu
siness w
ith lo
w free cash
flow
and
low
inv
estmen
t, po
ssibly
requires d
isinvestm
ent. It rep
resents a p
roduct m
arket w
hich
is declin
ing fo
r a variety
of reaso
ns. T
he ‘q
uestio
n
mark
’ is a hig
h-in
vestm
ent b
usin
ess with
poten
tially h
igh p
rofits an
d a lo
w (o
r neg
ative) free cash
flow
.
The h
igh in
vestm
ent is n
ecessary to
build
up th
e mark
et and th
e firm’s m
arket sh
are. In an
M&
A d
eal, the
BC
G m
atrices of b
oth
the acq
uirin
g an
d acq
uired
com
pan
ies are to b
e com
bin
ed th
rough p
roper calib
ration, so
as to u
nderstan
d th
e resultan
t strength
of th
e BC
G m
atrix o
f the co
mbin
ed en
tity.
The A
ppen
dices-1
,2,3
,4&
5 ex
plain
the v
arious effects o
f strategy calib
ration fo
r com
bin
ing th
e two B
CG
matrices o
f the targ
et as well as th
e acquirer. A
ppen
dix
-1 d
epicts th
e pre-m
erger p
ositio
n o
f the p
roduct p
ortfo
lio
of th
e two m
ergin
g co
mpan
ies. The targ
et is hav
ing all th
e four classified
pro
ducts classes w
hereas th
e acquirer
has o
nly
cash co
w an
d star p
roducts. T
he o
verall p
re-merg
er RO
I (return
on in
vestm
ent) o
f the targ
et is 16.5
%
whereas th
e same fo
r the acq
uirer is 3
6.7
% an
d th
e com
bin
ed p
re-merg
er RO
I is low
er at 28.6
%. S
uppose,
imm
ediately
on acq
uisitio
n, th
e acquirer d
ivests th
e dog an
d q
uestio
n m
ark p
roducts o
f the erstw
hile targ
et, then
dep
endin
g u
pon th
e valu
ations fo
r div
estmen
t and ch
ances o
f additio
nal o
peratio
nal sy
nerg
y (say
reductio
n in
cost o
f goods so
ld), th
e RO
I of th
e com
bin
ed en
tity can
be im
pro
ved
.
Four altern
ative situ
ations h
ave b
een n
um
erically p
resented
in A
ppen
dices-2
,3,4
&5. T
he altern
ative 1
is
presen
ted in
Ap
pen
dix
-2, w
hich
dep
icts that if th
e two
pro
du
cts (do
g an
d q
uestio
n m
ark) o
f the targ
et are
div
ested at th
eir book v
alue w
ith n
o ad
ditio
nal o
peratin
g sy
nerg
y, the im
med
iate post-m
erger R
OI o
f the co
mbin
ed
entity
rises to 3
2.5
% fro
m 2
8.6
%. T
he altern
ative 2
as presen
ted in
Appen
dix
-3, su
ggests th
at if the tw
o p
roducts
(dog an
d q
uestio
n m
ark) o
f the targ
et are div
ested at th
eir book v
alues, b
ut w
ith ad
ditio
nal o
peratin
g sy
nerg
y (in
the fo
rm o
f 10%
reductio
n in
overall co
st of sales), th
e imm
ediate p
ost-m
erger R
OI o
f the co
mbin
ed en
tity rises
to 3
5.8
% fro
m th
e orig
inal p
ositio
n o
f 28.6
%. T
he altern
ative 3
is presen
ted in
Appen
dix
-4, su
ggests th
at if the
Modellin
g S
trategies fo
r Corp
orate G
row
th
Fig
ure 1
. Bosto
n C
onsu
lting G
roup B
usin
ess Portfo
lio M
atrix
Cash
cow
Star
Do
g Q
uestio
n
Mark
Hig
h
Lo
w
Mark
et Gro
wth
Slo
w F
ast
Mark
et
Sh
are
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
11
two p
roducts (d
og an
d q
uestio
n m
ark) o
f the targ
et are div
ested at m
ore th
an th
eir book v
alues, resu
lting in
no
additio
nal o
peratin
g sy
nerg
y, the im
med
iate post-m
erger R
OI o
f the co
mbin
ed en
tity rises to
33.4
% fro
m th
e
orig
inal p
ositio
n o
f 28.6
%. T
he altern
ative 4
, presen
ted in
Appen
dix
-5, su
ggests th
at if the tw
o p
roducts (d
og
and q
uestio
n m
ark) o
f the targ
et are div
ested at m
ore th
an th
eir book v
alues, w
ith ad
ditio
nal o
peratin
g sy
nerg
y
(in th
e form
of 1
0%
reductio
n in
overall co
st of sales), th
e imm
ediate p
ost-m
erger R
OI o
f the co
mbin
ed en
tity
rises to 3
6.8
% fro
m th
e orig
inal p
ositio
n o
f 28.6
%. T
he resu
lts of th
is illustratio
n can
be su
mm
arized in
Tab
le-
4, w
hich
suggests th
at in o
rder to
gro
w th
rough M
&A
, appro
priate strateg
ies for p
ost-m
erger in
tegratio
n o
r
calibratio
n o
f pro
duct p
ortfo
lios are to
be fo
rmulated
and im
plem
ented
in su
ch a w
ay th
at the co
mbin
ed en
tity’s
pro
duct p
ortfo
lio m
atrix b
ecom
es stronger th
an th
e existin
g stan
d alo
ne m
atrices of th
e com
bin
ing en
tities.
Read
ers can rew
ork
upon th
e illustratio
n in
terms o
f furth
er investm
ent fo
r questio
n m
ark an
d related
cash
flow
s and so
on fo
r evalu
ation o
f alternativ
es. The B
CG
matrix
help
s iden
tify th
e SW
OT
of th
e pro
duct p
ortfo
lio
and
pro
vid
es gu
idan
ce as to w
hich
bu
sinesses can
be d
ivested
, retained
or stren
gth
ened
thro
ug
h ad
ditio
nal
investm
ent. T
he B
CG
matrix
analy
sis can p
rovid
e a directio
n o
f a com
pan
y’s strateg
ic move in
terms o
f mark
et
attractiven
ess and co
mpetitiv
e strength
.
An
soff M
atrix
An
aly
sis: The A
nso
ff matrix
explain
s four p
ossib
le strategic ch
oices av
ailable b
efore a firm
,
dep
endin
g o
n th
e relationsh
ip b
etween
its pro
ducts an
d m
arkets p
ortfo
lio. F
igure-2
constru
cts Anso
ff matrix
,
which
dep
icts mark
et ‘pen
etration’, ‘m
arket ex
tensio
n’, p
roduct ex
tensio
n’ an
d d
iversificatio
n. M
arket p
enetratio
n
hap
pen
s, when
the firm
increases m
arket sh
are of its ex
isting p
roduct in
the ex
isting m
arkets. M
arket ex
tensio
n
takes p
lace, when
the co
mpan
y sells its ex
isting p
roducts in
new
geo
grap
hical m
arkets. P
roduct ex
tensio
n is th
e
one w
hen
the firm
sells new
pro
ducts in
its presen
t mark
ets related to
the ex
isting p
roducts. D
iversificatio
n
hap
pen
s when
the firm
sells new
pro
ducts in
new
mark
ets.
The p
ositio
nin
g o
f a firm in
the m
arket w
ith resp
ect to th
e pro
ducts d
epen
ds o
n its o
wn ev
aluatio
n o
f the
attractiven
ess of th
e mark
et, com
petitiv
e strength
s and th
e poten
tials for v
alue creatio
n. T
he relativ
e dem
ands
for ex
isting o
r the n
ew m
arket d
epen
ds u
pon th
e firm’s strateg
ic choices fo
r gro
wth
and ex
pan
sion, w
hich
are
Modellin
g S
trategies fo
r Corp
orate G
row
th
Mark
et pen
etration P
roduct ex
tensio
n
Mark
et exten
sion
Div
ersification
Existin
g
New
Pro
duct
Existin
g N
ew
Fig
ure-2
. Anso
ff pro
duct-m
arket m
atrix
Mark
ets
12.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
influ
enced
by co
re com
peten
cies or d
istinctiv
e capab
ilities of th
e firm, co
nstitu
ting a firm
’s com
petitiv
e strength
.
In an
M&
A d
eal, the acq
uirin
g co
mp
any
mu
st exam
ine th
e target’s p
resent p
ositio
n in
the m
arket an
d th
e
op
po
rtun
ities for m
igratin
g to
the n
ew m
arkets. S
om
etimes, th
e acqu
isition
may
pro
vid
e an o
pp
ortu
nity
of
enterin
g a n
ew m
arket w
ith ex
isting
pro
du
cts of th
e target th
rou
gh
the m
arket d
om
inan
ce of th
e acqu
iring
com
pan
y. An acq
uisitio
n d
ecision m
ay p
rovid
e an o
pportu
nity
to th
e acquirin
g co
mpan
y to
enter a n
ew m
arket
and alter th
e relative p
resence in
the p
roduct-m
arket p
ortfo
lio. E
xam
ple: W
hen
ICIC
I Ban
k acq
uired
the B
ank
of M
adura, IC
ICI B
ank au
tom
atically m
ade its p
resence in
the so
uth
India, b
ecause IC
ICI B
ank d
id n
ot h
ave
any p
resence in
the so
uth
India, w
hereas erstw
hile B
ank o
f Mad
ura w
as hav
ing its g
ood p
resence in
south
becau
se of its o
rigin
. Lik
e BC
G m
atrix an
alysis, sim
ilar kin
d o
f exercise can
be d
one in
the case o
f Anso
ff
matrix
analy
sis with
the p
roduct-m
arket p
ortfo
lios o
f both
the targ
et and th
e acquirin
g co
mpan
ies. Acco
rdin
gly,
strategic ch
oice can
be m
ade fo
r the co
mbin
ed en
tity to
positio
n in
the m
ost so
ught after q
uad
rant o
f the m
atrix,
dep
endin
g u
pon th
e core co
mpeten
cy o
r core cap
ability
thro
ugh fu
rther in
vestm
ents o
r div
estmen
ts.
Pro
du
ct Life C
ycle A
naly
sis: Pro
duct life cy
cle analy
sis can d
erive so
me ratio
nale fo
r M&
A strateg
y fo
r the
acquirer as w
ell as the targ
et. The p
roduct life cy
cle concep
t as dep
icted in
Fig
ure-3
traces the ev
olu
tion o
f a
pro
duct an
d its asso
ciated m
arket o
ver tim
e. The g
eneric fo
ur stag
es of a p
roduct’s life are: lau
nch
, gro
wth
,
matu
rity an
d d
ecline. T
he firm
which
launch
es a new
pro
duct h
as a small m
arket w
ith h
igh p
rofit m
argin
and
the p
roduct can
be a fast m
over. A
fast movin
g p
roduct ex
pen
ds reso
urces an
d n
eeds ad
ditio
nal p
roductio
n
capacity
on b
uild
ing u
p o
f the d
eman
d fo
r the p
roduct. M
arket d
evelo
pm
ent ex
pen
ditu
re can b
e regard
ed as
pro
duct d
evelo
pm
ent ex
pen
ditu
re in term
s of d
istributio
n ch
annels, o
utb
ound lo
gistics an
d ad
vertisin
g. A
s the
mark
et expan
ds, th
e pro
duct en
joys h
igh m
argin
s on in
creasing sales. S
ubseq
uen
tly an
d co
nseq
uen
tly, the
expan
din
g m
arket w
ith h
igh p
rofits attracts co
mpetin
g firm
s and p
roducers. B
y th
e simple law
s of d
eman
d-
supply, th
e increased
supply
leads to
a low
er pro
fit marg
in as th
e com
petitio
n b
ecom
es inten
se, even
though
there is fu
rther ex
pan
sion
of m
arket d
eman
d. T
he firm
s then
beg
in to
com
pete o
n w
ider fro
nts e.g
.; price,
distrib
utio
n, p
roduct d
ifferentiatio
n (su
ch as p
roduct q
uality
and after-sales serv
ice, etc.). Durin
g th
is phase,
com
petitio
n is to
ugh w
hen
mark
et is gro
win
g at faster rate. T
hereafter, m
arket g
row
th slo
ws d
ow
n d
ue to
too
man
y m
arket o
perato
rs leadin
g to
excess p
roductio
n cap
acity. Com
petitio
n b
ecom
es keen
er, pro
fit marg
ins are
under p
ressure an
d sh
ake-o
ut starts in
the in
dustry. In
this p
hase, red
uctio
n o
f excess cap
acity is o
ften ach
ieved
thro
ugh d
efensiv
e merg
ers7. S
hak
e-out lead
s to sy
nch
ronizatio
n o
f pro
ductio
n cap
acity w
ith th
e mark
et dem
and
and sm
all com
petito
rs may
go fo
r conso
lidatio
n an
d am
algam
ation fo
r achiev
ing eco
nom
ies of scale. S
ooner o
r
later, pro
duct’s life reach
es the m
aturity
stage.
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
13
Fig
ue-3
. The p
roduct life cy
cle
The d
uratio
n o
f the p
hase d
epen
ds u
pon th
e natu
re of th
e pro
duct, e.g
. in th
e case of so
me n
ecessity p
roducts fo
r
which
substitu
tes emerg
e slow
ly, the m
aturity
phase can
relatively
be p
rolo
nged
. But, fo
r oth
er pro
ducts, co
nsu
mer
tastes may
chan
ge o
r substitu
tes may
be in
ven
ted, b
ringin
g ab
out th
e declin
e of th
e pro
duct. A
fter that, th
e
mark
et settles dow
n an
d b
ecom
e slow
er and o
ligopolistic co
mpetitio
n em
erges. P
rofit m
argin
s beco
me lo
w,
com
petito
r achiev
es significan
t and fairly
stable m
arket sh
are. The in
vestm
ent req
uirem
ents b
ecom
e low
also.
At th
is stage, v
olu
mes are fallin
g, p
rofit m
argin
s are low
also. In
deed
, this p
hase req
uires d
isinvestm
ent, w
hich
may
beco
me a so
urce o
f cash in
flow
.
Therefo
re, the p
roduct life cy
cle concep
t help
s iden
tify o
pportu
nities fo
r acquisitio
n o
r div
estmen
t of a
single p
roduct, w
heth
er the rig
ht tim
e is at the g
row
th o
r declin
e phase. T
he B
CG
matrix
, as explain
ed in
earlier
parag
raphs co
mplim
ents th
e pro
duct life cy
cle analy
sis, for in
stance, a ‘star’ is a b
usin
ess in th
e gro
wth
phase,
while a ‘d
og’ is in
the d
ecline p
hase, an
d so
on.
Porter
’s Fiv
e Forces M
od
el
Porter (1
985) co
ncep
tualized
com
petitiv
e structu
re of a firm
’s enviro
nm
ent w
ith fiv
e dim
ensio
ns, as sh
ow
n
in F
igure-4
. These fiv
e dim
ensio
ns are: (a) ex
isting lev
el of co
mpetitio
n in
the firm
’s industry, (b
) threat o
f the
new
entran
ts, (c) neg
otiatin
g o
r barg
ainin
g p
ow
er of su
ppliers o
f inputs, (d
) neg
otiatin
g o
r barg
ainin
g p
ow
er of
the b
uyers o
f the firm
’s outp
ut, an
d (e) th
e threat o
f substitu
tes. These fiv
e forces are n
ot eq
ual in
strength
s.
Their relativ
e strength
s vary
over tim
e with
in th
e same in
dustry
or acro
ss industries. T
he stren
gth
s of th
e five
com
petitiv
e forces are d
etermin
ed b
y a n
um
ber o
f factors, w
hich
need
furth
er analy
sis. The facto
rs listed in
Tab
le-5 su
ggest th
at there are a n
um
ber o
f strategic ch
oices b
efore th
e corp
oratio
ns to
ward
s surv
ival an
d g
row
th.
As stated
at the b
egin
nin
g o
f the ch
apter, th
e strategic ch
oices fo
r gro
wth
draw
academ
ic and m
anag
erial attentio
n
tow
ards fo
rward
-lookin
g an
d scen
ario-b
uild
ing ap
pro
ach fo
r the firm
’s futu
re strategic o
pportu
nities fo
r merg
ers
and acq
uisitio
ns. T
he P
orter’s fiv
e forces m
odel can
be u
sed fo
r analy
sis and u
nderstan
din
g o
f the strateg
ic
strength
s and m
arket attractiv
eness o
f the firm
’s and co
mpetito
r’s existin
g p
ortfo
lio o
f busin
esses. This w
ould
help
the targ
et and th
e acquirin
g co
mpan
ies to co
nfig
ure th
eir busin
esses in th
e post-m
erger scen
ario. In
the
pro
cess, a firm can
use su
ch an
alysis to
assess its com
petitiv
e strength
s and w
eaknesses in
ord
er to m
atch th
ese
again
st the o
pportu
nities an
d th
reats as posed
by th
e five fo
rces.
Such
a SW
OT
analy
sis will h
elp d
iscover a m
ismatch
betw
een th
e firm’s p
resent cap
abilities an
d th
ose, w
hich
are need
ed to
create, sustain
or stren
gth
en co
mpetitiv
e advan
tages in
a mark
et. Acco
rdin
gly, an
acquisitio
n can
be w
ell plan
ned
.
Modellin
g S
trategies fo
r Corp
orate G
row
th
14.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Fig
ure- 4
: Porter’s fiv
e forces m
odel o
f com
petitio
n
Tab
le-5: F
actors d
etermin
ing stren
gth
s of th
e five co
mpetitiv
e forces
Co
mp
etitive fo
rces S
treng
then
ed b
y
New
entran
tL
ow
level o
f entry
barriers th
rou
gh
econ
om
ies of scale, fu
rther cap
ital
inv
estmen
ts, etc.
Pro
du
ctL
ow
er prices o
f sub
stitutes, b
uy
er’s willin
gn
ess to g
o fo
r sub
stitutes,
sub
stitutio
nlo
wer p
rod
uct sw
itchin
g co
sts, etc.
Su
pp
lier po
wer
Hig
h co
st of sw
itchin
g to
oth
er sup
pliers fo
r the b
uy
ers, no
n-av
ailability
of su
bstitu
tes,
con
centratio
n o
n a few
sup
pliers, etc.
Bu
yer p
ow
erC
on
centratio
n o
n a few
bu
yers, lo
w co
st of sw
itchin
g to
oth
er sellers,etc.
Ex
isting
rivalry
Lo
w in
du
stry g
row
th, h
igh
com
mitted
fixed
man
ufactu
ring
costs, lo
w
and
com
petitio
np
rod
uct d
ifferentiatio
n, etc.
Valu
e Ch
ain
An
aly
sis : In an
M&
A strateg
y, valu
e chain
analy
sis can b
e carried o
ut at th
e busin
ess unit lev
el as
well as co
mpan
y lev
el. Such
analy
sis seeks to
iden
tify th
e cost stru
cture o
f a firm’s activ
ities. As ex
plain
ed b
y
Porter (1
980), a firm
is a ‘collectio
n o
f activities th
at are perfo
rmed
to d
esign, p
roduce, m
arket, d
eliver, an
d
support its p
roducts’. A
ll these activ
ities contrib
ute to
the co
st structu
re of th
e firm an
d so
me o
f these activ
ities
differen
tiate the firm
’s pro
ducts fro
m th
ose o
f its com
petito
rs. A ty
pical v
alue ch
ain o
f a man
ufactu
ring firm
represen
ts the b
reakdow
n o
f the v
alue o
f the to
tal outp
ut (in
the fo
rm o
f reven
ue) in
to its co
mponen
ts of p
rofit
marg
in an
d co
sts, as show
n in
Fig
ure-5
. The co
sts are bro
adly
div
ided
into
those ex
pen
ded
on p
rimary
and
support activ
ities. These co
sts are then
bro
ken
dow
n in
to v
arious fu
nctio
nal co
sts. Prim
ary activ
ities are those
directed
tow
ards th
e pro
curem
ent o
f inputs, m
akin
g o
f finish
ed p
roducts, sale an
d tran
sfer to th
e buyer, an
d after
sale service. S
tud
y o
f a firm’s v
alue ch
ain h
elps u
nd
erstand
the b
ehav
iou
r of co
sts in o
rder to
iden
tify th
e
po
ssible so
urces o
f differen
tiation
(Sh
ank
and
Go
vin
drajan
(19
93
). Acco
rdin
g to
Po
rter, a firm secu
res its
com
petitiv
e advan
tage b
y d
ifferentiatin
g its v
alue ch
ain. C
ost-b
ased co
mpetitiv
e advan
tage (i.e. co
st leadersh
ip
or b
eing th
e low
est cost p
roducer) is reflected
in th
e valu
e chain
in th
e form
of eco
nom
ies of scale in
operatio
ns.
Sim
ilarly, pro
duct d
ifferentiatio
n as a co
mpetitiv
e advan
tage is also
reflected in
the v
alue ch
ain in
the fo
rm o
f
technolo
gy d
evelo
pm
ent. T
he an
atom
y o
f valu
e chain
of a firm
suggests th
at the m
anag
emen
t can create o
r
impro
ve its co
mpetitiv
e advan
tage b
y fu
rther calib
ration o
r reconfig
uratio
n. A
s a result, th
e firm’s d
istinctiv
e
capab
ilities can b
e traced an
d reco
nfig
ured
to create a stro
nger v
alue ch
ain. In
the m
ergers an
d acq
uisitio
ns
contex
t, the acq
uirer is certain
ly co
ncern
ed w
ith tw
o v
alue ch
ains: its o
wn an
d th
at of th
e target. T
ruly, an
ticipated
synerg
y fro
m th
e merg
er can n
ot b
e realized u
nless th
e two v
alue ch
ains are reco
nfig
ured
so as to
create or
impro
ve th
e com
petitiv
e advan
tages fo
r the co
mbin
ed firm
. The reco
nfig
uratio
n p
rocess w
ill involv
e tedio
us
pro
cess chan
gin
g o
f one o
r both
of th
e valu
e chain
s and ch
angin
g o
f valu
e chain
s will also
mean
chan
gin
g th
e
org
anizatio
nal stru
ctures o
f two firm
s.
Modellin
g S
trategies fo
r Corp
orate G
row
thFig
ure-5
: Valu
e chain
of m
anufactu
ring firm
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
15
Under th
e norm
al circum
stances, th
is is a difficu
lt job an
d its acco
mplish
men
t will d
epen
d o
n th
e political
and cu
ltural p
rocesses o
f restructu
ring th
e merg
ing o
rgan
izations. A
cquisitio
ns are d
riven
by d
ifferent v
alue
creation
log
ic, based
on
wh
ich th
e valu
e chain
s of b
oth
the m
ergin
g firm
s are to b
e recon
figu
red. S
ay fo
r
exam
ple, if th
e logic is eco
nom
ies of scale th
en th
e pro
ductio
n facilities o
f both
firms are ratio
nalized
and
integ
rated to
reduce th
e operatin
g co
st com
ponen
t of th
e valu
e chain
. Therefo
re, if the eco
nom
y o
f scale in th
e
purch
ase of in
puts is th
e logic b
ehin
d th
e acquisitio
n, th
en th
e inbound lo
gistics co
mponen
t will h
ave to
be
reconfig
ured
to red
uce th
e input co
st of th
e com
bin
ed en
tity. Sim
ilarly, when
the acq
uirer aim
s at larger v
olu
me
of sales fro
m th
e target in
the p
ost-m
erger p
eriod, acq
uired
com
pan
y’s o
wn d
istributio
n n
etwork
can b
e rationalized
to red
uce th
e cost o
f the o
utb
ound lo
gistics co
mponen
t of th
e valu
e chain
.
Even
though, th
e strategic co
nsid
eration fo
r a conglo
merate m
erger can
be th
e expected
reductio
n in
the
cost o
f capital, th
ere are possib
ilities of red
uctio
n o
f the firm
s’ infrastru
cture co
sts. In so
me cases, so
me o
f the
activities o
f the acq
uired
firm b
ecom
e redu
nd
ant, su
ch as R
&D
and
desig
n cap
ability, h
um
an reso
urce
man
agem
ent, fin
ancial m
anag
emen
t, etc. As th
ese activities are term
inated
in th
e even
t of m
erger, th
e support
activity
com
po
nen
ts of th
e acqu
ired firm
’s valu
e chain
beco
me slim
. Wh
en th
e prim
e mo
tive fo
r M&
A is
finan
cial, the h
ead o
ffice staff and
oth
er central an
d co
mm
on
fun
ction
s of th
e target are tran
sferred to
the
acquirer an
d co
nseq
uen
tly th
e overall in
frastructu
re cost co
mponen
t reduces. T
he resu
ltant v
alue ch
ain in
the
post m
erger p
eriod b
ecom
es stronger th
rough th
e reconfig
uratio
n o
f the su
pport v
alue d
rivers in
the en
larged
valu
e chain
. In th
e case of related
merg
er, recon
figu
ration
or recalib
ration
of v
alue d
rivers in
the p
rimary
activities are to
be carefu
lly strateg
ized. S
imilarly, in
the case o
f conglo
merate m
erger, th
e valu
e driv
ers in th
e
sup
po
rt activities n
eed carefu
l calibratio
n an
d co
nfig
uratio
n. T
here m
ay n
ot b
e any
ideal situ
ation
for th
e
integ
ration o
f the v
alue ch
ains o
f the acq
uirer an
d th
e acquired
; care should
be tak
en in
holistic reco
nfig
uratio
n,
recalibratio
n an
d in
tegratio
n o
f the m
axim
um
num
ber o
f com
ponen
ts in th
e respectiv
e valu
e chain
s. How
ever,
any ch
anges in
the v
alue ch
ain w
ill be reflected
in th
e form
of in
crease in rev
enues, co
sts, pro
fit marg
in, cash
flow
, RO
I, EV
A, etc. an
d d
ecrease in in
vestm
ent req
uirem
ents o
f the co
mbin
ed en
tity. In M
&A
s, where fin
ancial
synerg
ies are expected
, the co
st of cap
ital may
also b
e reduced
. Therefo
re, the p
resent v
alue o
f the in
cremen
tal
cash flo
ws at th
e new
reduced
cost o
f capital ad
ds v
alue b
ecause o
f the acq
uisitio
n.
Form
ula
ting S
trateg
ies for M
ergers a
nd
Acq
uisitio
ns
An o
rgan
ization m
ust set o
ut its b
usin
ess objectiv
es and g
row
th strateg
y in
a clear, rational, an
d d
ata-
orien
ted w
ay. Top ex
ecutiv
es should
establish
specific criteria, b
ased o
n th
e objectiv
es that th
ey h
ave d
etermin
ed
and o
n a strateg
y o
f gro
wth
thro
ugh acq
uisitio
n, to
describ
e what a v
iable targ
et com
pan
y w
ould
brin
g to
the
party. T
hey
should
express th
ese criteria in term
s of su
ch g
oals as m
arket sh
are, geo
grap
hical access, n
ew
pro
ducts o
r technolo
gies, an
d g
eneral am
ounts fo
r finan
cial synerg
y (Jo
hnso
n, S
choles an
d W
hittin
gto
n, 2
0080).
In strateg
y d
evelo
pm
ent, it is o
ften im
po
rtant to
help
the C
EO
’s direct rep
orts g
ain clarity
abo
ut w
hat th
e
strategy m
eans fo
r them
perso
nally
and d
evelo
p sp
ecific action p
lans fo
r implem
entin
g th
at strategy. T
he v
ery
importan
t aspect o
f strategy fo
rmulatio
n is th
e determ
inatio
n o
f a specific m
ethod fo
r conductin
g th
e merg
er
transactio
n an
d th
e subseq
uen
t integ
ration. In
this p
hase, th
e CE
O’s o
ffice work
s with
vario
us fu
nctio
ns lik
e
org
anisatio
nal d
evelo
pm
ent, H
R, m
arketin
g, O
peratio
ns, fin
ance, etc. an
d th
e SB
U (strateg
ic busin
ess units)
head
s in o
rder to
map
the en
tire M&
A p
rocess, d
efinin
g sp
ecific responsib
ilities. This p
hase co
nsid
ers and
evalu
ates the fo
llow
ing ty
pical strateg
y an
d risk
issues o
f the M
&A
:
1.
What k
ind o
f cost stru
cture sh
ould
the id
eal target h
ave?
2.
What k
ind o
f mark
et chan
nels sh
ould
the targ
et pro
vid
e?
3.
What k
ind o
f org
anizatio
nal co
mpeten
cy an
d cap
abilities sh
ould
the targ
et hav
e?
4.
Should
the targ
et pro
vid
e optim
um
leverag
e and cap
ital structu
re and th
e greatest n
um
ber o
f sources o
f
syn
ergies?
5.
Should
there b
e acquisitio
ns o
f strategic cu
stom
er accounts o
f the targ
et or its v
alue ad
din
g m
arket seg
men
ts?
Modellin
g S
trategies fo
r Corp
orate G
row
th
16.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
6.
In w
hich
part o
f the w
orld
or reg
ion ad
ditio
nal cap
acity sh
ould
be b
uilt?
7.
How
the acq
uisitio
n targ
ets be id
entified
?
8.
What k
ind o
f busin
ess and m
anag
emen
t structu
re and g
overn
ance p
rocess o
f the targ
et will h
elp so
lid
integ
ration
?
M&
A P
lan
Follo
win
g an
alysis o
f vario
us o
ptio
ns, if it is sen
sible to
go fo
r an acq
uisitio
n o
r merg
er, then
it is necessary
to
draw
an M
&A
plan
and im
plem
ent it. T
he m
erger an
d acq
uisitio
n p
lan req
uire a d
ifferent ty
pe o
f implem
entatio
n
strategy. T
he M
&A
plan
focu
ses on sh
ort-term
rather th
an lo
nger-term
strategic issu
es. It consists o
f man
agem
ent
objectiv
es, resource assessm
ent, m
arket an
alysis, clearly
specified
actions, tim
etable fo
r com
pletin
g th
e acquisitio
n
and id
entify
ing th
e indiv
iduals resp
onsib
le for m
akin
g it all h
appen
. These are ex
pressed
in term
s of m
anag
emen
t
objectiv
es and tactics d
efined
in th
e plan
. The ‘o
bjectiv
es’ specify
man
agem
ent’s ex
pectatio
ns fo
r the acq
uisitio
n,
whereas th
e ‘tactics’ pro
vid
e guid
ance as to
how
the acq
ui-sitio
n p
rocess in
cludin
g th
e specificatio
n an
d th
e criteria
for selectin
g p
oten
tial acquisitio
n targ
ets are to b
e execu
ted. T
actics inclu
de m
anag
emen
t’s choice o
f the m
ethod o
f
pay
men
t (stock
, cash, d
ebt o
r a com
bin
ation), w
illingness to
accept im
med
iate EP
S d
ilutio
n, p
reference fo
r a
stock
purch
ase or asset p
urch
ase, and so
on. T
he o
bjectiv
es and tactics o
f acquisitio
n p
lan sh
ould
be co
mpletely
con-sisten
t with
the firm
’s strategic o
bjectiv
es, which
are both
finan
cial and n
on-fin
ancial.
Fin
an
cial O
bjectiv
es: The
finan
cial objectiv
es in th
e merg
ers and acq
uisitio
n p
lan m
ay in
clude a m
inim
um
rate
of retu
rn o
n in
vestm
ent o
r rate of o
peratin
g p
rofit o
n rev
enues, to
tal reven
ues, cash
-flow
or an
y o
ther fin
ancial
targets to
be ach
ieved
with
in a sp
ecified tim
e perio
d. T
he m
inim
um
or req
uired
rates of retu
rn m
ay b
e targeted
substan
-tially h
igher th
an th
ose sp
ecified in
the b
usin
ess plan
, which
relates to th
e required
return
to sh
arehold
ers on
capital em
plo
yed
. The req
uired
return
for th
e acquisitio
n m
ay reflect a su
bstan
tially h
igher lev
el of risk
due to
the
perceiv
ed v
ariability
of th
e amount an
d tim
ing o
f the ex
pected
cash flo
ws resu
lting fro
m th
e acquisitio
n. T
he th
eory
of
contracts su
ggests th
at the g
oal o
f the m
anag
ers of a firm
is to m
axim
ize the w
ealth o
f the o
wners o
f the firm
(i.e., the
shareh
old
ers) and th
e presu
mptio
n is th
at man
agers sh
ould
accept o
nly
those in
vestm
ents co
ntrib
utin
g to
shareh
old
er
wealth
(Laffo
nt an
d M
artimort, 2
006). G
enerally, sh
arehold
ers’ wealth
max
imizatio
n is v
iewed
as the p
rimary
goal o
f
busin
ess but m
any firm
s add th
e desire to
meet th
e need
s of o
ther stak
ehold
ers to th
is over arch
ing o
bjectiv
e. Failu
re
to m
ake g
ood-faith
efforts to
meet th
e reasonab
le need
s of th
e oth
er stakeh
old
ers may
seriously
impact th
e
firm’s ab
ility to
satisfy its sh
arehold
ers due to
closu
re, strikes, state-im
posed
rules, en
viro
nm
ental reg
ulatio
ns an
d
failure to
receive reg
ulato
ry o
r shareh
old
er appro
val to
com
plete th
e pro
posed
M&
A tran
saction.
Non
-finan
cial O
bjectiv
es: No
n-fin
ancial o
bjectiv
es are basically
the m
otiv
ation
s for m
akin
g M
&A
s wh
ich
necessitate ach
ievin
g th
e finan
cial return
s as stipulated
in th
e busin
ess plan
. on m
any in
stances, su
ch o
bjectiv
es
pro
vid
e substan
tially m
ore g
uid
ance fo
r those resp
onsib
le for m
anag
ing th
e acquisitio
n p
rocess th
an fin
ancial targ
ets.
The n
on-fin
ancial o
bjectiv
es in th
e acquisitio
n p
lan in
clude th
e follo
win
g:
1.
Rig
hts to
pro
ducts, p
atents, co
pyrig
hts o
r bran
d n
ames.
2.
Gro
wth
opportu
nities in
the sam
e or related
mark
ets.
3.
New
distrib
utio
n ch
annels in
the sam
e or related
mark
ets.
4.
Additio
nal p
roductio
n cap
acity in
strategically
located
facilities.
5.
R&
D cap
abilities.
6.
Access to
pro
prietary
technolo
gies, p
rocesses, so
ftware an
d sk
ills.
The first co
nsid
eration in
form
ulatin
g an
M &
A strateg
y is to
decid
e wheth
er or n
ot an
acquisitio
n o
r even
a merg
er is an ap
pro
priate strateg
y fo
r gro
wth
. In all p
robab
ility, the M
& A
strategy sh
ould
be co
nsisten
t with
the acq
uirer’s o
verall m
ission, o
bjectiv
es, and g
oals o
f gro
win
g th
rough b
usin
ess com
bin
ations. T
able-6
explain
s
furth
er the co
mplim
entary
and su
pplem
entary
relationsh
ips an
d alig
nm
ent b
etween
busin
ess plan
and M
&A
plan
. The strateg
y sh
ould
express fin
ancial o
bjectiv
es of M
&A
(inclu
din
g acq
uisitio
n p
rice), acquisitio
n criteria,
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
17
and acq
uisitio
n b
udget in
clear and ratio
nal term
s. This m
ay b
e more d
etailed an
d m
ore q
uan
titative th
an th
e
CE
O’s statem
ents to
beco
me an
‘x’ billio
n d
ollar co
mpan
y in
‘y’ num
ber o
f years. In
ord
er to stay
off th
e boss’s
black
list, man
y a tim
e the strateg
ic plan
ners fo
rmulate M
&A
policy
and strateg
y w
hich
are not o
nly
bias to
ward
s
boss’s w
ishes b
ut m
ay b
e the cau
ses for th
e beg
innin
g o
f a failed m
erger. T
he acq
uisitio
n criteria sh
ould
specify
the o
bjectiv
es such
as div
ersification, ex
pan
sion, h
orizo
ntal / v
ertical integ
ration an
d th
e like. T
he acq
uisitio
n
plan
should
specify
qualificatio
ns, talen
ts, and p
lans o
f man
agem
ent fo
r post-acq
uisitio
n in
tegratio
n, risk
pro
file
of m
anag
emen
t (e.g., h
igh risk
target w
ith a g
reater poten
tial for h
igh retu
rns v
ersus lo
w risk
pro
bab
ility o
f
low
er return
s), and th
e required
cash flo
w in
cludin
g th
e meth
od o
f finan
cing th
e purch
ase price (e.g
., deb
t,
equity, o
r a com
bin
ation o
f both
). The M
&A
strategy sh
ould
also sp
ecify th
e types o
f adviso
rs and in
termed
iaries
need
ed fo
r M&
A co
nsu
ltations. A
dviso
rs and in
termed
iaries inclu
de: acco
untan
ts, attorn
eys an
d leg
al experts,
busin
ess bro
kers, in
vestm
ent b
ankers, len
din
g so
urces, M
&A
specialists, etc.
The su
ccess of an
M&
A d
epen
ds o
n th
e focu
s and u
nderstan
din
g o
f a well d
rawn b
usin
ess plan
. There are
vario
us q
uestio
ns th
at must b
e addressed
in d
evelo
pin
g a v
iable b
usin
ess plan
and th
ese inclu
de:
1.
Where an
d h
ow
should
the firm
com
pete?
2.
How
can th
e firm satisfy
custo
mer n
eeds b
etter than
the co
mpetito
rs?
3.
Why is th
e chosen
M&
A strateg
y p
referable to
oth
er optio
ns?
In o
rder to
answ
er these q
uestio
ns, th
e busin
ess plan
nin
g p
rocess sh
ould
consist o
f a thoro
ugh an
alysis o
f
custo
mers’ n
eeds an
d an
inten
sive an
alysis o
f the firm
’s SW
OT
in term
s of co
mpetitio
n. T
he p
lannin
g p
rocess
should
result in
a clearly articu
lated m
ission an
d set o
f quan
tified o
bjectiv
es with
associated
time fram
es and
Modellin
g S
trategies fo
r Corp
orate G
row
th
18.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
ind
ivid
uals resp
on
sible fo
r meetin
g th
ese ob
jectives b
y th
e targeted
dates. T
he assu
mp
tion
s un
derly
ing
the
strategy an
d su
pportin
g fin
ancial statem
ents sh
ould
be id
entified
clearly. Of co
urse th
is is crucial b
ecause th
e
reasonab
leness o
f any b
usin
ess strategy is so
lely d
epen
den
t on th
e credib
ility o
f its underly
ing assu
mptio
ns.
Fin
ally, an ap
pro
priate M
&A
strategy is selected
from
a range o
f reasonab
le optio
ns. H
ow
ever, th
ere is a linkag
e
betw
een th
e acquisitio
n p
lan an
d b
usin
ess plan
. Acq
uisitio
n p
lan d
escribes h
ow
the firm
will en
cash th
e busin
ess
strategy th
rough an
acquisitio
n o
r merg
er. The sam
e logic ap
plies if th
e implem
entatio
n o
f the firm
’s busin
ess
plan
requires an
y k
ind o
f busin
ess com
bin
ation lik
e join
t ven
ture o
r busin
ess alliance.
Arch
itecture fo
r M&
A
An M
&A
architectu
re has to
be d
evelo
ped
follo
win
g th
e listed d
ow
n g
uid
ance fo
r the arch
itects of m
ergers
and acq
uisitio
ns. T
he fo
llow
ing are so
me o
f the featu
res, which
are linked
to M
&A
architectu
re:
1.
Iden
tify th
e specific p
urp
ose o
f the acq
uisitio
n. T
his sh
ould
inclu
de w
hat sp
ecific goals are to
be ach
ieved
(e.g., co
st reductio
n, access to
new
custo
mers, d
istributio
n ch
annels o
r pro
prietary
technolo
gy, so
ftware,
enhan
ced p
roductio
n cap
acity, etc.) and h
ow
the ach
ievem
ent o
f these g
oals w
ill better en
able th
e acquirin
g
firm to
implem
ent its b
usin
ess strategy.
2.
Estab
lish a tim
etable fo
r com
pletin
g th
e acquisitio
n (in
cludin
g in
tegratio
n) if th
e target firm
is to b
e merg
ed
with
the acq
uirin
g firm
’s operatio
ns.
3.
Evalu
ate the acq
uirer’s fin
ancial an
d m
anag
erial capab
ility to
com
plete an
acquisitio
n.
4.
Indicate th
e acquirer’s p
references fo
r a “friendly
” acquisitio
n o
f contro
lling in
terest usin
g sto
ck, d
ebt,
cash, o
r any co
mbin
ation, etc.
5.
Dev
elop screen
ing criteria fo
r iden
tifyin
g p
oten
tial target firm
s and ex
plain
plan
s for co
nductin
g th
e search
as to w
hy th
e target u
ltimately
be selected
and h
ow
initial co
ntact w
ith th
e target firm
would
be m
ade.
6.
Iden
tify k
ey b
uy
er/seller issues fo
r establish
ing
neg
otiatio
n strateg
y. Reco
mm
end
a deal stru
cture th
at
addresses th
e prim
ary n
eeds o
f all parties in
volv
ed. C
om
men
t on th
e characteristics o
f the d
eal structu
re
like acq
uisitio
n v
ehicle (i.e., th
e legal stru
cture to
be u
sed in
acquirin
g th
e target firm
), the p
ost clo
sing
org
anizatio
n (i.e., th
e legal fram
ework
to b
e used
to m
anag
e the p
ost acq
uisitio
n co
mbin
ed en
tity), m
ode o
f
pay
men
t (i.e., cash, p
aper, o
r som
e com
bin
ation), fo
rm o
f acquisitio
n (i.e., w
heth
er assets or sto
ck are
bein
g acq
uired
) and tax
structu
re (i.e., wheth
er it is a taxab
le or a n
ontax
able tran
saction).
7.
Indicate h
ow
to clo
se the g
ap b
etween
the seller’s p
rice expectatio
ns an
d th
e acquirer’s o
ffer price.
8.
In o
rder to
dev
elop a p
relimin
ary m
inim
um
and m
axim
um
purch
ase price ran
ge an
d d
etermin
e the in
itial
offer p
rice. For th
is purp
ose, p
rovid
e pro
jected 5
-year fin
ancial statem
ents alo
ng w
ith k
ey assu
mptio
ns o
f
the acq
uirin
g an
d targ
et firms in
div
idually
and m
ake co
nso
lidated
statemen
ts with
and w
ithout th
e effects
of sy
nerg
y. Iden
tify an
initial o
ffer price, th
e com
positio
n (i.e., cash
, stock
, deb
t, or so
me co
mbin
ation) o
f
the o
ffer price, an
d w
hy it is b
elieved
that th
e offer p
rice is right in
terms o
f meetin
g th
e prim
ary n
eeds o
f
both
target an
d acq
uirer sh
arehold
ers.
9.
Determ
ine w
heth
er the p
roposed
offer p
rice can b
e finan
ced w
ithout en
dan
gerin
g th
e com
bin
ed firm
’s
credit w
orth
iness o
r seriously
erodin
g fu
ture p
rofitab
ility an
d cash
flow
. For listed
firms, atten
tion is to
be
giv
en to
the n
ear-term im
pact o
f the acq
uisitio
n o
n th
e EP
S o
f the co
mbin
ed firm
s.
10
.D
evelo
p in
tegratio
n strateg
ies to id
entify
the p
oten
tial integ
ration ch
allenges an
d p
robab
le solu
tions in
cludin
g
exit strateg
y fo
r the fin
ancial b
uyers.
An acq
uisitio
n is o
ne o
f the m
any o
ptio
ns av
ailable fo
r implem
entin
g a b
usi-n
ess strategy. T
he d
ecision to
pursu
e an acq
uisitio
n rests o
n th
e desire to
achiev
e contro
l and a p
erceptio
n th
at the acq
uisitio
n w
ill result in
achiev
ing th
e desired
objectiv
es more rap
idly
than
oth
er optio
ns. In
the p
rocess, m
any acq
uirers p
ay to
o m
uch
for g
ainin
g co
ntro
l. At tim
es, an altern
ative o
ptio
n m
ay p
rove to
be less risk
y. A firm
may
choose to
implem
ent
what am
ounts to
a phased
acquisitio
n b
y first en
tering in
to a jo
int v
entu
re with
anoth
er com
pan
y b
efore acq
uirin
g
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
19
it at a later date. O
nce a firm
consid
ers an acq
uisitio
n as a k
ey to
realizing th
e strategic m
ove in
the b
usin
ess
plan
, an M
&A
plan
is dev
eloped
. The m
ergers an
d acq
uisitio
ns p
lan p
rovid
es the d
etails need
ed to
implem
ent
effectively
the firm
’s busin
ess strategy. T
he acq
uisitio
n p
lan d
efines th
e specific o
bjectiv
es what th
e man
agem
ent
hopes to
achiev
e by co
mpletin
g an
acquisitio
n. T
he M
&A
plan
addresses issu
es of reso
urce av
ail-ability
and
iden
tifies the sp
ecific tactics the m
anag
emen
t cho
oses to
com
plete a tran
saction
. Th
e acqu
isition
plan
also
establish
es a sched
ule o
f milesto
nes to
keep
the p
rocess o
n track
and
clearly d
efines th
e auth
ority
and
responsib
ilities of th
e indiv
iduals w
ho are en
trusted
with
man
agin
g th
e acquisitio
n p
rocess.
Reso
urce A
vaila
bility
: At th
e beg
innin
g o
f the acq
uisitio
n p
rocess, it is im
portan
t to k
now
the am
ounts o
f the
firm’s av
ailable reso
urces th
at senio
r man
agem
ent w
ill com
mit to
a merg
er or acq
uisitio
n. B
efore u
ndertak
ing
a search fo
r po
tential targ
et, the acq
uirer firm
need
s to d
evel-o
p targ
et selection
criteria and
loo
k in
to th
e
finan
cial resources av
ailable an
d req
uired
to b
e raised fro
m th
e mark
et for strik
ing th
e deal. It is to
be seen
if the
target firm
has th
e poten
tial pool o
f funds p
rovid
ed b
y th
e intern
al cash flo
w o
f the co
mbin
ed co
mpan
ies in
excess o
f norm
al operatin
g req
uirem
ents, as w
ell as the cap
acity o
f the co
mbin
ed firm
to issu
e new
equity
shares o
r increase th
e leverag
e. A firm
is alway
s attractive to
raise sufficien
t funds fo
r an acq
uisitio
n if th
e acquirin
g
firm can
dem
onstrate th
at it can earn
its cost o
f capital. T
ruly, th
e senio
r man
agem
ent’s risk
toleran
ce play
s an
importan
t role in
determ
inin
g w
hat th
e acquirer b
elieves it can
afford
to sp
end o
n a m
erger o
r acquisitio
n. A
t the sam
e
time, risk
-averse m
anag
emen
t may
be in
clined
to co
m-m
it only
a small p
ortio
n o
f the to
tal finan
cial resources fo
r
M&
A.
Determ
inin
g A
fford
ab
ility a
nd
Risk
s: While m
akin
g an
acquisitio
n d
ecision, v
arious ty
pes o
f risks co
nfro
nt th
e
senio
r man
agem
ent an
d th
ese risks affect th
e afford
ability
of an
M&
A o
pportu
nity. T
hese risk
s are operatin
g,
finan
cial, and o
ver-p
aym
ent. D
epen
din
g u
pon h
ow
man
agers p
erceive th
ese risks, th
ey w
ill com
mit p
oten
tial
resources av
ailable fo
r mak
ing an
acquisitio
n d
ecision. T
he risk
s are:
Op
eratin
g R
isk: T
his risk
is gen
erally p
erceived
to b
e hig
her fo
r M&
As, if it is u
nrelated
to th
e acquirer’s co
re
busin
ess.O
peratin
g risk
add
resses the ab
ility o
f the b
uy
er to m
anag
e the acq
uired
com
pan
y effectiv
ely an
d
efficiently. L
ack o
f understan
din
g o
f man
agers in
the acq
uirin
g co
mpan
y o
f the co
mpetitiv
e dynam
ics of th
e new
mark
et and th
e inner w
ork
ings o
f the targ
et firm m
ay n
egativ
ely affect th
e post-m
erger in
tegratio
n. A
s a result
man
agem
ent o
f the co
mbin
ed co
mpan
y w
ould
be serio
usly
affected.
Fin
an
cial R
isk: F
inan
cial risk arises w
hen
the b
uyer is w
illing to
leverag
e an M
&A
transactio
n an
d accep
t
dilu
tion o
f near-term
earnin
gs p
er share, resu
lting in
hig
h ch
ances o
f shareh
old
er valu
e destru
ction. A
cquirer
man
agem
ent’s to
lerance o
f finan
cial risk can
be m
easured
by th
e credit ratin
g to
som
e exten
t. In o
rder to
main
tain a
specific cred
it rating, th
e acquirin
g co
mpan
y m
ust m
aintain
certain lev
els of fin
ancial ratio
s such
as deb
t-equity
and
interest co
verag
e. A firm
’s increm
ental d
ebt cap
acity can
be ap
pro
xim
ated b
y co
mparin
g th
e relevan
t finan
cial
ratios to
those o
f com
parab
le firms in
the sam
e industry
that are rated
by th
e credit ratin
g ag
encies. T
he d
ifference
represen
ts the am
ount th
ey th
eoretically
could
borro
w w
ithout jeo
pard
izing th
eir curren
t credit ratin
g. T
he
man
agem
ent can
also g
ain in
sight in
to h
ow
much
EP
S d
ilutio
n eq
uity
investo
rs may
be w
illing to
tolerate
thro
ugh in
form
al discu
ssions w
ith an
alysts an
d can
mak
e an assessm
ent o
f recently
done co
mparab
le M&
A
transactio
ns fin
anced
by issu
ing sto
cks.
Overp
aym
ent R
isk: H
ubri th
eory
suggests th
at acquirer h
as a tenden
cy to
overp
ay fo
r an acq
uisitio
n. T
he
overp
aym
ent risk
involv
es the d
ilutio
n o
f EP
S o
r a reductio
n in
its gro
wth
rate resultin
g fro
m p
ayin
g sig
nifican
tly
more th
an th
e econom
ic valu
e of th
e acquired
com
pan
y. The effects o
f overp
aym
ent o
n earn
ings d
ilutio
n can
last for y
ears. Imm
ediately
on acq
uisitio
n, th
e acquirer m
y h
ave g
o fo
r a series of in
ternal restru
cturin
g affectin
g
gro
wth
of E
PS
adversely. H
ow
ever, acq
uirer m
anag
emen
t may
argue th
at the sav
ings resu
lting fro
m co
mbin
ing th
e
two en
tities will raise th
e com
bin
ed E
PS
gro
wth
. But th
e risk is th
at the sav
ings m
ay b
e real-ized d
urin
g th
e time
frame as assu
med
by m
anag
emen
t and as a resu
lt the slo
wdow
n in
earnin
gs m
ay ex
tend b
eyond th
e nex
t few
Modellin
g S
trategies fo
r Corp
orate G
row
th
20.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
years. F
ailure to
achiev
e the p
ost-m
erger E
PS
gro
wth
rates is likely
to resu
lt in a su
bstan
tial deterio
ration in
the
enlarg
ed firm
’s mark
et valu
e.
Tactics fo
r M&
A A
rchitectu
re
Tactics fo
r M&
A arch
itecture reflect sen
ior m
anag
emen
t’s preferen
ces for co
nductin
g th
e acquisitio
n d
eal pro
cess.
Dep
endin
g u
pon m
anag
emen
t’s risk to
lerance an
d b
iases, man
agem
ent can
pro
vid
e guid
ance to
those ex
ecutiv
es
responsib
le for n
egotiatin
g th
e M&
A tran
saction in
the fo
llow
ing m
atters:
1.
Freezin
g th
e criteria (e.g., size, p
rice range, cu
rrent p
rofitab
ility, gro
wth
rate, or g
eograp
hic lo
cation) to
be
used
to ev
aluate p
rosp
ective targ
et candid
ates.
2.
Determ
inin
g an
d selectin
g th
e meth
ods fo
r findin
g th
e acquisitio
n can
did
ates (e.g., so
liciting b
oard
mem
bers,
analy
zing co
mpetito
rs and co
ntactin
g b
rokers, in
vestm
ent b
ankers, len
ders, law
firms, an
d th
e trade p
ress).
3.
Fix
ing th
e roles an
d resp
onsib
ilities of th
e acquisitio
n team
, inclu
din
g th
e use o
f outsid
e consu
ltants an
d
quan
tifyin
g d
efinin
g th
e team’s b
udget Id
entify
ing accep
table so
urces o
f finan
cing (e.g
., equity
issues, b
ank
loan
s, unsecu
red b
onds, seller fin
ancin
g, o
r asset sales).
4.
Choice b
etween
‘asset purch
ase’ or ‘sto
ck p
urch
ase’ and m
ode o
f pay
men
t (cash, sto
ck, o
r deb
t or a co
mbin
ation).
5.
Allo
wan
ces for g
oodw
ill or o
ther in
tangib
le assets.
6.
Open
ness to
partial o
r full acq
uisitio
n.
7.
Willin
gness to
launch
friendly
or u
nfrien
dly
acquisitio
n.
8.
Fix
ing affo
rdab
ility lim
its (such
as max
imum
price, b
ook earn
ings b
efore in
terest and tax
es, or cash
flow
multip
le or a m
axim
um
purch
ase consid
eration).
9.
Choice b
etween
related an
d u
nrelated
acquisitio
ns an
d so
on.
Wh
ole h
earted in
vo
lvem
ent an
d p
articipatio
n b
y m
anag
emen
t will h
elp d
ramatically
in th
e successfu
l
implem
entatio
n o
f the acq
uisitio
n p
rocess. B
ut u
nfo
rtunately, at th
e beg
innin
g o
f the p
rocess, sen
ior m
anag
emen
t
does n
ot sh
are significan
t info
rmatio
n w
ith o
ther m
anag
ers, desp
ite recognizin
g th
e valu
e of co
mm
unicatio
n
which
leads to
limited
particip
ation b
y o
ther lev
els of m
anag
emen
t, misco
mm
unicatio
n, co
nfu
sion, an
d p
oor ex
ecutio
n
of th
e M&
A p
rocess.
Tim
e Sch
edu
le: There sh
all be a p
roperly
structu
re and d
esigned
acquisitio
n p
lan, w
hich
is basically
a sched
-ule
of all th
e key
even
ts that m
ust tak
e place th
roughout th
e acquisitio
n p
rocess alo
ng w
ith a tim
e line. E
ach ev
ent
should
be ch
aracterized b
y b
egin
nin
g an
d en
d-in
g m
ilestones o
r dates as w
ell as the n
ame o
f the in
div
iduals
responsib
le for en
surin
g th
at each m
ilestone is ach
ieved
. The tim
etable o
f even
ts can b
e aggressiv
e but realistic,
lest due d
iligen
ce is not d
one p
roperly. T
he tim
etable sh
ould
moti-v
ate all particip
ants in
the p
rocess to
work
as
exped
itiously
as possib
le to m
eet the m
anag
emen
t objectiv
es establish
ed in
the acq
uisitio
n p
lan. H
ow
ever, an
over o
ptim
istic timetab
le may
pro
ve to
be d
e-motiv
ating to
those in
volv
ed b
ecause u
nco
ntro
llable o
r unfo
reseen
circum
stances m
ay d
elay reach
ing certain
milesto
nes, affectin
g th
e success in
the p
ost-m
erger p
eriod.
Assets D
eal a
nd
Sto
ck D
eal: W
hile co
ntem
platin
g th
e M&
A d
eal, both
the b
uyer an
d seller strateg
ies wheth
er
the tran
saction w
ould
be an
asset transactio
n o
r a stock
transactio
n. T
he b
uyer m
ay w
ant to
buy th
e assets,
becau
se he o
r she can
avoid
poten
tial lawsu
its from
inheren
t corp
orate liab
ilities and can
write u
p o
r write d
ow
n
the assets, claim
ing larg
er dep
reciation to
avail m
ore tax
advan
tages. O
n th
e oth
er han
d, th
e seller would
prefer
stock
sale as he o
r she m
ay face a tax
liability
for d
epreciatio
n w
rite back
and fo
r selling th
e mach
inery
at a
hig
her v
alue th
an th
at show
n o
n th
e written
dow
n b
ook v
alue. A
n asset sale is also
time co
nsu
min
g an
d co
stly
becau
se there w
ill be leg
al transfer o
f each asset. It is also
more d
ifficult b
ecause o
f the n
eed fo
r third
-party
consen
ts on leased
and lo
aned
assets, etc. when
it is an asset sale; th
e purch
ase price is assig
ned
to sp
ecific
assets at their fair m
arket v
alue, n
ot th
e dep
reciated v
alue as p
er the b
ooks. T
he d
ifference b
etween
the p
urch
ase
price an
d th
e allocatio
n o
f the p
urch
ase price is g
oodw
ill. Under th
e vario
us tax
laws, g
oodw
ill can b
e amortized
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
21
over a lo
ng p
eriod o
f time d
epen
din
g u
pon a co
untry
along w
ith o
ther in
tangib
les. Both
stock
purch
ase and asset
purch
ase can b
e thro
ugh cash
pay
men
t or ex
chan
ge o
f acquirer’s sh
ares. So, it is n
ecessary to
understan
d th
e
pro
s and co
ns o
f asset and sto
ck p
urch
ases.
Syn
ergy fo
r M&
A S
uccess
Synerg
y8 is a m
uch
-loved
and o
verw
ork
ed m
anag
emen
t jargon an
d so
metim
es loosely
used
to d
escribe a
mysterio
us ch
emistry
betw
een th
e com
bin
ing en
tities. In fact, th
e term refers to
the co
mbin
ation o
f vario
us
physical, fin
ancial an
d in
tellectual assets su
ch th
at their v
alue is g
reater than
the su
m o
f their in
div
idual w
orth
.
Siro
wer (1
997) o
bserv
ed, “T
he easiest w
ay to
lose th
e acquisitio
n g
ame is b
y failin
g to
defin
e synerg
y in
terms
of real an
d m
easurab
le impro
vem
ents in
com
petitiv
e advan
tage, su
ch as cash
flow
s”. Synerg
y is o
ne o
f the
prim
e motiv
ating fo
rces for d
ecidin
g th
e merg
ers and acq
uisitio
ns b
ut m
any a tim
e the m
anag
emen
ts of b
oth
acquirin
g an
d targ
et com
pan
ies tend to
oversim
plify
it by co
nsid
ering th
at the co
rporate co
mbin
ation w
ill alway
s
create greater sh
arehold
er valu
e than
if they
operate in
div
idually. T
echnically
speak
ing, S
ynerg
y is th
e ability
of
the m
erged
com
pan
y to
gen
erate hig
her sh
arehold
ers’ wealth
than
the stan
dalo
ne en
tities. Eco
nom
ically, it is the
ability
of th
e com
bin
ed en
tity to
furth
er limit co
mpetito
rs’ abilities to
contest th
eir or th
e targets’ cu
rrent in
put
mark
ets, pro
cesses, or o
utp
ut m
arkets an
d/o
r the ab
ility to
open
new
mark
ets and/o
r encro
ach in
to th
e com
petito
rs’
mark
ets where th
ese com
petito
rs cannot resp
ond. S
om
e merg
ers create synerg
ies becau
se the co
mbin
ed firm
can eith
er cut co
sts or u
se the co
mb
ined
assets mo
re effectively
to g
enerate m
ore cash
flow
and
valu
e for
shareh
old
ers and th
is is gen
erally a g
ood reaso
n fo
r a merg
er. Synerg
ies are supposed
to create th
e follo
win
g
ben
efits to ju
stify th
e M &
A:
1.
Cost red
uctio
n : th
e com
bin
ed firm
can o
perate m
ore efficien
tly th
an th
e separate firm
s due to
:
a.E
conom
ies of scale: co
nso
lidatio
n o
f man
ufactu
ring reso
urces can
push
merg
ed firm
to a m
ore co
st effective
scale of o
peratio
n.
b.
Eco
no
mies o
f vertical in
tegratio
n: b
ecause su
pp
ly ch
ain relatio
nsh
ips are w
ithin
the firm
, pro
fits that
would
norm
ally g
o to
oth
er busin
esses are retained
.
c.C
om
plem
entary
resources: red
undan
t or u
nder-u
tilised reso
urces are co
mbin
ed o
r conso
lidated
.
2.
Tax
ben
efits: these are lu
crative in
centiv
es for m
ergers an
d acq
uisitio
ns. S
uch
ben
efits are gen
erally w
rite-
off o
f unab
sorb
ed lo
sses of th
e target co
mpan
y. When
the targ
et firm h
as significan
t unab
sorb
ed tax
losses
from
form
er years, th
ese can b
e applied
to th
e inco
me o
f the co
mbin
ed firm
after the acq
uisitio
n o
r merg
er,
thus red
ucin
g cash
out flo
w th
rough tax
savin
gs.
3.
Unused
deb
t capacity
: if the targ
et firm h
as a low
er deb
t-equity
ratio (D
ER
) than
that o
f the b
iddin
g firm
,
the u
nused
deb
t capacity
can lead
to in
cremen
tal tax sh
ields, w
hich
accrues to
the co
mbin
ed firm
.
4.
Surp
lus fu
nds: ex
cess funds in
the targ
et com
pan
y m
ay rem
ain u
npro
ductiv
e and id
le and th
at can b
e
turn
ed o
ver to
positiv
e NP
V in
the co
mbin
ed o
rgan
ization (F
ama an
d F
rench
, 1997).
5.
Asset w
rite-ups: th
e assets of th
e target firm
may
be re-assessed
or rev
alued
at a hig
her m
arket v
alue fo
r
inclu
sion
on
the co
mb
ined
firm’s b
alance sh
eet. Dep
end
ing
up
on
the sp
ecific cou
ntry
’s tax law
s, the
resultin
g in
cremen
tal dep
reciation m
ay p
roduce a tax
shield
, which
adds v
alue to
the co
mbin
ed o
rgan
isation.
Syn
ergy M
od
el
To ex
press sim
ply, V
synerg
y = V
A(E
nlarg
ed) –
(VA +
VB ), o
r VA
(Enlarg
ed) =
(VA +
VB ) +
Vsy
nerg
y
wh
ere,
VA
(Enlarg
ed) is th
e valu
e of th
e com
bin
ed an
d en
larged
entity
after merg
er,
VA &
VB
are the stan
d alo
ne v
alues o
f the co
mbin
ing en
tities ‘A’ an
d ‘B
’, where ‘A
’ is the acq
uirin
g co
mpan
y an
d
‘B’ is th
e target co
mpan
y.
Vsy
nerg
yis th
e valu
e of sy
nerg
y.
Modellin
g S
trategies fo
r Corp
orate G
row
th
22.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
In o
ther w
ord
s, synerg
y ex
ists when
VA
(Enlarg
ed) >
(VA +
VB ) an
d th
is can n
ot h
appen
unless th
e disco
unted
presen
t
valu
e of n
et increm
ental cash
flow
s for a co
nsid
erable p
eriod o
f time fro
m th
e merg
er is positiv
e. Therefo
re the
valu
e of estim
ated p
re-merg
er synerg
y [V
synerg
y(E
) ]can b
e expressed
as:
Vsy
nerg
y(E
) = [!
CF
t /(1+
WA
CC
)t]=
!C
F1 /(1
+W
AC
C)
1+!
CF
2/(1
+W
AC
C)
2+!
CF
3/(1
+W
AC
C)
3 + …
……
.. +
!C
Ft /(1
+W
AC
C)
t ,
Wh
ere,
!C
Ft is th
e estimated
post-m
erger in
cremen
tal cash flo
w fo
r an accep
table ex
plicit tim
e perio
d ‘t’
=!
Rev
enues
t –!
Costs
t – M
erger ex
pen
ses – !
Tax
es t –
!C
apital R
equirem
ents
t ,
WA
CC
is weig
hted
averag
e cost o
f capital o
f the en
larged
com
bin
ed en
tity.
At th
e time o
f M&
A d
ecision th
e valu
e of sy
nerg
y [V
synerg
y(E
) ] is estimated
. But after th
e deal is o
ver, it is
essential to
track th
e valu
e of sy
nerg
y to
understan
d h
ow
the estim
ated sy
nerg
y is b
eing realized
. Ideally, th
e
valu
e of sy
nerg
y realised
can b
e expressed
as Vsy
nerg
y(R
) = P
ost-m
erger V
A(E
nlarg
ed) –
Pre-m
erger[(V
A+
VB )].T
herefo
re,
imm
ediately
after closin
g th
e deal, v
aluatio
ns o
f the en
larged
and co
mbin
ed en
tity [V
A(E
nlarg
ed) ] at d
ifferent in
tervals
are necessary
to track
the m
ovem
ent o
f actual realisatio
n o
f synerg
y. For th
is purp
ose, v
aluatio
n an
alysis can
be
done fo
r differen
t time p
eriods as co
mpared
to (a) d
ate of d
eclaration an
d (b
) date o
f closin
g th
e deal. T
his
analy
sis pro
vid
es the v
ariance b
etween
the p
re-merg
er synerg
y estim
ated [V
synerg
y(E
) ] and th
e post-m
erger sy
nerg
y
realised [V
synerg
y(R
) ].If [V
synerg
y(E
) ] is greater th
an [V
synerg
y(R
) ] , there is in
cremen
tal merg
er gain
and if it is v
ice
versa, th
en th
ere arises neg
ative sy
nerg
y (also
called an
ergy) th
rough th
e M&
A tran
saction. Id
eally, it is expected
that [V
synerg
y(E
) ] will b
e equal to
[Vsy
nerg
y(R
) ].
In an
M&
A d
ecision, th
e man
agers’ estim
ates of sy
nerg
ies are gen
erally o
verb
low
n. M
ost o
f the ex
ecutiv
es
feel that th
ey o
ught to
be creatin
g a larg
e synerg
y th
rough th
e acquisitio
n th
ey are p
lannin
g. T
hey
may
not h
ave
special in
sights in
to th
e synerg
y o
pportu
nities o
r aptitu
de fo
r nurtu
ring sy
nerg
y. As a resu
lt they
may
feel that
synerg
y effect is p
erpetu
al and th
erefore, w
hile v
aluin
g sy
nerg
y th
ey co
nsid
er the term
inal v
alue. T
he au
thor is
of o
pin
ion th
at com
putin
g term
inal v
alue o
f the in
cremen
tal cash flo
w d
ue to
perp
etual sy
nerg
y fo
r infin
ite
perio
d is a w
rong effo
rt. As is w
ell know
n, a m
erger b
ecom
es uneco
nom
ical over a p
eriod o
f time b
ecause
synerg
y realizatio
n ceases d
ue to
vario
us reaso
ns. T
herefo
re, the au
thor su
ggests th
at if presen
t valu
e of ad
ditio
nal
cash flo
w fo
r a finite p
eriod is ad
ded
with
the term
inal v
alue fo
r unlim
ited p
eriod, th
e valu
e of sy
nerg
y w
ould
be
overstated
and as a resu
lt the M
&A
would
beco
me fin
ancially
failure. T
he p
ost m
erger in
tegratio
n p
lan h
as a
great im
pact o
n ach
ievin
g th
e savin
gs o
r additio
nal cash
flow
s in th
e form
of sy
nerg
y. Contin
uous m
otiv
ation o
f
man
agers w
ith sp
ecial com
pen
sation p
ackag
es are to b
e targeted
tow
ards ach
ievin
g sy
nerg
istic savin
gs th
roughout
perp
etually. It m
ay b
e little conserv
ative ap
pro
ach b
ut so
unds realistic to
valu
e synerg
y fo
r a finite p
eriod;
oth
erwise h
uge fo
recasted p
ost-acq
uisitio
n v
alue o
f the acq
uirer w
ill not m
aterialize in th
e med
ium
term.
Iden
tificatio
n a
nd
Rea
lisatio
n o
f Poten
tial S
yn
ergies
It has b
een o
bserv
ed th
at when
the m
ergers are d
eclared to
the p
ublic, th
e CE
Os o
f the m
ergin
g co
mpan
ies
categorically
spell o
ut th
e types o
f synerg
ies they
believ
e to accru
e in th
e post-m
erger scen
ario. T
hey
do n
ot
quan
tify fin
ancially
to th
e public b
ut d
escribe q
ualitativ
ely. Fin
ancial q
uan
tification o
f synerg
y is eith
er done
meticu
lously
by th
e due d
iligen
ce team o
r it simply
remain
s a calculated
guess. B
ased o
n th
eir experien
ces, and
dep
endin
g u
pon th
e natu
re of th
e com
pan
ies’ econom
ic pro
files they
can id
entify
the p
oten
tial sources fro
m
where th
e synerg
ies are seemed
to accru
e. How
ever, a reaso
nab
le estimate o
f the eco
nom
ic gain
s of th
e pro
posed
merg
er would
substan
tially in
fluen
ce, perh
aps d
ecide th
e conclu
sion ab
out th
e deal. S
om
e times, th
e CE
Os m
ay
simply
and casu
ally set o
ut targ
ets for th
e synerg
ies out o
f the p
roposed
merg
er deal w
ithout id
entify
ing th
e
possib
le sources o
f synerg
ies. As a resu
lt in m
any su
ch cases th
e post m
erger fin
ancial calcu
lations b
ring lo
t of
disap
poin
tmen
ts, affecting sh
arehold
er valu
e. After id
entify
ing all th
e possib
le sources o
f synerg
ies, one h
as to
evalu
ate it realistically. A p
ruden
t man
agem
ent can
iden
tify th
e sources fro
m w
here th
e merg
er ben
efits will
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
23
accrue. A
s observ
ed b
y W
eston an
d W
eaver (2
001), th
e synerg
y (o
r efficiency
gain
s) com
e from
a wid
e range o
f
items listed
in A
pp
end
ix-6
. So
me o
f the sy
nerg
ies are mo
re pro
bab
le than
oth
ers; som
e are mo
re speed
ily
realisable th
an o
thers w
hile so
me sy
nerg
ies are more co
mplicated
than
oth
ers.
Cu
stom
er Based
Syn
ergy R
ealisa
tion
: One o
f the w
ays to
assess realisation o
f synerg
y is to
evalu
ate the
outco
me o
f a merg
er or acq
uisitio
n w
ith resp
ect to retu
rn o
n cu
stom
er RO
C9. T
his is a m
easure to
determ
ine th
e
valu
e created th
rough M
& A
for th
e custo
mers o
f both
the acq
uirin
g an
d th
e target co
mpan
ies. Max
imizin
g
overall R
OC
of th
e custo
mers o
f the co
mbin
ed en
tity req
uires a firm
to fav
our, su
pport, o
r expan
d th
ose elem
ents
of th
e custo
mer b
ase hav
ing th
e hig
hest R
OC
. ‘Custo
mer S
ynerg
y’ is a stro
ng ratio
nale fo
r a merg
er but in
fact,
majo
rity o
f acquirin
g firm
s are quite p
oor at ex
plo
iting su
ch sy
nerg
ies. If the m
anag
ers of th
e com
bin
ed firm
hav
e experien
ce in creatin
g a cu
lture o
f custo
mer tru
st, and are co
mm
itted to
creating lo
ng-term
valu
e as well as
short-term
pro
fits, then
such
synerg
ies are much
more lik
ely to
be realized
. The th
eory
of sy
nerg
y su
ggest th
at
the R
OC
of th
e com
bin
ed en
tity w
ill be g
reater than
the R
OC
of th
e two in
dep
enden
t merg
ing en
tities, calculated
based
on th
eir stand alo
ne cu
stom
er equity. R
eturn
on C
usto
mer h
elps d
etermin
e wheth
er real valu
e is created
with
such
a com
bin
ation o
r not (A
ng an
d C
hen
g, 2
003).
If two in
dep
enden
t entities, A
(acquirin
g co
mpan
y) an
d T
(target co
mpan
y) m
erge to
create entity
A(en
larged
) , then
the m
erger creates real v
alue o
f:
RO
CA
(enlarg
ed) ,>
RO
CA +
RO
CT , w
here,
RO
CA
(enlarg
ed)
= [ "
i A(en
larged
) + !
CE
A(en
larged
) ] ÷ C
EA
(enlarg
ed) , an
d
RO
CA +
RO
CT
= ["
i A + !
CE
iA +"
i T + !
CE
iT ] ÷ [C
Ei-1
A + C
Ei-1
T ]
Wh
ere,
"i is th
e cash flo
w fro
m cu
stom
ers of th
e acquirin
g co
mpan
y A
and th
e target co
mpan
y T
durin
g p
eriod i,
!C
Ei is ch
ange in
custo
mer eq
uity
durin
g p
eriod i fo
r the acq
uirin
g co
mpan
y A
and th
e target co
mpan
y T
and,
CE
i-1 is the cu
stom
er equity
at the b
egin
nin
g o
f perio
d i
Cu
stom
ers are the sin
gle m
ost co
nstrain
ed reso
urces. In
cremen
tal capital is alw
ays av
ailable fo
r go
od
investm
ents, b
ut in
cremen
tal custo
mers aren
’t alway
s availab
le, even
if the p
roducts are g
ood. C
apital can
be
allocated
to p
roducts an
d p
roducts can
be allo
cated to
custo
mers. T
he R
OC
pred
iction req
uires in
form
ation o
n
how
custo
mers w
ill chan
ge th
eir futu
re beh
avio
ur b
ased o
n th
e treatmen
t they
receive to
day
from
the co
mpan
ies.
An in
sight in
to cu
stom
er trust can
pro
vid
e a tremen
dous co
mpetitiv
e advan
tage. T
here can
be eco
nom
ic barriers
to th
is strategy b
ut in
som
e of th
e busin
esses or b
usin
ess units, th
e RO
C m
atrix w
ill guid
e the m
anag
ers to
determ
ine w
here an
d w
hen
it is more feasib
le to ap
ply
RO
C tech
niq
ue fo
r the M
& A
decisio
n.
Peo
ple B
ased
Syn
ergy R
ealisa
tion
: Em
plo
yees at ev
ery lev
el of th
e org
anizatio
n h
elp to
forg
e a corp
orate
bran
d id
entity
and rep
utatio
n. E
mplo
yees h
elp create n
ew stream
s of rev
enue b
y b
eing clo
se to th
e mark
et place
and reco
gnizin
g n
ew o
pportu
nities. C
orp
orate lead
ers use v
arious reso
urces to
mobilize p
eople’s en
ergies to
ward
s
a set of strateg
ic goals. T
alented
peo
ple co
ntrib
ute th
eir expertise w
ithin
a supportiv
e and en
ablin
g co
rporate
cultu
re. Man
y o
f the p
eople b
ased sy
nerg
ies arise from
the fo
llow
ing:
1.
Bran
d an
d co
rporate id
entity
2.
Cap
ital and n
ew stream
s of rev
enue
3.
Core co
mpeten
cies in m
anag
emen
t or b
usin
ess pro
cesses
4.
Peo
ple w
ho p
ossess u
niq
ue sk
ills or cu
stom
er relationsh
ips
5.
Cultu
re or o
peratin
g en
viro
nm
ent
6.
Man
agem
ent reso
urces
Modellin
g S
trategies fo
r Corp
orate G
row
th
24.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
In reality, a fu
lly fo
rmed
merg
er strategy is a m
yth
. Very
often
the m
anag
emen
t team h
ardly
pre-estim
ate
and p
redict sy
nerg
ies to b
e deriv
ed fro
m co
st cuttin
g, eco
nom
ies of scale, etc. M
ost o
f these sy
nerg
ies are won
thro
ugh th
e better ex
plo
itation o
f tangib
le assets. A carefu
l look at so
me o
f the p
rom
ised sy
nerg
ies reveals th
at
they
are actually
con
servativ
e estimates. O
n th
e lon
ger-term
syn
ergies th
at can o
nly
be ach
ieved
thro
ug
h
leverag
ing th
e new
entity
’s intellectu
al assets, there is o
ften silen
ce.
Gro
wth
Syn
ergy v
ersus E
fficiency
Syn
ergy
It is a fact that alm
ost all m
ergers o
ffer opportu
nities to
save m
oney, b
ut th
e prim
ary reaso
n fo
r the m
erger
decisio
n as w
ell as the fo
cal poin
t durin
g p
ost-m
erger in
tegratio
n sh
ould
be g
row
th. T
here are tw
o k
inds o
f
synerg
ies: ‘efficiency
synerg
y’ an
d ‘g
row
th sy
nerg
y’. C
om
pan
ies place to
o m
uch
emphasis o
n ‘co
st’ or ‘efficien
cy
synerg
ies’, ignorin
g g
row
th p
oten
tials of th
e com
bin
ed en
tity. Gro
wth
mean
s unlo
ckin
g th
e “merg
er added
valu
e” by
takin
g ad
van
tage o
f the p
ositiv
e com
bin
ation
s offered
by
the co
mp
any
’s com
bin
ed reso
urces, in
terms o
f attractive g
row
th o
pportu
nities su
ch as cro
ss-selling p
ossib
ilities or k
now
ledge sh
aring in
research an
d
dev
elopm
ent, rev
enues, p
rofits, cap
ital form
ation, em
plo
ym
ent g
eneratio
n as id
entified
durin
g d
ue d
iligen
ce.
In m
any p
ress conferen
ces, the C
EO
s of th
e acquirin
g co
mpan
ies talk ab
out sy
nerg
ies, which
they
essentially
refer to co
st-cuttin
g. T
hey
may
quick
ly p
lace a sum
mary
on so
me sav
ings o
f a few m
illion ru
pees h
ere and th
ere
on acco
unt o
f the m
ergers. W
hen
asked
, “then
what?” o
r “What h
appen
s nex
t?” or “W
hat h
appen
s after cost-
cut?”, th
e CE
Os m
ay n
ot g
ive an
y p
ositiv
e answ
ers, rather th
ey m
ay d
iplo
matically
say, “To
be p
erfectly
honest: I d
on’t q
uite g
et the q
uestio
n.” E
ver sin
ce the last m
erger w
ave in
the late 1
980s, h
ardly
there is an
y
press release o
f the m
ergin
g co
mpan
ies with
out so
me h
ard referen
ce to th
e money
to b
e saved
on acco
unt o
f
“synerg
ies.” The w
ord
“gro
wth
” remain
s almost n
on-ex
istent in
the C
EO
s’ press co
nferen
ces. Synerg
y is o
ften
treated as a sy
nonym
for co
st-cuttin
g an
d a eu
phem
ism fo
r job cu
ts and facto
ry sh
utd
ow
ns. M
erged
com
pan
ies
are rarely su
ccessful in
capitalizin
g o
n th
e synerg
ies they
pro
claimed
prio
r to strik
ing th
e deal. T
he co
mpan
ies
either m
ake w
rong effo
rts or fo
cus so
lely o
n ach
ievin
g an
ticipated
‘efficiency
synerg
ies’ at the ex
pen
se of th
e
gro
wth
synerg
ies. There are co
mm
on m
isconcep
tions am
ong m
anag
ers that th
e merg
ed co
mpan
y w
ill hav
e to
underg
o a slu
mp in
sales and sh
rink b
efore co
nso
lidatin
g an
d startin
g to
gro
w. O
ne n
eeds to
elaborate o
n h
ow
to
look fo
r, recognize, an
d tak
e advan
tage o
f the g
row
th sy
nerg
ies that really
matter an
d th
at should
hav
e help
ed
driv
e your m
erger d
ecision to
beg
in w
ith (B
anerjee an
d O
wers, 1
992). T
he tim
e and reso
urces sp
ent o
n ach
ievin
g
efficiency
synerg
ies should
be k
ept to
the m
inim
um
necessary, so
that th
e upsid
e opportu
nities o
ffered b
y th
e
“gro
wth
” synerg
ies are not o
verlo
oked
or m
issed (B
aum
ol, 1
959).
Co
nclu
sion
In th
is pap
er, merg
ers and acq
uisitio
ns h
ave b
een p
laced in
the b
road
er persp
ective o
f a firm’s co
rporate
and b
usin
ess strategies. It is th
e firm’s strateg
ic choice w
heth
er it should
undertak
e M&
A fo
r sustain
able g
row
th
or it w
ould
resort to
org
anic ex
pan
sion. If it is an
M&
A, th
en w
hat w
ould
the ty
pe b
e: acquisitio
n, m
erger,
alliance o
r what? A
strategic an
alysis o
f merg
ers and acq
uisitio
ns sh
ould
also b
e undertak
en in
the lig
ht o
f valu
e
creation lo
gic an
d id
entify
ing th
e sources o
f valu
e creation. A
n an
alytical fram
ework
for a strateg
ic analy
sis of
busin
ess gro
wth
thro
ugh n
ew p
roject an
d acq
uisitio
ns h
as been
pro
vid
ed h
erein. U
sing th
e models d
erived
from
this fram
ework
, acquirers can
dev
elop th
e acquisitio
n criteria w
hich
poten
tial targets m
ust satisfy. T
he stu
dy
indicates co
ncern
s for th
e hard
analy
sis of q
uan
tifiable eco
nom
ic and fin
ancial asp
ects of acq
uisitio
ns. A
naly
sis
of so
ft, non-q
uan
tifiable facto
rs is often
more im
portan
t than
the h
ard an
alysis. T
hese so
ft factors in
clude th
e
political an
d cu
ltural d
imen
sions o
f both
the acq
uirer an
d th
e target. T
here is a g
eneral say
ing an
d it is a m
atter
of fact th
at majo
rity o
f merg
ers and
acqu
isition
s are fou
nd
to b
e un
successfu
l, the p
rime reaso
n b
eing
too
ambitio
us an
d im
practical estim
ation o
f synerg
y n
ot fin
ally m
aterializing in
the p
ost-m
erger p
eriod. T
herefo
re,
ill plan
nin
g an
d b
ad ex
ecutio
n are th
e reasons fo
r not realizin
g th
e estimated
synerg
y. Som
e times, co
mpan
ies
go fo
r tight secrecy
in th
e matter o
f M&
A as a resu
lt, a large co
mm
unicatio
n g
ap em
erges b
etween
the su
per to
p
and to
p m
anag
emen
ts. M&
A p
lannin
g m
ust tak
e care of in
ternal co
mm
unicatio
n asp
ect very
carefully. A
t the
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
25
same tim
e super to
p m
anag
emen
t insists fo
r quick
execu
tion o
f the M
&A
deals leav
ing m
any m
istakes b
een
com
mitted
from
target search
to v
aluatio
n to
synerg
y estim
ation to
integ
ration. T
he strateg
y fo
rmulatio
n seem
s
to b
e reasonab
ly co
rrect but th
e execu
tion b
ecom
es un-co
mpatib
le with
the k
ind o
f a particu
lar M&
A d
eal due
to m
any u
nfo
reseen facto
rs which
inclu
de u
nrealistic v
aluatio
n o
f estimated
synerg
y an
d lack
of fo
resights
tow
ards p
ost-m
erger in
tegratio
n in
terms o
f cultu
re, pro
cess and p
eople.
Refe
ren
ces
Ag
rawal, A
nu
p, an
d G
ersho
n N
. Man
delk
er (19
87
), “Man
agerial In
centiv
es and
Co
rpo
rate Inv
estmen
t and
Fin
ancin
g D
ecisions,” Jo
urn
al o
f Fin
ance 4
2(4
): 823-8
37.
An
g, Jam
es S., an
d Y
ing
mei C
hen
g (2
00
3), “D
irect Ev
iden
ce on
the M
arket-D
riven
Acq
uisitio
ns T
heo
ry,”
work
ing p
aper, F
lorid
a State U
niv
ersity.
Ban
erjee, Ajey
o, an
d Jam
es Ow
ers (1992), “W
ealth R
eductio
n in
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nig
ht B
ids,” F
inancia
l Managem
ent
21(3
): 48-5
7.
Bau
mol, W
illiam (1
959), B
usin
ess Beh
avio
r, Valu
e, and G
row
th, N
ew Y
ork
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York
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illan.
Ericso
n, R
ichard
and A
riel Pak
es (1995), “A
n A
lternativ
e Theo
ry o
f Firm
and In
dustry
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ics,” Review
of
Eco
nom
ic Stu
dies 6
2: 5
3-8
2.
Fam
a, Eugen
e and K
enneth
Fren
ch, (1
997), “In
dustry
Costs o
f Equity,” Jo
urn
al o
f Fin
ancia
l Eco
nom
ics 43(2
):
15
3-1
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Gorto
n G
ary, Matth
ias Kah
l and R
ichard
J. Rosen
(2006), “
Eat o
r be ea
ten: a
theo
ry of m
ergers a
nd firm
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Work
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aper S
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4, F
ederal R
eserve B
ank o
f Chicag
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Hard
ing, D
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ovit, S
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uild
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eals on B
edro
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arva
rd B
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ess Review
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28.
Lynch
, J. G. an
d L
ind, B
. (2002), E
scapin
g m
erger an
d acq
uisitio
n m
adness. S
trateg
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eadersh
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0 (2
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12
.
Hurtt, D
. N., K
reuze. J. G
. and L
angsam
, S. A
. (2000), C
an th
is merg
er be sav
ed? Jo
urn
al o
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ora
te
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untin
g &
Fin
ance, 1
1 (2
): 17-2
4.
Jensen
, Mich
ael C. (1
986), “A
gen
cy C
osts o
f Free C
ash F
low
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orate F
inan
ce, and T
akeo
vers,” A
merica
n
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nom
ic Review
76(2
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29.
Johnso
n G
erry, Kev
an S
choles an
d R
ichard
Whittin
gto
n (2
008), E
xplo
ring C
orp
orate S
trategy, P
earson, N
ew
Delh
i.
Laffo
nt Je
an
-Jacq
ues a
nd
Dav
id M
artim
ort, (2
00
6), T
he T
heo
ry o
f Incen
tives: T
he P
rincip
al A
gen
t
Model,P
rinceto
n U
niv
ersity P
ress, Prin
ceton.
Morck
, Ran
dall, A
ndrei S
hleifer, an
d R
obert V
ishny (1
990), “D
o M
anag
erial Objectiv
es Driv
e Bad
Acq
uisitio
ns?,”
Journ
al o
f Fin
ance 4
5(1
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8.
Perry, J. S
. and H
erd, T
. J. (2004), M
ergers an
d acq
uisitio
ns: R
educin
g M
&A
risk th
rough im
pro
ved
due d
iligen
ce,
Stra
tegy a
nd L
eadersh
ip, 3
2 (2
): 12-1
9.
Porter M
ichael E
. (1985), C
om
petitiv
e Advan
tage: C
reating an
d S
ustain
ing S
uperio
r Perfo
rman
ce, The F
ree
Press, N
ew Y
ork
.
Porter M
ichael E
. (1980), C
om
petitiv
e Strateg
y: T
echniq
ues fo
r Analy
zing In
dustries an
d C
om
petito
rs, The
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ress, New
York
.
Roll, R
ichard
(1986), “T
he H
ubris H
ypoth
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orate T
akeo
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urn
al o
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16.
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g S
trategies fo
r Corp
orate G
row
th
26.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Shyu Y
ih-W
en an
d K
uan
gyu H
sia (2008), “D
oes sto
ck m
arket v
olatility
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e shifts sig
nal th
e busin
ess
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urn
al o
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inance 2
008 - V
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pp. 4
33 - 4
50
Siro
wer M
ark L
, (1997), ‘T
he S
ynerg
y T
rap: H
ow
Com
pan
ies Lose th
e Acq
uisitio
n G
ame’, F
ree Press, N
ew
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99
7.
Shan
k Jo
hn K
. and V
ijay G
ovin
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(1993), S
trategic C
ost M
anag
emen
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ew T
ool fo
r Com
petitiv
e
Advan
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he F
ree Press, N
ew Y
ork
.
Westo
n J.F
red &
Sam
uel C
. Weav
er Book (2
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ergers an
d A
cquisitio
ns, M
cGraw
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ew Y
ork
.
Westo
n, J. F
red, K
wan
g S
. Chung, an
d Ju
an A
. Siu
(1998), T
akeo
vers, R
estructu
ring, an
d C
orp
orate G
overn
ance,
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addle R
iver, P
rentice H
all, NJ.
En
d N
otes
1Reg
ime sh
ifts sign
ify rap
id reo
rgan
ization
s of b
usin
ess from
on
e relatively
stable state to
ano
ther. B
usin
ess
cycles m
ay b
e con
sidered
as regim
e shifts. S
hy
u an
d H
sia (20
08
) con
firm a cau
sal relation
ship
betw
een
stock
return
vo
latility an
d th
e bu
siness cy
cle. Th
ey o
bserv
ed th
at the sm
oo
thed
pro
bab
ilities for m
ediu
m
and
hig
h v
olatility
regim
es lead to
fluctu
ation
s in th
e coin
ciden
t econ
om
ic ind
ex, w
hile a ch
ang
e in th
e
coin
ciden
t econ
om
ic ind
icators p
recedes th
e filter pro
bab
ilities for lo
w v
olatility
regim
es.
2Th
is is an in
teresting
hy
po
thesis reg
ardin
g tak
eov
er mo
tives. T
he p
ride o
f the m
anag
ers of th
e acqu
iring
firm m
ay p
lay ro
les in ju
stifyin
g th
e M&
As an
d th
e takeo
vers. T
he h
ub
ris hy
po
thesis im
plies th
at man
agers
seek to
acqu
ire firms fo
r their o
wn
perso
nal m
otiv
es and
that th
e pu
re econ
om
ic gain
s to th
e acqu
iring
firm
are no
t the so
le mo
tivatio
n o
r even
the p
rimary
mo
tivatio
n in
the acq
uisitio
n. In
such
cases, man
agers m
igh
t
pay
a prem
ium
for a firm
that th
e mark
et has alread
y co
rrectly v
alued
and
as such
the p
ride o
f man
agem
ent
allow
s them
to b
elieve th
at their v
aluatio
n is su
perio
r to th
at of th
e mark
et. Imp
licit in th
is theo
ry is an
un
derly
ing
con
victio
n th
at the m
arket is efficien
t and
can p
rov
ide th
e best in
dicato
r of th
e valu
e of a firm
.
Th
ere are evid
ences th
at the sto
ck p
rices of th
e acqu
iring
firms fall after th
e mark
et beco
mes aw
are of th
e
takeo
ver b
id. T
his o
ccurs b
ecause th
e takeo
ver is n
ot in
the b
est interests o
f the acq
uirin
g firm
’s stock
ho
lders
and
do
es no
t represen
t an efficien
t allocatio
n o
f their w
ealth. O
n th
e oth
er han
d, th
e stock
prices o
f the
target firm
s increase w
ith th
e bid
becau
se the acq
uirin
g firm
is no
t on
ly g
oin
g to
pay
a prem
ium
bu
t also
may
pay
a prem
ium
in ex
cess of th
e valu
e of th
e target. T
hu
s, the co
mb
ined
effect of th
e increasin
g v
alue o
f
the targ
et and
the fallin
g v
alue o
f the acq
uirin
g firm
can so
me tim
es be n
egativ
e. A n
um
ber o
f stud
ies sho
w
that th
e acqu
iring
firm’s an
no
un
cemen
t of th
e takeo
ver resu
lts in a d
ecline in
the v
alue o
f the acq
uirer’s
stock
, con
sequ
ently, sig
nifican
t neg
ative retu
rns are b
oo
ked
by
the in
vesto
rs.
3Free cash
flow
can b
e com
pu
ted in
two
way
s; (a) ind
irect meth
od
and
(b) d
irect meth
od
. Un
der th
e ind
irect
meth
od
, Free cash
flow
= n
et inco
me (i.e. earn
ing
s after tax) +
dep
reciation
+ d
ecrease in acco
un
ts receivab
le
(or m
inu
s increase) +
decrease in
inv
ento
ries (or m
inu
s increase) +
increase in
accou
nts p
ayab
le (or m
inu
s
decrease) +
increase in
taxes p
ayab
le (or m
inu
s decrease) +
after-tax in
terest exp
enses –
gro
ss inv
estmen
ts
in p
lant, m
achin
ery, equ
ipm
ent at co
st, etc. Altern
atively, as p
er direct m
etho
d, F
ree cash flo
w =
sales –
(cost o
f go
od
s sold
+ sellin
g, g
eneral an
d ad
min
istration
exp
enses) –
taxes o
n in
com
e + d
epreciatio
n +
decrease in
accou
nts receiv
able (o
r min
us in
crease) + d
ecrease in in
ven
tories (o
r min
us in
crease) + in
crease
in acco
un
ts pay
able (o
r min
us d
ecrease) + in
crease in tax
es pay
able (o
r min
us d
ecrease) + after-tax
interest
exp
enses –
gro
ss inv
estmen
ts in p
lant, m
achin
ery, equ
ipm
ent at co
st, etc.
4R
esou
rces inclu
de m
arketin
g ex
cellence, a d
istribu
tion
netw
ork
, R&
D an
d su
rplu
s op
erating
capacity.
So
me o
f these reso
urces are in
the fo
rm o
f strategic assets lik
e mark
et po
wer an
d en
try b
arriers.
5Strateg
ic assets as tho
se characteristics o
f the m
arket stru
cture w
hich
giv
e a firm its co
mp
etitive ad
van
tage.
6Th
e merg
er or acq
uisitio
n o
f a firm co
mp
eting
in th
e same in
du
stry is referred
to as a h
orizo
ntal acq
uisitio
n.
In a h
orizo
ntal acq
uisitio
n acq
uirin
g firm
’s mark
et po
wer in
creases by
exp
loitin
g co
st-based
and
reven
ue-
based
syn
ergies. V
ariou
s researches su
gg
est that h
orizo
ntal m
ergers an
d acq
uisitio
ns o
f firms (w
ith sim
ilar
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
27
characteristics in
clud
ing
their b
usin
ess ph
iloso
ph
ies) result in
hig
her p
erform
ances th
an w
hen
firms w
ith
dissim
ilar characteristics co
mb
ine th
eir op
eration
s. In a v
ertical merg
er or acq
uisitio
n, a firm
acqu
ires a
sup
plier o
r distrib
uto
r and
the acq
uirer m
od
ifies and
imp
rov
es the v
alue ch
ain th
rou
gh
calibratio
n o
f vario
us
valu
e driv
ers. In th
e ph
armaceu
tical ind
ustry, th
e man
ufactu
rer has a ten
den
cy to
acqu
ire the d
rug
distrib
uto
r
to create m
ore v
alue b
y o
wn
ing
its ow
n d
istribu
tion
sou
rce. So
me tim
es, vertical acq
uisitio
ns lead
to alien
ate
som
e of th
e custo
mers, ev
en th
ou
gh
there are ch
ances o
f increasin
g th
e firm’s p
erform
ance. P
epsiC
o
disco
vered
this effect after acq
uirin
g P
izza Hu
t, Taco
Bell, an
d K
FC
. On
e ob
jective o
f these acq
uisitio
ns
was to
use th
e three restau
rant ch
ains as d
istributio
n ch
annels to
sell Pep
si’s drin
ks. S
oon, C
oca-C
ola co
nvin
ced
Wen
dy
’s and
oth
er fast foo
d ch
ains th
at selling
Pep
si in th
eir stores in
directly
ben
efited th
ose o
f their
com
petito
rs that P
epsiC
o o
wn
ed. L
ater, Pep
siCo
spu
n o
ff its three fo
od
un
its to fo
rm T
ricon
, a separate
entity. T
hu
s, man
y firm
s balan
ce anticip
ated b
enefits o
f a vertical m
ergers an
d acq
uisitio
n h
avin
g p
oten
tial
risks.
7Th
e directo
rs of a th
reatened
com
pan
y m
ay acq
uire an
oth
er com
pan
y fo
r shares as a d
efensiv
e measu
re to
forestall th
e un
welco
me tak
eov
er bid
. Fo
r this p
urp
ose, th
ey p
ut larg
e blo
ck o
f shares o
f their o
wn
com
pan
y
in th
e han
ds o
f shareh
old
ers of frien
dly
com
pan
y to
mak
e their o
wn
com
pan
y least attractiv
e for tak
eov
er
bid
. Also
, it is a form
of sh
ark rep
ellent: a strateg
ic mo
ve b
y a tak
eov
er target co
mp
any
to m
ake its sto
ck less
attractive to
a po
tential acq
uirer. T
he d
efensiv
e merg
er strategy
is for th
e target co
mp
any
to co
mb
ine w
ith
ano
ther co
rpo
ration
that w
ou
ld create an
titrust o
r oth
er regu
latory
pro
blem
s if the o
rigin
al un
wan
ted tak
eov
er
pro
po
sal was co
nsu
mm
ated.
8A ‘2
+ 2
= 5
’ effect is po
pu
larly d
escribed
as syn
ergy, w
hich
sign
ifies that th
e com
bin
ed effo
rts of tw
o o
r
mo
re agen
ts create such
effects, wh
ich are g
reater than
the su
m o
f their in
div
idu
al effects. Sy
nerg
y h
as its
imp
ortan
ce in b
usin
ess, med
icine, sp
orts, an
d p
erform
ing
arts, and
man
y field
s, wh
ich req
uire sp
irited team
wo
rk. T
he term
syn
ergy
is som
e times lo
osely
used
or ex
pressed
in v
agu
e terms w
itho
ut u
nd
erstand
ing
the
real mean
ing
in th
e con
text o
f merg
ers & acq
uisitio
ns. S
yn
ergy
mean
s that th
e wh
ole is w
orth
mo
re than
the
sum
of th
e parts. A
2-1
= 2
effect is called ‘rev
erse syn
ergy
’, wh
ich im
plies th
at in th
e even
t of d
ivestm
ent
of a p
art of th
e firm d
oes n
ot red
uce th
e firm v
alue.
9RO
C is eq
ual to
a firm’s cu
rrent p
eriod
cash flo
w fro
m its cu
stom
ers plu
s any
chan
ges in
the u
nd
erlyin
g
custo
mer eq
uity
as div
ided
by
total cu
stom
er equ
ity at th
e beg
inn
ing
of th
e perio
d. C
usto
mer eq
uity
is the
agg
regate life-tim
e valu
e of firm
’s curren
t and
futu
re custo
mers, w
hich
is the n
et presen
t valu
e of all th
e
futu
re stream o
f cash flo
ws a co
mp
any
exp
ects to g
enerate fro
m th
e presen
t and
the fu
ture cu
stom
ers.
Modellin
g S
trategies fo
r Corp
orate G
row
th
28.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Modellin
g S
trategies fo
r Corp
orate G
row
th
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
29
Modellin
g S
trategies fo
r Corp
orate G
row
th
30.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Modellin
g S
trategies fo
r Corp
orate G
row
th
Ap
pen
dix
-6
Sources o
f Gain
s and S
ynerg
y in
M&
A
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
31
Modellin
g S
trategies fo
r Corp
orate G
row
th
32.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Tra
de D
ispu
tes in P
ractice
Win
ston W
. Chan
g*
Ab
stract
This p
aper d
iscusses W
TO
’s trade d
ispute settlem
ent p
roced
ure. It also
discu
sses NA
FT
A’s u
niq
ue d
ispute
settlemen
t system
that su
bjects an
tidum
pin
g an
d co
unterv
ailing d
uty
determ
inatio
ns to
bin
ational p
anel rev
iews
instead
of th
e more co
nven
tional ju
dicial rev
iews. T
he p
aper th
en stu
dies sev
en n
otab
le trade d
ispute cases. It
analy
zes the k
ey so
urces o
f these d
isputes, so
me fro
m co
nflicts b
etween
natio
nal law
s and th
e WT
O ru
les, som
e
from
special in
terest gro
ups’ actio
ns, an
d so
me fro
m sp
ecial treatmen
ts for th
e less-dev
elopin
g co
untries. T
he
pap
er cautio
ns th
at the W
TO
rulin
gs are o
ften m
et with
delay
ed im
plem
entatio
n o
r non-im
plem
entatio
n o
n o
ne
pretex
t or an
oth
er, particu
larly b
y th
e majo
rs. This co
uld
underm
ine th
e futu
re effectiven
ess of th
e WT
O.
Key
Word
s: AD
, CV
D, G
AT
T, W
TO
, NA
FT
A, an
d T
rade D
isputes.
Intro
du
ction
Trad
e conflicts are in
evitab
le in an
interlo
ckin
g w
orld
econom
y th
at is full o
f com
plex
rules an
d reg
ulatio
ns.
Each
country
has its o
wn d
om
estic laws an
d th
e World
Trad
e Org
anizatio
n (W
TO
) also h
as a set of ru
les guid
ing
intern
ational trad
e. Issues reg
ardin
g th
e conflict b
etween
a country
’s trade law
s and W
TO
’s rules h
ave o
ften
surfaced
. Un
fair trade p
ractices, such
as du
mp
ing
and
exp
ort su
bsid
ies, hav
e pro
du
ced n
um
erou
s WT
O
antid
um
pin
g an
d co
unterv
ailing cases. E
ven
with
in a free trad
e area, trade d
isputes are also
often
observ
ed.
This p
aper d
iscusses W
TO
’s trade d
ispute settlem
ent p
roced
ure an
d th
e uniq
ue d
ispute settlem
ent sy
stem
in th
e North
Am
erican F
ree Trad
e Agreem
ent (N
AF
TA
). It exam
ines sev
en n
otab
le trade d
ispute cases, so
me o
f
wh
ich are lo
ng
-stand
ing
disp
utes an
d so
me are recen
t even
ts. Th
e pap
er analy
zes the k
ey so
urces o
f these
disp
utes, so
me fro
m co
nflicts b
etween
natio
nal law
s and th
e WT
O ru
les, som
e from
special in
terest gro
ups’
pro
tection o
f their self in
terests, and so
me fro
m sp
ecial treatmen
ts for th
e less-dev
elopin
g co
untries. T
he p
aper
show
s that th
e WT
O ru
lings are o
ften m
et with
delay
ed im
plem
entatio
n o
r non-im
plem
entatio
n o
n o
ne p
retext
or an
oth
er, particu
larly b
y th
e majo
rs. It cautio
ns th
at such
outco
mes co
uld
underm
ine th
e futu
re effectiven
ess
of th
eW
TO
. 1
Th
e Gen
eral A
greem
ent o
n T
ariffs a
nd
Tra
de (G
AT
T)
At th
e end o
f World
War II, m
any n
ations w
anted
to fo
rm th
e Intern
ational T
rade O
rgan
ization (IT
O) to
pro
mote m
ultilateral trad
e agreem
ents in
ord
er to p
reven
t the recu
rrence o
f econom
ic dep
ressions lik
e that o
f
the 1
930s. T
hese n
ations sig
ned
the G
eneral A
greem
ent o
n T
ariffs and T
rade (G
AT
T) in
1947 as a tem
porary
measu
re until all m
ember g
overn
men
ts ratified th
e ITO
. Unfo
rtunately, th
e ITO
did
not co
me in
to b
eing sin
ce
the U
.S. C
ongress refu
sed to
ratify it. T
he G
AT
T, h
ow
ever, d
id n
ot req
uire co
ngressio
nal ap
pro
val sin
ce it is
neith
er an in
stitutio
n n
or an
org
anizatio
n, b
ut is m
erely an
agreem
ent u
nder th
e pro
visio
ns o
f the R
ecipro
cal
Trad
e Act o
f 1934. It b
egan
its pro
visio
nal ex
istence o
n 1
January
1948 w
hen
23 co
ntractin
g p
arties (technically
not m
embers) sig
ned
the ag
reemen
t. The U
.S. in
itiated n
egotiatio
ns w
ith o
ther co
ntractin
g p
arties to reg
ulate
45,0
00 tariff rates an
d also
particip
ated in
man
y ro
unds o
f multilateral tariff red
uctio
ns.
Alth
ough th
e GA
TT
did
not h
ave th
e auth
ority
to en
force its ru
les, it noneth
eless conducted
several ro
unds
of trad
e neg
otiatio
ns o
n tariffs an
d o
ther trad
e barriers. In
the h
alf centu
ry fo
llow
ing th
e initial 1
947 G
AT
T
agreem
ent, eig
ht ro
un
ds o
f GA
TT
trade n
ego
tiation
s redu
ced th
e averag
e tariff on
ind
ustrial p
rod
ucts fro
m
roughly
40%
to 3
.8%
, and w
orld
trade v
olu
me g
rew fo
urteen
fold
. As a resu
lt, tariffs as a barrier to
trade h
ave
beco
me less sig
nifican
t than
nontariff b
arriers.
* D
epartm
ent o
f Eco
no
mics, S
tate Un
iversity
of N
ew Y
ork
at Bu
ffalo, B
uffalo
, New
Yo
rk 1
42
60
, US
A E
-mail: eco
ww
c@b
uffalo
.edu
.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
33
The eig
hth
round o
f GA
TT
talk, th
e Uru
guay
round, to
ok eig
ht y
ears to n
egotiate b
etween
1986 an
d 1
994,
and b
roke su
bstan
tial new
gro
unds th
an th
e com
bin
ed p
revio
us ro
unds o
f multilateral n
egotiatio
ns. It co
nclu
ded
with
123 n
ations ag
reeing to
create the W
TO
. The W
TO
is a legal o
rgan
ization th
at is perm
anen
t and h
as a
bro
ader ran
ge o
f responsib
ilities than
its subsu
med
GA
TT
. It is an in
ternatio
nal in
stitutio
n resp
onsib
le for settlin
g
world
trade d
isputes an
d p
rom
otin
g fu
rther trad
e liberalizatio
n. Its m
embersh
ip h
as reached
153 m
embers recen
tly.
The m
embers d
o n
ot h
ave to
be fu
ll sovereig
n n
ation-states, b
ut th
ey m
ust b
e indep
enden
t custo
ms territo
ries,
such
as Hong K
ong. C
urren
tly, there are 3
0 o
bserv
er govern
men
ts that are n
ot y
et mem
bers. 2
The W
TO
establish
ed a set o
f agreem
ents th
at contain
s 558 p
ages o
f legal d
ocu
men
ts and so
me 2
5,0
00
pag
es of in
div
idual tariff rates an
d o
ther co
ncessio
ns. T
his set o
f agreem
ents in
cludes b
oth
the n
ew ag
reemen
ts
in th
e Uru
guay
round an
d th
e orig
inal G
AT
T (“G
AT
T 1
947”) th
at had
been
amen
ded
thro
ugh v
arious ro
unds o
f
prev
ious n
egotiatio
ns.
WT
O’s D
ispu
te Settlem
ent P
roced
ure
The d
ispute settlem
ent p
roced
ure is th
e most im
portan
t functio
n o
f the W
TO
. When
a mem
ber state fin
ds
its tradin
g p
artner(s) v
iolates th
e WT
O ru
les, it must fo
llow
its disp
ute settlem
ent p
roced
ure to
seek rem
ediatio
n.
This p
reven
ts unilateral actio
n o
f one m
ember ag
ainst o
ther m
embers an
d p
rovid
es an en
forcin
g p
ow
er for th
e
harm
ed co
mplain
ant to
seek co
mpen
sation fro
m th
e rule v
iolato
rs. The W
TO
, how
ever, en
courag
es the in
volv
ed
parties to
settle their d
ispu
te them
selves at an
y stag
e. Th
e detailed
rules an
d p
roced
ures are co
ntain
ed in
Understan
din
g o
n R
ules an
d P
roced
ures G
overn
ing th
e Settlem
ent o
f Disp
utes (D
SU
).T
he D
SU
is praised
for
enhan
cing th
e stability
and fairn
ess of th
e world
tradin
g sy
stem.
If, after the in
itial 60 d
ays o
f consu
ltations an
d m
ediatio
n, n
o v
olu
ntary
settlemen
t is reached
, then
the
com
plain
ant state can
request th
e setup o
f a disp
ute settlem
ent p
anel, w
hich
norm
ally co
nsists o
f three ad
hoc
mem
bers th
at are appoin
ted b
y th
e Secretariat. In
six m
onth
s, the p
anel files its rep
ort, first to
the in
volv
ed
parties, an
d tw
o w
eeks later to
all oth
er WT
O m
embers. If th
ere is no ap
peal, th
en w
ithin
60 d
ays, th
e Disp
ute
Settlem
ent B
ody (D
SB
) shall ad
opt th
e report, u
nless it d
ecides b
y co
nsen
sus n
ot to
do so
or a p
arty to
the
disp
ute d
ecides to
appeal. T
he w
hole p
rocess w
ithout ap
peal tak
es about o
ne y
ear to o
btain
a decisio
n.
An ap
peal is m
ade to
a standin
g A
ppellate B
ody w
hich
only
consid
ers issues o
f law an
d th
e pan
el’s legal
interp
retations. W
ithin
30 d
ays o
f receivin
g th
e Appellate B
ody’s rep
ort, th
e DS
B sh
all either ad
opt o
r reject it
by co
nsen
sus. T
he in
volv
ed p
arties must u
nco
nditio
nally
accept th
e rulin
gs an
d rem
edial reco
mm
endatio
ns.
The resp
onden
t state must th
en co
mply
imm
ediately
with
the reco
mm
endatio
ns an
d ru
lings. If it feels
impracticab
le to d
o so
imm
ediately, th
en w
ithin
thirty
day
s of th
e final rep
ort, it m
ust in
form
the D
SB
of its
reason
able co
mp
liance tim
e. Ho
wev
er, if the co
mp
lainan
t state disag
rees, the issu
e will th
en b
e settled b
y
bin
din
g arb
itration. If th
e remed
ial measu
res taken
by th
e responden
t state are not satisfacto
ry to
the co
mplain
ant
state, the d
isagreem
ent sh
all be d
ecided
, if possib
le, by th
e same p
anel th
at heard
the o
rigin
al disp
ute. T
here w
ill
be n
o fu
rther p
ossib
ility o
f appeal.
Fin
ally, if later a responden
t state fails to carry
out satisfacto
ry rem
edial m
easures w
ithin
the ag
reed-u
pon
time, it m
ay n
egotiate w
ith th
e com
plain
ing state fo
r mutu
ally accep
table co
mpen
sation. H
ow
ever, if n
o ag
reemen
t
can b
e reached
with
in 2
0 d
ays o
f the rem
edial p
eriod, th
e com
plain
ant state m
ay req
uest au
thorizatio
n fro
m th
e
DS
B to
susp
end its co
ncessio
ns an
d o
ther o
blig
ations p
revio
usly
mad
e to th
e responden
t state under th
e covered
agreem
ents. U
nless th
e DS
B d
ecides b
y co
nsen
sus to
reject the req
uest, it sh
all gran
t the au
thorizatio
n w
ithin
30
day
s of th
e remed
ial perio
d an
d sh
all set the criteria fo
r retaliation. If th
e responden
t state objects to
the lev
el of
the retaliatio
n m
easures, an
oth
er arbitratio
n is p
rovid
ed fo
r, if possib
le, by th
e orig
inal p
anel m
embers, o
r by an
arbitrato
r or arb
itrators ap
poin
ted b
y th
e Directo
r-Gen
eral. The arb
itration m
ust b
e com
pleted
with
in 6
0 d
ays
from
expiratio
n o
f the rem
edial p
eriod.
Trad
e Disp
utes in
Practice
34.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
The D
SU
calls for sp
ecial consid
erations to
the p
roblem
s and in
terest of d
evelo
pin
g co
untries. If a d
evelo
pin
g
country
is one p
arty to
a disp
ute, it is en
titled to
hav
e at least one p
anelist w
ho is fro
m a d
evelo
pin
g co
untry. If
it is a respo
nd
ent p
arty, the in
itial con
sultatio
n tim
e befo
re a pan
el is con
ven
ed m
ay b
e exten
ded
, and
the
dead
line fo
r it to m
ake its d
ocu
men
t subm
ission to
a pan
el may
be relax
ed. F
urth
er, form
al com
plain
ts again
st
the least d
evelo
ped
countries are d
iscourag
ed. If co
nsu
ltations fail, th
e Directo
r-Gen
eral or th
e Chairm
an o
f the
DS
B sh
all offer to
p-lev
el med
iation fo
r settlemen
t befo
re a request fo
r a pan
el is mad
e.
NA
FT
A’s U
niq
ue D
ispu
te Settlem
ent S
ystem
NA
FT
A w
as signed
by th
ree mem
ber states—
the U
.S., C
anad
a, and M
exico
. It was an
expan
sion o
f the
1989 U
.S.-C
anad
a Free T
rade A
greem
ent an
d w
ent in
to effect o
n 1
January
1994. N
AF
TA
imm
ediately
elimin
ated
duties o
n h
alf of all U
.S. g
oods sh
ipped
to M
exico
and C
anad
a, and g
radually
phased
out o
ther tariffs o
ver a 1
4
year p
eriod. It p
rovid
ed en
han
ced p
rotectio
n o
f intellectu
al pro
perty
rights an
d rem
oved
a great d
eal of in
vestm
ent
restrictions am
ong m
ember co
untries.
NA
FT
A h
as a un
iqu
e disp
ute settlem
ent sy
stem. C
hap
ter 19
of N
AF
TA
sub
jects antid
um
pin
g an
d
counterv
ailing d
uty
determ
inatio
ns to
bin
ational p
anel rev
iews in
stead o
f the m
ore co
nven
tional ju
dicial rev
iews.
In th
e U.S
., the rev
iews o
f agen
cy d
ecisions o
n th
e impositio
n o
f these d
uties are n
orm
ally h
eard b
efore th
e U.S
.
Court o
f Intern
ational T
rade. N
AF
TA
parties, h
ow
ever, h
ave th
e optio
n o
f appealin
g th
e decisio
ns to
bin
ational
pan
els, com
po
sed o
f five citizen
s from
the tw
o in
vo
lved
cou
ntries. D
ecision
s by
Ch
apter 1
9 p
anels can
be
challen
ged
befo
re a NA
FT
A E
xtrao
rdin
ary C
hallen
ge C
om
mittee. S
uch
a com
mittee, h
ow
ever, d
oes n
ot fu
nctio
n
as an o
rdin
ary ap
peal—
it will o
nly
vacate o
r reman
d a d
ecision if it in
volv
es a significan
t and m
aterial error th
at
threaten
s the in
tegrity
of th
e NA
FT
A d
ispute settlem
ent sy
stem.
Som
e Nota
ble T
rad
e Disp
utes
As o
f April 2
009, th
e WT
O h
as han
dled
over 3
90 d
isputes sin
ce 1995. S
o far th
is year it h
as taken
on th
ree
cases: Can
ada’s co
mplain
t about K
orean
limits o
n b
eef imports, G
uatem
ala’s challen
ge ag
ainst C
hin
a on ex
port
subsid
ies, and th
e U.S
.’s com
plain
t again
st the E
U o
ver p
oultry. A
strikin
g recen
t pattern
is the stead
y d
ecline in
case filings o
ver tim
e. In th
e first five y
ears since W
TO
’s arrival, th
ere were 1
85 d
ispute cases filed
. In th
e nex
t
five y
ears, from
20
00
to 2
00
4, th
e cases decreased
to 1
41
, and
from
20
04
to A
pril 2
00
9, th
e cases furth
er
decreased
to 6
7.
The N
AF
TA
has h
ad a n
um
ber o
f disp
ute cases am
ong its m
embers. T
here are th
ree so far in
2009, in
volv
ing
hydro
gen
pero
xid
e and tw
o steel trad
e issues. It also
pro
duced
a Mex
ican retaliatio
n ag
ainst th
e U.S
as a result
of recen
t U.S
. Congressio
nal d
ecision to
blo
ck M
exican
truck
s from
U.S
. road
s that effectiv
ely w
ithdrew
a
neg
otiated
settlemen
t to M
exico
’s 2001 case v
ictory. M
exico
has resp
onded
by re-im
posin
g p
re-1993 tariffs o
n
$2.4
billio
n w
orth
of A
merican
exports o
n farm
pro
ducts an
d lig
ht-m
anufactu
re goods. T
otal U
.S. ex
ports to
Mex
ico in
2008 w
ere $151 b
illion. In
what fo
llow
s, we selectiv
ely d
iscuss a n
um
ber o
f notab
le trade d
ispute
cases.
Un
ited S
tates v
s. Can
ad
a: S
oftw
ood
Lu
mb
er
## ### Th
e Disp
utes:
For alm
ost 2
5 y
ears, the U
nited
States an
d C
anad
a hav
e been
engag
ed in
a series of trad
e
disp
utes o
ver C
anad
ian so
ftwood p
roducts (n
otab
ly lu
mber, flo
orin
g, an
d sid
ing d
erived
from
conifero
us w
ood).
The U
.S. h
as argued
that b
ecause n
on-m
aritime p
rovin
cial govern
men
ts in C
anad
a ow
n m
uch
of th
e timber
lands an
d ch
arge p
rivate firm
s arbitrary
extractio
n ren
ts (stum
pag
e fees) that are less th
an th
ose th
rough co
mpetitiv
e
bid
din
g, it am
ounts to
a subsid
y th
at need
s to b
e offset b
y co
unterv
ailing d
uties. In
terested C
anad
ian p
arties and
govern
men
t officials h
ave co
untered
that b
ecause stu
mpag
e pro
gram
s are univ
ersal and n
ot co
nfin
ed to
one
particu
lar industry, th
e policy
cannot b
e classified as a su
bsid
y u
nder th
e U.S
. law.
Trad
e Disp
utes in
Practice
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
35
Early
Ph
ases: F
rom
early 1
980’s to
Novem
ber 2
006, th
e disp
ute w
ent th
rough sev
eral phases. T
he first o
ccurred
in 1
982 w
hen
Am
erican lu
mber co
mpan
ies petitio
ned
the D
epartm
ent o
f Com
merce (D
OC
) for co
unterv
ailing
duties. T
heir req
uest w
as den
ied b
ecause th
e DO
C, lik
e the C
anad
ians, failed
to see h
ow
the n
on-d
iscrimin
atory
stum
pag
e system
cou
ld b
e cou
nterv
ailed if n
ot law
fully
con
sidered
an in
du
stry-sp
ecific sub
sidy. In
stead o
f
appealin
g, th
e lum
ber lo
bby re-su
bm
itted its p
etition in
1986 an
d as a resu
lt spark
ed a seco
nd p
hase o
f deb
ate.
This tim
e the p
etition w
as accepted
by th
e DO
C after th
ey co
nclu
ded
that th
e Can
adian
softw
ood in
dustry, in
particu
lar, was b
enefitin
g fro
m th
e equiv
alent o
f a 15%
subsid
y. Fearin
g th
e loss o
f reven
ue fro
m a p
unitiv
e
duty, C
anad
a neg
otiated
a Mem
oran
dum
of U
nderstan
din
g (M
OU
) with
the U
.S. th
at required
Can
ada to
impose
a 15%
export tax
and to
grad
ually
transfer stu
mpag
e man
agem
ent co
sts to p
rivate firm
s.
In 1
991, C
anad
a with
drew
from
the M
OU
claimin
g th
at the ag
reemen
t was n
o lo
nger n
ecessary. The U
.S.
DO
C d
isag
reed
an
d se
lf-initia
ted
a c
ou
nte
rvailin
g d
uty
inv
estig
atio
n w
hic
h u
ltimate
ly re
sulte
d in
the
implem
entatio
n o
f a 6.5
1%
ad v
alorem
tax o
n C
anad
ian lu
mber im
ports. 3 In
response, C
anad
a bro
ught th
e issue
befo
re a bin
ational d
ispute reso
lutio
n b
ody o
f the n
ewly
form
ed C
anad
a-US
Free T
rade A
greem
ent. T
he b
ody,
consistin
g o
f three C
anad
ians an
d tw
o A
merican
s, voted
along n
ational lin
es and ru
led ag
ainst th
e U.S
. becau
se
of a lack
of ev
iden
ce. Shortly
thereafter th
e United
States T
rade R
epresen
tative (U
ST
R) to
ok th
e case to th
e
Extrao
rdin
ary C
hallen
ge C
om
mittee (E
CC
) allegin
g, am
ong o
ther th
ings, a co
nflict o
f interest in
volv
ing tw
o o
f
the C
anad
ian ju
dg
es. In 1
99
4 th
e EC
C, also
rulin
g o
n n
ation
al lines, stru
ck d
ow
n th
e Am
erican ch
alleng
e.
Desp
ite som
e early resistan
ce, the U
.S. ev
entu
ally refu
nded
all of th
e collected
tariff reven
ue an
d in
1996 th
e
two co
untries sig
ned
the S
oftw
ood L
um
ber A
greem
ent w
hich
restricted th
e volu
me o
f Can
adian
lum
ber ex
ports
for th
e ensu
ing fiv
e years.
Recen
t Dev
elop
men
ts:F
ollo
win
g th
e expiratio
n o
f the S
oftw
ood L
um
ber A
greem
ent in
2001, th
e Am
erican
lum
ber in
dustry
asked
the D
OC
to im
plem
ent b
oth
counterv
ailing d
uties an
d an
tidum
pin
g m
easures o
n im
ports
of C
anad
ian lu
mber. L
ater that y
ear, prelim
inarily
DO
C in
vestig
ations co
nclu
ded
that C
anad
ian lu
mber im
ports
should
be su
bject to
punitiv
e duties. In
additio
n, th
e United
States In
ternatio
nal T
rade C
om
missio
n (IT
C) ru
led
that su
bsid
ized C
anad
ian lu
mb
er po
sed a serio
us th
reat to th
e Am
erican so
ftwo
od
ind
ustry. A
final D
OC
determ
inatio
n in
2002 lo
wered
the in
itial counterv
ailing an
d an
tidum
pin
g rates to
18.7
9%
and 8
.43%
, respectiv
ely.
Can
ada req
uested
the D
OC
and
ITC
rulin
gs b
e review
ed b
y N
AF
TA
and
the W
TO
. A m
ultitu
de o
f
con
tradicto
ry fin
din
gs an
d ru
ling
s ensu
ed as each
institu
tion
arrived
at differen
t op
inio
ns, so
metim
es even
reversin
g th
eir orig
inal co
nclu
sions. N
otab
ly, although th
e WT
O in
itially ag
reed w
ith N
AF
TA
’s judgm
ent th
at
Can
adian
lum
ber w
as not a th
reat to A
merican
dom
estic pro
ducers, an
d th
us n
ot su
sceptib
le to tariffs, it later
annulled
the d
ecision an
d sid
ed w
ith th
e U.S
. Conseq
uen
tly, the U
.S. an
d C
anad
a contin
ued
to b
attle verb
ally
and leg
ally o
ver w
hich
body h
ad ju
risdictio
n an
d w
heth
er Can
ada w
as entitled
to b
illions o
f dollars in
duty
restitutio
n. 4
Perm
an
ent o
r Tem
pora
ry R
esolu
tion
?: In
April 2
006, a ten
tative d
eal was reach
ed b
etween
the tw
o co
untries.
It required
the U
.S. to
return
about 8
0%
of th
e five b
illion d
ollars it h
ad co
llected in
tariff reven
ue. T
he C
anad
ian
oblig
ations d
epen
d o
n th
e prev
ailing m
onth
ly p
rice of lu
mber. If th
e price is ab
ove $
355 p
er thousan
d m
easured
board
feet (MB
F), C
anad
ian lu
mber ex
ports are u
nrestricted
, but if th
e price is b
elow
$355 p
er MB
F, each
Can
adian
exportin
g reg
ion m
ust im
pose eith
er an ex
port tax
with
a soft v
olu
me cap
, or a lo
wer ex
port tax
with
a hard
volu
me cap
, or “v
olu
me restrain
t.”5
On 1
2 S
eptem
ber 2
006, th
e two co
untries sig
ned
a com
preh
ensiv
e Softw
ood L
um
ber A
greem
ent u
nder
Article 3
.6 o
f the D
SU
coverin
g th
e disp
ute cases D
S236, D
S247, D
S257, D
S264, D
S277 an
d D
S311. T
his
agreem
ent carries a term
of sev
en y
ears.
In A
ugust 2
007, th
e US
TR
announced
that th
e U.S
. will in
itiate arbitratio
n p
roceed
ings u
nder th
e 2006
Softw
ood L
um
ber A
greem
ent to
com
pel C
anad
a to liv
e up to
its oblig
ations. 6 In
Feb
ruary
2008, th
e London
Court o
f Intern
ational A
rbitratio
n trib
unal ag
reed w
ith th
e U.S
. that C
anad
a failed to
pro
perly
adju
st export
Trad
e Disp
utes in
Practice
36.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
volu
mes fro
m its eastern
pro
vin
ces for th
e perio
d Jan
uary
thro
ugh Ju
ne 2
007 b
ut n
o v
olu
me ad
justm
ents w
ere
required
for its w
estern p
rovin
ces. It ruled
that C
anad
a must co
llect an ad
ditio
nal 1
0%
export ch
arge o
n so
ftwood
lum
ber sh
ipm
ents fro
m its eastern
pro
vin
ces until ab
out $
54.8
millio
n h
as been
collected
. Can
ada o
ffered to
tend
er a pay
men
t of $
36
.66
millio
n, b
ut w
as rejected. B
ecause C
anad
a did
no
t take th
e requ
ired rem
edial
actions b
y th
e 28 M
arch 2
009 d
eadlin
e, the U
.S. h
as announced
that startin
g 1
5 A
pril 2
009, it w
ill collect a 1
0%
import d
uty
on certain
softw
ood lu
mber p
roducts fro
m th
e Can
adian
pro
vin
ces of O
ntario
, Queb
ec, Man
itoba
and S
askatch
ewan
until it h
as collected
$54.8
millio
n. 7
In Jan
uary, 2
008, C
anad
a created a C
$1 b
illion fu
nd to
assist its forest in
dustry. In
response, th
e U.S
.
initiated
anoth
er arbitratio
n p
roceed
ing, ch
argin
g th
at certain C
anad
ian p
rogram
s for so
ftwood lu
mber p
roducers,
inclu
din
g g
rants, lo
ans, lo
an g
uaran
tees and tax
credits an
d o
ther fo
rest man
agem
ent p
rogram
s are in v
iolatio
n
of th
e Softw
ood L
um
ber A
greem
ent. T
he trib
unal h
as yet to
render its ru
ling. 8
Bra
zil vs. U
nited
Sta
tes: Cotto
n
Th
e Disp
ute
: In th
e cotto
n m
arket, th
e U.S
. is the larg
est exporter an
d th
e second larg
est pro
ducer in
the w
orld
while B
razil is the fifth
largest p
roducer. S
ince 2
002, B
razil has tak
en a n
um
ber o
f steps to
halt A
merican
cotto
n
subsid
ies which
it claims v
iolatin
g th
e WT
O ru
les. It charg
ed th
at the su
bsid
ies caused
the w
orld
cotto
n p
rices
to fall b
elow
fair mark
et valu
es and
thu
s hin
dered
the g
row
th o
f Brazilian
firms. T
he U
.S. co
nten
ded
that
govern
men
t pay
men
ts to co
tton farm
ers should
not b
e classified as an
unfair trad
e practice b
ecause th
ey d
id n
ot
exceed
WT
O m
andated
subsid
y th
reshold
s.
Early
Ph
ases:
In 2
002, B
razil form
ally acted
on its d
ispleasu
re with
U.S
. cotto
n su
bsid
ies by req
uestin
g W
TO
consu
ltations (W
TO
DS
267). A
fter three u
nsu
ccessful m
eetings b
etween
the tw
o n
ations, B
razil petitio
ned
the
WT
O fo
r the fo
rmatio
n o
f a DS
B p
anel. A
s with
most first tim
e DS
B p
anel req
uests, th
e defen
dan
t, in th
is case
the U
.S., b
lock
ed th
e pro
ceedin
gs in
accord
ance w
ith th
e WT
O ru
le. Brazil’s su
bseq
uen
t petitio
n fo
r the
establish
men
t of a d
ispute settlem
ent p
anel w
as auto
matically
appro
ved
by th
e DS
B in
March
2003. T
he p
anel’s
final d
etermin
ation cam
e a year an
d a h
alf later and fo
und th
e U.S
. guilty
of:
1.
exceed
ing W
TO
allotted
subsid
y lev
els:
2.
giv
ing d
irect pay
men
ts to farm
ers—a p
rogram
that is n
ot ex
empt fro
m W
TO
eductio
n co
mm
itmen
ts becau
se it could
not b
e verified
as com
pletely
indep
enden
t inco
me su
pport;
3.
usin
g ex
port g
uaran
tees that are essen
tially ex
port su
bsid
ies; and b
asing its d
om
estic
support m
easures o
n m
arket co
nditio
ns, th
us in
creasing su
pplies an
d lo
werin
g p
rices, ultim
ately resu
lting
in “serio
us p
rejudice” to
Brazil. 9
(Sch
nep
f 2006)
Clearly
the D
SB
decisio
n w
as a significan
t loss fo
r the U
.S. co
tton in
dustry
but also
poten
tially fo
r oth
er
Am
erican ag
ricultu
ral firms. T
he U
.S. im
med
iately ap
pealed
, but in
March
2005, th
e appellate p
anel u
pheld
the
prev
ious ru
ling. S
oon after, th
e U.S
. Secretary
of A
gricu
lture an
nounced
that h
e was sen
din
g C
ongress a d
raft of
policy
chan
ges th
at would
elimin
ate or alter th
e pro
gram
s pro
hib
ited b
y th
e WT
O. E
nco
urag
ed b
y th
e U.S
.’s
prelim
inary
effort to
com
ply
with
the W
TO
rulin
g, B
razil temporarily
susp
ended
all punitiv
e actions, su
ch as
retaliatory
tariffs.
In resp
onse, th
e U.S
. dro
pped
the “S
tep 2
” cotto
n su
bsid
y w
hich
guaran
teed co
tton ex
porters an
artificial
dom
estic price an
d also
guaran
teed U
.S. m
ill users th
e low
er intern
ational p
rice. The U
.S. refu
sed fu
rther ch
anges
desp
ite losin
g ap
peals o
n th
e oth
er subsid
ies.
Recen
t Dev
elop
men
ts:C
iting failu
re by th
e U.S
. to rem
ove co
tton su
bsid
ies prev
iously
declared
illegal b
y
the W
TO
, Brazil in
early S
eptem
ber 2
006 req
uested
the W
TO
’s form
al investig
ation o
f Am
erican co
mplian
ce.
Once ag
ain th
is first petitio
n w
as blo
cked
by th
e U.S
. but B
razil launch
ed a seco
nd su
ccessful attem
pt. T
he U
.S.
claimed
it had
sufficien
tly am
ended
its policies, an
d th
erefore, th
ere was n
o b
asis for an
investig
ation. 1
0(Sch
nep
f
20
06
)
Trad
e Disp
utes in
Practice
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
37
The W
TO
confirm
ed in
2007 th
at the U
.S. failed
to b
ring its co
tton su
bsid
ies into
com
plian
ce with
an
earlier rulin
g an
d req
uired
the U
.S. to
mak
e an 8
2%
cut in
trade d
istortin
g su
bsid
ies to A
merican
farmers. T
he
U.S
. rejected th
e cuts. S
ubseq
uen
tly, in th
e same y
ear, a WT
O co
mplian
ce pan
el conclu
ded
that th
e U.S
. had
not
adeq
uately
chan
ged
its cotto
n su
pport m
easures to
fully
com
ply
with
its oblig
ations u
nder th
e WT
O ru
les.
The U
.S. ap
pealed
the ru
ling in
Feb
ruary
2008, b
ut w
as unsu
ccessful. O
n 2
5 A
ugust 2
008, B
razil requested
that th
e arbitratio
n p
roceed
ings b
e resum
ed. T
he fin
al arbitratio
n resu
lts are still pen
din
g. 11 P
revio
usly, B
razil
had
requested
auth
orizatio
n to
impose $
3 b
illion w
orth
of san
ctions. Its o
fficials hav
e indicated
that th
ey are
likely
to p
ursu
e a smaller claim
by tak
ing in
to acco
unt so
me rem
edial actio
ns th
e U.S
. has tak
en, w
hich
inclu
de
repealin
g th
e Step
2 su
bsid
y p
rogram
and refo
rmin
g th
ree export cred
it guaran
tee pro
gram
s. Asid
e from
usin
g
import tariffs ag
ainst th
e U.S
., Brazil h
as also th
reatened
to w
ithdraw
certain in
tellectual p
roperty
rights an
d
services co
mm
itmen
ts.
Un
ited S
tates v
s. Eu
rop
ean
Un
ion
: Boein
g a
nd
Airb
us
Th
e Disp
ute
:B
oein
g an
d A
irbus are an
intern
ational d
uopoly
in th
e pro
ductio
n o
f civil aircrafts. W
ith th
e help
of h
eavy E
uro
pean
govern
men
t subsid
ies in its early
years, A
irbus h
as turn
ed aro
und an
d em
erged
as a fierce
com
petito
r of B
oein
g. In
recent y
ears, Airb
us h
as captu
red ab
out h
alf of th
e mark
et. Consid
ering th
is industry
’s
massiv
e research an
d d
evelo
pm
ent co
sts, very
large w
ork
force w
ith p
roductio
n facilities scattered
across th
e
glo
be, th
ere are a multitu
de o
f pro
tection in
centiv
es for th
e concern
ed g
overn
men
ts.
Both
the U
.S. an
d th
e EU
hav
e accused
each o
ther o
f gran
ting su
bsid
ies and sp
ecial ben
efits to th
eir firms
in v
iolatio
n o
f the W
TO
rules.
Early
Ph
ases:
Quarrels o
ver aircraft su
bven
tion started
to receiv
e attentio
n in
the m
id-1
980s w
hen
the U
.S.
entered
trade talk
s with
Britain
, Fran
ce, and
West G
erman
y w
ith th
e ho
pe o
f redu
cing
Eu
rop
ean sales an
d
pro
ductio
n su
bsid
ies. The U
.S. claim
ed th
at subsid
ies to A
irbus v
iolated
the G
AT
T 1
979 ag
reemen
t on civ
il
aircraft, wh
ile the E
uro
pean
s argu
ed th
at Bo
eing
ben
efited fro
m b
oth
go
vern
men
t tax b
reaks an
d research
fundin
g. N
egotiatio
ns w
ent o
n fo
r years, b
ut in
1992, sh
ortly
after the U
.S. th
reats to fo
rmally
issue a co
mplain
t
with
the G
AT
T, th
e U.S
. and th
e Euro
pean
Com
munity
(EC
) reached
an ag
reemen
t. The acco
rd, w
hich
would
last appro
xim
ately ten
years, stip
ulated
that th
e EC
limit A
irbus p
roductio
n su
bsid
ies to o
ne-th
ird o
f dev
elopm
ent
costs an
d th
at the U
.S. cap
indirect aid
to B
oein
g at 4
% o
f the co
mpan
y’s to
tal reven
ue.
Recen
t Dev
elop
men
ts:In
the su
mm
er of 2
004 th
e U.S
. told
the E
U th
at it wan
ted A
irbus p
roductio
n su
bsid
ies
removed
, arguin
g th
at the 1
992 treaty
had
expired
and w
as no lo
nger v
alid. F
urth
ermore, th
e U.S
. warn
ed th
at
if the E
U d
id n
ot co
mply, th
e issue w
ould
be referred
to th
e WT
O. S
om
e observ
ers attributed
the U
.S. p
olicy
chan
ge to
Boein
g’s lo
ss of m
arket sh
are, the p
endin
g co
mpletio
n o
f the m
assive A
irbus A
-380 ju
mbo jet, an
d
the u
pco
min
g A
merican
presid
ential electio
n. T
he U
.S. an
d th
e EU
each req
uested
consu
ltations w
ith th
e WT
O
in O
ctober 2
004, an
d after m
onth
s of u
nsu
ccessful b
ilateral neg
otiatio
ns, th
e WT
O ev
entu
ally estab
lished
multip
le
DS
B p
anels to
investig
ate a variety
of claim
s. Sim
ilar to p
revio
us d
isputes, th
e U.S
. asserts that th
e pro
ductio
n
subsid
ies pro
vid
ed to
Airb
us are u
nfair u
nder th
e WT
O ru
les, while th
e EU
conten
ds th
at the U
.S. in
directly
supports B
oein
g th
rough tax
break
s and ex
clusiv
e aerosp
ace research co
ntracts.
Citin
g th
e extrem
e com
plex
ity o
f the issu
e, multip
le com
plain
ts, and th
e num
ber o
f parties in
volv
ed, th
e
WT
O an
nounced
in A
pril 2
006 th
at it does n
ot ex
pect th
e pan
els to arriv
e at any co
nclu
sions so
on. O
n 1
1 Ju
ly
2008, th
e Pan
el info
rmed
the D
SB
that it n
ow
expects to
com
plete its w
ork
in 2
009. 1
2
Un
ited S
tates v
s. Bra
zil: Con
centra
ted O
ran
ge J
uice
Th
e Disp
ute
:B
razil is the larg
est pro
ducer o
f oran
ge ju
ice in th
e world
and is also
the larg
est exporter w
hile
the U
.S. is th
e world
’s largest im
porter. D
ue to
geo
grap
hic an
d clim
ate differen
ces, Brazil’s h
arvest seaso
n
occu
rs three m
onth
s earlier than
the U
.S. T
rade in
oran
ge ju
ice eases seasonal sh
ortag
e in th
e U.S
.
Trad
e Disp
utes in
Practice
38.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Conflict o
ver B
razilian co
ncen
trated o
range ju
ice exports to
the U
.S. b
egan
a little more th
an 2
5 y
ears ago
and co
ntin
ues to
this d
ay. The U
.S. co
nten
ds th
at Brazilian
firms sell o
range ju
ice in A
merican
mark
ets at less
than
fair valu
e (LT
FV
) and th
at the B
razilian g
overn
men
t subsid
izes its industry
thro
ugh, am
ong o
ther th
ings,
child
labor an
d tax
rebates. 1
3 Brazil d
enies th
ese charg
es and claim
s that th
e U.S
. tariffs are unw
arranted
and
disp
roportio
nate to
the alleg
ed in
juries.
Early
Ph
ases:
After a series o
f frosts d
evastated
the F
lorid
a citrus in
dustry
in th
e late 1970s an
d early
1980s,
the v
olu
me o
f cheap
imported
Brazilian
concen
trated o
range ju
ice soared
to co
mpen
sate for th
e declin
e in th
e
U.S
. pro
du
ction
. Betw
een 1
97
7 an
d 1
98
1, im
po
rts jum
ped
from
16
millio
n g
allon
s per y
ear to 8
9 m
illion
gallo
ns. F
lorid
a oran
ge ju
ice firms, fearin
g th
eir ow
n v
iability, p
etitioned
the D
OC
and th
e ITC
for co
unterv
ailing
duties in
1982. T
he p
laintiffs claim
ed th
at Brazilian
concen
trated o
range ju
ice firms u
nfairly
ben
efited fro
m
low
interest rates, tax
rebates, etc. A
year later, th
e DO
C reach
ed an
agreem
ent w
ith th
e Brazilian
govern
men
t
which
resulted
in an
export tax
on B
razilian firm
s in ad
ditio
n to
a U.S
. counterv
ailing d
uty
already in
place.
In 1
986, a co
nso
rtium
of F
lorid
a citrus g
row
ers again
filed a co
mplain
t with
the D
OC
and th
e ITC
. How
ever,
this tim
e they
sought an
tidum
pin
g d
uties o
n B
razilian co
ncen
trated o
range ju
ice. The A
merican
firms arg
ued
that B
razilian ex
ports w
ere bein
g so
ld fo
r LT
FV
and w
ere desig
ned
to w
ipe o
ut an
already crip
pled
industry.
Soon after, th
e DO
C ru
led in
favor o
f the A
merican
firms an
d im
plem
ented
antid
um
pin
g d
uties ran
gin
g fro
m 1
to 8
%. B
y 1
995 all tax
es on B
razilian o
range ju
ice imports h
ad g
one u
p to
about 5
0%
.
Recen
t Dev
elop
men
ts:In
the m
id-1
990s, w
ith talk
s of N
AF
TA
expan
sion in
to a F
ree Trad
e Area o
f the
Am
ericas (FT
AA
), the red
uctio
n o
f agricu
ltural su
bsid
ies and th
e reductio
n o
f U.S
. tariffs on B
razilian o
range
juice lo
oked
pro
misin
g. Y
et as the talk
on F
TA
A b
roke d
ow
n o
n a n
um
ber o
f fronts, it b
ecame clear th
at the
oran
ge ju
ice disp
ute w
as far from
over. In
2002 B
razil requested
a WT
O rev
iew o
f Flo
rida’s “eq
ualizin
g ex
cise
tax” o
n g
rounds th
at it was an
unfair p
rotectio
n. T
he tw
o p
arties later info
rmed
the W
TO
that th
ey h
ad reach
ed
a mutu
ally ag
reed u
pon so
lutio
n. B
ut in
the fall o
f 2003 th
e DO
C an
d IT
C in
itiated y
et anoth
er dum
pin
g p
robe
desp
ite findin
g n
o ev
iden
ce of in
jury
in th
eir prelim
inary
investig
ations.
In F
ebru
ary 2
006, th
e final d
etermin
ation o
f the D
OC
and IT
C o
vertu
rned
their earlier d
ecisions an
d firm
-
specific an
tidum
pin
g m
easures ran
gin
g fro
m alm
ost 1
0%
to a w
hoppin
g 6
0%
were im
posed
. 14 T
ropican
a Pro
ducts,
Inc., a resp
on
den
t, app
ealed th
e case to th
e U.S
. Co
urt o
f Intern
ation
al Trad
e (CIT
) wh
ich, in
Ap
ril 20
07
,
reman
ded
the case to
the IT
C fo
r re-exam
inatio
n. O
n rem
and, th
e ITC
upheld
its inju
ry d
etermin
ation.
In N
ovem
ber 2
008, B
razil requested
a WT
O co
nsu
ltation o
n U
.S.’s an
ti-dum
pin
g ad
min
istrative rev
iews
and o
ther m
easures related
to im
ports o
f certain o
range ju
ice from
Brazil. 1
5 It charg
es that so
me m
easures o
f
U.S
. laws, reg
ulatio
ns, p
roced
ures, p
ractices and m
ethodolo
gies o
n th
e oran
ge ju
ice issue are in
consisten
t with
the W
TO
rules. A
disp
ute settlem
ent p
anel h
as yet to
be estab
lished
.
Un
ited S
tates v
s. Bra
zil, Ch
ina, E
cuad
or, In
dia
, Th
aila
nd
, an
d V
ietnam
: Sh
rimp
Th
e Disp
ute: S
ince th
e late 1990s, th
e Unites S
tates has accu
sed a n
um
ber o
f Asian
and L
atin A
merican
natio
ns, m
ost n
otab
ly T
hailan
d, B
razil, Ecu
ador, C
hin
a, Vietn
am, an
d In
dia o
f dum
pin
g sh
rimp o
nto
the A
merican
mark
et at LT
FV
. In ad
ditio
n, th
e U.S
. alleges th
at the sh
rimp in
dustries in
man
y o
f these co
untries are su
bsid
ized
by th
eir govern
men
ts. All o
f these n
ations refu
ted th
ese claims an
d arg
ued
that th
e U.S
. was m
erely p
rotectin
g
an in
efficient d
om
estic industry
that co
uld
not co
mpete w
ith larg
e foreig
n sh
rimp farm
s.
Early
Ph
ases:
Rum
blin
gs th
at U.S
. shrim
pers w
ere about to
petitio
n th
e DO
C fo
r antid
um
pin
g m
easures o
n
shrim
p im
ports b
egan
in 1
998. T
he m
ovem
ent h
ad g
ained
mom
entu
m a few
years p
rior as A
merican
dem
and
soared
and d
om
estic suppliers stru
ggled
to co
mpete w
ith ev
er increasin
g ch
eap fo
reign im
ports. A
t the tim
e,
there w
ere more th
an 5
0 co
untries an
d th
eir exports o
f shrim
p w
ere more th
an tw
ice the am
ount o
f shrim
p
caught in
the U
.S. T
hose in
favor o
f tariffs claimed
that th
e foreig
n firm
s were g
uilty
of d
um
pin
g, w
hile so
me
Am
erican d
etractors an
d th
e accused
parties asserted
that fo
reign sh
rimp farm
s had
a com
parativ
e advan
tage
Trad
e Disp
utes in
Practice
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
39
ov
er the A
merican
ind
ustry
wh
ich relied
solely
on
wh
at cou
ld b
e caug
ht in
the G
ulf o
f Mex
ico. T
he U
.S.
shrim
pers started
explo
ring leg
al actions ag
ainst th
e foreig
n p
roducers. In
Decem
ber 2
003, th
e South
ern S
hrim
p
Allian
ce’s law firm
, Dew
ey B
allantin
e LL
P, deliv
ered 1
48,8
00 p
ages o
f petitio
ns an
d su
pportin
g d
ocu
men
ts in
two v
ans to
the D
OC
and th
e ITC
, charg
ing d
um
pin
g fro
m fo
reign p
roducers in
Brazil, C
hin
a, Ecu
ador, In
dia,
Thailan
d, an
d V
ietnam
. 16(H
itt and H
ookw
ay 2
007)
Recen
t Dev
elop
men
ts:In
Decem
ber 2
004, th
e ITC
released its fin
al determ
inatio
ns. It fo
und th
at firms fro
m
all six co
untries w
ere guilty
of d
um
pin
g w
arm w
ater shrim
p an
d p
rawns, d
espite a few
contrad
ictory
prelim
inary
rulin
gs. B
ut it also
conclu
ded
that in
dustries in
the U
.S. p
roducin
g can
ned
warm
water sh
rimp an
d p
rawns w
ere
not m
aterially in
jured
or th
reatened
by im
ports fro
m C
hin
a, Thailan
d, an
d V
ietnam
even
though th
ey w
ere sold
in th
e U.S
. at LT
FV
, and su
ch im
ports fro
m B
razil, Ecu
ador, an
d In
dia w
ere neg
ligib
le. Dum
pin
g m
argin
s and
subseq
uen
t antid
um
pin
g tariffs o
n im
ports o
f warm
water sh
rimp an
d p
rawns w
ere installed
in F
ebru
ary 2
005,
which
ranged
from
3.5
% to
more th
an 1
00%
dep
endin
g o
n th
e orig
inatin
g co
untry
and firm
. 17
The accu
sed n
ations an
d o
ther co
ncern
ed states h
ad fo
rmally
requested
either co
nsu
ltation w
ith th
e U.S
.
under th
e ausp
ices of th
e WT
O o
r thro
ugh D
SB
pan
els regard
ing th
is issue. In
Novem
ber 2
005, E
cuad
or req
uested
consu
ltations w
ith th
e U.S
. concern
ing D
OC
’s practice o
f “zeroin
g.”
18 (C
han
g 2
008). T
he W
TO
ruled
in fav
or
of E
cuad
or. T
he U
.S. ag
reed to
recalculate th
e du
mp
ing
marg
in w
itho
ut zero
ing
. As a resu
lt, it fou
nd
that
Ecu
ador d
id n
ot co
mm
it dum
pin
g.
The U
.S. sh
rimpers w
anted
even
more. O
n th
e first anniv
ersary o
f the sh
rimp tariffs in
Feb
ruary
2006, th
e
South
ern S
hrim
p A
lliance filed
a sweep
ing rev
iew req
uest, citin
g so
me 8
00 fo
reign p
roducers an
d p
rocesso
rs.
This actio
n sp
ooked
more th
an 1
00 fo
reign sh
rimp su
ppliers in
to p
ayin
g m
illions o
f dollars to
the A
lliance in
return
for d
roppin
g th
e action. 1
9 On th
e tariff’s second an
niv
ersary in
Feb
ruary
2007, th
e Allian
ce requested
the
U.S
. govern
men
t for an
oth
er bro
ad tariff rev
iew. B
ut th
is time n
ew sh
rimper factio
ns jo
ined
the act, w
antin
g a
piece o
f the actio
n. A
gro
up rep
resentin
g sh
rimpers an
d p
rocesso
rs, the L
ouisian
a Shrim
p A
ssociatio
n, filed
its
ow
n rev
iew req
uest, claim
ing th
at it did
not g
et a dim
e from
the A
lliance. M
eanw
hile, th
e state of L
ouisian
a,
which
pro
vid
ed earlier fu
ndin
g to
the A
lliance, h
as also m
ade in
quiries ab
out th
e Allian
ce’s finan
ces and w
heth
er
it should
receive a sh
are of th
e pie.
In 2
005, th
e U.S
. required
exporters at risk
of d
efaultin
g o
n th
e pay
men
t of an
ti-dum
pin
g d
uties to
post a
bond co
verin
g th
e full am
ount. In
dian
exporters d
eemed
such
a measu
re unreaso
nab
le by arg
uin
g th
at it resulted
in an
excessiv
e finan
cial burd
en o
n th
e exporters. In
dia an
d T
hailan
d b
oth
requested
consu
ltations w
ith th
e U.S
.
in 2
006 o
ver th
e measu
re and req
uested
establish
ing W
TO
pan
els to reso
lve th
e disp
utes. A
disp
ute settlem
ent
pan
el ruled
in F
ebru
ary 2
008 th
at the U
.S. m
easure v
iolated
the W
TO
rules th
at pro
hib
it importers fro
m im
posin
g
policies o
ther th
an ex
tra duties to
counter d
um
pin
g (L
ynn 2
008).
Ecu
ad
or, C
olo
mb
ia a
nd
U.S
. vs. E
U: B
an
an
as
Sin
ce the 1
990s, sev
eral Latin
Am
erican b
anan
a pro
ducers an
d th
e U.S
. hav
e clashed
with
the E
U o
ver its
system
for g
rantin
g p
referential m
arket access to
ban
anas fro
m its fo
rmer co
lonies in
African
, Carib
bean
and
Pacific (A
CP
) countries. 2
0 Countries su
ch as E
cuad
or, C
olo
mbia, an
d th
e U.S
. (which
interv
ened
on b
ehalf o
f
the U
.S. b
anan
a exporters su
ch as C
hiq
uita) h
ave w
on a series o
f cases conten
din
g th
at EU
’s tariffs, quotas an
d
import licen
ses discrim
inated
again
st Latin
Am
erican b
anan
a exporters. 2
1(P
atterson 2
001)
In 1
997, th
e WT
O A
ppellate B
ody o
rdered
the E
U to
modify
its ban
ana im
port reg
ime. T
wo y
ears later, the
WT
O fu
rther ru
led th
at Bru
ssels’ reform
s had
still not g
one far en
ough, an
d th
at the U
.S. w
as auth
orized
to
retaliate again
st the E
U. A
fter neg
otiatio
ns w
ith E
cuad
or an
d th
e U.S
. in 2
001, an
agreem
ent w
as reached
that
main
tained
the E
U’s p
references fo
r AC
P ex
ports u
ntil th
e end o
f 2005, an
d refo
rmed
the E
U’s tariff-rate q
uota
(TR
Q) to
a ‘tariff-only
regim
e,’ which
would
at least main
tain to
tal mark
et access for M
ost F
avored
Natio
n
(MF
N) b
anan
a suppliers w
ho d
id n
ot h
ave th
e ben
efit of p
references. 2
2
Trad
e Disp
utes in
Practice
40.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
EU
’s new
tariff levels w
ere later challen
ged
by E
cuad
or an
d th
e U.S
. Tw
o sep
arate WT
O arb
itrations b
oth
confirm
ed th
at the n
ew rates w
ere too h
igh to
pass th
e total m
arket access test. T
he E
U n
oneth
eless implem
ented
a new
ban
ana im
port reg
ime at th
e beg
innin
g o
f 2006 w
ithout ag
reemen
ts from
the affected
countries. T
he n
ew
regim
e carried an
MF
N tariff rate o
f EU
R176 p
er tonne, an
d acco
rded
a 750,0
00 to
nne d
uty
-free quota fo
r the
AC
P co
untries, b
eyond w
hich
the M
FN
rate beg
an to
apply. 2
3
Ecu
ado
r believ
ed th
at EU
’s new
imp
ort reg
ime w
as still no
t in co
mp
liance w
ith th
e 19
97
rulin
gs an
d
requested
a new
consu
ltation o
n 1
6 N
ovem
ber 2
006. S
pecifically, it arg
ued
that th
e new
MF
N tariff rate o
f
EU
R176 p
er tonne far ex
ceeded
the E
UR
75 p
er tonne in
-quota M
FN
rate form
ally b
ound in
the E
U’s o
wn
sched
ule o
f com
mitm
ents to
the W
TO
. The E
U co
untered
that im
port v
olu
mes fo
r MF
N b
anan
as orig
inatin
g
from
Latin
Am
erica as a whole ro
se 8.2
% in
2006. 2
4 Under th
e new
tariff regim
e, the sh
are of L
atin A
merican
ban
anas in
the E
U m
arket h
ad actu
ally d
eclined
.
On 2
1 M
arch 2
007, C
olo
mbia req
uested
consu
ltations w
ith th
e EU
concern
ing th
e com
plian
ce of E
U’s
new
tariff regim
e with
the W
TO
rulin
gs. It ch
arged
that E
U’s n
ew b
anan
a import reg
ime is in
consisten
t with
the
GA
TT
1994 fo
r the fo
llow
ing reaso
ns:
1. “T
he M
FN
tariff rate of E
UR
176/to
nne is in
consisten
t with
Article II:1
becau
se it exceed
s the d
uties set fo
rth
in th
e EC
’s Sch
edule o
f Concessio
ns;
2. O
nly
AC
P b
anan
as ben
efit from
the ap
plicatio
n o
f a zero tariff, w
hich
is inco
nsisten
t with
Article I:1
. This
inco
nsisten
cy can
not b
e justified
under th
e Article I “D
oha W
aiver” as th
at waiv
er ceased to
apply
to b
anan
as as
of 1
January
2006 b
ecause th
e EC
no lo
nger o
bserv
es the term
s and co
nditio
ns o
f that w
aiver, in
particu
lar
becau
se the E
C h
as failed to
rebin
d its im
port tariff o
n b
anan
as and at a lev
el that resu
lts in at least m
aintain
ing
total m
arket access fo
r MF
N b
anan
a suppliers, tak
ing in
to acco
unt all E
C W
TO
mark
et-access com
mitm
ents;
3. T
he ap
plicatio
n o
f the A
CP
TR
Q en
tails discrim
inatio
n b
etween
AC
P b
anan
as and M
FN
ban
anas, w
hich
is
inco
nsisten
t with
vario
us p
rovisio
ns o
f Article X
III. Moreo
ver, th
is inco
nsisten
cy can
not b
e justified
under th
e
Article X
III ‘Doha W
aiver’ sin
ce that w
aiver ex
pired
on 3
1 D
ecember 2
005 an
d h
as not b
een ex
tended
.”25
Sin
ce Colo
mbia w
as not a p
arty to
Ecu
ador’s p
ast pan
el cases, it was n
ot ab
le to retaliate ag
ainst th
e EU
even
if Ecu
ador w
ould
win
its new
com
plain
t. The tw
o cases are v
ery sim
ilar, but E
cuad
or’s case is o
n E
U’s
nonco
mplian
ce with
the W
TO
’s earlier rulin
gs w
hile C
olo
mbia’s case in
cludes m
ore sp
ecific and u
p-to
-date
charg
es on v
iolatio
ns o
f the W
TO
pro
visio
ns. C
olu
mbia w
as also seek
ing to
subject its case to
accelerated
pro
cedures, arg
uin
g th
at the p
roduct at issu
e was p
erishab
le, and as a d
evelo
pin
g co
untry, it d
epen
ded
heav
ily
on its ex
ports o
f ban
anas. 2
6 As o
f this w
riting, th
e WT
O h
as not y
et issued
its report an
d C
olu
mbia h
as not
requested
the estab
lishm
ent o
f a DS
B p
anel.
On 2
9 Ju
ne 2
007, th
e U.S
. requested
the estab
lishm
ent o
f a WT
O p
anel ch
argin
g th
at the E
C h
ad failed
to
brin
g its im
port reg
ime fo
r ban
anas in
to co
mplian
ce with
its WT
O o
blig
ations. In
July
2007, th
e DS
B referred
the m
atter to th
e orig
inal p
anel. In
April 2
008, a seco
nd W
TO
pan
el ruled
in fav
or o
f Ecu
ador’s co
mplain
t. Also
,
in D
ecember 2
008, a W
TO
Appellate B
ody u
pheld
an earlier p
anel d
ecision th
at the E
U b
anan
a import reg
ime
vio
lated th
e WT
O ru
les. These d
ecisions co
uld
pav
e the w
ay fo
r Ecu
ador an
d th
e U.S
. to im
pose trad
e sanctio
ns
again
st the E
U. In
an earlier p
hase o
f this lo
ng-ru
nnin
g case, th
e U.S
. imposed
sanctio
ns ag
ainst E
U’s ex
ports in
the am
ount o
f $191.4
millio
n a y
ear for sev
eral years.
In F
ebru
ary 2
009, th
e EU
reported
ly o
ffered to
low
er its 176 p
er metric to
nne M
FN
ban
ana tariff w
ith th
e
follo
win
g sch
edule: im
med
iate reductio
n to
136 p
er tonne, th
en th
ree-year fro
zen rate at 1
36 startin
g 2
January
20
11
, and
then
follo
wed
by
grad
ual red
uctio
ns to
11
4 p
er ton
ne b
y 2
01
9. T
he o
ffer dem
and
ed in
return
a
defin
itive en
d to
WT
O litig
ations an
d an
understan
din
g th
at the E
U w
ould
hav
e fulfilled
all of its o
blig
ations
even
under an
even
tual D
oha R
ound ag
reemen
t. Ecu
ador ap
pears to
be w
illing to
accept th
e offer, b
ut C
osta
Rica, b
ankin
g o
n sig
nin
g a co
mpreh
ensiv
e Cen
tral Am
erica-EU
deal in
January
2010—
which
could
furth
er
low
er the tariff—
has so
far refused
to accep
t. 27
Trad
e Disp
utes in
Practice
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
41
Th
e EU
an
d th
e U.S
. vs. In
dia
: Win
es & S
pirits T
ariffs
In M
arch 2
006, th
e EU
sought th
e establish
men
t of a W
TO
disp
ute p
anel to
rule o
n alleg
ed In
dia’s ex
cessive
tariffs on w
ines an
d sp
irits imports, after th
e EU
failed to
resolv
e the d
ispute in
prio
r consu
ltations w
ith In
dia.
It argued
that v
arious d
uties o
n w
ines an
d sp
irits imports resu
lted in
a com
bin
ed rate far ex
ceedin
g th
e max
imum
150%
duty
set out in
India’s W
TO
tariff sched
ule. T
he E
U also
challen
ged
India’s v
iolatio
n o
f a WT
O ru
le by
forb
iddin
g th
e sale of im
ported
win
es and sp
irits in th
e south
ern In
dian
state of T
amil N
adu, w
here o
nly
Indian
-
mad
e win
es and sp
irits could
be so
ld.
Acco
rdin
g to
the E
U, In
dia ap
plied
, on to
p o
f the o
rdin
ary cu
stom
s duties o
f 100%
for w
ines an
d 1
50%
for
spirits, ad
ditio
nal d
uties o
n im
ported
win
es at rates of 2
0 to
75%
and o
n im
ported
spirits at rates o
f 25 to
150%
.
In ad
ditio
n, In
dia also
applied
an “ex
tra additio
nal d
uty
” on im
ported
win
es and sp
irits at a rate of 4
%. A
foreig
n
spirit o
r win
e hav
ing a d
eclared v
alue o
f $40 w
ould
cost co
nsu
mers at least $
120 fo
r spirits an
d n
early $
85 fo
r
win
es. For a sp
irit with
a declared
valu
e of $
10, th
e duties w
ould
hav
e push
ed u
p th
e final p
rice by a h
efty
550%
. As a resu
lt, India, th
e world
’s largest w
hisk
ey m
arket, o
nly
imported
15%
of w
ines an
d less th
an 1
% o
f
spirits.O
n 1
3 Ju
ly 2
007, th
e EU
susp
ended
its WT
O ch
allenge d
ue to
New
Delh
i’s decisio
n to
elimin
ate som
e
duties o
n w
ine an
d sp
irits imports. H
ow
ever, th
e EU
was still u
nsatisfied
with
India’s p
rogress an
d an
nounced
,
in D
ecember 2
007, th
at it would
press ah
ead fo
r a pan
el rulin
g. 2
8(Mercer 2
007)
The U
.S., fo
llow
ing E
U’s lead
, requested
consu
ltations w
ith In
dia in
March
2007 reg
ardin
g its tariff p
olicy
on w
ines an
d sp
irits. Shortly
thereafter, th
e EU
and A
ustralia fo
rmally
petitio
ned
the W
TO
to jo
in th
e pro
ceedin
gs.
A D
SB
pan
el was estab
lished
in Ju
ne o
f that y
ear after the p
arties failed to
reach a m
utu
al agreem
ent. In
dia
argued
that th
e additio
nal an
d ex
tra-additio
nal d
uties w
ere perm
itted b
ecause th
ey sim
ply
offset certain
intern
al
taxes, su
ch as v
alue-ad
ded
taxes. T
he D
SB
pan
el agreed
with
India, ru
ling th
at any im
port ch
arges aim
ed at
offsettin
g in
ternal tax
es need
only
serve th
e same fu
nctio
n as th
e intern
al taxes b
ut n
eed n
ot b
e equiv
alent in
amount to
those in
ternal tax
es. How
ever, u
pon U
S’s ap
peal, an
Appellate B
ody in
Novem
ber 2
008 rev
ersed th
at
decisio
n an
d ag
reed w
ith th
e U.S
. that su
ch im
port ch
arges can
not resu
lt in h
igher am
ounts b
eing ch
arged
to
imports th
an to
like d
om
estic pro
ducts. S
om
e called th
e U.S
. victo
ry “larg
ely m
oral” sin
ce India w
ithdrew
the
additio
nal d
uty
and m
odified
the ex
tra-additio
nal d
uty
in 2
007. In
additio
n, th
e Appellate B
ody d
id n
ot req
uire
India to
brin
g its im
port d
uties in
line w
ith W
TO
rules b
ecause it lack
ed su
fficient in
form
ation to
determ
ine
wheth
er those d
uties w
ere in fact illeg
ally h
igh.
Sep
arately, on 2
2 S
eptem
ber 2
008, th
e EU
requested
for co
nsu
ltations w
ith In
dia. T
he E
U claim
ed th
at
som
e Ind
ian states d
iscrimin
ate again
st imp
orted
win
es and
spirits b
y restrictin
g th
eir retail and
wh
olesale
distrib
utio
n an
d also
by g
rantin
g tax
exem
ptio
n o
nly
to lo
cal win
es. In O
ctober 2
008, A
ustralia an
d th
e U.S
.
requested
to jo
in th
e consu
ltations, w
hich
were h
eld in
Novem
ber 2
008. 2
9 Subseq
uen
tly, on 1
5 D
ecember 2
008,
the E
U req
uested
supplem
entary
consu
ltations w
ith In
dia reg
ardin
g d
iscrimin
atory
taxatio
n o
n im
ported
bottled
win
es by th
e Indian
state of K
arnatak
a. On 2
3 D
ecember, 2
008, th
e U.S
. requested
to jo
in th
e supplem
entary
consu
ltations. A
DS
B p
anel h
as yet to
be estab
lished
.
Co
nclu
sion
Th
e GA
TT
achiev
ed a su
bstan
tial liberalizatio
n o
f the w
orld
trade b
y red
ucin
g tariffs an
d o
ther trad
e
barriers. It, h
ow
ever, d
id n
ot h
ave th
e auth
ority
to en
force its ru
lings o
n trad
e disp
utes am
ong m
ember co
untries.
On
the co
ntrary, th
e WT
O is em
po
wered
with
the au
tho
rity to
enfo
rce its rulin
gs b
y au
tho
rizing
sanctio
ns
again
st the o
ffendin
g p
arties, thus fo
rcing th
e even
tual reso
lutio
n o
f a trade d
ispute. W
e hav
e seen m
any cases
of trad
e disp
utes su
ccessfully
resolv
ed b
y th
e WT
O. It h
as served
the d
isciplin
ary ro
le again
st the u
nju
stified
disto
rtion
s to th
e wo
rld trad
e. With
mo
re and
mo
re cases settled u
nd
er the W
TO
jurisd
iction
, the w
orld
is
movin
g to
ward
a better trad
ing sy
stem.
Trad
e Disp
utes in
Practice
42.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
We h
ave sh
ow
n th
at the d
isputes o
ften w
ere triggered
by co
nflicts b
etween
natio
nal law
s and th
e WT
O
rules. H
ow
ever, th
ey w
ere more o
ften trig
gered
by sp
ecial interest g
roups seek
ing to
pro
tect their o
wn in
terests.
We h
ave also
show
n th
at the W
TO
rulin
gs w
ere met w
ith d
elayed
implem
entatio
n o
r non-im
plem
entatio
n o
n
on
e pretex
t or th
e oth
er, particu
larly b
y th
e majo
rs. 30 P
rolo
ng
ed n
on
-resolu
tion
cou
ld u
nd
ermin
e the fu
ture
effectiven
ess of th
e WT
O.
The rap
id rise o
f preferen
tial tradin
g arran
gem
ents su
ch as th
e free trade areas (F
TA
s) and th
e custo
ms
unio
ns (C
Us) can
bypass so
me o
f the W
TO
obstacles. T
he N
AF
TA
’s uniq
ue sy
stem o
f disp
ute settlem
ent can
be
a usefu
l model fo
r oth
er tradin
g b
locs to
emulate. T
here are still n
um
erous trad
e-related issu
es remain
ing to
be
resolv
ed. T
hey
inclu
de, b
ut n
ot lim
ited to
, enviro
nm
ental issu
es, poverty, m
arket stab
ility, com
petitio
n ru
les,
agricu
ltural su
bsid
y, ob
stacles on
services reg
ulatio
n, lib
eralization
of d
om
estic regu
lation
s that h
ind
er
intern
ational trad
e, pro
duct an
d lab
or m
arket p
olicies th
at prev
ent th
e realization o
f econom
ies of scale an
d
impro
vem
ents in
pro
ductiv
ity, regulatio
n o
f food safety
and tech
nical stan
dard
s, and reg
ulatio
n o
f world
finan
cial
mark
ets. The cu
rrent D
oha ro
und n
egotiatio
ns are aim
ing at sev
eral aspects o
f these issu
es. The w
orld
tradin
g
system
, though v
astly im
pro
ved
since th
e establish
men
t of th
e GA
TT
, is still far from
perfect.
Referen
ces
Brid
ges W
eekly Tra
de N
ews D
igest (2
006), ‘E
cuad
or U
npeels N
ew C
hap
ter in B
anan
a Disp
ute w
ith E
U’, v
ol.
10, n
o. 3
9, N
ovem
ber 2
2.
Brid
ges W
eekly Tra
de N
ews D
igest (2
007), ‘E
U B
anan
a Import R
ules C
hallen
ged
Again
, This T
ime b
y C
olo
mbia’,
vol. 1
1, n
o. 1
1, M
arch 2
8.
Chan
g, W
W (2
008), ‘A
ntid
um
pin
g, C
ounterv
ailing, an
d S
afeguard
Measu
res’, Gita
m R
eview o
f Intern
atio
nal
Busin
ess, vol. 1
, issue 1
, July, p
p. 1
-34.
Co
un
cil of th
e EU
Gen
eral Secretariat (2
00
9), G
enera
l Overview
of A
ctive WT
O D
ispu
te Settlem
ent C
ases
Invo
lving
the E
U a
s Co
mp
lain
an
t or D
efend
an
t an
d o
f Active C
ases u
nd
er the T
rad
e Ba
rriers Reg
ula
tion
,
January
23, v
iewed
1 A
pril (2
009), <
http
://trade.ec.eu
ropa.eu
/doclib
/docs/2
007/m
ay/trad
oc_
134652.p
df>
.
Fro
ese, MD
. (2006), ‘C
ontin
gen
t Pro
tection M
easures an
d th
e Man
agem
ent o
f the S
oftw
ood L
um
ber T
rade in
North
Am
erica’, The E
stey Cen
treJo
urn
al o
f Intern
atio
nal L
aw
and T
rade P
olicy 7
, pp. 1
26-5
1.
Hitt, G
& H
ookw
ay, J (2007), ‘S
eafood F
ight: U
.S. S
hrim
pers H
aul C
ash fro
m L
ow
er-Cost R
ivals’, T
he W
all
Street Jo
urn
al, A
pril 2
.
ITC
SD
(2009), ‘B
anan
a Update’, N
ews a
nd A
nalysis 1
3, n
o. 1
, March
.
ITC
(2005), ‘C
ertain F
rozen
or C
anned
Warm
water S
hrim
p an
d P
awns F
rom
Brazil, C
hin
a, Ecu
ador, In
dia,
Thailan
d, an
d V
ietnam
’, Publicatio
n 3
748.
ITC
(2007), ‘C
ertain O
range Ju
ice from
Brazil’, P
ublicatio
n 3
930.
Lynn, J (2
008), ‘W
TO
Pan
el Rules ag
ainst U
.S. in
Shrim
p C
ases’, Reu
ters, Feb
ruary
29.
Mercer, C
2007, E
U to
Press A
hea
d w
ith In
dia
Spirit T
ariffs D
ispute, D
ecember 4
, view
ed 1
April (2
009), <
http
://ww
w.b
everag
edaily.co
m/>
.
Patterso
n, E
(2001), T
he U
S-E
U B
anana D
ispute, A
SIL
Insig
hts, T
he A
merican
Society
of In
ternatio
nal L
aw,
Feb
ruary, v
iewed
1 A
pril 2
009, <
http
://ww
w.asil.o
rg/in
sigh63.cfm
>.
Sch
nep
f, R (2
00
5),
‘Back
gro
un
d o
n th
e U
.S.-B
razil W
TO
Co
tton
Su
bsid
y D
ispu
te’, C
RS
Rep
ort
forC
on
gress
RL
32
57
1.
Sch
nep
f, R (2
006),‘U
.S. A
gricu
ltural P
olicy
Resp
onse to
WT
O C
otto
n D
ecision’, C
RS
Rep
ort fo
r Congress
RS
22
18
7.
Trad
e Disp
utes in
Practice
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
43
TE
D C
ase
s Stu
die
s 20
09
a, U
S-C
an
ad
a S
oftw
oo
d L
um
ber D
ispu
te, v
iew
ed
1 A
pril (2
00
9), <
http
://
ww
w1
.american
.edu
/TE
D/u
scanad
a.htm
>.
TE
D C
ase
s Stu
die
s (20
09
)b, S
weet O
ran
ges?
vie
wed
1 A
pril 2
00
9, <
http
://ww
w1
.am
eric
an
.ed
u/T
ED
/
oran
ge.h
tm>
.
World
Trad
e\Interactiv
e (2007), ‘U
.S. A
ccuses C
anad
a of N
onco
mplian
ce with
Softw
ood L
um
ber A
greem
ent’,
vol. 1
4, Issu
e 159, A
ugust 9
.
World
Trad
e\Interactiv
e (2009), ‘U
.S. L
evies 1
0%
Import T
ariffs on S
oftw
ood L
um
ber fro
m F
our C
anad
ian
Pro
vin
ces’, vol. 1
6, Issu
e 71, A
pril 9
.
WT
O (1
996), ‘E
uro
pean
Com
munities—
Reg
ime fo
r the Im
portatio
n, S
ale and D
istributio
n o
f Ban
anas’, W
TO
DS
27
.
WT
O (2
002), ‘U
nited
States—
Subsid
ies on U
plan
d C
otto
n’, D
ispute D
S267.
WT
O (2
007)b
, ‘United
States—
Measu
res Affectin
g T
rade in
Larg
e Civ
il Aircraft—
Seco
nd C
om
plain
t’, Disp
ute
DS
35
3,
WT
O (2
007)c, ‘E
uro
pean
Com
munities—
Reg
ime fo
r the Im
portatio
n o
f Ban
anas’, D
ispute D
S361,
WT
O (2
008)a, ‘In
dia—
Certain
Tax
es and O
ther M
easures o
n Im
ported
Win
es and S
pirits’, D
ispute D
S380.
WT
O (2
008)b
, ‘United
States—
Anti-D
um
pin
g A
dm
inistrativ
e Rev
iews an
d O
ther M
easures R
elated to
Imports
of C
ertain O
range Ju
ice from
Brazil’, D
ispute D
S382.
WT
O (2
009)a, C
hro
nolo
gical L
ist of D
isputes C
ases.
WT
O (2
009)b
, Index
of D
isputes Issu
es.
WT
O (2
009)c, U
nderstan
din
g th
e WT
O: M
embers an
d O
bserv
ers.
En
dn
otes
1Fo
r a com
plete list o
f the W
TO
cases, see its Ch
ron
olo
gical L
ist of D
ispu
tes Cases (2
00
9a) an
d In
dex
of
Disp
utes Issu
es (20
09
b).
2 Fo
r the lists o
f mem
bers an
d o
bserv
ers, see WT
O (2
00
9c).
3Fo
r add
ition
al info
rmatio
n o
n h
ow
the D
OC
pro
ceeded
in th
is case, see TE
D C
ase Stu
dies (2
00
9a).
4 Fo
r a com
preh
ensiv
e cov
erage o
n th
e issues, see F
roese (2
00
6) an
d W
TO
(20
02
) with
oth
er sub
sequ
ent
cases listed th
erein.
5 Reg
ion
s ado
ptin
g a so
ft vo
lum
e cap, su
ch as B
ritish C
olu
mb
ia, are also su
bject to
a “surg
e” mech
anism
. If
its exports ex
ceed th
e volu
me cap
by m
ore th
an o
ne p
ercent in
a month
, a retroactiv
e add
ition
al exp
ort tax
mu
st be im
po
sed o
n all so
ftwo
od
exp
orts fro
m th
at regio
n to
theU
.S. d
urin
g th
e mo
nth
in q
uestio
n.
6S
ee Wo
rldT
rade\In
teractive (2
00
7).
7S
ee Wo
rldT
rade\In
teractive (2
00
9).
8See U
ST
R (2
00
8).
9 Fo
r a detail an
alysis o
f the ru
ling
, see Sch
nep
f (20
05
).
10F
or ad
ditio
nal in
form
ation
regard
ing
action
s taken
by
the U
.S. in
respo
nse to
the W
TO
rulin
g, see S
chn
epf
(20
06
).
11
See th
e latest up
date co
ntain
ed in
the W
TO
DS
26
7 o
rigin
ally p
ub
lished
in W
TO
(20
02
).
Trad
e Disp
utes in
Practice
44.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
12S
ee the latest u
pd
ate con
tained
in W
TO
(20
07
b) o
n D
S3
53
.
13F
or m
ore in
form
ation
on
child
labo
r in th
is ind
ustry
and
oth
ers, see TE
D C
ases Stu
dies (2
00
9b
).
14F
or a d
etail analy
sis of recen
t ITC
rulin
g o
n certain
oran
ge ju
ice from
Brazil, see IT
C (2
00
7).
15F
or d
etail, see WT
O (2
00
8b
).
16S
ee Hitt an
d H
oo
kw
ay (2
00
7).
17F
or d
etail, see ITC
(20
05
).
18Z
eroin
g is a p
ractice of d
etermin
ing
the d
um
pin
g m
argin
s by
inclu
din
g o
nly
tho
se imp
orted
go
od
s wh
ose
“no
rmal v
alues” are h
igh
er than
their sellin
g p
rices in an
imp
ortin
g co
un
try w
hile ex
clud
ing
tho
se go
od
s in
the o
pp
osite case. T
his p
ractice has b
een arg
ued
by
man
y as u
nfair an
d b
iased. F
or a fu
rther d
iscuss o
f
zeroin
g, see C
han
g (2
00
8).
19A
ccord
ing
Hitt an
d K
oo
kw
ay (2
00
7), a V
ietnam
ese shrim
p ex
po
rter, Can
Th
o Im
po
rt Ex
po
rt Seafo
od
Join
t Sto
ck C
o., p
aid $
68
,00
0 to
the A
lliance after g
etting
hit w
ith a 4
.57
% tariff in
20
05
. To
fend
off fu
rther
tariffs, it agreed
to p
ay th
e Allian
ce1.5
% o
f its U.S
.shrim
p sales in
20
06
. Th
e pay
ou
t was ex
pected
to rise to
3%
ov
er the en
suin
g th
ree years.
20T
he first leg
al challen
ge ag
ainst th
e Eu
rop
ean E
con
om
ic Co
mm
un
ity’s (E
EC
’s) discrim
inato
ry b
anan
a
imp
ort arran
gem
ents in
the G
AT
T d
ispu
te settlemen
t pro
ceedin
gs w
as laun
ched
by
five L
atin A
merican
ban
ana p
rod
ucin
g co
un
tries (Co
lom
bia, C
osta R
ica, Gu
atemala, N
icaragu
a, and
Ven
ezuela). T
he first G
AT
T
Pan
el repo
rt issued
in 1
99
3 w
as nev
er ado
pted
and
becam
e irrelevan
t becau
se the E
EC
had
already
decid
ed
to rep
lace the n
ation
al restriction
s by
a com
mo
n im
po
rt regim
e sho
rtly after th
e repo
rt was issu
ed.
21F
or a d
etailed d
iscussio
n o
f the early
perio
ds o
f the b
anan
a trade d
ispu
tes, see Patterso
n (2
00
1).
22F
or d
etails of th
e agreem
ent, see W
TO
(19
96
).
23T
he p
revio
us in
-qu
ota tariff w
as EU
R7
5 p
er ton
ne an
d o
ver-q
uo
ta rate was E
UR
68
0 p
er ton
ne.
24S
eeB
RID
GE
S W
eekly Tra
de N
ews D
igest (2
00
6).
25S
ee WT
O (2
00
7c).
26S
eeB
RID
GE
S W
eekly Tra
de N
ews D
igest (2
00
7).
27S
ee ICT
SD
(20
09
).
28S
ee Mercer (2
00
7).
29F
or fu
rther d
etails, see Co
un
cil of th
e EU
Gen
eral Secretariat (2
00
9) an
d also
WT
O (2
00
8a).
30T
he W
TO
case on
intern
et gam
blin
g b
rou
gh
t by
An
tigu
a and
Barb
ud
a again
st theU
.S.is an
oth
er go
od
exam
ple (D
ispu
te 20
03
DS
28
5). A
nu
mb
er of U
.S. law
mak
ers were fu
riou
s ov
er the ru
ling
again
st the
U.S
.‘s ban
nin
g o
n in
ternet g
amblin
g, ch
argin
g th
at the W
TO
’s rulin
g im
pin
ges u
pon U
.S. n
ational so
vereig
nty.
It is un
likely
that th
e U.S
. will ab
ide b
y th
e rulin
g in
the fo
reseeable fu
ture. W
ith o
nly
$2
1 m
illion
gran
ted
by
the W
TO
to each
plain
tiff to ap
ply
sanctio
ns an
nu
ally ag
ainst th
e U.S
., the tw
o w
inn
ing
, small, co
un
tries
simp
ly d
o n
ot h
ave m
uch
po
wer to
force th
e U.S
. to co
mp
ly.
Trad
e Disp
utes in
Practice
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
45
Em
plo
yee E
ngagem
ent : T
he O
nly
Way A
hea
d
Kak
oli S
en*
Ab
stract
World
wid
e Em
plo
yee E
ngag
emen
t (EE
) is on th
e declin
e today
(Bates, 2
004; R
ichm
an 2
006). R
oughly
half o
f all Am
ericans are n
ot fu
lly en
gag
ed o
r even
disen
gag
ed an
d co
st US
busin
esses US
$ 3
00 b
illion a y
ear
in lo
st pro
ductiv
ity (B
ates, 2004; Jo
hnso
n,2
004). In
India o
nly
about 3
4 %
of th
e emplo
yees are fu
lly en
gag
ed
and th
e rest either p
artially en
gag
ed o
r com
pletely
disen
gag
ed (T
he g
lobal su
rvey, 2
008). W
ith su
ch lo
w lev
els
of em
plo
yee en
gag
emen
t, man
agin
g E
mplo
yee E
ngag
emen
t should
be th
e top p
riority
for In
dian
org
anizatio
ns
today. It n
ot o
nly
mak
es busin
ess sense, it is th
e only
way
to su
stain an
d g
row
in to
day
’s chan
gin
g en
viro
nm
ent.
Build
ing an
engag
ed an
d lo
yal w
ork
force to
day
will h
elp o
rgan
izations w
eather th
e challen
ges o
f tom
orro
w.
This article seek
s to ex
plo
re Em
plo
yee en
gag
emen
t both
from
the acad
emic an
d m
anag
emen
t persp
ectives,
discu
ss the b
usin
ess sense fo
r it and o
utlin
e the im
plicatio
ns fo
r practice.
Key
Word
s : Com
mitm
ent, P
roductiv
ity, Efficacy, In
volv
emen
t and S
atisfaction.
Intro
du
ction
“Em
plo
yee E
ng
agem
ent” (E
E) is a relativ
ely n
ew H
R term
wh
ich h
as gain
ed p
rom
inen
ce since 2
00
0
onw
ards. It o
rigin
ated fro
m th
e consu
ltancies an
d su
rvey
houses (R
afferty et.al 2
005) an
d w
orld
wid
e several
research an
d co
nsu
ltancy
firms lik
e Gallu
p o
rgan
ization, D
evelo
pm
ent D
imen
sions In
ternatio
nal (D
DI), K
enex
a,
Hew
itt Asso
ciates, and M
cKin
sey h
ave co
nducted
research o
n em
plo
yee en
gag
emen
t, the reco
mm
endatio
ns o
f
which
are wid
ely u
sed b
y th
e Intern
ational B
usin
ess World
. Gallu
p h
as paten
ted its 1
2 item
measu
re of E
E, th
e
Q12 scale.
Today
it is a popular area o
f research in
academ
ia and a v
ariety o
f defin
itions are av
ailable. K
ahn (1
990)
first defin
ed en
gag
emen
t at work
as “the h
arnessin
g o
f org
anizatio
n m
embers’ selv
es to th
eir work
roles; in
eng
agem
ent, p
eop
le emp
loy
and
exp
ress them
selves p
hy
sically, cog
nitiv
ely, and
emo
tion
ally d
urin
g ro
le
perfo
rman
ces.” In o
ther w
ord
s it is sug
gested
that en
gag
emen
t mean
s to b
e psy
cho
log
ically p
resent w
hen
occu
pyin
g an
d p
erform
ing an
org
anizatio
nal ro
le. Roth
bard
(2001) also
defin
es engag
emen
t as psy
cholo
gical
presen
ce at work
but ad
ds tw
o critical co
mponen
ts i.e. attentio
n an
d ab
sorp
tion to
it. While atten
tion h
as been
referred to
as the “co
gnitiv
e availab
ility an
d th
e amount o
f time o
ne sp
ends th
inkin
g ab
out a ro
le”, abso
rptio
n
indicates “b
eing en
gro
ssed in
a role an
d refers to
the in
tensity
of o
ne’s fo
cus o
n a ro
le.” Engag
emen
t has also
been
defin
ed as em
otio
nal an
d in
tellectual co
mm
itmen
t to th
e org
anizatio
n (B
aum
ruk, 2
004; R
ichm
an, 2
006;
Shaw
, 2005) o
r the am
ount o
f discretio
nary
effort ex
hib
ited b
y em
plo
yees in
their jo
bs (F
rank et a
l., 2004).
McC
ashlan
d (1
999) d
efined
EE
as “an em
otio
nal o
utco
me to
the em
plo
yee resu
lting fro
m th
e critical com
ponen
ts
of th
e work
place”. M
iles (2001) d
escribed
it as “inten
sively
involv
ing all em
plo
yees in
hig
h en
gag
emen
t cascades
that create u
nd
erstand
ing
, dialo
gu
e, feedb
ack an
d acco
un
tability, em
po
wer p
eop
le to creativ
ely alig
n th
eir
subunits, team
s and in
div
idual jo
bs w
ith th
e majo
r transfo
rmatio
n o
f the w
hole en
terprise”.
Acco
rdin
g to
Maslach
et al. (2
001), en
gag
emen
t is characterized
by en
ergy, in
volv
emen
t, and efficacy.
Sch
aufeli
et al. (2
002) d
efine en
gag
emen
t “as a positiv
e, fulfillin
g, w
ork
-related state o
f min
d th
at is characterized
by
vig
or, d
edicatio
n, an
d ab
sorp
tion
.” Harter, S
chm
idt &
Hay
es (20
02
) describ
ed E
E as th
e ind
ivid
ual’s
involv
emen
t and satisfactio
n w
ith as w
ell as enth
usiasm
for w
ork
. Engag
ed em
plo
yees are th
us said
to h
ave
hig
h lev
els of en
ergy an
d are en
thusiastic ab
out th
eir work
and fu
lly im
mersed
in th
eir work
. Sch
aufeli et a
l.
(2002) fu
rther state th
at EE
is a “persisten
t and p
ervasiv
e affective-co
gnitiv
e state that is n
ot fo
cused
on an
y
particu
lar object, ev
ent, in
div
idual, o
r beh
avio
r”. Hen
ce it is not a m
om
entary
and sp
ecific state.
*A
sst.Pro
f. (OB
& H
RM
), Institu
te : IILM
institu
te of H
igh
er Ed
ucatio
n,O
ff.add
ress :3,L
od
hi In
stitutio
nal A
rea, Lo
dh
i Ro
ad, N
ew
Delh
i 11
00
03
, Em
ail: kak
olix
@y
aho
o.co
m
46.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Acco
rdin
g to
Gib
bons (2
006) “em
plo
yee en
gag
emen
t is a heig
hten
ed em
otio
nal an
d in
tellectual co
nnectio
n
that an
emplo
yee h
as for h
is/her jo
b, o
rgan
ization, m
anag
er, or co
-work
ers that in
turn
influ
ences h
im/h
er to
apply
additio
nal d
iscretionary
effort to
his/h
er work
”. Task
er (2004) d
efines en
gag
emen
t as a ben
eficial two-
way
relationsh
ip w
here em
plo
yees an
d em
plo
yers “g
o th
e extra m
ile” for o
ne an
oth
er. Engag
ed em
plo
yees are
indiv
iduals, co
mm
itted to
the o
rgan
ization, w
ho tak
e action to
impro
ve b
usin
ess results fo
r their o
rgan
izations
and w
ho are w
illing to
help
out co
lleagues.
Sch
mid
t (20
04
) defin
es eng
agem
ent as b
ring
ing
satisfaction
and
com
mitm
ent to
geth
er. Sch
mid
t also
men
tions th
at though b
oth
satisfaction an
d co
mm
itmen
t are key
com
ponen
ts of en
gag
emen
t, indiv
idually
none
of th
em g
uaran
tee engag
emen
t.
Ellis an
d S
oren
sen (2
007) p
rovid
e a two d
imen
sional d
efinitio
n o
f engag
emen
t accord
ing to
which
an
engag
ed em
plo
yee is o
ne “w
ho k
now
s what to
do at w
ork
and w
ants to
do th
e work
” which
mean
s the em
plo
yee
has th
e right k
now
ledge as w
ell as the attitu
de an
d w
illingness to
do th
e work
. Glo
bal H
um
an cap
ital consu
lting
firm R
ight M
anag
emen
t (2006) d
efines tru
e engag
emen
t as every
perso
n in
the o
rgan
ization u
nderstan
din
g an
d
bein
g co
mm
itted to
the su
ccess of th
e busin
ess strategy.
Meere (2
005) d
escribes th
ree levels o
f engag
emen
t:
$%
Engag
ed –
Em
plo
yees w
ho w
ork
with
passio
n an
d feel a p
rofo
und co
nnectio
n w
ith th
eir org
anizatio
n. T
hey
driv
e innovatio
n an
d m
ove th
e org
anizatio
n fo
rward
.
&%
Not E
ngag
ed –
Em
plo
yees w
ho atten
d an
d p
articipate at w
ork
but are tim
e servin
g an
d p
ut n
o p
assion o
r
energ
y in
to th
eir work
'%
Disen
gag
ed –
Em
plo
yees w
ho are u
nhap
py at w
ork
and w
ho act o
ut th
eir unhap
pin
ess at work
, and also
underm
ine th
eir colleag
ue’s w
ork
on a d
aily b
asis.
There are sev
eral defin
itions o
f Engag
emen
t found in
man
agem
ent literatu
re also. E
E h
as been
defin
ed as
“a positiv
e two w
ay relatio
nsh
ip b
etween
emplo
yee an
d th
e org
anizatio
n” w
here “b
oth
parties are aw
are of th
eir
ow
n an
d th
e oth
er’s need
s and su
pport each
oth
er to fu
lfill these n
eeds. E
ngag
ed em
plo
yees an
d th
eir org
anizatio
ns
go th
e extra m
ile and b
oth
reap m
utu
al ben
efits (Dan
iel, 2004). L
anphear (2
004) d
efines E
E as “th
e bond,
emplo
yees h
ave w
ith th
eir org
anizatio
n, w
hen
emplo
yees really
care about th
e busin
ess, they
are more lik
ely to
go th
at extra m
ile.”
Llo
yds (2
004) an
d M
acDonald
(2002) su
ggest th
at EE
dep
ends o
n o
ffering em
pow
ermen
t and th
at jobs
should
fit emplo
yees’ in
terests.
Buch
anan
(2004) su
ggests th
at there are tw
o ty
pes o
f engag
emen
t, rational an
d em
otio
nal an
d th
at the
latter is more im
portan
t in d
etermin
ing p
erform
ance.
EE
is som
etimes v
iewed
as a precu
rsor to
work
place p
roductiv
ity an
d so
metim
es as pro
duct o
f work
place
variab
les. While so
me d
efinitio
ns (M
cCash
land, 1
999; M
iles, 2001) su
ggest th
at EE
is pro
duced
by asp
ects in
the w
ork
place, th
ere are oth
ers that su
ggest E
E is so
meth
ing th
at the in
div
idual b
rings to
the w
ork
place (H
arter,
Sch
mid
t & K
eyes, 2
002; G
oddard
, 1999). E
E h
as also b
een in
terchan
geab
ly u
sed w
ith co
mm
itmen
t (McC
ashlan
d,
1999); h
ow
ever E
mplo
yee en
gag
emen
t is differen
t from
Org
anizatio
nal co
mm
itmen
t. While O
rgan
izational
Com
mitm
ent refers to
a perso
n’s attitu
de an
d attach
men
t tow
ards th
e org
anizatio
n, en
gag
emen
t is the d
egree to
which
an in
div
idual is atten
tive an
d ab
sorb
ed in
the p
erform
ance o
f his o
r her jo
b ro
les.
Wh
ile com
mitm
ent is a w
ell establish
ed co
ncep
t catego
rized as N
orm
ative, A
ffective o
r Co
ntin
uan
ce
com
mitm
ent (M
ow
day, S
teers & P
orter, 1
979) em
plo
yees can
experien
ce vary
ing d
egrees o
f engag
emen
t and
be E
ngag
ed, N
ot en
gag
ed an
d d
isengag
ed (M
eere, 2005). E
ngag
emen
t also d
iffers from
job in
volv
emen
t. While
job in
volv
emen
t is the resu
lt of a co
gnitiv
e judgm
ent ab
out th
e need
satisfyin
g ab
ilities of th
e job an
d is tied
to
Em
plo
yee E
ng
agem
ent :T
he O
nly
Way
Ah
ead
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
47
one’s self-im
age M
ay et al. (2
004), en
gag
emen
t is about h
ow
indiv
iduals em
plo
y th
emselv
es in th
e perfo
rman
ce
of th
eir job. E
ngag
emen
t may
be lo
oked
at as a precu
rsor to
job in
volv
emen
t as indiv
iduals w
ho ex
perien
ce
deep
engag
emen
t in th
eir roles co
me to
iden
tify w
ith th
eir jobs. E
ngag
emen
t thus seem
s to b
e a com
bin
ation o
f
job satisfactio
n, o
rgan
izational co
mm
itmen
t and in
tentio
n to
stay.
Th
e Bu
siness C
ase fo
r EE
Today
there are n
ew ch
allenges lik
e glo
balizatio
n o
f busin
ess, new
age tech
nolo
gy, an
increasin
gly
div
erse
work
force an
d in
creased m
arket p
ressures to
perfo
rm th
at the o
rgan
izations are face to
face with
. To rem
ain
com
petitiv
e, org
anizatio
ns w
ill need
to tap
all the talen
ts and
mo
tivatio
ns o
f all their em
plo
yees. H
ow
ever
emp
loy
ees also face an
increasin
g p
ressure to
pro
du
ce mo
re for less (C
ov
ey, 20
04
) with
fewer reso
urces
(Bu
ckin
gh
am &
Co
ffman
, 19
99
) and
un
clear exp
ectation
s in an
env
iron
men
t of lo
w m
anag
erial sup
po
rt
(Covey,2
004). T
hese d
eman
ds in
crease emplo
yee stress, resu
lting in
disen
gag
ed em
plo
yees at th
e work
place
(Cartw
right &
Hom
es, 2006; H
arter, Sch
mid
t & H
ayes, 2
002). In
such
a dynam
ic busin
ess enviro
nm
ent it is
extrem
ely essen
tial to h
ave m
ore an
d m
ore en
gag
ed em
plo
yees, th
ose w
ho b
elieve in
the o
rgan
izational g
oals
and are w
illing to
go th
e extra m
ile to ach
ieve th
e same.
It is gen
erally b
elieved
that th
ere is a con
nectio
n b
etween
emp
loy
ee eng
agem
ent an
d b
usin
ess results
(Harter
et al., 2
002). E
mplo
yee en
gag
emen
t is said to
be g
ood fo
r org
anizatio
nal su
ccess and fin
ancial p
erform
ance
(Bau
mru
k, 2
004; R
ichm
an, 2
006). E
ngag
emen
t has b
een fo
und to
be related
to jo
b p
erform
ance an
d ex
tra-role
beh
avio
r and also
positiv
ely related
to o
rgan
izational co
mm
itmen
t and n
egativ
ely related
to in
tentio
n to
quit,
(Sch
aufeli an
d B
akker, 2
004; S
onnen
tag, 2
003). E
ngag
emen
t is said to
trigger an
upw
ard sp
iral and lead
to
hig
her lev
els of self-efficacy
over tim
e (Salan
ova et a
l.2006).
Acco
rdin
g to
Bak
ker (2
008) th
ere are at least four reaso
ns w
hy en
gag
ed w
ork
ers perfo
rm b
etter than
non-
eng
aged
wo
rkers. E
ng
aged
emp
loy
ees often
exp
erience p
ositiv
e emo
tion
s, inclu
din
g h
app
iness, jo
y, and
enth
usiasm
; experien
ce better h
ealth; create th
eir ow
n jo
b an
d p
ersonal reso
urces; an
d tran
sfer their en
gag
emen
t
to o
thers. A
goal-d
irected b
ehav
ior is facilitated
when
peo
ple are en
gag
ed in
their w
ork
becau
se they
hav
e the
energ
y (can
do) an
d th
e motiv
ation (w
ant to
do) to
undertak
e action (B
akker,2
008). T
his h
elps th
em n
ot o
nly
achiev
e better p
erform
ance b
ut also
increase th
eir chan
ces for a b
etter career dev
elopm
ent.
Kah
n (1
992) p
roposed
that en
gag
emen
t leads to
both
quality
in in
div
idual o
utco
mes as w
ell as gro
wth
and
pro
ductiv
ity o
f org
anizatio
ns. E
ngag
ed em
plo
yees are lik
ely to
be m
ore attach
ed to
their o
rgan
izations an
d w
ill
hav
e a low
er tenden
cy to
leave th
eir org
anizatio
n. R
ecent research
has sh
ow
n th
at engag
ed em
plo
yees o
ften
experien
ce positiv
e emotio
ns (S
chau
feli and V
an R
hen
en, 2
006), an
d th
is may
be th
e reason w
hy th
ey are m
ore
pro
ductiv
e. Hap
py p
eople are m
ore sen
sitive to
opportu
nities at w
ork
, more o
utg
oin
g an
d h
elpfu
l to o
thers, an
d
more co
nfid
ent an
d o
ptim
istic (Cro
pan
zano an
d W
right, 2
001).
Driv
ers of E
E
While th
ere are man
y in
div
idual an
d o
rgan
izational facto
rs that d
etermin
e wheth
er and to
what ex
tent
emplo
yees b
ecom
e engag
ed, th
ere is no d
efinitiv
e all-purp
ose list o
f engag
emen
t driv
ers. While m
ost o
f the
org
anizatio
ns try
to m
anag
e emplo
yee reten
tion an
d m
otiv
ation b
y in
creasing salaries an
d b
enefits, b
y p
rovid
ing
cash in
centiv
es etc., it is importan
t to rem
ember th
at peo
ple h
ave v
ery in
div
idual m
otiv
ations, o
ften in
com
plex
com
bin
ations an
d m
otiv
ation an
d reten
tion are n
ot n
ecessarily b
est or ex
clusiv
ely m
anag
ed w
ith cash
inducem
ents.
Robin
son et al (2
004), stresses th
e importan
ce of ‘feelin
g v
alued
and in
volv
ed’ b
y an
emplo
yee as a k
ey d
river
of en
gag
emen
t. There are a n
um
ber o
f elemen
ts that h
ave a v
aryin
g in
fluen
ce on th
e exten
t to w
hich
the em
plo
yee
will feel v
alued
and
inv
olv
ed an
d h
ence en
gag
ed. F
igu
re 1 b
ased o
n a d
iagn
ostic m
od
el in R
ob
inso
n et al
(2004), illu
strates the d
rivers o
f engag
emen
t in in
creasing o
rder o
f importan
ce.
Em
plo
yee E
ng
agem
ent : T
he O
nly
Way
Ah
ead
48.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Fig
ure 1
: Robin
son et al (2
004) m
odel o
f the d
rivers o
f emplo
yee en
gag
emen
t
Pech
.R.J. (2
009) su
ggests th
at a sense o
f trust b
etween
emplo
yees an
d th
eir man
agers as w
ell as a sense o
f
perso
nal co
ntro
l are the k
ey d
etermin
ants fo
r emplo
yee en
gag
emen
t. The o
rgan
izational cu
lture m
ust co
mm
unicate
trust &
the p
rocess m
ust start fro
m th
e top o
f the o
rgan
ization.
Pritch
ard (2
008) su
ggests th
at at differen
t stages em
plo
yees d
iffer in th
eir need
s and lev
els of en
gag
emen
t
– fro
m b
eing a p
oten
tial emplo
yee to
beco
min
g an
ex-em
plo
yee, an
d ev
ery step
along th
e way.
Sriv
astava &
Bhatn
agar (2
008) o
pin
e that em
plo
yees feel en
gag
ed w
hen
they
find p
ersonal m
eanin
g an
d
motiv
ation in
their w
ork
, receive p
ositiv
e interp
ersonal su
pport, an
d fu
nctio
n in
an efficien
t work
enviro
nm
ent.
The au
thors also
suggest th
at there sh
ould
not b
e any g
ap b
etween
what w
ork
ers aspire fo
r, from
the o
rgan
ization
and
wh
at they
actually
get. T
his g
ap h
as the p
oten
tial to lead
to em
plo
yee d
iseng
agem
ent. P
sych
olo
gical
mean
ingfu
lness can
be ach
ieved
from
task ch
aracteristics that p
rovid
e challen
gin
g w
ork
, variety, allo
w th
e use
of d
ifferent sk
ills, perso
nal d
iscretion, an
d th
e opportu
nity
to m
ake im
portan
t contrib
utio
ns. Jo
bs th
at pro
vid
e
indiv
iduals w
ith th
e room
and in
centiv
e to b
ring m
ore o
f them
selves in
to th
eir work
will h
elp in
keep
ing th
em
engag
ed (K
ahn, 1
992).
Welb
ourn
e (2007) su
ggests th
at there are fiv
e key
roles th
at emplo
yees o
ccupy at w
ork
: Core jo
b h
old
er
role, en
trepren
eur o
r innovato
r role, team
mem
ber ro
le, career role an
d o
rgan
izational m
ember ro
le. Firm
s stay
ahead
of th
e com
petitio
n w
hen
they
dev
elop th
eir hum
an reso
urces in
a way
that is n
ot easily
replicab
le by th
eir
com
petitio
n. If a co
mpan
y v
alues o
nly
the co
re job ro
le and em
plo
yees en
gag
e in b
ehav
iors ex
clusiv
ely asso
ciated
with
the co
re job, th
ese jobs are v
ery easy
for th
e com
petito
rs to rep
licate.
Acco
rdin
g to
Gib
bons (2
006) th
e top d
rivers o
f emplo
yee en
gag
emen
t inclu
de tru
st and in
tegrity
for
the em
plo
yees o
n th
e part o
f the em
plo
yer, n
ature o
f the jo
b –
the ex
tent o
f emplo
yee p
articipatio
n an
d au
tonom
y;
the co
nnectio
n b
etween
indiv
idual an
d co
mpan
y p
erform
ance –
the ex
tent to
which
emplo
yees u
nderstan
d th
e
com
pan
y’s o
bjectiv
es, curren
t levels o
f perfo
rman
ce, career gro
wth
opportu
nities &
a clearly d
efined
career
path
; prid
e about th
e com
pan
y –
the ex
tent to
which
emplo
yees d
erive self-esteem
from
their w
ork
; attitudes
and p
erspectiv
es of co
work
ers tow
ards th
eir jobs an
d th
e com
pan
y; em
plo
yee d
evelo
pm
ent –
the ex
tent to
which
efforts are m
ade to
dev
elop th
e emplo
yee’s sk
ills; and p
ersonal relatio
nsh
ip w
ith o
ne’s m
anag
er – th
e
exten
t to w
hich
the em
plo
yee v
alues th
is relation
ship
. Wh
ile eng
agem
ent lev
els can v
ary acco
rdin
g to
dem
ograp
hic an
d jo
b related
factors, S
aks,M
.A. (2
006) su
ggests th
at man
y o
f the d
rivers o
f engag
emen
t will b
e
com
mon to
all org
anizatio
ns, reg
ardless o
f sector.
Kah
n (1
990) rep
orted
that in
additio
n to
mean
ingfu
l work
, peo
ple v
ary in
their en
gag
emen
t as a functio
n
of th
eir percep
tions o
f the b
enefits th
ey receiv
e from
a role, a sen
se of retu
rn o
n in
vestm
ents can
com
e from
extern
al reward
s and reco
gnitio
n.
Maslach
et al. (2001) h
ave also
suggested
that w
hile a lack
of rew
ards an
d reco
gnitio
n can
lead to
burn
out,
appro
priate reco
gnitio
n an
d rew
ard is im
portan
t for en
gag
emen
t. Kah
n (1
990) fo
und th
at supportiv
e and tru
sting
Em
plo
yee E
ng
agem
ent : T
he O
nly
Way
Ah
ead
IMPORTANCE
•T
rainin
g, d
evelo
pm
ent an
d career
•Im
med
iate man
agem
ent
•P
erform
ance an
d ap
priasal
•C
om
mu
nicatio
n
•E
qual o
pportu
nities an
d
fair treatmen
t
•P
ay an
d b
enefits
•H
ealth an
d safety
•C
oo
peratio
n
•F
amily
friendlin
es
•Jo
b satisfactio
n
Feelin
g
valu
ed an
d
involv
ed
En
gag
emen
t
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
49
interp
erson
al relation
ship
s as well as su
pp
ortiv
e man
agem
ent p
rom
oted
psy
cho
log
ical safety. Su
pp
ortiv
e
enviro
nm
ents allo
w m
embers to
experim
ent an
d to
try n
ew th
ings an
d ev
en fail w
ithout fear o
f the co
nseq
uen
ces
(Kah
n, 1
990). In
oth
er word
s, when
emplo
yees b
elieve th
at their o
rgan
ization is co
ncern
ed ab
out th
em an
d
cares about th
eir well-b
eing, th
ey are lik
ely to
respond b
y attem
ptin
g to
fulfill th
eir oblig
ations to
the o
rgan
ization
by b
ecom
ing m
ore en
gag
ed. F
irst-line su
perv
isors are also
believ
ed to
be esp
ecially im
portan
t for b
uild
ing
engag
emen
t and also
to b
e the ro
ot cau
se of em
plo
yee d
isengag
emen
t (Bates, 2
004; F
rank et al., 2
004). F
airness
and ju
stice is also o
ne o
f the w
ork
conditio
ns acco
rdin
g to
Maslach
et al. (2001) an
d p
ositiv
e percep
tions o
f
fairness can
impro
ve en
gag
emen
t.
Th
e Sta
te of E
mp
loyee E
ngagem
ent T
od
ay
Em
plo
yee E
ngag
emen
t is on th
e declin
e among em
plo
yees w
orld
wid
e today
(Bates, 2
004; R
ichm
an 2
006).
Bates (2
004) &
Johnso
n (2
004) fo
und th
at roughly
half o
f all Am
ericans are n
ot fu
lly en
gag
ed o
r even
disen
gag
ed
and co
st US
busin
esses US
$ 3
00 b
illion a y
ear in lo
st pro
ductiv
ity, while in
UK
it is US
$ 3
7.2
to 3
8.9
billio
n
annually, in
Japan
, US
$ 2
32 b
illion an
nually. T
he g
lobal su
rvey
(2008) rev
eals that o
nly
about 3
4 %
of th
e
emplo
yees in
India are fu
lly en
gag
ed an
d th
e rest either p
artially en
gag
ed o
r com
pletely
disen
gag
ed. B
ecause o
f
their b
eing clo
se to d
ecision m
akin
g, p
eople h
igher u
p in
the o
rgan
izations ran
k h
igher in
emplo
yee en
gag
emen
t,
how
ever th
ere is a dro
p in
the en
gag
emen
t level p
ast the V
ice Presid
ent lev
el. The su
rvey
also rev
eals a large
disp
arity b
etween
the en
gag
emen
t levels o
f men
and w
om
en, w
ith m
en b
eing 8
% m
ore fu
lly en
gag
ed an
d 6
%
less disen
gag
ed th
an w
om
en. A
ccord
ing to
the su
rvey, th
e top th
ree factors in
fluen
cing em
plo
yee satisfactio
n
were career d
evelo
pm
ent o
pportu
nities &
trainin
g, m
ore ch
allengin
g w
ork
and m
ore o
pportu
nities at d
oin
g
what th
e emplo
yee d
oes b
est. With
such
low
levels o
f emplo
yee en
gag
emen
t, man
agin
g E
mplo
yee E
ngag
emen
t
should
be th
e top p
riority
for o
rgan
izations to
day. It n
ot o
nly
mak
es busin
ess sense, it is th
e only
way
to su
stain
and g
row
in to
day
’s chan
gin
g en
viro
nm
ent.
Imp
licatio
ns fo
r Pra
ctice
In th
e dynam
ic busin
ess enviro
nm
ent o
f today, o
rgan
izations w
ill constan
tly n
eed to
evolv
e them
selves n
ot
only
in term
s of strateg
ic busin
ess dev
elopm
ent b
ut also
in strateg
ic hum
an d
evelo
pm
ent. O
rgan
izations to
day
need
peo
ple w
ho are n
ot ju
st com
plian
t emplo
yees w
ho d
o th
e prescrib
ed jo
bs b
ut team
mem
bers w
ho are
talented
, who are creativ
e, hav
e new
ideas an
d are co
mm
itted to
their w
ork
and th
e org
anizatio
n. O
rgan
izations
will n
eed to
focu
s on em
plo
yees’ p
erceptio
ns o
f the su
pport th
ey receiv
e from
their o
rgan
ization. O
rgan
izational
pro
gram
s and
po
licies that ad
dress em
plo
yees’ n
eeds an
d co
ncern
s and
dem
on
strate caring
and
sup
po
rtive
enviro
nm
ent are lik
ely to
motiv
ate emplo
yees to
recipro
cate with
hig
her lev
els of en
gag
emen
t.
Lin
e man
agers p
lay a m
ajor ro
le in k
eepin
g th
eir subord
inates en
gag
ed. W
hile lin
e man
agers o
r imm
ediate
bosses are th
e reason w
hy team
mem
bers th
rive in
an o
rgan
ization, th
ey are also
the p
rime reaso
n w
hy em
plo
yees
quit th
eir jobs. M
ajority
of em
plo
yees w
ant th
eir man
agers to
giv
e regular feed
back
on th
eir perfo
rman
ces,
apprise th
em o
f missio
n im
portan
ce and alig
nm
ent w
ith o
rgan
izational g
oals, d
iscuss em
ergin
g w
ork
trends,
and h
elp in
career dev
elopm
ent. M
anag
ers need
to u
nderstan
d th
e importan
ce of so
cial exch
ange fo
r emplo
yee
engag
emen
t. In p
articular, m
anag
ers will n
eed to
pro
vid
e emplo
yees w
ith reso
urces an
d b
enefits th
at will o
blig
e
them
to recip
rocate in
kin
d w
ith h
igher lev
els of en
gag
emen
t. How
ever m
anag
ers will also
need
to u
nderstan
d
that em
plo
yee en
gag
emen
t is a long-term
and o
n-g
oin
g p
rocess th
at requires co
ntin
ued
interactio
ns o
ver tim
e in
ord
er to g
enerate o
blig
ations an
d a state o
f recipro
cal interd
epen
den
ce (Cro
pan
zano an
d M
itchell, 2
005).
Em
plo
yee en
gag
emen
t should
be lo
oked
at as a bro
ad o
rgan
izational an
d cu
ltural strateg
y th
at involv
es all
levels o
f the o
rgan
ization (F
rank et a
l., 2004), a series o
f actions an
d step
s (Shaw
, 2005) th
at require th
e input
and
inv
olv
emen
t of o
rgan
ization
al mem
bers (R
ob
inso
n et a
l., 20
04
), and
con
sistent, co
ntin
uo
us, an
d clear
com
municatio
ns (K
ress, 2005). B
esides , each
emplo
yee is d
ifferent in
his n
eeds an
d asp
irations an
d “o
ne size
fits all” appro
ach w
ill not b
e effective fo
r emplo
yee en
gag
emen
t. Bearin
g th
is in m
ind o
rgan
izations sh
ould
Em
plo
yee E
ng
agem
ent :T
he O
nly
Way
Ah
ead
50.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
adap
t their p
ractices to su
it differen
t emp
loy
ee need
s and
keep
them
eng
aged
. So
me o
f the p
ractices that
org
anizatio
ns can
imp
lemen
t to in
crease emp
loy
ee eng
agem
ent am
on
g th
eir emp
loy
ees are to p
rov
ide ro
le
clarity, job v
ariety, share ch
allenges &
strategies fro
m tim
e to tim
e, enco
urag
e two w
ays co
mm
unicatio
n, p
rom
ote
an o
pen
and carin
g en
viro
nm
ent, co
mm
unicate o
pen
ly an
d clearly
about ex
pectatio
ns fro
m th
e emplo
yees, b
e
involv
ed in
the em
plo
yees d
evelo
pm
ent, celeb
rate indiv
idual, team
and o
rgan
izational su
ccesses on a su
stained
basis.
Con
clusio
n
The w
ork
force d
emograp
hics h
ave ch
anged
; peo
ple are m
ore sk
illed, m
ore k
now
ledgeab
le and m
ore m
obile
than
ever. P
eople activ
ely seek
jobs th
at would
suit th
eir perso
nality, h
elp th
em ach
ieve th
eir perso
nal an
d
pro
fessional g
oals in
life. At w
ork
emplo
yees w
ant to
be in
form
ed ab
out th
eir perfo
rman
ce. Lifetim
e emplo
ym
ent
has lo
st its mean
ing. E
mplo
yee en
gag
emen
t is the b
ypro
duct o
f our eco
nom
y’s tran
sition fro
m an
industrial
base to
a service an
d in
form
ation b
ase and en
gag
ing em
plo
yees is an
art and resp
onsib
ility o
f man
agem
ent.
While to
sustain
and g
row
in th
e multi g
row
th o
pportu
nity
mark
et of to
day, it is im
perativ
e to h
ave a d
iverse,
talented
and en
gag
ed w
ork
force, it is im
portan
t to rem
ember th
at the talen
t mark
et is also co
mpetitiv
e and th
e
traditio
nal “attract-retain
” talent m
anag
emen
t strategy h
as beco
me o
utd
ated. E
mplo
yees are lik
ely to
be m
otiv
ated
by a ran
ge o
f factors in
cludin
g n
on fin
ancial o
nes. T
his is p
articularly
true o
f really talen
ted p
eople. E
ngag
ing
talented
peo
ple th
us n
eeds to
be a to
p o
rgan
izational p
riority
becau
se they
are quite lik
ely to
find an
oth
er job if
they
do n
ot d
erive satisfactio
n, p
urp
ose an
d sen
se of self-w
orth
from
their cu
rrent jo
bs.
Em
plo
yee en
gag
emen
t is a new
model o
f social co
ntract b
etween
com
pan
ies and th
eir peo
ple. It m
eans
actively
involv
ing its o
wn p
eople in
decisio
n m
akin
g an
d ch
ange m
anag
emen
t. Each
emplo
yee n
eeds to
understan
d
and b
elieve in
the m
ission statem
ent o
f the o
rgan
ization an
d activ
ely w
ork
tow
ards its ach
ievem
ent. O
ne sh
ould
hav
e the freed
om
to ex
press an
d d
evelo
p h
is ideas at w
ork
. Em
plo
yers w
ill ben
efit by h
avin
g a flex
ible, co
mm
itted
and h
ighly
motiv
ated p
ool o
f talent w
ho h
ave a stro
ng sen
se of p
urp
ose ab
out th
eir work
.
Build
ing an
engag
ed an
d lo
yal w
ork
force to
day
will h
elp o
rgan
izations w
eather th
e challen
ges o
f tom
orro
w
(The G
lobal su
rvey,2
008). O
rgan
izations th
at actively
work
tow
ards em
plo
yee en
gag
emen
t will fare b
etter in
terms o
f perfo
rman
ce, staff retentio
n, m
otiv
ation an
d cru
cially, pro
fitability. It is im
portan
t to reg
ularly
measu
re
the m
ost lik
ely p
redicto
rs of m
otiv
ation an
d/o
r dissatisfactio
n am
ong th
e emplo
yees an
d tak
e active step
s to
dev
elop en
gag
emen
t. Org
anizatio
ns to
day
need
leaders w
ho w
ill transfo
rm th
ose w
ho fo
llow
them
thro
ugh
insp
iration o
f the m
ind, care o
f the h
eart, and ack
now
ledgem
ent o
f hum
an em
otio
ns (M
accoby,2
007).
Such
leaders w
ill dev
elop an
enviro
nm
ent o
f iden
tifyin
g th
e right talen
t, pro
vid
ing a so
lid in
ductio
n in
to
the sy
stem, d
evelo
pin
g th
eir work
force o
n an
ongoin
g b
asis; enco
urag
e open
com
municatio
n an
d creativ
ity,
focu
s on in
div
idual career d
evelo
pm
ent an
d p
rom
ote w
ork
-life balan
ce. To su
mm
arize, enhan
cing em
plo
yee
engag
emen
t is a long-term
pro
positio
n. In
div
iduals are u
nlik
ely to
beco
me en
gag
ed b
ecause th
ey are ex
pected
to. E
ngag
emen
t will o
ccur n
aturally, w
hen
the co
nditio
ns are rig
ht, w
hen
the lead
ers are insp
iring, w
hen
indiv
iduals
find th
e ideal p
lace to ap
ply
their stren
gth
s and can
actually
see their g
row
th in
the o
rgan
izational ro
le they
are
in.
Referen
ces
Bak
ker,A
.B.&
Dem
erouti E
. (2008),”T
ow
ards a m
odel o
f work
engag
emen
t”, Career D
evelo
pm
ent In
ternatio
nal,
13 (3
) pp: 2
09-2
23.
Bates.,S
.(2004) “G
etting en
gag
ed”, H
R M
agazin
e, Vol.4
9(2
) pp 4
4-5
1.
Bau
mru
k, R
. (2004), “T
he m
issing lin
k: th
e role o
f emplo
yee en
gag
emen
t in b
usin
ess success”, W
orksp
an
, Vol.
47 p
p.4
8-5
2.
Buch
anan
.,C. (2
004), “T
he th
ings th
ey d
o fo
r love” H
arva
rd B
usin
ess Review
, 82 1
2 p
p 1
9(2
)
Em
plo
yee E
ng
agem
ent :T
he O
nly
Way
Ah
ead
Vig
nan
a Jyoth
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anag
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t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Exp
an
din
g th
e Valu
e Horizo
n o
f HR
: An
En
ab
ler an
d F
acilita
tor
to B
uild
ing C
orp
ora
te Govern
an
ce Pra
ctices
Dim
ple G
rover*
Ab
stractT
he o
ngoin
g eco
nom
ic recession h
as once ag
ain p
oin
ted its g
laring fin
gers at th
e differen
ce betw
een
the b
ook v
alue an
d th
e mark
et valu
e of th
e firms. N
o m
ore th
e focu
s of C
orp
orate G
overn
ance (C
G) lies o
n th
e
size, com
positio
n, q
ualificatio
n an
d ro
le of th
e board
. Underg
oin
g a p
aradig
m sh
ift the m
eanin
g an
d relev
ance
of C
orp
orate G
overn
ance h
as chan
ged
in th
e presen
t contex
t where in
tellectual assets are u
sed fo
r the co
mpetitiv
e
advan
tage. M
anag
ing in
tellectual assets an
d b
uild
ing th
e org
anizatio
nal cu
lture h
as alway
s been
a prero
gativ
e
of H
R. H
R w
hich
has b
een p
eripheral to
the C
G issu
es, is now
back
again
in its seat. H
avin
g a m
ore ev
olv
ing
and ch
allengin
g ro
le, HR
has to
take o
n o
nus an
d resp
onsib
ility to
act as an en
abler to
CG
. This p
aper ex
amin
es
HR
’s role an
d in
vestig
ates how
it can m
ake a m
eanin
gfu
l and m
ore strateg
ic contrib
utio
n to
corp
orate g
overn
ance
with
in o
rgan
izations. T
he p
aper also
attempts to
integ
rate HR
’s role in
build
ing g
ood co
rporate g
overn
ance
practices in
the firm
.
Key
Word
s: Hum
an R
esource, In
tellectual C
apital, C
orp
orate G
overn
ance, In
tellectual A
ssets, Com
parativ
e
Advan
tage an
d S
trategic.
Intro
du
ction
:
Eco
nom
ic freedom
has b
ecom
e a relative issu
e. An ev
iden
t to th
is is the eco
nom
ic recession. B
usin
ess
com
petitiv
eness h
as touch
ed its p
innacle b
indin
g co
untries, in
stitutio
ns, an
d p
eople. K
enich
i Ohm
ae (1990),
“Th
e natio
n –
state itself – th
at artifact of th
e eigh
teenth
and
nin
eteenth
centu
ries - has b
egu
n to
crum
ble,
battered
by a p
ent sto
rm o
f political resen
tmen
t, ethnic p
rejudice, trib
al hatred
and relig
ious an
imosity
”.
Th
e crum
blin
g o
f the eco
no
mies h
ave its u
nd
erpin
nin
g in
large co
rpo
rate sectors leav
ing
no
ston
e
untu
rned
to acco
mplish
their g
oal to
earn rev
enue ev
en at th
e cost o
f ethics an
d v
alues.H
ow
ever, th
e recent
failures o
f the g
iant fin
ancial in
stitutio
ns lik
e Leh
man
bro
thers, G
old
man
Sach
s hav
e forced
the ru
les of th
e
gam
e hav
e to b
e rewritten
, though th
ey m
ay n
ot b
e entirely
new
, yet th
eir relevan
ce has to
be estab
lished
in a
new
contex
t. One o
f the k
ey co
nstitu
ent is th
e emplo
yee –
emplo
yer relatio
nsh
ip. T
o b
ecom
e responsiv
e to
dynam
ic busin
ess enviro
nm
ent, H
R h
as taken
on th
e onus o
f accelerating g
ears emphasizin
g red
istributio
n o
f
pow
er, greater p
articipatio
n b
y in
div
iduals, an
d team
work
. To u
nderstan
d th
e relationsh
ip b
etween
HR
and
govern
ance, it is im
portan
t to u
nderstan
d th
e prin
ciples o
f govern
ance. T
raditio
nally
and h
istorically, H
R lead
ers
hav
e not tak
en u
pon an
active ro
le in term
s of reg
ulatin
g g
overn
ance issu
es, acting im
plicitly
only. E
xplicitly
they
hav
e only
work
ed in
the issu
e relating to
com
plian
ce.
Underg
oin
g a p
aradig
m sh
ift HR
M is assu
min
g m
ore d
ynam
ic role o
f integ
rating th
e busin
ess pro
cesses,
alignin
g th
em w
ith p
eople p
rocesses w
ithin
the co
mpan
y to
build
on effectiv
e org
anizatio
nal sy
stems. G
uest
(1987) d
efinin
g th
e key
characteristic o
f HR
laid em
phasis o
n in
tegratio
n. T
his in
cludes relatin
g H
RM
strategy
to co
rporate strateg
y, main
tainin
g in
ternal co
nsisten
cy in
HR
M p
ractices and th
e integ
ration o
f the em
plo
yees’
interest w
ith th
ose o
f org
anizatio
ns. T
his in
tegratio
n, id
eally sh
ould
involv
e interactio
n b
etween
micro
politics,
functio
nal flex
ibility, an
d th
e role o
f HR
M in
pursu
it of b
oth
, flexib
ility an
d in
tegratio
n. G
overn
ance, o
n th
e
oth
er han
d h
inges o
n th
e role o
f stakeh
old
ers, accountab
ility, transp
arency, an
d d
isclosu
re, equitab
leness an
d
fairness in
prin
ciple.
*A
ssistant P
rofesso
r at Jayp
ee Bu
siness S
cho
ol, N
oid
a, Em
ail: gro
verd
imp
le@red
iffmail.co
m.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
55
The p
rimary
focu
s of th
is pap
er is to ex
amin
e the ro
le ascertained
by H
R in
dev
elopin
g g
ood co
rporate
govern
ance o
f the firm
s. This lin
kag
e gets estab
lished
as HR
takes o
n th
e strategic ro
le while b
uild
ing its ed
ifice
on th
e traditio
nal H
R fu
nctio
ns.
Hu
man
Reso
urce M
an
agem
ent
“The h
um
an reso
urce o
f an o
rgan
ization co
nstitu
tes its entire w
ork
force. H
um
an R
esource d
epartm
ent
of an
org
anizatio
n is resp
onsib
le for selectin
g an
d in
ducin
g co
mpeten
t peo
ple, train
ing th
em, facilitatin
g an
d
motiv
ating to
perfo
rm at th
e hig
h lev
els of efficien
cy, and p
rovid
ing m
echan
isms to
ensu
re that th
ey m
aintain
their affiliatio
n w
ith th
e org
anizatio
n” (V
enkat et.al. ,2
006).
Cascio
(2003), d
efined
, hum
an reso
urce m
anag
emen
t “gettin
g ev
erybody fro
m th
e top o
f the o
rgan
ization
to th
e botto
m d
oin
g th
ings to
implem
ent th
e strategy o
f the b
usin
ess effectively
”. Both
the d
efinitio
ns clearly
earmark
the ro
le of h
um
an reso
urce d
epartm
ent as it en
gag
es in th
e build
ing th
e hum
an cap
ital the m
ost im
portan
t
source o
f any o
rgan
ization, th
ough C
ascio in
his d
efinitio
n lay
s emphasis o
n in
volv
ing all th
e emplo
yees acro
ss
the v
erticals.
Till recen
t past H
R d
epartm
ent w
as blam
ed to
sit in th
e AC
room
s and b
uild
ing p
olicies related
to
industrial relatio
ns an
d few
pro
cess man
agem
ent. H
ow
ever, th
e emplo
yee –
emplo
yer relatio
nsh
ip in
the recen
t
past h
as underg
one ch
ange b
ut, as g
lobalizatio
n to
ok p
lace, HR
dep
artmen
t could
not sit b
ack an
d h
ad to
assum
e
a more resp
onsib
le positio
n as retain
ing o
f the talen
ted em
plo
yees b
ecame a h
erculean
task. N
ot o
nly
that it also
had
to assist in
alignin
g th
e intern
al pro
cesses and sy
stems w
ith th
e busin
ess (corp
orate strateg
y o
f the co
mpan
y.
Lin
kin
g an
d lay
ing im
portan
ce of H
R’s d
ynam
ic role w
ith o
rgan
izational p
erform
ance, P
feffer, 1998 id
entified
a bundle o
f seven
HR
best p
ractices - self-man
aged
teams, selectiv
e hirin
g, co
mpen
sation tied
to o
rgan
izational
perfo
rman
ce, emplo
ym
ent secu
rity, info
rmatio
n sh
aring, lo
w statu
s differen
ces among em
plo
yees, an
d ex
tensiv
e
trainin
g, w
hich
stands tru
e and v
alid in
the p
resent d
ay co
ntex
t.
In resp
onse to
the d
ynam
ic enviro
nm
ent H
R d
epartm
ent n
ow
work
s in clo
se associatio
n w
ith all th
e
oth
er dep
artmen
ts with
in an
d o
utsid
e the o
rgan
izations, th
ereby assu
min
g a strateg
ic role th
us alig
nin
g itself
with
busin
ess/ corp
orate strateg
y. In sim
ple w
ord
s, it mean
s to in
tegrate d
ecisions ab
out p
eople w
ith th
e decisio
ns
of an
org
anizatio
n to
achiev
e perfo
rman
ce, thus efficien
cy. Miles an
d S
now
, 1984 d
efined
Strateg
ic Hum
an
Reso
urce M
anag
emen
t (SH
RM
) as ‘a hum
an reso
urce sy
stem th
at is tailored
to th
e dem
ands o
f the b
usin
ess
strategy’ to
‘the p
attern o
f plan
ned
hum
an reso
urce activ
ities inten
ded
to en
able an
org
anizatio
n to
achiev
e its
goals’ (W
right an
d M
cMah
an 1
992). T
hus, as ev
iden
t SH
RM
build
s a brid
ge b
etween
traditio
nal h
um
an reso
urce
man
agem
ent activ
ities with
in a firm
’s overall strateg
ic plan
nin
g an
d ex
ecutio
n.
Acco
rdin
g to
(Leg
nick
-Hall &
Leg
nick
-Hall, 1
988, “S
HR
M in
tegrates h
um
an reso
urce co
nsid
erations
with
oth
er ph
ysical, fin
ancial, an
d tech
no
log
ical resou
rces in th
e setting
of g
oals an
d so
lvin
g co
mp
lex
org
anizatio
nal p
roblem
s. SH
RM
also em
phasizes th
e implem
entatio
n o
f a set of p
olicies an
d p
ractices that w
ill
bu
ild em
plo
yee p
oo
l of sk
ills, kn
ow
ledg
e, and
abilities (Jack
on
and
Sch
ulerm
19
95
) that are relev
ant to
org
anizatio
nal g
oals. T
hus a larg
er variety
and m
ore co
mplete set o
f solu
tions fo
r solv
ing o
rgan
izational p
roblem
s
are pro
vid
ed an
d th
e likelih
ood th
at busin
ess goals o
f the o
rgan
ization w
ill be attain
ed is in
creased (M
echelin
,
1996). F
ew o
f the b
enefits b
y im
plem
entin
g S
HR
M can
be in
terms o
f (i) scannin
g th
e enviro
nm
ent an
d id
entify
ing
the ex
ternal o
pportu
nities an
d th
reats crucial to
the co
mpan
y’s su
ccess, (ii) facilitating in
build
ing o
f missio
n
and
visio
n (iii) R
ecruitin
g, retain
ing
and
mo
tivatin
g p
eop
le, (iv) en
surin
g ad
dressal o
f peo
ple d
evelo
pm
ent
issues (v
) Aw
areness reg
ardin
g th
e custo
mer (v
i) Ensu
ring h
igh p
roductiv
ity (v
ii) build
ing b
usin
ess surp
lus
thro
ugh co
mpeten
cy.
Strateg
ic HR
M an
d H
RM
functio
ns d
rive each
oth
er to attain
the effectiv
eness o
f the o
rgan
ization.
Both
, interd
epen
den
t on each
oth
er are key
to an
y o
rgan
ization. F
igure 1
dep
icts the in
terdep
enden
cy o
f vairo
us
functio
ns o
f HR
and realatio
nsh
ip b
etween
HR
Strateg
y an
d H
R F
unctio
ns.
Ex
pan
din
g th
e Valu
e Ho
rizon
of H
R
56.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
HR
an
d L
ead
ership
Bu
ildin
g:
The g
reatest com
petitiv
e advan
tage w
hich
a com
pan
y can
hav
e is thro
ugh
effective lead
ership
. In th
e presen
t contex
t, with
com
pan
ies movin
g in
differen
t countries, g
lobal lead
ership
has
beco
me an
integ
rative p
art of th
em. H
R p
lays an
importan
t role in
integ
rating th
e execu
tive d
evelo
pm
ent p
rocess
with
corp
orate strateg
y.
Man
pow
er Pla
nn
ing
:M
anpow
er plan
nin
g aim
s to m
aintain
and im
pro
ve th
e ability
of th
e org
anizatio
n to
achiev
e corp
orate o
bjectiv
es thro
ugh th
e dev
elopm
ent o
f strategies d
esigned
to en
han
ce the co
ntrib
utio
n o
f
man
pow
er at all times in
the fo
reseeable fu
ture. A
ccord
ing to
Bow
ey (1
977), “M
anpow
er plan
nin
g is a strateg
y
for m
atchin
g fu
ture m
anpow
er num
bers an
d sk
ills with
org
anisatio
nal activ
ities”.
Perfo
rman
ce Man
agem
ent:
Perfo
rman
ce Man
agem
ent is a reco
rd o
f outco
mes p
roduced
on a sp
ecified jo
b
functio
ns o
r activities d
urin
g a sp
ecified tim
e perio
d. E
valu
ating an
d m
anag
ing an
indiv
idual’s p
erform
ance is
an in
evitab
le part o
f org
anizatio
nal life. E
very
one is co
nsisten
tly ev
aluated
by h
is superio
rs, subord
inates, p
eers
and o
ther asso
ciates of th
e org
anizatio
ns. T
he feed
back
giv
en b
ecom
es importan
t in term
s of d
evelo
pin
g th
e
indiv
idual. P
erform
ance M
anag
emen
t is an in
tegral p
art of a co
mpan
y’s H
R activ
ity.
Com
peten
cy M
ap
pin
g:
Felser (2
003) d
efined
com
peten
ce as “Com
peten
ce is determ
ined
by th
e know
ledge-
based
and
netw
ork
-driv
en ab
ility o
f an acto
r and
his en
viro
nm
ent to
act alon
e or w
ith p
artners, to
satisfy
indirectly
or d
irectly ex
isting cu
stom
er requirem
ents o
ptim
ally. By th
is sustain
able ad
ded
valu
es are created in
a com
petitiv
e and su
perio
r man
ner.” T
o g
ain th
e com
petitiv
e advan
tage th
e HR
is tryin
g to
align an
indiv
idual
com
peten
cy to
the o
rgan
ization n
eeds an
d req
uirem
ents to
create the b
est fit and to
gau
ge th
e max
imum
advan
tage.
Corp
ora
te Govern
an
ce
Corp
orate g
overn
ance reg
ulates th
e ow
nersh
ip an
d co
ntro
l of o
rgan
izations (B
erle and M
eans 1
932). It
sets tone fo
r the leg
al terms an
d co
nditio
ns fo
r the allo
cation o
f pro
perty
rights am
ong stak
ehold
ers, structu
ring
their relatio
nsh
ips an
d in
fluen
cing th
eir incen
tives, an
d h
ence, w
illingness to
work
togeth
er. CG
practices are
beco
min
g a to
ol to
form
ulate n
orm
s and p
olicies to
ethically
run an
org
anizatio
n. It is b
ecom
ing m
ore an
d m
ore
interestin
g to
see the sp
ecificity o
f each p
arameter g
ainin
g fo
cus an
d atten
tion. K
eepin
g th
e OE
CD
prin
ciples as
the g
uid
ing so
urce, th
e auth
ors fo
cus an
d d
erive th
at prin
cipally
corp
orate g
overn
ance h
inges o
n th
e role o
f the
stakeh
old
ers, equitab
le and fair treatm
ent o
f all the sh
arehold
ers, accountab
ility o
f the b
oard
and tran
sparen
cy
and d
isclosu
res.
Role o
f the sta
keh
old
er :S
tan
ford
Rese
arc
h In
stitute
(SR
I, 19
63
; qu
ote
d in
Fre
em
an
, 19
84
, p.3
1)
defin
ed
stakeh
old
ers as “those g
roups w
ithout w
hose su
pport th
e org
anizatio
n w
ould
cease to e
xist”
(Fre
em
an
,
19
84
). Th
e sta
tus o
f the sta
keh
old
er is th
e m
ost d
eb
ate
d issu
e in
the literatu
re. Donald
son an
d P
reston
Ex
pan
din
g th
e Valu
e Ho
rizon
of H
R
Fig
ure 1
: Interd
epen
den
cy o
f HR
functio
ns.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
57
(1995) p
roposed
a stakeh
old
er theo
ry fo
cusin
g o
n th
ree core asp
ects – d
escriptiv
e/empirical, in
strum
ental, an
d
norm
ative b
uild
ing an
d ju
stifyin
g th
e CG
practices. T
he v
iew th
at stakeh
old
er man
agem
ent an
d th
e perfo
rman
ce
of an
org
an
izatio
n h
av
e a
stron
g c
orre
latio
n c
om
mo
nly
held
in th
e fie
ld o
f man
ag
em
en
t sciences’ b
e it
with
the acad
emician
s or w
ith th
e man
agers.
Acco
un
tab
ility:
Acco
untab
ility is d
efined
as the p
erceptio
n o
f defen
din
g o
r justify
ing o
ne’s b
ehav
ior to
an
audien
ce with
reward
or san
ction au
thority, an
d w
here rew
ards o
r sanctio
ns are p
erceived
to b
e contin
gen
t upon
audien
ce evalu
ation o
f such
conduct (B
uck
ley et al., 2
001). It fo
cuses o
n th
e ability
to acco
unt fo
r the allo
cation,
use an
d co
ntro
l, i.e. bu
dg
eting
, accou
ntin
g an
d au
ditin
g. In
a bro
ader sen
se, it is also co
ncern
ed w
ith th
e
establish
men
t, and en
forcem
ent o
f rules an
d reg
ulatio
ns o
f corp
orate g
overn
ance. S
arban
es Oxley
Law
(2002)
pro
tects investo
r’s interests b
y im
pro
vin
g th
e accuracy
and reliab
ility o
f disclo
sures. A
ccountab
ility is th
e most
fundam
ental d
uty
of a b
oard
. The b
oard
mem
bers h
ave h
igh acco
untab
ility to
build
upon th
e public tru
st. It
places h
eavy o
blig
ations o
n th
e vario
us m
embers to
preserv
e, main
tain an
d d
evelo
p th
e org
anizatio
n. T
he b
oard
reserves th
e right fo
r appoin
ting, m
onito
ring an
d ev
aluatin
g th
e perfo
rman
ce of th
e CE
O.
Tra
nsp
aren
cy a
nd
Disclo
sure :
A m
ajor resp
onsib
ility o
f the b
oard
of d
irectors is to
ensu
re shareh
old
ers and
stakeh
old
ers are pro
vid
ed w
ith h
igh q
uality
disclo
sures o
n th
e finan
cial and o
peratin
g resu
lts of th
e com
pan
y, and o
n
com
pan
y o
bjectiv
es, so th
at they
mak
e info
rmed
and accu
rate assessmen
ts of th
e pro
gress o
f the co
mpan
y. Alm
ost all
of th
e corp
orate g
overn
ance co
des aro
und th
e world
inclu
din
g th
e OE
CD
(2004) p
rincip
les, Sarb
anes O
xley
Law
(2002), co
mbin
ed co
de (2
003), an
d E
U T
ransp
arency
directiv
e (2004), em
phasize th
e importan
ce of fu
ll disclo
sure as
the v
ital basis o
f effective w
ork
ing o
f all the m
echan
isms o
f corp
orate g
overn
ance. T
he av
ailability
of in
form
ation
on
the co
mp
any
web
site or o
ther p
ub
lic sou
rces regard
ing
its po
licies brin
gs fo
rth th
e com
pan
y’s co
mm
itmen
t
tow
ards tran
sparen
cy an
d d
isclosu
res. Black
et a
l. (20
02
) fou
nd
that “th
e corp
orate tran
sparen
cy is h
igh
ly
related to
perfo
rman
ce and co
mpan
ies with
better co
rporate g
overn
ance h
ave h
igher stan
dard
s of d
isclosu
re and
transp
arency
”. Acco
rdin
g to
San
g –
Woo N
am (2
003), “In
the face o
f keen
er com
petitio
n, th
ere is pressu
re to
impro
ve th
e man
agerial tran
sparen
cy.”
Eq
uita
ble a
nd
Fairn
ess: Equitab
le and fairn
ess for an
d am
ongst all th
e shareh
old
ers ensu
re pro
tection an
d
opportu
nity
to all th
e shareh
old
ers for ‘red
ress of th
e vio
lation o
f their rig
hts’ (O
EC
D, 2
004) O
ne o
f the m
ost
imp
ortan
t pillar o
f corp
orate g
ov
ernan
ce it ensu
res a go
od
repu
tation
of th
e firms b
ut also
attracts the k
ey
investo
rs. It also h
elps b
uild
a fair cultu
re with
in th
e org
anizatio
n.
Corp
ora
te Govern
an
ce an
d H
R
Corp
orate g
overn
ance leg
ally stru
ctures stak
ehold
er relations an
d p
rioritizes th
eir interests in
fair and
equitab
le man
ner. B
oth
, intern
al and ex
ternal stak
ehold
ers hav
e an im
portan
t role in
determ
ing th
e pro
ductiv
ity
of a co
mpan
y. Intern
al stakeh
old
ers (emplo
yees) h
ave a d
irect influ
ence o
n th
e efficiency
of th
e org
anizatio
n as
they
engag
e them
selves in
vario
us p
roductio
n activ
ities on a reg
ular b
asis. Extern
al stakeh
old
ers by v
irtue o
f
their au
thority
enfo
rce an o
rgan
ization to
giv
e the b
est results in
form
of retu
rns. G
ood H
R p
ractices help
in
build
ing strateg
ies facilitating an
d en
ablin
g g
ood g
overn
ance. A
ccord
ing to
Ulrich
(1997), “In
org
anizatio
ns
where th
e HR
functio
n is o
nly
view
ed as an
overh
ead co
st and is n
ot seen
as a strategic p
artner h
elpin
g to
create
valu
e in th
e busin
ess, then
HR
system
s gen
erally d
o n
ot w
ork
as effectively
”. Cosh
and H
ughes (2
003), fo
und
that fin
d th
at ‘friendly
relations’ b
etween
man
agers an
d em
plo
yees an
d a relian
ce on em
plo
yee co
-operatio
n an
d
‘loyalty
’ are a mean
s by w
hich
efficient w
ork
org
anizatio
n is ach
ieved
. The F
igure 2
corro
borates w
ith th
e work
conducted
by (U
lrich 1
997; C
appelli an
d C
rock
er-Hefter 1
996). T
hey
found th
at research o
f HR
practices an
d
perfo
rman
ce in larg
er firms h
as show
n p
ositiv
e results. H
uselid
(1995) fo
und th
at out o
f 700 p
ublicly
traded
firms in
the U
SA
, those th
at had
implem
ented
best p
ractices in th
ese areas achiev
ed an
annual sh
arehold
er
return
of 9
.4%
versu
s 6.5
% fo
r firms u
sing few
er practices an
d h
ad m
ore th
an 5
0%
as hig
h a g
ross rate o
f return
on cap
ital The sp
ecific HR
best p
ractice areas inclu
ded
form
al and co
nsisten
t perso
nnel selectio
n, jo
b d
esign,
info
rmatio
n sh
aring, p
erform
ance ap
praisal, p
rom
otio
n sy
stems, g
rievan
ce pro
cedures, attitu
de assessm
ent an
d
Ex
pan
din
g th
e Valu
e Ho
rizon
of H
R
58.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
incen
tive sy
stems. In
an an
oth
er study C
ollin
s and C
lark (2
003), fo
und th
at hig
h tech
nolo
gy co
mpan
ies top
man
agers’ so
cial netw
ork
s acted to
med
iate relationsh
ips b
etween
hum
an reso
urce p
ractices and firm
perfo
rman
ce.
Fig
ure 2
: Interrelatio
nsh
ip b
etween
corp
orate strateg
y, HR
strategy an
d co
rporate g
overn
ance.
To w
in th
e trust o
f the v
arious stak
ehold
ers, HR
execu
tives n
eed to
build
on a cu
lture m
otiv
ating an
d en
courag
ing
open
ness to
win
the in
vesto
rs and cu
stom
ers. Not o
nly
this as em
plo
yees b
ecom
ing m
ore en
gag
ing as stak
ehold
ers.
Em
plo
yees are v
iewed
as active in
puts in
to th
e pro
ductiv
e pro
cess, capab
le of d
evelo
pm
ent, in
volv
emen
t and
info
rmed
choice.
Co
mm
un
ication
, mo
tivatio
n, lead
ership
and
a shared
or ‘m
utu
al’ visio
n o
f the o
rgan
ization
and
its
objectiv
es are therefo
re enco
urag
ed in
ord
er to d
evelo
p an
d stren
gth
en co
mm
itmen
t (Beer an
d S
pecto
r 1985).
HR
pro
fessional h
ave a m
ajor task
of b
uild
ing sy
stems an
d p
rocesses en
ablin
g an
enviro
nm
ent o
f hig
h eth
ical
standard
s. In o
rder to
achiev
e the h
ighest b
ench
mark
in term
s of ach
ievin
g b
ehav
ioral o
utco
mes o
f hig
h eth
ical
standard
s, com
pan
ies (HR
) need
to fo
llow
the leg
al com
plian
ce norm
s by fo
rmin
g p
olicies lead
ing to
the cu
lture
(good) o
f the o
rgan
ization. A
n effectiv
e outco
me o
f it is the h
igh lev
el of co
mm
itmen
t. Fig
ure 3
belo
w sh
ow
s
the relatio
nsh
ip b
etween
the p
arameter o
f HR
leadin
g to
org
anizatio
nal cu
lture h
avin
g co
mm
itmen
t as an o
utco
me.
The in
terest of th
e stakeh
old
ers are aligned
with
the o
rgan
izational cu
lture
Fig
ure 3
: Relatio
nsh
ip b
etween
param
eters of H
um
an R
esource (H
R p
lannin
g) w
ith o
rgan
izational cu
lture.
Marin
ating h
igh eth
ical standard
s and in
tegrity
of th
e org
anizatio
n d
rives th
e HR
dep
artmen
ts to en
sure
that th
e top ex
ecutiv
es of th
e com
pan
y tak
e responsib
le actions to
main
tain th
e sanctity
of th
e com
pan
y. An
attunin
g o
f the sen
ior ex
ecutiv
es will m
ake th
em m
ore acco
untab
le and th
us in
congru
ence w
ith th
e org
anizatio
nal
strategy. T
he ex
ecutiv
e man
agem
ent lead
s to en
surin
g th
at the to
p ex
ecutiv
es take actio
n in
favor o
f the co
mpan
y,
thus m
akin
g th
em resp
onsib
le and acco
untab
le. Fig
ure 4
belo
w sh
ow
s the relatio
nsh
ip b
etween
the p
arameter
of H
R in
terms o
f execu
ting th
e norm
s and reg
ulatio
ns lead
ing to
top ex
ecutiv
es accountab
ility (a k
ey q
uestio
n
in th
e presen
t day
contex
t) which
will p
ose an
outco
me o
f effectiven
ess for th
e com
pan
y.
Ex
pan
din
g th
e Valu
e Ho
rizon
of H
R
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
59
Fig
ure 4
: Relatio
nsh
ip b
etween
HR
param
eters (Norm
and reg
ulatio
n ex
ecutio
n) lead
ing to
effectiven
ess of th
e org
anizatio
n.
Tra
nsp
are
ncy
an
d d
isclo
sure
s are
the h
eart o
f an
y c
orp
ora
te g
ov
ern
an
ce issu
e. T
o c
on
trol th
e
misap
pro
priatio
ns o
f the firm
s, vario
us n
orm
s hav
e com
e into
existen
ce. The g
overn
men
ts across th
e world
hav
e built th
e best p
ractice code fo
r the co
mpan
ies and v
arious reg
ulato
ry b
odies are strictly
monito
ring th
e
com
pan
ies as well b
oo
kin
g th
em in
case no
t follo
wed
. As ev
ery H
R d
epartm
ent attem
pts to
brin
g an
op
en
cultu
re it will fu
rther lead
to d
isclosu
res and th
us tru
st as an o
utco
me. F
igure 5
show
s relationsh
ip b
etween
HR
param
eter (Open
ness) lead
ing to
CG
param
eter (accountab
ility) b
uild
ing T
rust am
ongst stak
ehold
ers.
Fig
ure 5
: Relatio
nsh
ip b
etween
HR
param
eter (Open
ness) lead
ing to
CG
param
eter.
Equitab
le and fair treatm
ent o
f the v
arious stak
ehold
ers creates valu
e for th
e firm. E
nsu
ring, in
practice,
one sh
arehold
er one v
ote it p
rotects th
e min
or in
vesto
r’s rights. A
t the sam
e time th
e emplo
yees o
f the co
mpan
y
also lo
ok fo
rward
to w
ork
ing in
the co
mpan
ies which
pro
mote a h
ealthy en
viro
nm
ent. F
igure 6
show
s relationsh
ip
betw
een H
R p
arameter (F
airness) lead
ing
to C
G p
arameter (in
vesto
r pro
tection
and
mo
tivatio
n) lead
ing
to
efficiency
of th
e org
anizatio
n
Fig
ure 6
: Relatio
nsh
ip b
etween
HR
param
eter (Fairn
ess) leadin
g to
CG
param
eter (investo
r pro
tection an
d
mo
tivatio
n)
On th
e basis o
f the ab
ove m
odels an
architectu
ral conclu
sion can
be d
rawn reg
ardin
g th
e relationsh
ip
betw
een H
R an
d C
orp
orate G
overn
ance. T
he fo
llow
ing F
igure 7
dep
icts the m
odules an
d th
eir interactio
n w
ith
oth
er parts o
f our co
ncep
t:
Fig
ure 7
: A m
odel o
f HR
as an en
abler an
d facilitato
r of co
rporate g
overn
ance
Ex
pan
din
g th
e Valu
e Ho
rizon
of H
R
E
60.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Effic
iency
Fairness
Investor
Protection
Con
clusio
n
Hu
man
Reso
urce m
anag
emen
t has b
een an
age o
ld p
hen
om
eno
n. T
raditio
nally
associated
with
main
tainin
g reco
rds an
d d
ealing w
ith trad
e unio
ns, it h
as now
underg
one a p
aradig
m sh
ift. Now
play
ing a m
ajor
role in
build
ing o
rgan
izational effectiv
eness, it h
as assum
ed strateg
ic role alig
nin
g itself w
ith th
e bro
ader p
icture
of th
e com
pan
y. Exam
inin
g th
is, Guest(1
997) p
roposed
that h
igh p
erform
ance at th
e indiv
idual lev
el — w
hich
osten
sibly
leads to
impro
ved
perfo
rman
ce at the o
rgan
izational lev
el — d
epen
ds u
pon h
igh m
otiv
ation, p
ossessio
n
of th
e necessary
skills an
d ab
ilities, and an
appro
priate ro
le and u
nderstan
din
g o
f that ro
le.
Th
e mean
ing
and
relevan
ce of co
rpo
rate go
vern
ance is also
chan
gin
g w
ith tim
es. Em
ergin
g as an
indisp
ensab
le aspect o
f man
agem
ent, strin
gen
t norm
s are bein
g fo
rmed
to reg
ulate th
e com
pan
ies. In th
e past,
the co
rporate v
alue w
as mostly
measu
red b
y th
e tangib
le assets reflected in
the b
ook v
alue o
f the co
mpan
ies
how
ever; in
the p
resent d
ay co
ntex
t the co
rporate’s u
sing in
tellectual assets fo
r their co
mpetitiv
e advan
tage to
create corp
orate v
alue. T
his h
as led th
e HR
dep
artmen
ts to act as an
enab
ler and facilitato
r of co
rporate g
overn
ance
mech
anism
s. Th
e prem
ise of th
e presen
t pap
er is to estab
lish a lin
k b
etween
HR
practices an
d co
rpo
rate
go
vern
ance.
Referen
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eans.G
(1932), T
he m
odern
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im (2
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lobal S
tage: T
he: C
hallen
ges an
d O
pportu
nities in
Our B
ord
erless World
, Wharto
n sch
ool o
f
pu
blish
ing
.
Ulrich
,D. (1
997), H
um
an reso
urce ch
ampio
ns: T
he n
ext ag
enda fo
r addin
g v
alue an
d d
eliverin
g resu
lts. Harv
ard
Busin
ess Sch
ool P
ress.
Ven
kat R
atnam
C.S
. and S
rivastav
a B.K
. Perso
nnel / h
um
an reso
urce m
anag
emen
t, Tata M
cGraw
hill.
62.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Serv
ice Qu
ality
an
d C
usto
mer S
atisfa
ction
: A C
ase S
tud
y in
Gen
eral In
sura
nce u
sing C
usto
mized
SE
RV
PE
RF
Instru
men
t.
Dr. L
ewly
n L
. R. R
odrig
ues 1 D
r. Gopalak
rishna B
2 D
r. K. V
. M.V
arambally
3
Ab
stract
The o
bjectiv
e of th
is study is to
investig
ate the relatio
nsh
ip b
etween
Serv
ice quality
and C
usto
mer satisfactio
n
in a serv
ice industry. T
he research
questio
n attem
pted
to an
swer in
this research
is, ‘does S
ervice q
uality
increase
Custo
mer satisfactio
n?’ W
hile th
e obvio
us an
swer is ‘y
es’ the research
findin
gs are in
dicativ
e that it n
eed n
ot
necessarily
be tru
e. Th
is stud
y in
vo
lves m
easurem
ent o
f Serv
ice qu
ality an
d C
usto
mer satisfactio
n u
sing
a
multip
le item m
etric. The p
aper h
ypoth
esizes that th
ere is a significan
t differen
ce in p
erceptio
n b
etween
Serv
ice
Quality
and C
usto
mer S
atisfaction. A
link b
etween
service q
uality
and cu
stom
er satisfaction h
as been
establish
ed
which
show
s that serv
ice quality
and cu
stom
er satisfaction are in
ter-dep
enden
t and in
ter-related. F
urth
er, the
study is in
dicativ
e that en
han
cemen
t of serv
ice quality
will h
ave a p
ositiv
e impact o
n th
e custo
mer satisfactio
n.
How
ever, b
eyond a certain
level, a g
iven
increase in
service q
uality
may
not in
crease the satisfactio
n lev
el of
custo
mers b
y a p
roportio
nal am
ount.
Key
Word
s: Serv
ice quality, C
usto
mer satisfactio
n, P
erceptio
n, E
xpectatio
n, G
eneral In
suran
ce and S
ER
VP
ER
F
Intro
du
ction
Serv
ice quality
and cu
stom
er satisfaction are o
f hig
h im
portan
ce to th
e mark
eting th
eory
and p
ractice and
it is the u
ltimate g
oal o
f all service p
rovid
ers. Com
pan
ies that h
ave co
mpetitiv
e advan
tage in
deliv
ering h
igh
Serv
ice Perfo
rman
ce (SE
RV
PE
RF
) will u
sually
achiev
e Custo
mer satisfactio
n. B
ut th
is need
not n
ecessarily b
e
true in
all the cases. T
his is b
ecause S
ervice q
uality
is characterized
by th
e ‘Custo
mer p
erceptio
n’ o
f service.
What co
unts is th
e quality
as it is perceiv
ed b
y th
e custo
mers i.e. th
e custo
mers are th
e sole ju
dge o
f quality
(Berry
1980, p
p. 2
4-8
). The earlier attem
pts in
defin
ing an
d m
easurin
g q
uality
hav
e largely
com
e from
the g
oods
sectors w
here it w
as defin
ed as ‘co
nfo
rman
ce to req
uirem
ents’. O
win
g to
its importan
ce, Perceiv
ed serv
ice
quality
is one o
f the h
ighly
deb
ated an
d research
ed to
pics in
mark
eting th
eory
across th
e world
(Buttle 1
996, p
p.
8-3
2). C
usto
mer satisfactio
n is co
nsid
ered a p
rerequisite fo
r custo
mer reten
tion an
d lo
yalty, p
rofitab
ility, mark
et
share, retu
rn o
n in
vestm
ent, etc. W
hile th
ere are several in
strum
ents (O
liver &
Sw
an 1
989, p
p. 2
1-3
5; O
liva,
Oliv
er & M
acMillan
1992, p
p. 8
3-9
5) o
f service q
uality
measu
remen
t, this research
is based
on th
e instru
men
t
dev
eloped
by S
uresh
chan
dar et al. (2
001, p
p. 1
11-2
4) (th
e nin
e-item scale).
Cu
stom
er satisfaction
and
service q
uality
remain
critical issues fo
r finan
cial service p
rov
iders th
at offer
gen
erally u
ndifferen
tiated p
roducts lik
e the in
suran
ce. The m
ajor ap
pro
ach to
differen
tiate one in
surer fro
m
anoth
er is the serv
ice pro
vid
ed b
efore an
d after th
e sale of th
e policy
(Staffo
rd &
Wells 1
996, p
p. 1
63-8
2). In
India u
ntil th
e past d
ecade, d
ifferentiatio
n b
etween
the tw
o in
suran
ce com
pan
ies was n
ot sig
nifican
t becau
se
insu
rance p
rovid
ers offered
govern
men
t man
dated
standard
ized p
roducts. A
t presen
t, becau
se of d
econtro
l over
insu
rance secto
rs, there is in
creased im
portan
ce of cu
stom
er service q
uality
and satisfactio
n d
ue to
com
petitio
ns.
Insu
rance in
du
stry u
tilizes the co
mp
laint ratio
as a measu
re of serv
ice qu
ality. Th
is ratio is th
e nu
mb
er of
com
plain
ts received
div
ided
by a m
easure o
f insu
rance b
usin
ess in fo
rce (Wells &
Staffo
rd 1
995, p
p. 4
62-7
7).
Com
plain
t ratio fails to
captu
re critical info
rmatio
n su
ch as feelin
gs an
d p
erceptio
ns o
fth
ose in
div
iduals w
ho
did
not co
mplain
. It is importan
t to n
ote th
at a non-co
mplain
ing cu
stom
er need
not n
ecessarily b
e a satisfied
1.
Pro
fessor, M
echan
ical and
Man
ufactu
ring
En
gin
eering
Dep
artmen
t,Man
ipal In
stitute o
f Tech
no
log
y, Man
ipal.,
E-m
ail : rod
rigu
sr@g
mail.co
m
2.
Facu
lty, Mech
anical an
d M
anu
facturin
g E
ng
ineerin
g D
epartm
ent, M
anip
al Institu
te of T
echn
olo
gy, M
anip
al,
E-m
ail : bg
_m
it@y
aho
o.co
m
3.
Directo
r, Man
ipal In
stitute o
f Man
agem
ent, M
anip
al, Ind
ia. E-m
ail : varam
bally
@y
aho
o.co
m
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
63
one. T
he co
mplain
t ratio is an
overall in
dicato
r of serv
ice quality
but can
not b
e an ab
solu
te measu
re. Moreo
ver,
com
pan
ies remain
unaw
are of th
e indiv
idual p
roblem
s that p
rom
pted
a particu
lar com
plain
t. This lack
of sp
ecific
know
ledge ab
out serv
ice shortfalls can
result in
com
pan
ies’ overlo
okin
g o
f the critical p
roblem
areas, and
hen
ce, this k
ind o
f metric b
ased ev
aluatio
n o
f Serv
ice quality
and C
usto
mer satisfactio
n b
ecom
es importan
t.
Th
e Metric - S
ervice q
uality
Gro
nro
os (1
984, p
p. 3
6-4
) concep
tualized
a service q
uality
model w
here h
e iden
tified th
e two v
ariables o
f
service q
uality, i.e. ex
pected
service an
d p
erceived
service. T
he ex
pected
service is b
uilt u
p th
rou
gh
the
pro
motio
nal activ
ities of th
e firm, p
ast experien
ce of th
e custo
mer, W
ord
of m
outh
com
municatio
n an
d th
e
need
s of th
e custo
mer. T
he p
erceived
service is th
e result o
f a consu
mer’s w
ord
of m
outh
com
municatio
n an
d
the n
eeds o
f the cu
stom
er. The p
erceived
service is th
e result o
f a consu
mer’s v
iew o
f a bundle o
f service
dim
ensio
ns, so
me o
f which
are technical an
d o
thers fu
nctio
nal in
natu
re. Gro
nro
os(1
984, p
p. 3
6-4
) observ
ed
that th
e discrep
ancy
betw
een ex
pectatio
ns an
d p
erceptio
ns is th
e prim
ary d
etermin
ant o
f custo
mers’ serv
ice-
quality
assessmen
t.
The S
ER
VQ
UA
L in
strum
ent (P
arasuram
an et al. 1
988, p
p. 1
2-4
0) is a 2
2-item
scale that m
easures serv
ice
qu
ality alo
ng
five facto
rs, nam
ely reliab
ility, respo
nsiv
eness, assu
rance, em
path
y an
d tan
gib
les. Th
ere is a
gen
eral agreem
ent th
at the S
ER
VQ
UA
L v
ariables are reaso
nab
ly g
oo
d p
redicto
rs of serv
ice qu
ality in
its
wholen
ess. Carefu
l scrutin
y o
f the 2
2 item
s indicates th
at the item
s at large d
eal with
the elem
ent o
f hum
an
interactio
n in
the serv
ice deliv
ery an
d th
e rest on th
e tangib
le items o
f service. In
contrast, S
ER
VP
ER
F scale
which
uses th
e percep
tion item
of S
ER
VQ
UA
L scale (C
ronin
& T
aylo
r 1992, p
p. 5
5-6
8). T
he S
ER
VQ
UA
L
instru
men
t seems to
hav
e ov
erloo
ked
som
e oth
er imp
ortan
t factors o
f service q
uality
like co
re service,
system
atization/ stan
dard
ization o
f service d
elivery
(the n
on-h
um
an elem
ent), an
d th
e social resp
onsib
ility o
f
the serv
ice org
anizatio
n. S
uresh
chan
dar et al. (2
001, p
p. 11
1-2
4)
concep
tualize serv
ice quality
by tak
ing in
to
account all th
e aspects o
f custo
mer p
erceived
service q
uality
and id
entified
follo
win
g fiv
e factors o
f service
quality
as critical from
the cu
stom
ers’ poin
t of v
iew:
1.
Core serv
ice or serv
ice pro
duct.
2.
Hum
an elem
ent o
f service d
elivery.
3.
System
atization o
f service d
elivery
: non-h
um
an elem
ent.
4.
Tan
gib
les of serv
ice.
5.
Social resp
onsib
ility.
Tab
le 1 su
mm
arizes the d
ifferent facto
rs of serv
ice quality
used
in th
is research to
measu
re service q
uality.
The o
rigin
al statemen
ts were m
odified
to m
ake th
em su
itable to
insu
rance in
dustry. T
he m
odified
, standard
ized
and v
alidated
surv
ey in
strum
ent co
nsists o
f 40 q
uestio
ns to
measu
re the p
erceptio
n ab
out serv
ices. A fiv
e poin
t
Lik
ert scale has b
een u
sed to
measu
re the lev
els of serv
ice quality.
Cu
stom
er Satisfa
ction
: Cro
nin
and T
aylo
r (1992, p
p. 5
5-6
8)
measu
red cu
stom
er satisfaction as a o
ne-item
scale that ask
s for th
e custo
mer’s o
verall feelin
g to
ward
s an o
rgan
ization. B
itner an
d H
ubert (1
994, p
p. 7
2-9
4)
used
four item
s to m
easure th
e custo
mers’ o
verall satisfactio
n w
ith th
e service p
rovid
er. Shem
well et al. (1
998);
Cro
sby &
Step
hen
s (1987); O
liver &
Sw
an (1
989); an
d O
liva (1
992) h
ave also
emphasized
the m
ulti-faceted
natu
re of cu
stom
er satisfaction an
d h
ave u
sed m
ultip
le item scales to
measu
re custo
mer satisfactio
n. H
ow
ever,
the cu
rrent tren
d is to
captu
re the satisfactio
n in
transactio
n at m
ultip
le levels in
the o
rgan
ization. B
itner an
d
Hubert (1
994) arg
ue th
at 22 item
s of S
ER
VQ
UA
L, w
hen
measu
red as a fu
nctio
n o
f multip
le experien
ces with
the firm
, may
be g
ood p
redicto
rs of o
verall serv
ice satisfaction. In
this research
, measu
remen
t of cu
stom
er
satisfaction is tak
en as m
ulti-facto
r service. C
usto
mer satisfactio
n is tak
en fo
r all the fiv
e factors o
f service
qu
ality an
d o
ne q
uestio
n in
gen
eral ov
erall service q
uality. T
he resp
on
den
ts hav
e been
asked
to g
ive th
eir
responses reg
ardin
g th
eir level o
f satisfaction o
n a fiv
e-poin
t scale from
poor to
excellen
t.
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
64.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Tab
le 1: T
he facto
rs of cu
stom
ers service q
uality
(Suresh
chan
dar et al. 2
001)
Resea
rch M
ethod
olo
gy
: This research
is partly
qualitativ
e and p
artly q
uan
titative in
natu
re. It is qualitativ
e
in th
e sense th
at it involv
es in-d
epth
interv
iew w
ith th
e frontlin
e staff, custo
mers an
d m
anag
ers of In
suran
ce
Com
pan
ies so as to
concep
tualize th
e mean
ing o
f Serv
ice quality
and C
usto
mer satisfactio
n in
the co
ntex
t of
Insu
rance in
dustry. T
he stu
dy b
ecom
es quan
titative as it seek
s relationsh
ips b
etween
variab
les of stu
dy an
d
correlates th
e research p
arameters.
This fo
cus g
roup co
nsists o
f small an
d m
ediu
m scale in
dustrial cu
stom
ers of g
eneral in
suran
ce com
pan
ies.
Ran
dom
samples o
f consu
mers w
ho h
ave reg
ular claim
s with
their in
surers w
ere the resp
onden
ts for th
is research.
The sam
ple size w
as 618 cu
stom
ers of sm
all and m
ediu
m scale in
dustrial cu
stom
ers belo
ngin
g to
11 G
eneral
Insu
rance co
mpan
ies in In
dia (4
Public In
surer an
d 7
Priv
ate Com
pan
ies). Out o
f 618 resp
onden
ts, 435 (7
0.4
%)
were fro
m G
overn
men
t Gen
eral Insu
rance co
mpan
ies and 1
88 (2
9.6
%) w
ere from
Priv
ate Com
pan
ies (Tab
le 2).
Tab
le 2: D
istributio
n o
f Resp
onden
ts
The P
erceptio
n S
atisfaction resp
onses w
ere taken
on a 5
poin
t Lik
ert scale. Assessm
ent o
f the reliab
ility
and v
alidity
of th
e scales is done fo
r the in
strum
ent. T
he reliab
ility o
f the scales (in
ternal co
nsisten
cy) w
ere
assessed u
sing th
e Cro
nbach
’s Alp
ha co
efficient, th
e valu
e bein
g 0
.7, w
hich
indicated
moderate reliab
ility. The
operatin
g elem
ents o
f service q
uality
are presen
ted in
the A
ppen
dix
(1). R
esponden
ts were fro
m th
ree differen
t
geo
grap
hical lo
cations o
f India b
elongin
g to
two secto
rs viz., P
ublic an
d P
rivate (T
able 3
).
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
65
Tab
le 3: R
egio
n-w
ise and S
ector-w
ise Distrib
utio
n o
f responden
ts
The reg
ions are selected
based
on th
e follo
win
g criteria.
$ R
egio
n A
(Mum
bai): M
ost ad
van
ced, fin
ancial cap
ital of In
dia.
& R
egio
n B
(Vad
odara): M
ost ad
van
ced In
dustrial h
ub fro
m state o
f Gujarat.
' R
egio
n C
(Udupi &
South
Can
ara): One o
f the in
dustrially
back
ward
s cities.
Tw
o H
ypoth
eses hav
e been
tested as d
efined
belo
w:
H1 :
There is n
o sig
nifican
t differen
ce in p
erceptio
n b
etween
service q
uality
and
cu
stom
er sa
tisfactio
n w
ith
respect to
indiv
idual d
imen
sions.
H2 :
There is n
o sig
nifican
t correlatio
n b
etween
service q
uality
and cu
stom
er satisfaction
dim
ensio
ns.
Resu
lts an
d D
iscussio
n: In
ord
er to test th
e first hypoth
esis (H1 ), a p
aired “t” test w
as carried o
ut to
check
for
differen
ces betw
een serv
ice quality
and cu
stom
er satisfaction p
erceptio
ns w
ith resp
ect to th
e five d
imen
sions
(Tab
le 4).
Tab
le 4: P
aired t-test
The resu
lts indicate th
at there is a sig
nifican
t differen
ce betw
een S
ervice q
uality
and C
usto
mer satisfactio
n
percep
tions w
ith resp
ect to all th
e five d
imen
sions. T
his in
dicates th
e fact that serv
ice quality
and cu
stom
er
satisfaction are in
dep
enden
t param
eters, and if th
e custo
mers p
erceive th
at Serv
ice quality
is good en
ough it
cannot b
e conclu
ded
that th
e service p
rovid
er has ach
ieved
Custo
mer satisfactio
n.
In o
rder to
test the seco
nd h
ypoth
eses (H2 ), co
rrelations b
etween
service q
uality
and cu
stom
er satisfaction
with
respect to
the fiv
e dim
ensio
ns h
ave b
een co
mputed
. The resu
lts are tabulated
in T
able 5
.
Tab
le 5: C
orrelatio
n b
etween
service q
uality
and cu
stom
er satisfaction
*C
orrelatio
n is sig
nifican
t at the lev
el 0.0
1 ( 2
-tailed).
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
66.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
The reaso
nab
ly h
igh v
alues co
rrelations (0
.544 to
0.7
44) in
dicate stro
ng relatio
nsh
ips b
etween
Serv
ice
quality
and C
usto
mer satisfactio
n d
imen
sions. C
ross tab
ulatio
n p
roced
ure w
as emplo
yed
for fu
rther an
alysis o
f
service q
uality
and
satisfaction
. It facilitates measu
remen
t of th
e relation
ship
betw
een S
ervice q
uality
and
Custo
mer satisfactio
n.
The S
ervice q
uality
data (o
rigin
ally in
five-p
oin
t scale) has b
een co
llapsed
into
a three-p
oin
t ord
inal scale
(low
, med
ium
and h
igh). T
he cro
ss-tabulatio
n o
f the fiv
e dim
ensio
ns o
f study v
erses Custo
mer satisfactio
n are
giv
en in
Tab
les 6-1
0. T
he en
try in
each cell in
dicates th
e num
ber o
f responden
ts corresp
ondin
g to
a category
of
response an
d th
e valu
es in b
rackets are th
e corresp
ondin
g p
ercentag
es (of th
e total resp
onden
ts).
Tab
le 6: C
ore S
ervice q
uality
Vs C
usto
mer S
atisfaction
Tab
le 7: H
um
an elem
ent o
f Serv
ice quality
Vs C
usto
mer S
atisfaction
Tab
le 8: N
on h
um
an S
ervice q
uality
Vs C
usto
mer S
atisfaction
Tab
le 9: T
angib
les Serv
ice Quality
Vs C
usto
mer S
atisfaction
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
67
Tab
le 10: S
ocial E
lemen
t of S
ervice q
uality
Vs C
usto
mer S
atisfaction.
The cro
ss tabulatio
n resu
lts indicate th
at on th
e overall b
asis hig
hest p
ercent o
f responden
ts expressed
averag
e
satisfaction w
ith th
e services p
rovid
ed b
y In
suran
ce com
pan
ies. A m
ajority
of resp
onden
ts felt that th
ere is
med
ium
service q
uality
in th
e insu
rance co
mpan
ies. It is also o
bserv
ed th
at increase in
service q
uality
from
med
ium
to h
igh resu
lted in
less num
ber o
f custo
mer ex
pressed
as hig
h satisfactio
n lev
el.
In o
rder to
find ag
reemen
t and d
isagreem
ent ab
out th
is opin
ion, w
e hav
e consid
ered:
$ p
oor cu
stom
er satisfaction as a lo
w lev
el of satisfactio
n;
& b
elow
averag
e, averag
e, above av
erage w
ere med
ium
satisfaction; an
d
' ex
cellent satisfactio
n as h
igh satisfactio
n.
For co
mplete ag
reemen
t, we h
ave co
nsid
ered lo
w-lo
w, m
ediu
m–m
ediu
m, an
d h
igh-h
igh serv
ice quality
and cu
stom
er satisfaction v
alues. T
he resu
lts of cro
ss-tabulatio
n p
rovid
e valu
able in
form
ation o
n th
e deg
ree of
com
plete ag
reemen
t and co
mplete d
isagreem
ent. T
he d
egree o
f ‘com
plete ag
reemen
t’ and ‘co
mplete d
isagreem
ent’
with
respect to
the p
erceptio
ns o
n S
ervice q
uality
and C
usto
mer satisfactio
n d
imen
sions are sh
ow
n in
Tab
le 11.
Tab
le 11: D
egree o
f com
plete ag
reemen
t and co
mplete d
isagreem
ent
It can b
e observ
ed fro
m T
able 1
1 th
at the v
alues fo
r com
plete ag
reemen
t betw
een S
ervice q
uality
and
Custo
mer satisfactio
n ran
ge fro
m 4
6.6
% to
68.3
% fo
r the fiv
e dim
ensio
ns. O
n th
e oth
er han
d, th
e valu
e for
com
plete d
isagreem
ent ran
ges fro
m 0
.5%
to 1
.6%
. Therefo
re, there ex
ists a dep
enden
cy b
etween
Serv
ice quality
and C
usto
mer satisfactio
n p
erceptio
ns. H
ow
ever, it is also
indicativ
e of th
e fact that an
increase S
ervice q
uality
need
not lead
to an
increase in
custo
mer satisfactio
n.
Con
clusio
n
Sin
ce last two
decad
es, particu
larly after g
lob
alization
, there h
ave b
een sco
res of research
articles on
Serv
ice quality. E
qually
good n
um
ber o
f articles is also p
resent o
n C
usto
mer satisfactio
n. In
the p
resent g
lobal
scenario
a need
has b
een id
entified
to stu
dy th
e relationsh
ip b
etween
these tw
o field
s of research
interest o
win
g
to th
e gro
win
g aw
areness th
at Serv
ice quality
alone h
as failed in
achiev
ing C
usto
mer satisfactio
n. It is in
this
contex
t the p
resent research
has m
ade a co
ntrib
utio
n.
The resu
lts of th
is research in
dicate th
at there is a sig
nifican
t differen
ce in S
ervice q
uality
and C
usto
mer
satisfaction p
erceptio
ns in
Gen
eral Insu
rance In
dustry. T
he tw
o p
arameters are in
deed
differen
t which
mean
s
that it b
ecom
es necessary
for th
e service p
rovid
ers to v
iew th
e two sep
arately. In fact, C
usto
mer satisfactio
n n
ot
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
68.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
only
dep
ends u
pon S
ervice q
uality
but also
dep
ends u
pon sev
eral oth
er variab
les. Therefo
re, quality
impro
vem
ent
initiativ
es by th
e man
agem
ent in
service in
dustry
should
not ju
st focu
s on im
pro
vin
g S
ervice q
uality
but also
focu
s on C
usto
mer satisfactio
n v
ariables w
ith a h
olistic ap
pro
ach. T
his w
ould
open
up th
e study o
f oth
er variab
les
which
would
influ
ence C
usto
mer satisfactio
n w
hich
may
inclu
de: w
ord
of m
outh
com
municatio
n, p
ast experien
ce,
perso
nal n
eeds o
n serv
ice quality
etc.
Ev
en th
ou
gh
the co
nclu
sion
arrived
thro
ug
h th
is research is p
urely
based
on
the su
rvey
con
du
cted in
Gen
eral Insu
rance In
du
stry, it can b
e gen
eralized to
a great ex
tent, as in
the p
resent w
orld
of u
ncertain
ty,
insu
rance h
as beco
me a h
ighly
service in
tensiv
e sector an
d all th
e five d
imen
sions o
f study p
lay a v
ery sig
nifican
t
role in
the su
ccess of th
is service in
dustry.
Referen
ces
Berry, L
.L. (1
980),” S
ervices M
arketin
g Is D
ifferent,” B
usin
ess, Vol. 3
0 M
ay-Ju
ne, p
p.2
4-2
8.
Bitn
er, M.J. an
d H
ub
ert, AR
. (19
94
), “En
cou
nter satisfactio
n v
ersus o
verall satisfactio
n v
ersus q
uality
: the
custo
mer’s v
oice”, in
Rust, R
.T. a
nd O
liver, R.L
. (Eds), S
ervice Quality: N
ew D
irections in
Theo
ry and P
ractice,
Sag
e Publicatio
ns, L
ondon, p
p. 7
2-9
4.
Buttle, F
. (1996), “S
ER
VQ
UA
L: rev
iew, critiq
ue, research
agen
da”, E
uro
pean
Journ
al o
f Marketin
g, V
oL
30,
pp. 8
-32.
Cro
nin
, J.J. and T
aylo
r, S.A
(1992), “M
easurin
g serv
ice quality
: a re-exam
inatio
n an
d ex
tensio
n”, Jo
urn
al o
f
Marketin
g, V
oL
56, p
p. 5
5-6
8.
Cro
sby, L
.A an
d S
tephen
s, N. (1
987), “E
ffects of relatio
nsh
ip m
arketin
g o
n satisfactio
n, reten
tion, an
d p
rices in
the life in
suran
ce industry
”, Journ
al o
f Marketin
g R
esearch
, Vol. 2
4, p
p. 4
04-1
1.
Gro
nro
os, C
. (1984), “A
service q
uality
model an
d its m
arketin
g im
plicatio
ns”, E
uro
pea
n Jo
urn
al o
f Marketin
g,
Vol. 1
8, N
o.4
, pp. 3
6-4
4.
Oliv
a, T.A
., Oliv
er, R.L
. and M
acMillan
, I.E. (1
992), “A
catastrophe m
odel fo
r dev
elopin
g serv
ice satisfaction
strategies”,
Journ
al o
f Marketin
g, V
ol. 5
6, p
p. 8
3-9
5.
Oliv
er, R.L
. and S
wan
, J.E. (1
989), “C
onsu
mer p
erceptio
ns o
f interp
ersonal eq
uity
and satisfactio
n in
transactio
ns:
a field su
rvey
appro
ach”, Jo
urn
al o
f Marketin
g, V
ol. 5
3, p
p. 2
1-3
5.
Parasu
raman
, A, Z
eitham
l, V.A
and
Berry, L
.L. (1
98
8), “S
ER
VQ
UA
L: a m
ultip
le-item scale fo
r measu
ring
consu
mer p
erceptio
ns o
f service q
uality
”, Journ
al o
f Reta
iling
, Sprin
g, p
p. 1
2-4
0.
Shem
well, D
.J., Yav
as, U. an
d B
ilgin
, Z. (1
998), “C
usto
mer-serv
ice pro
vid
er relationsh
ips: an
empirical test o
f
a model o
f service q
uality, satisfactio
n an
d relatio
nsh
ip o
riented
outco
me,” In
ternatio
nal Jo
urn
al o
f Service
Industry M
anagem
ent, V
ol. 9
, No. 2
, pp.1
55-6
8.
Staffo
rd, M
.R. &
Wells, B
.P. (1996), “T
he effect o
f dem
ograp
hic v
ariables o
n p
erceived
claims serv
ice quality,”
Journ
al o
f Insu
rance Issu
es, Vol.1
4, N
o.2
, pp.1
63-8
2.
Suresh
chan
dar, G
.S., R
ajendran
, e. and K
amalan
abhan
, T.J. (2
001), “C
usto
mer p
erceptio
ns o
f service q
uality
- a
critique”,
Tota
l Quality M
anagem
ent, V
ol. 1
2, p
p. 111
-24.
Wells, B
. P. and S
tafford
M.R
., (1995), “S
ervice Q
uality
in th
e Insu
rance In
dustry, C
onsu
mer P
erceptio
ns V
erses
Reg
ulato
ry P
erceptio
ns” Jo
urn
al o
f Insu
rance R
egula
tion, V
ol.1
3, N
o.4
, pp.4
62-4
77.
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
69
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
70.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Appen
dix
I: Cu
stom
er percep
tion
s of S
ervice qu
ality M
etric
Key
: 1=
Very
poor, 2
= P
oor, 3
= A
verag
e, 4 =
Good, an
d 5
= V
ery G
ood
1. C
ore service o
r Fea
tures th
at a
re offered
in a
service
1.
Pro
vid
ing th
e relevan
t guid
ance w
hile tak
ing th
e correct in
suran
ce policy
tow
ards an
y asset b
y th
e Policy
underw
riters
. ( i.e. Field
dev
elopm
ent o
fficer / Insu
rance co
mpan
y M
anag
ers )
2.
Em
plo
yees o
f Gen
eral Insu
rance C
om
pan
y h
ave su
fficient su
bject k
now
ledge to
deliv
er the serv
ice durin
g p
olicy
underw
riting an
d d
urin
g claim
s pro
cessing.
3.
Subject K
now
ledge, S
ervices th
at is pro
vid
ed b
y th
e Gen
eral Insu
rance S
urv
eyors’ d
urin
g claim
s pro
cessing.
4.
Officials o
f Insu
rance C
om
pan
y are ab
le to cater to
your sp
ecific info
rmatio
n o
n a reg
ular b
asis thro
ugh p
ost, telep
hone
or th
rough e-m
ail
5.
Availab
ility o
f differen
t services in
every
bran
ch / d
epartm
ent o
f the G
eneral In
suran
ce Com
pan
y.
6.
Conven
ient o
peratin
g h
ours an
d d
ays (e.g
. work
ing o
n S
aturd
ays an
d S
unday
s, exten
ded
service h
ours d
urin
g ev
enin
gs,
week
day
s, etc).
2.
Hum
an elem
ent o
f service delivery
1.
Pro
vid
ing serv
ices as pro
mised
.
2.
Effectiv
eness o
f the in
suran
ce com
pan
y em
plo
yees’ sk
ills and ab
ility fo
r respondin
g w
hen
ever a
critical incid
ent tak
es place (i.e. w
hen
a pro
blem
/ claim arise).
3.
When
ever a p
roblem
arises, the d
egree to
which
the in
suran
ce com
pan
y su
cceeds in
brin
gin
g th
e conditio
n b
ack to
norm
alcy b
y satisfy
ing th
e custo
mer.
4.
Pro
vid
ing ap
pro
priate serv
ices at the first m
eeting itself.
5.
Pro
vid
ing serv
ices like p
olicy
issue, claim
settlemen
t etc. as per th
e pro
mised
sched
ule.
6.
Apprisin
g th
e custo
mers o
f the n
ature an
d sch
edule o
f services av
ailable in
the G
eneral In
suran
ce Com
pan
y.
7.
Willin
gness to
help
custo
mers an
d th
e readin
ess to resp
ond to
custo
mers’ req
uests.
8.
Exten
t to w
hich
the feed
back
from
custo
mers are u
sed to
impro
ve serv
ice standard
s.
9.
Reg
ularly
appraisin
g th
e custo
mers ab
out in
form
ation o
n serv
ice quality
and actu
al service p
erform
ance v
ersus set
targets in
the o
rgan
ization.
10.
Em
plo
yees w
ho in
still confid
ence in
custo
mers b
y ap
pro
priate b
ehav
ior.
11.
Mak
ing cu
stom
ers feel safe and secu
re in th
eir transactio
ns.
12
.E
mp
loy
ees wh
o are co
nsisten
tly p
leasing
and
cou
rteou
s.
13
.E
mp
loy
ees wh
o h
ave th
e kn
ow
ledg
e and
com
peten
ce to an
swer cu
stom
ers’ specific q
ueries an
d req
uests.
14
.E
ffectiven
ess of cu
stom
er griev
ance h
and
ling
pro
cedu
res and
pro
cesses.
15
.G
ivin
g carin
g an
d in
div
idu
al attentio
n to
custo
mers b
y h
avin
g th
e custo
mers’ b
est interests in
min
d.
16
.E
mp
loy
ees wh
o u
nd
erstand
the n
eeds o
f their cu
stom
ers.
3.
System
atiza
tion o
f service delivery: n
on-h
um
an elem
ent o
r The p
rocess , p
roced
ures, system
s
and T
echnolo
gy th
at w
ould
make a
service contin
uous o
ne.
1.
Hav
ing
a hig
hly
stand
ardized
and
simp
lified d
elivery
pro
cess so th
at services are d
elivered
with
ou
t any
hassles o
r excessiv
e bu
reaucracy
2.
Hav
ing
a hig
hly
simp
lified an
d stru
ctured
deliv
ery p
rocess so
that th
e time tak
en fo
r service d
elivery
is
min
imu
m.
3.
Enhan
cemen
t of tech
nolo
gical cap
ability
(e.g. co
mputerizatio
n, n
etwork
ing o
f operatio
ns, etc.) to
serve cu
stom
ers
mo
re effectively.
4.
Deg
ree to w
hich
the p
roced
ures an
d p
rocesses are fo
ol - p
roo
f.
5.
Ad
equ
ate perso
nn
el are availab
le for cu
stom
er service.
6.
Ad
equ
ate and
necessary
facilities for g
oo
d cu
stom
er service.
4.
Tangib
les of service: M
an m
ade p
hysica
l enviro
nm
ent
1.
Th
e amb
ient co
nd
ition
s such
as temp
erature, v
entilatio
n, n
oise an
d o
do
ur p
revailin
g in
the G
eneral In
suran
ce
Co
mp
any..
2.
Ex
tent o
f the p
hy
sical layo
ut o
f equ
ipm
ent an
d o
ther fu
rnish
ing
s bein
g co
mfo
rtable fo
r custo
mers to
interact
with
emp
loy
ees.
3.
Hav
ing
ho
usek
eepin
g as a p
riority
and
of th
e hig
hest o
rder in
the o
rgan
ization
4.
Visu
ally ap
pealin
g sig
ns, sy
mb
ols, ad
vertisem
ent b
oard
s, pam
ph
lets and
oth
er artifacts in th
e Gen
eral Insu
rance
Co
mp
any.
5.
Em
plo
yees w
ho
hav
e a neat an
d p
rofessio
nal ap
pearan
ce.
6.
Visu
ally ap
pealin
g serv
ice materials su
ch as p
olicy
cop
y an
d o
ther d
ocu
men
ts.
5.
Socia
l responsib
ility
1.
‘Serv
ice transcen
den
ce’ mak
ing
custo
mers realize th
eir un
exp
ressed n
eeds b
y g
ivin
g m
ore th
an w
hat th
ey ex
pect.
2.
Giv
ing
qu
ality serv
ice at a reason
able co
st.
3.
Hav
ing
bran
ch lo
cation
s in m
ost p
laces con
ven
ient to
all section
s of th
e society
(e.g. v
illages, d
ow
nto
wn
areas,
etc.)
4.
A so
cial respo
nsib
ility ch
aracterized b
y d
eservin
g serv
ice and
pro
du
ct to p
eop
le belo
ng
ing
to all strata o
f the
society.
5.
A sen
se of p
ub
lic respo
nsib
ility am
on
g em
plo
yees (in
terms o
f bein
g p
un
ctual, reg
ular, sin
cere and
with
ou
t
go
ing
on
strike).
6.
Ex
tent to
wh
ich th
e insu
rance co
mp
any
pro
mo
tes corp
orate b
usin
ess ethics th
rou
gh
its services.
Serv
ice Qu
ality an
d C
usto
mer S
atisfaction
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
71
Wh
y sh
ou
ld w
e Stu
dy H
um
an
Reso
urces M
an
agem
ent?
S. R
. Tulasi *
Ab
stract
The au
thor faced
a query
while teach
ing “H
um
an R
esources M
anag
emen
t” as to w
hy th
is subject n
eeds to
be stu
died
. The co
mm
on p
erceptio
n is th
at this fu
nctio
n is least resp
ected am
ongst all in
an O
rgan
ization. T
his
poser m
ade th
e auth
or to
thin
k ab
out th
e evolu
tion o
f HR
over th
e decad
es and h
ow
it failed to
move w
ith th
e
chan
gin
g tim
es. In fact H
R is n
ow
at crossro
ads an
d g
ropin
g fo
r directio
n.
The au
thor traced
the ev
olu
tion o
f HR
from
its “Perso
nnel” ro
ots to
the cu
rrent d
ay “ B
usin
ess Partn
er “
scenario
and ex
plain
ed th
e parad
oxical co
nflicts in
the H
R ro
le “expected
” by o
ther fu
nctio
nal co
lleagues an
d
the “d
esired” ro
le by H
R itself. T
he au
thor is co
nvin
ced th
at HR
has a m
eanin
gfu
l and p
ractical role to
perfo
rm
and it alo
ne is eq
uip
ped
to d
o so
. He h
ad en
unciated
and elab
orated
this u
niq
ue ro
le for H
R in
the article.
Tow
ards th
e conclu
sion, th
e auth
or ex
plain
ed th
e qualities, th
e studen
ts of H
RM
will n
eed to
equip
them
selves
with
, in o
rder to
succeed
in th
e “HR
” pro
fession.
Intro
du
ction
“Why sh
ould
we stu
dy th
e Hum
an R
esources M
anag
emen
t?”. This q
uestio
n to
ok m
e by su
rprise w
hen
I
had
com
pleted
my first m
odule w
hile teach
ing “H
um
an R
esources M
anag
emen
t” and p
rodded
my n
ew stu
den
ts
at Vig
nan
a Jyoth
i to ask
questio
ns an
d seek
clarifications. It sh
ould
n’t h
ave.
When
we o
pen
the d
aily ed
ition o
f “Eco
nom
ic Tim
es”, it is most lik
ely th
at we co
me acro
ss a bone tick
ling
jok
e on
Hu
man
Reso
urces fu
nctio
n in
its centre p
ages. M
ore o
ften th
an n
ot, it co
uld
equ
ally b
e a tho
ug
ht
pro
vokin
g in
sight in
to cu
rrent m
anag
emen
t affairs which
is besid
es the p
oin
t.
There is lik
ewise, n
o d
earth o
f chain
mails o
n in
ternet in
ridicu
ling th
e min
dless ad
heren
ce to ru
les and
practices b
y H
R p
ractitioners in
Industry.
And th
e most v
isible im
pressio
n o
f a HR
execu
tive in
the m
inds o
f buddin
g em
plo
yees is th
at of a fello
w
with
a cynical sm
ile on h
is lips w
hile h
andin
g o
ver th
e pin
k slip
s.
Why sh
ould
we th
erefore stu
dy th
is subject w
hich
is but a b
utt o
f ridicu
le !
I hav
e tried, in
the in
terven
ing fifteen
min
utes b
efore th
e nex
t session co
mm
enced
, to ex
plain
the p
ositiv
e
aspects o
f “Hum
an R
esources M
anag
emen
t” and d
ispel th
e impressio
n th
at HR
is an ev
il force o
ut to
ruin
an
Org
anizatio
n. B
ut th
is query
from
a young m
anag
emen
t studen
t did
distu
rb m
e and sev
eral thoughts cro
ssed m
y
min
d w
hich
found ex
pressio
n su
bseq
uen
tly in
this article.
Ob
jectives o
f Hu
man
Reso
urces M
an
agem
ent
What cam
e instan
tly to
my m
ind w
as the p
oser b
y D
ave U
lrich, “ S
hould
we d
o aw
ay w
ith H
R !” in
his
semin
al book “H
R C
ham
pio
ns” an
d h
is observ
ation th
at it is a silly q
uestio
n an
d a sen
seless deb
ate. He g
oes o
n
to ad
d –
“Of co
urse w
e should
do aw
ay w
ith H
R if it fails to
add v
alue”. H
e furth
er suggests th
at a more u
seful
questio
n to
ask w
ould
be “ H
ow
can H
R create v
alue an
d d
eliver resu
lts !”Let u
s exam
ine th
e purp
ose an
d
relevan
ce of H
R an
d h
ow
it can ad
d v
alue to
an O
rgan
ization. S
ubseq
uen
tly w
e will try
and ex
plo
re the ap
pro
priate
com
peten
cies the stu
den
ts of th
is course w
ould
need
to acq
uire if th
ey w
ere desiro
us to
mak
e HR
as a career.
*V
ice Presid
ent ( H
R ) –
Retired
, ITC
Lim
ited, P
aperb
oard
s & S
pecialty
Pap
ers Div
ision
, Hy
derab
ad, E
mail –
srtulasi@
yah
oo
.com
72.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Wh
at d
o H
R p
eop
le norm
ally
do ?
Staffin
g, co
mpen
sation, b
enefits, co
mm
unicatio
n, train
ing an
d d
evelo
pm
ent, o
rgan
ization d
esign, so
on
and so
forth
. HR
peo
ple co
me to
their jo
bs w
ith a set o
f skills th
at enab
le them
perfo
rm th
ese activities. M
any
man
agem
ents ex
pect th
em to
focu
s on th
ese adm
inistrativ
e and tran
sactional activ
ities and H
R w
ork
is thus
pattern
ed in
bureau
cratic way
s. We h
ave th
erefore seen
that th
e HR
modules b
eing tau
ght at B
usin
ess schools
focu
s on th
e “science” o
f Hum
an R
esources fu
nctio
n co
upled
with
info
rmatio
n o
n statu
tory
and o
ther reg
ulato
ry
system
s so as to
understan
d th
e “Industrial relatio
ns” asp
ect of H
R.
These m
odules, are n
o d
oubt, im
portan
t but a g
reater emphasis p
erhap
s need
s to b
e accord
ed to
the “art”
of H
R w
hich
is closely
link
ed “h
um
an relatio
ns” an
d o
f cou
rse the strateg
ic HR
. Ho
w d
id th
e fun
ction
of
“Hum
an R
esources” ev
olv
e ! HR
functio
n to
day
is the p
roduct o
f its past. Its h
istory
starts in th
e late nin
eteenth
centu
ry w
ith a “w
elfare” role w
hich
was esp
ecially co
nnected
with
the p
rotectio
n o
f the ex
plo
ited lab
our seg
men
t.
Em
plo
ym
ent o
f “Welfare o
fficers” was fo
und to
be essen
tial both
from
legal req
uirem
ents an
d m
oral o
blig
ation
to p
rotect an
d im
pro
ve th
e lot o
f the em
plo
yees. In
this ro
le, HR
( then
know
n as “P
ersonnel” ) co
uld
just aid
the
pro
ductio
n b
y lim
iting ab
sence o
f emplo
yees, d
eal with
their g
rievan
ces and p
unish
the u
nru
ly b
ehav
ior.
Post w
orld
war, trad
e unio
n m
ovem
ents b
ecame a g
lobal p
hen
om
enon an
d lo
ng term
agreem
ents to
resolv
e
the em
plo
ym
ent related
issues su
ch as jo
b d
escriptio
ns, w
ork
hours, fair w
ages etc assu
med
importan
ce in
Industrial relatio
ns field
. Perso
nnel d
epartm
ents b
ecame d
om
inated
by th
ose w
ith sk
ills and ex
pertise to
carry
out su
ch activ
ities. The to
ugh m
inded
indiv
iduals th
at thriv
ed in
this en
viro
nm
ent b
enefited
from
the p
ow
er of
trade u
nio
ns ; it ju
stified th
eir importan
ce. Sev
eral Man
agers in
line fu
nctio
ns d
etested th
e industrial relatio
ns
wo
rk an
d n
eeded
the su
pp
ort fro
m th
eir “Perso
nn
el” colleag
ues if o
nly
to act as referees b
etween
warrin
g
parties.
Anoth
er contrib
utio
n o
f the P
ersonnel fu
nctio
n w
as that o
f pro
vid
ing an
efficient ad
min
istrative serv
ice
with
in o
f course clearly
defin
ed ru
les and p
roced
ures. T
his ro
le may
hav
e help
ed to
boost th
e self servin
g eg
o o
f
the H
R p
rofessio
nals as p
ow
er is just n
ot p
erceived
but d
emonstrated
in an
adm
inistrativ
e role.
Recru
itmen
t was a h
igh v
olu
me activ
ity an
d in
ductio
n/ jo
b related
trainin
g w
ere linked
tasks. A
noth
er
dim
ensio
n w
hich
was p
arallel with
these d
evelo
pm
ents w
as the g
row
th in
legal reg
ulatio
ns an
d co
mplian
ce
which
beau
tifully
fitted w
ith th
e auth
oritativ
e role th
at came to
be p
ersonified
by a P
ersonnel m
anag
er. In
short, a “p
rescriptiv
e” appro
ach to
peo
ple m
anag
emen
t.
It was a tim
e of co
mplian
ce to ru
les and reg
ulatio
ns. N
o w
onder, In
dustrial relatio
ns an
d ad
min
istrative
com
plian
ce represen
ted th
e essence o
f Peo
ple m
anag
emen
t durin
g th
is era.The o
bitu
ary o
f the H
R fu
nctio
n w
as
written
man
y a tim
e since P
eter Dru
cker fam
ously
questio
ned
the ro
le, the co
ntrib
utio
n an
d th
e futu
re existen
ce
of th
ese “Perso
nnel” d
epartm
ents 5
0 y
ears ago.
Imp
act o
f Lib
eraliza
tion
an
d G
lob
aliza
tion
Glo
balizatio
n d
om
inated
the co
mpetitiv
e horizo
n, w
orld
over in
the sev
entees o
f the last cen
tury. S
everal
glo
bal ev
ents su
ch as G
AT
T ag
reemen
t bro
ke th
e hith
er to b
uilt artificial trad
e barriers an
d w
orld
shru
nk in
to
a glo
bal v
illage. G
lobalised
, inten
se com
petitio
n h
as push
ed O
rgan
izations to
be b
oth
effective an
d efficien
t.
Priv
ate sector co
mpan
ies hav
e had
to resp
ond to
stock
mark
et dem
ands fo
r a quick
er return
on in
vestm
ents.
Those in
the p
ublic secto
r hav
e had
to co
pe w
ith sim
ilarly im
patien
t Govern
men
t requirem
ents fo
r cost red
uctio
n
and im
pro
ved
efficiencies. S
udden
ly all th
e org
anizatio
ns w
ere forced
to fo
cus o
n cap
ability
build
ing in
ord
er
to su
rviv
e in th
is bord
er less world
.
Firm
s hav
e started ask
ing th
emselv
es –
What cap
abilities ex
ist with
in th
e firm ?
What cap
abilities are req
uired
for th
e futu
re success o
f the firm
?
Wh
y sh
ou
ld w
e Stu
dy
Hu
man
Reso
urces M
anag
emen
t?
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
73
How
can w
e align cap
abilities w
ith B
usin
ess Strateg
ies ?
How
can w
e desig
n H
R p
ractices to create th
e need
ed cap
abilities ?
The tran
sform
ation o
f a “Perso
nnel” fu
nctio
n to
a “Hum
an R
esources” fu
nctio
n w
as so su
dden
but so
smo
oth
that it ap
peared
to h
ave tak
en p
lace almo
st ov
ernig
ht. S
everal n
ew H
R p
hrases su
ch as C
han
ge
Man
agem
ent, T
ransfo
rmatio
n, R
eeng
ineerin
g, C
ultu
re chan
ge, R
e inv
entio
n, F
lexib
ility, Ag
ility cam
e in to
circulatio
n. H
R p
rofessio
nal fo
und a n
ew ro
le in th
at he w
as expected
to ch
ampio
n th
is chan
ge p
rocess.
A D
ifficult T
ran
sform
atio
n In
deed
!
HR
functio
naries w
ere told
to fo
llow
Dav
e Ulrich
’s supposed
mag
ical recipe o
f partn
ering w
ith th
e Busin
ess
to ach
ieve b
oard
room
presen
ce and su
ccess.HR
had
to fin
d a n
eat balan
ce betw
een its still v
aluab
le day
to d
ay
operatio
nal ro
le and th
e ‘big
pictu
re’ transfo
rmatio
nal in
itiatives an
d th
e two in
reality can
’t be n
eatly seg
men
ted.
The d
ifficulty
seemed
to stem
from
an u
ncertain
ity o
ver w
hat ro
le it should
play.
HR
M is n
ow
pro
ved
to b
e not a sin
gle, u
nified
concep
t but a v
aried ap
pro
ach to
peo
ple m
anag
emen
t.
There is a w
ide v
ariety o
f concep
tions o
f HR
’s role. It m
ay b
e a perm
anen
t adviso
r to th
e line m
anag
emen
t. It
may
be a g
uard
ian o
f policies an
d p
ractices. It may
be a lead
er creating ch
ange o
r a represen
tative o
f emplo
yees’
view
s.These ro
les are partly
driv
en b
y a ran
ge o
f expectatio
ns fro
m a v
ariety o
f stake h
old
ers – sen
ior m
anag
emen
t,
line m
anag
ers, emplo
yees –
who in
evitab
ly try
to in
fluen
ce what th
e functio
n sh
ould
be d
oin
g an
d h
ow
it should
be d
oin
g it.
Post 9
0’s, as a resu
lt of g
lobalizatio
n, ch
angin
g in
dustrial scen
ario led
to a stead
y d
ecline in
trade u
nio
ns’
importan
ce and th
e long term
agreem
ents w
ere no lo
nger th
e ‘feared d
ragons’ w
hich
how
ever sh
ould
not b
e
constru
ed as red
undan
cy o
f IR asp
ect of th
e HR
functio
n. In
creasingly
line m
anag
ers were en
trusted
with
the
job o
f man
agin
g p
eople. L
ong term
agreem
ents b
ecame th
e prim
e responsib
ility o
f line m
anag
emen
t in m
any
org
anizatio
ns, w
ith facilitatio
n, o
f course fro
m th
e HR
functio
n w
ho w
ere now
expected
to p
erform
strategic
roles.H
R critics w
ere concern
ed th
at “Perso
nnel” m
anag
ers who w
ere “servan
ts of p
ow
er” are ill equip
ped
and
ill positio
ned
to d
on th
is new
role.
Ch
allen
ges in
this T
ran
sition
!
Mism
atched
expectatio
ns o
ccur w
hen
percep
tions o
f line m
anag
ers and H
R p
rofessio
nals
diffe
r. Th
e
balan
ce betw
een w
hat th
e line m
anag
er should
do an
d w
hat P
ersonnel sh
ould
do is as o
ld as th
e functio
n itself.
The n
ew ro
le which
HR
had
now
donned
is in fact to
ugher as it req
uired
HR
to w
ork
as a facilitator fo
r the
line cu
stom
er as regard
s the issu
es related w
ith u
nio
nized
emplo
yee categ
ory
and fo
cus o
n cap
ability
build
ing
at mid
dle an
d sen
ior m
anag
emen
t levels.
Hy
po
thesis
Old
style P
ersonnel to
transfo
rm in
to n
ew w
ave H
R req
uired
–
a tactician to
beco
me a strateg
ist,
a fire fighter to
beco
me risk
man
ager,
a police o
fficer to b
ecom
e an ad
viso
r and
a contro
ller to b
ecom
e a facilitator.
In reality, th
is adju
stmen
t is not as straig
ht fo
rward
as it mig
ht seem
and certain
ly n
ot as b
lack an
d w
hite. A
n
area of d
ebate, an
d p
erhap
s more co
nten
tious o
r at least not so
clear cut, is th
e deg
ree of o
peratio
nal su
pport H
R
Wh
y sh
ou
ld w
e Stu
dy
Hu
man
Reso
urces M
anag
emen
t?
74.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
giv
es to lin
e man
agem
ent. H
R’s ex
pertise is really
in its tech
nical p
rofessio
nalism
and th
is is what lin
e man
agers
wan
t from
HR
. Th
ey w
ou
ld n
eed p
rofessio
nal sk
ills in recru
itmen
t, emp
loy
ee relation
s and
trainin
g &
dev
elopm
ent. S
ure, th
ey w
elcom
e HR
to b
ecom
e busin
ess savy b
ut th
ey d
o n
ot w
ant H
R so
much
in th
e clouds
that it can
’t contrib
ute to
the d
ay to
day
operatio
nal b
usin
ess. But H
R p
erceives th
at such
an ap
pro
ach d
raws H
R
back
in to
the reactiv
e, firefightin
g ro
le it has b
een try
ing to
escape fro
m !
Em
plo
yees are n
ot m
achin
es. They
hav
e min
ds o
f their o
wn. T
hey
can leav
e the co
mpan
y, go o
n strik
e,
speed
up o
r slow
dow
n p
roductio
n, d
ecide to
stay in
bed
a day
longer after illn
ess, so o
n an
d so
forth
. They
need
to b
e man
aged
differen
tly. HR
has th
e skill set to
understan
d w
hat m
otiv
ates and d
emotiv
ates emplo
yees. B
ut in
its desire to
get clo
ser to “b
usin
ess” and to
shed
the im
age o
f a “welfare” fu
nctio
n, H
R h
as put m
ore d
istance
betw
een itself an
d p
eople. H
R h
ad n
ot learn
t to p
lay m
ultip
le roles ex
pected
of th
em in
the ch
anged
scenario
.
And n
ot all lin
e man
agers accep
ted th
at peo
ple m
anag
emen
t was n
ow
an im
portan
t com
ponen
t of th
eir job.
They
wan
ted to
concen
trate on th
e technical asp
ects of th
eir work
and p
eople m
anag
emen
t was o
ften reg
arded
as a burd
en. S
om
e of th
e difficu
lties stemm
ed fro
m th
e effects of d
ow
nsizin
g w
hich
resulted
in larg
e span
of
contro
l. Lin
e man
agers m
ay h
ave also
experien
ced lack
of sk
ills to p
erform
the p
eople m
anag
emen
t tasks ev
en
if they
had
time at th
eir disp
osal. T
hus co
mbin
ation o
f disp
ositio
n, sk
ills ( or lack
of ), tim
e and m
anag
emen
t
pressu
re contin
ue to
inhib
it line m
anag
ers from
takin
g o
n th
e tasks fro
m H
R an
d lim
it their p
articipatio
n in
HR
policy
mak
ing.
We h
ave d
iscussed
these issu
es in lig
ht o
f the ch
allenges in
the tran
sition. It is h
ow
ever n
ot to
be co
nstru
ed
that th
e move h
ad failed
and b
een g
iven
up. It is tru
e that L
ine M
anag
ers are mak
ing m
ore an
d m
ore p
eople
decisio
ns w
hile th
e HR
staff is beco
min
g m
ore in
volv
ed in
bro
ader o
rgan
izational issu
es albeit at a p
ace slow
er
than
required
.
As reg
ards b
usin
ess strategic p
artnersh
ip is co
ncern
ed, th
ere is consid
erable d
istance to
be co
vered
for H
R
to b
ecom
e a strategic p
artner at all lev
els. To d
o so
, HR
need
s to b
uild
its ow
n in
ternal co
mpeten
cies to d
eal with
org
anizatio
nal issu
es, edu
cate itself on
the v
ision
and
missio
n o
f the O
rgan
ization
, and
find
way
s to o
ffer
creative an
d in
novativ
e solu
tions to
Org
anizatio
n w
ide issu
es.
Meth
od
olo
gy
What is th
e valu
e HR
adds to
an O
rgan
ization !
HR
practices w
ill need
to b
e integ
rated an
d fo
cused
on v
alue ad
ded
agen
das su
ch as in
tangib
les, custo
mer
connectio
n, o
rgan
ization cap
abilities, an
d in
div
idual ab
ilities. HR
transfo
rmatio
n m
ust b
e more th
an rh
etoric; it
must sh
ape b
ehav
ior an
d create an
d en
sure stak
ehold
er valu
e. Sen
din
g o
ne o
r two H
R p
rofessio
nals to
a semin
ar
does n
ot tran
sform
the H
R d
epartm
ent. O
ften, p
eople retu
rn fro
m train
ing w
ith g
reat ideas b
ut are g
reeted w
ith
little opportu
nity
to ap
ply
them
. Tran
sform
ation req
uires w
hole n
ew ag
endas, th
oughts, an
d p
rocesses acro
ss
the en
tire dep
artmen
t, not ju
st on th
e part o
f a few in
div
iduals. F
inally, g
ainin
g cred
ibility
and accep
tance b
y
man
agem
ent o
r emplo
yees is n
ot tran
sform
ation. D
oin
g so
may
be a g
ood step
pin
g-sto
ne to
futu
re work
, but
real transfo
rmatio
n m
ust tu
rn rela
tion
ship
s into
results an
d also
create valu
e for cu
stom
ers, shareh
old
ers,
man
agers, an
d em
plo
yees.
Prem
ise of H
R V
alu
e
Sin
ce valu
e is defin
ed b
y th
e receiver, n
ot th
e giv
er, any v
alue p
ropositio
n b
egin
s with
a focu
s on receiv
ers,
not g
ivers. F
or H
R p
rofessio
nals, th
e valu
e prem
ise mean
s that rath
er than
imposin
g th
eir beliefs, g
oals, an
d
actions o
n o
thers, th
ey first n
eed to
be o
pen
to w
hat o
thers w
ant.T
his fu
ndam
ental p
rincip
le is too o
ften o
verlo
oked
.
Often
, HR
pro
fessionals h
ave b
eliefs, goals, an
d actio
ns th
at translate in
to th
ings th
at they
wan
t to h
ave th
em
hap
pen
in th
eir org
anizatio
n—
so th
ey g
o straig
ht fo
r their d
esired resu
lts, with
out p
ayin
g en
ough atten
tion to
the p
erspectiv
es of o
thers. In
fluen
ce with
impact o
ccurs w
hen
HR
pro
fessionals start w
ith th
e beliefs an
d g
oals
of th
e receivers.
Wh
y sh
ou
ld w
e stud
y H
um
an R
esou
rces Man
agem
ent?
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
75
$ W
ho are th
e key
stakeh
old
ers I must serv
e?
& W
hat are th
e goals an
d v
alues o
f the receiv
ing stak
ehold
ers?
' W
hat is im
portan
t to th
em? W
hat d
o th
ey w
ant?
When
these req
uirem
ents are fu
lly u
ndersto
od, th
en th
e HR
pro
fessional can
show
how
an in
vestm
ent in
an H
R
practice w
ill help
the stak
ehold
er gain
valu
e as defin
ed b
y th
at stakeh
old
er.
Resu
lts
To
an em
plo
yee w
orried
abo
ut g
etting
laid o
ff, HR
pro
fession
als sho
uld
dem
on
strate that b
eing
mo
re
pro
ductiv
e will h
elp th
e emplo
yee stay
emplo
yed
. To a lin
e man
ager w
orried
about reach
ing strateg
ic goals, H
R
pro
fessionals n
eed to
show
how
investm
ent in
HR
work
will h
elp d
eliver b
usin
ess results. W
ith cu
stom
ers, HR
pro
fessionals n
eed to
remem
ber th
at their in
terest in cu
stom
ers must create v
alue in
the p
roducts o
r services
custo
mers receiv
e. Fo
r shareh
old
ers wh
o are w
orried
abo
ut su
stained
return
s and
gro
wth
, HR
mu
st create
org
anizatio
ns th
at deliv
er results to
day
and in
tangib
les that g
ive o
wners co
nfid
ence th
at results w
ill be d
elivered
in th
e futu
re.
HR
pro
fessionals n
eed a p
erspectiv
e that is co
mpatib
le with
and d
istinct fro
m o
ther b
usin
ess persp
ectives.
That is, th
ey m
ust b
e able to
understan
d an
d v
alue th
e finan
ce and sales p
erspectiv
es, but th
ey m
ust also
add
their o
wn p
oin
t of v
iew. W
ithout su
ch a u
niq
ue an
d p
ow
erful p
erspectiv
e, they
are redundan
t and fail in
their
aspiratio
ns as fu
ll busin
ess contrib
uto
rs. For ex
ample, an
HR
persp
ective th
at is both
uniq
ue an
d p
ow
erful is
one th
at establish
es the lin
kag
es betw
een em
plo
yee co
mm
itmen
t, custo
mer attitu
des, an
d in
vesto
r return
s.
Th
is un
iqu
e view
dem
on
strates a po
werfu
l con
nectio
n b
etween
wh
at is carried o
ut b
y m
anag
ers and
emplo
yees in
side th
e firm an
d w
hat h
appen
s with
custo
mers an
d in
vesto
rs on th
e outsid
e.
With
a uniq
ue an
d p
ow
erful p
erspectiv
e of th
eir ow
n, H
R p
rofessio
nals w
ill see aspects o
f the b
usin
ess
enviro
nm
ent th
at go b
eyond w
hat o
ther b
usin
ess discip
lines b
ring an
d th
at add su
bstan
tially to
busin
ess.
Such
a uniq
ue p
erspectiv
e could
be d
evelo
ped
if HR
were to
address th
e follo
win
g q
uestio
ns:
$W
hat are th
e org
anizatio
nal cap
abilities th
at my co
mpan
y m
ust h
ave to
createp
rod
ucts a
nd
serv
ices th
at
result in
our cu
stom
ers’ takin
g m
oney
out o
f their w
allets and p
uttin
g it in
to o
urs in
stead o
f giv
ing it to
our
com
petito
rs?
&W
hat em
plo
yee ab
ilities do o
ur p
eople n
eed so
that th
ey can
understan
d an
d resp
ond to
short-term
and lo
ng-
term m
arket d
eman
ds?
'H
ow
do w
e invest in
HR
practices th
at deliv
er busin
ess results?
(H
ow
do w
e org
anize H
R activ
ities to d
eliver m
axim
um
valu
e?
When
HR
pro
fessionals resp
ond to
these q
uestio
ns, th
ey w
ill know
why o
thers w
ould
ben
efit by listen
ing
to th
em, b
ecause th
ey w
ill be d
eliverin
g real v
alue—
and th
ey w
ill know
what th
at valu
e is. When
HR
pro
fessionals
beg
in w
ith th
e receiver in
min
d, th
ey can
more q
uick
ly em
erge as fu
ll strategic co
ntrib
uto
rs; add g
reater valu
e
for k
ey stak
eho
lders (cu
stom
ers, inv
estors, lin
e man
agers, an
d em
plo
yees); en
han
ce bu
siness p
rod
uctiv
ity;
achiev
e measu
rable an
d v
aluab
le results; create su
stainab
le com
petitiv
e advan
tage; an
d h
ave m
ore fu
n in
their
careers.
Con
clusio
n
How
can H
R p
rofessio
nals d
evelo
p th
is uniq
ue p
erspectiv
e !
It would
be an
interestin
g p
ropositio
n if o
ne w
ere to arg
ue th
at hum
ans are n
ot th
e asset. Relatio
nsh
ips w
ith
hu
man
s are the tru
e asset, and
relation
ship
s cann
ot b
e con
trolled
bu
t neg
otiated
and
reneg
otiated
and
then
reneg
otiated
. Relatio
nsh
ips req
uire care, n
urtu
ring
, and
need
to b
e con
stantly
mo
nito
red h
ow
well b
eing
main
tained
. When
relationsh
ips are o
ptim
ized, th
e Org
anizatio
n ex
perien
ces “superio
r” beh
avio
rs as a result.
Wh
y sh
ou
ld w
e Stu
dy
Hu
man
Reso
urces M
anag
emen
t?
76.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
This m
ay b
e translated
into
loyalty, en
gag
emen
t, trust, an
d m
ore. S
uch
“ superio
r” beh
avio
rs translate in
to
impro
ved
teamw
ork
, alignm
ent to
ward
s the O
rgan
izational g
oals, h
elpin
g an
oth
er team m
ember w
hen
it’s not
part o
f the jo
b, an
d m
any m
ore.
Wh
o’s In
Ch
arg
e Of O
ptim
izing H
um
an
Rela
tion
ship
s?
It’s interestin
g to
note th
at, although th
ere is consid
erable su
pport fo
r the n
otio
n th
at relationsh
ips are an
org
anizatio
n’s tru
e asset, in m
ost co
mpan
ies, no o
ne d
epartm
ent, p
erson, o
r gro
up ten
ds to
be h
eld acco
untab
le
for th
e total stak
eho
lder relatio
nsh
ip strateg
y. Fin
ance is in
charg
e of relatio
nsh
ips w
ith sh
areho
lders an
d
poten
tial investo
rs; mark
eting an
d sales are in
charg
e of relatio
nsh
ips w
ith cu
stom
ers; line m
anag
ers and H
RM
are in ch
arge o
f relationsh
ips w
ith em
plo
yees; p
urch
asing an
d m
anufactu
ring are in
charg
e of relatio
nsh
ips w
ith
ven
dors, an
d th
e list goes o
n. B
ut n
o o
ne g
roup is in
charg
e of assu
ring th
at there is o
ne co
heren
t stakeh
old
er
strategy fo
r a busin
ess. Thus, th
e true asset –
hum
an relatio
nsh
ips –
is often
mism
anag
ed. H
RM
dep
artmen
t
could
be in
the p
erfect positio
n to
fill this v
oid
and tak
e on th
e role o
f RE
AL
hum
an relatio
nsh
ip strateg
y !
As th
e functio
n in
charg
e of lead
ership
and m
anag
emen
t dev
elopm
ent, H
RM
can im
pact th
e decisio
ns
leaders m
ake ab
out h
um
ans. T
his ab
ility to
man
age “h
um
an relatio
nsh
ips” is th
e key
to d
evelo
pm
ent o
f uniq
ue
HR
persp
ective in
an O
rgan
ization
. Relatio
nsh
ip m
anag
emen
t is an o
pp
ortu
nity
that can
be seized
by
HR
execu
tives w
ho are tru
ly strateg
ic and w
ho u
nderstan
d w
hat is n
eeded
for th
eir busin
esses to su
cceed to
day
and
remain
com
petitiv
e as the b
usin
ess landscap
e contin
ues to
evolv
e and ch
ange.
For a m
om
ent o
ne sh
ould
not co
nclu
de th
at HR
should
assum
e the ro
le of a su
per fu
nctio
n to
dictate
to
oth
er functio
ns as to
how
to co
nduct th
eir peo
ple relatio
nsh
ips. It is a lo
t subtler a ro
le that n
eeds m
aturity
to
perfo
rm. F
or th
e sake o
f clarity, let us say, H
R sh
ould
beco
me th
e eyes an
d ears o
f the O
rgan
ization an
d m
ore so
the C
EO
, as regard
s hum
an relatio
nsh
ips are co
ncern
ed an
d en
sure th
at suitab
le pro
active m
easures are tak
en
thro
ugh C
EO
and th
e functio
nal h
eads.
Reco
mm
end
atio
ns
What are th
e uniq
ue co
mpeten
cies that H
R P
rofessio
nals w
ill need
to acq
uire to
successfu
lly m
anag
e this
“Relatio
nsh
ip M
anag
emen
t” ! While m
anag
erial com
peten
cies such
as Custo
mer F
ocu
s, Pro
blem
Solv
ing an
d
decisio
n m
akin
g sk
ills, Presen
tation S
kills, In
tegrity, In
telligen
ce, Energ
y, Flex
ibility, V
ision, P
olitical A
waren
ess
are a must fo
r any su
ccessful fu
nctio
nary
in an
Org
anizatio
n, certain
Com
peten
cies as detailed
belo
w are a m
ust
for a H
R P
rofessio
nal in
ord
er to m
anag
e the ‘R
elationsh
ip M
anag
emen
t”Relatio
nsh
ip F
ocu
sed:
appro
achab
le;
relates easily to
div
erse gro
ups an
d in
div
iduals; b
uild
s trust an
d d
evelo
ps relatio
nsh
ips.
Resu
lt focu
sed: A
HR
Pro
fessional tru
ly b
elieves in
the ad
age “ H
ow
wonderfu
l any task
can b
e accom
plish
ed
if one w
ere not co
ncern
ed ab
out w
ho g
ets the cred
it”
Activ
e Listen
ing: ab
ility to
abso
rb an
d tran
slate oth
ers’ statemen
ts into
objectiv
e responses an
d actio
ns; ab
ility
to g
ive an
d receiv
e feedback
in an
appro
priate m
anner. C
om
posu
re and P
rofessio
nalism
: ability
to m
aintain
pro
fessional d
emean
or in
difficu
lt or stressfu
l situatio
ns; p
atience w
ith cu
stom
ers; ability
to d
iffuse an
ger an
d
deal w
ith d
ifficult cu
stom
ers.
Ch
an
ge M
an
agem
ent: A
structu
red ap
pro
ach to
chan
ge in
indiv
iduals, team
s, org
anizatio
ns an
d so
cieties that
enab
les the tran
sition fro
m a cu
rrent state to
a desired
futu
re state.
Interp
erson
al S
kills : O
ne sh
ould
consid
er and resp
ond ap
pro
priately
to th
e need
s, feelings &
capab
ilities of
differen
t peo
ple in
differen
t situatio
ns; sh
ould
be tactfu
l, com
passio
nate an
d sen
sitive, an
d treat o
thers w
ith
respect.
Wh
y sh
ou
ld w
e stud
y H
um
an R
esou
rces Man
agem
ent?
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
77
Wh
y sh
ou
ld w
e stud
y H
um
an R
esou
rces Man
agem
ent?
Com
mu
nica
tion
Sk
ills:This is n
ot ab
out ju
st the ab
ility to
speak
English
languag
e. One sh
ould
be ab
le to
express h
imself / h
erself clearly an
d ad
equately
in a v
ariety o
f com
municatio
n settin
gs an
d sty
les; should
get th
e
messag
e across th
at will h
ave d
esired effect. E
qually
importan
t is the ab
ility to
understan
d th
e unsp
oken
word
along w
ith th
e spoken
.
If the H
R p
rofessio
nals su
cceed in
dev
elopin
g th
ese com
peten
cies which
help
them
beco
me ch
ange cataly
sts
and p
rovid
e them
an ed
ge to
play
the n
eeded
critical role in
partn
ering w
ith b
usin
ess leaders to
build
org
anizatio
n
capab
ility, respect fo
r HR
fun
ction
will g
et accord
ed u
nask
ed. Is it really
po
ssible fo
r HR
Pro
fession
als to
dev
elop su
ch q
ualities th
at they
aim at su
per o
rdin
ate goals su
ch as co
mm
on g
ood o
f the p
eople an
d o
rgan
ization
above self in
terests ! Yes, it is p
ossib
le if they
were to
realize that su
ch su
per o
rdin
ate goals are in
fact in th
eir
self interest.
Ad
ditio
nal R
ead
ings
Reilly, P
eter Andrew
, (2006) S
trateg
ic HR
–B
uild
ing th
e capability to
deliver, G
ow
er Publish
ing L
td.,
Ulrich
, Dav
e and B
rock
ban
k, W
ayne, (2
005) T
he H
R V
alu
e pro
positio
n, H
arvard
Busin
ess Sch
ool P
ress, Bosto
n,
Massach
usetts,
Ulrich
, Dav
e (1996) “H
um
an R
esource C
ham
pio
ns”
- The n
ext agen
da fo
r addin
g va
lue a
nd d
elivering resu
lts
Harw
ard B
usin
ess Sch
ool P
ress,
Welb
ourn
e, Theresa (2
003) “S
trategic H
um
an R
esources M
anag
emen
t”, What is it-really,
78.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Ch
an
gin
g G
end
er Role A
ttitud
es an
d F
am
ily P
urch
ase
Decisio
ns
Pin
ni V
asanth
a Lak
shm
i *
Ab
stract
Majo
r shifts in
the lifesty
les and ro
le structu
re of th
e family
hav
e pro
mpted
researchers to
reexam
ine
decisio
n m
akin
g p
ractices of th
e househ
old
. One o
f the v
ariables th
at retained
the in
terest of research
ers for its
pred
ictability
of relativ
e influ
ence w
as gen
der-ro
le (or g
end
er-role) attitu
des. T
his stu
dy
inv
estigated
the
congru
ence b
etween
family
’s gen
der-ro
le attitude an
d ro
le beh
avio
rs in th
e areas of fam
ily p
urch
ase decisio
ns
of d
urab
le goods. F
indin
gs w
ere based
on th
e data co
llected fro
m 2
17 fam
ilies residin
g in
Chen
nai city
who
hav
e recently
purch
ased an
y o
f the th
ree durab
le pro
ducts n
amely
-air conditio
ner, p
ersonal co
mputer an
d car.
Based
on th
e gen
der ro
le attitude th
ey p
ossessed
, responden
ts were classified
into
traditio
nal an
d m
odern
families.
Th
e com
pariso
n o
f gen
der ro
le mo
dern
and
gen
der ro
le traditio
nal fam
ily m
emb
ers reveals d
ifferences in
percep
tion o
f family
purch
ase decisio
n in
fluen
ce.
Key
Word
s: Gen
der-ro
le, Chen
nai, T
raditio
nal, M
odern
, Durab
le and P
urch
ase Influ
ence.
Intro
du
ction
Th
e traditio
nal d
emarcatio
n b
etween
the cu
lturally
prescrib
ed ro
les of m
en an
d w
om
en is b
ecom
ing
increasin
gly
obscu
re both
at the so
cietal and d
om
estic levels. A
com
mon o
bserv
ation is th
at there is co
nsid
erable
movem
ent in
the p
erceptio
ns o
f men
and w
om
en to
ward
more eg
alitarian v
iews in
determ
inin
g th
eir roles. T
he
evolv
ing statu
s of w
om
en fu
eled b
y th
eir increasin
g ed
ucatio
n an
d o
ccupatio
nal attain
men
t coupled
with
the
femin
ist movem
ent h
as been
regard
ed as th
e majo
r force u
nderly
ing th
is chan
ge in
gen
der-ro
le attitudes.(E
ricksen
,
Yan
cy, and E
ricksen
1979; R
oper an
d L
abeff 1
977) W
hile th
ech
anges in
gen
der-ro
le attitudes o
f men
and
wom
en are tak
ing p
lace perv
asively, th
ey d
o n
ot o
ccur sim
ultan
eously
across th
e whole p
opulatio
n. T
he v
aryin
g
deg
rees of g
ender-ro
le attitudes (o
n th
e modern
-traditio
nal co
ntin
uum
) held
by p
eople h
ave b
een h
ypoth
esized
as a causal facto
r underly
ing d
ifferent p
atterns o
f family
role b
ehav
iors. A
ccord
ing to
Qualls (1
987), g
ender-
role attitu
des reflect th
e societal n
orm
s and ex
pectatio
ns b
y w
hich
family
mem
bers d
etermin
e the rew
ards an
d
costs asso
ciated w
ith th
eir actions. (B
lood W
olfe 1
960) p
roposed
long ag
o th
at the cu
ltural n
orm
s and ex
pectatio
ns
hav
e a direct im
pact o
n th
e family
decisio
n in
fluen
ce structu
re. Most fam
ily research
ers giv
e creden
ce to th
e
relation
ship
betw
een g
end
er-role attitu
de an
d ro
le beh
avio
r. A g
eneral b
elief is that eg
alitarian g
end
er-role
attitu
des fo
ster a
co
mm
itmen
t to m
ore
eq
ual sh
arin
g o
f ho
use
ho
ld d
ecisio
n in
fluen
ces a
nd
fam
ily
responsib
ilities.(Scan
zoni 1
977, 1
979; M
ortim
er, Hall, an
d H
ill 1978; B
ird, an
d S
cruggs 1
984).
Litera
ture R
eview
Gen
derR
ole A
ttitud
es & P
rod
uct P
urch
ase D
ecision
s: Gen
der-ro
le attitudes are co
mm
only
know
n as sex
-
role attitu
des. S
tudies relatin
g g
ender-ro
le attitudes o
f husb
and an
d w
ife to th
e influ
ence p
attern in
durab
le
purch
ase decisio
ns are scan
ty an
d th
eir findin
gs are so
mew
hat m
ixed
. The stu
dy b
y G
reen an
d C
unnin
gham
(1975)
which
exam
ined
the n
um
ber o
f sub d
ecisions m
ade b
y each
spouse in
five p
roduct/serv
ice purch
ase situatio
ns,
reported
that h
usb
ands o
f liberal w
ives ten
ded
to m
ake few
er decisio
ns th
an h
usb
ands o
f conserv
ative an
d
moderate g
ender-ro
le wiv
es regard
ing th
e purch
ase of m
ajor ap
plian
ces, auto
mobile, an
d v
acation. H
ow
ever,
the th
ree gen
der-ro
le gro
ups o
f wiv
es did
not sh
ow
a significan
t differen
ce in th
e num
ber o
f sub d
ecisions th
ey
had
influ
ence o
ver ex
cept fo
r the au
tom
obile p
urch
ase. Lib
eral wiv
es reported
to m
ake sig
nifican
tly m
ore su
b
decisio
ns relatin
g to
the au
tom
obile p
urch
ase than
moderates o
r traditio
nals.
*S
enio
r Lectu
rer, St.Jo
seph
’s Co
llege o
f En
gin
eering
, Dep
artmen
t of M
anag
emen
t Stu
dies, O
ldM
amallap
uram
Ro
ad, Jep
piaar N
agar,
Ch
enn
ai-11
9. E
mail: sv
asanth
a99
@g
mail.co
m.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
79
Acco
rdin
g to
Qualls (1
982),
gen
der-ro
le traditio
nal h
usb
ands, m
uch
more so
than
their g
ender-ro
le modern
cou
nterp
arts, perceiv
ed as d
om
inatin
g p
urch
ase decisio
ns reg
ardin
g v
acation
s, auto
mo
biles, h
ou
sing
, and
insu
rance. 6 In
contrast, g
ender-ro
le orien
tation o
f wiv
es did
not sh
ow
any sig
nifican
t relationsh
ip to
the p
erceived
influ
ence p
attern. T
he ev
iden
ce found b
y S
chan
inger, B
uss, an
d G
rover ap
pears m
ore u
neq
uiv
ocal. In
their
findin
gs, g
ender-ro
le modern
families sh
ow
ed less h
usb
and’s an
d m
ore jo
int an
d w
ife’s influ
ence o
ver th
ree of
the fiv
e aspects o
f the last d
urab
le purch
ase (who d
ecided
initially
to b
uy, w
hen
to b
uy, an
d w
here to
buy).
Furth
er, it was o
bserv
ed th
at wiv
es’ gen
der-ro
le attitudes w
ere more stro
ngly
related to
decisio
n m
akin
g in
fluen
ce
than
husb
ands’. 7 A
study b
y Q
ualls (1
987) in
vestig
ated th
e effect of g
ender-ro
le attitudes o
n fo
ur fam
ily d
ecision
mak
ing v
ariables sp
ecified in
a theo
retical netw
ork
, among w
hich
was h
ouseh
old
decisio
n o
utco
me m
easured
as husb
and- o
r wife-d
om
inan
t in a h
ypoth
etical househ
old
purch
ase situatio
n.
Gen
der-ro
le attitud
es of h
usb
and
s and
wiv
es were n
ot ex
amin
ed sep
arately in
this stu
dy. R
ather each
spouse’s sco
res on fiv
e dim
ensio
ns o
f Scan
zoni’s (1
977) g
ender-ro
le attitude m
easurem
ent w
ere used
as indicato
rs
of h
ouseh
old
gen
der-ro
le orien
tation. T
he stu
dy fo
und th
at househ
old
gen
der-ro
le orien
tation affected
the co
uple’s
perceiv
ed in
fluen
ce structu
re and
mo
de o
f con
flict resolu
tion
, bu
t did
no
t hav
e a direct effect o
n d
ecision
ou
tcom
e.
In su
mm
ary, the literatu
re review
suggests th
at the stren
gth
of th
e relationsh
ip b
etween
gen
der-ro
le attitude
and ro
le beh
avio
rs in fam
ily ten
d to
vary
across d
ifferent fam
ily task
s as well as b
etween
husb
ands an
d w
ives.
A stu
dy b
y S
piro
(1987) w
hich
found a relatio
nsh
ip b
etween
the trad
itional fam
ily id
eolo
gy an
d th
e type o
f
influ
ence strateg
y each
spouse u
sed in
a join
t decisio
n m
akin
g situ
ation ad
ds a n
ew d
imen
sion to
the stu
dy o
f
gen
der-ro
le attitudes.
One can
also n
otice in
the ex
isting literatu
re that th
e relationsh
ip b
etween
gen
der-ro
le attitude an
d d
ecision
influ
ence p
attern h
as been
exam
ined
largely
with
biv
ariate analy
ses, or at b
est, in a co
ntex
t of reg
ression
analy
sis inco
rporatin
g o
ther h
ypoth
esized d
etermin
ants o
f role stru
cture. W
hat is co
nsp
icuously
missin
g is an
attempt to
investig
ate simultan
eously
the in
terrelationsh
ip b
etween
gen
der-ro
le attitudes o
f husb
and an
d w
ife
as well as th
e effect of each
spouse’s g
ender-ro
le attitude o
n ro
le structu
ring b
ehav
ior in
several h
ouseh
old
decisio
n areas. M
arriage is a co
mparativ
ely stab
le relationsh
ip, an
d it in
volv
es a great d
eal of in
strum
ental an
d
emotio
nal in
terdep
enden
ce betw
een th
e spouses.
There is ev
iden
ce that th
e spouses in
fluen
ce each o
ther in
shap
ing th
e preferen
ces and b
eliefs of th
e oth
er.
For in
stance, C
ronkite(1
977) fo
und in
both
cross-sectio
nal an
d o
ver-tim
e analy
sis that each
partn
er’s beliefs in
innate g
ender-ro
les (i.e., men
are born
with
more d
rive to
be am
bitio
us an
d su
ccessful th
an w
om
en, an
d w
om
en
by n
ature are h
appiest w
hen
mak
ing a h
om
e and carin
g fo
r child
ren) d
irectly in
fluen
ce the o
ther’s. S
amsin
ar,
Zaw
awi, Y
ee, Basu
and H
amzah
(2004) in
vestig
ated th
e effects of g
ender ro
le orien
tation o
n ro
le structu
re in
family
decisio
n m
akin
g in
Malay
sia and fo
und th
at wiv
es with
hig
her lev
els of ed
ucatio
n h
ad m
ore m
odern
gen
der ro
le orien
tation an
d th
e effect of g
ender ro
le orien
tation o
n w
ives’ relativ
e influ
ence w
as found fo
r the
purch
ase of fu
rnitu
re, electrical applian
ces and g
roceries.
The co
ngru
ence b
etween
gen
der-ro
le attitude an
d p
urch
ase role b
ehav
iors in
family
life is the to
pic o
f investig
ation
in th
is study.
Meth
od
olo
gy o
f Stu
dy
The stu
dy w
as conducted
in C
hen
nai city. T
he d
ata for th
e study w
as collected
thro
ugh p
ersonal in
terview
s
con
du
cted b
etween
Ap
ril 20
08
and
Octo
ber 2
00
8, th
rou
gh
a structu
red, n
on
-disg
uised
qu
estion
naire. T
he
questio
nnaire u
sed fo
r the su
rvey
was d
ivid
ed in
to th
ree parts. T
he first p
art of th
e questio
nnaire in
cluded
the
perso
nal d
etails of th
e family, th
e second p
art related to
the m
easurem
ent o
f gen
der-ro
le attitudes an
d th
e third
part o
f the q
uestio
nnaire in
cluded
questio
ns relatin
g to
purch
ase influ
ence o
f vario
us fam
ily m
embers in
each
of th
e durab
le pro
ducts.
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
80.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Th
e Sam
ple
: A n
on-p
robab
ility co
nven
ience sam
ple w
as adopted
. The sam
ple co
nsisted
of 2
17 fam
ilies who
had
recently
purch
ased an
y o
f the th
ree durab
le pro
ducts n
amely
-Air C
onditio
ner, P
ersonal C
om
puter an
d C
ar.
These p
roducts w
ere chosen
for th
e study as th
ey are v
ery ex
pen
sive d
urab
le pro
ducts g
enerally
consu
med
by
the en
tire family
hen
ce the in
volv
emen
t of all th
e family
mem
bers w
ill be h
igh in
the p
urch
ase of th
ese pro
ducts.
Sin
ce the stu
dy co
ncern
ed th
e differen
t roles p
layed
by v
arious fam
ily m
embers, th
e family
was co
nsid
ered as
the b
asic samplin
g u
nit.
While selectin
g th
e sample item
s, care was tak
en to
ensu
re that th
e families selected
represen
ted d
ifferent
inco
me an
d ag
e gro
ups, p
rofessio
ns, jo
int an
d n
uclear stru
ctures, th
ose w
ith sin
gle earn
ing m
embers as w
ell as
double-in
com
e families. F
or th
e purp
ose o
f the su
rvey, a fam
ily w
as defin
ed as co
nsistin
g o
f husb
and, w
ife and
child
ren.
Sam
ple C
hara
cteristics: The av
erage ag
e of th
e husb
and w
as around 4
8 y
ears while th
at of th
e wife w
as 42
years. M
ajority
of th
e couples w
ere grad
uates. 5
4%
of th
e responden
t families w
ere double-in
com
e families
wh
ile 46
% o
f the fam
ilies were w
ith sin
gle earn
ing
mem
ber. T
he av
erage m
on
thly
family
inco
me w
as Rs
48,0
00. M
ost o
f the fam
ilies were n
uclear fam
ilies with
1-2
child
ren.
An
aly
sis & In
terpreta
tion
The an
alysis w
as carried o
ut in
two step
s. In th
e first step, attitu
de to
ward
s role o
f wom
en in
the so
ciety
was ex
amin
ed an
d in
the seco
nd step
, impact o
f gen
der-ro
le attitude o
n p
urch
ase decisio
n m
akin
g in
families
was stu
died
.
Gen
der R
ole A
ttitud
e in F
am
ilies an
d A
ttitud
e Assessm
ent: In
ord
er to ex
amin
e the attitu
de o
f responden
t
families to
ward
s the ro
le of w
om
en in
the so
ciety, they
were ask
ed to
indicate th
eir level o
f agreem
ent/d
isagreem
ent
with
each o
f the 5
2 statem
ents o
n a fiv
e-po
int L
ikert scale (5
=S
tron
gly
Ag
ree, 4=
Ag
ree, 3=
No
t certain o
r
undecid
ed, 2
=D
isagree, 1
=S
trongly
Disag
ree). These statem
ents b
ased o
n six
them
es: Trad
itional ro
les; vocatio
nal,
educatio
nal, an
d in
tellectual ro
les; freedom
, indep
enden
ce, and statu
s of w
om
en; m
arital relations an
d o
blig
ations;
Div
ision o
f househ
old
tasks, an
d attitu
de to
ward
s child
care; and p
olitical an
d lead
ership
roles w
ere taken
from
a scale dev
eloped
by D
.Israel and Jay
aseelan C
lemen
t Sudhah
ar.(2005)
Facto
r Analy
sis was ap
plied
to resp
onses o
f 217 resp
onden
ts to su
mm
arize their g
ender ro
le attitudes.
Measu
res of S
ample A
deq
uacy
(MS
A) su
ch as co
rrelation m
atrix, B
arlett’s test of sp
hericity
and K
MO
valu
e
(0.8
90) sh
ow
ed th
at data w
ere fit for facto
r analy
sis. Prin
cipal C
om
ponen
t Analy
sis was u
sed fo
r extractin
g
factors an
d th
e num
ber o
f factors to
be retain
ed w
as based
on laten
t root criterio
n, v
ariance ex
plain
ed an
d S
cree
Plo
t analy
sis. Initially
the so
lutio
n g
ave ten
factors w
hich
explain
ed 7
6.5
0%
of th
e total v
ariance.
But scree p
lot an
alysis su
ggested
that few
er factors w
ould
be m
eanin
gfu
l as overlap
pin
g o
f factors w
as hig
h
when
ten facto
rs were ex
tracted. T
herefo
re, factor an
alysis w
as run ag
ain to
giv
e eight facto
rs. Alth
ough v
ariance
fell to 6
9.0
6%
, the facto
rs were seen
to b
e more sig
nifican
t. The resu
lts were o
btain
ed th
rough o
rthogonal ro
tations
with
Varim
ax an
d all facto
r load
ings g
reater than
0.4
0 w
ere retained
. The n
ames o
f the facto
rs, the statem
ent lab
els
and facto
r load
ings are su
mm
arized in
Tab
le 1
Facto
r An
aly
sis Resu
lts: Facto
r analy
sis by P
rincip
al Com
ponen
t meth
od red
uced
the fifty
two v
ariables in
to
eight p
redom
inan
t factors fo
r gen
der ro
le attitude. In
this ju
nctu
re it is essential to
classify fam
ilies based
on
their p
erceptio
ns ab
ou
t eigh
t pred
om
inan
t factors. K
-Mean
s Clu
ster analy
sis is exp
loited
in th
is con
text to
iden
tify th
e existen
ce of h
eterogen
eous g
roups o
f consu
mers. T
he fo
llow
ing are th
e results o
f K-M
eans clu
ster
analy
sis
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
81
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
Tab
le 1: F
actor A
naly
sis Resu
lts
82.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
83
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
84.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Tab
le 2: R
esults o
f K-M
eans C
luster A
naly
sis
Usin
g K
-mean
s Clu
ster Analy
sis (Tab
le. 2) th
e responden
ts hav
e been
gro
uped
into
two clu
sters based
on th
e
eight g
ender ro
le attitude facto
rs. The first clu
ster ranks first in
four facto
rs such
as conserv
atism, su
bm
issiven
ess,
con
ditio
nin
g an
d o
rtho
do
xy
wh
ile it rank
s secon
d in
factors su
ch as eq
uality, freed
om
, revo
lutio
n an
d
empow
ermen
t hen
ce this clu
ster can b
e categorized
as traditio
nal fam
ily. The seco
nd clu
ster ranks first in
four
factors su
ch as eq
uality, freed
om
, revolu
tion an
d em
pow
ermen
t and is ran
ked
second in
the rem
ainin
g fo
ur
factors su
ch as co
nserv
atism, su
bm
issiven
ess, conditio
nin
g an
d o
rthodoxy. H
ence th
is cluster can
be su
itably
labeled
as modern
family.
Tab
le 3: N
um
ber o
f Cases in
each C
luster
More n
um
ber o
f responden
ts falls in th
e first cluster o
f traditio
nal fam
ilies. (Tab
le. 3)
Tab
le 4: A
NO
VA
(Analy
sis of V
ariance)
The fin
al cluster cen
ters Tab
le. 4 sh
ow
s that th
e two clu
sters differ in
mean
valu
e of all th
e eight facto
rs. The
AN
OV
A tab
le indicates th
at the d
ifference ex
ists among th
e two clu
sters in th
e mean
valu
es are significan
tly
differen
t. The sig
nifican
t valu
e for all th
e eight facto
rs is less than
0.0
5. T
his m
eans th
at all the eig
ht facto
rs
hav
e significan
t contrib
utio
n o
n d
ivid
ing th
e families in
to tw
o seg
men
ts based
on g
ender ro
le attitude.
Rela
tion
ship
betw
een G
end
er role a
ttitud
e segm
ents a
nd
Dem
ogra
ph
ic Varia
bles
It is necessary
to an
alyse th
e factors th
at determ
ine g
end
er role attitu
de b
ased seg
men
tation
. First
dem
ograp
hic v
ariables are co
nsid
ered. T
he d
emograp
hic v
ariables u
sed in
the stu
dy are ag
e, educatio
n, fam
ily
inco
me, n
um
ber o
f years b
een m
arried, n
um
ber o
f child
ren, n
um
ber o
f dep
enden
ts and fam
ily life cy
cle stage.
The ch
i-square an
alysis w
as done to
find o
ut w
heth
er the d
emograp
hic v
ariables h
ave im
pact o
ver g
ender ro
le
attitud
e.
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
85
Fro
m T
able. 5
it is clear that ag
e, educatio
n, fam
ily in
com
e, num
ber o
f years b
een m
arried, n
um
ber o
f child
ren,
and fam
ily lifecy
cle stage h
ave sig
nifican
t associatio
n w
ith g
ender ro
le attitude seg
men
ts.
Tab
le 6: P
ercentag
e of In
fluen
ce of v
arious fam
ily m
embers in
Purch
ase Decisio
n M
akin
g
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
86.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
87
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
Inferen
ces from
Tab
le 6
Air-C
on
ditio
ner
:Jo
int d
ecision o
f husb
and an
d w
ife was p
redom
inan
t in case o
f traditio
nal fam
ilies in m
ost
of th
e stages o
f purch
ase decisio
n m
akin
g p
rocess w
hereas in
case of m
odern
families, h
usb
and d
om
inatio
n w
as
more o
bserv
ed.
Perso
nal C
om
pu
ter:
Though jo
int d
ecision o
f husb
and an
d w
ife was m
ore v
isible, ch
ildren
’s influ
ence w
as
more p
rom
inen
t in term
s of in
itiating th
e idea o
f purch
ase, decid
ing o
n th
e style/ty
pe as w
ell as the b
rand o
f the
com
puter. T
he ro
le of th
e wife w
as passiv
e in m
ost o
f the p
urch
ase decisio
n stag
es in b
oth
traditio
nal as w
ell as
modern
families.
Car:
The in
fluen
ce of all th
e family
mem
bers th
at is husb
and, w
ife and ch
ildren
altogeth
er was q
uite h
igh in
case of car p
urch
ase.
All th
e three p
rod
ucts:
The in
fluen
ce of w
ife and ch
ildren
was n
eglig
ible in
terms o
f decid
ing th
e mode o
f
pay
men
t for th
e purch
ase. Join
t decisio
n o
f husb
and an
d w
ife was p
rom
inen
t in trad
itional fam
ilies whereas th
e
entire fam
ily w
ent an
d m
ade th
e purch
ase especially
in case o
f Perso
nal C
om
puter an
d car in
modern
families.
Tab
le 7: C
hi-sq
uare A
naly
sis (Trad
itional an
d M
odern
Fam
ilies)
88.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
In case o
f air conditio
ner, th
e two ty
pes o
f families d
id n
ot d
iffer statistically reg
ardin
g d
ecision o
n size w
hile in
case of p
ersonal co
mputer b
oth
traditio
nal an
d m
odern
families d
id n
ot d
iffer statistically w
ith resp
ect to in
itiating
the id
ea of p
urch
ase. Decisio
n reg
ardin
g tim
ing o
f purch
ase decisio
n as w
ell as who actu
ally w
ent to
the sh
ow
room
and p
laced th
e purch
ase ord
er show
ed n
o sig
nifican
t differen
ce betw
een trad
itional an
d m
odern
families in
car
purch
ase. In all o
ther p
urch
ase decisio
ns all th
e three d
urab
le pro
ducts sh
ow
ed statistically
significan
t differen
ces
betw
een trad
itional an
d m
odern
families (C
hi-sq
uare v
alues w
ere significan
t). Hen
ce, the n
ull h
ypoth
esis that
traditio
nal an
d m
odern
families d
o n
ot d
iffer in m
akin
g p
roduct p
urch
ase decisio
ns is rejected
for all th
e three
durab
le goods u
nder stu
dy.
Con
clusio
n
There is an
increasin
g tren
d o
f egalitarian
ism in
Chen
nai fam
ilies. The co
mpariso
n o
f gen
der-ro
le modern
and g
ender-ro
le traditio
nal su
ggests th
at a family
mem
ber’s g
ender-ro
le orien
tation affects th
e deg
ree to w
hich
families in
teract and th
e perceiv
ed p
attern o
f influ
ence fo
r vario
us fam
ily d
ecisions. T
he ten
den
cy is fo
r gen
der-
role m
odern
family
mem
bers to
perceiv
e a more eg
alitarian d
istributio
n o
f family
decisio
n in
fluen
ce and th
us
increased
interactio
n b
etween
family
mem
bers. M
od
ern fam
ilies are clearly ex
hib
iting
the in
fluen
ce of th
e
entire fam
ily i.e. h
usb
and, w
ife and ch
ildren
in th
e purch
ase of d
urab
le goods esp
ecially th
at of p
ersonal co
mputer
and car. C
hild
ren are p
layin
g an
importan
t role in
family
purch
ase decisio
ns. N
o m
ore th
e family
purch
ase
decisio
ns are d
om
inated
by h
usb
and an
d w
ife only. A
lternativ
ely, gen
der-ro
le traditio
nal o
riented
family
mem
bers
are show
ing jo
int p
urch
ase decisio
n m
akin
g o
f husb
and an
d w
ife. Its no m
ore h
usb
and d
om
inated
purch
ase
decisio
ns.
Referen
ces
Bird
, Glo
ria W., G
erald A
. Bird
, and M
arguerite S
cruggs 1
984, “D
etermin
ants o
f Fam
ily T
ask S
harin
g: A
Stu
dy
of H
usb
ands an
d W
ives,” Jo
urn
al o
f Marria
ge a
nd th
e Fam
ily, 46 (M
ay), p
p. 4
35-3
55.
Blo
od, R
.O. an
d D
.M. W
olfe 1
960, H
usb
ands a
nd W
ives: The D
ynam
ics of M
arried
Livin
g, G
lenco
e, IL: T
he
Free P
ress.
Cro
nkite, R
uth
C. 1
977, ‘T
he d
etermin
ants o
f Spouses’ N
orm
ative P
references fo
r Fam
ily R
oles,” Jo
urn
al o
f
Marria
ge a
nd th
e Fam
ly, 39, p
p. 5
75-5
85.
Erick
sen, J., W
. Yan
cy, and E
. Erik
sen 1
979, “T
he D
ivisio
n o
f Fam
ily R
oles,” Jo
urn
al o
f Marria
ge a
nd th
e
Fam
ily, 41 (M
ay), p
p. 3
01-3
13.
Green
, R.T
. and
I.C.M
. Cu
nn
ing
ham
19
75
, “Fem
inin
e Ro
le Percep
tion
and
Fam
ily P
urch
asing
Decisio
ns,”
Journ
al o
f Marketin
g R
esearch
, 12, p
p. 3
25-3
32.
Hall, J.T
.R. an
d R
. Hill 1
97
8, “H
usb
and
s’ Occu
patio
nal A
ttribu
tes as Co
nstrain
ts on
Wiv
es’ Em
plo
ym
ent,”
Socio
logy o
f Work a
nd O
ccupatio
ns, 5
(August), p
p. 2
85-3
13
Israel, D. an
d Jay
aseelan C
lemen
t Sudhah
ar 2005, “S
RO
Measu
remen
t and S
cale dev
elopm
ent in
assessing
spousal d
om
inan
ce on p
urch
ase decisio
n m
akin
g in
India,” P
restige Jo
urn
al o
f Managem
ent a
nd R
esearch
,
Octo
ber, V
ol.9
, No.2
, pp.2
65-2
78.
Qualls, W
illiam J. 1
982, “C
han
gin
g S
ex R
oles, Its Im
pact U
pon F
amily
Decisio
n M
akin
g,” A
dva
nces in
Consu
mer
Resea
rch, V
ol. 9
, ed. M
itchell, A
., Ann A
rbor,
MI: A
ssociatio
n o
f Consu
mer R
esearch, p
p. 2
67-2
70.
Qualls 1
987, “H
ouseh
old
Decisio
n B
ehav
ior: T
he Im
pact o
f Husb
ands’ an
d W
ives’ S
ex-ro
le Orien
tation,” Jo
urn
al
of C
onsu
mer R
esearch, 1
4 (S
eptem
ber), p
p. 2
64-2
79.
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
89
Roper, S
. and E
. Lab
eff 1977, “S
ex R
oles an
d F
emin
ism R
evisited
: An In
tergen
erational A
ttitude C
om
pariso
n,”
Journ
al o
f Marria
ge a
nd th
e Fam
ily, 39, p
p. 1
13-1
19.
Scan
zoni 1
977, “S
ex R
oles, E
conom
ic Facto
rs, and M
arital Solid
arity in
Black
and W
hite F
amilies,” Jo
urn
al o
f
Marria
ge a
nd th
e Fam
ily, 39 (F
ebru
ary), p
p. 1
30-1
44
Scan
zoni 1
979, “S
ex R
ole In
fluen
ces on M
arried W
om
en’s S
tatus A
ttainm
ent,” Jo
urn
al o
f Marria
ge a
nd th
e
Fam
ily, 41 (N
ovem
ber), p
p. 7
93-8
00; M
ortim
er,
Sch
anin
ger, C
M., W
.C B
uss, an
d R
. Gro
ver 1
982, “T
he E
ffect of th
e Sex
Roles o
n F
amily
Eco
nom
ic Han
dlin
g
and D
ecision In
fluen
ce,” An A
ssessmen
t (Marketin
g T
hought a
nd P
ractice, ed
. Walk
er, B., C
hicag
o: A
merica
n
Marketin
g A
ssocia
tion, p
p. 4
3-5
7.
Spiro
, Rosan
n 1
983, “P
ersuasio
n in
Fam
ily D
ecision M
akin
g,” Jo
urn
al o
f Consu
mer R
esearch
, 9 M
arch, p
p.
39
3-4
02
.
Sam
sinar M
d.S
idin
, Dah
lia Zaw
awi, W
on
gfo
on
g Y
ee, Ru
han
a Basu
and
Zalfa L
aili Ham
zah (2
00
4), “T
he
Effects O
f Sex
Role O
rientatio
n O
n F
amily
Purch
ase Decisio
n M
akin
g In
Malay
sia,” Journ
al o
f Consu
mer
Marketin
g, V
ol. 2
1 N
o 6
,Oct ,p
p.3
81-3
90
Ch
ang
e Gen
der-R
ole attitu
des an
d fam
ily p
urch
ase decisio
ns
90.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Dep
osits R
epayab
le By B
an
ks th
rou
gh
Eq
uated
Mon
thly
Insta
llmen
ts :A
Pro
posa
l for a
n In
novativ
e
Pro
du
ct an
d its P
oten
tiality
Stu
dy
Vip
in D
esai *
Ab
stract
Wh
en a p
erson
retires, the first th
ing
that h
e loses is a reg
ular so
urce o
f inco
me. T
he in
terest on
the
accum
ulated
funds g
enerally
refuses to
pro
mise th
e same stan
dard
of liv
ing as b
efore. T
he ev
er rising in
flation
and
rising
med
ical bill ad
d fu
el to th
e fire. Rev
erse Mo
rtgag
e loan
schem
e was in
trod
uced
to h
elp sen
ior
citizens b
y o
ffering reg
ular m
onth
ly cash
flow
s again
st ow
n h
om
e allow
ed to
be self-u
sed d
urin
g life tim
e .The
loan
would
be reco
vered
by th
e ban
k fro
m th
e sale-pro
ceeds o
f the h
ouse after h
is death
when
the h
ouse w
ould
no lo
nger b
e usefu
l to th
e ow
ner. B
ut a larg
e num
ber o
f senio
r citizens n
ot h
avin
g o
wn h
ouse can
not av
ail the
aforesaid
loan
. In th
is article the au
thor h
as floated
an id
ea to h
elp th
is class. A h
om
eless senio
r citizen d
epen
ds
only
on th
e limited
interest in
com
e with
out to
uch
ing th
e prin
cipal am
ount an
y tim
e durin
g th
e whole life. B
ut
this p
rincip
al amount, to
o, w
ould
no lo
nger b
e usefu
l to h
im after h
is death
. A d
eposit sch
eme can
be d
evised
which
consid
ers rational d
isbursem
ent o
f prin
cipal am
ount b
eing p
aid in
terms o
f regular m
onth
ly in
stallmen
ts
along w
ith p
aym
ents o
f month
ly in
terest. With
findin
gs o
f a sample su
rvey
of 2
00 sen
ior citizen
s undertak
en at
Vad
odara in
Gujarat, th
e auth
or co
nten
ds to
establish
that if p
roperly
desig
ned
the sch
eme w
ith its b
asic reasonin
g
can co
nvin
ce sufficien
t num
ber o
f peo
ple to
accept th
e same w
ithout g
etting affected
by so
cio-eco
nom
ic issues
like trad
itional m
entality
to leav
e a legacy, d
isinclin
ation o
f sons/d
aughters to
ward
s the sch
eme etc. T
he n
um
ber
of p
eople accep
ting th
e schem
e can m
akes v
iable p
ropositio
n to
hav
e the sch
eme accep
ted b
y th
e ban
kers, to
o.
The p
roduct can
beco
me an
additio
nal so
cial welfare to
ol .It can
also o
ffer a good av
enue fo
r busin
ess for
the In
dian
and fo
reign b
anks o
peratin
g in
India
Key
Word
s : Sen
ior C
itizens, S
ource o
f Inco
me, S
tandard
of L
ivin
g, In
terest, Use o
f Prin
cipal A
mount A
fter
Death
, Socio
-Eco
nom
ic Issues.
Intro
du
ction
The p
roposed
dep
osit sch
eme is b
ased o
n th
e popular co
ncep
t of an
nuity. T
he term
Annuity
is used
to
describ
e a series of p
eriodic flo
ws o
f equal am
ounts w
hich
can b
e either receip
ts or P
aym
ents. S
uch
flow
s will
be in
form
of receip
ts com
ing to
the d
eposito
rs as repay
men
t of th
eir dep
osits w
ith in
terest so far as th
e pro
posed
dep
osit sch
eme is co
ncern
ed. If y
ou h
ave a certain
amount o
f money
and y
ou w
ant to
place it in
a ban
k, y
ou
hav
e only
one o
ptio
n to
get reg
ular p
eriodic in
com
e: place th
e money
for a certain
perio
d u
nder a fix
ed d
eposit
schem
e of a b
ank an
d g
et regular in
terest every
month
.At th
e end o
f the ch
osen
perio
d th
e prin
cipal am
ount w
ill
remain
intact .Y
ou can
again
renew
the d
eposit an
d co
ntin
ue to
get in
terest leavin
g th
e prin
cipal am
ount in
tact.
This can
hap
pen
till the en
d o
f your life tim
e but iro
nically
the fact rem
ains th
at you w
ill nev
er be ab
le to u
se the
prin
cipal am
ount w
hich
after your d
eath w
ould
go in
to th
e han
ds o
f your leg
al heirs. Y
ou d
o n
ot u
se the p
rincip
al
amount b
ecause th
at will red
uce y
our d
eposit am
ount an
d y
ou w
ill get lesser reg
ular in
com
e that is in
terest. Is
it po
ssible to
use th
e prin
cipal am
ou
nt ev
en d
urin
g th
e life time w
itho
ut sacrificin
g th
e interest o
therw
ise
receivab
le ? The p
roposed
schem
e com
es with
an affirm
ative an
swer. A
s know
n to
every
one, th
e Equated
Month
ly In
stallmen
t (EM
I) in th
e contex
t of an
y b
ank lo
an reco
vers fro
m y
ou n
ot o
nly
the in
terest part o
f the
loan
but also
the p
rincip
al amount o
n p
ro-rata b
asis over a p
eriod o
f time leav
ing zero
balan
ce at the en
d o
f the
perio
d. H
ere in th
e contex
t of p
roposed
dep
osit sch
eme y
ou are reco
verin
g n
ot o
nly
the in
terest from
the b
ank
*S
r.Facu
lty M
emb
er (Ban
kin
g &
Fin
ance), IN
C V
ado
dara E
-mail: v
ipin
desai2
00
2@
yah
oo
.co.in
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
91
but also
a part o
f the p
rincip
al amount o
f dep
osit ev
ery m
onth
. This m
eans h
igher liq
uid
ity in
your h
ands. O
f
course, at th
e end o
f the life y
ou w
ill hav
e zero b
alance in
your d
eposit acco
unt .B
ut d
oes it m
atter? To fin
d an
answ
er to th
is questio
n first it w
ould
be in
teresting to
com
pare th
e pro
posed
dep
osit sch
eme w
ith th
e Rev
erse
Mortg
age L
oan
Sch
eme as th
ere are certain co
mm
onalities.
Com
pariso
n w
ith th
e Rev
erse Mortg
age L
oan
Sch
eme
The R
everse M
ortg
age lo
an sch
eme in
troduced
by m
any b
anks fo
llow
ing th
e pro
clamatio
n o
f the g
overn
men
t
in th
e 2007-B
udget o
f its desire to
hav
e the sch
eme tak
en u
p b
y th
e Indian
ban
ks .A
s we k
now
now
, the R
everse
Mortg
age L
oan
Sch
eme is a lo
an ag
ainst o
wn h
ouse g
iven
to a sen
ior citizen
. He can
contin
ue to
occu
py th
e
house th
rough o
ut h
is life and u
se the b
orro
wed
money
com
ing h
is way
from
the b
anks in
form
of reg
ular
month
ly cash
flow
s for m
aintain
ing h
is standard
of liv
ing w
ithout b
oth
eration o
f repay
ing th
e loan
or in
terest
any tim
e durin
g h
is life time. T
he b
ank w
ill recover th
e loan
with
interest o
nly
after his d
eath o
r the d
eath o
f the
last surv
ivin
g sp
ou
se by
selling
the h
ou
se .Th
is is a bro
ad id
ea abo
ut th
e Rev
erse Mo
rtgag
e Lo
an sch
eme
(Ruparelia M
.V.2
008). T
he accep
tance o
f the lo
an sch
eme larg
ely d
epen
ds u
pon w
heth
er a perso
n p
ossesses
emotio
nal attach
men
t with
the h
om
e and th
e kid
s and w
heth
er he h
as the trad
itional In
dian
men
tality to
leave a
legacy
beh
ind h
im fo
r the k
ids. If th
ere is no su
ch attach
men
t and th
e men
tality, it would
also m
atter wheth
er the
kid
s would
com
e in th
e way
of m
akin
g a d
ecision to
take th
e loan
by m
ortg
agin
g th
e house. A
gain
, we h
ave to
see as to w
hat ex
tent th
e fast erosio
n in
the so
cial valu
es and h
ow
the k
ids are treatin
g th
e paren
ts in th
e modern
times h
ave a ch
angin
g im
pact o
n th
e traditio
nal m
entality. S
ince th
e acceptan
ce of th
e pro
posed
dep
osit sch
eme
is also lik
ely to
be in
fluen
ced b
y alm
ost sim
ilar factors a co
mpariso
n o
f both
pro
ducts h
as been
consid
ered as
usefu
l to clear th
ese poin
ts. It may
not b
e out o
f place to
men
tion h
ere that th
e findin
gs fro
m su
rvey
on p
oten
tiality
study o
f the R
everse M
ortg
age L
oan
Sch
eme w
ere quite in
favour o
f success o
f the sch
eme in
form
of v
iable
num
ber o
f peo
ple lik
ely to
accept th
e same. T
here m
ay b
e som
e additio
nal featu
res com
ing to
fore o
nce w
e start
thin
kin
g m
ore ab
out th
e pro
posed
dep
osit sch
eme .W
e will h
ave to
take an
overall v
iew . B
ut b
efore w
e talk
about th
e oth
er implicatio
ns let u
s start first with
the co
mpariso
n.
Both
the sch
emes are b
asically aim
ed at en
han
cing th
e purch
asing p
ow
er of a sen
ior citizen
with
the u
se of
som
e asset on th
e prem
ise that th
e asset in each
case is no lo
nger u
seful to
him
after his d
eath an
d an
y ad
ditio
nal
liquid
ity th
at can b
e gen
erated d
urin
g o
ne’s life tim
e is certainly
ben
eficial.
The ap
preh
ended
obstacles in
acceptab
ility o
f the R
everse M
ortg
age L
oan
Sch
eme are d
iscussed
above
While so
me o
f the o
bstacles ap
ply
also to
the p
roposed
dep
osit sch
eme, w
heth
er the d
egree o
f attachm
ent to
hom
e is equal to
the attach
men
t to o
ther o
wn assets lik
e ban
k d
eposit is a q
uestio
n. T
he au
thor feels th
at the
Indian
s’ emotio
nal attach
men
t to h
om
e may
be g
reater than
the attach
men
t to an
y o
ther asset. If th
is sounds tru
e,
the th
ings g
o m
ore in
favour o
f the d
eposit sch
eme g
etting accep
ted b
y m
any p
eople in
cludin
g ev
en th
e hom
e-
ow
ners w
ho m
ight reject th
e reverse M
ortg
age L
oan
Sch
eme d
ue to
their stro
ng em
otio
nal attach
men
t to h
om
e.
Anoth
er obstacle w
hich
was ap
preh
ended
in resp
ect of R
everse M
ortg
age L
oan
Sch
eme w
as: what w
ould
hap
pen
, if the sen
ior citizen
outliv
es the lo
an p
eriod. A
lthough, th
e schem
e pro
mised
to allo
w th
e senio
r citizen
to co
ntin
ue to
occu
py th
e house till d
eath o
f both
the sp
ouses, th
e month
ly reg
ular in
flow
would
be d
iscontin
ued
This featu
re is also ap
plicab
le in case o
f the p
roposed
dep
osit sch
eme. W
e shall d
iscuss th
is later when
we
critically an
alyze all th
e features o
f the sch
eme. O
ne rem
arkab
le feature w
hich
can also
be d
rawn fro
m th
e
com
pariso
n is th
at a perso
n is n
ot av
erse to th
e Rev
erse Mortg
age lo
an S
chem
e but h
e cannot accep
t it simply
becau
se he d
oes n
ot h
ave an
y h
om
e of h
is ow
n .T
his in
div
idual h
avin
g so
me am
ount o
f savin
gs w
ill hav
e no
difficu
lty in
readily
availin
g th
e pro
posed
dep
osit sch
eme.
Both
the sch
emes g
enerally
com
e with
out th
e obstacles d
iscussed
above to
the sen
ior citizen
s who are
unm
arried, d
ivorcees / m
arried b
ut h
avin
g n
o issu
e, hav
ing m
ale/female k
ids n
ot n
eedin
g/in
terested in
paren
ts’
pro
perty
.This is so
becau
se of irrelev
ance o
f the issu
es pertain
ing to
attachm
ent to
hom
e or o
ther assets after
death
, leavin
g a leg
acy fo
r the k
ids o
r likely
interferen
ce of th
e kid
s.(Mad
hu. T
2009).
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
92.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Com
pariso
n w
ith E
xistin
g P
ensio
n S
chem
es
None o
f the ex
isting p
ensio
n sch
emes h
ave th
e features m
atchin
g w
ith th
e pro
posed
dep
osit sch
eme. It can
be
explain
ed as u
nder rep
resentativ
ely.
1.
Jeevan
Surak
sha (L
akhotia &
Subash
Lak
hotia) P
ensio
n co
ntin
ues to
the leg
al heirs. H
ence it d
oes n
ot
repay
prin
ciple lik
e EM
I.
2.
ICIC
I Pru
forev
er Life: T
he m
axim
um
entry
level ag
e is 55.T
he p
urch
ase price is retu
rnab
le to th
e legal
heir. H
ence it d
oes n
ot rep
ay p
rincip
le in E
MI.
3.
UT
I Retirem
ent B
enefit P
lan is a m
utu
al fund sch
eme an
d d
oes n
ot m
atch w
ith th
e features o
f the p
roposed
dep
osit sch
eme. T
he m
axim
um
entry
level ag
e is 58.
4.
Jeevan
Dhara an
d Jeev
an A
ksh
ay (L
IC): T
he co
rpus is p
assed o
n to
the n
om
inee after d
eath. H
ence it, to
o,
does n
ot rep
ay p
rincip
le like E
MI.
5.
Koth
ari Pio
neer’s P
ensio
n P
lan: T
he co
rpus is k
ept in
tact. Hen
ce it does n
ot en
tail EM
I-based
pay
men
t.
Th
e Ad
van
tages o
f the P
rop
osed
Dep
osit S
chem
e
It would
be u
seful to
enum
erate the lik
ely b
enefits th
at can b
e deriv
ed fro
m th
e schem
e. These can
be
enlisted
as under w
ith little rep
etition to
hav
e full list o
f ben
efits presen
ted at o
ne g
o.
1.
The sch
eme w
ill enhan
ce the p
urch
asing p
ow
er of th
e senio
r citizen to
com
bat th
e ever risin
g in
flation w
ith
no m
atchin
g in
crease in th
e interest rates.
2.
The sch
eme w
ill instill a sen
se of secu
rity as fin
ancial secu
rity h
as a consid
erable b
earing o
n th
e overall
security
concern
s.
3.
The h
om
eless peo
ple w
ho co
uld
not accep
t the R
everse M
ortg
age lo
an sch
eme w
ould
find an
alternativ
e
solu
tion av
ailable.
4.
Th
e peo
ple w
ho
may
no
t accept th
e Rev
erse Mo
rtgag
e loan
Sch
eme b
ecause o
f the stro
ng
traditio
nal
attachm
ent to
ow
n h
om
e may
not h
ave p
roblem
to accep
t this sch
eme as th
e oth
er assets like d
eposits m
ay
not fall in
the categ
ory
of th
e same d
egree o
f strong em
otio
nal attach
men
t as in th
e case of h
om
e.
5.
Som
e peo
ple m
ay n
ot accep
t the R
everse m
ortg
age lo
an sch
eme d
ue to
the stro
ng em
otio
nal attach
men
t
with
ow
n h
om
e .How
ever so
me o
f them
may
not b
e able to
actually
stay in
their o
wn h
om
e .They
may
hav
e
to co
mpulso
rily stay
togeth
er with
the k
ids settled
at som
e oth
er place b
ecause m
aintain
ing tw
o estab
lishm
ents
may
not b
e possib
le for th
e kid
s. These sen
ior citizen
s may
hav
e a strong feelin
g to
go b
ack to
their o
rigin
al
place w
here th
ey liv
ed th
roughout th
eir life if som
e alternativ
e source o
f inco
me is av
ailable. T
he p
roposed
dep
osit sch
eme o
ffersth
is.
6.
The ab
ove ad
van
tage is also
applicab
le to h
om
eless peo
ple stay
ing elsew
here w
ith th
e kid
s .Alth
ough th
ey
cannot d
ream o
f stayin
g in
an o
wn h
ouse at o
rigin
al place b
ut can
at least fulfill th
e dream
to stay
at ‘ow
n’
tow
n (m
ay b
e in a ren
ted h
ouse) w
ith th
e help
of ad
ditio
nal liq
uid
ity co
min
g th
eir way
thro
ugh th
e dep
osit
schem
e.
7.
The class co
mprisin
g o
f unm
arried p
eople, p
eople w
ith n
o issu
e, peo
ple w
ith issu
e but k
ids n
ot in
terested /
need
ing an
yth
ing fro
m p
arents, w
ill find n
o p
roblem
in accep
ting th
e schem
e unless th
ere are som
e oth
er
reasons d
iscussed
later on.
8.
The p
eople w
ho d
o n
ot w
ant to
pass o
n an
yth
ing to
the k
ids b
ecause o
f lattter’s ill treatmen
t may
accept th
e
schem
e with
no p
roblem
.
9.
The p
eople can
get ad
ditio
nal liq
uid
ity to
the ex
tent ran
gin
g fro
m 1
5%
to 6
1%
dep
endin
g u
pon th
eir estimated
residual life sp
an as ex
plain
ed in
Appen
dix
1 to
this article w
hich
is based
on p
resum
ptio
n o
f interest rate o
f
10
%p
.a.
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
93
10
.D
espite th
e socio
-econom
ic obstacles in
the R
everse M
ortg
age L
oan
Sch
eme, th
e surv
ey cam
e out w
ith
viab
le num
ber o
f peo
ple in
its favour. T
he o
bstacles h
avin
gco
mm
on
ality
with
the p
rop
ose
d d
ep
osit
schem
e cannot d
eter the sam
e from
hav
ing
equally
viab
le num
ber o
r even
larger th
an th
at.
Lik
ely E
ffects of O
utliv
ing o
n A
dop
ting th
e Pro
posed
Dep
osit S
chem
e an
d th
e Pro
posed
Solu
tion
s
The calcu
lations in
the tab
le appearin
g at A
ppen
dix
I is based
on th
e dep
osit term
chosen
by an
indiv
idual.
This ch
oice w
ill dep
end o
n th
e expected
residual life sp
an in
each case. T
he sen
ior citizen
s in th
e age g
roup o
f
80-9
0 y
ears may
choose a 5
years term
. The p
eople in
the 7
5-8
0 y
ears-age-g
roup m
ay ch
oose a 1
0 y
ears term.
Those in
the ag
e gro
up o
f 70-7
5 y
ears may
go fo
r 15 y
ears term. T
he p
eople in
the still lo
wer ag
e gro
up m
ay g
o
for a term
of 2
0 y
ears or m
ore .L
onger th
e term, lesser w
ill be th
e amount o
f EM
I. Of co
urse, w
hatev
er term is
chosen
, the E
MI w
ill alway
s be b
igger th
an m
ere interest
Life ex
pectan
cy o
f an In
dian
citizen w
as just o
ver 4
0 y
ears in 1
947 .T
oday
it is 64 y
ears .But th
is is a
gen
eral averag
e .A p
articular in
div
idual m
ay liv
e more th
an th
at. If the assessm
ent fo
r the ex
pected
residual
life-span
differs w
hen
it com
es to reality
and th
e perso
n o
utliv
es the d
eposit term
, he w
ould
be left w
ith zero
balan
ce of d
eposit b
efore d
eath an
d th
e EM
Is would
stop co
min
g h
is way. T
he sim
ilar pro
blem
can b
e visu
alized
in resp
ect of R
everse m
ortg
age sch
eme, to
o. B
ut lo
okin
g to
the p
opularity
of th
e said sch
eme in
the w
estern
countries it ap
pears th
at the carefu
l choice o
f the term
and so
me ad
ditio
nal p
rotectiv
e measu
res can elim
inate
the p
roblem
in resp
ect of th
e dep
osit sch
eme, to
o.
The p
ossib
le solu
tion to
this p
roblem
in resp
ect of th
e pro
posed
dep
osit sch
eme can
also b
e addin
g so
me
reasonab
le cush
ion to
one’s ex
pected
mortality
level an
d p
lacing th
e dep
osit fo
r a little longer p
eriod .H
ere,
month
ly an
nuity
may
go little lo
wer th
an th
e one sh
ow
n in
the tab
le. Again
, it is certain th
at it will b
e alway
s
more th
an m
ere interest.
The ch
oice o
f the term
can b
e mad
e only
after seekin
g o
pin
ion o
f the m
edical ex
perts. E
ven
the m
edical
advice m
ay n
ot b
e 100%
accurate. T
he risk
of su
rviv
ing can
be m
itigated
by m
akin
g it a su
bject m
atter of
insu
rance .T
he in
suran
ce com
pan
y can
play
a vital ro
le to o
ffer a fool-p
roof p
rotectio
n. It can
beco
me a v
iable
insu
rance p
roduct co
nsid
ering th
at Insu
rance co
. may
hav
e to p
ay in
few p
articular cases as ag
ainst larg
e no. o
f
cases which
will fall in
the zo
ne o
f averag
e longev
ity p
eriod.
If the g
overn
men
t can see th
e schem
e as an effectiv
e social secu
rity m
easure, it can
play
a constru
ctive ro
le
in resp
ect of th
e last two su
ggestio
ns. T
he g
overn
men
t can also
consid
er how
the in
terest rates can b
e pro
tected
to en
sure o
nly
positiv
e and n
o n
egativ
e impact o
f the in
terest rate fluctu
ations o
n th
e amount o
f EM
I.
Th
e Need
an
d O
bjectiv
es
Alth
ough th
e likely
ben
efits of th
e schem
e are discu
ssed at len
gth
, how
the p
eople w
ould
weig
h th
em in
the co
ntex
t of th
e perceiv
ed p
roblem
s was co
nsid
ered a su
bject –
matter o
f a surv
ey. The su
ccess or failu
re of th
e
schem
e in em
ergin
g as accep
table d
epen
ds u
pon th
e size and scale o
f the p
roblem
s. The b
est way
to ascertain
the sam
e was to
go to
the sen
ior citizen
s, ask th
em an
d fin
d th
e facts. The su
rvey
was co
nducted
with
the
follo
win
g o
bjectiv
es.
1.
To estim
ate the m
agnitu
de o
f the sen
ior citizen
s to w
hom
the sch
eme can
be p
rima facie b
eneficial.
2.
To carv
e out th
e percen
tage o
f the p
eople (o
ut o
f the lik
ely b
eneficiaries) w
ho m
ay actu
ally o
pt fo
r the
schem
e with
out an
y self-g
enerated
or ex
ternal o
bstacles.
3.
To d
erive co
nclu
sion ab
out th
e poten
tiality o
f the sch
eme.
4.
To p
ut fo
rth ratio
nal reco
mm
endatio
ns.
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
94.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Th
e Meth
od
olo
gy a
nd
Lim
itatio
ns o
f the su
rvey
1.
A q
uestio
nn
aire based
samp
le surv
ey o
f 20
0 sen
ior citizen
s in V
ado
dara , G
ujarat after g
etting
the
questio
nnaire v
alidated
by first co
nductin
g a p
ilot su
rvey
of 2
5 sen
ior citizen
s belo
ngin
g to
differen
t socio
-
econom
ic class.
2.
Sin
ce the targ
et locatio
n o
f the su
rvey
was city
of V
adodara, th
e Vad
odara-sp
ecific features m
ay, to an
exten
t, dilu
te the o
bjectiv
ity o
f the fin
din
gs.
3.
To m
inim
ize the im
pact o
f the ab
ove m
entio
ned
limitatio
n th
e samples w
ere chosen
from
differen
t localities
in p
roportio
n to
their relativ
e weig
htag
e in th
e total o
pulatio
n o
f Vad
odara. T
his w
as aimed
at min
imizin
g
at least any area-sp
ecific impact o
n th
e findin
gs.
Fin
din
gs
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
95
Chart -1
.2 4
% sen
ior citizen
s :unm
arried
Sta
tus R
egard
ing K
ids
1. B
AS
IC IN
FO
RM
AT
ION
Chart -1
.1
Sta
tus o
f Savin
gs
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
Out o
f the ab
ove referred
balan
ce 49%
peo
ple so
me p
eople m
ay b
e presen
tly at
Chart -2
.2
Sin
ce the p
roposed
schem
e is basically
2. N
EE
D ID
EN
TIF
ICA
TIO
N
Chart -2
.1
Presen
t Reso
urces P
ositio
n
Desire to
up
gra
de L
ivin
g S
tan
dard
96.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
3 . O
BS
TA
CL
ES
IN D
EC
ISIO
N M
AK
ING
Chart - 3
.1
Chart -2
.3
Socio
-Eco
nom
ic Need
:Hom
e-com
ing
Men
tality
to L
eave L
egacyV
ignan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
97
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
Chart - 3
.3
Chart - 3
.4
Lik
elihood
of K
id’s In
terferend
ce
Wh
o a
re Th
ey?
Chart - 3
.2
Perceiv
ed C
om
plica
tion
98.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Con
clusio
n
The b
asic Sco
pe o
f the S
chem
e
1.
The g
roups co
ntain
ing alm
ost co
nfirm
ed tak
ers form
total o
f 23 %
portio
n o
f the w
hole targ
et gro
up, w
hich
is not a n
eglig
ible fig
ure to
start with
.
2.
There is a sco
pe to
mark
et this sch
eme in
India co
nsid
ering th
e viab
ility em
anatin
g fro
m th
e mag
nitu
de o
f
the p
oten
tial optees.
The S
cope in
Futu
re
1.
There is a g
roup o
f peo
ple w
ho n
eed ad
ditio
nal fu
nd in
flow
but d
o n
ot o
pt n
ow
becau
se of reaso
ns lik
e
desire to
leave a leg
acy, no risk
men
tality o
r anticip
ated d
isinclin
ation fro
m k
ids etc. T
he n
eedy p
eople
hav
ing k
ids b
ut ill-treated
are likely
to h
ave a seco
nd th
ought an
d b
ecom
e strong co
nten
ders o
f the sch
eme.
This is a class w
hich
offers h
idden
poten
tial in th
e med
ium
to lo
ng ru
n.
2.
It is a hum
an ten
den
cy n
ot to
accept an
y n
ew th
ing im
med
iately b
ut to
chan
ge th
e min
d set o
ver a p
eriod
of tim
e after watch
ing o
thers en
joyin
g fru
its of th
at thin
g
Reco
mm
end
atio
ns a
nd
Su
ggestio
ns
The p
roposed
dep
osit S
chem
e offers su
fficient sco
pe in
India fo
r the p
resent to
be tak
en u
p as a v
iable
pro
duct b
y th
e ban
ks ,w
hich
can see en
larged
scope in
med
ium
to lo
ng term
.For th
is creation o
f sufficien
t
awaren
ess among th
e peo
ple an
d fin
e tunin
g th
e terms o
f the sch
eme to
suit b
oth
the en
ds are th
e majo
r
initiativ
es required
to b
e taken
by th
e govern
men
t and b
anks.
The p
roposed
schem
e should
be seen
as an im
portan
t social secu
rity m
easure an
d w
hen
it is a matter o
f
strikin
g a b
alance b
etween
feasibility
/viab
ility an
d so
cial security, th
e go
vern
men
t sho
uld
take n
ecessary
supportiv
e and m
otiv
ational m
easures lik
e insu
ring th
e risk asto
timin
g o
f death
in a sp
ecific time-slo
t to en
sure
additio
nal p
rotectio
n in
case of d
eposito
r outliv
ing th
e dep
osit term
.
The S
enio
r Citizen
s’ foru
ms in
India can
play
a constru
ctive ro
le in creatin
g aw
areness am
ong th
e peo
ple
about th
e ben
efits of th
e schem
e as also arran
gin
g fo
r som
e med
ical consu
ltancy
services to
help
the sen
ior
citizens ch
oose a rig
ht term
and ad
equate cu
shio
n. T
hey
can also
follo
w u
p w
ith th
e govern
men
t for relev
ant
issues lik
e insu
rance an
d in
terest rates.
Referen
ces
Govern
men
t Web
site, view
ed 1
st March
2007
<http
://ww
w.cb
ec.gov.in
/budget0
708/sp
eech-e.h
tm>
Ind
ian
Ban
ks’ A
ssocia
tion
offic
ial w
eb
site p
ag
e o
f sup
po
rt serv
ices, v
iew
ed
20
th F
eb
ruary
, 20
09
<h
ttp:w
ww
.iba.o
rg.in
/Mo
n_
Inc_
Dep
_d
isc_in
ter.asp>
Lak
hotia &
Subhash
Lak
hotia “Jeev
an S
urak
sha-P
ersonal P
ensio
n S
chem
e” Wed
nesd
ay, 04 D
ecember , 2
002,
18:1
6 L
ast Updated
: Wed
nesd
ay, 14 M
ay , 2
003, 2
0:1
8 , v
iewed
25
th Feb
ruary
2009 <
http
://sify.com
/finan
ce/
tax/fu
llstory.p
hp
?id=
12
19
07
21
>
Mad
hu T
, “Sunset F
unds - A
regular in
com
e on y
our retirem
ent, an
d m
ore tax
savin
gs, v
iewed
25
th Feb
ruary
20
09
http
://ww
w.o
utlo
ok
mo
ney.co
m/o
lmn
ew/article.asp
x?sid
=6
&cid
=3
0&
articleid=
70
5>
Official w
ebp
age o
f LIC
: Sch
eme D
etails on
Jeevan
Ak
shay
–III, v
iewed
28
th Feb
ruary
20
09
< h
ttp://
ww
w.licin
dia.co
m/p
ensio
n_
plan
s_0
02
_featu
res.htm
>
Official w
ebpag
e of L
IC: S
chem
e Details o
n Jeev
an N
ew Jeev
an D
hara-I, v
iewed
28
th Feb
ruary
2009 <
http
://
ww
w.licin
dia.co
m/p
ensio
n_
plan
s_0
04
_featu
res.htm
>
Ru
pare
lia,M
.V., “
Rev
erse
Mo
rtgag
e L
oan
by
M.V
.Ru
pare
lia”, v
iew
ed
1st F
eb
ruary
20
08
< h
ttp://
mvru
p.red
iffiland. co
m/scrip
ts/ xan
adu_diary
_view
.php?p
ostId
=1187852589>
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
99
Dep
osits R
epay
able b
y B
ank
s thro
ug
h E
qu
ated M
on
thly
Installm
ents
100.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Resista
nce o
ver S
hift S
ystem
R. K
rishnav
eni1 an
d R
avi C
hin
nath
ambi
2
(Th
is case exp
lains in
detail th
e wo
rk en
viro
nm
ent p
revalen
t in h
ealth care serv
ices. Th
e natu
re of w
ork
ing
is well
bro
ug
ht o
ut. D
ue to
env
iron
men
tal and
bu
siness ch
ang
es, the related
measu
re un
dertak
en b
y th
e man
agem
ent lead
s to
resistance am
on
g th
e emp
loy
ees.)
Back
gro
un
d
Boss B
ack-O
ffice Serv
ices Pvt. L
td is a 1
00%
export o
riented
unit estab
lished
in th
e year 1
998 at C
oim
bato
re
by
two
academ
icians w
ho
turn
ed o
ut to
be en
trepren
eurs after d
ecades o
f teachin
g in
a Go
vern
men
t aided
colleg
e in C
oim
bato
re. The co
mpan
y w
as started w
ith th
ree emplo
yees w
ith an
aim o
f offerin
g IT
Dev
elopm
ent
& C
onsu
ltancy. W
ithin
one y
ear the co
mpan
y d
iversified
into
offerin
g b
ack o
ffice services to
health
care facilities
prim
arily in
the U
nited
States, an
d later it started
exten
din
g th
e services to
Australia an
d C
anad
a. When
the
recession in
US
hit th
e IT in
dustry
in 2
001, th
e org
anizatio
n ceased
to o
ffer IT d
evelo
pm
ent an
d C
onsu
lting b
ut
contin
ued
to d
evelo
p k
iosk
applicatio
n fo
r dom
estic mark
et, especially
the G
overn
men
t enterp
rises. The u
nclear
focu
s of G
overn
men
t officials an
d d
elayed
pay
men
ts mad
e the activ
ity fin
ancially
unfeasib
le. How
ever th
e
focu
s on th
e health
care services (tran
scriptio
n) g
ained
strength
year after y
ear.
The tran
scriptio
n is o
ne o
f the b
ack o
ffice services ren
dered
to th
e health
care facilities in th
e 1U
S. T
he
docto
rs must m
aintain
a detailed
med
ical report / reco
rd o
f every
visit o
f each p
atient d
ue to
the fo
llow
ing
reason
s:
1.
as a legal req
uirem
ent
2.
to claim
money
from
the in
suran
ce com
pan
y fo
r the treatm
ent o
r consu
ltation g
iven
for fu
ture referen
ce
pu
rpo
se
3.
info
rmatio
n to
be p
assed o
n to
the referred
do
ctor in
need
y cases reg
ardin
g th
e treatmen
t giv
en to
the
referred p
atient
4.
to safeg
uard
him
self / herself fro
m an
y leg
al suits
5.
To m
ake th
e patien
t info
rmatio
n av
ailable electro
nically
as per F
ederal G
overn
men
t’s Health
care policy.
The co
mpan
y h
as over 1
00 p
eople w
ork
ing fo
r them
both
in-h
ouse an
d fro
m-h
ouse. W
hen
the co
mpan
y
div
ersified in
to h
ealthcare B
PO
, there w
as a pro
liferation o
f similar co
mpan
ies all around C
oim
bato
re and th
e
skilled
man
pow
er had
too m
any ch
oices to
choose fro
m. T
o g
ain co
mpetitiv
e advan
tage an
d attract talen
ted
man
pow
er, the co
mpan
y to
ok a p
olicy
decisio
n an
d an
nounced
the fo
llow
ing as U
niq
ue sellin
g p
ropositio
n
(US
Ps) to
attract the h
um
an reso
urces.
1.
Only
Gen
eral shift (R
egular w
ork
ing h
ours as in
ban
ks, co
lleges etc)
2.
Flex
ible w
ork
ing h
ours to
suit th
e married
wom
en an
d to
-be-m
oth
ers.
3.
Split sh
ift (Anoth
er flexib
le optio
n th
at allow
s staff to w
ork
few h
ours in
the m
orn
ing an
d th
e remain
ing
hours in
the ev
enin
g w
ith a larg
e break
in b
etween
)
4.
Subsid
ized lu
nch
etc
These m
easures m
ade B
oss B
ack-O
ffice Serv
ices the b
est place fo
r the h
um
an reso
urces to
work
with
while m
ost o
f the co
mpan
ies insisted
on 2
-shifts, if n
ot 3
-shifts.
1. P
rofesso
r, PS
G In
stitute o
f Man
agem
ent, C
oim
bato
re. E-m
ail : rmk
rishn
aven
i@g
mail.co
m
2. S
tud
ent, E
xecu
tive M
BA
pro
gram
, PS
G In
stitute o
f Man
agem
ent, C
oim
bato
re. E-m
ail : cravi@
seyy
on
e.co.in
Case S
tud
y
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
101
Resistan
ce ov
er Sh
ift Sy
stem
Th
e com
pan
y o
ffered free train
ing
with
perfo
rman
ce-link
ed in
centiv
e. Wh
ile man
y co
mp
anies o
ffered
trainin
g b
y g
etting m
oney
from
the p
oten
tial candid
ates, Boss B
ack-O
ffice Serv
ices and a few
com
pan
ies offer
free trainin
g to
all the selected
candid
ates. Additio
nally, d
urin
g th
e trainin
g p
rogram
me th
e trainees are p
aid
attractive p
erform
ance-b
ased stip
end. A
s a result th
e org
anizatio
n in
vests h
eavily
on each
indiv
idual to
mak
e
them
a good tran
scriptio
nist. In
turn
, all the train
ees are expected
to sig
n an
agreem
ent to
stay w
ith th
e com
pan
y
for a m
inim
um
perio
d o
f 2 y
ears. Every
candid
ate must u
nderg
o a 6
-month
long, stren
uous train
ing p
rogram
me
with
very
hig
h p
erform
ance targ
ets. Can
did
ates who co
uld
not w
ithstan
d th
e pressu
re to m
eet the h
igh stan
dard
s
dro
pped
out an
d o
nly
around 6
0%
of th
e trainees u
sed to
get in
to th
e pro
ductio
n. S
ince b
oth
the w
hole-tim
e,
founder D
irectors w
ere academ
icians, th
eir flair for teach
ing m
ade th
e com
pan
y k
now
n fo
r the b
est trainin
g
among th
e host o
f com
pan
ies located
in an
d aro
und C
oim
bato
re. One o
f them
prim
arily to
ok ch
arge o
f the
trainin
g an
d th
e oth
er directly
man
aged
the O
peratio
ns an
d H
R
The p
er perso
n p
roductiv
ity u
sed to
be v
ery h
igh as a resu
lt of g
ood train
ing. W
ithin
6 m
onth
s of ex
perien
ce,
the tran
scriptio
nists u
sed to
type 6
00 lin
es per d
ay w
ith an
accuracy
rangin
g fro
m 8
0%
to 9
0%
. As th
e salary w
as
also lin
ked
with
the p
roductiv
ity an
d th
ere was n
o tim
e restrictions, staff u
sed to
spen
d lo
nger h
ours, as h
igh as
12 h
ours in
the co
mpan
y to
type m
ore. S
om
e of th
em earn
ed in
centiv
e equal to
50%
of th
eir salary o
r more. A
lso
work
ing at B
oss B
ack-O
ffice Serv
ices was fu
n an
d th
ere used
to b
e a lot o
f parties an
d celeb
rations. A
ll the
staffs used
to tak
e interest in
all the g
et togeth
er and o
ther activ
ities in w
hich
they
actively
particip
ated.
Few
years after th
e establish
men
t, wh
en th
e streng
th in
creased co
nsid
erably, sep
arate man
agers w
ere
emplo
yed
to tak
e care of T
rainin
g an
d O
peratio
ns w
ho rep
orted
to th
e Directo
rs directly.
Cu
rrent situ
atio
n
After th
e entry
of m
any A
merican
com
pan
ies, the B
oss B
ack-o
ffice Serv
ices started facin
g relativ
ely h
igh
attrition rate. T
his w
as becau
se the salary
offered
was relativ
ely a b
it hig
her b
y th
e Am
erican co
mpan
ies but th
e
wo
rkin
g co
nd
ition
s were also
a bit strin
gen
t. An
oth
er trou
bleso
me tren
d faced
by
Bo
ss was th
e per-p
erson
pro
ductiv
ity w
as also red
uced
to 4
50 lin
es per d
ay w
ith av
erage accu
racy aro
und 7
5 p
ercent. T
he lo
wer p
roductiv
ity
ultim
ately b
rought d
ow
n earn
ing p
er seat and also
loyalty
was fo
und to
be w
anin
g o
ut. T
he em
plo
yees w
ho left
the co
mpan
y q
uoted
longer-w
ork
ing h
ours as th
e prim
ary reaso
n. T
he ru
pee ap
preciatio
n ag
ainst th
e dollar w
as
also an
oth
er concern
that h
ad d
irectly affected
the p
rofit m
argin
of th
e com
pan
y. The situ
ation seem
s to b
e more
or less th
e same in
oth
er Coim
bato
re-based
com
pan
ies as well.
IssuesIn
this cu
rrent scen
ario, th
ere is an in
creased p
ressure fo
r the co
mpan
y to
impro
ve th
e per-seat earn
ings.
The to
p m
anag
emen
t, in o
ne o
f the b
oard
meetin
gs, d
iscussed
the n
eed fo
r brin
gin
g in
shift sy
stem as o
ne o
f the
measu
res inten
ded
at impro
vin
g th
e earnin
gs, w
hich
incid
entally
help
s in o
ther w
ays as w
ell. When
the b
oard
wan
ted to
know
how
it the sh
ift system
is goin
g to
help
, Directo
r (Operatio
ns) m
entio
ned
that th
e shift sy
stem
would
be b
eneficial in
the fo
llow
ing w
ays.
1.
The reso
urces are p
ut in
to efficien
t utilizatio
n.
2.
Mak
e the staff co
mplete th
e work
with
out w
asting an
ytim
e with
in th
e stipulated
time o
f say 7
or 8
hours
instead
of ex
tendin
g it to
10 o
r more h
ours.
3.
With
100 m
achin
es, instead
of 1
00 staff w
ork
ing in
gen
eral shift, b
y m
ovin
g to
shift sy
stem, 2
00 staff can
work
and th
ere is no n
eed fo
r expan
sion o
f infrastru
cture
when
the can
did
ates recruited
on th
e campus
join
the train
ing p
rogram
me d
urin
gth
e ensu
ing su
mm
er and th
ereafter.
4.
The p
roductiv
ity p
er mach
ine w
ould
be m
ore.
5.
Ultim
ately it resu
lts in in
creased earn
ings p
er mach
ine. E
ach m
achin
e in g
eneral sh
ift yield
s on an
averag
e
500 lin
es but in
the sh
ift system
(two sh
ifts), it is expected
to y
ield 8
00 lin
es.
102.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
6.
Th
ere will b
e an in
crease in th
e ov
erall pro
du
ctivity
by
abo
ut 6
0%
, wh
ich is ex
pected
to resu
lt in an
increase o
f 40%
in th
e overall b
illing. 5
5%
of th
is differen
ce in b
illing g
ets directly
added
to th
e pro
fit
marg
in. (T
here is n
o tax
for 1
00%
EO
Us in
India till 2
009)
7.
The co
ncern
expressed
by th
e staff in th
e exit in
terview
about lo
ng w
ork
hours co
uld
also b
e addressed
.
8.
The staff sh
all go b
ack h
om
e much
early an
d h
ave b
etter work
-life balan
ce.
9.
Red
uces th
e fatigue o
f staff
10
.F
ocu
sed an
d co
ncen
trated w
ork
results in
better q
uality
11
.S
taffs are hard
pressed
for tim
e and h
ence th
ere will b
e less intern
al politics.
Actio
ns In
itiated
The O
peratio
ns M
anag
er was en
trusted
with
the resp
onsib
ility o
f intro
ducin
g th
e shift sy
stem. H
e was also
pro
mised
an attractiv
e cash in
centiv
e upon im
plem
entatio
n. H
e was in
structed
to co
me o
ut w
ith reco
mm
endatio
ns
and a d
etailed p
lan an
d m
ake a p
resentatio
n to
the D
irector o
n th
e first Monday
of M
arch 2
008 at 5
PM
. The
Directo
r (Operatio
ns) in
itiated th
e initial ro
und o
f discu
ssion w
ith th
e team lead
ers along w
ith th
e Operatio
ns
Man
ager. T
here seem
ed to
be a b
it of en
thusiasm
among th
e team lead
ers. It was su
ggested
that th
e team d
iscuss
the p
lan w
ith th
e indiv
idual m
embers. A
fter discu
ssions an
d d
eliberatio
ns, th
e issues raised
by th
e team m
embers
must b
e bro
ught u
p fo
r follo
w-u
p d
iscussio
n.
In th
e mean
time few
concessio
ns w
ere also sim
ultan
eously
announced
. A red
uctio
n in
the m
onth
ly targ
ets to
accom
modate th
e reduced
time an
d a few
oth
er welfare m
easures. T
he O
peratio
ns m
anag
er had
4 o
r 5 ro
unds o
f
discu
ssion w
ith th
e team lead
ers and th
e team o
ver a p
eriod o
f two-w
eeks.
It was clo
se to 5
p.m
. on M
arch 3
, 2008, M
onday
; the D
irector (O
peratio
ns) w
as lookin
g fo
r the O
peratio
ns
Man
agers th
rough th
e glass w
indow
in h
is cabin
. He w
as found to
be in
volv
ed in
an activ
e discu
ssion w
ith a
gro
up o
f staff even
after five p
ast five. T
he D
irector tu
rned
his atten
tion w
hen
the V
oice o
ver th
e Intern
et
Pro
toco
l (VO
IP) p
hone ch
uck
led. W
hen
he w
as talkin
g to
the clien
t on th
e oth
er end o
f the g
lobe, h
e could
hear
foot step
s appro
achin
g h
is door. A
s he k
ept o
n talk
ing, h
e could
see him
standin
g w
ith h
is should
ers stoopin
g
dow
n, ey
es with
out an
y u
sual g
littering an
d lip
s dry. W
hen
he sw
itched
-off th
e speak
er phone, T
he O
M said
to
him
, “Sir! I’m
extrem
ely so
rry. I could
not co
nvin
ce or m
otiv
ate the staff to
fall in lin
e with
our id
ea.” Even
after
the an
nouncem
ent o
f concessio
ns h
e was u
nab
le to co
nvin
ce the staff to
move to
shift o
peratio
ns an
d w
as forced
to p
ostp
one th
e decisio
n o
n acco
unt o
f heav
y o
ppositio
n b
y th
e mem
bers o
f the staff an
d ev
en th
ere was an
indicatio
n th
at som
e of th
e key
peo
ple m
ight leav
e.
Resista
nce
He listed
out v
arious reaso
ns th
at mad
e them
resist: The m
ain asp
ect for resistan
ce among th
e emplo
yees
was d
ue to
the fo
llow
ing reaso
ns. M
any o
f them
who m
ay h
ave to
work
in th
e afternoon sh
ift would
be fo
rced
to g
o late an
d p
arents n
ever lik
ed it, as m
ost o
f the staffs are u
nm
arried g
irls. They
preferred
neith
er to b
e
dro
pped
by call tax
ies. Staff w
ho m
ay h
ave to
com
e in th
e morn
ing said
that th
ey h
ave d
ifficulty
leavin
g h
om
e
so early
and also
som
e of th
em said
they
hav
e health
pro
blem
s like asth
ma, allerg
ies etc. Som
e oth
ers feared th
at
their p
roductiv
ity w
ould
com
e dow
n as a resu
lt of restricted
work
ing h
ours an
d h
ence th
eir ability
to earn
more
salary an
d in
centiv
e.
Man
y m
arried w
om
en fo
und g
eneral w
ork
ing h
ours co
mfo
rtable as th
ey can
take care o
f their ch
ildren
/
diseased
in-law
s. Som
e feared th
at their g
row
th m
ay b
e ham
pered
as they
could
not sp
end ex
tra time to
learn.
While o
thers felt th
at they
may
be fo
rced to
learn ab
out n
ew clien
ts to g
et sufficien
t pro
ductiv
ity.
After listen
ing to
him
keen
ly, the O
peratio
ns D
irector to
ok a d
eep b
reath, clo
sed h
is eyes in
deep
thin
kin
g
for a few
mom
ents an
d said
to h
im firm
ly, “Let m
e try!”
Resistan
ce ov
er Sh
ift Sy
stem
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
103
104.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
Vig
nan
a Jyoth
i Journ
al of M
anag
emen
t / Vol. I. Issu
e. I. / July.-D
ecember 2
009.
105