Transformative Organizations

Transformative

Organizations

GLOBE stands for the Global Leadership and Organizational Behavior Effectiveness Program, led by Professor Robert House, at the Wharton School. GLOBE is now a network of about 200 investigators in more than 70 nations. In Phase I and Phase II of the GLOBE program, over 15,000 middle managers from 1,000 firms in 62 societies completed the GLOBE survey examining how societal and organizational cultures affect the acceptance and effectiveness of leadership practices. In Phase III of the GLOBE program, funded generously by the National Science Foundation of the US, about 2,000 CEOs have been interviewed and about 15,000 top managers have been surveyed assessing how values-based and entrepreneurial leadership practices influence management of change, organizational climate, and societal performance. In India, Phase III of the GLOBE program is being undertaken in all the 28 states and 2 of the Union Territories, with a target sample of more than 1,000 professionally run as well as family-based companies. Dr. Vipin Gupta is coordinating the India project through GLOBE India Development Center, situated at the EMPI Business School, Delhi, India. This book was written with the help and support of the following members of GLOBE India Development Center. Associate Editors J. Rajasekar

Neelu Rohmetra

Pankaj Saran

Associate Reviewers Girish K. Agrawal Ashok Aima Kanika T. Bhal Subhash Chandra Nimit Chowdhary Sukhendu Debbarma Rosemary R. Dzuvichu Mathai B. Fenn Sridhar Guda Lokanandha Reddy Irala Mohamed Basheer Khan Seema Mahajan Mary Matthew Kumkum Mukherjee

Renu Nagar N. Natarajan A K Pani Guru Prakash Prabhakar Roma Puri Sarika Raghav Neeti Rana Dinesh Sharma Mrinalini Shrivastava Niti Singh Ancheri Sreekumar ES Srinivas Gita S. Surie Fr. Vattathara M. Thomas

Transformative

Organizations A Global Perspective

Editor

Vipin Gupta

Response Books

A division of Sage Publications New Delhi l Thousand Oaks l London

Copyright © Vipin Gupta, 2004 All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2004 by

Response Books A division of Sage Publications India Pvt Ltd B–42, Panchsheel Enclave New Delhi 110 017 Sage Publications Inc. 2455 Teller Road Thousand Oaks, California 91320

Sage Publications Ltd 1 Oliver’s Yard, 55 City Road, London EC1Y 1SP

Published by Tejeshwar Singh for Response Books, typeset in 10/12 points Garamond by Innovative Processors, New Delhi and printed at Chaman Enterprises, New Delhi. Library of Congress Cataloging-in-Publication Data Transformative Organizations: A Global Perspective/[edited by] Vipin Gupta. p. cm. Includes bibliographical references and index. 1. Organizational Change, 2. Strategic Planning, 3. Organizational Learning, 4. Organizational Behaviour, 5. Industrial Management. I. Gupta, Vipin, 1968— HG58.8.T698 658.4¢06—dc22 2004 2003017028 ISBN: 0–7619–9820–9 (US-HB)

81–7829–331–5 (India-HB)

Production Team: Gargi Dasgupta, R.A.M. Brown, Ritu Singh and Santosh Rawat

Contents Preface

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1. An Introduction to Transformative Organizations Vipin Gupta

1

Part I: Asian Context Concepts and Case Studies in the Indian Context 2. The Transformative Organization The Coates of India Story Vipin Gupta l Kumkum Mukherjee

l

Roma Puri

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3. A Model of the Transformative Organization Learning from the Wesman Group of India Vipin Gupta l Kumkum Mukherjee l Roma Puri

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4. Roles of Principal Players during Restructuring The Orissa State Electricity Board Thillai Rajan A. l V. Anand Ram

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5. Metamorphosis at India Post The ePost Initiative Srikumar K. l Ananda Sarkar l Bharat Kumar L. l Rajni Ravindran l Ramkumar Ganesan l Shubhosree Dasgupta l R. Srinivasan

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Functional Strategies in the Indian Context 6. Knowledge Management and Change Processes Lessons from Kabir Vipin Gupta l Deepak Kaul l Mrinalini Shrivastava

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7. Innovative Compensation Practices for Organizations in India Atul Mitra

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8. Internationalization of Small Scale Enterprise Networks A Study of Exporters from Aligarh David Watkins l Nitin Jain

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9. Transformative Brand and Organizational Communication Vipin Gupta l S. Ramesh Kumar l J. Rajasekar

161

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CONTENTS

Geographical Strategies in the Confucian Context 10. Performance Drivers of Corporate Restructuring in Korea Seungwha (Andy) Chung l Gyeong Mook Kim

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11. Globalization of Market-driven State Enterprise CHN-CHN Ceramics (C&C), China Jifu Wang l William R. Boulton

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12. Development of Chinese Managerial Behavior A 7-P Model based on the Forces of History and Culture Kai Cheng Yu l Ping Ping Fu

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13. An Integrated Theory of Management Geography Japanese Hybrid Factories in the Three Major Regions Tetsuo Abo

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Part II: Trans-Asian Context The Northern European Context 14. Acculturation of Cross-border Acquisitions Cowboys in Germany Thomas Steger 15. Employees as ‘Co-Intrapreneurs’ An Evolving Perspective for Managing Change in the Germanic Context Rolf Wunderer 16. Functional Flexibility in the Norwegian Context Strategic Adaptation vs Competence Orientation Paul N. Gooderham l Bente R. Løwendahl l Odd Nordhaug

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The Anglo Cultures Context 17. Transformational Forces in the American Corporate System Managing Changes in the Production Methods and Workforce Organization Tetsuji Kawamura 18. Internationalizing the American Franchise System The Value of Resources, Agency Capabilities and Strategic Intent Ilan Alon 19. The Positive Psychology of the Transformative Organization A Fresh Perspective and Evidence from the Anglo Context Paul T.P. Wong l Vipin Gupta

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The Latin Cultures Context 20. Sense-making in Change Interventions Lessons from Argentina Carlos Altschul

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CONTENTS

21. Cultural Symbols as Change Agents International Joint Ventures in Mexico Anabella Davila l Edmundo Garcia 22. Managing Change Designing Organizations using the Evolutionary Perspective Luca Solari

VII

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The Diverse Global Context 23. Multinational Ethical Capability A Source of Competitive Advantage Paul F. Buller l Glenn M. McEvoy

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24. Behavior of Firms during Economic Liberalization Conceptual Propositions and an Integrative Model Sougata Ray

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25. Organizational Design Under Post-modernization What can we Learn from the World Values Surveys? Vipin Gupta l Mathai B. Fenn l Ancheri Sreekumar

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26. Concluding Comments on Transformative Organizations Vipin Gupta 27. Epilogue An Overview of the GLOBE Research Program Robert J. House

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Notes on Contributors

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Index

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Preface This book may be regarded as a step towards the study of comparative organizational metaphysics—broadly and heuristically explicating the nature of organizations in different regions of the world, the meaning their existence carries, the cultural sources of this meaning, how leaders can and do bring this meaningful value to the world by creating and transforming organizations, and how such organizational transformations may be sustained to offer unique value in both emerging and industrialized market contexts. I hope this book is able to highlight a need for further paradigm development in the study of organizations and their strategic management. The analysis and conclusions are the results of my research on the culture, leadership, organizational behavior, performance, technological growth, Japanese management, and emerging markets, at both doctoral and post-doctoral levels at the Wharton School of the University of Pennsylvania. During my doctoral research, I was fortunate to be affiliated jointly with the Wharton School and the University of Tokyo. At the University of Tokyo, I was in close touch with two major research projects—the Japanese Multinational Enterprise Study Group under Professor Tetsuo Abo, and the Japan cell of Massachusetts Institute of Technology’s (MIT) International Motor Vehicle Program under Professor Takahiro Fujimoto, that offered path-breaking insights into Japanese culture and the difficulties that Japanese firms face in coming to terms with the development of China and increasing protectionism in the West. At the Wharton School, I was exposed to strategic and macro-economic issues by several leading international authorities, including Professor Harbir Singh; Professor Jeff Dyer; Professor Jitendra Singh; Professor John Kimberly; Professor Masaru Yoshitomi; Late Professor Ned Bowman; Professor Dan Levinthal; Professor Connie Helfat; Professor Marshall Meyer; Professor Bruce Kogut; Professor Guido Krickx; Professor Ian Macmillan; and Professor Max Boisot; with all of whom I was engaged in one or more research projects during the course of my doctoral work and subsequently. Since 1997, I have had the privilege of working as a junior colleague with Professor Robert (Bob) House, the founder and initiator of the 62-society GLOBE research project on culture, leadership and organizational behavior effectiveness, at the Wharton School. The final chapter of the book contains an overview of the GLOBE research program by Bob House, adapted from the proposal submitted to the US National Science Foundation in 2000 for funding GLOBE’s CEO study. In terms of this book,

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GLOBE is truly a transformative undertaking as it has discovered new meanings and provided new connections among the scholars around the world. As a member of the GLOBE program, I have enjoyed substantial lively interactions with cross-cultural scholars in several national and international forums, including in Latin America, North America, Europe and Asia, and online through the exchange of emails, working closely with Paul Hanges, Mansour Javidan, Peter Dorfman, and Mary Sully—the core members of GLOBE integrative team. I am especially grateful to the members of the GLOBE India Investigator Network, who are helping to collect interview and survey data on CEOs and top managers in different states of India, for a comparative analysis with GLOBE’s new ongoing study of value-based leadership in around 35 nations. In addition to the funding offered by Globe Research and Educational Foundation through the US National Science Foundation, general financial support for the study has also come from the Indian Institute of Management (IIM), Indore. The Xavier Labour Relations Institute (XLRI), Jamshedpur has helped in extending the network to the rather inaccessible eastern states of India, with Don Bosco Youth Mission & Educational Services, Guwahati taking responsibility for data collection in Northeast India, and being the first at the all-India level to actually deliver the data! The idea for this book originated and the work developed through interactions with the members of the GLOBE India Investigator Network, and I am very grateful to them for sharing with me their ideas and insights from the key concerns of the CEOs interviewed by them. In particular, I must acknowledge J. Rajasekar (Principal Co-Investigator, GLOBE India project, at IIM Indore), Neelu Rohmetra (State Co-Investigator— Jammu & Kashmir, GLOBE India project, at Jammu University), and Pankaj Saran (Vice President, EMPI University, New Delhi), for their critical inputs at various stages of the making of this book. Rajasekar reviewed several chapters and helped abridge some of them for crisper reading. Neelu invited several scholars to submit contributions to this book, and urged me to initiate this project. I am also grateful to the two anonymous reviewers, and Leela Gupta (Consulting Editor, Response Books, Sage, New Delhi), who provided constructive feedback, and helped substantially improve the manuscript. I would like to make a special mention of the assistance of the following students at management institutes of Indore (Devi Ahilya University, Institute of Management Studies, and Prestige Institute) in transcribing the interviews of Indian CEOs: Saunak Ghosh, Warsi Syed, Vishnu Mishra, Trishla Jain, Swati Yadav, Sumit Harkauli, Shilpi Sinha, Shikha Sharad, Shashank Shukla, Puneet Kotha, Preetish Gupta, Preeti Arora, Preeti Kshirsagar, Nivrati Grover, Gaurav Shrivastava, Arpita Gupta, Amrita Burman, Ambuj Dixit, Abhishek Mehrotra, Abhinay Saxena, Peeyush Sharma, Anubhav Kansal, Huzefa Malak, Nidhi Mehrotra, Shalini Saboo, Somesh Surana and Javed. Ms. Mrinalini Shrivastava and Ms. Renu Nagar helped coordinate the efforts of these students.

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I hope that this book, based on the contributions of scholars from around the world, would serve to strengthen the bridges among different communities and organizations across the globe. The support of my family members, in particular my wife Bhakti, her parents Virendra Jain and Madhur Jain, and my parents Surender Nath and Manju Gupta, and love of my nephew and nieces, Navya, Shanaya, Smrit, and Ritvik, and of my siblings, uncles, aunts, friends, and colleagues, also deserves a special mention for inspiring the accomplishment of this work. I remain indebted to my Guru Param Siddh Kartar Singh Yadavji for His spiritual and divine blessings. Vipin Gupta February 24, 2003 Philadelphia

AN INTRODUCTION TO TRANSFORMATIVE ORGANIZATIONS

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1

An Introduction to Transformative Organizations Vipin Gupta

India and the other new economies in Asia and around the world are going through a period of unprecedented crisis. In the aftermath of 9/11, high-profile corporate scandals, and a global slowdown, growth of the new global economy has languished, and unemployment has risen with many educated workers losing their jobs and recruitment drying up for the new graduates. Many corporations have gone out of business, and others have abandoned or postponed their investment plans. Even the Information Technology sector—the driver of the dreams in the new economy—has reeled under conditions that have influenced virtually every sector including automobiles, consumer electronics, consumer durables and steel. Tourism, particularly air travel and the hotel industry, is severely affected with an unusually low number of international tourists, significantly hindering initiatives for international integration. The micro-economic crisis has created problems of massive proportions on the macro-economic front. In India, for instance, the combined central and state government fiscal deficit is almost 10 per cent of the national income, far exceeding the international norms of financial stability that require it to be below 3 per cent. Consequently, the government as well as the private sector has been unable to commit $30–$40 billion annually into the infrastructure that India needs to emerge out of poverty on a sustainable basis. The need of the hour is ‘a better understanding of the micro workforce climate of the organization and formulation of the practices and policies that generate, promote, sustain and reward performance oriented behaviors’ (Pattanayak and Gupta, 2003). McKinsey reports that India’s labor productivity is just 8 per cent of US levels— ranging from 1 per cent in electricity distribution to 44 per cent in even software. Even in a dozen ‘modern’ sectors, labor productivity is 15 per cent of the American rate. In general, there is a tendency to seek government action to manage crisis. Such tendencies are particularly stronger in nations with a substantial reliance on the new economy, as government support is seen as a way to protect initial investments and to ensure that firms in the nation survive and remain competitive when the global slowdown reverses itself. Government support is important, but more important is to transform a situation of crisis into a window of opportunity. As Ian Macmillan (Pattanayak

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and Gupta, 2002) observes, the challenges of entrepreneurial leadership are best met ‘in recognition of the appropriate context if a performing organization has to be created’. More generally, Pattanayak and Gupta (2002) explicate that with the onset of economic reforms, liberalization and globalization, Indian and other new economy corporations are witnessing a modern-day Darwinian phenomena of the survival of the fittest, where only those companies can exist that are able to understand and rapidly adapt to change. Even in the US, history shows that only a select few of the fittest survive the changing context. Of the US companies that made it to the 1955 Fortune 500 list in terms of the highest sales revenues, about 75 per cent are now out of business; of those in the 1980 Fortune 500 list, only about 50 per cent still exist as corporate entities. With the emergence of the new economy, the average life span of the companies at the top is rapidly declining. The need of the hour lies in an entrepreneurial leadership focused on the transformative organization—an organization that has a capacity and capability for continuing change and learning, based on a systematic and strategic priority on meaningful cross-cultural exchanges. The transformative organization is capable of discovering opportunities and patterns in the volatile global context, based on an insightful appreciation of the models and perspectives from different cultures of the world. This book highlights the link between the diversity of cultures and corporate strategy (strategic alliances, supply chain management, customer relationship management, and mergers and acquisitions), and showcases how diversity can be leveraged as a vehicle for learning and cross-cultural value accrual. Modern corporations have done well to share their own values with communities and groups around the world, and in selectively conducting business only with those who subscribed to and endorsed these values. However, they have failed to capitalize on the opportunities offered by the post-modern milieu, where all people have the right and freedom to determine their own favored values in a democratic fashion. Entrepreneurial leaders must develop a transformative perspective, so that they are not stopped from accepting and respecting people from different parts of the world for the specific set of values they have. The transformative perspective calls leaders to engage in a fruitful dialogue and conversation about the foundations and relevance of the values of different people. It focuses on appropriate enrichment and development of a portfolio of values that can be used by people around the world to deal with specific situations and challenges.

Transformative Organization in New York City To understand the challenges for managing crisis situations, in April 2002, we interviewed senior managers and entrepreneurs of New York City, with the help of business students at Fordham University. Most of the respondents were from the services sector, since New York City is largely a service economy, but some manufacturers with their offices in the city were also included. Nearly all the 30-odd respondents indicated that the events of 9/11 had heightened the

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responsive elements. In general, the respondents characterized the culture of New York city businesses as either ‘predatory’—with a material focus on acquiring wealth and, if there is a hurdle, to resolve it by hook or by crook; or ‘pragmatic’—a technocratic focus on innovation, quality, efficiency, and service initiatives. However, in the aftermath of 9/11, the respondents indicated a transformative shift towards the responsive culture founded on three levels: (a) asympathetic attitude (inter-personal level); (b) social consciousness (collective level); and (c) resolve (personal level).

S YMPATHETIC A TTITUDE A very strong common perception was that 9/11 events changed people’s interactions and respect towards one another, and changed employers’ minds, eyes, and hearts and increased their sympathy to workforce problems and concerns. It gave people a chance to step back and to realize that there are far more important things in this world than greed and the bottom line. The most noticeable impact was immediate in that people were more humane toward others; there was increased camaraderie, more honesty, and greater enjoyment and happiness in everyday business because one never knows what tomorrow may bring. On a more sustainable basis, knowing that the clients and the companies one conducts business with are reputable and can be trusted became critically significant.

S OCIAL C ONSCIOUSNESS A general perception was that 9/11 transformed the collective business culture into one in which rebuilding New York City’s economy was of utmost importance. One respondent noted that, relationships with clients became more personal as firms made an increased effort to be respectful of people’s fears, moods, and feelings. Another observed that people have come to understand the value of human life and the resolution of social problems. Many have and will continue to follow in the footsteps of the Red Cross, showing compassion for human life and taking a genuine interest in society. People were proud of making real contributions to the society. Businesses publicly supported socially conscious organizations to increase their emotional appeal to the public, especially current and potential customers.

R ESOLVE The final theme with 9/11, was that business has not changed, just the way we do it has. Some felt that the events changed a lot of the ideals of corporate America; that the companies now put more focus on the importance of the individual. However, the business has remained the same, because like anything in life, in order to be successful you must be able to ‘roll with the punches’. Others observed that it was important to maintain strong values and ideals in order for businesses to get back on their feet. Ideals must be strengthened, not changed to keep a sort of normalcy within a company.

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On the whole, the 9/11 events shaped stronger connections of business culture with the people and society around and thus forged a stronger, empathic sense of responsiveness. The general consensus was that the successful rebuilding of New York City as a global center calls for a responsive-pragmatic entrepreneurial leadership, and this can hardly happen using a materialistic culture typical of the city.

IMPLICATIONS FOR MANAGING CHANGE The study of response to the 9/11 crises in New York City has interesting implications for understanding the sources of crisis while managing in a culturally diverse milieu. Most transnational corporations find the costs of managing the business model across borders to be exorbitant. For instance, Japanese firms have experienced substantial costs and dilemmas while seeking to transfer their organizing principles, management models, learning techniques, and technological solutions across borders (Abo, 1994). The barriers have been both cultural as well as work-cultural in nature. Culturally, the norms for managing contracts and relationships, for problem solving, rewards, and compensations, and for responding to change and competition, differ considerably across borders. Even where there were no major cultural differences, the variations in work conditions—deriving from factors such as differing institutions, histories, government policies, cost of capital, supplier capabilities, workforce skills, consumer awareness, and economic development—have been frequently huge. The limitations of the cross-border organization have become a major source of continued recession in the Japanese economy since the late 1980s (Gupta, 1998). The early solutions to the management of cross-border diversity were either mental or structural in nature. Perlmutter (1969), for instance, highlighted the need for a geocentric mind-set that would allow international managers to work out a business model that transcends the logic of both the enthnocentric home nation and the polycentric host nations. On the other hand, Stopford and Wells (1972) uncovered shifts in the structures of American multinationals from a simple structure or a structure with an international division into more sophisticated worldwide product and worldwide geographical structures. These sophisticated structures worked on the basis of a cohesive product or a regional strategy depending on whether product-technology or market-responsiveness dominated business effectiveness. The ideal of developing global managers, whose careers would give them experiences in different cultures around the world, remained a distant reality in most corporations. With the growth of self-managing work teams, where many management roles are bestowed on the grassroots level, the possibility of relying on geocentric managers became even more remote. The shortcomings of the two structural solutions became evident in the 1970s itself when firms began experimenting with alternatives such as the Matrix form to manage both product-technology as well as market-responsiveness demands, though without much success.

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The transnational solution of Bartlett and Ghoshal (2001), has sought to resolve product efficiency, market responsiveness, as well as technological learning challenges of contemporary global corporations. The key to the transnational solution is its emphasis on ‘shared values’—the highly visible and clearly identifiable set of core corporate values, which are publicly endorsed and communicated by top managers and which are used to select, socialize, reward, and promote employees at all levels of organization. The mantra of ‘shared values’ became so popular during the 1990s that several corporations used it to screen their suppliers around the world, and to build their distinctive cultural identity through brands and corporate reputation. However, recent research on cross-border cultures suggests that the contemporary corporate focus on ‘shared values’ is severely inadequate. The values of people in different nations are significantly different, even when one considers very basic and universal value concepts such as honesty (Schwartz, 1994). Therefore ‘shared values’ can demoralize and alienate the vast majority of people in several, if not most, nations. These people may believe, and with some substantive historical, experiential, and cultural basis, in their own value perspectives. When the corporation shuts off all possible learning conversations and dialogues on values by emphasizing its own set of shared values, it may develop into a self-centric entity isolated from the dominant values in the multifaceted global milieu where it is operating. The failure of Enron, which took deep pride in its values—the values that encouraged free risk-taking and entrepreneurship and where the top managers let everyone perform on their own and honestly believed that this has and would further the corporate fundamentals—is instructive. Enron’s failure was not just because of its isolation from the values around the world, but also quite ironically because of its isolation from the values within the US, its home base. The concept of ‘shared values’ that uniquely define the identity and reputation of a corporation can thus push firms into deep black holes, where they are blinded from the limitations of these shared values. The concept of shared values is fundamentally antithetical to the thrust on organizational learning. A learning-oriented organization encourages people to seek collaborative learning and to be responsive to the demands of the market. Such an organization is designed to be transformative in nature—where mutual learning helps the firm as well as its stakeholders, the broader community, and where external groups discover and develop new perspectives. In contrast, ‘shared values’ call for the specification of a selective set of values identified by the top managers, either on their own or in consultation with their employees, clients, and other stakeholders. These values are then thrust upon those who either did not participate in the consultation process or did not share the consensus constructed by the organization to derive the identified values. In other words, the concept of shared values inculcates the dependency of people with diverse ideologies on the organization, by making them believe that the best and only course of action available is to accept what the organization tells them to value. Even the people who initially participated in and endorsed them are dissuaded from keeping an open mind, and from re-evaluating their assessments on the

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basis of any subsequent experiences or introspection that they may have. The whole process becomes particularly problematic in light of the cultural research findings that values are associated with one specific generation at a point in time, and that with generation shifts, the endorsed values also change substantially around the world (Inglehart, 1997). The concept of shared values thus seriously limits the ability of the organizations to be in-sync with the emergent values, and degenerates them into a stereotypical older person who is concerned about core values that nobody respects and follows any longer. We suggest that it is time to move on and to embrace the emergent, dynamic world reality that the organizations are currently living in, and are expected to continue living in, in the new millennium. Rather than spending millions of dollars on just identifying and then propagating their own shared values (which are known not to be shared by most people, as else there is no need to perpetually expend vast resources on them), firms should put a top priority on connecting with the tacit or explicit value capital of their stakeholders, the broader community, and external groups. As an illustration, the Indian software sector has been at the center of new economy revolution, and has shown a great resilience to the global economic downturn in the aftermath of the Internet meltdown, 9/11 and corporate scandals. India’s advantage stems from the lower cost of skilled labor and programmers, which has enabled Indian firms to secure software programming and business process outsourcing projects from firms in the US and other industrialized nations. However, Chinese firms are rapidly emerging as strong contenders in the global software market, notwithstanding their limitations in the English language. It is critical for Indian firms to adopt a transformative perspective so that they can perpetuate their value creation. Indian firms could approach transformation by considering the new set of values that would be critical for servicing customers when lower labor costs no longer remain the unique source of competitive advantage. Around the world, organizations are able to accrue increasing returns by focusing on value-added customer solutions, based on the knowledge about the needs and the systems of customers. A skilled higher cost labor is in fact an asset, not a liability, when organizations have such solutionfocused values. Towards this end, Indian firms may seek to develop strategic networks of relationships with firms in yet-to-emerge markets such as those in Africa, and thereby understand the issues involved in dealing with suppliers from nations with less than comparable infrastructure, technological, and financial resources. Such an organizational learning would allow the Indian firms to better appreciate the perspectives of customers in industrial markets, and help develop systems that strengthen the linkages with clients that have world-class quality service expectations for generating increasing and sustainable returns. Guided by the above insights, this book first presents the rich diversity of perspectives for change management initiatives in the Asian context based on 12 contributions. A mix of case-based and conceptual/empirical analysis is conducted, covering the domestic private sector, public sector, small-scale, and multinational enterprises in India. Thereafter, techniques and frameworks for change management used in the Confucian Asian societies of South Korea,

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China, and Japan are explicated, using four different research methodologies: empirical analysis, case-based analysis, conceptual/historical analysis, and comparative analysis. Second, the book highlights the value roadmaps that guide the transformative initiatives in a trans-Asian context—transcending the boundaries of the Asian region—using an additional set of 12 chapters. Merry Wiesner (2002) identifies the trans-Asian contacts as the basis for the historical world system, where forging cross-cultural interactions by reaching out facilitated the transformation of the old world into a new one. In this spirit of understanding the transformations necessary for the new economies to gain parity in competencies and competitiveness with the world in the chosen organizational domains, three of the chapters are based on the Northern European contexts, three on the Anglo contexts, three on the Latin American/Latin European contexts, and three on the global context. Finally, in the concluding part, the book presents a dynamic model for pursuing and perpetuating a transformative organization that is founded on the discovery and development of the opportunities for cross-cultural exchange, and generates value by offering services that enrich the productive and participative cultures of its local and global community groups. This book also presents some preliminary findings and case studies using the value-based leadership project of GLOBE in India. GLOBE—which stands for the Global Leadership and Organizational Behavior Effectiveness program— is a network of more than 200 investigators in over 70 societies worldwide. GLOBE has surveyed more than 15,000 middle managers on issues related to societal and organizational culture, and effective leadership behaviors. The findings of the GLOBE program’s study of culture and leadership behaviors are available in House, Hanges, Javidan, Dorfman, and Gupta, 2003. Currently, GLOBE is working on a follow-up project involving interviews of Chief Executive Officers (CEOs), and surveys of top management teams, in more than 30 nations. The project intends to compare the value-based leadership in professionally managed and entrepreneurial organizations. In India, we have forged collaborations with the management institutions in all the 28 states of India, plus Delhi and Pondicherry. The project in India is co-funded by the IIM, Indore and EMPI Business School, New Delhi, along with the Globe Research and Educational Foundation. XLRI, Jamshedpur is a co-coordinator of the project. In each state, we have interviewed up to 40 CEOs and have surveyed up to nine members of the top management team. The firms covered include both professionally managed and family-based firms, and encompass a variety of forms: domestic and multinational; private and public; old economy and new economy; small scale and large scale, and manufacturing and service. Rich insights into the effects of liberalization and globalization on change management initiatives, and the attempts to forge a transformative organization that bridges and connects local with global, East with West, and old with new are emerging from the preliminary analysis of this data (see Gupta, Surie, Javidan and Chhokar, 2002 for findings related to India in a Southern Asian context using the earlier phase of GLOBE data).

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In this chapter, we present key highlights of the contributions in the book and why they were selected as critically insightful for meeting the transformative challenge in new economies—the economies that are emerging from an era of poverty, and embracing globalization, growth, and gainful dynamism in technological and cultural endowments. The first part of the book deals with the Asian context. The first four chapters introduce the key concepts for the transformative organizational theory, and illustrate them using case studies from the Indian context. The next four chapters focus on the functional strategies of the transformative organization: organizational behavior, human resource management, international management, and marketing management, all illustrated based on research related to the Indian context. The final four chapters highlight the geographical strategies for the management of change—an essential aspect for implementing the transformative organization, based on the studies in South Korea, Chinese, and Japanese contexts. Taken together, the first part draws on the practices in Asia to investigate the strategy formulation aspects of a transformative organization, the functional management aspects, and the implementation tactics associated with the unique history and culture of a geographical context. In Chapter 2, Vipin Gupta, Kumkum Mukherjee, and Roma Puri, use a life cycle perspective to explicate The Transformative Organization: The Coates of India Story. The authors review recent developments in the transformative perspective, with special reference to the concepts of change, leadership, and learning. They emphasize that a transformative organizational learning shapes not just what the firm does, but also the meaning the firm associates with its mission. The authors highlight four alternative sets of strategic cultures, and demonstrate these ideal cultural types using the story of the Coates of India—a member of the Japan-based Dainippon Inks and Chemicals (DIC) Group. The same authors extend their analysis using another case study in Chapter 3, A Model of the Transformative Organization: Learning from the Wesman Group of India. Their perspective seeks to resolve three major problems defining the contemporary organizational theory: the formative problem of who has the ownership of the firm; the normative problem of how to integrate local vs global and internal vs external stakeholders; and the fulfillment problem of the boundaries of the firm. The authors explicate the techniques of formative, normative and summative evaluation to improve, integrate, and transform the organizational initiatives over a series of lifecycles. The Kolkata-based Wesman Group has been India’s foremost name and the dominant manufacturer for foundry equipment, combustion equipment, and industrial furnaces. Based on this case study, the authors illustrate how organizations can become effective democratic citizens by applying transformative methodologies. In Chapter 4, Thillai Rajan and Anand Ram provide yet another life-cycle analysis of the Roles of Principal Players during Restructuring: The Orissa State Electricity Board. They select the electricity supply industry as the context for their study because it is undergoing worldwide restructuring, and offer insights into the complex transformative aspects of the privatization process. Using a case study of Orissa State Electricity Board, three phases are identified in the

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restructuring process, namely, Impetus phase, Reorganization phase, and Consolidation phase. The authors highlight how the role of various actors changes in the different phases of the restructuring process in an emerging market context. Srikumar, Srinivasan, and a group of recent MBA graduates from IIM, Lucknow, discuss the perplexing Metamorphosis at India Post: The ePost Initiative in Chapter 5. Their thrust is on showcasing how a public service organization can be transformed, under conditions where privatization may not be a politically and socially viable alternative. Specifically, the authors analyze how the Indian Postal Department is capitalizing on its strengths—its vast distribution network, existing infrastructure, reliability and trust among the populace, and the government support it enjoys on account of its being a stateowned organization—to tap these opportunities. Interestingly, there does not appear to be anything special about its web-based ePost service: the timing is not the first, the technology used is not cutting edge, partnerships formed are not necessarily the best-in-their-class, the pricing is not the least in the market, the organization structure is not the most flexible, and the customer response time is not the best in the industry. Yet, ePost has carved its own niche in the marketplace, enthused the workforce, given a new contemporary touch to its postal channels, and offered its customers—many from interior rural areas not reached by the alternative organizations—a novel way to connect to the new economy. Vipin Gupta, Deepak Kaul, and Mrinalini Shrivastava, seek to connect the old with the new in Chapter 6, by investigating Knowledge Management and Change Processes: Lessons from Kabir. Based on medieval Indian literature, represented by the work of the scholar and saint, Kabir, and contemporary research on organizational behavior, the authors identify a three-step sequential learning model for managing transformative organizations. The model is contrasted with Lewin’s (1945) change management model, which also emphasizes three stages: unfreezing, changing, and refreezing. The model derived here is in better alignment with the emerging market contexts, where the landscape is more turbulent, change is more drastic and continuous, and the freezing approach is non-viable and costly. The three steps for sequential learning are: Learning to Discover, Learning to Develop, and Learning to Correct. Specific implementation issues related to these three steps are highlighted. Taking a complementary human resources perspective for knowledge management, Atul Mitra discusses Innovative Compensation Practices for Organizations in India in Chapter 7. Interestingly, after the liberalization that started in 1991, many Indian organizations have shown remarkable capabilities to offer high quality services at competitive prices in several knowledge-driven service sectors. Compensation and rewards systems must be transformed in congruence with the strategic intent of these new knowledge-driven organizations. Based on an empirical study, this chapter offers propositions for Indian compensation professionals to design and deliver compensation and rewards systems to help their organizations develop dynamic capabilities. In Chapter 8, David Watkins and Nitin Jain illustrate how in some cases a collaborative approach can help accelerate or bypass the time and resource

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consuming sequential approach to developing the knowledge for globalization work in their Internationalization of Small Scale Enterprise Networks: A Study of Exporters from Aligarh. The authors underscore that a critical factor in the ability to carry the globalization initiative is the possession of appropriate knowledge. This includes knowledge about foreign markets, techniques of foreign operation, the ways of doing business, and about key people in buyers’ organizations. Much of this is not easily acquired ‘off the shelf”; it is developed through the actual experience of foreign operations. Based on the survey data from 26 small Indian brass builder hardware exporters based in Aligarh, the authors found that 84 per cent of small firms first became active abroad through direct exports. Though the older firms first gained experience in the domestic market before going global, the newer firms were established specifically for the global markets. A common element was the reliance on personal contacts like the social community, friends and relatives. Vipin Gupta, Ramesh Kumar, and J. Rajasekar’s concern in Chapter 9 is to clarify approaches that can be used by the emerging market firms to compete with the better endowed multinational enterprises, through Transformative Brand and Organizational Communication. The authors observe that multinational firms have highly recognized brand equities, which are reinforced through heavy advertising and sponsoring of major events such as sports and entertainment that are core to the psyche of the local culture. Further, their operational and technological costs are spread over their entire worldwide networks, making them unusually competitive in quality and innovation investments. The emerging market firms can not compete on the basis of just simple brand building or investments in Research and Development (R&D). Instead, they should seek to integrate functional value with the intrinsic symbolic value that their brand carries by virtue of their better awareness of the aspirations and meanings desired by local stakeholders. They show, using a case study of Larsen and Toubro India, how functional excellence can be achieved and communicated through the enactment of entrepreneurial leadership within the organization. In Chapter 10, Andy Chung and Gyeong Mook Kim try to build understanding about the Performance Drivers of Corporate Restructuring in Korea. The authors recommend an integrative process view combining various performance drivers such as financial, strategic, and organizational initiatives. Using an analysis of 103 publicly traded Korean companies in the machinery industry, they find support for their proposition that retrenchment-oriented restructuring initiatives will improve only the short-term financial performance. For long-term corporate performance, companies combining both business portfolio restructuring with organizational system changes in a concomitant or sequential manner will benefit most. Without this long-term perspective for corporate revitalization, the recent wave of restructuring in South Korea in the aftermath of the East Asian Crisis would end up as another sort of herd behavior like the unrelated diversification of Korean chaebols in the past. An illustration of the transformative process of crafting a long-term perspective for restructuring, and the resulting benefits is offered by Jifu Wang

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and William R. Boulton in Chapter 11, Globalization of Market-driven State Enterprise: CHN-CHN Ceramics (C&C), China. Most state enterprises in China struggle to make their products competitive in a global marketplace, and lack structural flexibility, competitive technologies, or operational efficiencies. C&C— a leading state-owned Ceramic enterprise in China—used the funds obtained from the government to forge a joint venture with a Hong Kong-based firm. It imported the world’s most automated ceramic plant from Germany, and purchased a formula developed by the Germany Ceramic Research Center to use Chinese raw materials that met the standards of German five-star hotels as well as related German ceramic designs. The employees were hired from the best ceramics town in China and the managers from the first market-oriented town in China. An integrated computer system technology was adopted. The firm aggressively pushed for contracts to manufacture ceramics for firms around the world in their own brand names, while founding a ceramics technical center for award-winning process innovations. As a result, the firm became the leading seller of ceramics in China by 1998, and made rapid strides towards regional and global leadership, as the percentage of international sales jumped from 5 per cent in 1998 to 70 per cent in 2000. In Chapter 12, Kai Cheng Yu and Ping Ping Fu suggest constructing a longterm perspective by combining national history and cultural variables to understand the Development of Chinese Managerial Behavior: A 7-P Model based on the Forces of History and Culture. Chinese managers are commonly recognized as showing concern for relationships. Consequently, they are reluctant to take risks necessary for undertaking change that might jeopardize the prior relationships, and appear to be less assertive in communicating the need and the direction for change compared with their Western counterparts. At negotiation tables, they are seen to be very persistent but diplomatic. Though such a characterization might suggest that Chinese organizations are difficult to transform, the reality is otherwise. For gaining an appreciation of this complex reality, the authors underscore the profound influence of modern history on the behavior of Chinese managers. Drawing on extensive Chinese writings and some empirical studies, the authors construct a 7-P model to offer a holistic characterization of Chinese managerial behaviors. The 7-Ps include Paternalism, Principles primacy, Political orientation, Patience and Perseverance, Politeness, Particularism, and Patriotism. The characteristics such as the emphasis on primal principles and morality can and are used effectively by Chinese leaders to guide appropriate type and pace of change—both evolutionary and gradual as well as revolutionary and dramatic. Finally, Tetsuo Abo presents the findings of the 15-year long Japanese Multinational Enterprise Study Group in Chapter 13, An Integrated Theory of Management Geography: Japanese Hybrid Factories in the Three Major Regions. Tetsuo Abo and his colleagues have conducted field observations and surveys of Japanese factories in more than 20 nations, covering Confucian Asia, Southern Asia, Anglo, Germanic Europe, Latin Europe, and Latin America cultural regions. Based on the findings of this extensive research, the author discusses the need to integrate locational and historical factors into an integrated theory of management

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geography. Both locational distances and historical developments influence the socio-cultural frameworks, and thence the business model practices in different regions. The author explicates these relationships using evidence related to the application of the Japanese management and production systems in three regions: Anglo, Continental Europe, and Confucian Asia. The chapter highlights the nature of challenges faced by the managers while extending into other historical and cultural contexts, and how change management initiatives that allow for diversity in values are better positioned to cope with these challenges. The second part of the book investigates the Trans-Asian context, transcending the boundaries of Asia where most of the new economies are situated. It reaches out into different parts of the world, in search of additional insights that would be useful for transformative organizations to survive, compete and generate value in the emerging global landscape. The intent is to gain an appreciation of the alternative cultural approaches, so that the firms may apply the same to address specific concerns for which the solutions within their cultures remain latent, undiscovered, undeveloped, and unauthenticated. It is hoped that the recognition, application, re-formulation, and integration of these cultural approaches would aid the managers in the new economies to develop their own culturally distinct methodologies for a unique competitive advantage. Only then can the organizations in new economies smartly complement the transformative initiatives of the established firms from the older economies, without engaging into politically, socially and economically degenerative copycat imitations. In this part, the first three chapters focus on the Northern European context—emphasizing the need for offering opportunities for competence development and entrepreneurial initiatives to the workforce. The following three chapters focus on the Anglo context—where the strategic role of leadership as the driver of transformational initiatives in hyper-competitive and distressed environments is explicated. Thereafter, three chapters with a special focus on the Latin American/Latin European context are included—which highlight the need for creating spaces for recovering and discovering lost meanings that inhibit the workforce from accepting both empowerment as well as leadership initiatives of the managers seen as self-serving power-holders. The final three chapters pertain to a diverse global context. In Chapter 14, Thomas Steger pursues the issue of learning from the transnational contexts by analyzing Acculturation of Cross-border Acquisitions: Cowboys in Germany. In a cross-border acquisition, the firms involved differ not just in strategic orientations but also cultural competencies, which the author illustrates using a case study of a mid-sized East German firm acquired by a US firm. The chapter demonstrates that cycles of trust and distrust play an important role in the interactions and influence the organizational climate, over and above the effects of strategic and cultural congruence. The resulting enacted fit between the two partners—or what the author terms as cooperative congruence—is the deciding factor in keeping the acculturative stress to a manageable level. Some degree of cultural and strategic differentials create more challenges for the workforce and allow their competencies to develop and the organization to

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make transformations necessary to deal with the variety in the changing environments. Rolf Wunderer discusses how in a context where the workforce is professionally qualified and has field training through apprenticeship programs, it is gainful to distribute the responsibility for continuous improvement and reengineering in Chapter 15, Employees as ‘Co-Intrapreneurs’: An Evolving Perspective for Managing Change in the Germanic Context. Based on the insights drawn using the surveys of German and Swiss companies, the author develops a systemic framework of ‘Co-Intrapreneurship’—investing as large a number of employees as possible at all hierarchies and functional areas with a high degree of self-initiative and sense of responsibility. In the new economies that are facing drastic and turbulent change, there is often a tendency to institutionalize hierarchical control to keep the organization on its path. The findings of this chapter suggest that this hierarchical power is best exercised to develop a social network of competent workforce, willing and able to take responsible initiatives. Organizations would need to perform culturally and contextually appropriate transformations of the Germanic approach illustrated in this chapter to make this happen. The value of workforce competencies in developing a flexible orientation for a volatile and rapidly changing environment gets further endorsement from Paul Gooderham, Bente Løwendahl, and Odd Nordhaug in Chapter 16, Functional Flexibility in the Norwegian Context: Strategic Adaptation vs Competence Orientation. The authors compare the influence of competence orientation and strategic adaptation on the firms’ intentions to develop functional flexibility among core employees, using a representative sample of Norwegian manufacturing companies with 50 or more employees. The results reject the strategic adaptation approach—functional flexibility is not found to be a product of variations in external competitive forces currently faced by firms, nor a result of variations in their discrete strategic decision making. Instead, employee competencies are a key prerequisite and determinant of functional flexibility. Increasingly, the authors propose, it is becoming correct to say that, ‘strategy matters but that learning decides’. While the implementation of more organic management modes has been a product of low uncertainty avoidance in the Norwegian context, the organizations in the new economies can also effectively absorb the uncertainty in their process and service performance through a strategic support for learning—not just of the organization but also of the employees. Transformational Forces in the American Corporate System: Managing Changes in the Production Methods and Workforce Organization is the theme of interest for Tetsuji Kawamura in Chapter 17. Within a pro-technology policy environment, application of information technology by the companies has helped improve productivity, and has led economic growth in the US since the 1990s, even as the Japanese and European economies have stalled. During the late 1970s and early 1980s, the US economy was facing deep problems, including unprecedented huge trade deficits, a declining share of the world export market, slackening productivity growth, lower profitability, and decreased real wages.

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During the late 1980s, the American firms used mergers, acquisitions, and divestments to streamline their operations and dissolve conglomerate structures. Second, encouraged by the flexible factory model of Japan, they introduced radical changes to their mass production methods and took strong initiatives to change their labor management and work rules. Thus they were able to reap gains from the microelectronics automation revolution that called for a flexibly skilled workforce, and leapfrog their competitors. In conclusion, this chapter highlights that strategic adaptation is an important force in competence development, particularly under conditions of hyper-competition and intense pressure for cost reduction and revenue generation. Ilan Alon gives another twist to the issue of strategic leadership in Chapter 18 while looking at the drivers of Internationalizing the American Franchise System: The Value of Resources, Agency Capabilities and Strategic Intent. For international expansion, the need for resources is pronounced because environmental differences and cultural and lingual dissimilarities often require modifications in product/service and the ability to adapt quickly and effectively to change. This has gained significance as American franchisors have been entering emerging countries with different economic, political and cultural structures. An analysis of 158 American franchisors over 1990–1997 confirms that more resources, as in bigger and faster growing firms, and more domestically dispersed operations allow them to expand overseas. However, the author also finds that in order to compete and gain economies of scale, brand name recognition and market penetration, younger franchisors are increasingly internationalizing early in their life cycle. Thus, this chapter suggests that through invoking of strategic intent, new organizations can offset the limitations of resource and agency capabilities. In Chapter 19, Paul Wong and Vipin Gupta underline the significance of mission-critical meaning in The Positive Psychology of Transformative Organization: A Fresh Perspective and Evidence from the Anglo Context. They highlight the challenge of creating a healthy culture and a positive work climate on a daily basis even in areas that are not regulated by shared core values. A culture-climate competency requires reclaiming the vibrant and dynamic ethos of community and responding to the physical, emotional and spiritual potential of employees and other stakeholders. On the other hand, there is little benefit of enforcing shared values on people who are psychologically healthy, and positive in their own right. Using interviews of New York City based managers, they show how a climate of control and oppression, secrecy and suspicion, division and disrespect, and politics should and could be transformed into one of healthy empowerment, support, openness, unified consciousness, respect and professionalism. In many new economies, as in Argentina, the workforce lacks confidence in the strategic initiatives for leadership or competency development because it perceives the managers to be relying on the positional power to enact changes in a rather authoritarian way. To rebuild confidence, Carlos Altschul underscores the significance of Sense-making in Change Interventions: Lessons from the

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Argentine Context in Chapter 20. On account of a lack of confidence in managerial intentions and intervention methodologies, new organizing principles, deriving from the Confucian, Northern European and Anglo models, have shown only limited success in the Argentine context. Inferring from the illustrations of change programs in Argentine organizations, the author suggests that for a change intervention to succeed, key actors should leverage the creation of new spaces for reflection. The loose time frames allow the membership to recover and add new meanings within an experimental space around their work. This chapter highlights the special role of expatriates and facilitators in effective mentoring and sense-making, and in enabling the workforce to lead change by accepting the value of change. Anabella Davila and Edmundo Garcia further examine the process of preserving and enriching the personal meanings using transformative opportunities in Chapter 21, Cultural Symbols as Change Agents: International Joint Ventures in Mexico. Using extensive observations and archival analyses of a Mexico-based joint venture between Mexico and the US that competes in the auto-parts industry, the authors trace the genesis and evolution of cultural symbols, and their influence in the construction of new meaning and change in organizational culture. Findings reveal that daily operations of the joint venture create and re-create a series of symbols that conform to a system of meanings to which organizational members react. Members of the joint venture exhibited a sense of self-criticism, a sense of order, a sense of business value, a sense of urgency, and a sense of unity. Thus, the operation of this international joint venture is dominated by non-traditional Mexican management practices, which have been developed through cultural symbols. The regenerative process of recovering and discovering lost and new meanings does not happen in a snapshot. Rather, it involves a systematic and a not so systematic development. Elaborating on the nature of this development, in Chapter 22, Luca Solari presents Managing Change: Designing Organizations Using the Evolutionary Perspective. The author rejects the traditional paradigm, which originated mainly from Anglo-Saxon, low-context cultures, where organizations institutionalize solutions to problems and, thereby, increase human ability to cope with problems at large through reduced discretion, and thus variety, in behaviors. The goals are the goals of the designer and the structure does not incorporate conflicting interests. The author instead emphasizes the value of the evolutionary perspective, based on variation-selection-retention, where the role of design is to let as many behaviors emerge and select some of them to become new practices within the organization. Such perspective is particularly in high-context cultures, as frequently observed in the Latin European context, for instance, where institutionalization of formal practices is limited by stronger social habits, and formalization such as by qualifications plays a lesser role. Potential regenerative opportunities may not always lie within the context, but would need to be created before they can be selected and retained. In Chapter 23, Paul Buller and Glenn McEvoy elucidate the process of developing

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Multinational Ethical Capability: A Source of Competitive Advantage. In the context of multinational corporations (MNCs), ethical awareness includes an understanding of the various ethical frameworks (e.g., utilitarianism, rights-based, justice) as well as sensitivity to the differences among ethical perspectives across cultures. The authors suggest that MNCs can enhance their competitive advantage to the extent that they can develop the capability to perceive, deliberate on and respond effectively to ethical issues across cultures. The chapter identifies ‘shared mindsets’ (i.e., assumptions, values, and beliefs) to be at the heart of ethical capability, and suggests that these core values and beliefs must be created and reinforced by the various management practices that govern employees’ behaviors in the organization. Sougata Ray’s Chapter 24, Behavior of Firms During Economic Liberalization: Conceptual Propositions and an Integrative Model provides some interesting insights into the design of ‘shared practices and policies’, as firms in the emerging markets seek to align their organizational strategies with the fast-changing environment. In the deterministic schools of strategy, the focus of managerial decision making is not on choice but on gathering correct information about changes in the environment and examining the consequences of alternative responses. However, in the more recent strategic schools, organizations can construct, eliminate or redefine the objective features of their environment. Based on this, the author suggests that the managers need to develop a perception of environmental munificence and efficiency and seek to foster youthful organizational contexts, rather than just focus on deploying their business-specific, entrepreneurial, and general management capability. A perspective that views the environment as constructive and resourceful, and that encourages unorthodox interventions and meanings within the organization, should facilitate sustained transformations in a changing emerging market. Under trans-Asian conditions, thus, some societies rely on strategic leadership, others on workforce competencies, and still others on fostering meaningful spaces, and selective retention of contextual diversity within the organization. Instead of investing in costly socialization for external members, the organizations should rather focus on the creation of new mindsets cultivated and matured further by the opportunities for cross-cultural dialogue, and on the discovery and exploitation of environmental endowments. Over the recent years, post-modern discourse has revived the value of human development through self-expression and well-being, which recognizes the need for tolerating diversity of strategic, organizational, and cultural approaches, and pursuing transformations that allow preserving, sustaining and exploiting this diversity. World Values Surveys, led by Ronald Inglehart, is a landmark study of the worldwide shifts towards post-modern values over the last 20–25 years. Vipin Gupta, Mathai B. Fenn, and Ancheri Sreekumar with GLOBE India associates draw relevant insights in Chapter 25, Organizational Design Under Post-Modernization: What can We Learn from the World Values Surveys? A fundamental element in post-modernity is an appreciation of the present and the future in terms of the history. The future carries with it a legacy of its past,

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and the current age is interpreted in terms of what lies behind us, and how it relates to what lies ahead of us. However, much of the discourse on postmodernism has focused on either deterministic or evolutionary processes, and there is little understanding of the strategic implications for the organizations. Using a re-analysis of data on 73 societies of World Values Surveys, the authors show that post-modernism is usually associated with adoption of secular authority and gender attainment, with a job-defined focus, but it does not preclude an emphasis on religion as a source of meaning. Further, with post-modernism, societies may put a greater confidence in democracies, or alternatively could view democracies defined as the rule of majority with a critical sense because of their enhanced concern with minorities. In summary, discovering perspectives that allow one to appreciate the relevance of the different values, beliefs and practices under different contexts and developing an understanding of how to apply these alternative values, beliefs and practices within an integrative context is a major challenge for creating and perpetuating a transformative organization that is meaningful and relevant for pursuing initiatives and a network of partnerships across the trans-Asian region. An important issue of recent interest has been the versatility and diversity of cultures. Specifically, several scholars have identified diversity as one of the key elements of emerging global values (Inglehart, 1997). Many of these scholars take a post-modernist perspective, wherein the emphasis is on tolerance and appreciation of diversity. However, prior modernization is not necessary for a versatile culture where multiple values and practices flourish. Several nations of the world, particularly those in Africa and Asia, support highly diverse values and practices of different sub-groups. Thus, there is a need to recognize the universal value of a climate which fosters exchange among the diverse values and practices, and a mental orientation that actively recognizes, seeks and is open to learning from the diversity of knowledge and perspectives all around. If organizational cultures support single trajectories of the dominant values and practices, then the variances are eliminated through several vehicles, such as the ‘one best way’ based competition, training, learning, performance assessment, rewards, and recognition. Organizations with such cultures must be very careful in selecting other nations for their investments and collaborations because it is difficult for them to deal with the differences in values and practices. The preference is to seek cultures with similar values and practices, so that minimum adaptation is needed in other nations and to maintain cross-national integration and coordination. If investments and collaborations are sought outside cultures with similar values and practices, then such initiatives must be strategically assessed. However, some investments may seek to tap the learning potential from alternative values and practices. For instance, firms from individualist cultures may invest in collectivist cultures, so that they can better learn the mechanisms supporting teamwork, which could then be implemented in their home culture. Alternatively, firms from collectivist cultures could invest into individualist cultures, with a view to learning about systems underlying the performance-based incentives and then adopt these in the home culture.

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When the organizational and societal culture emphasizes a single set of cultural trajectories, a cross-cultural learning strategy is subject to considerable risks—especially if it is not institutionally accepted as the desired direction for cultural change. Therefore, firms need to complement their cross-cultural learning strategies with network-building strategies to gain institutional legitimacy. Institutional strategies may also be required to induce acceptance by media, researchers, government, families, and educational institutions, so that the firm maintains a high degree of institutional fit and reliability in a culture where one single trajectory of the cultural development is favored. Increasingly all cultures are becoming versatile; they support a large variance in the values, beliefs, norms, and practices; and they allow the diverse sub-groups to prosper and enjoy equal opportunities. In these cultures, the MNCs can also learn to operate without substantial costs of the adaptation of their knowledge, organizational, and marketing models. Cross-national integration and coordination involving business units in these cultures is easier. Firms from versatile cultures enjoy a home-based advantage on how to efficiently work with groups having alternative values and practices, and can effectively collaborate with firms around the world. These versatile cultures are wonderful research labs and marketing test centers for generating and synthesizing new ideas, and for assessing their receptivity internationally. An appreciation and cultivation of the versatile cultures, where diversity in values and practices support diverse cultural models, is critical for developing an effective transformative organization for perpetuating value-adding change initiatives.

References Abo, T. (ed.) (1994). Hybrid Factory: The Japanese Production System in The United States, UK: Oxford University Press. Bartlett, C.A. & S. Ghoshal (2001). Managing Across Borders: The Transnational Solution, MA: HBS Publishing. Gupta, V. (1998). A Dynamic Model of Technological Growth: Diffusion of Japanese Investment Networks Overseas, Ph.D. Dissertation, The Wharton School of the University of Pennsylvania. Gupta, V., G. Surie, M. Javidan & J. Chhokar (2002). ‘Southern Asia cluster: where the old meets the new?’. Journal of World Business, 37(1): 16–27. House, R., P. Hanges, M. Javidan, P. Dorfman & V. Gupta (eds.) (2003). Leadership, Cultures, and Organizations: The GLOBE Study of 62 Societies, CA: Sage Publications. Inglehart, R. (1997). Modernization and Post-Modernization. NJ: Princeton University Press. Lewin, K. (1945). The research center for group dynamics at Massachussetts Institute of Technology, Sociometry, 8, 126–136.

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Pattanayak, B. & V. Gupta (eds.) (2002). Creating Performing Organizations: International Perspectives for Indian Management, New Delhi: Sage Publications. Perlmutter, H.V. (1969). ‘The tortuous evolution of the multinational corporation’. Columbia Journal of World Business, 4: 9–18. Schwartz, S.H. (1994). ‘Beyond individualism/collectivism: New cultural dimensions of values’. In U. Kim, H.C. Triandis, C. Kagitcibasi, S.C. Choi, & G. Yoon (eds.), Individualism and Collectivism: Theory, Method and Applications, pp. 85–119, Thousand Oaks, CA: Sage. Stopford, J.M. & T.L. Wells (1972). Managing the Multinational Enterprise, NY: Basic Books. Wiesner, M. (2002). Discovering the Global Past: A Look at the Evidence, volume 1 to 1650. 2nd ed. Boston: Houghton Mifflin, 2002.

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Asian Context

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Concepts and Case Studies in the Indian Context

2

The Transformative Organization

The Coates of India Story1

Vipin Gupta

l

Kumkum Mukherjee

l

Roma Puri

In recent years, the transformative perspective has gained popularity among social scientists which is indicated by the rash of new concepts such as transformative change (Lichtenstein, 2000); transformative leadership (Astin and Astin, 2001; Bass, 1985; Bemis and Nanus, 1985); transformative mediation (Bush and Folger, 1994); transformative justice (Morris, 1994); transformative learning (Mezirow, 1991); transformative knowledge (Vargas, 1987); and transformative technology (Brent, 1991). Here, we review the core insights of the transformative perspective with respect to change, leadership and learning. Then, we highlight the importance of four domains—investor, competence, post-competence, and spiritual—in the transformative decision making of organizations. We propose that a transformative perspective emphasizes how organizational learning encompasses not just what the firm does, but also the meaning the firm associates with what it has been doing and its mission in the future. Organizational learning is facilitated by a comparative understanding of the behaviors and values generated through processes such as perspective taking (Parker and Axtell, 2001) and relational capability (Dyer and Singh, 1998), which allows firms to identify common patterns in apparently divergent behaviors. The result is a change in the very system of organization that enables the firm to identify how devaluing some domains in the past limited its overall performance and to pursue development initiatives where the norms for the targeted domain may be fulfilled. We identify the firms that demonstrate a focus on transformative perspective as ‘transformative organizations’. In other words, the transformative perspective helps firms to transcend the paradox of performance, identified by Meyer and Gupta (1994), that an emphasis on some measures of performance makes the

1

We are thankful to the US National Science Foundation, Globe Research and Educational Foundation, IIM Indore, and EMPI Business School for funding the study as part of worldwide cross-cultural CEO research initiated by Professor Robert House. XLRI Jamshedpur and Eastern Institute for Integrated Learning offered additional help for this particular chapter.

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organizations simultaneously effective on those measures, and ineffective on other measures and thus vulnerable to failure. The failure of Enron, whose policies were very effective in the investor domain, but not other domains, is a case in point. Next, we review the literature on transformative perspectives and present a theoretical model of strategic cultures of transformative organizations. Then, we explicate the theoretical model using the story of Coates of India. The story is based on the CEO interview and survey of the top management team conducted in 2001 as part of an international cross-cultural study.

Review of the Transformative Perspective TRANSFORMATIVE PERSPECTIVE AND CHANGE We propose that a transformative perspective fundamentally involves a transition in the forming process; from one focused on incremental change to a catalyst oriented towards quantum change. In general, change happens when there is some variance, either in what the firm does and what it is expected to do (practices and norms to be met), or in what it does and what it expects to do (practices and values to be fulfilled). Once the change is ‘formed’, the firm seeks to benefit from its learning by institutionalizing the change intervention in all relevant aspects of its functioning. It may also diffuse the change among its external constituencies and seek financial or non-financial benefits from such knowledge spillovers. This institutionalization and diffusion reflects ‘norming’ of the change. As the norms mature, including through reverse learning from the outcomes of other internal applications and of the use by the external constituencies, the change initiative is fulfilled and the changed behavior becomes routinized for effortless enactment. However, the outcome of the changed behavior may not be the same in all cases. When shortcomings are diagnosed and validated, the firm seeks to develop corrective interventions, and again goes through the forming, norming, and fulfilling phases as shown in Figure 2.1.

Fig. 2.1: The Process of Transformative Change

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Thus, typically, organizations go through a sequential process of change. In this process, they: (a) may deny the need for change (change by denial); (b) may become aware of the need for change only after it has already happened gradually (change by experience); (c) may mandate an instant change as soon as they recognize and validate the need for change (change by mandate); or (d) may reinterpret the pre-changed behavior in a way that the need as well as direction for change becomes self-evident (change by reinterpretation). In our view, the transformative change reflects a continuous openness to change by reinterpretation, and a systematic approach to change by mandate and change by experience, so that the need for change is not denied. The four processes of change may be related to Ferguson’s (1980) types of change. These types include: 1. Change by exception: the firms allow exceptions to their beliefs but do not change these beliefs; 2. Incremental change: a collection of small changes eventually alters, rather unconsciously, the mental model of the firm; 3. Pendulum change: an extreme point of view is exchanged for its opposite and the past is completely discredited as irrelevant or mistaken; 4. Paradigm change: the firm steps out of the box for a more fundamental rethinking of premises, based on the integration of available information. In short, from a change perspective, transformative organizations recognize not only the reality of the changing world and of the accelerating pace of change, but also of the changing nature of change. Consequently, they do not seek to be effective in only some parts of a system, but seek proficiency in managing the multifaceted dimensions of their operation.

TRANSFORMATIVE PERSPECTIVE AND LEADERSHIP The transformational theory of leadership focuses on the ability of leaders to motivate others to do more than they originally expected to do (Bass, 1985). The thrust is on creating institutions that motivate employees to recognize the community of their needs and to empower them to satisfy these collective needs (Bemis and Nanus, 1985). The transformative perspective further integrates the collective organizational needs with an enhanced understanding of the potentiality of each member and a wholesome conception of self in personal, relational, societal, and communal domains. By recognizing that each employee is more than just an individual or a member of the organization and has societal and communal identities also, transformative leaders facilitate more of what each employee truly wants to accomplish without necessarily sacrificing the realization of collective needs. Employees also discover that their life in the organization need not be disjointed from their lives in the society and the community, and that the former can be lived in a way which serves their purpose and enhances their prestige in the society and the community also. As a result, transformative

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leadership becomes a reciprocal process whereby both leaders and followers raise one another to higher levels of motivation and morality. In this sense, transformative leadership builds on the value-based approach to transformational leadership (Kuczmarski and Kuczmarski, 1995; Goeglein and Indvik, 2000). Further, Gandhi’s concept of trusteeship—which recognizes service as the purpose of leadership; moral principles as the basis of goals, decisions, and strategies; and employing a single standard of conduct in both public and private life—is crucial to transformative leadership (Gupta, Rajasekar, and Srinivas, 2002). In contrast to transformational leadership, which focuses on enhancing efficiency and effectiveness through first-order quantitative change in motivation, the transformative leadership emphasizes a higher-order qualitative integration of motivation over multiple domains. Consequently, transformative leadership generates change in basic assumptions and goals of life so that accomplishments in each domain are reinterpreted as being related to other domains, and thus serves a higher-order purpose of life. Despite some similarities, transformative leadership can also be distinguished from the transactional, and value-based transformational models of leadership. In the transactional model, the roles of each individual are clearly defined and the responsibilities and expectations are limited and predictable. In contrast to the view of a transactional leader who must get things done, whether by focusing on the task or on the person, the transformational leader emphasizes the purpose, mission, and spirit of the action so that the quantum nature of its benefits becomes self-evident to all. Both these approaches could result in unjust outcomes as they may exclude members who do not find the values of the leader as fulfilling. The transformative model, on the other hand, generates a new interpretation of the reality, where the previously marginalized members are also able to engage themselves in the task of learning, and where meaningful linkages can be constructed between these members and the dominant organizational values and social and communal institutions. This is made possible because of the common learning on the part of both the organization as well as the members that they are an important part of each others’ life. In summary, from a leadership perspective, transformative organizations recognize not just the reality of changing roles and of the need to empower participants to effectively and rapidly perform these roles, but also the changing nature of the roles that the leadership should be focusing on if the participants’ lives as well as the organizational mission are to be fulfilled.

TRANSFORMATIVE PERSPECTIVE AND LEARNING Transormative approaches to learning focus on how learners construe, validate, and reformulate the meaning of their experience. Mezirow (1991) has developed one of the most popular models of transformative learning. According to Mezirow (1991:167), transformative learning involves ‘perspective transformation’, which ‘is the process of becoming critically aware of how and why our assumptions have come to constrain the way we perceive, understand, and feel

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about our world; changing these structures of habitual expectation to make possible a more inclusive, discriminating, and integrating perspective; and, finally, making choices or otherwise acting upon these new understandings’. Mezirow distinguishes between meaning structures, which are frames of reference based on the totality of individuals’ cultural and contextual experiences that influence how they behave and interpret events, and meaning schemes (specific beliefs, attitudes, and emotional reactions), that make up these meaning structures. The usual learning process, as an individual adds to and integrates ideas within an existing scheme, contributes to a routine change in meaning structures. However, transformative learning, involving change in meaning structures, results from an accumulation of transformations in meaning schemes over a period of time, or more often from a ‘disorientating dilemma’ triggered by a life crises or major life transition. In general, Mezirow identifies experience, critical reflection, and rational discourse as the three major catalysts of transformative learning. Boyd and Myers (1988) offer an alternative approach, which recognizes transformative learning to be more of an intuitive, creative, emotional process. They use the term transformative education to connote a fundamental change in one’s personality involving both the resolution of a personal dilemma as well as the expansion of consciousness resulting in greater personality integration. Transformative education draws on the ‘realm of interior experience, one constituent being the rational expressed through insights, judgments, and decision; the other being the extrarational expressed through symbols, images, and feelings’ (Boyd and Myers, 1988:275). It builds on the process of discernment, i.e., creating a personal vision or meaning of being a human. The discernment involves receptivity, recognition, and grieving. Bush and Folger (1994) apply the transformative perspective to Alternative Dispute Resolution (ADR). They suggest a shift from a problem solving or settlement-oriented mediation that focuses on finding a mutually agreeable settlement of an immediate dispute, to ‘transformative mediation’ that seeks to transform the disputing parties by empowering them to understand their own situation and needs as well as enabling them to recognize the situation and needs of their opponents. At the organizational level, transformative mediation may transform the representatives, but could leave out the constituencies, and engender a ‘scale up problem’ (Burgess and Burgess, 1996). Lederach (1989) emphasizes a more inclusive concept of ‘conflict transformation’ which entails development of not just empowerment and mutual recognition, but also interdependence, justice, forgiveness, and reconciliation. The thrust is on creating a dialogue in which people are empowered to express their needs and explore their differences so that inclusion and participation is encouraged. Similarly, Montville (1993) underlines how dialogue helps people confirm each others’ humanity and recognize beliefs and values of the other person and the importance of historical analysis, including sharing of grievances and their recognition by the opponents, for encouraging transformation in the parties’ relationships. In essence, from a learning perspective, transformative organizations recognize not only the differences in perspectives and the need to empower

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participants to advocate their unique perspectives, but also the need to transform each individual’s meaning associated with these perspectives so that a more inclusive perspective is developed.

SUMMARY There are significant similarities in the transformative approaches used in change, leadership, and learning domains. Each emphasizes the importance of recognizing differences and the need for change, empowering participants to share these differences and to bring about change; and finally developing an integrative perspective relating these differences and changes to the very purpose of human and organizational life across multiple domains. As a result, the differences and changes are not seen as threatening or exceptions, and are instead sought to improve multiple dimensions of organizational and participant life. Consequently, the target of transformative approaches is not the actions of the organization, but the very culture of the organization. The emic aspect of culture—the meaning the participant attach to the actions, is as relevant for transformative approaches, as the etic aspect—the cross-culturally comparable actions and behaviors.

Theoretical Model Using a transformative lens, we develop a theoretical model of the importance placed by the firms on alternative strategic values. The four strategic culture types are: 1. Investor Orientation. It reflects paramount importance of cost control, sales volume, product quality and firm profitability in strategic decision-making. Investor culture is typical of the Western Hemisphere and Anglo societies where the foremost responsibility of the business is towards its owners. 2. Competence Orientation. It signifies a decision-making value where most emphasis is put on long-term competitive ability of the organization, along with the relational issues with those directly involved in the business operations. Competence culture is typical of the Asia-Pacific societies, where the relationships and long-term competitive ability are most critical. Such cultures support collaborative organizational learning, but limit the flexibility of the firms in seeking new knowhow. This is so because the benefits of knowhow generally are diffused quite quickly throughout the relational network. On the other hand, firms incur the costs of knowhow discovery and its codification on their own, and thereby seek to stand out from the rest and be recognized for their pioneering contributions. 3. Post-competence Orientation. It signifies a strategic perspective that puts most priority on societal welfare, including environmental concerns, welfare of local community, nation’s economic welfare, minority employees, and employee gender. Post-competence culture is typical of the European societies. The primary

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responsibility of the firms is not to their investors or their business partners, but to respect collective interest of the members of the community in ecology and welfare issues. The post-competence oriented firms are most willing to assume the costs of social charter, and to believe that the social charter is not necessarily at odds with the investor and business relationship concerns. 4. Spiritual Orientation. It reflects a strategic preference for ethical considerations, and being devoted to the supernatural forces, such as auspicious days, forecasts by soothsayers, and pleasing, respecting, and not offending a divine being. Spiritual culture is typical of firms in Africa. Glock and Stark (1965) have identified five manifestations of spiritual orientation. These include: (a) an experiential manifestation, capturing normative religious experiences; (b) a belief manifestation, capturing normative religious beliefs; (c) a ritual manifestation, capturing normative religious practices; (d) an intellectual manifestation, capturing knowledge about these religious norms; and (e) a devotional manifestation, capturing enacted religious practices and attitudes. Spiritually oriented firms are highly concerned about the kind of people they deal with. To them, the key organizing principle is ‘ubuntu’ or that a person is a person through others. Ubuntu refers to ‘humaneness’—a pervasive spirit of caring and community, harmony and hospitality, respect and responsiveness—that individuals and groups display for one another’ (Mangaliso, 2001:24). The cultural orientation of firms can be ordered in a salience space indicating the significance of each particular cultural type in their strategic values. The salience space has an influence on not just the firm’s behavior, but also of the behavior of the members. At the individual level, salience indicates ‘the degree to which the person’s relationships to specified set of others depends on his or her being a particular kind of person, i.e. occupying a particular position in an organized structure of relationships and playing a particular role’ (Stryker and Serpe, 1982:207). At any level, cultural salience can be measured using comparative scores on the four types of strategic cultures. Next, we discuss the research methodology used to test the relevance of the theoretical model, for validating the force of cultural salience, and for investigating the development of a transformative organization that recognizes the integrative importance of the four domains.

RESEARCH METHODOLOGY For our study, we chose to study an Indian firm, whose ownership has transferred from a British parent, to first a French parent, and then to a Dutch/Japanese parent, over the last 10 years. The firm was studied using the CEO interview guide and top management team survey of the GLOBE program. The GLOBE program developed these research instruments for the study of CEOs and top management teams in more than 30 nations of the world, under the overall coordination of Professor Robert House at the Wharton School. In India, the study is being conducted in each of the 28 states and two of the Union Territories, with a sample of 40 firms in each state, under the overall coordination of the

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first author. The top management team surveys included questions relating to the leadership of the CEO. In addition, there were 17 questions intended to learn about the strategic values, where the respondents were asked how much importance ‘should be’ assigned to each factor when making critical management decisions. These 17 value items were used to construct four types of strategic culture scales. The item composition of the four scales is given in Table 2.1. A scale validation analysis of 212 firms from seven states in northeast India showed that the four scales were internally consistent (Cronbach alpha>0.70), both at the firm level as well as the top management level. Table 2.1: Item Composition of Strategic Culture Scales Investor Orientation Competence Orientation

Post-Competence Orientation Spiritual Orientation

Cost control; firm profitability; product quality; sales volume Long-term competitive ability of the organization; effect on relationships with other organizations with which you do serious business; employee professional growth and development; employee relations issues; customer satisfaction Contribution to the economic welfare of the nation; welfare of the local community; environment; minority employees; female employees Ethical considerations; supernatural forces, such as auspicious days and forecasts by soothsayers; pleasing, respecting, and not offending a divine being

Note: All items evaluate how much importance should be assigned when making critical management decisions, with response alternatives ranging from 1 (none) to 4 (moderate) to 7 (most important).

The interview guide asked the CEOs about their background, leadership goals, management philosophy, and personal strengths and weaknesses. These items were supplemented with questions about the industrial relations climate in the main plant of the firm in India, located in the same city where the firm had its domestic headquarters. More details about the firm (Coates of India) are given in the next section to set the research context.

RESEARCH CONTEXT Coates of India (COI) was set up in 1947 as a wholly-owned subsidiary of Coates Brothers PLC, UK in Calcutta in the state of West Bengal, to manufacture and market printing inks and allied products used in the process of printing. The parent firm diluted its stake in COI to 66.2 per cent in 1962. In 1991, the French group TotalFina, a leading player in global crude and petroleum industry, took over the parent firm, and acquired a 51 per cent stake in COI. In 1999, TotalFina sold its printing inks business worldwide to Sun Chemical group of the Netherlands, which is a wholly-owned subsidiary of $10-billion Dainippon Inks and Chemicals (DIC) Group of Japan. Besides being a global leader in graphic

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arts products, the DIC group has a significant presence in printers’ supplies, machinery, pigments and reprographic products. As part of the deal, the resins and industrial adhesives business of COI were spun off to TotalFina, and the ownership of COI was transferred to DIC. DIC had been operating in India through marketing agents and saw COI as a valuable opportunity for expanding further into India. It immediately sought to use the entire marketing network of COI and increased its equity stake in COI to 59.4 per cent. The COI board was restructured to bring in four Japanese directors to oversee the strategic growth. On December 31, 1997, COI transferred its packaging coatings business to a separate 100 per cent subsidiary, Coates Coatings India Limited (CCIL). The goal was to bring in Valspar Corporation of the US as a joint venture partner for the packaging coatings business and to divest that business in a phased manner to Valspar as the business developed through capital infusion and new technology from the latter. In the meantime, there was a shift in the packaging concept from metal containers to plastic poly-tubes in India, which led Valspar—whose interests lay principally in the can packaging coatings market—to back out of the joint venture deal in 2001. In June 2001, COI/CCIL initiated an alternative agreement with the new group parent company DIC, for the perpetual transfer of printing inks technology. The printing ink industry essentially consists of pigments, resins, additives and solvents. Pigment is the main raw material for manufacturing inks, resins give special properties to the inks while additives are necessary for maintaining the flow. The principal users of printing inks are packaging, printing and publishing industries. In India, the packaging market for the fast moving consumer goods (FMCG) sector is a key segment, accounting for a share of 40 per cent. In addition, in November 2001, a new $1.3 million plant was inaugurated at Ahmedabad in the state of Gujarat for the manufacture of newspaper blank with the technology support from DIC. DIC is currently looking to upgrade the product mix of COI, which has a battery of seven manufacturing plants in India at Kolkata, Mumbai, Ahmedabad, Delhi, Chennai, Bangalore and Noida (satellite township of New Delhi), and seven sales offices located in various metropolitan cities, deemed a key advantage in the applications-oriented printing ink industry. Globally, the US, Japan, and Germany account for two-thirds of the $15 billion sales of the printing ink industry. The US accounts for about 30 per cent of the global market. Two firms hold a total of 80 per cent market share in the US: Sun Chemicals and Flint Ink. These two firms have transformed the industry into a highly concentrated structure through a series of acquisitions of smaller ink manufacturers in the US and overseas. With diminished opportunities for growth through acquisitions, the DIC is now looking for organic growth opportunities for its subsidiary. India represents a key emerging market for such organic growth. The Indian domestic ink market is valued at $125 million (Rs 6 billion), with a production volume of 50,000 tons. It has seen 12–15 per cent growth over the past few years and is expected to sustain this growth rate in the near

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future. The market is divided equally between a concentrated organized sector, with a few medium-to-large scale firms, and a fragmented unorganized sector, with over 200 small-scale ink manufacturers. At the top are the two firms: COI and its principal competitor, Hindustan Inks and Resins Ltd (HRIL). HRIL, set up in 1991, has been steadily gaining market share from COI, principally because of a 15-year sales tax exemption for its core plant at Daman that has allowed it to become the first Indian firm to successfully backward integrate manufacture of two core ingredients of printing inks viz. resins and flushed pigments, and to set up new units including a wholly-owned subsidiary in Austria to facilitate exports. In response, COI has increasingly focused on the premium segment, realizing a greater price per kg of ink as compared to other players in the market. The strategy of COI is based on its strong brand equity, regional manufacturing plants and sales offices to cater to the specific needs of different markets, and now on the technological and marketing support from the DIC group. Its products are perceived to be of high quality, backed by continuous research and development expenditures, and its technology state-of-the-art. It has been modernizing its plants through extensive capital investment, raising its installed capacities by 10–15 per cent every year, and revamping the computer system and other balancing equipment at its factories to meet the higher demand for products, and has seen profitable growth despite a recent slowdown in the global and Indian packaging coatings market. In summary, COI has been historically influenced by the culture of the Anglo parent, and later of the European parent, and more recently by the Japanese parent. Further, its presence in West Bengal—which is known to have leftist/ socialist leanings—should also influence COI’s strategic culture. It has a strong brand and technological base that has enabled it to realize profitable growth, but does not necessarily have a significant competitive edge in costs over the new entrants. On the whole, the formative Anglo influences appear to support its investor orientation, while the recent Japanese influences appear to be dominant in a focus on competence orientation. The French influences appear to be relatively weak on COI’s strategic culture particularly because the core business of the ex-French parent was quite different from that of COI. Also, the Dutch influences are possibly dwarfed by the proactive role taken by the Japanese global parent company with respect to the Indian subsidiary. Still, the presence in the socialist state of West Bengal should have strengthened its post-competence orientation. Finally, since the firm is based in India, where the culture is relatively spiritual in nature, one would expect non-trivial significance of spiritual orientation in the firm’s strategic culture. Next, we confirm these expectations using the top management questionnaire survey.

FINDINGS: TOP MANAGEMENT QUESTIONNAIRE SURVEY Table 2.2 gives the scores of the firm on the four strategic culture scales, both at the individual top management level as well as the aggregated firm level.

Table 2.2: Strategic Culture Scores for Coates of India Respondent 2

Respondent 3

Respondent 4

Respondent 5

Respondent 6

Firm’s Average

7.00

5.50

7.00

5.00

6.50

6.75

6.29

6.40

5.80

6.60

4.80

6.20

6.40

6.03

5.20

4.80

4.40

4.40

4.40

6.20

4.90

3.33

3.00

3.33

2.00

2.00

5.00

3.11

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Investor Orientation Competence Orientation Post-Competence Orientation Spiritual Orientation

Respondent 1

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As can be seen, on a scale of 1–7, the firm scored 6.29 on Investor Orientation and 6.03 on Competence Orientation. The difference between these two types of strategic culture was not significant (difference = 0.26; df = 5; p > 0.05). Thus, the top management of the firm puts ‘very high’ importance on both investor orientation and competence orientation. The Spearman’s rank correlation between the scores of top management on these two was 0.96 (p < 0.01). Thus, top managers who focused more on investor orientation emphasized more of competence orientation also. However, there was a greater variation in the individual top manager values for investor orientation (from 5.00 to 7.00), than for competence orientation (from 4.80 to 6.40). The firm’s score on post-competence orientation was 4.90, which was significantly different from its scores on investor orientation (difference = 1.39; df = 5; p < 0.05) and on competence orientation (difference = 1.13; df = 5; p < 0.01). Further, the Spearman’s rank correlation of the top manager scores on Post-competence orientation was not significant with either competence orientation or investor orientation. Thus, emphasis on post-competence orientation was independent of the focus on competence and investor orientation. Finally, the firm scored 3.11 on spiritual orientation, which was significantly different from its scores on investor orientation (difference = 3.18; df = 5; p < 0.01); competence orientation (difference = 2.92; df = 5; p < 0.01); and postcompetence orientation (difference = 1.79; df = 5; p < 0.01). However, the Spearman’s rank correlation was not significant for the top manager scores on spiritual orientation and any of the other three scales. On the whole, the firm put only ‘some’ emphasis on spiritual orientation, ‘high’ emphasis on post-competence orientation, and ‘very high’ importance on competence and investor orientation. There was an indication that the firm’s top managers took an integrated and stronger view of the investor and competence orientation, while taking an independent but positive view of post-competence orientation without being overwhelmed by the socialist forces in West Bengal. Finally, the top managers gave a non-trivial priority to the spiritual orientation in their strategic decision making, consistent with its significance in Indian culture. On the whole, the firm appears to operate according to the transformative perspective. Next, we present the findings of the CEO interview to show how this transformative perspective must be created, and cannot be taken for granted.

WORKING TOWARDS THE TRANSFORMATIVE PERSPECTIVE Of COI’s seven manufacturing units, the plant in Kolkata with a workforce of 620 is the largest. The plant experienced a rapid growth in production volumes and values during 1990–1995, realizing an enormous growth in productivity, profitability, and value realizations, as shown in Table 2.3 and Table 2.4. The increase in production took place with a largely stable number of workers; there was a continued rise in wage incomes for these workers, profitability for the firm, and product quality for the consumers, with diminishing costs as the ratio of wage costs to both units produced/production

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value showed a significant reduction. The growth was a result of a new business vision, pursuant to the liberalization of Indian economy in the early 1990s and a concomitant change in the parent group from Coates Brothers of UK to Totalfina of France. Table 2.3: Production Growth at Kolkata Plant of COI during early 1990s Departments Liquid Inks Liquid Inks Blending Liquid Inks Varnish Paste Inks Weighing Paste Inks Varnish Chips

Production before 1990s

Production during 1994–1995

Increase in Percentage

2000 7 jobs 1200 2000 4 tons 3 tons

3600 10 jobs 2600 4000 7 tons 7.7 tons

80 43 117 100 75 157

The new vision emphasized substantial modernization of the plant with sustained increase in the production capacity, and introduction of automated machines and application of latest technologies, in ways that would be labor and skill enabling, rather than labor and skill displacing. Table 2.5 provides data on the investments made by the firm in computers and plant and machinery at Kolkata plant. The success with modernization in the Kolkata plant, home to one of the most left-leaning workforce, unions and the government in India, instilled the company with confidence to persist with further investments in computerization and technology improvement in other plants of COI, in the second half of the 1990s. West Bengal has been notorious for its perpetual strikes, politicallysanctioned labor agitation and industrial unrest and sense of animosity between the managers and the workers, which were at their peak during 1960–1990. Despite such a historically dismal socio-political context of the workplace, COI led the transformation in the industrial atmosphere of West Bengal during the 1990s. The thrust of COI’s vision was not on incentives—in fact, no incentive schemes were operational in the Kolkata unit. Rather, there was a new sense of collaboration among managers, workforce and the unions, which helped contain the average absenteeism levels to single-digit levels of 7–10 per cent, avoid overtime costs with mutual consent, and enhance the productivity and standards of living for the benefit of the workforce, consumers and the investors at the same time. COI’s new model for managing the ‘living assets’ was founded on mutual respect and trust. It recognized the shift in workforce ranks to the fourth generation workers, who were extremely loyal to the firm and were looking at a better future than their predecessors as part of COI. It was built on the confidence that the firm had not experienced any strike or lockout throughout its history, in a socio-political context where these incidents were quite a common part of industrial life. The firm had since its inception resolved all the issues with the workers and the unions through continuous discussions, formalized into annual agreements signed by both union and the management. This allowed the firm to

Production Value (Rs million) Production units (in million tons) Value Added (Rs million) Wages (Rs million) Number of Workmen Productivity (Rs Value Added/worker) Profitability (Rs Valueadded – Wages)/worker Units produced (in million tons) per workman Production Value (Rs per worker) Wage Cost in Rs/unit produced in million tons Wage Cost/Production Value Unit Realization (Rs/ton) 205.73 1802.15 65.41 12.75 237 276,000 222,000 7.60 868,000 7076 6.2 0.11

1605.13 44.88 11.87 240

187,000

138,000 6.69

618,000 7394 8 0.09

1991–1992

148.32

1990–1991

5.78 0.13

7527

1,086,000

8.33

278,000

341,000

14.74 235

80.14

1958.65

255.17

1992–1993

5.79 0.13

7456

1,184,000

9.19

341,000

409,000

16.03 234

95.71

2150.58

277.02

1993–1994

Table 2.4: Growth in Kolkata Plant Productivity over the early 1990s

4.74 0.14

6855

1,591,000

11.00

438,000

513,000

17.12 227

116.45

2497.93

361.25

1994–1995

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Table 2.5: Modernization Investments in Kolkata Plant of COI (Rs million) Year

Computers

Plant and Machinery

1994 1995 1996 1997

– – 11.851 10.347

52.257 51.049 24.388 30.715

keep its industrial relations free from political intervention. Now, the new governance environment, both at the corporate level as well as at the national and state level, encouraged the management to bring the two rival unions together, and to seek a collaborative approach for enhanced productivity at the firm and welfare of the workers, within a framework of modernization, technological advancement, and organizational learning.

THE OLD AND THE NEW In the past, especially during the 1980s, the rivalry between the two unions in a bid to establish supremacy over the workforce and have their say in the discussions with the management disrupted the organizational climate. Both the unions had about an equal number of members, and each struggled hard to prove their majority. There were always several opportunist members who made the most of this by switching unions on a regular basis and threatening to leave one particular union whenever they were denied a coveted status within the union. Their movement back and forth was a sheer nightmare for most loyalists in the two unions and they tried every trick in the book to win back the lost members. Once it went to the extent of one union coercing members of the other union to join their union by going to their respective houses and making them sign the membership-related documents. Consequently, the other union made a big hue and cry over this issue. The unions had so many complaints against one another that the management had to employ select individuals in management positions especially to listen to their problems and negotiate issues separately with each of the unions. The amount of time spent by these people with each of the unions was so great that eventually the persons concerned were jokingly referred to as owning that particular union. Under these conditions, the management had to sit with the two unions separately and it was almost impossible to arrive at any consensus at any given point of time. Any agreement with one of the unions automatically meant opposition from the other. It was more of a vicious circle with no end in sight, in so much that some members of the management thought that the classic divide and rule policy would be the best course of action. A new managerial philosophy emerged at COI in the 1990s when the British parent company was mulling over the stake sale to TotalFina and new economic policies were being introduced in India. The change agent was Dr. P.K. Dutt, who had joined COI in 1970 as a management trainee after obtaining a Ph.D. in polymer science and working for over a decade as a faculty member at the

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University of Arizona from 1960 to 1970. Dutt rose rapidly to become the first non-British Chief Technical Manager of COI over the next few years. After a two year strategy stint at the British head office, he came back as a general manager for COI and West African operations of the parent company in 1982. Soon thereafter, he was appointed to the Board of COI in 1984, given charge as assistant managing director in 1986, and eventually made managing director (equivalent to CEO) of COI in 1991. Regarding this period, Dutt commented in our interview: I had no intention of coming back to India when I was posted in UK, but I was called here as the company was going through some difficulty. In this context, therefore, I had a very clear mandate: (1) to modernise the company, and (2) to take it forward. Though one should not boast, the subsequent results, however, proved that after I came back the turnover more than doubled and profits rose four times during the period 1988– 1989. With his appointment as managing director, Dr. Dutt and his management team charted out a fresh approach to break the long-standing union impasse. The previous management had worked on the assumption that it was better to deal with two weak rival unions instead of one strong union. The belief of the new management was that if they could appeal to the good sense of the workers, they would understand the importance of collaboration and unity. No employee, whichever union s/he belonged to, was interested in petty squabbles and union fights on a daily basis. They were coming to work to earn their daily bread and had enough sense to understand what was good for them in the long run. In other words, the new model was to approach the workforce as ‘loving’ and ‘living’ assets—who loved their firm and who would prefer to live in a healthy and vibrant work environment. In the words of Dr. Dutt, the model was guided by the changing worldview of competition and strategy: Till the mid-eighties we had to become competitive against local smallscale companies which had a lot of fiscal advantage and the product did not require any sophisticated technology. Being a British company, on the other hand, we had a very high overhead cost. During that time we could, however, manage to improve our efficiency and survive. From midnineties and afterwards, due to liberalisation, our competitors are not the local companies anymore. We have to now compete with anybody, anywhere across the globe and remain really ‘world-class’. It was not easy for the company to become world-class which was functioning in a country closed for nearly forty years. Taking the opportunity of upcoming annual agreements with the unions, the management put to test the hypothesis of treating the workforce as ‘loving and living assets’. In response to the two separate charters of demand from the two unions, the management placed a unique and hitherto unheard of proposal.

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They intended to recognize both the unions as one representing the interests of the entire workforce. They announced that the management would only entertain a joint charter of demands and the process of negotiation and final settlement would only be done with representatives from both the unions attending the meeting. There was an immediate resistance from all the quarters, including members of the management who felt that the new model was doomed to fail. However, the management took a firm stand and adopted the strategy of communicating to workers on the shop floor the benefits of such a collaboration. They explained to the workers that the strength in numbers in deciding majority/ minority did not make much of a difference to them as the management was committed to treating both the unions at par. The management would always follow a policy of non-discrimination, recognizing both the unions as representing the interests of the workers. The union leaders resisted this move strongly, fearing a loss of power. However, the communication exercise of the management was beginning to have a profound effect on the general workers. Dr. Dutt observed: ...my major strength is my total openness. I don’t hesitate to say the truth straight and value transparency. It might be seen as my weakness as well but I do honestly perceive it as my strength. I could be blunt, if required. I believe that after all the CEO is the leader and if anything is not right the leader has to say it. To tell the truth in the Indian situation, speaking the truth may be, often perceived as weakness. Culturally, we are always looking for sympathy. Sympathy for the right reason or the right cause is humane. But sympathy for somebody’s failure does not exist in my book. I believe that everybody should show a sense of responsibility. I also have a very high expectation from people as I believe that performance is truly limitless. Though I at times sound rather blunt, people know that what I tell them is nothing personal based on my liking/disliking. I am always perceived as fair. The rank and file members recognized that the new model was fundamentally designed for their own benefit and, at the same time, for enhancement of organizational effectiveness. The union leaders soon gave in to the popular grassroots sentiments and called a joint meeting to resolve mutual differences on their own without managerial intervention. Finally, they decided to accept practically all the pre-conditions of the new model, i.e., they agreed to sit in a joint negotiation meeting with the management with equal representatives from both the unions. They also decided to have an equal number of representatives on the Works Committee and the Canteen Committee where the number of union representatives required was even. But the Provident Fund Committee seemed to pose a problem, as the number of representatives required was three. This was resolved through a management suggestion to have two representatives from one union and one from the other in the first year and reverse the ratio in the next. In addition, workers were barred from switching between unions. Any new recruit would be given a choice to join any union but would have to remain with that union for life. Though the union leaders vehemently opposed

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the idea of submitting a single memorandum, they eventually landed up submitting a virtually identical Charter of Demands on their union letterheads. As part of the new code of conduct, no labor-related issue was to be discussed from then on, unless representatives from both unions were present even when discussing issues pertaining to one union only. Further, to contain costs and ensure dedicated work during normal hours, all overtime hours were eliminated with mutual consent. Looking back in 2001, Dr. Dutt noted: Here, the unions have different political affiliations. But we always talk to them together. I don’t even know who belongs to which union and people often laugh at me for that, but it really does not matter. There are only some token symbols ( like union flags ) but no real politics goes on inside the company. Long back, in mid-eighties I had told them it is their choice whether they want to be a part of a sick company or a healthy business organisation. If they want politicking and unionism they would surely dig their own grave.

TOWARDS A SHARED FUTURE Today, after almost a decade, the workplace environment has been so transformed that the union members hardly differentiate between the unions. More often than not, they invite the opposite union’s leader to solve intra-union problems in the belief that the presence of any one leader would be enough to handle any situation. If one union leader is absent, it is taken for granted that the other leader will intervene. The two union leaders, who used to avoid being seen together in public, now share a very good rapport, and an equal status from members of both the unions. The management is seen as a true friend, philosopher and guide, with umpteen instances where workers, after having been promoted to managerial positions, still retaining their union memberships. In this regard, Dr. Dutt observed: I do not believe in any management-union division, which is very artificial in nature. I know almost all the workers personally go, meet and talk to them and they can also talk to me freely. I tell them, “Look, what you are doing is not right” and they listen to me since they know I don’t talk rubbish. I am working in this company for so many years and whenever in Calcutta I go to the factory, at least three-four times a day. I never restrict myself in the office because I don’t believe in running a company from an office. The success of the ‘loving and living asset’ model has allowed COI to move ahead with several innovative work practices to face the new era of globalization and competition. As part of the annual agreement signed on January 2, 2000, to celebrate the new millennium, the management and unions decided to introduce a new night shift, to relocate existing manpower and support further growth in productivity through multi-skilling and flexible learning. Already, there is an

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increased thrust on training workers to run several machines, instead of limiting them to just one. To capitalize on the opportunity for enhanced learning, the number of holidays has been reduced to 12 instead of 16, without any extra compensation for these days, which has allowed the company to commit to enhanced training despite growing competition. The boundary of the jobs has now become flexible to ensure that work never suffers even if there is a shortage of manpower. Further, the workers have been entrusted with tasks such as quality control, previously entrusted to management staff only. In addition, housekeeping is now a part of everybody’s job. On the other hand, peripheral jobs like security have been contracted with an outside agency to allow the firm to focus on jobs where it can contribute to the skill enhancement of the workers. All the workers are now paid by cheque and are eligible to draw money using an ATM card from zero-balance accounts with a bank. These developments have taken a fresh meaning with the changeover to the Japanese parent. According to him, ‘being a part of DIC, a very large group of companies, COI has access to the very best technology in the world. We are training the people all the time and like any other company the focus is now on cost, we are now much more cost-conscious than we were before.’ In summary, the management belief in treating human assets with dignity and believing in their inherent goodness has been the key to the development of COI. While the firm has done well in preserving and fostering its human and technical competencies, and responding to the post-competence challenges, it is looking forward to a renewed integration of these with Investor Orientation. As shown in Table 2.6, the profits of the firm took a beating in 2000 as compared with the earlier years on account of increased depreciation and material costs. Table 2.6: Recent Performance of Kolkata Plant of COI Year

Sales Figures (in Million Rupees)

Profit After Tax (in Million Rupees)

Production Units (in Tons)

1998 1999 2000

1448 1642 1844

85 101 90*

2531 2657 3051

*There was a significant increase in material costs and depreciation leading to reduction in the amount of profits.

The spiritually-guided attitude of Dr. Dutt, reflected in the following quote, may prove as decisive in the transformative organization without any discontinuity: I don’t see or need any major change, which can only happen when there is no proper planning. I believe the changes should be focused on the business process. I do not believe in drastic downsizing because I understand that in this country without any social security system people are really helpless without a job. I firmly believe that in every sick company it is the

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failure on the part of the management rather than the fault of the workers. I attribute 75 per cent weight to the change of business process and reducing wastage and 25 per cent reducing the number of people. In a country with a tremendous growth potential, in fact, we need people. I welcome the process of automation but I will also like to calculate the real costeffectiveness. We reduce numbers through a really soft Voluntary Retirement Scheme (VRS) program which basically emphasizes the concept of natural attrition and job-freezing. Already, COI’s positive climate has become an exemplar in West Bengal, which is now shedding its past image of leftist unionism and trying to foster a more positive and meaningful relationship between the workforce and the management.

Conclusions In this chapter, we reviewed the transformative perspective in change, leadership, and learning domains. In its essence, the transformative perspective allows an organization to develop a higher-order integrative insight into the differentiated features of various domains so that a new meaning of change, leadership, and learning is created, which enables the organization to live a fulfilling life in each of those domains. The participants in the organization are also thereby able to share their differences and develop a shared sense of reality, and construct bridges between the different realms of their life. The transformative organizations go to the very purpose of human and organizational life, which pervades all the domains of human and organizational behavior. Thus, the transformative approaches influence the heart or culture of the organization and help generate a new integrative emic meaning of each behavior. We developed a theory of strategic cultures of organizations, identifying four types of strategic cultures: Investor Orientation, Competence Orientation, Post-competence Orientation, and Spiritual Orientation. We propose that globalization necessitates an integrative culture, and the transformative perspective can help firms put appropriate proportionate priorities on each of these strategic domains without sacrificing any one of them. We tested the transformative organization proposition using the case analysis of COI, where management control passed from a British parent to French parent, and then to a Dutch/Japanese parent over the past 10 years. Using survey data from the top management team, we found that the firm gives top priority to an Investor and Competence oriented culture, strong priority to Postcompetence culture, and moderate priority to a Spiritual culture. The CEO interview further indicated that the firm has enjoyed greatest gains in Competence oriented culture over the recent years as manifested in a complete transformation of the industrial relations climate. It has also built up Post-competence orientation involving the positive effect of this transformation on the local state. The Investor oriented culture has taken a beating recently, but is likely to improve as the firm

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looks at its role in transformative terms, covering co-development of employees, community, and the nation. In summary, our case study demonstrates how organizations can achieve excellence in multiple cultural domains and, thus, be attuned to the demands and values of different kinds of stakeholders. By adopting a transformative perspective, firms can be more meaningful on diverse criteria for a broad constituency and they can be at home in diverse cultures. There is a further need to investigate the process through which a transformative organization may be forged. In particular, the firms may first cultivate a work climate focused on empathy and exchange of perspectives in a global environment. Conventionally, firms have sought to form alliances with only those partners who share their value sets. As a result, there has been a growing institutionalization of a narrow set of goals. During the early 1990s, nearly all the S&P 500 companies in the US emphasized a narrow set of management tools such as core competency, reengineering and total quality management, thereby reducing their labor costs, and enhancing profit margins. Consequently, from 1992 to 1997, their profits rose by a total of 135 per cent, while sales grew only a fourth as fast (Carr, 1999). In the latter half of the 1990s, there were hardly any new ideas left to reduce costs and there was a mass shift towards another set of narrow themes: mission and vision statements oriented to motivate employees using a variety of buzz slogans about what the organization stood for. It was felt that the prices and volumes could not be increased in domestic markets and, therefore, growth would have to come from the emerging markets. However, the crises in many emerging markets made it difficult to realize the expected revenue growth targets. With a growing maturity of the old economy operations, the growth in the new economy sector also could not be sustained, eventually leading to a meltdown. Through a further understanding of the transformative perspective, firms will be able to forge learning conversations about alternative values with their alliance partners, and adopt practices that will be in tune with the diversity of values in this world. They can thus sustain their transformations without the need to forget their prior learning as they take up new challenges.

References Astin, A. and H. Astin. (2001). ‘Principles of Transformative Leadership’. AAHE Bulletin, January, Washington, D.C.: American Association for Higher Education. Bass, B. M. (1985). Leadership and Performance Beyond Expectations. New York: Free Press. Bemis, W. & B. Nanus. (1985). Leaders: The Strategies for taking Charge. New York: Harper & Row. Boyd, R.D. & J.G. Myers (1988). ‘Transformative Education’. International Journal of Lifelong Education, 7(4): 261–284.

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Brent, D. (1991). ‘Oral Knowledge, Typographic Knowledge, Electronic Knowledge: Reflections on the History of Ownership’. Ejournal, 1(3), Albany, New York: University of Albany. Burgess, H. & G. Burgess (1996). ‘Constructive confrontation: A transformative approach to intractable conflicts’. Mediation Quarterly, 13(4): 305–322. Bush, R.A.B. & J.P. Folger (1994). The Promise of Mediation: Responding to Conflict through Empowerment and Recognition, San Francisco: Jossey-Bass. Carr, E. (1999). ‘Indecent Exposure’. The World in 1999, pp. 84–86, London: The Economist. Dyer, J.J. & H. Singh (1998). ‘The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantage’. Academy of Management Review, 23(4): 660–679. Glock, C.Y. & R. Stark (1965). Religion and Society in Tension, Chicago: Rand McNally. Goeglein, A. & J. Indvik, J. (2000). ‘Values-Based Transformational Leadership: An Integration of Leadership and Moral Development Models’. Proceedings of the Academy of Strategic and Organizational Leadership, 5(2): 12–16. Gupta, V., J. Rajasekar and E.S. Srinivas (2002). “Managing Performing Workforce: The Case of India—Challenges and Legacies”. In B. Pattanayak & V. Gupta (eds.), Creating Performing Organizations: International Perspectives for Indian Management, India: Sage Publications. Kuczmarski, S.S. & T.D. Kuczmarski (1995). Values-based Leadership. Englewood Cliffs, N.J.: Prentice-Hall. Lederach, J.P. (1989). ‘Director’s Circle’. Conciliation Quarterly, 8(3): 12–14. Lichtenstein, B.M.B. (2000). ‘Self-organized Transitions: A Pattern Amidst the Chaos of Transformative Change’. The Academy of Management Executive, (4): 128–141. Mangaliso, M.P. (2001). ‘Building Competitive Advantage from Ubuntu: Management Lessons from South Africa’. The Academy of Management Executive, 15(3): 23–33. Meyer, M.W. & V. Gupta (1994). ‘The Performance Paradox’. In B.M. Staw & L. Cummings (eds.), Research in Organizational Behavior, Greenwich, Connecticut: JAI Press, 16: 309–369. Mezirow, J. (1991). Transformative Dimensions of Adult Learning. San Francisco: Jossey-Bass Inc. Montville, J.V. (1993). ‘The Healing Function in Political Conflict Resolution’. In Conflict Resolution Theory and Practice: Integration and Application, edited by Dennis J. Sandole and Hugo van der Merwe, 112–127. New York: St. Martin’s Press. Morris, R. (1994). A Practical Path to Transformative Justice, Toronto: Rittenhouse. Ferguson, M. (1980). The Acquarian Conspiracy: Personal and Social Transformations in the 1980s, Los Angeles: J.P. Tarcher.

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Parker, S.K. & C.M. Axtell (2001). ‘Seeing another viewpoint: Antecedents and outcomes of employee perspective taking’. Academy of Management Journal, 44(6): 1085–1101. Stryker, S. & R.T. Serpe (1982). ‘Commitment, identity salience, and role behavior: Theory and research example’. In W. Ickes & E.S. Knowles (eds.), Personality, Roles and Social Behavior, 199–218. New York: Springer-Verlag. Vargas, R. (1987). ‘Transformative Knowledge: A Chicano Perspective’. In Context, 17: 48–50, Langley, WA: Context Institute.

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A Model of the Transformative Organization

Learning from the Wesman Group1 of India  Vipin Gupta

l

Kumkum Mukherjee

l

Roma Puri

Organization theory is facing serious challenges at the dawn of the 21st century. These challenges are of three types. First, the formative challenge: the debate between those who emphasize that the organizations exist to serve the interests of their owners and stockholders alone (Freeman, 1984), and those who assert a multiple-constituency stakeholder logic for organizational functioning (Drucker, 1999; Blair, 1995; Donaldson and Preston, 1995) has reached new levels of urgency. The owner-stockholder camp builds on the private property rights logic and holds that by focusing on their main job—to be profitable—the organizations can generate greatest value and allow society to enjoy the highest welfare and people to have the maximum resources to satisfy their needs. In contrast, the multi-constituency stakeholder camp builds on the social capital logic and asserts that each stakeholder constituency is essential to the success (ontological view), that the organization will be more effective by recognizing the emotional ‘ownership’ of these constituencies (epistemological view), and that the contributions of those constituencies constitute moral entitlements to shared ownership (axiological view). Second, the normative challenge: the conversation between those who assert the paramount significance of the local institutions, and a need for the organizations to accept and adapt to the local institutional norms for legitimacy, preferential resource access, and buffered contingencies, and those who emphasize the freedom of the organization and a need to apply more general and universal criteria for strategic decision-making, has gained central place in international management literature. This conversation has grown into an emic versus etic debate in comparative management; localization versus globalization debate in 1

We are thankful to the US National Science Foundation, Globe Research and Educational Foundation, IIM Indore, and EMPI Business School for funding the study as part of worldwide cross-cultural CEO research initiated by Professor Robert House. XLRI Jamshedpur and Eastern Institute for Integrated Learning offered additional help for this chapter.

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multinational management; relativism versus universalism in business ethics; and modernization versus post-modernization debate in development theory. Bartlett and Ghoshal’s (1991) transnational solution for this normative challenge has received much attention, but its emphasis on the shared vision to manage ‘local responsiveness and flexibility’ and ‘global efficiency and competitiveness’ simultaneously for ‘worldwide innovation and learning’ begets the unresolved issue of whose vision must be shared within the organization. In a transnational organization, the units with multiple perspectives and capabilities, dispersed assets and resources, and differentiated roles and responsibilities are believed to prosper in a globally efficient manner because of two techniques—shared worldwide vision and the mission of the organization reinforced through visible behavior and public actions of senior management, and the shared corporate values underlying the organizational psychology shaped through corporate personnel policies (Bartlett and Ghoshal, 1991:204). Third, the fulfillment challenge: another classic debate relates to the domain and boundary that would enable fulfillment of the fundamental organizational purpose. The domain includes arena issues about scope of products, geographies, customers, core technologies, and functional processes and activities, as well as the vehicle issues about ownership, alliances, and open outsourcing. The literature encompasses a range of guiding factors including transaction costs (Williamson, 1975), coordination costs (Richardson, 1972), agency costs (Jensen and Meckling, 1976), core competence (Prahalad and Hamel, 1990), and learning benefits (Kogut, 1983). In each case, the organization has stronger commitment to some domains in which it has direct and fullest ownership, moderate commitment to the other complementary domains where it has shared ownership, weak commitment to the supplementary outsourced domains directly relevant to its business model, and least commitment to the broader community and external groups. This radius of commitment approach is problematic because it precludes effective participation of the broader community and external groups through their influences on manpower quality and market purchasing power. On the whole, the organizational theory is struggling with the issues of for whom (the formative ownership problem), by whom (the normative integration problem), and of whom (the boundary fulfillment problem). We suggest that these three problems should be seen together within the context of an overarching democratic challenge since they are fundamental to the democratic working of modern society. Put differently, the organization must seek to balance the needs of the stockholders and the diverse stakeholders, the demands of the institutions and the efficiency of coordination, and the costs of governance and the power of the masses. We exemplify this balance-oriented approach to servicing by referring to the ‘transformative organization.’ In this chapter, we develop a model of transformative organization using evolutionary perspective as a point of departure. We also present a case study of the Wesman Group in India, illustrating how the transformative organization can be evaluated and developed.

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A Model of Transformative Organization THE EVOLUTIONARY PERSPECTIVE The evolutionary perspective highlights the fact that the development of an organization occurs through VSR—Variation, Selection, and Retention (Weick, 1969). Variation is considered a fact of life; evolution is deemed to occur through a persistent process of Selection from the generated Variation; and Retention springs from more adaptive forms of structures through replication and reinforcement. We propose that an understanding of the formative forces in Variation—its Why and How—is necessary to resolve any problems with the retained structures, and to facilitate the process of organizational restructuring, both on a continuous as well as a punctuated basis. Variation is typically associated with the emerging stage of the organization. This is a period when several organizational forms can co-exist, but where certain events force the selection of one dominant form. In the evolutionary perspective, these causative events are viewed as exogenous to the organizational development and are identified as ‘shocks’ for the system. The organizations or the actors within these organizations, do not have any control over these shocks and their behavioral response can at best be ‘adaptive’. However, one needs to develop a deeper understanding of the formative forces that make constructive mutations in an organization or a population possible. Next, we discuss how the formative forces may be cultivated to enhance Variation, and then support richer Selection and Retention over the course of the organizational lifecycle.

F ORMATIVE FORCE

AND

TRANSFORMATIVE O RGANIZATION

Formative means ‘capable of giving form or shape’ and ‘capable of alteration by growth and development’. The viability and development of an organization is a product of the formative power—the mission and vision of the people who lead that organization (‘the entrepreneurial leaders’). Depending on the scenario being enacted by the entrepreneurial leaders through their mission and vision, and commitment of the cast, the organization can continue to fulfill the needs of a wide group of people in its original or modified form over several time periods. Gupta, MacMillan, and Surie (2003) observe that ‘scenario’ enactment and ‘cast’ enactment are two critical roles underlying effective entrepreneurial leadership in all cultures. The formative power of the organization is a function of the quality of exploration, the scope of variation, the depth of research and development, the maturity of knowledge codification, the fundamentals of architecture, the excellence in technical skills, and the craft used to develop technological, manpower, material, and marketing capabilities. A high organizational slack— endowing access to adequate resources, and a loosely coupled network—offers opportunities that can be linked to the broader community and external groups and may support discovery-oriented formative power.

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The formative phase generates diverse combinations and recombination of the technological inputs and affirms the cast’s capability to deliver relevant, potentially valuable, services in the market place. The ability of these services to acquire an incremental value, over and above the cost incurred by the entrepreneurial leaders for the purposes of scenario and cast enactment, depends on whether those services offer normative utility to the broader community and external groups. Normative means being related to, determining, derived from, conforming to, or prescribing, the norms. The norms represent a working standard of development or achievement, measured by the central tendency of the broader community and external groups with respect to the criteria of action that guide and regulate appropriate behavior. Any deviation from the central tendency may still offer some normative utility to the community in proportion to the significance of the minority criteria compared with the central norms. The greatest normative utility is realized by carrying a meaningful relationship to the established central norms, or by prescribing how the services offered are more appropriate compared with the established norm for fulfilling the central needs of the broader community and external groups. The motivations of the different constituencies and groups vary. It is rather difficult to fulfil these varying motivations through one standardized norm. However, the entrepreneurial leaders may successfully discover and establish mechanisms to fulfil the needs of a diverse group of constituencies, and external groups, for instance, through flexible manufacturing. Table 3.1 summarizes the key characteristics of the formative, normative, and fulfillment phases of the transformative organization. Next, we discuss how to empirically identify and develop this transformative organization.

T RANSFORMATIVE ORGANIZATION

AND

P ERFORMING

A transformative organization can be identified on the basis of its approach to performance and the techniques it uses to measure, appraise and enhance performance. During the formative phase, a transformative organization focuses on a few criteria to allow for a broader range of commitments during the normative development, and is aware of the implications that the criteria will have on future organizational performance. Such ‘formative evaluation’ enhances the successful fulfillment of the mission and vision of any program (Breen and Candlin, 1980:106; Williams and Burden, 1994:22). The criteria used in the formative evaluation help to assess the worth of a resource during the formative phase of a program (Bhola, 1990). The perspective is essentially prospective, oriented towards improving the quality of resources, understanding the strengths in order to amplify them, and isolating the weaknesses to rectify. It is done before the resource’s service is formalized so that the conditions can be adapted to enhance the quality of the resource and the value of its potential service. Formative evaluation is typically conducted as a learning conversation with a cast of characters that share the same mission and vision, so that full commitment

Table 3.1: Characteristic Phases of the Transformative Organization Formative Phase

Normative Phase

Fulfillment Phase

Reference

1.

Economies

Scale

Competitive advantage Enactment process Value chain management Knowledge management Organization design Managerial skills Organization coupling Organization slack Products

Constructing position Selection

Scope (focus; purpose) Constructing exchange Retention

Chandler (1990)

2.

Learning (discovery) Constructing capability Variation

Gupta (1998)

3. 4. 5. 6. 7. 8. 9. 10.

Weick (1969)

Research and Development Codification

Manufacturing

Marketing

Porter (1985)

Diffusion

Abstraction

Boisot (1998)

Architecture

Routines

Culture

Technical

Interpersonal

Conceptual

Saloner, Shepard & Podolny (2001) Katz (1974)

Loose (open) High

Tight (efficient) Low

Craft

Standardized

Meaningful (empowering) Appropriate (flexible) Customized

Perrow (1984) Cyert & March (1955) Pine (1993)

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of the cast may be mobilized for the intended purpose. The formative evaluation uses multiple techniques, including internal dialogue, external review, and field test, which enhances the utility of the identified service and minimizes the costly and time consuming shocks and reformative services. The formative evaluation criteria help validate that the relevant incremental value is being accrued and to improve the performing, as necessary, by means of identification and immediate remediation of impediments (Weston, McAlpine, and Bordonaro, 1995). The normative evaluation covers a broad range of criteria, each of which is consistent with the firm’s formative mission and vision, and the derivative service commitments of the cast of characters. It highlights how the market’s need fulfillment, and the value accrued by the organization through its services, compares to the fulfillment of needs and the values accrued by the other organizations with similar constituencies, broader communities, and external groups. The normative evaluation is not intended as a measure of the effectiveness of the servicing program. It uses very simplistic criteria, such as comparison on market share, profits, or stock valuation, which capture at best a limited component of the efficacy of servicing program. The criteria used in the normative evaluation are those believed to be important for organizational performance, they represent the alternative outcomes that ought to be evaluated. In addition, normative evaluation assesses the beliefs of various constituencies, such as of stockholders, customers, and employees about how well the organization is performing (Weiss and Greene, 1992). These beliefs are based on the outcomes that these constituencies expect from the organization. The real test of the servicing effectiveness is if an organization performs better than its competitors who have access to a similar scale and quality of resources, by quickly delivering its services to its diverse constituencies, broader community and the external groups, retaining these networks for successive services, and growing faster than its competitors. Such ‘summative evaluation’ requires the servicing program to develop fully, and takes time to conduct because it encompasses the totality of the organization. Summative evaluation highlights whether the program has been fulfilling, but does not explicate the why or how sources of fulfillment (Williams and Burden, 1994:22; Chambers, Wedel and Rodwell, 1992:8; Stake, 1983). Its purpose is to document and disseminate overall results to various constituencies that are interested in the well being of the organization. It can also be used to evaluate the overall performance of the personnel and to assess overall value generated from the resources.

SUMMARY In essence, we suggest that an organization is the sum total of formative effects, which become normalized, but may not necessarily contribute to a 100 per cent fulfillment of the organizational purpose. Transformative organization seeks to evaluate the formative effects so that the value of its norms becomes explicit, and those norms may be used purposefully to discover ‘how’ of the organizational performing. Consequently, the priorities could shift from the norms that are

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inconsistent and inconsequential for accruing incremental value, to those of greater significance. Better alignment of the norms with the value accrual process helps in fulfilling the mission and vision of the organization, and allows additional, higher order, set of values to inform the subsequent formative and normative evaluation of the organization. Next we present a study of an illustrative transformative organization using the case of Wesman Group—the market leader in heat treatment products in India. The study identifies the summative evaluation of Wesman, the normative implications of the fulfilling summative performance, and the formative foundations of the effective norms.

WESMAN GROUP—A CASE STUDY OF TRANSFORMATIVE ORGANIZATION SUMMATIVE EVALUATION—IS WESMAN

A

FULFILLING EXPERIENCE?

The Wesman Group began with the founding of its flagship privately-held arm, Wesman Engineering Company Ltd in 1951 under the entrepreneur-owner Vaswani (Sr.) at the city of Calcutta (now Kolkata) in the state of West Bengal in eastern India. Since then, the Wesman Group has grown to 10 companies and more than 500 employees with manufacturing plants and offices throughout India. Wesman has been India’s dominant manufacturer of foundry equipment, combustion equipment, and industrial furnaces. Twenty per cent of the group’s sales come from foundry equipment, 30 per cent from combustion equipment, and the remaining 50 per cent from industrial furnaces. The flagship company was certified as ISO 9001:1994 in 1998. Wesman’s corporate and head offices are located in Kolkata, with regional offices at six major industrial centers—New Delhi, Ahmedabad, Mumbai, Pune, Bangalore, and Chennai—covering all of India. Since its inception, Wesman adopted a pioneering approach to design, manufacture and application of the foundry, combustion, and industrial furnace equipment for the modernization of Indian industries. It gained reputation for its quality and reliability; its products built over 25 years ago still provide reliable performance all over India. In recent years, to support further growth in the foundry business, it has entered the niche foundry markets where the customers are looking at reducing rejections. In 1977, Wesman entered into a long-term collaboration to secure designs and technology for liquid and gaseous combustion equipment from North American Manufacturing Company, US. With the support of a team of dynamic engineers and technologists, it offered value and built-in flexibility to its customers. Its combustion systems gained popularity not only in the steel, aluminum, foundry, forging and heat treatment industries but also in tea processing at all the major tea gardens in Assam and Darjeeling; its baking ovens are widely used by biscuit manufacturers. Recognized as a pioneer in the furnace industry since the 1950s, Wesman was the first to build many specific furnace designs in India. Subsequently,

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Wesman formed joint ventures with two German sister companies—Ipsen International and LOI Thermprocess GmbH—which allowed fuel fired and electric industrial furnaces to become its fastest growing business. Ipsen’s R&D program, which is focused on new furnace designs tailored to meet customer and market requirements, has been made available to all the joint ventures including Wesman. The first joint venture, Wesman Ipsen Furnaces Private Ltd, formed in 1993, counts among its clients almost all the major domestic and multinational automobile makers in India including their ancillaries for heat treatment requirements. It has nurtured long-term customer relationships through its deep involvement at all project stages, from equipment selection and sizing to installation process standardization and after-sales support during the lifetime of the equipment. The other joint venture caters to several players in the steel and aluminum sectors. In 2000, Wesman entered into a technology licensing agreement with Furnace Construction Company Ltd of the UK to manufacture oil and gas-fired cremators. The technology was seen as a natural extension of the industrial furnace business. Says CEO Vaswani Jr., ‘As far as we are concerned, it is manufacturing just another furnace. The equipment manufactured by us will conform to standards applicable in the UK. No fresh capital investment is entailed as the equipment would be manufactured with the existing machinery’ (Business Line, 2000). The company has been seeking to educate the customers on the need to move away from the use of wood for cremation purposes and switch over to more environment friendly oil and gas cremators. With the liberalization of the Indian economy, Wesman set up a separate export-dedicated company, and targeted the rapidly growing industrial markets in Asia-Pacific, Middle East and Africa. In addition, it became the marketing agent in India of several leading international foundry equipment manufacturers. This allowed it access to system components from the best international manufacturers, enabling it to deliver turnkey solutions to its national and international customers. By 2001, Wesman had forged several international tieups with German, US, British, Italian, and Canadian companies in the form of joint ventures. It also secured technical licenses from many international companies. Supported with its technical expertise, R&D facilities and international collaborations, it offered products of quality and price that were very competitive against international suppliers from Europe, Japan and the US. It sent its employees to client locations overseas for on-site erection supervision and commissioning services, and offered hands-on training to the customers’ operators. In short, Wesman’s global outlook has helped it achieve its mission of being the number one choice for its customers. Further, it has been successful in turning its employees into high-performers. In our interview conducted in 2002, Wesman’s CEO, Mr Rajan Vaswani Jr., observed: ‘A unique aspect in the organization is that whoever joined Wesman has remained with the organization till retirement. But that is again like a double-edged knife. People with limited capability cannot be trained to perform beyond a particular level. But to deal with the situation, the harsh approach was never taken. What we did instead was to become gradually more demanding and identifying more scope for

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individual development. I take pride in telling you that applying a combination of soft and hard approaches, we could really transform a number of nonperformers into high performers.’

N ORMATIVE EVALUATION—HOW EFFECTIVE IS W ESMAN’ S O RGANIZATION ? We use two criteria for evaluating Wesman’s organizational effectiveness: Top Management Optimism and Top Management Commitment. The two criteria were measured using the top management team survey of the Global Leadership and Organizational Behavior Effectiveness (GLOBE) program which has designed a survey of CEOs and top management teams in more than 30 nations of the world, under the overall coordination of Professor Robert House at the Wharton School. In India, the study is being conducted in 30 states with a sample of 40 firms in each state, under the overall coordination of the first author. The top management team surveys included questions relating to the leadership of the CEO. In addition, there were 11 questions intended to learn about the commitment, effectiveness, and satisfaction (CES) of the top management team. Of these, six CES items were used to construct the two scales. These two scales were found to be internally consistent (Cronbach alpha > 0.70) at both the firm level as well as the top management level. The Top Management Optimism scale is measured on the basis of the optimism of the top managers about their future with the organization, their agreement with the CEO’s vision, and their expectation for an excellent future for the organization. The Top Management Commitment scale is measured on the basis of top managers contributing 100 per cent of their ability to the organization, their willingness to make serious personal sacrifices to contribute to the organization, and their ability to work well together. As shown in Table 3.2, Wesman scored 5.72 on a 7-point scale for both top management optimism as well as top management commitment, indicating that its top managers have a positive, but moderate, degree of optimism and commitment to the organization. The range was similar for both, varying from 4.67 to 7.00 for optimism, and from 4.33 to 6.67 for commitment. The Pearson’s rank correlation between top manager scores of optimism and commitment was 0.51 (p > 0.10; N = 6), though not significant. Thus, Wesman’s top managers have some degree of optimism and commitment to the organization, though their optimism is not strongly related to their commitment. Their commitment is not necessarily rooted in their optimism about the future of the organization, and their optimism does not necessarily spring from their own commitment. There appears to be some additional forces that influence both commitment as well as optimism of the top management team of the Wesman Group. Next, we investigate the formative forces that account for the positive, albeit moderate, levels of top management commitment and optimism at Wesman.

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Respondent

Respondent

Respondent

Respondent

1

2

3

4

5

6

5.33 6.00

6.33 5.67

5.67 5.67

4.67 4.33

7.00 6.67

5.33 6.00

Firm’s Average

Respondent

Optimism Commitment

Respondent

Table 3.2: Top Management Optimism and Commitment at Wesman Group

5.72 5.72

F ORMATIVE EVALUATION—WESMAN’S 25-YEAR T RANSFORMATIVE J OURNEY Under the patriarchal leadership of founder-owner Vaswani (Sr.), Wesman Engineering Company gained reputation as a technological pioneer and its products became known for their quality and reliability. A major change in the group strategy emerged in the early 1970s with a shift in the corporate leadership. In 1970, Mr Rajan Vaswani, the present CEO, graduated as a metallurgical engineer with specialization in industrial furnaces and combustion engines. After working in the Wesman plant in Calcutta as a trainee for one year, he went abroad and lived in the US, Switzerland and the UK, working with the Wesman clients for about two years. He returned to India and joined the company on a full-time basis in 1973 at the age of about 25 years. A few years later, Vaswani (Sr.) entrusted the entire responsibility of running the business to Rajan and his younger brother, and permanently migrated to the US to help develop the group’s international business. Although Rajan felt quite unprepared for this daunting task, his father was fully confident about the abilities of his son. In 2001, Rajan reminisced about the challenges he saw at the time: ‘I was not really ready for it at such a young age and with no previous management experience. I had only one thing in my favor. From the age of 14, my father used to send me to the various factories and plants of Wesman during my school holidays. This gave me an opportunity to learn various skills. Engineering drawing is one such skill that I learnt during this time. I could make drawings independently. Someone at my age would never have the depth of knowledge that I had. It was that grounding that helped me immensely in my role as the person-in-charge of the organization. I was very confident in all areas pertaining to engineering. But management skills came from common sense only.’ Rajan found total support from a group of old loyalists who had worked under his father. This helped him take charge, but he now faced the problem of learning how to run the business in his own way in a manner that the old loyalists did not become a hindrance. Rajan knew that he had to discover his own solution. For a while, Vaswani (Sr.) had promised to fly down whenever Junior faced any critical problem, but it was only to be used as a ‘fire-brigade’ option.

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Says Rajan, ‘Regarding my father’s decision to hand over the company to me at such a young age, I don’t have the full answer to it. I am still trying to figure out why he did it. I guess he took the gamble which he figured could be taken because should the ship start sinking, nothing would prevent him from flying back. In the first year after he left, he came four times, second year three times, third year twice and fourth year only once. From the fifth year onwards he stopped coming. Thus, in a way, he took a step by step approach over a period of around three years and then decided that he could stay away.’ When he took the helm, Rajan found that the old-timers were happy in their own way, and even seemed complacent about the newcomer. The task of changing their outlook and the way of functioning appeared quite daunting. Most of them had seen Rajan from his childhood days and were loving in their own way. They saw themselves as a member of the patriarchal organization and were fiercely loyal to Vaswani (Sr.) and emotionally attached to all the rules and regulations of the older days. The key was to transform the love and emotional bonding of the old guard so as to make them supportive of the young Rajan’s entrepreneurial vision. Rajan recalled that he had three major goals at that time: (a) To identify strong well-known international partners and become one of the most highly respected companies. We should be among the top three players in our business domain; (b) To keep growing; and (c) To be the first choice of the customers even if the company’s products became an expensive choice. Rajan decided to bring about an incremental change rather than to author harsh and abrupt change in the organization. He respected people’s seniority and involvement, and showed a keen sense of learning about the managerial and operating issues from their experience. As he initiated the change process gradually, the changes were transformative in nature and became embedded in the very fabric of organizational life. More importantly, from Rajan’s perspective, it was a bloodless battle that he won, in which mutual love and respect had been reinforced and enhanced in the organization, making it truly a joyful place to be. He later recounted: ‘The company had many senior people in the organization. Therefore, it was a little delicate for a younger person forced into a chair for which he was not yet ready, but nevertheless, required to provide the leadership. So, my strategy was to learn from the senior people by giving them due respect that they deserved for their experience and knowledge. So they did not see me as someone who had come to make the river flow the other way. Once the personal balance was achieved, it became teamwork. The whole thing was some sort of step by step process. It took almost five years before they would start coming to me for decisions and expecting me to play the leadership/decision-making role. This process continued all the way through the rest of the cycle of my taking over the charge of the company. In fact, there was not a single resistance at any point. Generally, I have noticed that whenever the process of succession takes

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place in an organization, at least some senior people always tend to pack their bags and leave. This is a very common occurrence. We were fortunate that it never happened here.’ While he gained love and genuine respect from his people, Rajan found growing pressures from the competitors, and realized that something more had to be done to transform the organization in a way that would sustain its market position. ‘During this period the competitors must have been watching Wesman minutely and thought that it would definitely decline because of this abrupt change in leadership. In this situation, my pace of learning the ropes of the trade had to be accelerated,’ he said. When the Government of India liberalized the market and opened it to global competition in 1991, Rajan sought to harness the confidence of his people in his abilities as a leader to achieve his ambition of turning the organization into number one in its market. A key element of the leadership strategy was to develop the core areas of foundry, combustion, and industrial furnaces where the organization has already gained market reputation and technical expertise, and to enhance the human and technical capabilities of the organization. To make his vision work, Rajan hired an external consultant in 1991 to develop the organizational leadership for the emerging and exciting times. ‘During the tenure of my father’s leadership everything was done according to his diktat which was a potentially dangerous situation from the organization’s point of view. I myself was making the same mistakes earlier in my career. But fortunately, there was an opportunity to have an excellent external consultant who made me realize that I have to let go. I had to give others the space and freedom to do their work. Today nobody comes to bother me with little details. They do their job and I am there to provide back up support whenever they need. The external consultant made us relook and re-define ourselves and our objectives. On the basis of the oneto-one feedback from the consultant, I have now made my position in such a way that I don’t interfere in the day to day functioning of the organization and make myself available as and when necessary,’ said Rajan. The need of the hour was to shift from a continuous direct involvement of the owner/managers in all the areas to a more professional leadership style where the CEO was at best a virtual fire brigade. As Wesman charged its managers with greater freedom, new growth became feasible and new business partners were added. Rajan observed: ‘There was always a need to develop new product lines and identify new international business partners, in which we were continuously engaged in. The other business partners came on their own because of the company’s growing reputation. The entire thing was based on mutual trust. All our relationships with our business partners are strong and on a long-term basis.’

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LEARNING

TO

59

MAKE HIGH-PERFORMERS

With the new leadership conception, it was realized that the simple structure had failed to empower the people to live their own creative lives, and had only reinforced the dependency on the patriarchal style of leadership. To reach a new height of excellence, routine involvement of the CEO and his top management team had to give way to a more strategic role. The solution was to restructure the organization using the M-form (multidivisional form), by creating autonomous Strategic Business Units (SBUs), each with its own divisional head. The division heads now took the responsibility for operational issues. For a while, there was a general feeling that things were not going in the right direction and the transition was running into hurdles. The informal feedback from employees suggested that the involvement of the line managers did not meet their expectations and they longed for the previous style that offered them an opportunity to directly interact with the owner managers. The perception was that the line managers lacked charisma and personal touch as well as the instant decision-making power that the employees had loved in the owner-CEO. To deflect this dependence on the authority, Rajan sought to instill greater personal accountability among the employees for their roles, but progress appeared to be slow. In 1996, Rajan brought in an external consultant to obtain extensive confidential feedback from the employees across the organization, and identified Performance Appraisal System as the most critical aspect of the required transformation. The employees perceived the existing performance appraisal to be rather biased and arbitrary. The need was to design a performance appraisal system that linked employee performance with not only the organizational reward system, but also with the personal growth and development of the individual employee. To enhance the communication and to allow the employees a better access to the top management, a three-tier assessment system was introduced. Instead of the previous system where the immediate superior was the sole rater, employees were now rated by (a) their immediate superior, (b) the superior’s boss, and (c) by themselves, with self-appraisal covering own achievements, key performance areas, perceived value addition and future development plans in terms of training needs. Special feedback sessions on past performance and planning for future goals were added involving the three, which were also attended by one human resource person who played the role of a mediator and facilitator. As shown in Table 3.3, key performance areas were grouped into three categories: task, skill, and personality related attributes for the staff (S) and executive (E) levels, and business results, management style, and personality related attributes for management (M) and managerial executive (ME) levels. A special section was added about the employee’s health, reflecting the organization’s genuine concern for their employees’ wellbeing. Each attribute was evaluated on a 5-point scale, and different weighting was given to various factors according to the level of the employee. For instance, a key aspect of managerial personality attributes was the degree to which their actions reflected corporate values.

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Table 3.3: Areas for Measuring Performance at Wesman Engineering Staff Level

Manager Level

Task related areas l output of work l quality of work l customer orientation l quality orientation Skill related areas l conceptual skills l human skills l functional skills Personality attributes

Business results l achievement of results l quality orientation l systems orientation l customer orientation Management style l conceptual skills l human skills l functional skills Personality attributes

The core values of the organization were identified as something with which the entire performance appraisal system must be related and aligned. To discover the true organization-wide values to which the employees felt involved and committed, inputs were sought from the employees across all levels, and five core values were identified: (a) Personal integrity, (b) Decency and fair play, (c) Caring for customers, (d) Caring for employees and (e) Openness and team spirit. The CEO encapsulated these values in the company’s Vision statement, and highlighted the operational meaning of each based on the employee inputs. For instance, rather than assuming that loyalty means the same to everyone, an effort was made to clarify what loyalty meant for the employees working at Wesman, so that loyalty took a special and unique meaning related to the identity and life values of those part of the Wesman Group. The effects of the new performance appraisal system, introduced in 2000, are evident in Table 3.4. As can be seen from the table, there was a clear improvement in performance at the management level, modest deterioration at the managerial executive level (in particular due to an enhanced emphasis on value-related actions, not previously evaluated at this level), stable performance at executive level, and noticeably improved performance at the staff level. On the whole, there was a steady improvement, with managers aligning their behaviors more explicitly to the need for values-based leadership, and staff employees finding a more adaptive and values-based response from their executive and managerial executive bosses. The CEO, Rajan, expressed that the key to the success of the new initiative was Wesman’s reputation of being an organization that ‘listens to its people’ and its commitment to take serious actions to make the employees happy and committed to the organization’s vision and objectives. When asked about the specific factors that underlined the transformative culture of Wesman, Rajan identified four areas: (a) Transparency and trust (both with the outside agencies as well as insiders), (b) Bonding and positively discouraging politicking, (c) Supporting each other, and (d) Sharing the common pool of resources including the knowledge and skills.

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Table 3.4: Effects of New Performance Appraisal System on Employee Performance at Wesman Engineering Level Management Management executive Staff Overall

Year 2000–2001 1999–2000 2000–2001 1999–2000 2000–2001 1999–2000 2000–2001 1999–2000

P

A

4%

1%

A+

C 13% 8%

4% 1% 10% 1% 13% 8% 1% 10%

C+

G

G+

E

57% 43 55% 32% 40% 48% 52% 46% 54% 46% 54%

44% 42% 1% 33% 45% 35%

Note: P=Poor; A=Average; A+= Better than Average; C=Satisfactory; C+= Better than Satisfactory; G= Good; G+= Better than Good; E= Excellent

At the beginning of the 21st century, Wesman is sharply focused on further improving and upgrading each individual’s level of performance, by giving opportunities to people and giving scope for value addition. In tune with the times, the thrust is on creating and developing the internal processes using information technology to obliterate repetitive work, eliminate waste, better utilize time, and thereby enhance overall internal capability. Its vision is clear: become a respected company, through trust and openness and improving creativity in people on the one hand, and by being the customer’s first choice, help customers to be more profitable and improve customer retention, on the other. However, in the process, the normative values it has put in place are not necessarily strongly reflected at the middle management (ME) level, which could explain why the commitment of the top management is not strongly related to their optimism about the future and vision of the organization. Thus, the transformative journey of Wesman is likely to continue, and Rajan is well aware of this: ‘Today, the organization is ready to enter into the third generation of succession. Just like my father, who took an early retirement, I mean, he did not take retirement from work, but used to do some other type of work and did not get involved in the day-to-day operations, I am also planning to do the same. Today younger people like to have more freedom. I was forcibly given the freedom without my asking for it. Today the people expect it to come much earlier.’ As the Wesman group grants more freedom and space to its leaders and people, its big challenge is the role that the middle managers should perform so that the top management can effectively commit its best contributions for the future of the organization.

Conclusions We began by identifying three fundamental challenges being faced by the contemporary organizational scholars. These included deciding for whom does

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the organization exist (the ownership problem; the formative challenge), by whom should the organization be defined in terms of vision and values (the integration problem; the normative challenge), and of whom the organization would assume responsibility (the boundary problem; the fulfillment challenge). These challenges are best understood in the context of the organization as a democratic citizen, seeking to sustain and further the democratic spirit of the international society. By focusing on supporting exchange among the stockholders and other stakeholders, multiple local institutions, and diverse contributors to the organizational functioning, the transformative organization can better fulfill its formative and normative roles, without necessarily favoring one constituency over the other, and one institutional system over the other. We showed how the evolutionary perspective invokes the concept of mutation as a God-given gift in order to explain the formative force in effective organizational design. We underlined that this God-given gift can be cultivated through learning conversations about the mission and vision of the organization within the pioneering group, and then enhanced through normative development that brings the organization into the mainstream. The final test of the organizational effectiveness is highlighted by the summative evaluation, which captures the milestones achieved by the organization. Our case analysis of the Wesman Group in the State of West Bengal in India showed that the firm has reached tremendous milestones in terms of its market position and respect by the international partners. However, from a normative perspective, the commitment of its top management was not strongly related to the optimism about the organization’s future, though both were moderately and equally positive. Though neither top management commitment nor top management optimism were part of the firm’s formative vision, the current CEO had become increasingly aware over time about the need to give space and freedom to the employees, and the role of the top management in this respect. To ensure effective performance, the firm identified common values and their shared meaning through conversations at various levels of the organization. These initiatives were inspired primarily by the feedback from the grassroots level, and thus resulted in strongest performance enhancement at that level. The middle management, which was the source of disenchantment at the grassroots levels, actually saw some deterioration in its performance. While the core values reflected the top management vision, and their operational meaning was identified using the grassroots conversations, no explicit effort existed as yet to discover and integrate the middle managerial values. In general, the role of the middle managers has come under increasing scrutiny around the world with the rise of the downsizing and the horizontal organizations during the 1990s. With empowerment and multi-skilling at the grassroots level, and the spread of information technology at the mass level, the control and information transfer role of the middle managers has lost much of its relevance. Yet, middle managers represent a valuable resource for the organizations, since their distinctive expertise is to codify and balance the more abstract knowledge and values of the top management, and the highly diffused knowledge and values at the grassroots. Such an expertise is uniquely appropriate to the role of

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promoting exchange in knowledge and values, not only across different levels in the organization, but also across different radii of commitment outside the organization, multiple stakeholders of the corporation, and the varying local and national institutions. It is only by re-discovering the relevance of each resource, including middle managers, that the organizations can become truly transformative and perform most effectively. That is the essential challenge for the organizations in the 21st century democratic societies.

References Bartlett, C.A. & S. Ghoshal (1991). Managing Across Borders: The Transnational Solution. Boston: Harvard Business Publishing. Bhola, H.S. (1990). ‘Evaluating “Literacy for development” projects, programs and campaigns: Evaluation planning, design and implementation, and utilization of evaluation results’. Hamburg, Germany: UNESCO Institute for Education. Blair, M.M. (1995). ‘Ownership and Control: Rethinking Corporate Governance for the Twenty-first Century’. Washington, DC: Brookings Institution. Boisot, M. (1998). Knowledge assets: Securing competitive advantage in the information economy, New York: Oxford University Press. Breen, M.P. & C.N. Candlin (1980). ‘The essentials of a communicative curriculum’. Applied Linguistics, 1(2): 89–111. Business Line (2000). ‘Wesman to make oil, gas-fired cremators’, October 10, Calcutta, India: The Hindu Group of Publications. Chambers, D.E., K.R. Wedel & M.K. Rodwell (1992). Evaluating Social Programs. Boston: Allyn and Bacon. Chandler, A.D. (1990). ‘Scale and Scope: The Dynamics of Industrial Capitalism’. Cambridge, MA: Harvard University Press. Cyert, R.M. & J.G. March (1955). ‘Organizational Structure and Pricing Behavior in an Oligopolistic Market’. The American Economic Review, 45(1): 129– 139. Donaldson, T. & L.E. Preston (1995). ‘The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications’, Academy of Management Review, 20(1): 65–91. Drucker, P.F. (1999). Management Challenges for the 21st Century, New York: HarperBusiness. Freeman, R.E. (1984). Strategic Management: A Stakeholder Perspective, Boston: Pitman. Gupta, V. (1998). ‘A Dynamic Model of Technological Growth: Diffusion of Japanese Investment Networks Overseas’. Unpublished Ph.D. Dissertation, The Wharton School of the University of Pennsylvania. Gupta, V., I.C. Macmillan and G. Surie (2003). ‘Entrepreneurial Leadership: Developing and Measuring a Cross-cultural Construct’. In press, Journal of Business Venturing.

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Jensen, M.C. & W.H. Meckling (1976). ‘Theory of the firm: managerial behavior, agency costs and ownership structure’. Journal of Financial Economics, 3: 305–360. Katz, R.L. (1974). ‘Skills of an Effective Administrator’. Harvard Business Review, 51(5): 90–101. Kogut, B. (1983). ‘Foreign Direct Investment as a Sequential Process’. In The Multinational Corporation in the 1980s, C.P. Kindleberger and D. Audretsch, (eds.), MA: MIT Press. Perrow, C. (1984). ‘Normal Accidents: Living with High Risk Technologies’. New York: Basic Books. Pine, B.J. (1993). ‘Mass Customization: The New Frontier in Business Competition’. Boston: Harvard Business School Press. Porter, M.E. (1985). ‘Competitive Advantage: Creating and sustaining superior performance’. NY: Free Press. Prahalad, C. and G. Hamel (1990). ‘The core competence of the organization’. Harvard Business Review, 68(3): 79–91. Richardson, G.B. (1972). ‘The Organization of Industry’. Economic Journal, 82: 883–896. Saloner, G., A. Shepard & J. Podolny, J. (2001). ‘Strategic Management’. New York: John Wiley & Sons. Stake, R.E. (1983). ‘Program evaluation, particularly responsive evaluation’. In George F. Madaus et al. (eds.), Evaluation Models: Viewpoints on Educational and Human Services Evaluation. Boston: Kluwer-Nijhoff Pub., 287–310. Weick, K. (1969). The Social Psychology of Organizing. Reading, MA: AddisonWesley. Weiss, H.B. & J.C. Greene (1992). ‘An empowerment partnership for family support and education programs and evaluations’. Family Science Review, 5(1&2): 131–148. Weston, C., L. McAlpine & T. Bordonaro (1995). ‘A model for understanding formative evaluation in instructional design’. Educational Technology Research and Development, 43(3): 29–46. Williams, M. & R.L. Burden (1994). ‘The role of evaluation in ELT project design’. In English Language Teaching Journal, 48(1): 22–27. Williamson, O.E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. New York: The Free Press.

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Roles of Principal Players during Restructuring

The Orissa State Electricity Board Thillai Rajan A.

l

V. Anand Ram

The provision of electricity has become synonymous with economic development and social progress today. The Electricity Supply Industry (ESI) is one of the largest industries and it occupies an important position in the world economy. Over the past decade, several countries worldwide have taken steps to implement reforms in the ESI (Joskow 1998; Berg, 1997; Munasinghe, 1997; and Bates, 1997). Most studies of these reforms have not focused on the transformative process within an organization (Rajan Thillai, 2000a; Pollitt, 1997). In this chapter, we study the role of principal players during restructuring using a process framework that looks at the sequences of events, actions and activities (Rajan Thillai and Anandram, 2001).

Literature Review: Privatization Restructuring Any privatization results in a new environment for the firm which is characterised by changes in the markets (capital and product markets according to their relevance), introduction of new threats (competition and regulation), and reduction in politically imposed constraints. Prominent changes expected in the external environment after privatization are: 1. Budget Constraint: Public ownership is based on the notion of a soft budget constraint (Rowthorn and Chang, 1993). The losses incurred by a corporation were made up by the government, either by way of subsidies or direct grants. After privatization, the firm will not be able to depend on this kind of comfort from the government. 2. Political Intervention: Under state ownership, public corporations are subject to direct political control (Ferner and Colling, 1993). This political control gives ministers more diffuse means of exerting informal pressure on the management either through ‘arm twisting’ methods or direct intervention in management decision-making over a range of issues. But after privatization, the corporation

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is more subject to market forces (competition or regulation as the case may be) and less influenced by political or administrative control (Ramanadham, 1988). 3. Capital Market and Consumer Discipline: Privatization would expose the firm to the discipline of the capital market as it needs to address the concerns of the new shareholders for future resource mobilization. The privatized firms would also need to be more customer conscious as they are required to respond to market demands rather than political constraints (Clarke, 1993). To function effectively in the new environment, appropriate changes are required in the internal mechanisms of the organization (Parker, 1993; Woodward, 1988). Literature indicates several changes in the internal environment of the organization following privatization. Hammer et al., (1989) say a firm under transition from a public sector to the private sector would require a change in their corporate culture. Salama (1995) says that for the firms to function effectively in the new circumstances following privatization, the firm must possess appropriate skills to manage in a market economy. She also says the introduction of entrepreneurial behaviour is required to provide ex-state enterprises with the dynamism needed for the expected transformation in the firm’s efficiency. After privatization, a firm is forced to function differently from the state government enterprise. Wallis (1995) describes these changes in PowerGen, which was privatized from the Central Electricity Generating Board of the UK. He states, ‘The extent of change needed was enormous. Whereas the Central Electricity Generating Board had been risk averse, PowerGen needed to be innovative. Whereas the Central Electricity Generating Board had been engineering-led, PowerGen needed to be commercially driven. Whereas the Central Electricity Generating Board had no concept of the customer, the customer needed to be PowerGen’s main focus. And whereas the Central Electricity Generating Board had been slow moving and bureaucratic, PowerGen needed to be flexible and responsive.’ In their study on the privatization of British utilities, Ferner and Colling (1993) note that the management of privatized companies strive to adapt an organization culture to a more market-driven environment, by making it more responsive to customer demands and more innovative and flexible in the face of competitive pressures. Simnett (1997) also indicates that several measures were taken by National Power, the privatized generation entity of the UK ‘to overcome the legacy of a nationalised industry workforce and inefficient plant’. Some of the measures taken were reduction in the workforce, increased employee training, performancerelated incentives for employees, and improved IT systems. Parker (1993) attempts to identify various changes in the internal environment of the organization following privatization by studying 10 organizations

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in the United Kingdom that underwent privatization. He says that the organization structure changed from a rule bound bureaucratic one to one that was less hierarchical, less centralised and less rule bound. Salama (1995) studied the effects of privatization on culture change in five companies that had been privatized in the UK and Brazil. Her results indicate that it is not just ownership that triggers a culture change. The top management’s perceptions about the changes in the business environment were the conditions for the process of change in the firms investigated. New CEOs were appointed to prepare the organizations for the new environment; they modified the core mission (bringing in profit orientation) and organization structure (decentralisation) in the organizations. The need for change was communicated to the employees at all levels in the organization. During the process of culture change, all companies under investigation modified their personnel practices regarding managerial careers. The study also found that after privatization, the managers started to learn and embrace new ways of doing things. Davidson (1994), while studying the developments in two privatized utilities in the UK, found that after privatization, the organizations move towards contract labor from direct employment. There was a separation of various activities into independently accountable profit centers, which must buy and sell services from and to other departments or profit centers within the organization. She also notes that these organizations adopted new accounting practices and performance-related pay for its executives. Nelson and Dowling (1998) have studied the commercialization of Tasmania Electricity using the contextual method developed by Pettigrew (1987) and Dawson (1994). They conclude that though the environmental forces do have an impact on organizational plans for change, the difficult thing for management is to control the unfolding events, as much as possible, as change progresses. Some studies suggest that the performance improvements that occur after privatization can be traced to changes in the organization following privatization. Newbery and Pollitt (1997), for instance, note that the productivity increases that occurred following the privatization of the British electricity sector are not just derived from plant closures, reduction in employees and fuel switches, but also as a response to a different management style.

Research Design Case study is an appropriate strategy when there is no control over behavioral events and the research focuses on contemporary events (Yin, 1984). The restructuring of the Orissa State Electricity Board (OSEB) in India has been used as a case in this research study. The restructuring of OSEB was a part of the larger reform program that was implemented in the Orissa power sector. Restructuring of OSEB was chosen for the study because: 1. OSEB was the first utility in India and South Asia to undertake reform and restructuring.

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2. The restructuring program had the active involvement of multilateral lending agencies like World Bank, DFID, Asian Development Bank, and several leading management consultants. 3. Several other utilities in India and elsewhere were planning to restructure more or less on the lines of OSEB. Therefore the experience of Orissa would be important to other states, in policy or practical terms.

ORISSA POWER SECTOR REFORM PROGRAM: A BRIEF OVERVIEW Orissa was the first state in India and also in South Asia to implement a comprehensive power sector reform program. Prior to reform, the responsibility for power sector management and development in Orissa was vested in the following organizations: l l l

Department of energy, Government of Orissa; Orissa Power Generation Corporation; and Orissa State Electricity Board (OSEB)

OSEB obtained the required power for distribution either from its own generating stations, generating stations owned by the department of energy, or from other power generators. By using its transmission and distribution network, it supplied power to the end consumers. The process of power sector reform started in November 1993 when the Orissa government had discussions with the World Bank to improve the operational and financial performance of OSEB to enable Orissa to attract private investment for power development. These discussions resulted in an agreement between the Orissa government and the World Bank to implement power sector reform to secure funding for the sector. The reform program was subsequently reviewed and approved by the chief minister and council of ministers of Orissa.1  The Orissa power sector reform program comprised the following components (World Bank, 1996): l

l

l l

l

1

Restructuring of OSEB by corporatization and commercialization: Unbundling and structural separation of generation, transmission and distribution into separate services to be provided by separate companies. Privatization: Private sector participation in hydro generation and grid corporation, and privatization of thermal generation and distribution. Competition: Procurement of new generation through competitive bidding. Separate Regulation: Development of an autonomous power sector regulatory commission. Tariff Reform: Reforming of electricity tariffs at the bulk power, transmission and retail levels. Circular No. 7786/E, Department of Energy, Government of Orissa, Bhubaneswar, dated April 20, 1995.

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OSEB was vertically unbundled into separate companies for generation, transmission and distribution. All the hydro power generating plants were vested with Orissa Hydro Power Corporation. The transmission assets were vested with Grid Corporation of Orissa. Though the Orissa government initially owned Grid Corporation and Orissa Hydro Power Corporation, they were gradually expected to attract private participation. New legislation was enacted to govern the power sector of Orissa after reform. An autonomous regulatory commission, called the Orissa Electricity Regulatory Commission, was constituted to ensure operational, managerial, and financial autonomy of the new utilities and to promote transparency, efficiency, and economy. To ensure autonomy of the regulatory commission, the commission members were chosen on the basis of their ability, integrity, knowledge, and experience in dealing with various problems relating to the power sector. After the regulatory commission was constituted, the role of the Orissa government was restricted only to policy making and planning for the sector. Four zones were created for power distribution in Orissa. As a first step towards privatizing distribution, Grid Corporation of Orissa entered into a management contract called the Distribution Operations Agreement, with Bombay Suburban Electricity Supply Company, a private sector utility, to take over the power distribution in one of the zones on October 1, 1996. Under this arrangement, the private utility was responsible for distribution of energy, maintenance of the distribution system, and collection of electricity dues in the Central zone. Though the initial distribution agreement was for three years from October 1996, Grid Corporation of Orissa cancelled the agreement in April due to drawbacks in certain contractual provisions in the Distribution Operations Agreement. After the failure of the Distribution Operations Agreement, the Orissa government decided to privatize distribution forming the four zones as separate distribution companies. The four companies were incorporated as subsidiaries of Grid Corporation in November 1997 and four new managing directors were appointed for these companies in March 1998.2  Privatization was introduced in distribution by offering 51 per cent of the equity in these companies to private investors. The investors were selected through international competitive bidding on the basis of their financial and technical capability, track record and commitment to the improvement of the electricity distribution system. Though the investors were to be given full managerial autonomy, they were required to honor the terms and conditions of employment of employees of the distribution companies. After privatization, Grid Corporation held 39 per cent of the equity in the distribution companies, while 10 per cent of the shares was held by the employees trust. The privatization process for the distribution companies was completed in the first half of 1999. There was an unfortunate setback to the process of reforms when Orissa was ravaged by two devastating cyclones in quick succession following the 2

The GRIDCO Newsletter, March 1998.

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privatization of distribution. The damage caused to the transmission lines and sub-stations in the state had been estimated at Rs 3000 million ($ 65 million). However, there have been some indications of improvement in the quality of service and revenue collections3 .

D ATA C OLLECTION

AND

A NALYSIS

The data collection methods for the study included documentation, field observations, and from in-depth interviews. Such multiple sources of evidence helped in developing converging lines of inquiry. Any finding or conclusion in a case study is likely to be much more convincing and accurate if it is based on several different sources of information, as this leads to a “within-method” triangulation (Denzin, 1978:301). Documentary evidence was collected from various sources such as: l l

l

l

letters, memoranda, and other communiqués; agendas, announcements and minutes of meetings, and other written reports of events; administrative documents—proposals, progress reports and other internal documents; newspaper clippings and other articles that appeared in the media.

These documentary sources helped to construct the chronology of events in the reform program, and also provided information about various decisions taken during the period and the rationale behind those decisions. The gaps after the study of documentary evidence also provided further insights that were probed in greater detail during the interviews. As indicated by McCutcheon et al., (1993), observations made during field visits serve as another important source of evidence in a case study. The main form of data collection for this study was through in-depth interviews with key people involved during different stages in the restructuring process. The participants for the interviews were chosen based on their involvement and contribution to the implementation and planning of the Orissa power sector reform program. The interviews were semi structured where the broad area of information needed from each respondent was determined before the interview was taken. On an average each interview lasted between 90–120 minutes.

F RAMEWORK

FOR

ANALYSIS

A processual framework developed based on the various events that took place has led to an emergence of three conceptual phases in the restructuring process, with each phase being characterized by different sets of activities and tasks (Rajan Thillai and Anand Ram, 2001). 3

Anecdotal evidence on this is given in the various Grid Corporation of Orissa newsletters between the period May–December 2000.

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The three conceptual phases and their definitions are as follows: 1. Impetus Phase. It is defined as that period during which the momentum for change originated and got strengthened, thereby providing a definite thrust for reforms. An analysis of the causal factors of Orissa power sector reform program has been published elsewhere (Rajan Thillai, 2000b). 2. Reorganization Phase. It is defined as that phase of the reform program that was characterised by structural changes in the power sector, resulting in a new industry structure. 3. Consolidation Phase. It is defined as that phase during which the new organizations created by restructuring were strengthened to make them financially and commercially viable companies. A description of the different strengthening measures undertaken has also been published earlier (Rajan Thillai, 2000c). Impetus phase, Reorganization phase, and Consolidation phase incorporates the temporal element of the restructuring process. It starts with a phase during which the momentum for change originates, and ends with a phase during which the new organizations are strengthened to make them financially and commercially viable organizations (Rajan Thillai, 2000a).

PRINCIPAL PLAYERS IN UTILITY RESTRUCTURING The principal players in the restructuring process are the government, top management of the utility, the lending agencies, and the consultants. The reasons for identifying them as the principal players are as follows: Since the government has a statutory role in overseeing the power sector, therefore, any change in the sector will, ipso facto, involve it. The restructuring of the ESI and its subsequent privatization will require several changes in the internal environment of the organization. The top management will play an important role in implementing these changes. The poor financial position of the utility and the inability of the state government to support the sector results in the utility seeking external assistance. In such conditions, the lending agencies will stipulate reforms before providing assistance to the power sector. Consultants will assist the host utility during the restructuring process. They would also coordinate with the host utility in implementing the restructuring process. The following paragraphs summarise the role played by the principal players in the three phases identified in the restructuring process.

IMPETUS PHASE R OLE

OF THE

GOVERNMENT

The power sector of Orissa accounted for a significant and increasing share of the state government’s resources, both in terms of planned investment and subsidies. Such large spending on investments and subsidies in the power sector had contributed to the fiscal deficit of the state and had also affected the

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government’s spending in social sectors like health and education. To reverse this situation, the government had taken a number of initiatives and policy changes since 19914 . The leading role played by the Conservative Thatcher government in 1979 during UK privatization and the government of Konrad Adenauer in Federal Republic of Germany during the privatization in 1961 in West Germany are two well known instances of the government playing a prominent role in implementing privatization (Megginson et al., 1996). The Orissa government had demonstrated similar commitment to implement the power sector reforms. The commitment expressed by the chief minister towards power sector reforms in Orissa was so strong that the World Bank did not demand any further assurances on the government’s commitment to reform and interest in obtaining World Bank assistance to implement its reform program5 . The commitment to the reform program had also been demonstrated by the government by implementing difficult and unpopular measures, like tariff increases, which is a prominent feature of power sector reform programs in developing countries (Joskow, 1998). The Orissa government made a series of tariff adjustments, which raised average tariff revenue by about 67 per cent from April 1992. As a policy measure, the government adopted a policy of annual tariff adjustments of 15 per cent. The series of tariff adjustments prevented abrupt tariff increases following reform, which could have made the implementation of the reform program politically impossible. The steering committee was chaired by the chief secretary to the government of Orissa and had as its members, the secretaries of finance, law and energy. The task force was chaired by the energy secretary and had representatives from the finance and law department. Such high level representation ensured adequate government monitoring and support for the program.

ROLE

OF

LENDING AGENCIES

The World Bank has been actively engaged in power sector development in the developing countries both as a financier and advisor. (Haugland et al., 1997). It is the single largest source of capital for power projects in these countries. It sets trends in private sector lending and through its economic advice and loan conditions shapes energy policy in many developing countries (Strickland and Sturm, 1998). In recent years, the World Bank had played a leading role in implementing power sector reform in developing countries (Nelson, 1996). For example, in the four-year period between 1992–1996, the World Bank made $9.5 billion in loans to 61 power projects with a total cost of almost $40 billion. Virtually all the 61 power sector projects required reforms by the borrowing country. Most 4 5

World Bank Aide Memoire, dated November 28, 1993. This had been indicated in the World Bank Aide Memoire, dated November 28, 1993.

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required the restructuring of the concerned electric utility in some form and 48 of them required the borrowing country to raise or rationalise electricity prices (Strickland and Sturm, 1998). In 1993, the World Bank formulated new policies for power sector lending (World Bank, 1993). According to this policy, the World Bank provided loans only to those utilities, which functioned on commercial lines, or which were committed to improving the performance of the power sector through reform. It had been previously noted that, such policy conditions attached to multilateral and bilateral assistance had played an important triggering role in initiating and implementing reform in many developing countries (Commander and Killick, 1988). The World Bank’s view was that the situation in India was fully consistent with the worldwide trend. Therefore, conforming with the 1993 World Bank policies, even in India, the World Bank had put forth power sector reforms as a necessary condition for future assistance to the power sector. These policy changes and conditionalities of the World Bank were one of the motive factors for implementing the power sector reform program in Orissa. The Orissa power sector reform program was also designed with the aim to secure private sector participation in the power sector.

R OLE

OF

TOP MANAGEMENT

The importance of the chief executive being a good leader for initiating the change process has been well-recognized (Kotter, 1995; Nutt and Backoff, 1997a; Nutt and Backoff, 1997b). The OSEB chairman played an important role in initiating the reform process. Though the initial efforts were not quite similar to the final version of the reform program, they nevertheless represented the first steps taken towards the more comprehensive reform program planned during the subsequent months. Two prominent initiatives were in investment practices and tariffs. To remedy the situation, the chairman made efforts to increase the investment in transmission and strengthening the distribution network. Another initiative taken by the OSEB chairman was in regular revision of electricity tariffs, to improve the financial performance of OSEB. Previously, the tariffs of OSEB were not increased to reflect the increases in costs. The study of tariff increases of OSEB in the past indicates that tariffs were not usually revised for three–four years, followed by a sudden revision of about 30 per cent. Apart from being a poor commercial practice, it had become difficult to forecast the price of power. Power being an important component in many manufacturing processes, accounting for such ad hoc increases was getting difficult for business houses. So, the chairman ensured that the tariffs were revised at the rate of five– seven per cent at yearly intervals so as to keep the tariff increases in manageable limits. The chairman persuaded the government about the necessity of such regular tariff increases to improve OSEB’s financial performance. Such tariff reforms later became an integral component of the reform program.

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REORGANIZATION PHASE R OLE

OF

STATE GOVERNMENT

The reorganization phase witnessed a lot of political activity in Orissa. The Orissa power sector reform program was initially approved by the council of ministers during April 1994. The state went into elections subsequently, which resulted in a new party assuming power following the elections in 1995. However, the newly elected party (Congress-I) as indicated in its election manifesto not only continued to support the implementation of power sector reforms but also announced its intention to accelerate the process. The new government issued a formal statement of its power policy in April 1995 indicating its commitment to continue the reform program. As the OSEB chairman remarked, ‘Orissa was fortunate to have two governments which did not reverse the policy decisions of the earlier Government.’ During the reorganization phase the Orissa government supported the reform program in all its critical moments. This included for example, defending the reform bill at the center to obtain the assent of the President, in its own assembly, in implementing the Act, in funding the regulator, and in transfer of personnel. Apart from the general support of the government, the chief ministers of both governments provided an especially strong support to the reform program. The chief ministers created conditions that ensured that the implementation of the reform program progressed as planned. First, through the appointment of a suitable chairman of OSEB during the reorganization phase. M.Y. Rao, who was appointed as OSEB chairman during this phase of the power sector reform program, was widely known as a non-political person with strong administrative capabilities. Second, the chief ministers ensured that the chairman of OSEB [the chairman of OSEB during restructuring later continued as chairman of GRIDCO] and other key personnel involved in implementing the reform program were not transferred or replaced during the crucial period of implementation. Thus stability was ensured during the reorganization. Further, for a period during the reorganization phase, the chief minister had the energy portfolio. This arrangement resulted in obtaining faster decisions as the reform program had the direct attention of the chief minister. As a measure to improve the financial viability of GRIDCO, the government took the first step of being a good consumer of power. It decided to pay its outstanding power bills and settle its other financial obligations to GRIDCO.

R OLE

OF

TOP MANAGEMENT

The OSEB chairman and subsequently the chairman and managing director of GRIDCO, Mr. M.Y. Rao, provided strong support and direction to the program. Though there were several people who had played a key role in the reform program, almost all the respondents during the interview acknowledged the key role played by M.Y. Rao.

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The chairman organized various meetings to explain the importance of reform and restructuring to the field offices. During the reorganization phase, a lot of information was required from the divisions and field units. But the data were not forthcoming from the field units. He issued a letter to the field units, instructing them to provide the necessary data. And when some of the divisions did not adhere to the request, the chairman intervened directly to expedite submission of the required information.

R OLE

OF

C ONSULTANTS

The consultants played a key role in the restructuring process. The main objectives for hiring consultants were two fold: First, the consultants brought the experience of having done it before. Second, they brought dedicated resources for the project. For example, OSEB had to undertake its routine functions of generating and selling power to the consumers. It was not able to allocate dedicated staff for the project, as there was a shortage of qualified staff. The consultants assisted in formulating of a reform plan, creating separate entities, developing a financial model for the new corporations, valuation of the assets of OSEB and the Orissa government, drafting the Orissa electricity reform act, and transfer of personnel to different corporations. To aid in the strategic exercise, the consultants initially obtained valid and relevant information from the organization starting from the field units. Multifaceted technical and managerial data were collected including the number of employees, number of consumers, distribution of various consumers, revenue data, and generation station data. These data were used to process the reform plan subsequently. Most of the consultants involved in the reform program were foreign consultants. There was no Indian firm experienced in utility restructuring, as Orissa power sector reform was the first instance of such an exercise in India. By hiring foreign consultants, the Orissa reform program gained from the experience of those who had actually worked in the reforms in other countries. However, while formulating the reform plan, the consultants worked closely with reform project management group. Though the consultants had experience in international utility restructuring, they lacked knowledge about the Indian power sector. A senior general manager explained how the Indian power sector differs significantly from the power sector in developed countries. ‘In the west, for example in cities like London there are very low outages, may be about 8–10 hours a year. But here we have about 8–10 days a year. In India, there have been cases where there was no power supply for 24 hours. In London, if there is no supply for 24 hours then the company has to pay a compensation to the consumer. If a complaint is not answered within one hour, then the company has to pay a fine. These things we cannot adapt here easily. There the growth rate is very low, as already

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most of the consumers have got electricity connection. But our growth rate is high, as significant electricity connections are yet to be made.’ Consultants had to take these factors into consideration while formulating the reform plan. Moreover development of reform act and reform bill needed knowledge of local laws and customs. During this phase, apart from formulating the reform plan, the consultants also exposed the managers of OSEB to international practices and trends in the electricity industry.

ROLE

OF THE

LENDING AGENCIES

The World Bank was the largest lending agency assisting the reform program. The role of the lending agency during this phase was to ensure that there was no reversal of the initiatives taken towards power sector reform in Orissa. To ensure the Orissa government’s commitment to the reform program, the World Bank insisted that the government took certain irreversible decisions before finalising the loan agreement. Box 1 lists the conditions that needed to be met before availing the assistance for power sector reforms. Box 4.1: World Bank Conditions to be Met Before Availing Loan l

l

l l

l

l

The Orissa government had to issue a formal statement on its power sector policy to the World Bank. The Orissa government to implement power sector reform program as specified in its power policy statement. Registration and transfer of assets made to OHPC and GRIDCO. The state government had to formally approve the reform legislation and submit its final draft bill to the Government of India for clearance. The Orissa government had to put in place a management contract acceptable to the bank that transferred at least one of OSEB’s distribution circles to private management. The regulator formally established and its regulatory procedures acceptable to the bank, adopted and published.

The task leader of the World Bank team responded, ‘This is the first time that a program of this nature has been attempted in India. We insisted on these conditionalities before availing the loan because our experience in the past has not been very good. The governments used to make a lot of promises, but finally would not do anything. Therefore, we needed to start with something instead of just promises.’

CONSOLIDATION PHASE R OLE

OF THE

STATE GOVERNMENT

The Orissa government was completely supportive of the reform program. First, it ensured that the key people who were entrusted with the responsibility for implementing the reform program actually supported it.

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Second, the government fully backed the GRIDCO chairman for implementing the reform program even for many contentious issues. Previously, the OSEB chairman derived his powers from a resolution of the OSEB board which was also backed by a government order. This meant that the government decided the SEB chairman’s powers. For important decisions, he had to get the approval of the state government. But after corporatisation of GRIDCO, the Companies Act and Articles of Association of the company gave the broad parameters of the chairman’s powers. In keeping with the spirit of the reform program the Orissa government stopped the subsidies to GRIDCO. Usually, the SEBs are supported by their respective state governments. The state governments provided subsidies to the SEBs to enable them to achieve the mandatory 3 per cent return on net assets as stipulated by the Electricity Supply Act. The SEBs did not face any constraint in achieving the mandated return as the state governments bridged the revenue shortfall. After restructuring, Orissa imposed a hard budget constraint on GRIDCO by stopping the practice of providing subsidies to it. The hard budget constraint 6  has been one of the widely used measures in state enterprise reform (World Bank, 1995). This indirectly forced GRIDCO to concentrate on improving its performance. The state government continued to support GRIDCO in other ways. As it was owned by the state government, the loans raised by it had a state government guarantee for repayment. This guarantee helped GRIDCO to raise funds at lower rates of interest. The state supported GRIDCO’s efforts to advance the privatization of the distribution business, after the failure of the initial Distribution Operations Agreement. According to the initial reform plan, the distribution zones of Orissa were supposed to be privatized only by December 2000, which was later advanced to April 1999 following the failure of the Distribution Operation Agreement. The main reason behind this being that GRIDCO was incurring large losses in distribution and was not in a position to absorb these losses in the absence of assistance from the state government. Therefore, GRIDCO proposed to the government that distribution be privatized sooner than envisaged, which was supported and announced by the chief minister.

R OLE

OF

C ONSULTANTS

The role of consultants during this phase was to prepare GRIDCO for privatization. As one of the respondents said, ‘Privatization of GRIDCO might attract the interest of global or other national players. The role of consultants has been to prepare the offers of GRIDCO to the practices followed in these organizations.’ 6

A state enterprise is said to have a hard budget when, 1. It gets no subsidies, transfers, or special privileges, such as tax exemptions. 2. Its access to credit is decided by independent banks on the basis of commercial principles, without government guarantee and on market determined terms. 3. Its prices are set by the market, or if the enterprise is a monopoly, through regulation.

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Broadly the consultants had two objectives during the consolidation phase. First, to ensure that the various change measures that were planned actually get implemented. Second, to sustain the changes in the organization even after the consultants leave. The various measures taken by the consultants in achieving both the objectives are discussed below. To ensure that the various change measures get implemented in GRIDCO, the consultants worked very closely with the employees. Several consultants were sent on secondment exercises to GRIDCO, where they worked as employees to facilitate the change process. The consultants were seconded at various levels in the organization. For example, in the finance department in each of the four distribution companies, senior consultants were deputed to GRIDCO to act as zonal finance managers. They remained with the distribution company for the last 18 months. Under the zonal finance managers, there were assistant general managers. In the corporate office, a senior consultant was seconded to function as assistant director of finance. As a part of the revenue improvement activity, each divisional engineer and sub-divisional officer also had a consultant counterpart. Another measure to ensure the implementation of the change efforts was to design the initiatives appropriate to the context and needs of GRIDCO. In most of the cases, the consultants took the existing practices of GRIDCO and tried to improve upon them rather than bring in totally new practices. They hired local consultants to understand the local context. They ensured the involvement and participation of GRIDCO in the entire process. The consultants also took 30 of the top managers of GRIDCO on professional development tours abroad to observe some of the companies where electricity sector reforms were undertaken. These tours sensitized the top management to the best practices for managing the reforms in Orissa, leading to their support. The second objective of the consultants was to ensure that the change processes are sustained by adequate transfer of skills to the employees of GRIDCO. The secondment exercise to a certain extent facilitated this process. By this way of working closely with the consultants, which one of the consultants recounted as ‘a hand holding exercise’, the GRIDCO employees learnt the new processes when the consultants were around. Once the consultants left after completing the project, it was not difficult for the employees to continue the processes. Another activity was to produce manuals that documented step by step procedures of the new processes. As a consultant remarked, ‘The basic idea of this was that, even a person who has been trained when he is not sure of something, can refer to the manuals and when new people are recruited it would help them to learn the effective procedures.’

R OLE

OF

TOP MANAGEMENT

There was new recruitment of professionals to top management posts (chief general managers and directors of departments) following restructuring. The main purpose of recruiting professionals at the top was to provide necessary

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direction and guidelines for their respective departments. As the chief general manager of HRD remarked, ‘There was no new recruitment made in the middle or lower management. We were working with the same people. Our role was to provide a shot in the arm for the department.’ The top management’s commitment ensured that the rank and file also supported the reforms. The GRIDCO chairman recounted the nature of the various activities performed by him during the reform program: ‘ During the period when the working groups were functioning, my role was more of that of a facilitator. Half of the time I was functioning as the chairman of OSEB and the remaining as a chief executive who was heading an organization in transition. There was a theoretical concept of reform that was put forth by the World Bank and consultants and then there were the ground level realities of reforming the organization. I acted as a link between them. This went on practically up to 1996. But after restructuring most of my activity was concentrated on the nitty gritties. I was engaged in realising the electricity dues, metering the connections so that we can get money into the system. I had spent about 70 per cent of the time on the operational issues.’

R OLE

OF

WORLD BANK

A significant change in the stand of the World Bank could be noted during this phase. Before the loan agreement was signed the World Bank stipulated several compliances before the award of the loan. But after the loan was signed, the World Bank was more encouraging about the progress of the project. As the Orissa power sector reform was the first such program to be implemented in India, the World Bank wanted the program to become successful. Failure of the Orissa reform program might have had an adverse effect on the reform initiatives in other states. The World Bank, through its mission teams, monitored the project regularly and was keen to make it successful to set an example for other states. There was continuity in various World Bank missions. This developed mutual trust between GRIDCO and the World Bank. During this phase, they discussed various problems and their solution in detail with the GRIDCO people. The World Bank task force leader explained the objective behind the World Bank monitoring as, ‘Our objective in continuous monitoring of the project was to ensure that the project succeeds. Though we are not bothered about the repayment of the loan, as we make the loan directly to the Government of India, we did not want to make loans that burdened the nation. Our objective through these missions was to ensure that the reforms yielded a positive net flow to the state government.’

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Conclusions This study indicates that the government, the lending agencies, the top management of the utility, and the consultants play a key role in the implementation of restructuring and change process of the public sector organizations in emerging markets such as India. As the process moves from one phase to the other, the role of the principal players undergoes significant qualitative changes. Figure 4.1 indicates the character of these changes among the key actors.

Fig. 4.1: Role Transformations of Principal Players during the Restructuring Process During the impetus phase, the government played a major role by recognizing the need for undertaking reform. After realizing that it cannot continue to meet the demands of the power sector, the government sought to actively involve the private sector in the power sector development. During the reorganization phase, the government took concrete steps to implement

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restructuring. It constituted special-purpose committees and groups to look after the implementation process, and vested them with sufficient authority to take decisions on matters relating to reform. It also appointed a visionary leader as the chief executive of the organization, and fully supported this leader during the implementation. A cornerstone of the reform and restructuring process was the withdrawal of the government from directly governing the power sector to an arms length relationship. During the consolidation phase, the responsibility for implementing the necessary internal changes within the new entities rested within the organization. The government assumed a posture of non-interference in the working of the utilities. On the whole, the essence of restructuring lay in a high-level political commitment, similar to the findings of Grosse and Yanes (1998), and Rondinelli and Iacono (1986). Behind the political commitment, however, lay the initial idea of reforms built by the top management. In the impetus phase, the top management actively lobbied with the government for starting the reform program. In the reorganization phase, they played an interfacing role integrating the organization, government, lending agencies, and consultants. They also involved themselves in communicating about restructuring and generating support from the employees of the organization. In the consolidation phase, they created appropriate enabling conditions to facilitate the adoption of new practices and observe its performance, to help operationalize the change process. They actively communicated with and sought to involve the employees of the organization. The top management was assisted by the lending agencies in the impetus phase in convincing and negotiating with the government. The lending agencies felt that reform is necessary for overall sector improvement. After securing the governments’ assurance to undertake reform, in the reorganization phase, the lending agencies sought commitment on the reform policy. Specifically, they oversaw that the government took certain actions that were not easily reversible to ensure that the utilities did not revert to the earlier situation. Once the implementation had begun, in the consolidation phase, the lending agencies continuously monitored the progress, and provided all possible support to ensure successful implementation. It needs to be emphasized that successful implementation of reform became critical for other states planning to embark on similar power sector reforms. Importantly, the decision to restructure came from within the organization, enabling more successful implementation, compared to situations where the recommendation for change originates from external sources like consultants or lending agencies. The consultants played an active role only from the reorganization phase, when the decision to restructure had already been taken. By virtue of their experience with similar exercises in other countries, they made the government and the utility aware of the various options that were available for restructuring. In the reorganization phase, the consultants assisted in establishing the new entities, helping in drafting the reform legislation, and transfer of assets to the new entities. Further, in the consolidation phase, the consultants helped design measures to strengthen the new entities. While doing this, the consultants

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took steps to ensure appropriate transfer of expertise to the host utility, so that the employees of the new entities could adopt and continue with the change process initiated even after the consultants completed their assignment.

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Nelson, L. & P.J. Dowling (1998). ‘Electricity industry reform: A case analysis in Australia’. Journal of Organizational Change Management, 11(6): 481–495. Newbery, D.M.G. & M.G. Pollitt (1997). ‘The Restructuring and privatization of Britain’s Central Electricity Generating Board—Was it Worth it?’. Journal of Industrial Economics, 45 (3): 269–303. Nutt, P.C. & R.W. Backoff (1997a). ‘Facilitating transformational change’, Journal of Applied Behavioral Science, 33(4): 490–508. Nutt, P.C. & R.W. Backoff (1997b). ‘Organizational transformation’. Journal of Management Inquiry, 6(3): 235–253. Parker, D. (1993). ‘Ownership, organizational changes and performance’. In T. Clarke & C. Pitelis (eds.), The Political Economy of Privatization, Routledge: New York: 31–53. Pettigrew, A.M. (1987). ‘Context and action in the transformation of the firm’, Journal of Management Studies, 24(6): 649–670. Pollitt, M.G. (1997). ‘The impact of liberalization on the performance of the electricity supply industry: An international survey’. The Journal of Energy Literature, 3 (2): 3–31. Rajan Thillai, A. (2000a). Restructuring of a Vertically Integrated Electric Utility—A Process Study. Unpublished doctoral dissertation. Bangalore, India: Indian Institute of Management. (2000b). ‘Power sector reform in Orissa: An ex-post analysis of the causal factors’. Energy Policy, 28: 657–669. (2000c). ‘Reforms, restructuring, and infrastructure sector: A study of initiatives in Orissa power sector’. Vikalpa. 25(4): 11–25. Ramanadham, V.V. (1988). ‘The concept and rationale of privatization’, In V.V. Ramanadham (ed.), Privatization in the UK, London: Routledge. Rondinelli, D. & M. Iacono (1986). Policies and Institutions for Managing Privatization, Geneva: International Labour Office. Rowthorn, B. & H. Chang (1993). ‘Public Ownership and the Theory of the State’, In T. Clarke & C. Pitelis (eds.), The Political Economy of Privatization, 60, New York: Routledge. Salama, A. (1995). Privatization: Implications for Corporate Culture Change, Aldershot: Avebury. Simnett, E. (1997). National Power and the Privatization of the British Power Generation Industry, Harvard Business School, Management Case, 9-796066. Strickland, C. & R. Sturm (1998). Energy efficiency in World Bank power sector policy and lending: New opportunities’. Energy Policy, 26(11): 873–883. Wallis, E.A. (1995). ‘Managing privatization at PowerGen’, Long Range Planning, 28 (6): 10–18. Woodward, N. (1988). ‘“Managing” cultural change on privatization’. In V.V. Ramanadham (ed.), Privatization in the UK, London: Routledge, 85–101. World Bank (1993). The World Bank’s Role in the Electric Power Sector—A World Bank Policy Paper. Yin, R.K. (1984). Case Study Research: Design and Methods, Beverly Hills, CA: Sage.

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Metamorphosis at India Post The ePost Initiative*

Srikumar K. l Ananda Sarkar l Bharat Kumar L. l Rajni Ravindran l Ramkumar Ganesan l Shubhosree Dasgupta l R. Srinivasan ‘No media has destroyed another, particularly the Post. The Post has defied the electronic age from dit-dit to dot-com. It has overcome the telegraph, the telephone and fax. Each time, everyone has written off the post office. And now in the age of e-mail, the Post is still growing at 6 per cent a year in my country. Rather than be reactive to the world of change, the post office will play a proactive role and lead the way.’ –B N Som, secretary, Department of Posts, India**  India is a country of contrasts: it boasts of the second largest population in the world but a mere 4.5 persons per thousand have PCs and only 5.5 persons per thousand have access to the Internet3 (Figures 5.1, 5.2, and 5.3). However, even this low PC and Internet penetration has been turned into an advantage and an opportunity to be exploited by the Department of Posts of India (India Post). ePost, an e-mail to snail mail service, is one of the latest services launched by India Post to bridge the digital divide (launched in April 2001). Recently, the Indian postal department, in a bid to modernize, launched its website Indiapost.org along with websites for some select circles such as Aurangabad, Pune, Goa and Kerala. Through the websites, the department provides information and a variety of services. Amongst the various e-initiatives is ePost whose primary purpose is to connect the e-haves and e-have-nots, i.e., those who have access to the Internet and e-mail and those who don’t. The  *

**

Fellow student Srikumar K. and postgraduate students Ananda Sarkar, Bharat Kumar L., Rajni Ravindran, Ramkumar Ganesan and Shubhosree Dasgupta prepared this case under the guidance of Prof. R. Srinivasan. “Snail mail to email: The postman goes virtual, India Post: Where do you want to go tomorrow?”, http://www.zdnetindia.com/news/features/stories/21112.html, Jan 22, 2002.

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Fig. 5.1: Main Telephone Lines per 100 Inhabitants † in Selected Asian Countries  †

Eddie Cheung, Asia’s Telecommunication Infrastructure: An Overview, http:/ www.emarketer.com/analysis/easia/20010522_asia.html, Jan 10, 2002.

department has tried to capitalize on its strengths—its vast distribution network, existing infrastructure, reliability and trust among the populace, and the government support it enjoys on account of it being a state-owned organization. However, ePost is a late entrant in this service category and does not command the first mover advantage. It is therefore imperative that the postal department takes sufficient measures to establish the brand—the ePost service. India Post is grappling with several organizational issues: (a) How to acquire new customers given that many competitors are offering similar services within India as well as throughout the world; (b) What new avenues can help foster organizational growth; and (c) What capabilities should be built/acquired to make new services viable and cost effective for customers.

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Fig. 5.2: PCs per 100 Inhabitants in Selected Asian Countries The poor financial status and the bureaucratic organizational structure pose significant challenges for the department in its new initiatives. However, forays into new technology, with the associated options for collaborations and networking, are generating opportunities for new transformations. The department is shedding its traditional conservative approach while sharpening its focus on serving both the Internet haves and have-nots. Its new services are moderately priced. Yet, these service opportunities are providing real options for leveraging its vast distribution channel better and connecting this channel with the new means of communication. As a result of the transformative learning from the ePost, E-BillPost is another service recently launched by India Post that offers customers a single point payment of bills of all types in a queue-less and hasslefree environment. The ePost is also planning a new service on e-shopping (B2C e-commerce). In this chapter, the organizational context of the Indian Postal Service is described and the distinguishing elements of the business model for ePost highlighted. Interestingly, there does not appear to be anything special about

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India—Growth of Internet

India—Growth of Internet (Projections)

Fig. 5.3: Growth of Internet in India *

*

“Internet Survey”, http://www.nasscom.org/it_industry/int_survey.asp, Jan 11, 2002.

the ePost service from a conventional perspective: the timing is not the first, the technology used is not cutting-edge, partnerships formed are not necessarily the best-in-their-class, the pricing is not the least in the market, the organization structure is not the most flexible, and the customer response time is not the best in the industry. Yet, ePost has carved its own niche in the marketplace, enthused the workforce, given a new contemporary touch to its postal channels, and offered its customers a new way to connect to the economy. On the whole, it is adding positive and incremental value. A sustained effort towards recognition of the global technologies and organizational principles should allow the department to offer competitive value-added services.

Organization of Indian Postal Department The Indian Postal Department was established in 1854. At the time of Independence (1947), there were 23,344 post offices in the country.

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The whole country has now been divided into 22 postal circles. These circles manage the day-to-day functioning of the various head post offices, sub-post offices and branch post offices, through their regional and divisional level arrangements. A chief postmaster general heads each of these circles. Each circle is further divided into regions comprising field units, called divisions (postal/ RMS divisions). A postmaster general, who is the postal manager of the area, heads each region. Besides these 22 circles, there is another circle, called base circle, to cater to the postal communication needs of the Armed Forces. An additional director general, in the rank of a major general, Army Postal Service, heads the Base Circle.1  Each post office offers some basic services—mail in the form of post cards, inland letters, overseas airmail, book-post, parcel services, money order and registered post. A person who wishes to send a letter writes it on a pre-printed postcard or inland letter form or purchases stamps for the envelope. He/she then posts the letter in the post box. The mail is collected by postmen and sorted by pin code at the post office and subsequently, all out-station mail is dispatched to the General Post Office (GPO), which is a kind of a head post office for each circle. At the GPO, the letters are sorted by state and dispatched to the respective GPOs by mail train. The mail for locations within the same circle is dispatched to the main post offices in that city or town. These post offices further sort the mail by pin code and ship them to the ultimate post office. From there, postmen then deliver them by hand at the receiver’s location. Frequently, in rural areas, when the recipient is illiterate, the postman also reads these letters out to the recipient and takes down his/her reply, In addition to these basic services, some post offices offer services like Speed Post (express mail), Postal Life Insurance, and creation and maintenance of small savings accounts. Greeting Post is a new service offered by India Post which comprises a card with envelope with pre-printed postage stamp on the envelope. The envelope contains a multi coloured embossed stamp (which is a miniature replica of the design that appears on the card). These eye-catching cards are designed for a variety of occasions. The Indian Postal Department is the largest in the world having a humongous network with 150,000 post offices throughout the country with over 90 per cent of these in the rural sector. Almost every village with a population of over 500 has a post office. On an average, a post office serves an area of 21.32 sq. km. and a population of 5477. As on March 31, 1999, the department had 292,672 full-time regular employees and 309,915 part-time extra-departmental agents, employed in rural branch post offices.2  At the end of 1998–1999, the Department of Posts owned 5189 offices and about 1900 vacant plots of land. The thrust of the department since the early 1950s has been to replace rented buildings by owned buildings. Also, since the post office was a symbol of imperial presence, it occupied the center point in all  1 2

India Post website, http://www.indiapost.org/, Jan 22, 2002. Expenditure Reforms Commission Fifth Report 7 March, 2001, http://expenditurereforms.nic.in/ vsexpenditurereforms/fifthrep.pdf, Jan 22, 2002.

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metro and mini-metro cities. And a lot of these are being used not merely for the retail purpose but also for the administrative and accounting functions. While the retailing activity must continue in the urban business hubs, the accounting and administrative functions can be performed as efficiently away from the business district. There is an apparent under-utilization of these fixed assets. Hence effective utilization of these very high-sunk costs becomes imperative for the department to function profitably and not rely on heavy budget subsidies. The Department of Post continues to own and operate a large number of ancillary logistic services even though outsourcing these might be a cheaper alternative. The Department of Posts, because of its wide reach and large number of points of presence, is utilized by other departments of the central government and state governments to perform several functions on their behalf. l

l

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The Post Office Savings Bank (POSB) is the most important of such agency functions performed by the Department of Posts on behalf of the Ministry of Finance. The POSB operates 113.8 million accounts under various saving schemes. The cumulative outstanding balance in all forms of national savings as on March 31, 1999 was Rs 1552.95 billion ($ 36,600 million). The annual mobilization of savings in the POSB is about Rs 250 billion ($ 5,892 million).3  Postal Life Insurance (PLI), operated by the Department of Posts, is one of the oldest welfare schemes for the government employees and the general populace in the rural areas. The Department of Posts also performs other functions like payment of military pensions, coal miners’ pension, EPF and family pension and railway pension, for which it gets mutually agreed remuneration from the respective principals.

‘Our modernization process began in the early 1990s as a sequel to changing customer needs, efficiency requirements, technology revolution and financial constraints generated from the need to be self sufficient,’ says Mr BN Som, director general-India Post and Chairman of the Postal Services Board.4  Many modernization efforts have been undertaken since the early 1990s whereby the postal department has set up a 139-earth stations strong VSAT network. The plan is to target the linkage between the post and mail offices on a countrywide scale, to give shape to a vast Wide Area Network (WAN). The department plans to install 247 VSAT stations, mothering 2700 extended stations with Internet access, for backing up the virtual private networks by 2002.5   During 1999–2000, the department installed 1,250 multi-purpose counter machines and modernized 139 post offices. By 2001, there were 6,257 computer 3  4 5

At an exchange rate of Rs 42.43 to a US $. Department of Post mordernizes services via VSAT technology, http://www.hughes-escorts.com/ mediaroom/CIOL.htm, Jan 22, 2002. Annual report of Department of Posts, India, 2000–2001.

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based machines installed in 1,560 post offices aimed at providing efficient services through a single window. The department has also embarked upon computerization projects of other segments of postal operations like mail processing, savings bank and materials management. As part of mechanization and modernization of mail processing, 56 registration sorting centers, 20 transit mail offices have been computerized up to March 31, 2000. During 1999–2000, six head record offices were computerized and during 2000–2001 another seven were being computerized. Around 142 mail offices have been modernized up to March 31, 2000.

Metamorphosis at Indian Postal Department As a result of its modernization efforts, the department is launching many new technology enabled services. These include Speed Post Track and Trace, and the International Money Transfer Service. Speed Post Track-and-Trace enables customers to track Speed Post articles/ Express Parcels on the Internet. Currently only the delivery status is available but soon stage by stage tracking will also be available. Intimation of the Speed Post article delivery can be received as e-mail by the sender. Corporate customers can also upload data of Speed Post articles to be booked by the Speed Post centre through a floppy.6  The International money transfer service, is a service launched by the Department of Posts, in collaboration with the Government of India and the Western Union Financial Services, US. It enables instantaneous remittance of money from 185 countries to India. The recipients can in fact collect the money in cash (in Indian rupees) minutes after the sender has made the remittance. This service is targeted at fulfilling the needs for immediate cash of NRI dependent families in India, visiting international tourists and foreign students studying in India. It is enabled by the VSAT network.7  In addition to these services, India Post has also developed several softwares to enable its back-end processes. Some examples are: l

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Meghdhoot—integrates front office functions with the back office in a networked, fire walled and online environment with in-built connectivity features for data transmission with several modules like point of sale, accounts and sub accounts, treasury, delivery, registered delivery, money order payments, etc. Sanchay Post—takes care of all types of banking transactions handled by the postal authorities like savings, recurring deposits, term deposits, national savings certificates, etc. Sankalp—for counter and back office operations in the Philately Bureau covering all operations of the bureau, the most important being

http://www.indiapost.org/News and Events.html#speednett, Jan 22, 2002. http://www.indiapost.org/International Money.html, Jan 22, 2002.

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l

maintenance and nurturing of philately deposit accounts, receipts, sales, dispatches and accounting. Suvidha—a customer care application package with customised reports with bilingual support (Hindi/English), telebooking of complaints and export of data to remote offices through a modem.

E-MAIL TO POST IN INDIA Due to the dismally low Internet penetration in India, there is a huge digital divide among the masses. However, this can be translated into a potential business opportunity—connecting the Internet and e-mail users to non-Internet users. Several dot com companies are offering e-mail to snail mail services. They usually promise delivery of messages within three days, while conventional post, can take one or two weeks in remote locations. Bharatmail.com, Hotmailindia.com are some of the prominent players. Most of them target Non Resident Indians (NRIs). Some of these players even offer services free of charges. The number of players entering into this market is increasing by the day. For instance, ePost service started in April, US-India messaging (a joint venture between Indiatimes.com and Overnite Express) in October and Hotmailindia.com in November 2001. Currently, there are more than 10 players operating in India. So, the e-mail to post market in India is becoming highly competitive.

ePOST BACKGROUND The aim of ePost is to provide services which combine the speed of e-mail with the reliability of a postman even at far-flung corners of the country. It is a feebased service in which the user signs up and is assigned a user id, as in conventional e-mail services. The department targets primarily NRIs and urban dwellers who wish to contact their relatives in rural and semi-urban India where the PC penetration is abysmal. The department is also considering the introduction of the service in regional languages.8  The future of the department depends upon its ability to adopt new technology. Technology has totally changed the way business is conducted especially in the communication sector. Physical exchange of data and message is fast being replaced by electronic exchange over the Internet. The constraints of physical transportation by surface or air are fast disappearing. This has the tremendous potential of relieving an end-service provider like the Department of Posts of its reliance on physical carriers like railways and airlines. So, India Post has to complement its snail-mail services with e–mail, if it has to survive competition. Moreover, the postal department’s objective of serving the remote areas through its widespread network can be more effectively and efficiently achieved through a combination of e-mail and snail-mail service. Several private 8

India Plans E-Mail Delivery to the Doorstep, http://www.newsbytes.com/cgi-bin/udt/im.display.printable?client.id=newsbytes&story.id=168307, Nov 16, 2001.

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organizations like ‘Bharatmail’ have taken this initiative much earlier and hence it has become imperative for the Indian postal service to wake up to this paradigm. EPOST

SERVICES

In this service, the sender writes an e-mail that is directly sent to a delivery post office where it is printed and delivered to the recipient.9  A vast number of people with access to e-mail wish to communicate quicker with their friends, relatives and associates who do not have access to e-mail. This service targets not only Indians abroad but also migrants to cities who want to reach their relatives in towns and remote villages. The post offices already have the infrastructure needed to provide this service. The VSAT network used to connect the post-offices directly can cut down mail transmission time drastically. The necessary software and hardware have also been put in place during the recent modernization efforts. EPOST

WEBSITE

ePost can be accessed through links on the India Post website (http:// www.indiapost.org/) or at its site—http://www.indianpostoffice.net/. The site is designed in the distinctive red and white colours of India Post. It is extremely easy on the eye and easy to navigate. As with most e-commerce and mail sites, the log-in is clearly demarcated and present on the home page and new users will find a clear set of links to the explanations, demos, FAQs, privacy policy and terms of use. The home page also displays the security certification from Entrust. The creation of a new user ID is a very simple process and requires very few details. However there is a secret question, to validate users if the password is lost, as there is no requirement of any other e-mail ID. Adding credit to the account as well as sending a mail are very easy tasks too. For potential advertisers, there are large banners on the home page indicating where ads would be displayed and with inbuilt links inviting the advertisers to click on to contact ePost. See Figure 5.4 and Figure 5.5 for snapshots of the ePost site.

BUSINESS MODEL The salient features of the business model are10: l

9 10

The user sender, has to open an account with ePost. This is done by registering on-line through the website http://www.indianpostoffice.net/. A minimum payment of Rs 250 has to be made by the user. Credit card payment is accepted but with a surcharge of six per cent. The other alternative is to buy a prepaid card from any of the district headquarter’s head post offices in any of the

What is ePost?, www.indianpostoffice.net/whatisepost.html, Jan 22, 2002. FAQS, www.indianpostoffice.net/faqs.html, Jan 22, 2002.

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Fig. 5.4: Screen Shot of ePost Homepage

Fig. 5.5: Screen Shot of Terms and Use and Privacy Policy

METAMORPHOSIS AT INDIA POST

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states in which test marketing is being done or GPOs across the country. The user can then execute the instructions given on the card and on the website. The cards are available in denominations of Rs 250, Rs 500, Rs 2000, Rs 5000 and Rs 10,000 (Rs 45~$1). The sender fills in the recipient’s address and types the message in a form on the website. The message is then transmitted to a designated e-mail address based on the pin code of the recipient’s geographical location. It actually represents the email ID of the post office (ePost centre to be precise) nearest to the recipient’s location, e.g., Mumbai GPO, 400001 would be [email protected]. There would be a network of such ePost centers. As soon as the mail is sent, it is routed to the corresponding ePost center. The center receives the e-mail, prints it out and delivers it as a regular letter. India Post has a tie-up with Nettlinx Ltd to take care of the Internetrelated services. Nettlinx also maintains the user account through a software package and it has made it hassle-free. The end-user simply queries the service to inquire about the number of messages sent, amount utilized, amount in balance and other relevant information. The account is recharged either by credit card or prepaid card. ePost has tied-up with Ecomenable, the exclusive Indian affiliates of Entrust.net, that helps conduct secure e-commerce transactions. ePost uses Entrust.net’s 128-bit SSL web server certificate and ensures secure credit card transactions to the user. Refer Figure 5.6 for Business and Revenue Models.

BUSINESS PLAN The Department of Posts business plan for ePost is centered around the following: l

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Bridging the digital divide by complementing the snail-mail services with its new ePost services. To tap the large market of NRI community by enabling them to communicate with their friends, relatives, business associates back home. Providing greater value to the customer by leveraging its huge distribution network. Extend its ePost services throughout the country. Currently, as a pilotproject the service is offered only in five states (Andhra Pradesh, Goa, Gujarat, Kerala, and Maharashtra). To provide value added services like eShop, and e-BillPost.

BUSINESS STRATEGIES The business strategies adopted by ePost to achieve its business plan are set out below: l

ePost provides a free e-mail service to the user. However, to discourage users from signing up and using only the free e-mail service and not

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Fig. 5.6: Business and Revenue Models of ePost

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11

using the paid service, ePost has configured the mail account to expire if the user does not pay for the use of ePost service within 30 days from the date of registration. The sender is charged at the rate of Rs 10 per message of A4 sheet length. In view of some other competitors charging up to Rs 35 for similar services, and when we keep in mind the target population, this fee seems reasonable. However, some other competitors provide a similar service free of charge. So, ePost is considering the option of going for other value added and complementary services to lock in the customer. In addition, since the credibility of the service provider, Indian Postal Department, is very high, the reasonable price charged should not prove to be a significant deterrent. ePost has tied-up with Nettlinx to provide Internet-related service in which India Post doesn’t have any expertise. ePost tries to leverage its distribution network with the expertise of Nettlinx in Internet-related activities. The department has clearly spelt out privacy and security policies. ePost promises to respect and protect the sanctity of all information that is provided by the user during registration. It refrains from selling the information as mailing lists to interested organizations. This is of prime importance in order to enable the user to realize greater value out of the ePost’s service offerings.11 

Security, www.indianpostoffice.net/security.html, Jan 22, 2002.

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ePost tries to provide greater value to its customers by employing direct mailing techniques such as periodic member letters to announce important service changes, new features, technical issue updates and news about other products and services. ePost also provides additional value by supplying mail tracking info to the user. The user can inquire about the status of the delivery, e.g., whether his/her mail has been downloaded at the ePost Center or not, whether it has been already sent out for delivery or delivered to the addressee. All these would be available in the user’s message box. To realise economies of scope, ePost is launching a service named “eShop”. This is in effect, e-distribution of consumer goods (webshopping). The eShop site will be maintained by Nettlinx Ltd and the delivery will be the responsibility of the postal network. The advantage to a customer would be the vast network of delivery post offices in India. The DoP also promises cost-effective delivery service. Payment can be made through credit/debit card and benefits of comparisonshopping will also be available. Once the purchase is over, the products will be shipped for delivery from the nearest logistic centre to the destination.12  ePost is in the process of setting into action its plan of scaling its operations from its existing five states throughout the country.

S ECURITY

AND

PRIVACY

Payments are through credit cards or pre-paid cards. ePost uses Entrust.net’s 128-bit SSL encryption web server certificate 13  to ensure greater security for users. Security is a major concern in India and by partnering with Entrust.net, ePost hopes to allay the fears of most of its potential customers. In keeping with the best practices of all good websites, ePost also clearly outlines its privacy policy. According to ePost, all information provided by the users at the time of registration will be held in strict confidence and any information used will be for demographic statistical analysis and for internal use only. ePost assures users that it will not send any unsolicited information, including e-mail, except for a welcome letter to new users explaining the features provided by the service and periodic member letters to announce important service changes, features, technical issue updates and news about other products and services. They may also contact users to conduct research about users’ opinion of current

12 13

Coming Soon… The Shop of your Dreams – eShop, www.indianpostoffice.net/comingsoon.html, Jan 22, 2002. A web server certificate enables secure, confidential communication between a browser and a server. The Secure Socket Layer (SSL) technology ensures that data is passed on securely over the web and it reaches unaltered at the appropriate destination that it is meant for, thus ensuring that none the transmitted information is lost or misused. This high level of encryption and security ensures that customers’ credit card information cannot be stolen over the web.

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and prospective services via e-mail surveys or on behalf of their external business partners, about a particular new offering/service that may be of interest to the user. However ePost will not share users’ e-mail addresses with their business partners without the individual user’s approval.14 

C OMPETITION ePost offered by Indiapost.org is not the first e-mail to snail-mail service in operation. In fact, it is one of the late entrants in this field. India Post started this service only in April 2001. Several other players have been in operation for quite some time. The competitors for ePost can be categorized into three classes. The first category, say Class A, comprises those offering worldwide service like Arrowpost.com, Letterpost.com, and Remailemail.com. The second category of service providers, say Class B, are those specifically targeting NRIs and whose distribution covers the entire country like Hotmailindia.com, Bharatmail.com. And the third category, say Class C, of competitors include those who are targeting the NRIs but only serve niche Indian markets. Since India Post’s current offering is restricted to five states, including Gujarat, Maharashtra, and Andhra Pradesh, competitors in Class C would be Gujaratpatra.com, Web-ellora.com in Maharashtra region, Kakinadaonline.com in the Andhra region. Currently, ePost offering could be categorized into Class C and the direct competitors would be Class C companies. However as ePost services will be extended to all regions in India, we prefer to classify it as a class B company with other Class B companies as its competitors. Distinctive features of service offerings of each of the players in the three classes are outlined in Figure 5.7. Figure 5.8 and Figure 5.9 give screen shots of some competing offerings.

E-SHOPPING SCENARIO

IN

INDIA

In the recent past, E-malls had been growing significantly and there are over 70 sites offering on-line shopping facilities in India. E-malls offer a plethora of products ranging from books, music, garments to kitchen appliances, groceries, and furniture. Many of the E-malls provide multiple payment options like credit card, cash on delivery, Internet banking, cheques, demand drafts. K. Vaitheeswaran, vice president (marketing), Fabmart, says, ‘Non credit card payment options have certainly added a fresh set of consumers. But credit cards remain the most popular payment method at Fabmart (around 60 per cent of orders at Fabmart are paid through credit cards. We recently added cash on delivery for the grocery store, which has helped a lot since many housewives use this option to buy groceries.’15  The main concern of the Indian consumer is the security of on-line transactions. Although, standards like SSL, SET have emerged to address the security concerns, it still remains to be seen whether 14 15

Terms of Use of This Service, www.indianpostoffice.net/terms_epost.html, Jan 22, 2002. “Is e-shopping happening in India”, http://www.zdnetindia.com/news/features/stories/ 11403.html, Jan 3, 2002.

Class C

Class B

Arrowpost, a  letterpost ,

Class A

web-ellora , kakinadaonline,

e 

Bharatmail , d  hotmailindia , India Post

c 

remailemail

b 

Dot Com Companies

Class of Competitor

Business Model

Languages Value proposition

Delivery

Cost/ mail sent

Business Model

Cost/mail sent Delivery Languages Value proposition

Business Model

Parameter

(Contd.)

Register on the site, compose the message and send it across. The message will be processed and sent to the appropriate mail centre, which is its own area of operation, and printout is taken and delivered.

Register on the site, pay for the card in the case of Hotmailindia, compose the message and send it. The site scans or takes print out of the message and delivers the message through post. Free in the case of Bharatmail. Hotmailindia charges Rs 35 for every 160 words of message. Through the Indian postal or courier service. Since the mails are delivered to the nearest mail centre, the delivery time is much lesser compared to the snail mail. Multi-lingual support is offered in Bharatmail. Convenience, security, cost-effectiveness. India Post has a very clearly spelt out privacy and security policies.

Buy stamp, compose the message and send it. $1.4 to $9.9 based on the type of mail and the company. Sites claim that the mail gets processed within 24 hours. Many sites support English like characters. Convenience, reliability, cost-effectiveness. “Snail mail for the Internet age” (letterpost.com)

Characteristics

METAMORPHOSIS AT INDIA POST

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h

g

f

e

d

c

b

a

 

Free in the case of Kakinadaonline. However, other sites charge the sender. Punjablinks charges $ 0.33 to $ 2.45 per mail based on the delivery time desired (24 hours or 2–3 days). Ranges from 1–3 days As it is a niche segment, local language translation services are provided by many of the sites. Convenience, customization, cost-effectiveness. Some of the sites explicitly mention that if you desire more secure message transfer, go for some other secure communication system (chandigarhcity). So privacy issues are given least attention by these sites.

Characteristics

Fig. 5.7: Comparison of Services of Various Players Offering email to snail-mail

Value proposition

Delivery Languages

Cost/mail sent

punjablinks , g  chandigarhcity , h Alacrity FreEmail

f 

Parameter

Dot Com Companies

http://www.letterpost.com/index.html, Jan 10, 2002 http://www.remailemail.com, Jan 11, 2002. http://www.bharatmail.com, Jan 11, 2002. http://www.hotmailindia.com, Jan 10, 2002. http://www.web-ellora.com, Nov 25, 2001. http://www.punjablinks.com, Nov 27, 2001. http://www.chandigarhcity.com, Jan 03, 2002. http://fremail.alacrityhomes.com/, Jan 22, 2002.

Class of Competitor

Fig. 5.7: (Contd.)

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METAMORPHOSIS AT INDIA POST

Fig. 5.8: Screen shot of email service of Bharatmail (Class B)

Fig. 5.9: Screen shot of Letterpost.com (Class A)

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Indian consumers feel comfortable with revealing their credit-card information on the net. ePost’s eShop certainly can alleviate fears of credit card information misuse by allowing the user a variety of payment options including cash on delivery. eShop also promises comparison shopping—where a search result offers instant product comparison based on price, availability and merchant information, i.e., it helps shoppers find the best value on products, saving them time and money. However, the prime attraction is the promise of delivery anywhere in India, unlike other competitors who have geographic limits.

MOVES TOWARDS OTHER VALUE-ADDED SERVICES16 As the Indian Postal Department has positioned its organization to tap the new technologies, further opportunities for value-adding services are being discovered. E-BillPost is a promising example. It is designed to be an electronic collection and consolidation service for payment to the service provider wherein bills are collected in different locations, instruments processed and the accounts settled at one point as per the convenience of the service provider. The post office will perform the role of a consolidator and act on behalf of billing agencies such as electricity and water agencies, mobile phone companies and municipal corporations and so on. For the customer the facility is single point payment of bills of all types in a queue less and hassle free environment as the consolidator, the post office, will not only accept all kinds of bills for payment, but also in the event of the customer not having received a bill, access the service provider database for procuring a copy of the bill online. Depending on the location, availability of infrastructure in cities and towns with service providers, the collection could be on-line or off-line. Besides the two most common modes of payment, namely cash and cheque, depending on the agreement with service provider India Post may also go in for payment through credit cards with facilities for on-line authentication.

IMMEDIATE CONCERNS FOR THE DEPARTMENT The future holds a lot of promise for ePost, now that India Post has woken up to the challenge and the changing realities. At the outset, the chapter noted that India is a country of contrasts. The same holds true for the strategy being followed by the Indian Postal Department. The two strategies India Post is following appear to be based on contradictory assumptions of the future. While the success of ePost will depend on the continued low Internet penetration, eShop and E-BillPost can only succeed if the situation is just reverse. These contradictions may resolve themselves in an evolutionary manner, which could result in either differentiated offer of the two services to different client groups, or could result in divestment of these services to an external provider, or could be the basis for eventual privatization of the Indian Postal Service. However, at the present 16

http://www.indiapost.org/News and Events.html#e-billpost, Jan 22, 2002.

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time, these contradictions continue to challenge the Indian Postal Department. As Nitin Jaswal, a customer of the rival Bharatmail, says ‘Good that at least now Indian Postal Dept has woken up. There were a dozen players emulating the postal services in India during the dotcom boom...As of now Bharatmail is the only site which is providing the same free services are good and cannot be compared with Indian post. As a user of Bharatmail for the past four years—I tried a few links in the Indian Post and I found 1. the site is pathetically slow 2. none of the links are working 3. I had sent a mail asking for help—no reply until now Do u think Indian post can succeed ?’17  Yes, indeed, this seems to be the question on everyone’s mind—Can ePost succeed? Is the Indian market mature enough for eShop and E-BillPost? What transformative dynamism can be cultivated in the organization using the platforms created by these new services? How can the new capability and competencies feedback on the traditional postal services? Can the Indian Postal Department leverage the free services being offered by the private sector to further its social and economic mission?

17

“ZDNet Talk Back, Too Late….”, http://www.zdnetindia.com/talkback/viewcomment.html?iArticleId = 21105&tbkId=11182&itbksourceid=1&redirectURL=, Jan 22, 2002.

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Functional Strategies in the Indian Context

6

Knowledge Management and Change Processes Lessons from Kabir

Vipin Gupta

l

Deepak Kaul

l

Mrinalini Shrivastava

In this chapter, we investigate a key formative, historical influence on the Indian work culture. This influence is represented by medieval Indian literature, which represents fusion of the pre-medieval philosophy and turbulent medieval times. We focus on the works of the medieval saint and scholar, Kabir, and derive general implications and insights for the transformative organization in light of the current Indian context and international research. Kabir (1440–1518) was one of the greatest exponents of reforms in medieval India and a key figure in the medieval knowledge school. In this chapter, we draw from his work to highlight the process of discovering the diverse tacit knowledge bundles, developing them into productive organization-wide learning, and correcting the learning to sustain competitive advantage–the steps of knowledge management that we identify as integral to the transformative organizations. Kabir, born to a Hindu widow and abandoned at birth, was brought up in the house of a Muslim weaver in a village in Uttar Pradesh. His life was marked by spiritual happiness and contentment. He possessed a straightforward nature and challenged the dogmas of the powerful sections of society. His principal work, Kabir Granthavali, contains a distinct form of presentation using devotional couplets, whose dominant motif is the inter-relationship between social capital and spiritual capital. Kabir spread his message through examples for the managers and the masses alike, and his works are widely taught and referred to in modern India. Through his works, Kabir preached love and devotion which could be followed by the masses and thus unite all sections of society. He was opposed to all kinds of discrimination, whether on the basis of caste, religion, race, family or wealth. His sympathies were decidedly with the poor with whom he identified himself. Instead of focusing on social reformation, he addressed the issue of transforming the individual and the guiding power of true leaders or gurus, and thus contributed to a transformative and long-lasting change in social practices. It is this focus on the transformation of individual motivation to that of devotion and love for pursuing the path of knowledge, and realization of one’s mission,

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that makes Kabir relevant for both knowledge as well as values management in the modern organizations. Several models for the analysis of change are available, the most prominent being one by Lewin (1945) that specifies three steps of ‘unfreezing-changingrefreezing'. Unfreezing refers to creating need for change and reducing resistance to change. A crucial limitation of Lewin’s model is an assumption that change is something that is rare and occasional, rather than something that is continuous and discovery-driven. Another assumption is that change always represents positive learning and there cannot be an error of judgment in change decisions. However, if the change agent unfreezes a productive behavior and refreezes an unproductive one, then the costs of changing back become very high, and such reversal may not even be possible if the change was marketed and frozen very strongly. In turbulent times, the freezing of substituted change could actually be counter-productive because the change may have only short-term relevance as a stand-alone behavior. In contrast to Lewin’s change model, Kabir’s change management approach calls for an appreciation that the diverse practices are relevant and have the potential to contribute to the same mission. Therefore, change does not necessarily require discarding the old, though it does require gaining an awareness and appreciation of how and when the old is indeed gold. The change, in Kabir’s approach, is as much leadership oriented as it is individual-specific. Leadership plays an important role in carrying conviction that the beliefs, practices, and knowledge of other religions and groups have some value for accomplishing one’s mission, and in highlighting certain limitations of the beliefs, practices and knowledge of one’s own religion and group. The individual is challenged to go beyond the current beliefs, practices and knowledge, so that the mission could be accomplished effectively and on a sustained basis. By highlighting that those specific beliefs, practices and knowledge that are (and are not) productive for the fundamental goals of love and devotion, Kabir rather forcefully strove for an essential and positive transformation in the mindset of people—free from any dogma. Thus, Kabir sought to encourage people to discover their own true motivations and then to manage knowledge and values in a way that supports inter-personal and inter-community love, and that helps the development of the individual, the group, and the nation. To highlight the relevance of Kabir for transformative knowledge and values management, we use Lewin’s model as a basis and show how Kabir offers an alternative view of the three phases included in Lewin’s model. The relevant couplets of Kabir are reproduced in their original Hindi form followed by their transliteration in Roman, and then English translation and analysis of the same.

STEP I: Learning to Discover According to Lewin, the first stage in change management is to unlearn what has been learnt earlier. Such an approach has several limitations. First, there is limited evidence to support that human beings are like computers with memory storage space constraints. Second, human learning is not like a cloth that can be

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discarded at will. Human learning influences the fundamental attitudes of people and has a formative effect on their skills and behavior. Third, the new learning opportunity does not imply that the prior learning is of little use. Indeed, if everyone just forgets prior learning and becomes an expert in only new learning, then there would be very little diversity of knowledge among different people, and the value added by each person would lack uniqueness and be very limited. Fourth, the cost and effort devoted to obliterate the earlier learning can be better invested for further enriching the new knowledge and promoting the use and acceptance among people of diverse approaches. Fifth, no change ever requires a 180 degrees shift in one’s values, practices, and behaviors, but instead all changes can draw synergies from and build upon the prior values, practices, and behaviors. Therefore, instead of unlearning, the focus of the first phase of change management must shift towards ‘learning to discover’.

HUMILITY AND LEARNING TO DISCOVER Ego is a major impediment for learning new things. Once ego is shed, a person will discover immense opportunities for learning. It is critical to realize this opportunity for discovery and learning, because life has a limited span for accomplishing all this learning. Therefore, a person should recognize the knowledge potential of the world and seek to continuously improve learning. People following dogmatic rituals show egoism, which actually removes them from their goal. Kabir sought to encourage people to pursue the right practice through mutual love, respect, trust, and learning. Thus, Kabir notes:

;k nqfu;k esa vkbZ ds] NkfM nbZ rw ,SaB | ysuk gS lks ysb ys] mBh tkr gS iSaB ||1|| – – . Ya– duniya– me a–i ke, cha–di di tu– aimth | – . – – Lena hai so lei le, uthi jat hai paimth ||1||

Having come to this world, you should shed your egos, and quickly pick up all good things (good thoughts, actions and words) from the market of your life, as the market will soon close. In the organizational context, if the employees have to grow, then they must be prepared to learn continuously. One would be able to learn by being ready to accept new approaches and not just having blind and frozen bonds with one’s own prior learning. But if ego was attached to prior learning, it would contribute to a status quo and rejection of diverse knowledge, and allow others to take a lead and move ahead. The ego bound behavior, particularly in decision-making, learning and training, should be given up as it makes a person resistant to learning and exchange-led change. In order to improve continuously, it is imperative for both the individual team member and the leader to identify areas where egoistic tendencies hamper the development of the members. Poor performance is one potent indicator of

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this egoistic tendency. By identifying and highlighting the domains of poor performance and ineffectiveness, the firms can encourage people and groups to broaden their zone of acceptance, discovery and learning. Kabir highlights that to extract most from the market of one’s life, it is critical to first suspend the boundaries between self and the others, so that the knowledge of others is not viewed with suspicion, but is granted due recognition as an option for discovery and learning. At the same time, the suspended boundaries offer an opportunity to discover the fullest value of one’s own prior learning by exchanging it with the others for use in their respective goals. Kabir notes:

eSa rsjh rw tkfu djkS] esjh ewy fcuklh | esjh ix dk iSxMk] esjh xj dh Qk¡lh ||2|| – – – . Maim meri tu– ja–ni karau, meri mu–l bina–si | – – – . – meri pag ka– paigda–, meri gar ki pha–msi ||2||

You should come out of the labyrinth of ‘I’ and ‘mine’ as it is the root cause of selfdestruction; it is a shackle on the feet and a noose around the neck. This couplet has relevance for enhancing perspective taking, interconnectedness, social and spiritual capital, mutual trust and respect, and brotherly attitude, for it makes the futility of a selfish attitude very explicit. If one discriminates and distances oneself from the others, then the opportunity for discovery as well as exchange is lost and a two-fold destruction happens. First, the person fails to benefit from the knowledge of the others and is thus left unmoved as if there are shackles on the feet. Second, the person loses the option of gains from exchange and is just like a person with a noose around the neck, who must remain (un)satisfied with what s/he has and fails to realize dreams and goals. Self-growth should be the aim of the individual, but self-growth can’t occur if others are not invited to participate in the process. In an organization, if the employees or the management adopts the attitude of ‘us versus them’, then each would avoid entering into a dialogue and exchanging suggestions and ideas, and instead would try to impose one’s own views on the other. Thus, while each party would try to win at the cost of the other, the organization would end up being a loser in terms of value addition and no party would be able to realize its goals and true accomplishments.

EXCHANGE AND LEARNING TO DISCOVER According to Argyris, learning is a process of reaching maturity from the infant stage and comprises seven components. These are: (a) From infant passivity towards adult activity; (b) From dependence towards relative independence; (c) From limited behaviors to many different behaviors; (d) From erratic, shallow, brief interest to more stable, deeper interests; (e) From short-time perspective to

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longer time perspective; (f) From a subordinate social position to an equal or super-ordinate social position and (g) From lack of awareness to self-awareness and self-control. While these seven components reflect maturity of learning, they may also impede further learning. An infant is in a constant state of discovery, and this discovery is sustained and fueled by a passive, dependent, limited, brief, short-term, subordinate, and awareness-free curiosity about the surrounding environment, which allows the infant to rapidly learn from a variety of people about different things. Adults with mature learning can enjoy the learning advantages of an infant through a similar open-mindedness about discovery. Kabir illustrates the behavior of the infants, using a simile, where he compares human life with the life of a flower, adults with flowers in bloom, infants with buds, God with the gardener, and garden with the earth. He says that when the bloomed flowers (i.e., adults) are picked up by the gardener (i.e., God) to serve their purpose by going beyond the garden (i.e., earth), the buds (i.e., infants) gain awareness and look forward to take the initiative and be picked up next. Thus, as the adults conduct their spiritual and social roles, going beyond their own physical needs, the infants become aware of the immense possibilities that each adult represents, and gain confidence that God has granted them the same potential to accomplish those diverse functions. Infants reach out to actualize their potential to be as outstanding as, if not more, than the adults they hold as their models. Thus, Kabir proposes:

ekyh vkor ns[k dS] dfy;u dgS iqdkfj | Qwyh Qwyh pqu ybZ] dy gekjh ckfj ||3|| –

–

Ma–li a–vat dekh kai, kaliyan kahe pukari | – phu–li phu–li cun lai, kal hama–ri ba–ri ||3|| On seeing the gardener entering the garden, the buds state aloud that all the bloomed flowers have been picked up and soon it would be their turn. Here Kabir portrays the realizations of others as a basis for detachment from one’s current state, and to recognize those realizations as indicators of one’s infancy thereby encouraging learning to discover. If the adults remain attached to their worldly associations and believe their learning to be at an endstate, then it would be difficult for them to move towards their goals. In the organizational context if the employees want to grow, then they would have to constantly set new role models, and discover new possibilities for channeling their thought, perception and attitude; else they are liable to prove the Peter Principle of Incompetence as true. For example, workers can model the behaviors and values of a manager they find as successful, and having discovered valuable learning opportunities, seek to learn from their co-workers as well as from their juniors about relevant skills and behaviors. Only then would they develop their fitness and capability to be promoted to the level of the manager, and beyond for an extra impact in tune with the more competitive times.

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Kabir suggests that role models must be identified based on their evident relevance rather than on the basis of ideal dogmas and unsubstantiated notions. He asserts that the opportunities for discovering relevant learning are pervasive, but people overlook them because of the misguided influence of dysfunctional rituals. As a result, they are unable to appreciate their own true potential, and are unable to develop their capabilities. He posits:

gS eu bruk ckojk] ikFkj iwtu tk; | ?kj dh pkdh dksbZ u iwts] tkdk ihlk [kk; ||4|| Hai man itna– ba–vara–, pa–thar pu–jan ja–y | – – – – Ghar ki ca–ki koi na pu–je, ja–ka– pi sa– kha–y ||4|| It is the madness of the mind that it worships the stone-idol of God, but not the grinding stone of the house, which is so useful. People usually put greater emphasis on things they understand little and seek to model roles on those who are not visible to them. As a result, umpteen roles around them, that are possibly too easy to understand, are never really understood. However, it is discovering Newtonian Gravity based on the natural falling of an apple from the tree that represents true learning.

DETACHMENT AND LEARNING TO DISCOVER Kabir’s work suggests that the organization as well as the individuals within the organization must not blindly adopt the dysfunctional practices and hope that the external resources would solve their troubles. Instead, they must concentrate on developing full functional relevance and value of their internal capabilities. He retorts:

dslksa dgk fcxfM;k] tks e¡qMs lkS ckj | eu dks dkgs u e¡wfM;s] theS fo"k; fodkj ||5|| . . Kesom kaha– bigadiya–, jo mumde sau ba–r | . Man ko ka–he na mu–mdeye, jime visaya vika–r ||5|| What wrong has the hair done that it has to be shaved off so many times; why not clean the mind that (nurtures) the ill thoughts. In India, tonsuring of hair is a ritual that signifies a very big sacrifice done to gain divine blessings. Kabir questions the need for ritualistically repeating this sacrifice, when there is no assurance of a reward. In the organization too, several policies, procedures and rules are taken for granted and become routine, for they are believed and expected to return positive outcomes with little and superficial efforts. Such superficial routines only generate

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superficial outcomes, rather than economizing on the memory of people and organizations. They make people more and more dependent on the context and history, and limit their capability to discovering possibilities around them on a continuous basis. Routine procedures and rules impede learning, generate red tape, inefficiency and provide a free hand for corruption. Normally firms find that systems and procedures if not changed with time, lose their relevance and eventually they attempt unfreezing of those old systems and procedures for survival. Such a reactive approach must give way to a transformative approach, where the people learn about why specific systems and procedures are believed to be functional, and are free to discover if alternative systems and procedures could help improve this functionality.

STEP II: Learning to Develop Learning to discover detaches people and organizations, and removes their bonds and their shackles to prior knowledge. It revives the memory about why the practices and systems were first adopted in the organization. Once people discover the true meaning and value of the prior knowledge, then they are in a position to move quickly to develop the knowledge further by adopting alternative practices. The alternative practices need not necessarily be ‘better’ or ‘worse’— the selection criteria instead must be if those practices could generate an incremental value if used in complement with prior knowledge. The requisite discovery is not just about the alternative practices, but also about the value of prior and alternative practices for different realizations.

SELF-FRUCTIFICATION WITH LEARNING TO DEVELOP Kabir emphasizes the self-related elements of learning to develop using personal exemplification. For learning to develop, the person gains awareness of how various elements of knowledge can be put together to generate higher value in regular as well as once-in-a-lifetime domains. This learning can’t be taught as clearly as the learning to discover, because development is perfected only through constant and rigorous efforts and practices. Learning to develop has to be reinforced through proper evaluation of the self, whereby all negative thoughts generated on account of inadequacy of prior knowledge are obliterated from the mind.

dchj eu fueZy Hk;k] tSlk xaxk uhj | rc ikaNh yx gfj fQjS] dgr dchj dchj ||1|| – – . Kabii r man nirmal bhaya–, jaisa– gamga– ni r | – – . Tab pa–mchi lag hari phirai, kahat kabi r kabi r ||1||

Kabir suggests that if my heart becomes pure like the water of River Ganges, then instead of me searching for God, it would be Him who would follow me.

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The purification in an organizational context calls for gaining an understanding of the relevance of each diverse practice, so that these practices can be used effectively. Profitability, productivity, service, trust, loyalty, and competitive advantage would happen automatically, and the firm need not make any extra effort (such as tension, stress, conflict, incentives, downsizing and restructuring) to solve the problems. In the process of developing transparent working in the organization, the unique values that each employee brings to the organization becomes evident, so that there is little to gain by losing this asset. As Kabir notes,

izHkqrk dks lc dksbZ HktS] izHkq dks HktS u dksbZ | dg dchj tks izHkq dks HktS] rks izHkqrk psjh gks; ||2|| –

–

Prabhuta– ko sab koi bhajai, prabhu ko bhajai na koi | – – Kah kabi r jo prabhu ko bhajai, to prabhuta ceri hoy ||2|| Everyone desires for supremacy, but does not remember the supreme authority (i.e. God). Those who devote themselves to God, have supremacy becoming a slave to them. As people learn to develop, they are often inclined to develop degenerative desires for gaining acceptance as supreme. In the organizational context, an indiscriminate use of positional authority, in an attempt to prove one’s supremacy, results in the loss of face, reputation, and confidence sooner or later. On the other hand relentless efforts to share the learning that brought one to the current position and its exchange with the learning that helped others develop, generate continuous improvement in one’s knowledge and endow the power of knowledge. Promotion and rewards result automatically, as the value is added effortlessly. To drive home this perspective, Kabir observes:

dchj gfj ds ukolwa] izhfr djS bd rkj | rkS eq[k rS eksrh >MS+] ghjs var u ikj ||3|| – . Kabir hari ke na–vsum, pri ti karai ek ta–r | – Tau mukh tai moti jhadai na pa–r ||3||

Kabir says that when a person who has undivided devotion to God speaks, his/her speech is very soothing and valuable (being rare) as if he/she was spending out pearls and diamonds. Few people are totally dedicated to the cause of developmental activities, and when these people interact with others, they bring tremendous constructive, positive and meaningful energy to the fore. Kabir refers to it as precious wealth, which is infinite and possessed for an indefinite period by the employees who

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share their developmental energy. While motivation through financial incentive proves costly for the organization, and the managers must always be circumspect in trying to motivate too much (for it might cost a lot), the learning to develop itself motivates joint value creation.

SELF-GENERATION OF LEARNING TO DEVELOP Undivided devotion for learning to develop is something that must be selfgenerated for fullest realization of the potential and success in work and life. Similarly, the link between the personal learning to develop, and the exchange of this learning for collective development cannot be bought using incentives or brought from the market. As the learning to develop becomes self-fructifying, the employees realize the value of further development, and discover vast opportunities for developmental growth through inter-personal exchange. Once they understand that coordination is a must to achieve further development of learning (as only by specialization and cooperation can people realize incremental value for the organization), they would strive to perform as a team. Kabir explicates the in-dwelling precept very eloquently in several couplets as below:

rsjk lkag rq> esa] T;wa iqgqiu esa ckl | dLrwjh dk e`x T;kas] fQj fQj <w<s ?kkl ||4|| . . . Tera– sa–h tu–jh mem, jyu–m puhupan mem ba–s | . . – – – – Kasturi ka mrag jyom, phir phir dhudhe ghams ||4|| Just as there is fragrance in the flower, your God resides within you; but the confused mind like a deer traces the grass, without realizing that the sweet smell of musk is coming from its own body.

iqgqi ekWfg T;w ckl clr gS] eqdqV ekWfg tl Nkb | rSls gh gfj clS] fujarj esjs ?kV ekWfg ||5|| . – . Puhup ma–mhi jyu– ba–s basat hai, mukut ma–mhi jas cha–i | – . . Taise hi hari basai, niramtar mere ghat ma–mhi ||5|| Just as there is fragrance in the flower and shimmer (of jewels) in the crown, there is God residing continuously within my body.

T;ksa uSuks esa iwryh] R;ksa ekfyd ?kV ekWgh | ewj[k yksx u tkfugs] ckgj <w
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Kabir emphasizes that the flowers have fragrance, and they do not need to search for the fragrance. Similarly, once the workforce learns to develop, it understands that sky is the limit for its accomplishments, and that it is the master of its own destiny and divinity. It is futile to expect some outsider to coordinate, and to help realize the added value. Instead, the employees themselves must assume the leadership role and become self-empowered to make fullest contributions to the mission of the organization. Just like flowers gain value through sharing of their fragrance, employees must also appreciate their inherent potential, and earn incremental value through sharing it with everybody. Further explaining the benefits of developing the divine powers in oneself, Kabir declares:

dchjk lar lekt esa] Hkkjos Madk ekj | xj gqbcs ge jke ds] gksbZ jke gekj ||7|| . . . Kabira– samt sama–j mem bha–rve, damka ma–r | – – – Gar huibe ham ram ke, hoi ram hama–r ||7|| Kabir declares it aloud in society, “if we devote ourselves to God, God too would reciprocate to become ours.” If the organization is devoted to the trading of its core competencies and powers for development of each member, then the potential of each member also becomes a part of the organization’s core competencies. The developmental trading enhances the social capital of the firm, and strengthens its networks of relationships and resources. It allows the partners to develop their tacit knowledge, and to offer valuable components and services to the firm, and to have greater purchasing power for compensating the firm. In these varied ways, the firm benefits from the potential of its networks, by being devoted to the development of this potential. Team spirit can be developed and utilized only when the employees are ready to help each other. Similarly, the collaboration can generate mutual developmental learning when the organizations are devoted to exchanging their discoveries, competencies, and services. Mutual help and collaboration does not imply just accepting and praising the others and lauding their strengths. Though one may believe that such pretentious goodness is indicative of a positive mental attitude, there is nothing far from reality. Towards this end, Kabir asserts:

lkWp cjkcj ri ugha] >wB cjkcj iki | tkds fgjns lkWp gS] rkds fgjns vki ||8|| – . sa–mc bara–bar tap nahi , jhu–th bara–bar pa–p | . Ja–ke hirde sa–mc hai, take hirede aa–p ||8||

There is no penance harder than speaking the truth and no sin worse than telling a lie, for God stays in the heart of the truthful.

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The organizations can enjoy spiritual satisfaction and build a spiritual capital by developing their discriminating faculties, and encouraging their employees to uncover the true capabilities and powers of various people and organizations around them. The organizational mistakes and waste, responsible for thwarting its sustainable growth and competitive advantage, can be obliterated, and the penance achieved, if the employees are aware of the immense spiritual and social capital that exists in everybody. Such transformative organizations can enhance the entrepreneurial leadership of each employee, and further their productivity, commitment, satisfaction, and achievements.

SELF-DESTRUCTION WITHOUT LEARNING TO DEVELOP In the absence of developmental learning, the wasteful and counter-productive routines proliferate. Kabir specifically cautions:

dfcjk ?kkl u fufn;s] tks ikoks rfy gks; | mfM iMs tc vk[k esa] [kkjk nqgsyk gks; ||9|| Kabira– gha–s na nidiye, jo pa–vo tali hoy | . udi pade jab a–kh mem, kha–ra– duhela– hoy ||9|| Kabir says don’t trample the grass beneath your feet, because if it happens to get into your eyes, it can harm them. Even a small grass stick can be a major irritant if it enters the eyes. The organizations must not behave like the dominant monopolies, as if they are more capable than everybody else around them. Even a small opening can allow the other organizations to develop substantial destructive power. Therefore, the discriminating potential and knowledge of different organizations, even if they have limited power and presence in the market, must not be undermined or underestimated. The assembly of the firm’s networks should not be confined only to the most powerful, because it is the weakest entrepreneurs who bring about the downfall of the powerful and reach beyond the accomplishments of the powerful. Kabir elaborates this further as follows:

djrk Fkk lks D;ksa fd;k] vc dkgs ifprk;s | cksvk isM+ ccwy dk] vke dgk¡ ls [kk; ||10|| . Karata– tha– so kyom kiya–, ab ka–he pachita–y | . boa– ped babu–l ka–, a–m kaha–m se kha–y ||10|| There is no point in repenting for your wrong deeds, why did you do it in the first place. If you sow a thorny tree of acacia, you cannot expect it to bear sweet fruits of mango.

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This couplet brings out multiple insights for the transformative organizations. First, if the organization oriented towards establishing its own supremacy, then it can not be expected to discover the unique powers of other organizations, and to transform itself into a dynamic, new generation player. Second, instead of wasting resources in trying to fix the prior oversights and mistakes, the organization would do well to review its practices. If the organization seeks to punish the individuals for the failure, then the individuals would only become self-protective and reluctant to make their own discoveries for developmental learning. Finally, Kabir also observes:

thor le>S thor cw>S] thor gh djks vkl | thor dje dh Qkal u dkVh] eq;s eqfDr dh vkl ||11|| –

–

–

–

Ji vat samajhai ji vat bu–jhe, ji vat hi karo a–s | – – – . Jivat karam ki phams na ka–ti , muye mukti ki a–s ||11|| People spend their entire lives in understanding, exploring and expecting things without ‘detached’ right action, and still they expect salvation after death. People who search for the supremacy by living a life attached to the supremacy cannot expect to develop. Similarly, organizations that seek leadership by confining their benchmarks and relationships to only the cream of the market can never really understand what it takes to make the cream. Only through networking with the emerging and underdog organizations, that make efforts to realize the cream, can the firms gain knowledge of the developmental learning, and not by remaining attached to the organizations that already have the cream. The detached approach allows the people to visualize the true meaning of their life, see life as a journey that offers an opportunity to enjoy the multidimensional, vibrant colors of nature. If the people get emotionally or egoistically attached to any one color of life, then they are unable to develop the fuller potential of their life. Similarly, by being attached to the dominant positions, the organizations ignore the possibilities of the emergent new positions, and therefore are victimized by the gales of ‘creative destruction’. Therefore, even after making so many investments and with so many resources, the organizations are unable to generate and sustain their competitive advantage.

STEP III: Learning to Correct Once the organizations have learnt to discover and develop their knowledge, they must seek to further learn to correct their knowledge. Only corrected knowledge is applicable to new domains and higher-order missions of life, because the prior knowledge has a context-dependent element that would be degenerative if applied to alternative contexts. Each culture, for instance, has a unique emic, as well as universal, etic, dimension. Further, the cultures vary considerably on

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the etic dimensions, with some falling at one end, others at the other extreme, and still others somewhere in the middle. If the organizational practices and values are not corrected for this cultural knowledge, then they lose some of their meaning and relevance. In Lewin’s model, once the organizational learning has been unfrozen and changed, the third step is to refreeze the changed organizational learning. Moreover, the firms may become quite fearful and skeptical of their success in alternative cultural contexts, and apply substantial risk and uncertainty discounts when seeking investments in those contexts. If the new organizational learning is integrated into the knowledge repertoire of the workforce, then the organization can develop a more discriminating faculty about the relevance of the alternative knowledge bundles for the different contexts, and gain confidence about accomplishing corrective learning for newly emergent contexts. Thus, the organizations can integrate new domains within their current domains, and effectively service both of them without disruptive restructuring. Kabir’s couplets indicate the sequencing of the priorities for accomplishing the learning to correct. The first step (couplets 1 and 2) entails experiential learning, so that the organizations can gain awareness of the distinctive features of the context, and develop adaptive knowledge for these distinctive features. The second step (couple 3) involves referential learning, so that the organizations can compare their adaptations with those of the others, and develop a degree of sophistication and perfection. The third step (couplet 4) is oriented towards institutional learning, wherein the organization exchanges and diffuses its knowledge to the others, so that they can also correct their behaviors and generate incremental value in the market. Learning to correct is not a ‘be-all and end-all’ of the organizational learning and change process. A transformative organization must invest the compensation and benefits it receives from its knowledge exchange and diffusion process, and begin an enriched grassroots level first-order learning to discover all over again. With a broader cultural learning, it would discover new meanings in its everyday working, and can interpret its historical routines in a new light for further development and correction. Towards this end, the fourth step (couplet 5) aims at creating a transformative organization for dynamic, sustainable learning and competitive advantage.

EXPERIENTIAL LEARNING AND CORRECTIONS Experience is person-specific and is difficult for others to observe. To develop experiential learning, it is critical to focus on its true foundations—the prior process of discovery and development that allowed the tacit, experiential learning to evolve. Therefore, Kabir posits:

tkfr u iwNks lk/kq dh] iwN fyth, Kku | eksy djks ryokj dk] iMh jgu nks E;ku ||1||

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–

Ja–ti na pu–cho sa–dhu ki , pu–ch liji ai jñan | – mol karo talwa–r ka–, padi rahan do mya–n ||1|| Don’t ask the caste of the spiritual discoverers, instead ask how much knowledge they have, for you should value the sword and discard the scabbard. The reputation of an organization is of little value. Only the meaningful knowledge the organization has about accomplishments in a given context is relevant. If the organization is unable to realize and sustain its competitive advantage, then it is yet to learn the experiences relevant for fruitful actions. When the organizations reward is on the basis of learning of the prior knowledge, then they accomplish just that—i.e., learning of the prior knowledge, which is hardly relevant in the new context. When people are dedicated to learning the old, they hardly have any time and resources to learn the corrections to the old, and are not able to experience the uniqueness of the cultural milieu in which they are working. Old discoveries and developments are a part of the organization, and are accessible as and when the need emerges, and therefore there is little sense in devoting most of one’s time in learning about them. Instead, the organizations should have some dedicated resources and facilitators who are incharge of codifying the old discoveries and of recognizing the experts who further develop these discoveries. Then, these can be used as a ready reference and resource by people all around the organization, as well as for value-added servicing of the external constituencies. McKinsey, for instance, keeps a directory of knowledge experts, as well as knowledge documents, that can be searched and networked by anybody around the world, and can be consulted for quality, timely, and value-added servicing of any client. In addition to the prior discoveries and developments, experiential learning also builds upon the formative evaluation. In this regard, Kabir states the following:

iksFkh if<+ if<+ tx eqvk] iafMr Hk;k u dks; | v
It is quite common in the world to find people who have read books and scriptures, but the ‘truly learned’ are rare, for only the one who understands the true spirit of love deserves to be called a ‘learned person’. The corporate policies, instruction manuals, Intranets, Internet, patents, reports, and data are available to all, and most people in the field have knowledge about these. Yet, there are only a few people who have a true awareness of the value of these resources and knowledge, and the corrective improvements these

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can bring for better performance. Similarly, there are only a few organizations that demonstrate effectiveness in using resources and opportunities available in the market, and gain a competitive advantage by spreading love and happiness around the world through their need satisfaction services.

REFERENTIAL LEARNING AND CORRECTIONS Kabir suggests that if people are not aware of the formative value of the available resources and opportunities, then they must seek the experiential learning of those who are knowledgeable. One should always keep an open mind about the significance of resources and knowledge not being used currently, rather than discarding and discounting them without appreciating their true relevance. Opposition starts when people feel that their interests are opposite; hatred and severe antagonism sets in when people feel that their growth is depends on the downfall of other people and groups. As opposed to the leader-enforced organizational interventions, a self-corrective approach allows teamwork and a spirit of love and exchange to flourish on its own. Kabir specifically notes:

dFkuh FkksFkh txr esa] djuh mRre lkj | dg dchj djuh lqQy] mrjs eafty ikj ||3|| – – . Kathni thothi jagat mem, karni uttam sa–r | – – . Kah Kabi r karni suphal, utre mmanjil pa–r ||3||

Speeches alone are of no good, action is the essence of life. Kabir says that those who act successfully reach their destinations for sure. The zest of mission accomplishment is the action. Organizations can enhance mutual understanding among various members through conversations and dialogues. Eventually, however, people must act on the learning from these conversations and dialogues, and make appropriate corrections in their approach. If learning is only one way, then it implies that half the people have just voiced their views and knowledge, without acting upon the two-way corrective opportunity that exists in any dialogue. For the positive climate of a two-way learning, the focus has to shift from the person to the institution. Institutional learning can foster bilateral as well as multilateral exchange, and generate an allround spiritual fulfillment.

INSTITUTIONAL LEARNING AND CORRECTIONS The fundamental purpose of any institutional system is to motivate, facilitate, and extract the best from organizations, people, and various resource and knowledge endowments. Therefore, there must be mechanisms for continuously and relentlessly validating the functionality and the relevance of the institutional systems, and to correct their components if discovered to be dysfunctional. For developing and managing the institutional systems, it is typical to have specialized

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agencies be in-charge of the governance system and of the institution building and enforcement. Just as mutual exchange aids learning and development at the micro-level, analysis of the micro-level outcomes helps correct the macro-level institutions for supporting the productive realizations, and for avoiding the unintended trajectories of downward spirals. The goal of the governing agencies must not be a sheer enforcement of the institutional norms in the name of law. Instead, the mission should be to uphold the fundamental spirit of value generation, growth and development, and to investigate the institutional constraints that induce deviations from the norms. The constraint analysis can help correct the gaps and imperfections in the institutions, and to discover corrective developments. Kabir notes:

Qkxqu vkor nsf[k ds] cu :uk eu ekfg | Å¡ph Mkjh ikr gS] fnu fnu ihys vkfg ||4|| Phagun a–vat dekhi ke, ban ru–na– man ma–hi | – . – – Um ci da–ri pa–t hai, din din pi le a–hi ||4|| With the advent of spring, the forest meditated to itself that now the leaves at the top of the trees would turn yellow each day. Learned people are knowledgeable about the full cycle of environmental events and mass behavior. If the institutional systems can motivate certain kind of positive, aesthetic behaviors (such as, growing of leaves), they can also undermine the sustainability of those behaviors (such as, inducing yellowing of the leaves). Further, the institutional systems that were designed when a specific phase of the environment was underway may become ineffective later. A system designed to meet the scarcity requirements in the pre-spring context requires adaptations and corrections to meet the abundant requirements in the postspring context. If institutions do not help people manage the abundance in the light of future changes, they would be shocked when spring ends and the fruits they so cherish begin to rot.

THE TRANSFORMATIVE ORGANIZATION AND PERPETUAL LEARNING By anticipating and preparing for future developments, the governing agents behave as entrepreneurial leaders (Gupta, Macmillan and Surie, 2003). The entrepreneurial leaders paint the emergent scenarios for the future, and then set an institutional climate that allows the cast to discover new opportunities for creating wealth that remains meaningful in the new scenarios. Scenario enactment does not imply losing sight of the ground realities—rather it implies a fusion of the current realities and the emergent, less visible, possibilities, so that the organization can develop itself beyond the current conditions. Thus, entrepreneurial leadership helps to overcome the Law of Inertia and resistance to corrective learning. It also generates a flexibility and dynamism that help people and the

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organization to absorb the shocks if the painted scenarios do not materialize, and to discover and develop new learning opportunities as the ground realities change in expected and unexpected ways. Kabir aptly remarks:

ftl ejus FkS tx Mjs] lks esjs vkuan | dc efjgkS] dc nsf[kgkS] iwju ijekuan ||5|| . Jis marne thai jag dare, so mere a–namd | . – Kab marihau, kab dekhihau, puran parma–namd ||5|| The very thought of ‘death’, that causes fear in the minds of other people, fills me with happiness; in fact, I am anxious, as to when I would die and see the Almighty, the absolute pleasure source. The thought of failure, weaknesses, incompetence, erosion of profitability and competitive advantage, degeneration, decay, and death, panics people and organizations. As a result, they are unable to take bold steps for the future; instead they become highly conservative and resistant to change and development. Also, many organizations overlook their weaknesses because they wish to perpetuate an image of perfection and supremacy. The result is similar to the classic case of Enron—which was endorsed by all as the star of the fusion of old and new economy in days and hours leading to its abject downfall and disrepute. Many people lost their lives savings and several partners and creditors suffered a blot on their reputation and a pinch in their own purses. A transformative organization, on the other hand, creates a culture where corrections are a part and parcel of daily life, and discoveries and developmental learning are nurtured and are part of the organizational mission and people evaluation and reward systems. With a transformative mind-set, death need not be feared, because death just represents fulfillment of the purpose of life and accomplishment of the mission. Such a death gives spiritual realization and bliss, whereby the people can develop new opportunities and organizations for further servicing of the community around them. Thus, transformative organizations foster perpetual learning, a learning that people can use for diverse creative applications. Most organizations hardly, if ever, fulfill the promises and values for which they were established by their founders, and for which the other people joined them subsequently. Their end is therefore painful, and brings displeasure and losses for all related to them. In contrast, transformative organizations keeping themselves alive and relevant, help the agents and the cast to become transformative, so that they can fulfill the everlasting mission of servicing diverse communities. As a result, traumatic psychological and social effects of organizational divestitures, retrenchments, downsizing, and restructuring are mitigated, and the organizational change does not force undue and unexpected negative adjustments for various stakeholders. Instead, change becomes a constructive force in everybody’s life, and is accepted as natural rather than as exceptional.

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In short, the vision of transformative approach inherent in Kabir’s work carries deep insights for the management in emerging markets. Lewin’s model of change management through unfreezing, changing, and refreezing is likely to be less relevant for the emerging markets, because the amount of change needed is significant and the direction of change is itself undergoing dynamic transformation as the markets develop. Lewin’s model is more suitable in matured contexts, where the required learning and change would be quite infrequent, and would involve unfreezing of the organization, and then reformation for a accomplishing new mission once the earlier mission has been accomplished.

Conclusions The couplets of Kabir are a rich source of wisdom, which have long existed and have diverse applicability. His precepts were originally aimed at an individual’s reform in the emergent social setting when the pluralistic religious setting was taking shape in India, but today they enable interpretations with tremendous significance and power for management in the emerging markets. The relevance derives from the fact that globalization and liberalization has in many ways recreated the learning and change management needs evident during medieval India. The transformative organizations do not imply a new form of organization— indeed there are several organizations around the world that fulfilled their original missions, and rediscovered new missions to make themselves relevant and competitive on a sustained basis. Du Pont, IBM, and General Electric are just some examples of such organizations. However, most organizations wait for times to change, and their performance to fall, before they decide that their earlier mission was no longer relevant, or that their activities are no longer consistent with the true and fundamental foundations of their formative mission. In other words, the organizations typically let time define their destiny, rather than shaping and defining their destiny on their own. Thus, they become slaves of time and environment, rather than becoming masters of their own destiny. The medieval Indian writings, as illustrated by the works of Kabir, denounce routine, corruption, and inactivity, and call for time-bound accomplishments of the mission. By becoming transformative organizations, firms can realize their mission of empowering each group in society, irrespective of income, cast, region, and religion, and remain alive in the hearts of people and communities who competently and effectively undertake those activities on their own. Transformative organizational approach calls for entrepreneurial leadership, wherein the purpose is to help the cast develop its own capabilities for creative and innovative action. The entrepreneurial leadership mitigates the risk of failure, and puts people in a better position to compensate their own losses in case the target mission is found to be too optimistic to realize currently. The investments each group makes into the entrepreneurial venture consequently retain their value, and can be used for a variety of different applications depending on the group-specific interests and missions.

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References Argyris, C. (1964). Integrating the Individual and the Organization, New York: Wiley. Chandra, S. (1994). Medieval India—A History Textbook for Class XI (3rd reprint), New Delhi: Publication Department, NCERT. French, W.L. & C.H. Bell (1996). Organization Development—Behavioral Science Interventions for Organization Improvement, 5th edition, New Delhi: Prentice Hall of India Private Limited. Gupta, V., I.C. Macmillan & G. Surie (2003). 'Entrepreneurial Leadership: Developing and Measuring a Cross-cultural Construct’. In Press, Journal of Business Venturing. Hari, V. (1993). Kabir Sahib Ki Subodh Sakhiyam (10th reprint), New Delhi: Sasta Sahitya Mandal. Lewin, K. (1945). The research center for group dynamics at Massachusetts Institute of Technology. Sociometry, 8, 126–136. Machwe P. (1993). Kabir (5th reprint), New Delhi: Sahitya Akademi. Mishra, B.S. (1969). Kabir Gramthavali, Agra: Vinod Pustak Mandir. Narayan, B.K. & R. Sawhney (1998). The Dialogues of Kabir, New Delhi: Vikas Publishing House. Prasad, D., V.S. Prasad & Satyanarayan (2000). Administrative Thinkers (12th reprint), New Delhi: Sterling Publishers Private Limited. . Sahayak, R.L. (1972). Mahatma Kabir Evam Mahatma Gandhi Ke Vica– rom Ka–– – Tulnatmak Adhyyan, New Delhi: Atma Ram and Sons Publication. Sharma, R.S. (1993). Ancient India—A History Textbook for Class XI (4th reprint), New Delhi: Publication Department, NCERT. The New International Webster’s Comprehensive Dictionary, (1996). Deluxe Encyclopedic Edition, Florida: Trident Press International.

Key to Transliteration and Pronunciation v vk b bZ m Å _ , ,s vks vkS d [k x

a a– i – i u u– r e ai o au k kh g

Sounds like o in son a in master i in if ee in feel u in full oo in boot somewhat between r and ri a in evade y in my o in over ow in now k ckh in blockhead g (hard)

M < .k r Fk n /k u i Q c Hk e ;

d dh n t th d dh n p ph b bh m y

Sounds like d dh in godhead n in under French t th in thumb th in then theh in breathe here n p ph in loop-hole b bh in abhor m y

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?k ³ p N t > .k V B

gh n. c ch j jh ñ t th

Sounds like gh in log-hut ng ch (not k) ch in catch him j dgeh in hedgehog n (somewhat) t th in ant-hill

j y o 'k "k l g ] %

r l v s¢ s s h m. h

Sounds like r l v in avert sh sh in show s h m in hum half h in huh!

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Innovative Compensation Practices for Organizations in India1 Atul Mitra

‘The real treasure of India is its intellectual capital. The real opportunity of India is its incredible skilled work force. Raw talent here is like nowhere else in the world’ (Comments by Jack Welch, CEO, General Electric, Financial Express, 2000, italics added). Organizations across the globe, including organizations in emerging economies, are reconfiguring their resources to gain competitive advantage in a complex and uncertain environment resulting from ‘increasing international competition and the rapid pace of technological changes . . .’ (Miles, 1989:9). Newman (2000) defines organizational transformation as those intraorganizational change processes that ‘. . . leave the organization better able to compete effectively in its competitive milieu’ (p. 603). Organizational transformations vary in scale, scope and timeframe. Moreover, organizational transformation can take a variety of forms such as operational, strategic, and self-renewal (Johri, 1997). More recently, a significant amount of research has focused on reconfiguration of organizational assets to build dynamic capabilities (Amit and Schoemaker, 1993; Conner and Prahalad, 1996; Eisenhardt and Martin, 2000; Galunic and Eisenhardt, 2001; Teece, Pisano, and Shuen, 1997). Galunic and Eisenhardt (2001) broadly define dynamic capabilities as those ‘organizational and strategic processes by which managers manipulate resources into new productive assets in the context of changing markets’ (p. 1229). This definition alludes to several important implications. First, it implies that for a post-modern organization, a continuous transformation of assets has become a norm (Child and McGrath, 2001). Second, the dynamic capabilities framework is based on the resource-based view of the firm which asserts that sustainable competitive advantage stems from a firm’s ability to strategically configure its bundle of resources (Barney, 1991). Third, and more specifically, the dynamic capabilities framework suggests the need to develop valuable, rare, and non-imitable human resources (Wright, McMahan, 1

Earlier version of this chapter (Mitra & Gupta, 1999) was presented at the 1999 Annual Meetings of the Academy of Management, Chicago. The exploratory results reported here are based on indepth interviews of top-level HR executives of seven Indian firms in 2000.

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and McWilliams, 1994). Finally, it suggests that by transforming an organization from a provider of physical goods to a provider of knowledge-based goods/ services, managers can enhance shareholders’ returns by realizing above-normal economic rents (Child and McGrath, 2001; Amit and Schoemaker, 1993). These new organizational forms, however, offer managers as well as scholars new and unique challenges. Current theories and practices do not readily apply to new organizational forms (Child and McGrath, 2001). For an organization to become a ‘lean, agile, flexible, and learning’ entity, it must deal with the paradox of stability and change concomitantly. As Child and McGrath succinctly put it, ‘Rather than view organizations as stable structures designed to absorb uncertainty, as they were conceived to be in Thompson’s (1967) era, today many thinkers suggest that new organizations must build in flexibility and the capacity to handle constant change (Volberda, 1998)’ (p. 1139). In other words, ‘renewal and configuration’ rather than ‘efficiency and stability’ have become more critical concepts. Creation of knowledge-based assets requires organizations to continuously renew and reconfigure their human, organizational and social capital (Snell, Youndt, and Wright, 1996). Transformative organizations need to rethink the very basis of employment relationships including the strategic role of compensation and rewards systems (CRS) in recasting employment relationships (Bloom and Milkovich, 1999; Galunic and Eisenhardt, 2001; Heneman, Ledford, and Gresham, 2000; Milkovich and Newman, 2002; Tsui, Pierce, Porter, and Tripoli, 1997). These issues are equally important for Indian organizations seeking to gain competitive advantage in delivering knowledge-based goods and services (Kapur and Ramamurti, 2001). According to Mitra (2001), ‘The Indian economy has primarily been an agrarian economy, but a metamorphosis is taking place, and India is gaining prominence as a knowledge-driven economy’ (p. 32, italics added). Scholars acknowledge that Indian organizations have shown surprising competitive edge in many skill-intensive tradable services including information technology, engineering designs, pharmaceuticals and healthcare, entertainment and media, and biotechnology (Kapur and Ramamurti, 2001). To gain and sustain competitive advantage globally, many Indian organizations are also transforming themselves dramatically. These organizations are experimenting with a variety of innovative HR and compensation practices (Patil, 1997). Thus, the main objective of this chapter is to offer a critical assessment of the strategic role of compensation and rewards systems in formulating employment relationships by organizations in India. Based on the results of an empirical study, the chapter offers empirical evidence in support of the use of innovative pay systems to effectively design employment relationships within the Indian context.

Employment Relationships and Strategic CRS STRATEGIC COMPENSATION AND REWARDS SYSTEMS Compensation and rewards systems play a central role in achieving strategic goals of organizations operating in the developed economies (Gerhart, Trevor,

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and Graham, 1996; Gomez-Mejia and Balkin, 1992). Compensation and rewards systems acquire strategic value because they can influence organizational productivity by impacting several critical organizational, behavioral, structural and process outcomes. For instance, compensation and rewards systems have been found to influence the quality of human capital that an organization is able to acquire and retain (Gerhart et al., 1996; Lawler, 1987; Milkovich and Newman, 2002). Equally critical is the evidence that compensation and rewards systems significantly influence employees’ performance, innovation, and creativity. Compensation and rewards systems have also been found to shape an organization’s strategy, culture, and structure (Gerhart et al., 1996; Lawler, 1987; Mendonca and Kanungo, 1994). According to Milkovich and Newman (2002), ‘A strategic perspective toward compensation focuses on those compensation choices that help the organization gain and sustain competitive advantage’ (p. 32). An organization’s choices about compensation and rewards systems’ objectives and four strategic policies (i.e., internal alignment, external competitiveness, employee contributions, and administration) formulate its compensation strategy. Internal alignment ‘. . . refers to comparisons among jobs or skill levels inside a single organization’ (Milkovich and Newman, 2002:15), and the resulting alignment offers a snapshot of evaluative worth of various jobs or skills within an organization. External competitiveness deals with the competitiveness of an organization’s pay structure with reference to pay structures of other organizations in the labor market. The compensation and rewards systems policy about employee contributions deals with an organization’s procedures and rules about employees’ performance and other types of contributions. Finally, policy regarding administration of compensation and rewards systems refers to the management of design and delivery processes. These strategic policy decisions assume that a pay system can be treated as a strategic lever to achieve strategic organizational objectives and superior employment relationships (Milkovich and Newman, 2002).

EMPLOYMENT RELATIONSHIPS AND COMPENSATION AND REWARDS SYSTEMS As stated above, a properly designed compensation and rewards system can help organizations achieve myriad organizational strategic objectives. Compensation and rewards systems should not only focus on motivational issues but also on shared mindsets, tacit knowledge, creativity, and continuous learning. A strategic view requires that compensation professionals design and implement pay systems that focus on employment relationships to help embed the sources of competitive advantage into complex organizational path-dependencies and culture (Bloom and Milkovich, 1999; Gerhart et al., 1996). In this regard, Tsui et al., (1997) offer a valuable framework to conceptualize employment relationships. According to these authors, employment relationships can take four forms: quasi-spot contracts, mutual investment contracts, underinvestment contracts, and overinvestment contracts. In a quasi-spot

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contract, employers offer job-based, purely economic returns in exchange for well-defined employee contributions. A quasi-spot contract is characterized by short-term, close-ended relationship between the two parties. However, in many situations, particularly for transformative organizations, the two parties should be more interested in a long-term, open-ended relationship. An organizational environment characterized by a high degree of complexity and uncertainty puts demands on the two parties to build a mutually beneficial interdependent relationship. Collaborative goals and trust form the foundation of mutual investment contracts. The quasi-spot and mutual investment contracts generate a symmetrical and balanced employment relationship. Employment relationships can also be asymmetrical and unbalanced. Under such conditions, employers either underor over-invest in human resources. A highly competitive labor market often allows employers to offer underinvestment contracts. Overinvestment contracts, on the other hand, are often extended by government agencies or unionized organizations (Tsui et al., 1997). Tsui et al.’s (1997) framework insinuates different types of employment contracts for different types of institutional settings. It should be noted that though the distinction between balanced and unbalanced contracts is useful, essentially both underinvestment and overinvestment contracts are either quasispot or mutual investment type. In other words, the unbalanced contracts are primarily aberrations of the two types of balanced contracts. These contracts are directly influenced by the nature of total returns (i.e., remuneration as well as relational) from a job.

TRANSFORMATIVE ORGANIZATIONS AND STRATEGIC COMPENSATION AND REWARDS SYSTEMS An issue of strategic importance to compensation professionals is how compensation and rewards systems can be designed and delivered that help transformative organizations adapt to changes in internal and/or external environment. Compensation and rewards systems do not exist in a vacuum. Compensation professionals must assess their congruence with key elements of an organization. Lawler (2000) suggests four key interdependent elements of an organization— strategy, structure, people, and processes—with which compensation and rewards systems must be aligned. Furthermore, to develop dynamic capabilities and formulate appropriate employment relationships, these five features— compensation and rewards systems, strategy, structure, people, and processes— must be transformed based on an evaluation of three critical organizational activities. These three core organizational activities include organization’s collective goals, management of the flow of bundle of resources, and differentiation of rights and duties (Child and McGrath, 2001). These assertions are depicted in the proposed model (see Figure 7.1). The model suggests that three core organizational activities and four key organizational elements interact with compensation policies to build dynamic capabilities and employment relationships.

INNOVATIVE COMPENSATION PRACTICES FOR ORGANIZATIONS IN INDIA

Source: Based on Child & McGrath (2001), Lawler (2000), and Milkovich & Newman (2002).

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Fig. 7.1: The Proposed Model

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Bloom and Milkovich (1999) claim that sustainable competitive advantage ‘...comes from crafting compensation and reward systems to create employment relationships that extract the value of firm-specific resources’ (p. 295, italics in original). Therefore, transformative organizations focusing on mutual investment contract-based employment relationships should use different strategic compensation policies than those organizations focusing on quasi-spot contractbased employment relationships (Bloom and Milkovich, 1999; Gomez-Mejia and Balkin, 1992; Heneman et al., 2000; Lawler, 2000; Lawler and Jenkins, 1992; Tsui et al., 1997). Knowledge-driven organizations must reward development of knowledge. Heneman et al. (2000) assert that compensation and rewards systems of transformative organization seeking to deliver knowledge-driven goods and services are characterized by: (a) internal alignment policy based on person (i.e., skill-based pay rather than job-based pay); (b) external competitiveness based on the lead policy; (c) employee contributions based on teams, ownership, and variable pay; and (d) administrative policy based on decentralized structure, openness, and dynamic processes. Therefore, compensation and rewards system is an important indicator of the ability of the organizations to compete in knowledge-intensive goods and services (Lawler, 2000). The next sub-section uses information on the economic and labor market and cultural profile of India to offer a critical evaluation of the potential role of compensation and rewards systems for Indian organizations in competing effectively in the global knowledge economy.

BACKGROUND INFORMATION—INDIAN ECONOMY For over three decades, the Indian economy grew at only 3.5 per cent annually, largely due to import-substitution industrialization policies designed to achieve self-reliance in several critical basic sectors. However, in response to the debt crisis in 1991, the government of India embarked on a major liberalization process. The government took several systematic steps to harness higher growth rates. These policy changes have been relatively successful, allowing India to achieve enviable growth rate of 6.1 per cent annually between 1991 and 1999. Moreover, ‘The winds of competition have been allowed to pervade the Indian economic scene in a manner that has given Indian companies time to adjust’ (Indian Finance Minister Yashwant Sinha’s interview by Ramamurti, 2001:11). Several sectors experienced astonishing growths. For example, in the 1990s, the Indian software industry grew at an annual growth rate of 50 per cent. Table 7.1 provides information on basic indicators of the Indian economy. Most experts contend that India’s trend growth rate will approximate 6 per cent annually for a foreseeable future (Ramamurti, 2001; Bajpai and Sachs, 1998). Many well-known multinational enterprises (MNEs) have opened operations in India (Bajpai and Sachs, 2000; Kapur and Ramamurti, 2001) and the Foreign Direct Investment (FDI) to India in 1998 swelled to US$ 2.6 billion. According to a study by the Center for the Advanced Study of India (1997), ‘India’s advantages, beside the size and growth potential of the market, cluster around the relatively low risk on investment, easy availability of skilled manpower and

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reasonably sound judicial system’ (p. 3, italics added). Thus, the MNEs’ desire to seek skilled Indian manpower, particularly in the knowledge-driven service sectors, has altered the nature of employment relationships between Indian employers and employees (Bajpai and Radjou, 1999; Bajpai and Shastri, 1998; Kapur and Ramamurti, 2001). Table 7.1: Basic Economic Information about Business Environment in India Key Economic Indicators 1 and Long-Term Trends (average annual growth rate) GDP GNP per capita Exports of goods and services

1988–1998 5.5 3.7 11.9

1998 6.3 4.3 4.5

1988–2002

1

6.2 4.4 7.0

Structure of the Economy GDP (US $ billion) Imports of goods and services (as % of GDP)

1988 289.7

1998 419.7

9.3

14.0

Population and Labor Force: 2 1997–2012 Population (in millions) Labor Force (in millions)

1997 951.18 397.22

2002 1028.93 449.62

2012 1196.41 562.91

Work Opportunities—Sectors with 2 Significant Changes (in millions) Manufacturing Transportation, Storage & Communications Finance, Real Estate, Insurance and Business Services Electricity Source:

1997 43.56

2002 48.22

11.96

14.57

4.55 1.54

5.68 1.93

1

World Bank: India at a Glance (1998 data are preliminary estimates). Ninth Plan (1997–2002), Volume I, Employment Perspective.

2

BACKGROUND INFORMATION—LABOR MARKET In India, the agriculture sector affords a large proportion of the work opportunities. In 2002, it was estimated that the agriculture sector accounted for approximately 60 per cent of the total number of available jobs (Ninth Plan, Volume 1). According to the Indian government’s document on Ninth Plan (1997–2002), ‘nearly 70 per cent of the workforce is either illiterate or educated below the primary level’ (Chapter 4, p. 1). With a heavy concentration of job

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opportunities in the agriculture sector and a large pool of nearly uneducated workforce, Indian government’s important objective has been ‘. . . to focus on the growth of sectors which have high absorption intensities of a relatively uneducated labor force. The focus on agriculture, trade and transportation and construction reflects this imperative’ (Ninth Plan (1997–2002): Employment Perspective, Chapter 4, p. 1). In other words, the Indian government is likely to continue to formulate HR policies that help eradicate illiteracy and poverty (Ramamurti, 2001). In contrast to the predominant role that the agriculture sector plays in impacting India’s macro-economic wage policies, unionized organizations play a very limited role. Only about 9 per cent of India’s workforce is in the organized sector (Bhattacherjee, 1999; World Bank Report, 2000). Furthermore, the private and public enterprises employ 30 per cent and 70 per cent of organized labor, respectively. Even in the private sector, unions are mostly prevalent in the transportation, mining, and manufacturing settings (Bhattacherjee, 1999). Most of the skills-driven tradeable sectors are not unionized (Patil, 1997). Since only a fraction of the labor force is organized, unions in India are unable to exert significant influence on wage determination of the overall workforce. This is particularly true for organizations that deliver knowledge-driven goods and services. Shah (2000) has suggested a useful classificatory framework for professionally managed organizations in India which can be divided into two groups: public sector undertakings (PSUs) and private sector enterprises (PSEs). PSUs are either governed by the central government or by a state government. PSEs can be further classified into two types: private corporate sector (PCSs) and small-scale industries (SSIs) and traders. Finally, PCSs can be grouped into three types of businesses: multinational enterprises (MNEs), private corporations (i.e., publicly traded), and family-owned private corporations (FPCs). This classification is useful to understand variations in employment relationships across different Indian organizations.

The Nature of Employment Relationships in India The extant research on employment relationships among Indian organizations affirms the presence of four types of employment relationships contracts (Shah, 2000; Tsui et al., 1997). Overinvestment contracts can often be observed among PSUs. Certain sectors, such as manufacturing, as well as SSIs often rely on either underinvestment contracts or quasi-spot contracts. Professionally managed large corporations, including MNEs, may employ mutual investment contracts. For example, Infosys Corporation, India’s premier information technology company, states the following on its website: ‘The spirit of learnability among our people and an organizational commitment to continuous personal and professional development keeps Infosys at the forefront in a fast-changing industry. Our framework for continuous learning at Infosys is built around a number of focused programs for our employees. These range from major initiatives such as the Infosys Leadership Institute to various ongoing management development and

INNOVATIVE COMPENSATION PRACTICES FOR ORGANIZATIONS IN INDIA

133

personal improvement programs. They complement a host of technology advancement and ongoing training options’ (italics added). Thus, many Indian corporations that provide knowledge-driven services and goods rely on mutual investment contracts. Many FPCs also offer mutual investment contracts for their core employees (Shah, 2000). Table 7.2 provides a summary of different types of employment relationships contracts, attributes of four contracts, and possible usage of the four types of employment relationships contracts by Indian organizations.

INNOVATIVE TRENDS IN PAY SYSTEMS IN INDIAB Forms of Total Remuneration. Bloom and Milkovich (1999) classify total returns from an employment relationship into two groups: total remuneration and relational returns. Total remuneration comprises of cash (e.g., base pay, incentives and bonuses) and non-cash (e.g., legally mandatory and other types of benefits) returns. Relational returns include such outcomes as job growth opportunities, social rewards, and learning opportunities. Data on the nature of total compensation were collected using two sources. First, data on the forms of total remuneration were gleaned from the only systematic study on compensation and rewards systems in India by Sethi, Balaji, and Shrimali (1995). This study was commissioned to help set pay scales for central government employees. This study collected data on compensation and rewards systems from 112 private sector enterprises ranging from small businesses to large MNEs. This data provides a snapshot of the forms of total remuneration in the early 1990s. In addition, an empirical study was conducted to collect data on forms of total remunerations and innovative compensation and rewards systems currently used by Indian organizations. The sample for the current study comprises five private corporate sectors and two public sector undertakings. Table 7.3 provides a summary of this study about the forms of total remuneration in private as well public sectors. A closer look at data in Table 7.3 suggests that the ‘basic pay’ component of the total remuneration varies between 40 and 55 per cent. Benefits, including allowances for car and house, vary between 30 per cent to 59 per cent. PCSs are more likely to use allowance than PSUs. As noted by the Fifth Central Pay Commission Report, ‘Salaries are deliberately structured in the private sector so that an employee is able to save on income tax. A significant component of the pay packet in the private sector is that of cash allowances, which are given to them on “reimbursement” basis in order to avoid payment of income tax. Some of these could also be termed as malpractices’ (p. 343). In addition to structuring of pay systems according to income tax laws, Table 7.3 provides several interesting insights about the emerging trends in compensation and rewards systems. First, even though PSUs’ pay systems include a larger fixed component (i.e., basic pay), both PCSs and PSUs are moving towards a greater use of variable pay. Second, PCSs offer a larger percentage of total remuneration in the form of cash. This change apparently reflects recent changes in income tax laws. Finally, PSUs offer larger benefits than PCSs,

134

Nature of Employment Relationships Contract Balanced Quasi-spot

Primary Attributes of Contract

l l l

Mutual Investment

l l l l

Unbalanced Underinvestment

l l l

Overinvestment

l l l l

Indian Organization Likely to Use

Short-term oriented Mainly economic returns Trust or obligations not critical Long-term oriented Both economic and relational returns Trust and loyalty are critical Employees growth and human capital important

Competitive manufacturing settings (PCS) Knowledge-driven PCS/MNE or Professional managed FPC

May involve economic or relational returns Employers underinvest in employees Used in situation with high power over employees May involve economic or relational returns Employers overinvest in employees Social altruism a part of contract Often observed among government agencies

SSIs PSU

Notes: PSS—Private corporate sectors; MNE—Multi-national enterprises; FPC—Family-owned private corporations; SSI —Small sector industries; PSU—Public-sector undertakings.

TRANSFORMATIVE ORGANIZATIONS

Table 7.2: Employment Relationships and Indian Organizations

INNOVATIVE COMPENSATION PRACTICES FOR ORGANIZATIONS IN INDIA

135

Table 7.3: The Changing Nature of Total Remuneration in the Last Decade (Study 2 on Indian Compensation Practices) For Upper-Level Executives

Early 1990s b Year 2000

a

Total Remuneration Components Basic

HRA

Total Total Retirement Variable Benefits Benefits Pay

Private Corporate Sector (excluding MNEs) 39.7 45.4

26.5 16.4

9.7 15.5

25.2 16.4

b

6.1 6.2

Public Sector Undertakings (PSUs) Early 1990s Year 2000

56.8 55.8

6.0 6.5

3.0 3.5

25.2 25.3

9.0 9.0

a

Adapted from Sethi, Balaji, and Shrimali (1995). Based on the results of current study.

b

Notes: 1. HRA = House Rent Allowance. 2. For PSUs, the Basic component includes Dearness Allowance (DA) and City Compensatory Allowance (CCA). 3. Total Variable Pay may include pay based on individual performance, team performance, and organizational performance. 4. Total Benefits include such allowances as house/car loans, conveyance allowance, medical, education allowance, newspaper/magazine allowance, telephone allowances, uniform allowance etc. 5. Italic numbers indicated a significant change in compensation practice in the last decade.

suggesting that job-security is more important for PSUs. In fact, some scholars claim that many Indian corporations are mainly concerned with social justice, i.e., to minimize economic inequalities, provide life-long employment and offer employment to all citizens (Rohwer, 1995; Sinha, 1994). Until 1991, through the Industry Policy Resolutions, the Indian government considered social objectives more important than economic objectives. The government policies and regulations sought to minimize managerial discretion about human resource management practices of PSUs. These government policies and goals may have resulted in PSUs offering unbalanced (i.e., overinvestment) employment relationships contracts and making PSUs’ HR practices economically ineffective (Sinha, 1994). During in-depth interviews, HR executives from seven Indian organizations were also asked to indicate if their organizations were currently using any innovative compensation practices. The results of information innovative compensation practices along with survey results of two previous studies (Sethi et al., 1995; Patil, 1997) are compiled in Table 7.4. As can be observed from Table 7.4, many Indian organizations rely on unbalanced employment relationships contracts. Indian organizations providing skills-driven goods and services appear not to use skill-based pay plans. Current

1

l

l

Internal Alignment

External Competitiveness

l

l

l

l

Private Corporate Sector

2

Private Corporate Sector 3 (Transformative/skills-driven)

l

l

l

l

l

Increased use of training & development for core employees Increased use of variable pay Innovative benefits (e.g., foreign assignments)

None Greater focus with matching policy

l

l

l

l

l

l

Increased use of stock options Extensive use of innovative benefits (e.g., gyms, quiz bowls, etc.)

Increased use of consultants for wage/benefits survey and ‘compensation clubs’ Increased use of variable pay

None Use of ‘lead’ policy

Along with job-based pay system, also focus on firm-specific skills Wage/benefits survey Match or lead policy l

l

l

Along with job-based pay system, also focus on firm-specific skills Wage/benefits survey Match or lead policy

l

l

Hybrid policy (Contd.)

Use of skill-based pay

Proposed/Expected Innovations to Transform CRS to Create Superior Employment Relationships

Modest increase in variable pay

None Greater focus with matching policy

Innovative Compensation and Rewards Systems (CRS) Trends Gaining Acceptance

Public Sector Undertakings

Employee Contributions

Internal Alignment External Competitiveness

Compensation Strategic Choice

Table 7.4: Innovative Trends in Compensation Practices in India (Study 2)

136 TRANSFORMATIVE ORGANIZATIONS

Table 7.4: (Contd.)

Employee Contributions

1

Public Sector Undertakings l

l

Administration

l

Private Corporate Sector

More focus on performance and accountability Increase in the variable pay component

l

l

Openness

l

2

Extensive use of innovative bonus & benefits (e.g., gyms, quiz-bowls) Increased use of stock options Open, decentralized system

Private Corporate Sector 3 (Transformative/skills-driven) l

l

l

Increased use of team-based bonuses & innovative benefits Pay policies embedded with other HR & organizational processes Open, decentralized system

Intended Impact on Employment Relationships Contract Type

l

l

1

Unbalanced (overinvestment) to balanced Toward mutual investment contract

l

l

Unbalanced (overinvestment/ underinvestment) to balanced Toward mutual investment contract

Notes: Adapted from Sethi, Balaji, and Shrimali (1995). 2 Based on the results of current study. 3 Adapted from Patil (1997), current study, and Infosys website.

l

Use mutual investment contracts

INNOVATIVE COMPENSATION PRACTICES FOR ORGANIZATIONS IN INDIA

Compensation Strategic Choice

137

138

TRANSFORMATIVE ORGANIZATIONS

literature suggests that even organizations competing in traditional industries would benefit by building firm-specific human capital (Bloom and Milkovich, 1999; Heneman et al., 2000). Thus, one innovative practice that Indian organizations, particularly those competing in knowledge-intensive sectors, should consider is skill-based pay. Table 7.4 lists several additional innovative compensation practices that different types of Indian organizations should consider in order to create superior employment relationships. For example, with regard to external competitiveness policy, it is proposed that organizations adopt a hybrid pay policy to accommodate differential strategic goals for critical and non-critical human resources. Moreover, there should be increased focus on getting reliable information about effects of external labor market. The proposed innovative compensation practices with regard to ‘employee contributions’ policy include increased use of variable pay, creative use of bonuses in conjunction with skill-based pay plans, and development of firm-specific skills. Finally, Indian organizations should consider making compensation and rewards systems more open and decentralized. The adoption of the proposed innovative compensation practices is predicated to help build dynamic capabilities and superior mutually interdependent employment relationships.

National Culture and Innovative Compensation Practices Scholars assert that compensation and rewards systems should also be aligned with local context (Hofstede, 1984). National culture is an important contextual factor that can influence adoption of innovative compensation and rewards systems. Recent work by GLOBE (Gupta et al., 2002) points to the value of paying attention to the local culture. Table 7.5 provides comparative information on cultural profiles for three countries: the US, Japan, and India. The cultural profile offers two sets of cultural values. The first set is based on ‘as is’ descriptor and implies current cultural practices. The second set is based on ‘should be’ descriptor and implies cultural values (see Gupta et al., 2002, for details on definitions of cultural dimensions). A closer look at the cultural practices suggests that the Indian cultural profile is similar to the Japanese cultural profile. India, like Japan, is a hierarchical, collectivist, and masculine society. However, it also resembles the US in terms of uncertainty orientation. How should compensation and rewards systems be aligned with Indian culture? Like Japan, Indian organizations have frequently used seniority-based promotions and rewards. The use of seniority system implies that Indian organizations value person-based attributes. In fact, most Indians believe that age is associated with wisdom. Unfortunately, unlike Japanese organizations, Indian organizations do not assess enhancement of skills alleged to be associated with seniority. Indian organizations should evaluate the Japanese compensation and rewards systems to help change their seniority-based promotions and rewards to skills-based

INNOVATIVE COMPENSATION PRACTICES FOR ORGANIZATIONS IN INDIA

139

Table 7.5: Country Means for GLOBE Societal Cultural Dimensions US

Japan

India

4.15 4.15 4.88 4.20 4.17 4.49 4.25 3.34 4.55

4.07 4.29 5.11 5.19 4.30 4.22 4.63 3.19 3.59

4.15 4.19 5.47 4.38 4.57 4.25 5.92 2.90 3.73

4.00 5.31 2.85 4.17 5.53 6.14 5.77 5.06 4.32

4.33 5.25 2.86 3.99 5.41 5.17 5.26 4.33 5.56

4.73 5.60 2.64 4.71 5.28 6.05 5.32 4.51 4.76

Practice (‘as is’) Uncertainty Avoidance Future Orientation Power Distance Institutional Collectivism Humane Orientation Performance Orientation Family & Group Collectivism Gender Egalitarianism Assertiveness Values (‘should be’) Uncertainty Avoidance Future Orientation Power Distance Institutional Collectivism Humane Orientation Performance Orientation Family and Group Collectivism Gender Egalitarianism Assertiveness

Source: Gupta et al. (2002) and V. Gupta (Personal Communication, January 17, 2002).

promotions and rewards (Milkovich and Newman, 2002). Another similarity between India and Japan is with regard to collectivism. Since skill-based pay plans are often embedded in a team culture, this aspect of Indian culture should favor its use. Finally, since the Indian cultural profile is similar to the US cultural profile in uncertainty-orientation, Indian organizations should continue to focus on the use of variable pay. One note of caution is in order here. While it is useful to align compensation and rewards systems with the national cultural profile, the emerging evidence suggests that organizational and institutional factors play a far more dominant role in the design and delivery of compensation and rewards systems than the national culture does (Bloom, Milkovich, and Mitra, 2000).

Discussion and Conclusions Compensation practices in India are evolving to become more strategic. Many Indian organizations are experimenting with innovative compensation practices. Indian organizations have enhanced their focus on performance and accountability. Total remuneration in these organizations now includes a larger component of variable pay. In several interviews, managers indicated a desire to creatively use benefits. Often the underlying principles reflected a desire to be

140

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flexible, open-minded, employee-oriented. These managers wished to build personal assets for their employees. Current evidence also suggests that many well-known global Indian companies, particularly in information technology (IT) industry, now employ broad-based stock options. During one interview, a high-ranking executive indicated that even though his firm did not have a publicly traded stock, his company would tie yearly bonuses to a publicly traded broadindex for IT industry. These innovative approaches attest to the strategic orientation of Indian organizations to transform resources and develop quality human capital. However, current evidence points to a lack of attention toward the use of skill-based pay plans. Many scholars have recently touted the value of rewarding excellence and using skill-based pay plans (Heneman et al., 2000; Lawler, 2000). These scholars emphasize that skill-based pay plans are particularly suitable for transformative organizations competing in knowledge-based service sectors. Indian organizations, therefore, should take a closer look at the use of skill-based pay plans. Finally, based on the information on cultural profiles of India and Japan, it is expected that skill-based pay plans should be congruent with Indian culture. In conclusion, compensation and rewards systems have always played a crucial role in helping an organization achieve its strategic objectives. The global economic milieu is undergoing a metamorphosis. The current global economic circumstances have forced organizations to continuously transform their strategic assets. Innovative compensation and rewards systems, such as skill-based-pay plans, should play a more critical role in helping modern organizations to successfully transform their strategic assets.

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INTERNATIONALIZATION OF SMALL SCALE ENTERPRISE NETWORKS

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Internationalization of Small Scale Enterprise Networks

A Study of Exporters from Aligarh David Watkins

l

Nitin Jain

‘International business matters. It matters not only to the planning departments of large multinational companies, or to the government trying to attract the investment of such companies to create jobs for their people. It matters also to the managers of small-sized firms, and to corner shops, trying to retain the business of their local customers. Whether they know it or not, they are competing in an international marketplace for goods and services. Every initiative taken by an international firm has an impact in a local market and on the market share of local firms and their ability to satisfy their customers.’ Segal-Horn, 1994 There are various reasons why an organization decides on a strategy of internationalization. A major incentive to lead companies into international trade is the comparative economic advantage. Other reasons include the importance of developing the capability to compete with enterprises from other countries in the home market, and reduction in production costs through the pursuit of economies of scale. International growth also provides additional sales opportunities for firms constrained by the small size of their national markets. Most research on internationalization focuses on larger firms. It also deals mainly with firms located in the more advanced economies and/or industries. Small-size enterprises are also increasingly active in international markets, thus contributing to economic growth and prosperity. However, much less is known about the international activities of these companies as they have not received the same kind of academic attention as large firms, despite the fact that they produce, for example, about 35 per cent of Asia’s direct exports (OECD, 1997). Changes in communication, technology and the organization of production have all favored this process and mean that more small firms can compete internationally. Small firms use many different strategies to achieve internationalization such as exporting directly or indirectly; using an agent to deal directly with the

146

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end customer or an intermediate buyer; licensing a foreign distributor, or using a mixture of these approaches.

Research Context The primary objective of this chapter is to highlight the process of change during internationalization, using the ‘stages’ models of internationalization in the context of small firms from Aligarh. In addition, the relevance of the network perspective is highlighted to develop a holistic understanding of key managerial processes during change initiatives associated with globalization in the emerging markets.

SMALL SCALE INDUSTRY IN INDIA There is no universally accepted definition of small firms (Hertz, 1982); some countries classify small firms according to their number of employees, and others on the turnover of the company. Thus, according to the Indian government’s industrial size classification: ‘An industrial undertaking in which the investment in fixed assets i.e. plants and machinery, whether held on ownership terms or lease or on hire purchase does not exceed Rs 3 crores (UK£420K) is called Small Scale Industry’ (Confederation of Indian Industry, 2000). This official Indian definition of SSI has been adopted throughout this chapter. The Indian small business sector consists of over 3.1 million units, approximately 25 per cent of which belong to the small scale industry sector; the rest are micro firms making up the so-called tiny sector (units having investment in plant and machinery up to Rs 2.5 million are known as ‘tiny units’). Small units produce about 55 per cent of the almost 7500 different classes of goods produced by the small-scale industry; the rest is made by the tiny units. Most of these goods are consumer items but capital and intermediate goods are also included. The SSI sector’s contribution to total output can be judged by the fact that the sector accounts for 95 per cent of the country’s industrial units, 40 per cent of its industrial output, 80 per cent of industrial employment, 35 per cent of the value-added by the manufacturing sector and 35 per cent of total exports (Confederation of Indian Industry, 2000). Within the sub-continental context, the SSIs not only provide gross employment opportunities, but also contribute to the establishment of a broad and dispersed industrial base, leading to a more equitable distribution of national income and wealth. Thus, SSIs have an important role in India’s industrial and economic development which the aggregate figures underestimate. The number of small-scale units stood at 2.08 million in 1991–1992, rising to 3.14 million in 1997–1998. The output of small-scale units increased at the rate of 12–15 per cent per annum over the period 1991–1998 (Misra and Puri, 1999).

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Recognizing the importance of small-scale industry, the government initiated steps for the development of small firms. In order to stimulate exports, the Union minister of industrial development and internal trade set up a special export cell which was asked to identify the export-worthiness of units in the small firm sector; locate foreign buyers; disseminate export information to small scale industrialists; provide export promotion consultancy; assist small firms in the procurement of raw materials, machinery and finance; and, help small firms in preparing marketing literature. Moreover, in the Ninth Five-Year Plan (covering 1997–2002), the Indian government proposed a number of initiatives to counteract the perceived inadequate availability of credit to SSIs that included strengthening the financial and management bases of the State Financial Corporations and Small Industries Development Corporations (Misra and Puri, 1999).

FAMILY AND FAMILY BUSINESS IN INDIA Although the definitional problems of characterizing ‘family business’ (Sharma, Chrisman and Chua, 1996) exceeds even that of defining what constitutes a ‘small firm’ (Watkins, 1998), it is particularly important to recognize the importance of ownership issues in the Indian context since group and family needs are highly important within that culture. The entrepreneurial skills needed for small business success may be more readily absorbed or inherited within the context of family rather than individual achievement (Robinson and Hogan, 1994).

Change Process of Internationalization Donckels and Aerts (1998) have given several reasons for the growing interest in the role of small firms in the internationalization process which they classified as macroeconomic and microeconomic. Macroeconomic issues are chiefly concerned with creating employment and improving regional competitiveness. Here the principal interest is in the perceptions and behavior of firms, where Donckels and Aerts mention several advantages: l

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Companies may become more competitive through cheaper sourcing or subcontracting across national boundaries Companies will be able to prepare for threats and take advantage of opportunities if they have an effective international environment scanning process Companies may be able to find overseas markets which offer higher profit margins Companies may be able to achieve economies of scale through market development It may be possible to extend the product life-cycle through overseas market development Companies may be able to establish strategic alliances to maintain the critical mass required for research and development

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Thus, it is apparent that both small firms themselves and policy makers have a significant interest in internationalization issues. Unfortunately, there is no consensus on the nature of the process which firms should—or do—go through to achieve these ends.

Perceptions of the Internationalization Process The study of internationalization suffers from a lack of agreement on definitions and consequent difficulties in comparing studies made at different times and in different places. One favored definition is that of Beamish (1990, p. 77) who defines internationalization as: ‘…The process by which firms both increase their awareness of the direct and indirect influence of international transactions on their future, and establish and conduct transactions with other countries.’ Coviello and McAuley (1999) argue that Beamish’s definition is perhaps most helpful in that it is holistic, recognizing as it does that internationalization has both a behavioral and an economic component; it integrates the internal learning of the organization with its pattern of investment in a definition which is process-based. Internationalization is dynamic and evolutionary, and is not restricted only to outward patterns of investment; it thus allows the firm to be involved with inward internationalization activities such as importing or countertrade. Further, it implies that relationships might influence the firm’s growth and expansion to other countries, which are established through extant international transactions. Although in practice the internationalization process in the firms discussed below proved to be quite simple, it was this definitional framework which informed the construction of the study (Punnett and Risk, 1997).

CONCEPTUALISING THE INTERNATIONALIZATION PROCESS Coviello and McAuley (1999) identify three classes of internationalization theories: Foreign Direct Investment (FDI) Theory, Establishment Chain (Stages) Models, and Network Perspectives. In this chapter, we investigate the letter two models in the Indian context. A number of stage models have been developed, but perhaps the most influential one is the one by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977). This is often referred to as the Uppsala model which suggests that internationalization activities occur incrementally and are influenced by increased market knowledge and commitment. The Uppsala model identifies four stages of internationalization: no regular export activities; export via independent agent; sales subsidiary; and, production/manufacturing. Together these constitute what is termed the ‘establishment chain’. The Swedish group argue that firms follow these stages when they go into international markets.

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Note, however, their basic assumption that the firm first develops in the domestic market and that internationalization is the consequence of a series of subsequent incremental decisions. Stage models imply that international expansion is influenced strongly by managerial learning. One of the most commonly cited theories suggests that internationalization begins with low-risk, indirect exporting to ‘psychically close’ or similar markets (Johanson and Vahlne, 1977). Models like the Uppsala one predict two patterns in the internationalization of the firm. The first is the existence of a clear establishment chain with no regular export activities performed in the market at the start, giving practically no overseas market experience. Export then takes place via independent representatives. This improves the firm’s knowledge of foreign markets and develops information channels which then receive fairly regular (but possibly superficial) information about market conditions. Later, establishment of sales subsidiaries and finally manufacturing operations lead the firm towards a more differentiated and wider market experience. The second pattern is that firms tend to enter new markets with successively greater psychic distance. Psychic distance (Vahlne and Weidersheim-Paul, 1973) is defined in terms of factors such as differences in language, culture and political systems, which disturb the flow of information between the firm and the market. Therefore, the firm starts exporting to neighboring countries or countries that are comparatively well known and are perceived to adopt similar business practices. However, Nordstrom (1990) argues that the world has become much more homogeneous; consequently, psychic distance has decreased between firms in otherwise discrete markets. Firms are willing and able to enter directly into larger markets because of environmental changes such as improved information supply and more efficient means of transmitting information about these less fragmented markets. Therefore, the explanatory value of psychic distance would decline over time. While other writers conceptualize internationalization differently, they still view it as an orderly and progressive sequence. Wind, Douglas and Perlmutter (1973), for example, consider it as a process in which specific attitudes or ‘orientations’ are associated with successive stages in the evolution of international operations. They identify four attitudes: l

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Ethnocentrism: This is the predisposition in which all strategic decisions are guided by the conditions of the domestic market. Orders from abroad are neglected or treated as domestic. Products are not adapted. Polycentrism: This is the predisposition in which strategic decisions are tailored to meet the various market conditions in every country in which the firm competes. Products and marketing policy are adapted to every country to which the firm is exporting. Regiocentrism and Geocentrism: This is the predisposition in which strategic decisions are based on market conditions, which several countries (a region) or global segments have in common. Products are standardized as much as possible. (In this study, these two are taken together as a global orientation.)

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Other behavioral models also argue that internationalization is incremental, with various stages reflecting changes in the attitudinal and behavioral commitment of managers and the firm’s resultant international orientation. For example, the widely cited model of Bilkey and Tesar (1977) proposes six stages: (a) Management is not interested in exporting. (b) Management is willing to fulfill unsolicited orders. (c) Management explores the feasibility of active exporting. (d) Experimental exporting begins to psychologically close countries. (e) The firm is an experienced exporter to these markets. (f ) The firm looks to export to psychologically distant countries. Bilkey and Tesar (1977) primarily consider internationalization from the perspective of increased export dependence in a growing number of markets, while Johanson and Vahlne (1977) focus on the organizational forms that are associated with such dependence. The stress on organizational forms that are associated with growing export involvement is a distinct feature of the Uppsala School’s position on internationalization. Johanson and Vahlne (1977) emphasize the gain in market knowledge and experience with increased export activities. For example, sales subsidiaries are considered to give firms more controlled channels through which they can direct the type and amount of information flowing from and to the market. In this stage, it is argued, firms have market knowledge and experience and these experiences will govern the decision to establish direct production facilities, the final stage of foreign involvement. These models, and others such as the one developed by Reid (1981), argue that the perceptions and beliefs of managers are formed and influenced by the incremental involvement of their firm in foreign markets. This involvement results in a pattern of evolution from the stage where managers have little or no interest in international markets, to trial initiatives in, and evaluation of, psychically close markets, and finally an increasing commitment to international growth. Although these internationalization stage theories have gained considerable support empirically, they have also attracted significant criticism. While summarizing the evidence, Bell and Young (1995) suggest that the five basic beliefs of most stage theories as indicated below may all be challenged: l l l

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Firms develop in their domestic markets before initiating exports. There is some initial resistance to becoming involved in export activities. Firms begin by exporting to psychically ‘close’ countries and thereafter move to more distant markets. There is a logical linear sequence whereby firms begin by exporting before considering alternative market entry methods. The entire process is unidirectional and, to some extent, inevitable once the first tentative steps have been taken.

With regard to firm size, however, the general patterns in the extant literature suggest that primary interest has been focused on large firm activities. This is supported by Coviello and McAuley’s (1999) review of research on the

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internationalization of small firms. For example, during the 10-year period ending in mid-1998, they identify only 16 journal articles specific to the process of small firm internationalization. Moreover, only one of these studies focuses on small firm internationalization in developing countries (Zafarullah, Ali and Young, 1998). In the case of firms from emerging economies exporting to developed nations, there are other aspects of internationalization which may be considered. A relative lack of marketing expertise and absence of a marketing orientation among many developing country firms may lead to a high level of dependence on agents and distributors abroad. This may act as a barrier in moving to the sales subsidiary mode of market development in a foreign market (Zafarullah, Ali and Young, 1998); the stages model thus ‘stalls’ at a critical transitional stage.

ROLE OF THE NETWORKS A network perspective on internationalization embraces theories of social exchange and resource dependency by focusing on both firm behavior and interpersonal relationships. This view argues that organizational boundaries incorporate both formal and informal relationships. Such relationships can involve customers, suppliers, competitors, private and public support agencies, family, friends and so on. Network perspectives offer an alternative conceptual view of internationalization as they take into account the role and influence of social relationships in business transactions. Elements of network theory may be particularly appropriate for smaller firms which have less exposure to international markets since this can overcome inexperience and lack of resources by establishing long-term relationships through which firms can gain access to, and mobilize, external resources. Networks become the favored way of doing business because they redirect the flows of information and decisions. Holmlund and Kock (1998) suggest four factors influence a small firm’s internationalization: the firm’s resources, the business network, the social network and the operational mode. These are shown schematically in Figure 8.1 and discussed briefly below.

BUSINESS NETWORKS In a world of increasing global competition and dynamic changes, the presence of a business network is essential as it is from the present relations that a small firm gains many of the needed resources. Coviello and Munro (1995) claim that foreign market entry selection and entry initiatives of small firms are impacted by formal relationships, which facilitate and influence international growth patterns. Many small firms may be forced to make an international foray if they want to defend or maintain their position in particular business networks, or if other firms in the same business network establish relationships with counterparts abroad. Many service firms are forced to follow if their major customers enter a foreign business network such as insurance, accounting and advertising companies. On the other hand, the fact that customers become international or

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Fig. 8.1: Generalized Internationalizing Network Interactions develop connections in a particular country can also be a means of getting access to international markets. Many small firms are often dependent on co-operation with other businesses in order to get external resources, access to customers, product ideas and information (Malecki and Veldhoen, 1993). Business alliances can thus be an effective means of penetrating foreign markets. Companies often co-operate with other firms in order to save costs, to be able to offer a broader range of products, to attract new customers, and to pool resources. However, such cooperation has its drawbacks as well, such as different corporate culture and goals, slow decision-making, lack of trust and difficulties in achieving results. The companies mainly co-operate in marketing, purchasing and information sharing, provided they have a person in charge of the joint international activities or have formed a joint venture (Homlund and Kock, 1998). However, for small and medium enterprises (SMEs), the organizational overhead may be too much for a small management team to bear.

S OCIAL N ETWORKS Social networks are a further aspect of networking comprising both personal networks which the small firm owner has with specific individuals and wider embeddedness of the business within a shared community center. This is one of the key issues when establishing a relationship in an international context. Holmlund and Kock (1995) suggest that social networks emerge over time when

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individuals carry out business exchange thereby creating a ‘capital of trust’. For example, knowledge is accumulated and relationships are established when a company operates in a foreign market and interacts not only with the potential and actual customers but also with authorities and suppliers. Social bonds are vital for small firms, to access the necessary business information regarding upcoming projects, potential purchases, and market dynamics. Social bonds also have an impact on the entry mode because sometimes it is impossible for foreign individuals to enter a network without suitable social contacts in target markets. In the context of social networks, it is worth mentioning that Indian values reflect a well-developed sense of social interaction and responsibility. In many Indian firms, employees are closely related to each other, which helps the organization to develop a strong social network; amongst Indians, commitments to family, friends, and community are recognized as vitally important (Robinson and Hogan, 1994). Since social networks represent a competitive advantage to internationalizing SMEs, Indian firms should, like Chinese ones, have an edge over firms located in less community-oriented countries.

O PERATIONAL M ODE From the network perspective, the choice of entry mode is essential when entering a new market since the chosen mode will have an impact on the position, and the degree of centrality of that position, in foreign networks. Holmund and Kock (1998) argue that: ‘Centrality affects how the focal actor through his position in the business network gets access to vital information and how difficult it is to become included or excluded from the network’. The actors are tied to each other through different bonds: technical, social, cognitive, administrative, legal, and economic. Still, actors must defend and strengthen their position vis à vis new actors by developing bonds and making adaptations in the relationships to counterparts (Johanson and Vahlne 1990; Holmlund and Kock, 1998). Small firms often lack resources and are quite reluctant to take on larger risks. The two important operational modes they use to go abroad are their own agents and salesmen. Foreign agents are beneficial in that they are already embedded in a business network and have already converted this into a commercial relationship. By using agents, small firms can compensate for the lack of resources and capital as well as minimize risk. Although agents may be the best solution in an export market, they exhibit major drawbacks too—such as reducing the direct contact which the supplier has with the customer or enduser. Therefore, using an agent is a relatively passive and potentially self-limiting way of starting to export. The other operational modes are joint exporting (piggybacking) and using a sales company abroad. The benefits and drawbacks are, however, similar to those of using an agent. Other modes of entry demand more resources and a deeper commitment. They also require new relationships to be established in the foreign business network.

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R ESOURCES It has always been recognized that one of the major constraints that small firms face in going international is lack of internal resources. Resources are both tangible and intangible, e.g., personnel resources, software resources, hardware resources, organizational resources and capital resources. Networking can play a crucial role in securing access to vital resources, especially if these are in short supply.

RESEARCH METHOD There are 350 main clusters of small firms in India. Three of these specialize in the brass builders hardware sector. This has been chosen because India has a long history in brassware manufacture, exports are robust, concentration of units make survey work relatively easy, and personal knowledge and contacts are likely to increase response rates to requests for research data. Aligarh, the town in which contacts were best developed, was chosen for the study. There are 75 firms in the sector in Aligarh’s industrial district. A total of 26 responses was obtained, all of which were useable, giving a response rate of 34.5 per cent. Data were collected via self-administered questionnaires, locally distributed and collected, with the data then forwarded to the United Kingdom for analysis. The questionnaire was distributed in English, which is the language of Indian business and higher education although not the first language of the region.

RESEARCH FINDINGS BACKGROUND

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All the respondents were manufacturing businesses. The mean age of firms was 19 years, with 40 per cent of the firms over 20 years old. The oldest firm was founded in 1957 and the youngest in 1996. All except seven firms were family owned and managed. Five were sole proprietorships and two were non-family partnerships. All the surveyed firms have a total capital value of plant and machinery of less than Rs 30 million (~ $ 650,000), which categorizes them as ‘small’ within the Indian government classification. Employment distribution within the sample is shown in Figure 8.2. Of these 26 internationally active firms, 21 (80 per cent) did not enter the domestic market prior to going international, whereas only five firms, which were generally the older ones, established themselves first in the domestic market.

E XPORT INITIATION, DECISION-MAKING, C OUNTRY/MARKET CHOICE AND MODES OF ENTRY The underlying driver for the majority (16 firms; 61 per cent) of these small firms to go international was personal contacts established through family, friends, and close relatives. Four firms (16 per cent) initiated international activity through contacts made at trade fairs and the rest first went international by other means such as using consultants and trade associations.

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Fig. 8.2: Breakdown of Sample Firms by Employment Size (N=26) The majority of respondents have their export destinations in the UK and Europe, with 22 firms (84 per cent) citing UK as their major export destination. Other respondents favored export to other distant countries such as Australia, US, Canada or South America. Therefore, the most important export markets were in those developed countries which can be said to be ‘psychically close’ (Cf. Johanson and Wiedersheim-Paul, 1975). In particular, the UK, given its large Indian population, close ethnic ties and common use of the English language in business is ‘nearer’ to India in terms of psychic distance than other countries which may be geographically much closer. All the sample firms were committed to international business as a route to increasing profits and growth. However, the driving factor determining the choice of market was as much the personal contacts available as the size of the import market for the firm’s products in that country. More generally there was a view that overseas markets offered greater potential (especially developed countries’ markets) and security of sales. The companies were thus all in the category of being positive towards the notion of, and active in their search for, export markets. It is worth noting that only four (established) firms (16 per cent) went into exports in a sequential way, whereas newly established firms (84 per cent) went directly into exporting without going through the first stage of indirect exporting (shown in Figure 8.3). None of the surveyed firms was yet able to move on to any of the ‘higher’ stages of internationalization. Stage models have always had their strong detractors. For example, Turnbull (1987) argues that: ‘The stages model does not give a clear distinction within the internationalization stages and there is confusion in their measurement’. Nevertheless, the seeming irrelevance of the concept to an analysis of this group of

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prosperous Indian firms is still something of a surprise. The ‘jump straight in’ approach may be surprising, but the absence of any ‘stages’ at a higher level is less so.

Fig. 8.3: Theoretical versus Actual Approach of Internationalizing Indian SSIs Creating a sales subsidiary or production/manufacturing facility in a foreign market is a problem for all SMEs, not just those from developing countries. The main reasons for this are the internal constraints on small firms—such as lack of knowledge, finance, new technology, lack of expertise, and their reluctance to put money into risky projects. Boter and Holmquist (1998) similarly concluded that: ‘…Research into internationalization in small firms must study the environment in which the companies are operating. A further conclusion is that the history and the internal situation of the company strongly influence the internationalization process in the small firms.’

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The majority of small firm owners look to foreign markets as a growth opportunity creating more profit for their business. But a critical factor in the ability to carry through their chosen international activities is the possession of appropriate knowledge: this includes knowledge about foreign markets, techniques of foreign operation, ways of doing business, key people in buyers’ organizations, and so on. Much of this is not easily acquired ‘off the shelf’; it is developed through the actual experience of foreign operations. All respondents were asked about the factors they thought were key to the success of their company. The majority of them said family resources and social

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contacts were their major success factors—generally as well as in the specific context of their internationalization process. They stated that they had initiated the internationalization process mainly via personal contacts i.e. social community, friends and relatives. Amongst Indians, commitment to family, friends and community are very important. They emphasize teamwork and harmony, group involvement rather than individualism, and co-operation rather than rivalry. This attitudinal set helps small enterprises to enter into business networks or act as gatekeepers for others to obtain orders and make sales. Once in the network they can build new relationships with other business firms, people and organizations, which supports the achievement of their goal of growth and survival in existing markets. The research results fail to support fully the argument that firms move through a series of stages, at least in terms of entry mode and the assumption of the stages models that firms (should) first establish themselves in their domestic market before going into foreign ones. However, the research shows mixed results concerning stages of internationalization. Firms that were established from the late 1950s to the late 1970s consolidated in the domestic market prior to internationalizing and thus went through the predicted first and second stages of the model. However, those (84 per cent) firms which were established in the 1980s and 1990s jumped into direct exporting without going through the prior stage of indirect exporting. Therefore, the stages model appears to explain neither the factors influencing internationalization nor market selection. The dominant force in internationalization stems from opportunities and demands initiated through the firm’s network of relationships; and, regardless of whether the firm is active or reactive in international markets, network relationships influence the initial and subsequent decision to internationalize, as well as market selection.

Conclusions The objective of this chapter was to highlight the process of change during the internationalization process using the case of small enterprises from Aligarh, considering in particular internationalization stages theory and its assumptions. The evidence is as follows: l

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Firms first establish themselves solidly in their domestic market before they go into foreign markets (Johanson and Vahlne, 1977): There was very little support for this view, and that support which existed is based on the experiences of older firms. Only those few firms which were established from the late 1950s to the late 1970s first established themselves firmly in their domestic markets before they went abroad. New firms went directly into foreign markets, without having any domestic market experience. Firms begin by exporting to ‘psychically close’ countries: The definition of ‘psychic distance’ is in need of refinement. What was quite evident from the research findings was that most of the sample firms export to developed countries. This is due to the fact that these countries have bigger potential markets and provide greater sales security. A large expatriate Indian population,

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close ethnic ties, and common use of English language in business were also determining factors. It is not the country per se that is ‘physically close’, but a very specific, defined group within it. Internationalization is a logical, linear and sequential process. No support was found for this proposition. The research shows directly contrary results. Only a few firms went about internationalizing in a sequential way; most jumped directly to the second stage. Moreover, none of the surveyed firms had so far been able to reach the final stage of the stages model. It is doubtful, whether any of these companies should be advised to move beyond the export stage because their internationalization process and expansion are highly situation-specific. Thus, there is support for Reid’s (1983) view that: ‘…there will exist significant inter- and intra-firm variations in the way exports are handled and these variations have their genesis in firm and market specific factors’.

An alternative conceptualization of internationalization may be derived from the network perspective. In small firms, networks are domestically very influential and play a crucial role in their international business. Most of the surveyed firms were family-based. Swinth and Vinton (1993) suggest that family firms transcend cultures through shared values such as trust, loyalty, and longterm business focus. These shared values would enable family firms to bridge the cultural barrier more effectively than publicly held companies. It has been seen from the findings reported above that the driving force to go international was personal contacts and family resources; many of the resources needed by the internationalizing small firms were gained through relationships with other individuals in their present business network. Moreover, market selection was also driven by an opportunity that emerges out of a network relationship. In this respect the findings support the views of Sharma and Johanson (1987), Johanson and Mattsson (1988), and Johanson and Vahlne (1992). This has been a rare attempt to address the issue of internationalization in the context of a developing country. Strong doubts must exist about the appropriateness of the dominant ‘stages’ theory in this context, although there are reservations about the appropriateness of these models to SME internationalization generally, so these greater reservations may be only matters of degree rather than of kind. Network perspectives seem to hold greater promise for understanding the process, and thereby assisting firms to internationalize successfully. Internationalization is accepted to be a dynamic and transformative process. It would, therefore, appear sensible to approach research in the area in a similar way. Thus, by integrating multiple methods of data collection and analysis, the pool of knowledge would continue to expand across sectors and cultures over time. Making better use of the extant literature in an integrative manner, which would allow further knowledge development in the area of small firms’ internationalization to be appropriately grounded, would be beneficial to both future researchers and practitioners.

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References Beamish, P.W. (1990). ‘The Internationalization Process for Smaller Ontario Firms: A Research Agenda’. In A.M. Rugman (ed.), Research in Global Strategic Management—International Business Research for the 21st Century, Greenwich: JAI Press Inc., pp. 77–92. Bell, I. & S. Young (1995). The Internationalization of the Firm: A View for the New Millennium, Paper presented at the annual meeting of the UK Academy of International Business, Aston University, pp. 29–30. Bilkey, W.J. & G. Tesar (1977). ‘The Export Behaviour of Smaller-sized Wisconsin Manufacturing Firms’. Journal of International Business Studies, Vol. 8, pp. 93–98. Boter, H. & C. Holmquist (1998). ‘Industry Characteristics and Internationalization Process in Small Firms’. In Haahti, A.G. Hall, and R. Donckels (eds.) pp. 19–42 (1998), The Internationalization of SMEs: The Interstratos Project, London: Routledge. Confederation of Indian Industry (2000). Website accessed May 2000. Coviello, N.E. & A. McAuley (1999). ‘Internationalization and the Smaller Firm: A Review of Contemporary Empirical Research’. Management International Review, Vol. 39(3): 223–242. Coviello, T.L. & H.J. Munro (1995). ‘Growing the Entrepreneurial Firm: Networking for International Market Development’. European Journal of Marketing, 29(7): 49–61. Donckels, R. & R. Aerts (1998). Internationalization and Ownership: Family versus Non-family Enterprises, London: Routledge. Hertz, L. (1982). In Search of a Small Business Definition: An Exploration of the Small Business Definitions of the USA, the UK, Israel and the People’s Republic of China. Washington, D.C.: University Press of America. Holmlund, M. & S. Kock (1995). ‘Buyer Perceived Service Quality in Industrial Networks’, Industrial Marketing Management, 24, pp. 109–121. (1998). ‘Relationships and the Internationalization of Finnish Small and Medium-sized Companies’. International Small Business Journal, Vol. 16(4): 46–63. Johanson, J. & L.G. Mattsson (1988). ‘Internationalization in Industrial System— A Network Approach’. In N. Hood and J.E. Vahlne (eds), Strategies in Global Competition, London: Croom Helm, pp. 287–314. Johanson, J. & J.E. Vahlne (1977). ‘The Internationalization Process of the Firm— A Model of Knowledge Development and Increasing Foreign Market Commitments’. Journal of International Business Studies, 8 (1): 23–32. (1990). ‘The Mechanism of Internationalization’. International Marketing Review, Vol. 7(4): 11–24. (1992). ‘Management of Foreign Market Entry’. Scandinavian International Business Review, Vol. 1(3): 9–27. Johanson, J. & F. Wiedersheim-Paul (1975). ‘The Internationalization of the Firm—Four Swedish Cases’. Journal of Management Studies, 12(3): 305–322. Malecki, E.J. & M.E. Veldhoen (1993). ‘Network Activities, Information and Competitiveness in Small Firms’. Geografiska Annaler, 75(3): 31–148.

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Misra, S.K. & V.K. Puri (1999). Indian Economy, Himalaya Publishing House, New Delhi. Nordstrom, K.A. (1990). The Internationalization Process of the Firm in a New Perspective, Stockholm: Institute of International Business. OECD (1997). Globalisation and Small and Medium Enterprises (SMEs), Vol. 1: Synthesis Report, Paris: OECD. Punnett, B.J. & D.A. Risk (1997). International Business, 2nd ed., Oxford: Blackwell. Reid, S.D. (1981). ‘The Decision-Maker and Export Entry and Expansion’. Journal of International Business Studies, 12(2): 101–112. (1983). ‘Firm Internationalization, Transaction Costs and Strategic Choice’. International Marketing Review, 2, 1(2): 45–56. Robinson, S. & S. Hogan (1994). ‘Family business: Ideal vehicle for Indian business success?’. Montana Business Quarterly, 31(4): 1–5. Segal-Horn, S. (ed.) (1994). The Challenge of International Business, The Cranfield Management Research Series. Sharma, D.D. & J. Johanson, J. (1987). ‘Technical Consultancy in Internationalization’. International Marketing Review, 4(1): 20–29. Sharma, P., J.J. Chrisman & J.H. Chua (1996). A Review and Annotated Bibliography of Family Business Studies, Kluwer Academic Publishers. Swinth, R.L. & K.L. Vinton (1993). ‘Do Family Owned Businesses have a Strategic Advantage in International Joint Ventures?’. Family Business Review, 6(1): 19–30. Turnbull, P.W. (1987). ‘A Challenge to the Stage Theory of the Internationalization Process’. In: P.J. Rosson & S.D. Reed (eds), pp. 21–40, Managing Export Entry and Expansion, New York: Praeger. Vahlne, J.E. & F. Wiedersheim-Paul (1973). ‘Economic Distance. Model and Empirical Investigation’. In E. Hornell, J.E. Vahlne and F. WiedersheimPaul, Export and Foreign Establishments, Uppsala: University of Uppsala, pp. 81–159. Watkins, D. (1998). Reflections on the Development of Small Business Research in the United Kingdom. 50th Anniversary Biennial Rencontres de St. Gall, St. Gallen: University of St. Gallen. Welch, L.S. & R. Luostarinen, R. (1988). ‘Internationalization: Evolution of a Concept’. Journal of General Management, 14(2), pp. 34–55. Wind, Y., S.P. Douglas & H.V. Perlmutter (1973). ‘Guidelines for Developing International Marketing Strategies’, Journal of Marketing, Vol. 37, pp. 14–23. Zafarullah, M., M. Ali & S. Young (1998). ‘The Internationalization of the Small Firm in Developing Countries—Exploratory Research from Pakistan’. Journal of Global Marketing, Vol. 11(3), pp. 21–40.

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Transformative Brand and Organizational Communication1 Vipin Gupta

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S. Ramesh Kumar

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J. Rajasekar

How can the firms in the emerging markets compete against the multinational firms with powerful international brands and intellectual properties? The emerging market firms face two kinds of challenges: (a) transforming the communication of the brand externally with the customers, (b) transforming the communication of the organization internally with the workforce. The two goals—developing brand leadership externally and organizational empowerment internally—have conventionally been treated with alternative lenses. However, there are several commonalities in the two challenges. Conventionally, most organizations believe that mega-advertising budgets are essential for succeeding in a global world, and that without such budgets it is difficult for the firms from the emerging markets to survive in the face of liberalization and exposure to competition from the multinational enterprises. Recent research in the marketing discipline indicates the fallacy of this conventional belief (Schmitt, 1999; Joachimsthaler and Aaker, 1997; Kumar, 1998, 2001). Media clutter has increased tremendously with the growth of multinational enterprises in several regions of the world, expansion of television channels and proliferation of print media. Many firms are seeing limited benefits from their ad spending, and are exploring alternative channels. McKinsey’s analyst Renee Dye (2000) underlines the significance of buzz marketing. Buzz marketing uses viral, street, stealth, or guerrilla tactics to spread the word-of-mouth about products. Nearly two thirds of US consumer product sales are influenced by word of mouth, as opposed to conventional media advertising. Increasingly, buzz marketing has ceased to be just a strategy of small entrepreneurs, and has become central to the Fortune 500 corporate strategy. Leading traditional firms such as Ford and General Electric, as well as popular firms such as Nike and Palm, have sought to adopt buzz principles. While a Cricket World Cup or

1 Girish Agarwal and Renu Nagar at IIM Indore provided valuable research assistance. This study was partly funded by IIM Indore, GLOBE Research and Educational Foundation, and US National Science Foundation, as part of the GLOBE study of CEOs and top management teams in India.

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Super Bowl ad requires companies to cuff up several millions of dollars, buzz marketing can turn a niche product into a run-away success with just a few thousand dollars of investments. E-Bay and Hotmail churned mega-bucks with just word-of-mouth advertising during their hey days, and ‘Beanie Babies’ became such a rage in the US that all children wanted them without any backing of media advertising. Similarly, there is a need to transform the communication model for initiating organizational empowerment. Conventionally workforce is identified as just labor, which must follow the dictates of the top managers. Organizational empowerment is hardly more than lip service, since the workforce still has to perform the task delegated by the senior managers, as opposed to the task it decides to perform on its own. On the other hand, when the communication identifies workforce as entrepreneurial leader in its own right, a high level of commitment and innovation is generated (Gupta, Macmillan, and Surie, 2003). In this chapter, we present two related contributions. The first contribution is by Professor Ramesh Kumar S., who highlights how advertising has been used by the multinational enterprises to create a lot of symbolic value. He then presents an alternative approach, with parallels to the buzz marketing perspective, which shows how alternative media can be used for gaining brand leadership if the product also offers some degree of functional value. The second contribution is a joint work of Professor Vipin Gupta and Professor J. Rajasekar, who describe the case of Larsen and Toubro (L&T), India, in which the company transformed its communication to recognize workforce as entrepreneurial leaders. Their study shows that the transformed communication has allowed L&T to effectively compete with the multinational enterprises, even though the latter have stronger financial and technological resources.

Transforming Brand Communication Research in marketing discipline suggests that the transformation of a product into a leading brand is a function of three major factors: (a) level of involvement, (b) dimensions of branding, and (c) level of product concept. According to the involvement theory, most situations can be distinguished as high or low involvement (Loudon and Della-Bitta, 1988). A high involvement situation requires a high level of information search and a detailed evaluation of alternatives. It could involve considerable amount of time, effort and money. Though it usually entails high unit cost products, in some cases consumption or usage situation may also result in high involvement. A consumer may be very involved in personal grooming and this may make his/her shopping for readymade wear a high involvement situation. A low involvement situation, on the other hand, usually carries low unit costs, and entails very little deliberation in terms of consumer decision-making. The purchase process of the highinvolvement situation includes cognition, attitude development and trial. However, in a low-involvement situation, the sequence transforms into cognition,

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trial and attitude development. In high-involvement situations, the consumer is highly reassured when s/he buys or tries the brand; but in a low-involvement situation, the consumer develops an attitude towards a brand after s/he tries out the brand. Attitude development in both low-involvement and high-involvement situations is a function of the dimensions of branding. The branding dimension could be either symbolic or functional. Alternatively, an integration of the symbolism and functional could be attained. Symbolic brands are those which have a social signaling value and are used by the consumers predominantly for their brand value. They have an aura of prestige, address aspirational needs, exude a sense of accomplishment or address several aspects of self-concept—how the consumer would like to view themselves or would like others in a given social setting to view them. They become an extension of the consumers’ personality and turn into lifestyle statements. Imagery reflected through positioning (the process of making a niche in the mind of the consumer) is largely instrumental in accomplishing the symbolic value attached to these brands (Park, Jaworski, and MacInnis, 1986). In such “subjective” product categories, the consumers may buy the brand more out of their symbolic needs and over a period of time may even allow the brand to condition their physiological gratification because of the domination of symbolic appeal and the lack of a standardized functional tangible benefit. Coke, Pepsi and Thums Up are brands which have made use of symbolic imagery to build brands in the cola category of soft drinks. A youth aspiring to ‘grow up’ may stay with Thums Up and the one who believes that staying young is fun may stick with Pepsi (based on the advertising themes of the respective brands). When firms face a situation of this kind : (a) a soft drink is not always consumed for thirst quenching purposes (when there are better alternatives), (b) When consumers (target segment) believe that the personality statement/associations of the brand is a reflection of their inner self, and (c) When peer group pressure gets to reinforce the brand imagery, a firm has very little option but to build a brand personality using the advertising route in an overwhelming manner. This could be illustrated through Figure 9.1.

Fig. 9.1: Gratification Through Brand Imagery

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Functional branding, on the other hand, operate with a strong functional value (Joachimsthaler and Aaker, 1997). Functional brands focus on superior performance or enhancing the utility of the product or ease of use. There could even be state of the art innovations which have an orientation towards functional orientation. Real-time products are those which adapt themselves to the usage patterns of consumers (even without inputs from them) like fuzzy logic washing machines. Mitsubishi and Ford have real-time cars which adapt features such as fuel consumption and seat assembly systems in accordance with the type and nature of the driver. When a brand offers a strong functional benefit, there is a need to trigger trials and develop positive word of mouth. Limited advertising could be done just to create brand awareness. Sponsoring articles about issues connected with the product category and developing a one to one association to enhance the brand benefit may be a good strategy to spread the word of mouth. Pond’s (in the category of cosmetics) in the Indian context encourages prospective consumers to approach the company with their skin care problems and attempts to offer customized solutions. This could trigger off trial purchase and develop into a positive ‘word of mouth’ recommendation (Dye, 2000). Figure 9.2 suggests a different brand building route for a brand in such product categories:

Fig. 9.2: Gratification Through ‘Benefit Experience’ An integration of symbolic and functional benefits in one brand can be quite attractive from a strategic perspective. About 20 years back, Raymond’s in India advertised itself as the ‘guide for the well-dressed male’. Simultaneously the brand showcased its premium range of suiting in its exclusive showrooms

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and emphasized the quality of the fabric. This was done during the ‘awareness’ and ‘differentiator’ phases of advertising. When competition followed the brand and became intensive during the early 1990s, the brand came out with the “relationship” proposition of the brand—the campaign portrayed an executive (chosen to appeal to the target segment) as a ‘down to earth’ person involved with different kinds of relationships within the family. While the emotional campaign is nothing new, the brand had introduced it at a time when it was accepted on functional attributes. Later in the new millennium, the brand has introduced a range of ‘state-of-the art’ fabrics (like ‘all-season fabrics’). The advertising has shifted back to the functional attributes of the offerings and currently the brand is available in about 250 exclusive outlets in India. The first series of campaigns created awareness and built a preference with a functional differentiator; while the campaign in the early 1990s built an emotional association (after being accepted on functional attributes) and the new millennium campaign reinforced the superiority of functional attributes (these strategies have been backed up well with other marketing mix elements as part of the overall brand building). Many brands have become world leaders commanding a premium value, but at the same time are also known for their functional excellence. Mont Blanc pens, Omega watches and Mercedez cars are examples of brands that use the best of components, have a rigorous process to ensure quality, and offer an experiential feeling with regard to their usage. Here symbolic brands apart from being lifestyle brands also incorporate a high level of functional orientation. Similarly, the level of technology could also provide a symbolic motive. Ray Ban glasses, Mazda’s Miata cars and Citizen’s Ecodrive watches may be such examples. The features offered through state of the art technology set off the ‘word of mouth’ and possession of such brands adds an aura of prestige to the consumer. Figure 9.3 reflects the process by which an integration of the functional and symbolic associations could be developed.

Fig. 9.3: Advertising and Overall Brand Building The capability to integrate functional and symbolic benefits in a productline is associated with the level of product concept. The product concept operates at two major levels—core and augmented.

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The core product concept is associated with the basic and primary benefit which a consumer looks for in a product. This is more applicable to the introductory stages of the product when primary demand is just growing for the category itself, as is illustrated by the mass production of Model T by Ford company during the early stages in the history of marketing cars. When the product concept is at the core level, productline proposition usually builds on the functional benefits. Most emerging firm brands are marketed at the core level, as the market for them remains under-developed because of limited funds for commercialization. The augmented level is the level at which the brand differentiation is felt (Levitt, 1980). A number of brands enter the competitive context and each brand brings with it associations of functional or symbolic/emotional benefits or both. Augmentation also takes place at the sub-category level, as several segments of categories emerge. For instance, in India cars can be classified into mini, small, semi-premium and premium depending on features, benefits and prices. Similarly, washing machines can be categorized into semi-automatic, automatic and fuzzy logic driven sub-categories. Augmentation may involve a better feature, a distinguishing symbolic appeal or involve superior internal gratification. As the market matures, some augmented features may lose their symbolic value and could transform into functional standards. For example, the remote control device in a color television was an augmented product concept when the mass television market emerged in India during the early 1980s. Today every color television (even a basic ‘no-frill’ one) has a remote, which has ceased to be an augmented feature. Further, augmentation may sometimes be potential—it may give an idea about the nature of the product in the years to come. The state-ofthe art products like ultranomic washing machine or internet telephony or film less digital cameras may be examples of potential augmentation. Most multinational brands are marketed at the augmented level, because the firms have sufficient funds to introduce productline extensions based on the alternatives available in the local market. Even when the multinational firms market at the core level in their home markets, they find it easy and cost-effective to market at the augmented level in the emerging markets. For example, McDonald’s has been offering primarily hamburgers in its home market, but has introduced or is planning to introduce several ethnic Indian fast food items in India. Large advertising budgets allow firms such as McDonald’s to develop positive attitudes among the consumers, and to encourage mass trials, soon converted into a loyal customer base. A product line comprises several brands each with its own unique offering which could be functional or symbolic and these brands compete at a specific product level (whether it is core or augmented). Figure 9.4 summarizes the challenges and alternatives for the emerging market firms in deciding their productline propositions in the face of competition. As the multinational firms seek to capture a greater share of the customer purse through their symbolism created through advertising, the challenge for the emerging market firms lies in either matching the advertising budgets or showing a renewed commitment to enhancing functional excellence of their

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Fig. 9.4: Product Line Propositions product line. The emerging market firms enjoy a large captive customer base, which has tried their products several times, but which may not have developed a positive, loyal attitude towards their brand in the absence of any explicit symbolic communication. The brands of the emerging market firms may nevertheless enjoy some implicit symbolic benefit, including better awareness of the expectations and behaviors of the consumers. The emerging market firms can transform this implicit symbolic value into a platform for offering augmented benefits. For example, though a number of urban households in India have washing machines, the penetration of the product is still in single digit if the whole country is taken into consideration. Though there are sub-categories ranging from core to augmented (the basic semi-automatic version to fuzzy logic version), around 70 per cent of the market consists of only the basic level (semiautomatic version) which could be just associated with the core level of the product—it cleans the fabric. It took over 10 years for a pioneering brand like (Videocon) to sell the concept of washing machines to consumers. The brand today has a number of versions and operates at the augmentation level. In some cases, the brand may have to retain its original offering because of a huge market potential and create brands (with a different dimension) to cater to the higher end of the market. The Maruti 800 (with a fuel economy functional dimension) has been in the Indian market for over 15 years. The company has also created additional brands with symbolic associations such as Wagon R with a ‘family togetherness’ and Alto with a ‘trendy woman’ association.

Summary Transforming a brand communication perspective suggests that while the emerging market firms lack sufficient capital to fund mega-advertising to create explicit symbolic imagery, they do have an equally, if not more, valuable social and cultural capital in the implicit symbolism of their product line. The implicit symbolism derives from their better awareness and capabilities about consumer behavior, expectations, and needs, and their greater confidence and potential willingness to offer productline propositions that respond to the potential augmented demand from the customers. The subsidiaries of multinational firms, on the other hand, are bound, at least partly, by the norms, policies, and cultures

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of their parent, and so have only limited ‘domain of confidence’ in offering functionally valuable productline propositions. Is there any parallel between the situation in the marketing context and the situation in the organizational context? The answer is yes. In the organizational context, the multinational firms enjoy the benefit of investing heavily into the state-of-the-art technology and research, which allows them to realize a high level of productivity. The challenge for the emerging market firms is to discover an alternative that would allow at par, if not higher, productivity. The emerging market firms enjoy a superior intuition and knowledge about the aspirations and motivations of the local workforce. By transforming their intuition and knowledge into an organizational system where each worker is nurtured to be a leader—a leader who is empowered and inspired to take entrepreneurial initiatives —the emerging market firms can enjoy an accelerated level of learning, productivity, and growth in competitive advantage. A recent study by Gupta, Macmillan, and Surie (2003) suggests that the emerging market firms from the Southern Asia region, which includes India, are quite high in the effectiveness of entrepreneurial leadership. Entrepreneurial leadership is the capability to discover and develop value-adding options through painting of bold scenarios, building a window when the opportunity does not appear to be knocking on the door, and mobilizing the cast of characters to take entrepreneurial initiatives for realizing the mission of the organization (Gupta, Macmillan, and Surie, 2003). Gupta, Macmillan and Surie (2003) find that the managers from the Southern Asian organizations perceive entrepreneurial leadership quite effective for outstanding performance, at a par with the best as benchmarked in Anglo, Germanic and Nordic cultures. Next, we present the case of L&T India to discuss the dynamics of transforming organizational communication, in a way that recognizes and promotes the entrepreneurial leadership of the workforce.

The Case of L&T India L&T commenced operations as a partnership firm in 1938 set up by two immigrant Danish engineers, Henning Holck-Larsen and S.K. Toubro, as representatives of SL Smidth and Co. L&T was subsequently incorporated as an Indian company in 1946 and went public in 1951. With its beginnings in engineering and construction, L&T diversified into variegated spheres after the independence of India, ranging from bottle-cork making to shipping, switch gear manufacturing to heavy engineering. In terms of key criteria, viz., sales, profits, assets and market capitalization, L&T ranked among the top 10 in India’s private sector. In 1991, India embarked on major liberalization and globalization of the economy, and opened up its doors to foreign direct investments and imports. To reinforce its leadership position in the new era of competition, the company embarked on what it termed as a ‘change management journey’ in 1994. The journey envisioned L&T as a leading world-class Indian multinational, through commitment to total customer satisfaction, enhancing shareholder value, attaining

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global benchmarks and meeting the expectations of employees, stakeholders and society. Concomitant with this vision, corporate strategy and human resource strategy of the firm were fully transformed. The new corporate strategy called for a Jack Welch-inspired focus on areas of world-class capabilities and core competence, and quitting other domains where the firm lacked market leadership. Seven thrust areas were identified: heavy engineering, construction, cement, electrical and electronic products, construction equipment, industrial products and consumables and information technology. The content dimension of transformational strategy was complemented with a Toyota-inspired process dimension of ‘total quality management’ (TQM). TQM was adopted as an encompassing theme for all-round improvement of the company’s business process. For the firm, TQM consisted of total quality control, total waste elimination, and total employee involvement. The human capital was identified as the principal engine for implementing and sustaining the transformation journey. The kaizen movement provided the link between the transformed content and process of corporate strategy and the human resource strategy. The firm interpreted kaizen from its etymology, as ‘change for the better’. A movement was launched in which every employee was inspired to report one kaizen every day. Kaizen covered not just improvements that had a direct bearing on profit or productivity, but also those that involved employees in maintaining safety and hygiene. At the simplest level, identifying ways to keep the work-table clean was also part and parcel of the kaizen movement. The 8,000 employees were informed that if each of them reported a kaizen a day, then the firm could realize an 8,000-fold improvement compared with the change that would occur sequentially over time at the behest of top management alone. The major challenge was to forge an appropriate industrial relations climate conducive to making this ideal for transformation journey rooted in people’s contributions.

MAKINGS OF ENTREPRENEURIAL LEADERSHIP AT L&T Inspired by its change management journey, L&T took a transformative approach towards its human resource strategy, focusing on three areas: (a) building skills, (b) attracting and retaining talent, and (c) nurturing and developing potential for entrepreneurial leadership. These three areas were viewed as formative forces supporting sustained transformation in the new competitive landscape. Skill building was given top priority, taking into account its direct relevance to business strategy and the fact that the skill-building culture was expected to be the foremost factor attracting the new generation of workforce to the firms. Along with skill building, development of entrepreneurial leadership in each employee became a key factor for realizing the dream of a new kaizen-oriented workplace. Each member of the workforce was expected to take self-lead in moving the transformational journey ahead. Besides investing into a state-of-the-art Management Development Center at Lonavala, near Mumbai, the in-house skill building was pursued through Development & Assessment Centers and Management Leadership Program (MLP). Key human resource parameters were identified

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for their crucial impact on business, and used to develop business-focused ‘people related processes’ including performance appraisal, rewards, job rotation and career development. Emerging technology potential was harnessed for enabling people contributions, best exemplified by a whole-hearted reception of SAPHR that is still under implementation. In addition, the traditional human resource techniques, such as job evaluation, were reoriented to reflect the renewed confidence and priorities in people contributions.

SKILL BUILDING To generate and nurture its human capital in an intensely competitive environment, L&T made workforce training its top priority for the transformative workforce and business strategy. The transformative training program was specifically aligned to the business needs and competencies to be developed at various levels. Towards this end, skill building was linked to continuous mapping of organizational capability and identification of business value drivers. A computer-based self-learning facility provided an environment conducive to employee efforts to learn at their own pace, while being supported through capability mapping at the corporate level. The TQM journey and the kaizen movement were the core motivators for supporting this self improvementoriented culture among the employees. Further, more than 100 training programs were organized each year oriented towards specific needs of the business. Besides a management leadership program (MLP) for the managerial cadre, an exclusive school was established for the grassroots technicians, right down to plumbers, electricians and carpenters, at Chennai. Consistent with its democratic grassroots culture, quite often it were the linesmen who designed the course with the systems people and HRD, to take care of the practical requirements of the organization. Such flexible inhouse design of training programs was very cost-effective, amounting to an annual investment of only $ 0.5 million, not including paid compensation to the employees for the duration of training and cost of capital outlay on training infrastructure. Many of the firm’s training programs were designed to have flexible timings, and were disseminated across various project sites through CD-ROMs with the help of facilitators. A site engineer who had a half hour to spare during the day or in the evenings could thus access the CD-ROMs as per convenience. Following the training module, managers underwent an in-house test and appropriate recognition including merit increment was granted upon completing the course. Further, a main part of the program was continuous learning; in the last session of each course, the participants were directed to put forth a voluntary plan of action for joint implementation in the firm. The company offered many programs dealing with communication, and building of interpersonal skills for team building and conflict management. This kind of training aimed to smoothen problem areas coming to light during appraisal.

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L&T’s transformative model has become a national benchmark in the newera knowledge management, with its priority on development of competencies (knowledge, skill and attitudes) by the employees for realization of their full potential in consonance with the organizational vision. The company’s transformative model duly earned ISO certifications and is aptly viewed by its employees as comparable to the best in the world.

ATTRACTING AND RETAINING TALENT L&T has more than 8,000 employees on its rolls. In a business oriented towards contract engineering projects, where on an average day almost 100 employees at all levels must move to a new project location, attracting and retaining talent is a major challenge. According to S. Chandrasekar, L&T’s plant and human resources general manager, it’s not just the money that keeps them going, but also innovative employee welfare initiatives of the firm. In fact, the company is known for one of the lowest employee turnover at 6.34 per cent, which it is striving to reduce even further. The hallmark of L&T’s employee welfare system is medical services. Its Mumbai-based Andheri Health Center offers free medical services not only to company employees, but also to the community at large. In addition, the firm has a welfare department with trained counselors, who take pride in advising employees as well as their families on how to cope with personal and interpersonal problems, at home and at the workplace. Physical as well as psychological health is thus given priority by the firm, thereby forging a family-oriented, yet professionally spirited and performance driven organizational culture. Besides medical services, this is reflected in the firm’s comprehensive safety standards that mandate ‘total loss prevention’ through accident prevention, safety of employees, and avoiding damage to plant, machinery and material. Unlike several of its competitors in the public sector, L&T has avoided creating a township of its own, which could degenerate into in-breeding of fraternized ideas, and impede continuous flow of fresh ideas through interactions with those employed in other firms. Yet, the firm provides complete support to its employees seeking to find new accommodation or schooling for their family members. Similarly, consistent with its open and voluntary approach, the culture of standard uniform, typically used by the Japanese firms to foster camaraderie among the workmen, has not been adopted by the firm.

NURTURING AND DEVELOPING LEADERSHIP POTENTIAL Since its very inception, L&T has been renowned for its entrepreneurial leadership culture. This culture is best illustrated using the case of Raghavan, L&T’s CEO. Raghavan began his career in 1964 as a shop supervisor with a Hyderabad-based machine tool manufacturer, Pragat Tools Ltd, and joined L&T in 1972 at a small Mumbai-based unit responsible for purchasing sub-contracted materials, after securing an engineering degree. In 1978, the manufacturing plant to which the purchase unit was attached was closed down, because of unreliability

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of government orders towards which it was focused. He was thereafter reassigned to metals planning at Bangalore-based earth-moving equipment manufacturing factory, and soon secured two quick promotions becoming metals manager in 1985. In 1992, Raghavan was moved out of the factory as deputy general manager, planning for the core construction business line. As in-charge of planning business and product line strategy, he led the conversion of the construction business to a joint venture, proposing in 1995 that volumes typically less than 500 units per product line were too low to sustain world-class product development and research outlays, amidst emerging global competition and shrinking product life cycles then at three to four years. In our interview conducted in 2001, Raghavan noted, ‘I was able to convince the management that this is what we should do, so we decided to enter into discussions with leading manufacturers in the world… This resulted in converting our [earthmoving equipment] factory into a joint venture in 1998…with a 50-50 participation between L&T and Komatsu.’ A new agriculture equipment business was launched, not through acquisition of a brownfield plant as was becoming popular in those days of race for quick market share acquisition, but as a greenfield plant through joint venture collaboration with another foreign firm to support speed with technical competence and quality. Finally, another offshoot of construction business was converted into a joint venture with the US firm Case Corporation, culminating in three major multinational strategic alliances in 1998 for the core business of L&T. With his job at L&T becoming redundant, Raghavan was appointed the CEO of the Pithampur-based Case Corporation (now known as C&H Global) and L&T joint venture, near Indore, Madhya Pradesh. Taking up the new challenge, he decided to move alone to the new location, classified as backward area by the government of India, leaving behind his wife (a school teacher) and daughter at Bangalore— India’s silicon valley. The joint venture began to manufacture Case Corporation’s Brazilian-model of backloader, a tractor with a loading machine, but suffered enormous amount of reliability and quality problems due to an incompatibility with Indian human resource systems and infrastructure. Moreover, the product line was discontinued by Chase Corporation in Brazil after its own merger and absorption into C&H Global in 1998. Consequently, against the required breakeven of 500 units, the firm was struggling to market 250–300 units a year. Though L&T decided to bring in two products from its Bangalore operations, the joint venture remained unviable. In the meantime, the employees—its core resource—began ‘feeling alienated from the rest of the L&T group.’ In the interview, Raghavan noted that through a fresh focus on grassroots leadership, ‘I think I have probably helped them find that’ lost motivation. This is how Raghavan summarized his approach to grassroots entrepreneurial leadership: ‘I started lot of awareness programs here—what the market feels about the product and how they have to respond to the market. How they have to change their mindset from trying to sell what they make to trying to make what the market demands. They were always feeling that our marketing people are selling at a much lower price and our costs are more. So I told them irrespective of

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price whatever marketing people are selling it for, that is the price that the market is willing to pay. So either you have to make changes and improve the product or reduce the cost or you can get lost. And there was always reluctance on the part of R&D or design engineering here to say that this is not possible, that is not possible. So I told them this is possible. You only have to start thinking then it becomes possible. So if necessary I will get some outside consultants to help you. Then finally they thought that they could do it, so whatever changes marketing demanded in the product were all made, simultaneously our people were ready to look into what cost they could produce. And they were able to reduce cost. Each vibrator compactor’s cost was reduced by 20–25 per cent. That is how this unit has become profitable. And we have also arrested the increasing cost on the backloader. Selling prices have not been increased by a single paisa (cent) in the last three years… So in real terms there has been a decrease in selling price but still we have become an organization which is making profits.’ As another element of grassroots entrepreneurial leadership, Raghavan emphasized the innovative role of workforce managing the top management. Specifically, the compensation package at the Pithampur-based joint venture was lower than the all-India L&T levels, because Pithampur was a backward area where the plant had been set up with the help of government incentives. Raghavan observed the following regarding the challenges involved in bringing the compensation at par with the mainstream national levels of the company: ‘There was a thinking that since we are going to backward areas so we should be able to pay less to people. Again it was a paradigm which had to be converted into an upper echelons of L&T management, so that had to be done. It was a signal to people, if you perform well you will get as much as people elsewhere in L&T are getting.’ Raghavan has signaled a strong message that the biggest change the workforce can expect in the coming years is to be confident that if they wanted to make any changes they could do them. As the CEO, he has been trying to bring about positive transformation in the employees’ mental attitudes and paradigms. The sales of the venture he heads reached $20 million in 2000 and was expected to grow by nearly 50 per cent in 2001.

EFFECTIVENESS OF ENTREPRENEURIAL LEADERSHIP AT L&T Raghavan’s induction of entrepreneurial leadership culture at all levels at the joint venture is reflective of a new mood of optimism that pervades L&T. Though characterized as an ‘old economy’ firm, L&T—like several others of the socalled traditional Indian firms—has been quite successful in the new era of economic liberalization. Currently, 60 per cent of its revenues come from construction and engineering business, and another 25 per cent from cement, with the rest from diverse businesses such as electrical line, with an order book of more than $ 1.25 billion. Table 9.1 provides details of the sales and unit sale realizations for various core products. The firm has invested 75 per cent of its capital in the cement business where it shares market leadership with Gujarat

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Ambuja Cement. Most of the L&T clients are in traditional industries, including oil/gas, hydrocarbon, cement, fertilizer, food, paper, steel plants, thermal and hydroelectric power plants, turbo generators, and railway electrification. Table 9.1: Sales Performance of Core Products for L&T, India Year Ending

March 1998

Sales Value (Rs. billion)* Cement making machinery 1.8 Chemical plant and machinery 4.4 Earthmoving machinery 2.4 Equipment for nuclear projects 2.7 Industrial machinery 1.8 Portland cement 12.9 Switchgear 3.3 Sales volume(unit) Cement making machinery (Nos) 4.0 Chemical plant and machinery (Ton) 18,116.0 Earthmoving machinery (NOS) 668.0 Equipment for nuclear projects (Ton) 10,062.0 Industrial machinery (Ton) 13,006.0 Portland cement (Ton) 6.6 Unit realization (Rs million/unit)* Cement making machinery (Rs/machine) 456.5 Chemical plant and machinery (Rs/Ton) 0.2 Earthmoving machinery (Rs/machine) 3.6 Equipment for nuclear projects (Rs/Ton) 0.3 Industrial machinery (Rs/Ton) 0.1 Portland cement (Rs/Ton) 1,964.5

March 2001 1.5 3.4 8.8 10.2 0.8 21.9 3.2 3.0 9,462.0 5.0 13,486.0 6,499.0 11.3 520.9 0.4 175.2 0.8 0.1 1,940.1

*: Rs. 45 ~ US$1

To sustain its productivity the firm has taken several initiatives including benchmarking with global players, focucing on world-class delivery standards and emphasis on risk management. In addition, it has made cost control through greater localization its top priority, and has pledged to bring out new products and improve response time. Culture management has been identified as the basis for all these dimensions of corporate strategy, and is reflected in remarkable openness to all self-change initiatives of the workforce as well as recommended policy changes from the workforce. Consistent with its openness of culture for human resources, L&T has also committed to embrace best practice corporate governance systems, through sharing information with the shareholders about new performance measures including returns for each division. L&T’s new transformative philosophy, as exemplified by Raghavan, is for top management to seek constant interaction with every line person and the unions, and to identify opportunities for continuous training programs specifically tailored to the middle level people to facilitate their interactive role

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with the unions and the workers. The interactive philosophy is rooted in the emphasis on deep understanding of the corporate strategy and future direction, having a sound perspective of what the unit should be ‘five to 10 years down the line from now; what it should be doing, what kind of product lines it should be looking at’ all becoming part of a long-term orientation for the people in the firm. Such an enlightened perspective is deemed critical to the firm’s ability to know about new product lines and for its expansion in the competitive era. ‘Willingness to listen to people’ is deemed a key strength for the top management personnel, along with a ‘long-term perspective,’ both oriented towards change for the betterment, rather than acceptance of no to the possibility of improvement and development. The top management fosters an informal culture, and maintains an open door policy for any employee seeking to discuss any matter, even if there is another meeting going on. The company often supports its philosophy through an advertisement called ‘People the Prime Movers.’ In addition, all managers are deeply immersed in the values shown in the corporate video excerpts of Danish founder, Mr Larsen’s, philosophy who maintained that ultimately business is all about people. If you don’t have good people doing good work, investments in machinery and materials are all a waste. In short the case of L&T highlights how the firms need to contextualize their ‘change management script’, in order to enact entrepreneurial leadership at the grassroots level that is capable of responding to the emergent changes and of leading the organizational change. Such cultural contextualization may be critical not just for transforming the old economy firms, but also for restructuring and reviving the ailing new economy upstarts.

Conclusions In this chapter, we emphasized that it is quite difficult, for most emerging market firms to compete just on the symbolic brand value, since the multinational firms have highly recognized brand equities, which are reinforced through heavy advertising and sponsoring of major events such as sports and entertainment that are core to the psyche of the local culture. Similarly, it is difficult for the emerging market firms to compete just on quality and innovation, because smaller scale of operations makes the investments into quality and innovation difficult to recoup compared to the multinational enterprises, whose operational and technological costs are spread over their entire worldwide networks. Therefore, it is essential to transform brand communication externally, and organizational communication internally. Externally, the brand symbolism should be augmented using functional excellence. Internally, functional excellence should be integrated with innovation and quality through transformation of organizational communication, and recognition of entrepreneurial leadership potential of the workforce. It is important that the transformation of communication is sustainable, and not just superficial. For instance, many firms have traditionally equated buzz marketing with just celebrity endorsements. They spend several hundred

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millions of dollars to have star celebrities, such as Michael Jordan in the US, and Sachin Tendulkar, Saurav Ganguly, and Virender Sehwag in India, endorse their products, and to create awareness in the minds of hundreds of millions of middle class consumers. The underlying belief is that 1 mega-star celebrity would influence 1 million fans, and those 1 million fans would then influence at least 100 million mass consumers that have a financial capacity to purchase the product. However, real buzz marketing is about using vernacular language, vernacular operatives, and vernacular humor and settings—the arenas where the emerging market firms should excel. In the 1960s when Honda Motors had to build its brand in the US it barely had money to support the visit of its two employees to the US to find channel partners (Pascale, 1996). However, the conventional channels for distributing bikes were not interested in Honda’s bikes, because the principal user segment was the street-smart gangs who wanted sturdy and durable products. The bikes that some of the American distributors agreed to carry were large in size, and had little quality or competitive edge compared with the state-of-the-art models of the western companies in that product category. Further, those distributors had a high bargaining power, and did not pay for the product until after they actually sold the bikes, thus putting severe strain on the already thin financial reserves of Honda Motors in its heydays. Barely able to survive, its two employees visiting the US began using the smallest bikes—for which the conventional channels indicated no interest—for their dayto-day purchases of food and other functional necessities. The simple and light small bikes invoked great interest among passers-by, particularly among the female and child audience, and induced sports bike stores and mass retailers such as Sears to order those bikes with advance dollar payments. A new mass market was created overnight, and a college student at the University of California Los Angeles decided to even write the marketing term paper on Honda, coining a phrase ‘you meet the nicest people on Honda’. The phrase went on to become an instant rage in initial advertising, even without any celebrity endorsement, and soon turned Honda into a market leader among the Japanese automotive companies in the US, leaving more prestigious players—Toyota and Nissan— far behind. The companies around the world are beginning to appreciate the upside of new buzz marketing. In 2001, Italian company Vespa hired friendly male and female models to hang out on scooters outside cafes and nightclubs in Los Angeles, so that the passers-by might ask about that cool bike, and could learn all about Vespa and where to buy it. Another company, Big Fat Inc. of the US works for clients such as Nintendo and Nike, and sends undercover employees to restaurants and shopping centers, who pose as regular customers and make loud comments about the taste and quality of the client’s toys, shoes, beverages, and other products with a view to creating curiosity and interest among those around (Gaffney, 2001). Joachimsthaler and Aaker (1997) emphasize that with growing media clutter, mass advertising is losing its effectiveness. The old model of strategic brand manager who sat in the office and strategized about allocation of ad budgets to build identities of different brands, is no longer working well. New information

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channels, such as the Internet, are emerging that allow the customers to bypass advertising as they pursue information, entertainment and shopping options. Further, powerful retailers are trying to introduce their own private label products, thereby usurping the benefits of mass advertising through their pointof-purchase promotional efforts. In this environment, European companies have fared better in many arenas as compared to the American counterparts. In Europe, the availability of mass media marketing has been relatively limited compared to the US, because of the existence of several languages, and the cost of that mass media advertising has been rather high. Therefore, European firms have sought to rely more on alternative media for building their brands. The case of Swatch in the Swiss watch industry is instructive. Until the 1960s, watches were timeless timepieces; but during the 1970s and early 1980s, Japanese firms had captured the mass market through a concept of watches as low-cost time measurement pieces. Consequently, the Swiss firms that dominated the watch industry until the 1960s lost most of their market share to the Japanese firms. In 1983, SMH launched Swatch brand as fashion watches—an affordable line of watches with a stylish, fun, youthful and joyful personality, backed by Swiss quality and precision. The company linked its new selection of watches to carefully selected events, such as Halley’s Comet, opening of Eastern Europe, and United Nations summit on environment in 1992. Some of its limited edition watches even became collector’s items, fetching enormous prices in the auctions. It also launched new watches matching seasonal fashions and colors each year, making Swatch the best selling watch brand by 1992. However, without a pulse on consumer behavior and values, the alternative brand building vehicles rarely succeed—a fact that gives a unique advantage to the emerging market firms in the use of such vehicles vis-à-vis multinational firms. Consider the case of Italian company Benetton. Benetton had grown rapidly since the 1960s by focusing on high visibility publicity on issues such as youth, cultural diversity, and world peace. In the 1980s, Benetton supplemented the word of mouth with a strategic use of media ads, which substantially enhanced its market penetration. However, during the 1990s, Benetton’s ads began using controversial themes, such as a nun kissing a handsome priest, which began alienating its customers. In Germany, Benetton’s dealers even began boycotting its products after the customers complained, causing significant fall in sales and erosion of brand equity (Joachimsthaler and Aaker, 1997). The case of L&T discussed in this chapter indicates how the emerging market firms can use alternative reputation building vehicles, and compete at par with the multinational enterprises that rely on huge investments into state-of-art technology and ready-made local talent. Specifically, the firms need to identify core cultural identity, and transform each worker into an entrepreneurial leader. They must accept the workforce as the prime mover, and create an environment where each worker works on actualizing the unique potential he or she has. We would like to end with food for thought for the skeptics of the proposition presented in this chapter. It is well known that a persistent and consistent tortoise wins the race over an over-confident rabbit. However, even when the rabbit is not over-confident and is willing to put in all the might and

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resources available, one hundred tortoises can reach one hundred destinations faster and without burnout, as compared to the rabbit who tries to be first at each of those destinations.

References Dye, R. (2000). ‘The Buzz on Buzz’. Harvard Business Review, Nov-Dec, 139– 147. Gupta, V., I.C. Macmillan & G. Surie (2003). ‘Entrepreneurial Leadership: Developing a Cross-cultural Construct’. Journal of Business Venturing, in press. Gaffney, J. (2001). ‘The Cool Kids Are Doing It. Should You?’. Business 2.0, November, http://www.business2.com/articles/mag/0,1640,17380,00.html. Joachimsthaler, E. & D.A. Aaker (1997). ‘Building Brands Without Mass Media'. Harvard Business Review, Jan–Feb, 39–50. Kumar, S.R. (1998). Marketing Nuggets—Conceptual Dimensions in Marketing, New Delhi: Vikas Publications. (2001). Marketing Indian Brands: Marketing Concepts and Strategies, New Delhi: Vikas Publications. Levitt, T. (1980). ‘Marketing Success through Differentiation—of Anything’. Harvard Business Review, Jan–Feb, 83–91. Loudon, D.L. & A.J. Della-Bitta (1988). Consumer Behavior: Concepts and Applications, Third Edition, New York: McGraw-Hill. Park, C.W., B.J. Jaworski & D.J. MacInnis (1986). ‘Strategic Brand ConceptImage Management’. Journal of Marketing, 50 (October), 135–145. Pascale, R.T. (1996). ‘The Honda Effect’. California Management Review, 38(4): 80–91. Schmitt, B.H. (1999). Experiential Marketing: How to Get Customers to Sense, Feel, Think, Act and Relate to Your Company and Brand, New York: The Free Press.

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Geographical Strategies in the Confucian Context

10

Performance Drivers of Corporate Restructuring in Korea

Seungwha (Andy) Chung* l Gyeong Mook Kim

Corporate managements engage in restructuring to turn around a problematic business situation and/or to build a long-term growth engine. Restructuring performance is, however, not always positive, and it takes time to realize the benefits from it. Generally speaking, restructuring is a two-stage deal. The management first exercises restructuring initiatives to ensure short-term vitality of the company, and next creates new businesses to sustain its competitiveness. Top managers who do not understand this restructuring ‘process’ have a tough time in achieving a successful turnaround. Our study takes this view as a point of reference to understand the restructuring initiatives and performance of Korean firms in the last few years. Robbins and Pearce (1992) distinguish these sequential turnaround actions as retrenchment and recovery strategies, respectively. This research study aims to consider the causal chains and performance consequences of these well known, but hard-to-conduct restructuring practices. We borrow the process idea from the balanced scorecard perspective to test restructuring effectiveness. Although the balanced scorecard is originally designed to assess multi-level organizational performance status for achieving strategic goals (Kaplan and Norton, 2001), we suggest that the same perspective can also be applied to assess restructuring activities, which are essentially strategic actions for better corporate performance. Our research setting will be the Korean machinery industry right after the national financial crisis toward the end of 1997. From that time on till now, Korean companies have tried to focus on their core businesses, adopting American patterns of corporate restructuring and downsizing. This study considers all the restructuring initiatives covering financial, portfolio, and organizational restructuring during the three years from 1998 to 2000, taken by the 103 machinery companies publicly traded on the Korean Stock Exchange. We analyze the short- and long-term performance effects of restructuring initiatives. *

This work was supported by a Korea Research Foundation Grant (KRF-2001-042-C00098). The authors thank Boyoung Cheon for her committed research assistance.

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Literature Review Restructuring has become a popular management tool to deal with rapid business change in today’s competitive environment. In accordance with this trend, popular business literature regularly reports diverse consequences of restructuring practices. Most of the reports, however, have some limitations. First of all, as Bowman and Singh (1993) and Bowman et al., (1999) point out, analyses on the consequences of restructuring are typically focused on financial performance. Though concise, financial measures are inadequate to guide and evaluate the journey that companies under restructuring take to create future value. The future financial value will come from the investment in customers, suppliers, employees, processes, technology, and innovation. Realistically, difficulties in placing a reliable financial value on such assets as the new product pipe line, process capabilities, employee skills, motivation, flexibility, customer loyalty, data bases, and systems will probably preclude them from ever being recognized in organizational balance sheets. Yet, these are the very assets and capabilities that are critical for success in today’s competitive environment. Moreover, most studies focus on only one or two restructuring activities. Analyzed activities include: (a) portfolio restructuring (Bowman and Singh, 1990; Comment and Jarrell, 1992; Jensen, 1991; Shleifer and Vishny, 1992), (b) ownership restructuring (McConnell and Servaes, 1990; Morck et al., 1988), (c) asset divestiture and cost reduction (Barker and Mone, 1994), (d) organization restructuring (Bowman and Singh, 1993; Zajac and Kraatz, 1993; Amburgey et al., 1990; Robins, 1993), (e) workforce reduction (Bruton et al., 1996; McKinley et al., 1999; Barker et al., 1998; Cascio et al., 1997; Mentzer, 1996; Wayhan and Werner, 2000), (f) governance structure restructuring (Bethel and Liebeskind, 1993; Brush, Bromiley, and Hendrickx, 2000; Gibbs, 1993), and (g) financial restructuring (Lane, Cannella, and Lutatkin, 1998; Oswald and Jahera, 1991). However, companies usually employ various restructuring tools concomitantly or sequentially. Thus, there exists a serious gap between business reality and empirical analysis.

RESTRUCTURING PERFORMANCE Corporate restructuring is understood to enhance such organizational performance as profit, shareholder value, strategic alignment with the changing environment, and the long-term competitive capability. However, empirical research assessing whether organizations actually achieve these intended outcomes is relatively sparse. Furthermore, the results of the existing research outcomes indicate a lack of consensus on the issue. While many scholars assert that corporate restructuring enhances performances (Bowman et al., 1999; Jensen and Murphy, 1990; McConnell and Servaes, 1990; Morck et al., 1988; Robbins, 1993; Geringer, Tallman, and Olsen, 2000; Wayhan and Werner, 2000; Zajac and Kaatz, 1993), other researchers report there was no significant relationship between restructuring and financial performance (Barker and Mone, 1994; Barker et al., 1998; Bruton et al., 1996; Cascio et al., 1997; McKinley et al., 1999; Mentzer, 1996).

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On the more negative side, restructuring in general is considered to be disruptive and, thus, increases the rate of firm failure (Hannan and Freeman, 1984). Amburgey, Kelly, and Barnett (1990) support this negative argument, suggesting that change is hazardous because it destroys part of a firm’s existing proven practices. This destruction may be accompanied by the loss of corporate competencies due to the abandonment of familiar routines. Another proposition in this regard is that reorganization may disrupt relationships with external actors that organizations need to survive (Anderson, 1991). This disruption of key external relationships is detrimental to the firm because such relationships are difficult to build and need constant care to be maintained. A few attempts have been made to synthesize diverse aspects of restructuring initiatives and performance consequences. First of all, Schendel et al. (1976) and Hofer (1980) classify restructuring action either as operating or strategic. Schendel et al. (1976) introduce the notion of strategic operation contingency to distinguish restructuring resulting from poor strategy against the one resulting from poor operations. They found that while a substantial portion of declines was due to some efficiency problems, restructuring actions were more frequently associated with strategic moves. Hofer (1980), on the other hand, conceptualizes the link between the severity of downturn and the characteristics of restructuring. Strategic moves are responsible for more dramatic restructuring. Applying the notion of operational restructuring, Ofek (1993) looks at the effects of financial distress with a sample of 358 firms. He classifies restructuring strategies into six categories: asset restructuring, employee layoffs, management replacement, dividend cuts, debt restructuring, and bankruptcy filings. The results show that higher pre-distress leverage increases the probability of operational actions, particularly asset restructuring, employee layoffs, and dividend cuts. Comparing financial and non-financial restructuring actions, Pelham (2000) investigated the differences in restructuring strategies between successful and unsuccessful companies. The results suggest that non-financial strategies (such as R&D, quality control, customer management, education of employees) are more performance-enhancing than financial strategies (such as costs and workforce reductions, or recapitalization). Also, Grinyer et al., (1990) show that successfully recovering companies tended to focus more heavily on making significant improvements in operational aspects of their businesses such as marketing and production whereas unsuccessful companies stressed acquisitions, debt reduction, and diversification. To sustain their improvements in performance, they gave a greater weightage to good management, organizational reshaping, quality management, and customer management. This study supports this sequential approach in restructuring.

THE CAUSAL PERFORMANCE CHAIN IN RESTRUCTURING One-sided analyses, as discussed above, do not shed light on the leads and lags of management initiatives that realistically describe the trajectory of restructuring strategy and action. In fact, based on the balanced scorecard concept, Kaplan

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and Norton (1996a) assert that successful firms adopt more differentiated strategies as compared with unsuccessful firms, and employ sophisticated measurement devices appropriate for their greater degree of differentiation. As well publicized, the balanced scorecard perspective views organizational performance from four distinctive perspectives: financial, customer, internal business process, and learning and growth (Kaplan and Norton, 1992, 2000). If we extend the underlying principle of this balanced scorecard concept, we can analyze how companies restructure to create value for current and future customers, and how they enhance internal capabilities and investment in people, systems, and practices necessary to improve future performance while retaining short-term financial performance. Outcome measures without performance drivers do not communicate how the outcomes are to be achieved. They also do not provide sequential milestones on whether or not a restructuring strategy is being implemented successfully step by step. Working under the causal chain of the balanced scorecard, management may capture a series of restructuring initiatives as key performance drivers (i.e., leading indicators) that ultimately produce desired outcomes (i.e., lagging indicators) (Kaplan and Norton, 1996b). In accordance with this underlying performance principle, we can suggest that strategic initiatives and restructuring actions following the causal chains of the corporate performance cycle from learning and growth, to internal process, to customer, and finally to financial outcome, will lead to the increased corporate value. As long as companies engage in restructuring activities constantly, those applying the balanced scorecard perspective to their restructuring strategy will be more successful, with the benefit of fine-tuned systematic performance measures. Given this premise, our primary research question is: How can we interpret restructuring outcomes in a causal performance sequence as proposed by the balanced scorecard perspective? We approach this question by considering: (a) the sequential relationships among restructuring initiatives as performance drivers, and (b) the linkage between restructuring initiatives and their effects on performance outcomes. This study will, thus, provide an initial step for the development of a general theory of corporate restructuring though in the context of a Korean industry.

HYPOTHESES Robbins and Pearce (1992) distinguish restructuring strategy for retrenchment from that for recovery. In the initial stage (retrenchment), companies seek to stabilize declining performance for positive cash flows through asset divestment, headcount cuts, product elimination, and reduction in costs. The results of this retrenchment response are observable as changes in the income statement and balance sheet accounts. As they achieve financial stability, companies begin to emphasize substantial business activities that represent the implementation of their long-term strategy. This recovery response seeks to establish the long-term growth through market penetration, reconcentration and segmentation, new

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market entry, acquisitions, and producing new product development. This notion of the ‘recovery stage’ matches with the operational turnaround as discussed above (Schendel, et al., 1976; Hofer, 1980). On the retrenchment side, previous research suggests that asset/equity divestment (Barker and Mone, 1994; Comment and Jarrell, 1992; Hambrick and Schecter, 1983; Thomas and Kamath, 1984), recapitalizations (Brush, Bromiley, and Hendrickx, 2000), workforce reductions (Bruton, Keels, and Shook, 1996; Hambrick and Schecter, 1983; McKinley et al., 1999; Robbins and Pearce, 1992; Wayhan and Werner, 2000) have direct and immediate effects on financial outcomes. Interestingly, investigations reporting a positive relationship between restructuring and performance mostly focused on these ‘quick and dirty’ restructuring strategies. Based on these studies, we derive the following hypothesis: Hypothesis 1. Restructuring initiatives targeting financial vitality will improve corporate performance in the short run. Unfortunately, the quick and dirty restructuring initiatives and performance measures neither cover the diverse aspects of corporate restructuring nor consider intangible assets such as high quality products and services, motivated and skilled employees, responsive and predictable internal processes, and satisfied and loyal customers. Building these intangible assets is, however, integral to the longterm competitive advantage of a firm. Previous research is consistent with this argument. Portfolio restructuring (i.e., business contraction and/or expansion policy) (Robbins and Pearce, 1992), governance restructuring (McConnell and Servaes, 1990; Morck, Shleifer, and Vishny, 1988; Simerly and Li, 2000), work redesign (Beckett-Camarata et al., 1998; Grinyer et al., 1990), improvement of quality and service management system (Laitinen, 2000; Pelham, 2000; Zajac and Kraatz, 1993) have indirect and long-lasting effects on the corporate value. That is to say, their influences on financial outcomes are through a long-lasting journey as proposed by the balanced scorecard performance chain. In a similar vein, Laitinen (2000) emphasizes time lag effects in restructuring. He found that, in the medium term, investment in new product development and customer management were the most successful, whereas a strategy heavily based on financial restructuring was the most unsuccessful. In the long term, active adaptation strategies are most likely to lead to sustained success whereas financial restructuring is associated with a high risk of failure. This alternative aspect of restructuring leads to the following hypotheses: Hypothesis 2. Restructuring initiatives in business portfolio will improve corporate performance in the long run. Hypothesis 3. Restructuring initiatives in organizational systems will improve corporate performance in the long run. Tushman and Romanelli (1985) and Amburgey et al., (1990) suggest that the performance effects of restructuring are dependent on a coherent program of restructuring. It is very important to choose the right restructuring program

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for a successful restructuring outcome. Restructuring practices such as asset divestiture, de-diversification, workforce reductions are popular and enduring, but not always productive nor valuable. These restructuring activities inadvertently cause dramatic changes in the deep-seated, informal organizational structure and organizational learning capabilities (Fisher and White, 2000). Organizational learning is a social network phenomenon manifested at the group and organizational level. When the social complexities of an organization are considered, it becomes evident that non-prioritized restructuring has the potential to inflict damage on the learning and memory capabilities of the organization. To alleviate these detrimental effects, therefore, such restructuring strategies as asset divestiture, de-diversification, workforce reductions should be implemented not independently, but concomitantly or subsequently accompanied with an organizational revitalizing program such as work system redesign, improvement of quality, and service management system (Fisher and White, 2000). So, we can expect some lagged effects of a set of restructuring initiatives. In fact, Barker and Mone (1994) reveal that asset restructuring related positively with performance whereas efficiency-oriented restructuring (cost-reducing restructuring) have a negative relationship with performance in the near term following restructuring. However, there is a positive relationship between restructuring action and long-term performance. While some studies (Bruton, Keels, and Shook, 1996; McKinley et al., 1999; Wayhan and Werner, 2000) suggest that contraction-oriented restructuring such as asset divestiture, de-diversification and workforce reductions has positive effects on post-restructuring profitability, other studies (Barker et al., 1998; Cascio, Young and Morris, 1997; Mentzer, 1996) show little influence of restructuring on profits. We believe these mixed results are possibly due to organizational factors that moderate the effects of contraction-oriented restructuring on performance. We can also refer to the studies on diversification as an expansion-oriented restructuring strategy. According to Geringer, Tallman, and Olsen (2000), diversification has negative effects on profitability. However, Nguyen, Seror, and Devinney (1990) report that diversification based on technically related activities results in economies of scope and greater firm performance. Lubatkin and Chatterjee (1991) suggest that the best way to protect the shareholder value against economic downturns is to diversify in a manner that all of one’s eggs are in similar baskets. As Tushman and Romanelli (1985), Amburgey et al., (1990), Busija, O’Neil and Zethaml (1997) suggest, these mixed results indicate that the effects of portfolio restructuring on performance depend on implementing a coherent program of restructuring, aligning corporate strategy with new organizational work systems and new innovative capabilities. Based on this line of thought, we propose the following hypothesis suggesting longer term interaction effects among restructuring initiatives: Hypothesis 4. Restructuring initiatives for retrenchment will improve the long-term corporate performance when they are combined with changes in organizational systems.

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METHODS R ESEARCH SETTING Right after the national financial crisis at the end of 1997, Korean companies have been involved with various restructuring activities up until now. Some of them were voluntary, and others forced by the International Monetary Fund, the government, banks and other financial institutions. For example, many companies tried to meet the debt–equity ratio requirement of under 200 per cent as enforced by the government. Although many companies have slimmed down their business portfolios by selling and spinning off non-core business divisions, it is still doubtful whether they have made substantial changes in the organizational and management systems as a basis for future competitive capabilities. On the normative level, for their restructuring activities to be successful in the long run, they should have established a new corporate culture, strengthened their core businesses, and pursued their business goals under the renewed vision. Without this long-term perspective for corporate revitalization, the last three years of restructuring can be another sort of herd behavior like unrelated diversification of Korean chaebols in the past. By conducting systematic observations and analysis based on the recent historical data from this Korean business setting, we can not only assess the restructuring processes and outcomes of Korean companies, but more importantly search for evidence to test the process view of restructuring as proposed above.

SAMPLE

AND

DATA

Our research sample includes all of the 103 companies in the category of machinery industry that are traded in the Korean Stock Exchange. Specifically, this industry consists of the sub-categories of machines (30 firms), transportation equipment (six firms), medical and precision machines (seven firms), automobiles and the parts (34 firms), electric machines (21 firms), and computers and office machines (five firms). For these sample firms, we collected data on financial performance indicators and various restructuring initiatives for the three-year period from the beginning of 1998 to the end of 2000. As will be explained in the variable section below, the recorded restructuring initiatives include equity selloff, change in capital structure, legal reorganization, business expansion, divestitures, governance changes, organizational system change for efficiency improvement, organizational system change for quality improvement, workforce reduction, and human resource systems change. Data sources include company reports, the Korean Stock Exchange announcements, articles from the four major economic newspapers, and credit reports and financial data from the Korea Information Service. Before we recorded companies’ restructuring activities from the sources listed above, we distributed a survey questionnaire to all the sample firms, asking about their restructuring initiatives during the research period. Around 25 firms responded to the questionnaire (24 per cent response rate). The purpose was to test the accuracy

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of our archival data sources against corporate records. The results of reliability tests between survey answers and archival records in each restructuring category for the 20 firms with valid answers show that all the records are significantly consistent with corporate records (Cronbach alpha values above 0.6) except for equity selloff, capital structure change, and business expansion. For equity selloff, most companies declined to answer the question because of frequent transactions. For capital structure change and business expansion, archival data recorded more activities than questionnaire answers (means are 5.2 versus 1.55 for capital structure change, and 2.5 versus 0.05 for business expansion, respectively), meaning that archival data tended to be more comprehensive. Thus, we concluded that it would be more reliable as well as cost effective to use archival data for final analysis.

D EPENDENT VARIABLES We employ two key corporate performance measures. One is the economic value added, and the other the price/sales ratio. The economic value added (EVA) is defined as operating income minus taxes and costs of capital. It measures a firm’s income-generating capability, given capital investment and expenses. It indicates the cash flow consequences of various business initiatives including business restructuring, new business entries, and business process changes. For more than a one-year period in regression analysis, we used the average value of yearly EVAs for the given period. The price/sales ratio (PSR) is the average stock price divided by sales per share. This measure can substitute the price/earnings ratio when the earnings value is negative. When the PSR is high, it means that the firm’s growth potential is promising. In contrast, firms in a declining industry tend to have low PSRs. Thus, whereas the EVA measures the current income-generating capabilities for our sample firms, the PSR indicates their future potential. The PSR was chosen as a performance measure because it is a market-based measure, indicating how well strategic plans of management have enhanced shareholders wealth (Venkatraman and Ramanujam, 1986; Montgomery, Thomas, and Kamath, 1984; Wayhan and Werner, 2000). Specifically, we used the average value of yearly PSRs for a given period as a performance indicator.

INDEPENDENT VARIABLES All the independent variables measuring restructuring action were observed on a daily basis. We recorded a company’s restructuring initiative as an event taken place on a certain date. For each restructuring initiative, we gave different weights for an observation period extending over a year. That is, for the period from 1998 to 1999, we applied a weight of 2/3 for 1998 initiatives, and that of 1/3 for 1999 ones, respectively. In a similar manner, for the three-year observation period from 1997 to 2000, we applied weights of 3/6, 2/6, and 1/6 to 1998, 1998, and 2000 initiatives, respectively. The underlying assumption is that restructuring initiatives will take effect over an extended period of time rather than immediately within a year. We will explain each restructuring variable under the broader

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categories of financial, business portfolio, and organizational restructuring (Bowman et al., 1999). First, for financial restructuring, we observed cases of securities sell-off, capital structure change, and legal reorganization. Securities selloff means selling previously owned other companies’ securities in the market to resolve cash flow problems. Capital structure changes include debt-to-equity conversion, debt reduction, issue of new securities, equity reduction, new stock issues, asset revaluation and changes of accounting rules. Legal reorganization means getting into institutional procedures for corporate reorganization and financial workout under bankruptcy laws. Second, regarding business portfolio restructuring, we observed expansion into new business areas and divestiture. For business expansion, we included mergers and acquisitions, joint ventures and strategic alliances, new subsidiaries, entry into new businesses, capital investment, and capital asset acquisitions. Divestiture included divestment activities to concentrate on core capabilities such as business line selloffs, spinoffs, splitoffs, the divestment of subsidiaries, and the divestment of assets and businesses. Third, with regard to organizational restructuring, we observed governance system changes, organizational system changes, downsizing, and human resource systems changes. Governance system changes include adopting the newly required external directorship and public auditors. We distinguished organizational system changes for enhancing operational efficiency from those for improving operational quality. Changes for efficiency include internal mergers and integration, organizational design changes, and changes into an outsourcing system. Changes for quality include the adoption of quality control systems and after-sales service systems. Downsizing measured workforce reduction, early retirement systems, and layoffs. Changes in human resource systems include the adoption of payfor-performance systems and other new human resource management systems.

C ONTROL VARIABLES We controlled for company size with the average annual sales level (100 million Korean wons) for a given period. Companies in financial distress have a greater incentive to engage in restructuring activities such as asset restructuring, employee layoffs, dividend cuts (Ofek, 1993). Thus, we controlled for the net margin rate (per cent) and debt-to-equity ratio (per cent) at the start of a given period, and applied their averages for the period longer than a year.

Results and Discussion Table 10.1 provides the means, standard deviations, and bivariate correlations for all the data used to analyze restructuring performance. Here we reported the total cumulated restructuring initiatives (with yearly weights as discussed in the method section) for the three-year period from 1998 to 2000. Figure 10.1 shows yearly distributions of various restructuring activities. If we look at the means

a

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

EVA (100 M wons) PSR Securities sell-off Capital restructure Reorganization Expansion Divestiture Governance change Efficiency change Efficiency* downsizing Efficiency* divestiture Quality change Quality* downsizing Quality* divestiture Downsizing HR system change Downsizing*HR Debt ratio (%) Sales (100 M wons)

20. Net margin (%) a

Mean

s.d.

1

2

–230.59 0.73

916.97 1.65

.054

0.33

0.57

–.014

0.93 0.17 0.46 0.25

1.04 0.37 0.75 0.43

–.396** –.209* –.092 –.128

0.06

0.22

–.019

0.17

0.39

–.393** –.081

0.07

0.26

–.476** –.025

0.51 0.06

1.96 0.16

–.181+ –.078 –.077 –.037

0.01

0.07

0.03 0.09

0.16 0.22

0.09 0.05 391.92

0.21 0.18 2844.33

18.92

4

5

6

7

8

9

10

11

12

13

14

16

17

18

.102 .249* –.121 .028 .146 .442** .382** .409** –.122 –.103 .242* .409** .052 .320** .051

–.036

–.055

–.097

.002

.115

.110

.460** .209*

.073

.351**

.144

.500** .169+

.132

.376** .295** .818**

.266

.195* .493** .047 .131

.093 .002

.071 .534** .105 .733** .803** –.041 .217* .467** .512** .386** .366**

–.103

–.063

.101

–.090

–.110 –.052 .255** .445** –.303** –.051 .075 .330**

.019 .161

.026 .373** .076 .584** .672** .854** .464** .149 .190+ .494** .486** .615** .754** .589** .483** .273** .368**

–.065

15

.092

–.048

.042

.290**

.161

.184+

.048

19

.461**

–.242* –.034 .072 .298** .211* –.022 .136 .303** .457** .518** .385** .217* .069 .378** .550** –.257** –.007 .044 .357** .266** .030 .229* .214* .520** .604** .484** .206* –.010 .428** .664** .833** –.018 –.042 –.062 –.109 .114 –.015 –.036 .013 –.059 –.005 –.019 –.028 –.026 –.014 .003 –.041 –.032

5262.77 16579.66 –.320** –.082 –5.94

3

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1.

188

Table 10.1: Descriptive Statistics and Correlations

.213*

.042

.119 .194*

.383**

.029

.225* .320** –.002 .464** .461** .442**

–.140 –.473** .139

–.075

.080 –.166+ –.158

–.099

.127

.006

–.010

–.120

.346** .302** .227* .281** –.016 –.017

–.094

.000

–.041

.008

–.009

n = 103 companies; statistics and correlations are based on the three-year average from 1998 to 2000; for restructuring initiatives, weights of 3/6, 2/6, and 1/6 were applied to 1998, 1999, and 2000 values, respectively, in average calculations. + p < .10, *p < .05, **p < .01.

PERFORMANCE DRIVERS OF CORPORATE RESTRUCTURING IN KOREA

Fig. 10.1: Yearly Distributions of Restructuring Initiatives

189

a

of those initiatives, capital structure changes tend to be the highest whereas governance system changes the lowest. We can also observe that there were yearly fluctuations over the three-year period. The distribution patterns across different categories of restructuring action indicate that companies had been engaged in financial and portfolio restructuring much more than organizational restructuring throughout the period.

S TATISTICAL ANALYSIS A statistical analysis was conducted to show the relationships between various restructuring initiatives and both short- and long-run corporate performances for testing our hypotheses. Table 10.2 reports the results of regression analysis showing these relationships. The reported results were based on ridge regression analysis (Hoerl and Kennard, 1970) with the biasing parameter set at 0.8 to resolve multicollinearity problems observed for ordinary regression models.

HYPOTHESIS TESTING Hypothesis 1 expects improvements in the short-term performance with financial retrenchment oriented restructuring. In accordance with hypothesis 1, we can observe from one-year models that securities selloff improved both EVA and PSR significantly (p < .05). However, capital restructure changes did not improve EVA and PSR for the first year. Moreover, they even negatively affected EVAs for both two- and three-year periods (p < .01 for both). Companies under legal reorganization, however, experienced a serious negative effect on EVA (p < .01).

190

EVA (1998) Constant Securities sell-off Capital restructure Reorganization Expansion Divestiture Governance change Efficiency change Efficiency*downsizing Efficiency*divestiture Quality change Quality*downsizing Quality*divestiture Downsizing HR system change Downsizing*HR Debt ratio (%) Sales (100 M wons) Net margin (%) F 2 R a

–3.921 (3.105) 10.148* (4.902) –1.983 (1.592) –26.525** (5.695) 5.895+ (3.328) –0.830 (4.357) 6.211 (6.450) –12.498+ (6.485) 6.797 (9.992) –1.680+ (0.922) 8.578 (9.026) 4.048 (22.222) 15.748+ (9.455) 0.158 (8.376) –1.209 (7.624) 10.151 (9.648) –0.001 (0.001) 0.000 (0.000) –0.190** (0.049) 3.490** 0.972 .428 .172

PSR (1998) 0.386 1.240* 0.090 –0.278 0.890* 0.029 1.275+ –0.541 0.922 –0.158 0.179 0.220 0.878 –0.709 –0.874 1.772 0.000 0.000 0.001 6.485** .582

(0.357) (0.563) (0.183) (0.654) (0.382) (0.501) (0.741) (0.745) (1.148) (0.106) (1.037) (2.553) (1.086) (0.962) (0.876) (1.109) (0.000) (0.000) (0.006) 2.358** .335

EVA (1998–99) 115.632 (141.686) 2.352 (168.534) –314.070** (85.280) –54.476 (269.888) 220.616 (154.534) 49.363 (210.171) 870.313* (397.462) –376.667 (298.068) –2610.297** (463.554) 134.483* (54.987) 86.338 (559.334) –519.548 (1292.109) 769.003 (600.882) –213.947 (471.677) –82.876 (460.375) 393.568 (576.197) –0.028 (0.029) –0.016* (0.007) 2.481 (2.972) 3.783** 2.239* .448 .324

a

PSR (1998–99) 0.453 0.352 0.000 –0.290 1.826** –0.709 1.411+ –0.692 0.420 0.059 0.981 0.133 0.332 –2.223* –0.401 1.810 0.000 0.000+ –0.003

EVA (1998–2000)

(0.298) 62.373 (114.722) (0.354) 18.907 (134.536) (0.179) –224.008** (84.255) (0.567) –64.081 (215.877) (0.325) 94.937 (108.645) (0.442) –51.044 (196.756) (0.835) 479.103 (374.742) (0.626) –304.515 (260.112) (0.974) –2083.718** (432.308) (0.116) 184.618** (54.495) (1.175) 51.904 (562.128) (2.715) –39.872 (1076.088) (1.263) 883.693 (589.535) (0.991) –75.847 (469.666) (0.967) –270.871 (460.434) (1.211) 387.290 (587.667) (0.000) –0.014 (0.025) (0.000) –0.007 (0.005) (0.006) 3.101 (4.170)

TRANSFORMATIVE ORGANIZATIONS

Table 10.2: Results of Regression Analysis

PSR (1998–2000) 0.489 –0.081 0.022 –0.288 1.170** –0.821* 0.822 –0.452 0.469 0.109 0.687 0.199 –0.527 –1.635+ –0.308 1.571 0.000 0.000 –0.007

(0.229) (0.269) (0.168) (0.431) (0.217) (0.393) (0.748) (0.519) (0.863) (0.109) (1.122) (2.148) (1.177) (0.938) (0.919) (1.173) (0.000) (0.000) (0.008)

N = 103; standard errors are in parentheses; for restructuring initiatives, weights of 2/3 (1998) and 1/3 (1999) for the two-year performance effects, and 3/6 (1998), 2/6 (1999), and 1/6 (2000) for the three-year performance effects, respectively, were applied in average calculations; +p < .10; *p <.05; **p <.01.

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191

This is understandable because companies in serious financial distress would undergo legal reorganization. Thus, in the short run, the negative relationships might be caused by this initial problematic status, but not vice versa. Downsizing as a typical quick response to financial distress had negative effects on the two(p < .05) and three-year PSRs (p < .10). Overall, we can say that financial restructuring initiatives may improve the short-term performance, but they can hamper the medium- or long-run financial performance. This observation is consistent with the underlying spirit of hypothesis 1. In hypothesis 2, we expected the long-run improvement in performance through portfolio and organizational restructuring. Business expansion not only improved EVA (p < .10) and PSR (p < .05) positively in the first year, but also significantly increased PSR in the two- and three-year periods (p < .01 for both). This means that with expansions into related business areas, the companies’ future value potentials were heightened. Divestiture, however, showed no positive influence on performance. It even had a negative influence on PSR for the threeyear period (p < .05). Thus, we may conclude that business expansion as a portfolio restructuring lever may improve the long-run corporate performance. In the organizational side, governance system changes improved only PSR in the first year (p < .10), but both EVA (p < .05) and PSR (p < .10) in the twoyear period. Organizational system changes either for efficiency or quality improvement by themselves had no positive effects on EVA or PSR for all the periods. Changes for efficiency even had a negative effect on EVA in the first year (p < .10). Overall, we may say that organizational systems change by itself would not produce positive outcomes in corporate restructuring whereas governance systems change may create some value possibly with a new strategic vision and systematic monitoring system. Finally, in hypothesis 4, we expected some interaction effects between retrenchment activities and organizational system changes. The long-term corporate performance could be understood as a consequence of a series of actions at the multiple levels of performance chains. As the balanced scorecard view suggests, the short-term changes targeting financial aspects must be combined with customer-oriented restructuring activities. Those activities also have to be accompanied by subsequent organizational systems and processes changes and investments for learning and growth. If we look at the interaction terms in the regression results, we can observe positive effects on EVAs of the interaction variable of efficiency change and divestiture in the two- (p < .05) and three-year (p < .01) periods though it is negative in the first year (p < .10). This means that divestiture strategy must be accompanied by the efforts to improve efficiency in organizational systems to have the long-term positive effect on corporate performance. The interaction variable of quality change and divestiture shows a positive effect on EVA only in the first year. However, the interaction variable of efficiency change and downsizing show significant negative effects on EVAs for both the two- and three-year period (p < .01 for both). This signals that pursuing too much change for efficiency combined with layoffs and other types of workforce reduction can seriously

192

TRANSFORMATIVE ORGANIZATIONS

hamper the long-term vitality of the firm. We suspect that this may be due to employee morale and burnout problems. Overall, there are some positive signs that indicate the value of orchestrating various restructuring initiatives considering their step-by-step interactive performance consequences.

Conclusion Managers of a company under restructuring tend to search for quick answers to a deep-seated organizational problem. These quick answers are easy to implement, and they may come up with short-term financial improvements. However, as we tried to show in this study, these measures may ultimately destroy corporate capabilities of generating future income. Both the concept of causal performance chains and the empirical results imply that restructuring performance evolves over an extended period of time. So, the long-term performance consequences are products of interactive operations among various restructuring initiatives. Thus, we need to make a clear distinction between ‘quick-and-dirty’ and ‘incubational’ restructuring activities. This is not to say that quick-and-dirty action has to be avoided, but that it comes at an earlier stage of restructuring life cycle only to be replaced with incubational action in the later stage for the long-term performance. Future studies would have to be directed toward conceptualizing these multiple waves of restructuring changes. This study confirms the above argument in the setting of the Korean machinery industry under restructuring. One thing to be noted in this setting is that contrary to a typical understanding for Western companies, we observed negative effects of business divestitures as well as some positive effects of business expansions (Geringer et al., 1995). This is consistent with the argument that companies in the developing countries benefit by expanding their lines of business because of their institutional and market environments (Khanna and Palepu, 1999; Khanna and Rivkin, 2001). This might, of course, have been caused by corporate efforts to expand their lines of business based on their distinctive competencies.

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Beckett-Camarata, E.J., M.R. Camarta & R.T. Barker (1998). ‘Integrating internal and external relationships through relationship management: A strategic response to a changing global environment’. Journal of Business Research, 41: 71–81. Bethel, J.E. & J. Liebeskind (1993). ‘The effects of ownership structure on corporate restructuring’. Strategic Management Journal, 14 (Summer): 15– 31. Bowman, E.H. & H. Singh (1990). ‘Overview of corporate restructuring: Trends and consequences’. In L. Rock and R.H. Rock (eds.), Corporate restructuring, New York: McGraw-Hill. (1993). ‘Corporate restructuring: Reconfiguring the firm’. Strategic Management Journal, 14 (Summer Special): 5–14. Bowman, E.H., H. Singh, M. Useem & R. Bhadury (1999). ‘When does restructuring improve economic performance?’. California Management Review, 41(2): 33–54. Brush, T.M., P. Bromiley & M. Hendrickx (2000). ‘The free cash flow hypothesis for sales growth and firm performance’. Strategic Management Journal, 21(4): 455–472. Bruton, G.D., J.K. Keels & C.L. Shook (1996). ‘Downsizing the firm: Answering the strategic questions’. The Academy of Management Executive, 10(2): 38–45. Busija, E.C., H.M. O’Neil & C.P. Zeithaml (1997). ‘Diversification strategy, entry mode, and constraints’. Strategic Management Journal, 18(4): 321–327. Cascio, W.F., C.E. Young & J.R. Morris (1997). ‘Financial consequences of employment-change decisions in major U.S. corporations’. Academy of Management Journal, 40: 1175–1189. Comment, R. and G. Jarrell (1992). Corporate focus and stock returns, Working paper, William E. Simon Graduate School of Business Administration, University of Rochester. Fisher S.R. & M.A. White (2000). ‘Downsizing in a learning organization: are there hidden costs?’. Academy of Management Review, 25(1): 244–25. Geringer, J.M., S. Tallman & D.M. Olsen (2000). ‘Product and international diversification among Japanese multinational firms’. Strategic Management Journal, 21: 51–80. Gibbs, P.A. (1993). ‘Determinants of corporate restructuring: The relative importance of corporate governance, takeover threat, and free cash flow’. Strategic Management Journal, 14 (Summer Special): 51–68. Grinyer, P.H., D. Mayes & P. McKiernan (1990). ‘The sharpbenders: achieving a sustained improvement in performance. Long Range Planning, 23: 116– 125. Hambrick, D.C. & S.M. Schecter (1983). ‘Turnaround Strategies for Mature Industrial-Product Business Units’. Academy of Management Journal, 26: 231– 248. Hannan, M.T. and J. Freeman (1984). ‘Structural inertia and organizational change’. American Sociological Review, 49: 149–164. Hoerl, A.E. & R.W. Kennard (1970). ‘Ridge regression: Biased estimation for non-orthogonal problems’. Technometrics, 12: 55–67.

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Hofer, C.W. (1980). ‘Turnaround strategies’. Journal of Business Strategy, 1(1): 19–31. Jensen, M. (1991). ‘Corporate control and the politics of finance’. Journal of Applied Corporate Finance, 4: 13–33. Jensen, M. & K. Murphy (1990). ‘Performance pay and top management incentives’. Journal of Political Economy, 98: 225–264. Jöreskog, K.G. & D. Sörbom (1996). LISREL 8: User’s Reference Guide. Chicago: Scientific Software International. Kaplan, S.R. & D.P. Norton (1992). ‘The Balanced Scorecard—Measures that Drive Performance’. Harvard Business Review, 70(1): 71–79. (1996a). The Balanced Scorecard: Translating Strategy Into Action. HBS Press. (1996b). ‘Using the Balanced Scorecard as a Strategic Management System’. Harvard Business Review. 75(1): 75–85. (2000). ‘Having Trouble with Your Strategy? Then Map it’. Harvard Business Review, 78(5): 3–11. (2001). The Strategy-focused Organization : How Balanced Scorecard Companies Thrive in the New Business Environment. HBS Press. Khanna, T. & K. Palepu (1999). ‘Why focused strategies may be wrong for emerging markets’. In Harvard Business Review on Corporate Strategy, Boston, MA: Harvard Business School Press: 147–170. Khanna, T., & J.W. Rivkin (2001). ‘Estimating the performance effects of business groups in emerging markets’. Strategic Management Journal, 22: 45–74. Laitinen, E.K. (2000). ‘Long-term success of adaptation strategies: Evidence from Finnish companies’. Long Range Planning, 33: 805–830. Lane, P.J., A.A. Cannella, Jr. & M.H. Lubatkin (1998). ‘Agency problems as antecedents to unrelated mergers and diversification: Amihud and Lev reconsidered’. Strategic Management Journal, 19(6): 555–578. Lubatkin, M. & S. Chatterjee (1991). ‘The strategy-shareholder value relationship: Testing temporal stability across market cycles’. Strategic Management Journal, 12(4): 251–270. McConnell, J. & H. Servaes (1990). ‘Additional evidence on equity ownership and corporate value’. Journal of Financial Economics, 27: 595–612. McKinley, W., A.G. Schick, H.L. Sun & A.P. Tang (1999). ‘The financial environment of layoffs: A descriptitive study’. Journal of Strategic Management, 2(1): 121–145. Mentzer, M.S. (1996). ‘Corporate downsizing and profitability in Canada’. Canadian Journal of Administrative Sciences, 13: 237–250. Montgomery, C., A. Thomas & R. Kamath (1984). ‘Divestiture, market valuation, and strategy’. Academy of Management Journal, 27: 830–840. Morck, R., A. Shleifer & R. Vishny (1988). ‘Management ownership and market valuation: An empirical analysis’, Journal of Financial Economics, 20: 293– 315. Nguyen, T.H., A. Seror & T.M. Devinney (1990). ‘Diversification strategy and performance in Canadian manufacturing firms’. Strategic Management Journal, 11: 411–418.

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Ofek, E. (1993). ‘Capital structure and firm response to poor performance’. Journal of Financial Economics, 34: 3–30. Oswald, S.L. & J.S. Jahera (1991). ‘Research notes and communications the influence of ownership on performance: An empirical study’. Strategic Management Journal, 12(4): 321–326. Pearce , J.A. & K. Robbins (1993). ‘Toward improved theory and research on business turnaround’. Journal of Management, 19(3): 613–636. Pelham, A.M. (2000). ‘Market orientation and other potential influences on performance in small and medium-sized manufacturing firms’. Journal of Small Business Management, 38(1): 48–67. Robbins, D.K. & J.A. Pearce (1992). ‘Turnaround: Retrenchment and Recovery’. Strategic Management Journal, 13(4): 287–309. Robins, J.A. (1993). ‘Organization as strategy: Restructuring production in the film industry’. Strategic Management Journal, 14 (Summer Special): 103– 118. Schendel, D.E. & G.R. Patton (1976). ‘Corporate turnaround strategies: A study of profit decline and recovery’. Journal of General Management, 3(3): 3–11. Shleifer, A. & R. Vishny (1992). ‘The takeover wave of the 1980s’. Journal of Applied Corporate Finance, 5: 49–56. Simerly, R.L., & M. Li (2000). ‘Environmental dynamism, capital sturcture and performance: A theoretical integration and an empirical test’. Strategic Management Journal, 21(1): 31–49. Tushman, M.L. & E. Romanelli (1985). ‘Organizational evolution’. Research in Organizational Behavior, 7: 171–222. Venkatraman, N. & V. Ramanujam (1986). ‘Measurement of business performance in strategy research: A comparison of approaches’. Academy of Management Review, 11(4): 801–814. Wayhan, V.B. & S. Werner (2000). ‘The impact of workforce reductions on financial performance: A longitudinal perspective’. Journal of Management, 26(2): 341–363. Zajac, E.J., & M.S. Kraatx (1993). ‘A diametric forces model of strategic change: Assessing the antecedents and consequences of restructuring in the higher education industry’. Strategic Management Journal, 14 (Summer Special): 83–102.

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Globalization of Market-driven State Enterprise

CHN-CHN Ceramics (C&C), China Jifu Wang

l

William R. Boulton

China’s state enterprises face extinction unless they can transform themselves into competitive enterprises. Since state enterprises account for 35 to 40 per cent of China’s gross national product and 60 per cent of all state revenues, their successful transformation is critical to China’s continued economic growth and development. Statistics reveal that state enterprises represent 50 per cent of the firms in Chinese industry–some 305,000 state enterprises, of which 118,000 are industrial firms (Gao and Chi, 1997), not including township-level firms (World Bank, 1997). Near monopolies provide the nation’s infrastructure, energy, transportation, and telecommunications services. In China’s heavy industries, state enterprises virtually dominate steel making, machine building, and petroleum production. With their dominant position in China’s economic structure, state enterprises also provide much of the social welfare for the vast majority of China’s urban workers, as well as the fiscal revenues for most government operations (Steinfeld, 1998). With China’s entry into the World Trade Organization (WTO), the government is releasing state enterprises from state control, charging them to become globally competitive (Morrison, 1999). Enterprises are becoming responsible for their own viability, and government involvement is being reduced in accordance with WTO rules. As barriers to foreign firms fall, state enterprises face increased competition. Under to WTO rules, foreign, private, and state enterprises must freely compete in areas like manufacturing, telecommunications, banking and insurance. The government must treat all enterprises in the market equally. In air cargo, for example, foreign airlines have already opened and expanded air routes in China. Among the 15 strongest airfreight companies in the world, 13 have established routes into Mainland China. The four major express delivery companies (FedEx, UPS, DHL and TNT) have penetrated the market, creating unprecedented competition in the Chinese airfreight market. From January to August 2001, Chinese airline’s volume of air cargo transport and the revenue from air cargo services slipped 20 per cent on air routes to the United States (ChinaOnLine, 2001).

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Heavily influenced by Russia’s economic failure, the Chinese government is committed to converting state enterprises into market-driven enterprises. After decades of central planning and control, state enterprises face operational redundancies, organizational stagnation, and technological obsolescence. While the range of challenges and responses differ between state enterprises, most struggle to make their products competitive in a global marketplace (Filatotchev, Buck and Zhukov, 2000). They lack structural flexibility, competitive technologies, or operational efficiencies (Chi, 2000; Jefferson and Singh, 1997; Steinfeld, 1998). Unfortunately, capital required to address these problems is not readily available from the financially strapped banking system, or from outside investors.

State Enterprise Challenges State enterprises face a series of challenges in addressing the newly competitive Chinese marketplace. This research used the Challenge-Response Model (Hofer, 1973) to organize the list of widespread challenges (Figure 11.1) that threaten state enterprises. Organizationally, state enterprises are being forced to restructure themselves into modern corporations with boards of directors and effective organizational structures and management teams. The traditional lack of cost controls and information systems has made performance nearly impossible to determine or track. Lack of product design and quality controls has destroyed any brand loyalties, and has given foreign imports a competitive advantage. As a result, most products have become low-priced commodities with thin profit margins. Finally, poor investment planning and government funding systems have left firms with heavy debts and obsolete facilities and technologies.

Source: Adapted from Hofer, 1973.

Fig. 11.1: Conceptual Strategic Challenge-Response Model The WTO’s requirement to open China’s markets and the increased globalization present a major environmental challenge to the country’s state enterprises. As China opens its markets in accordance with its commitments to the WTO, its state enterprises face competition and pressure to modernize

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facilities, improve technologies and products, and enhance marketing skills. The Internet has opened access to information about competitive products and raised the expectations of Chinese buyers. With government priorities to modernize state enterprises and open domestic markets, the time available for corporate transformation has shortened. These challenges are forcing alterations in the state enterprise’s strategic directions (i.e., the firm’s objectives, strategy, functional policies and procedures). The type of strategic responses being adopted will influence the future performance of these firms (Hofer, 1973). Chongqing CHN & CHN Ceramics Co., Ltd. (C&C), for example, has emerged from near collapse as its new leadership introduced a well-orchestrated strategy to improve its technology in support of process and product innovations. Today, C&C produces the ‘best china in China’ and is a strong contender for leadership of the world ceramic market. C&C ‘s innovative and quality products, technologies, cost management capabilities, and information systems are world class.

C&C: A TRANSFORMATIVE CASE STUDY Chinese ceramics have gained recognition for thousands of years for their beauty, design, and shapes. They were said to reflect the mystery and elegance of the Far East. Indeed, the legacy of the origin of the term China, standing for ceramics, goes back to the 13th century when Western explorers traveled the Silk Route to a small town named Tanlan in China’s Jiangsi Province. They were attracted and amazed by the beauty of the ceramics there. From that time, ceramics and ceramics production techniques were introduced to Europe, which people called ‘China,’ after the Tanlan natives’ Chinese pronunciation for ceramics. However, China’s allure dwindled throughout the 20th century as countries like Great Britain, Germany, and Japan used advanced technology to produce finer ceramics. China fell to sixth place in the value of ceramics sales, despite the fact that it was first in terms of production volume, and exported nearly two thirds of the world’s ceramics output. ‘Made in China’ had come to reflect poor quality, cheap prices, and unreliable products. Poor quality and inferior products resulted in below average market prices for Chinese ceramics. As a result, the average price per piece of china was 87 US cents in the global marketplace, but only 30 US cents for Chinese ceramics. By 1990, the low point for Chinese ceramics’ quality and profits, C&C was 10 million yuan in debt and faced bankruptcy. As an state enterprise, C&C’s dismal performance resulted from a combination of poor technology, low quality products, and a resulting low-end market focus. Yet today, C&C is China’s leading producer of fine china, producing 30 million pieces of supreme ceramics and collecting revenues of 180 million yuan. In 1999, the CHN&CHN brand became the government’s choice of tableware for use at the state banquet to celebrate the 50th birthday of the People’s Republic of China, hosting 5000 people. C&C’s product quality even meets the stringent requirements of Rosenthal in Germany.

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C&C’ S S TRATEGIC P LAN Foreign competitors, who produced better quality china, were largely responsible for the rapid decline of China’s ceramics industry. Market-driven production management was lacking in state enterprises controlled by China’s centralplanning system. Although China had been moving towards a market economy since 1978, the state enterprises’ production and technology capabilities typically determined their market offerings, not customer requirements or demand. This was the case in the ceramics industry where firms ran labor-intensive sweatshops. Poor quality china lacked consumer demand (World Bank, 1997). Min Zhang, C&C’s CEO and Chairman, became factory manager in late 1993 when the company hit its nadir. As a government controlled state enterprise, Zhang had neither control over company resources nor the authority over factory personnel. At best, a manager could make cursory changes while waiting for government officials to decide the factory’s destiny. Instead of waiting, Zhang and his management team thoroughly analyzed the company’s challenges and proactively sought local and central governmental support to turn the company around. C&C’s management recognized five major challenges in becoming market-driven: 1. Addressing Customer Requirements. Zhang noted that most Chinese firms were weak in product design and innovation (Boulton and Kelly, 1999). Due to China’s ‘closed-door’ policy, product specifications and customer preferences were never considered. Designers could not travel abroad, which meant they had no information on consumer preferences for color, patterns, or fashions. 2. Setting Prices and Controlling Costs. Traditionally, state enterprises based prices either on cost plus some markup, traditional pricing protocols, or economic pricing models, not on competition or market acceptance. After carefully analyzing its markets, C&C focused on selected customer segments and established pricing strategies that addressed customer and competitive requirements. Pricing to markets put competitive pricing pressures on C&C, forcing the company to develop a cost management system. C&C’s management wanted its product prices to respond to changing market conditions, which meant that the company had to gain control of its operating costs. 3. Improving Product Quality. Along with product designs, C&C realized that product quality was the key to its market acceptance. Zhang contended that ‘good quality’ management must become part of the daily routine of its employees. He argued that quality ‘was not only the fundamental basis for the firm reputation, but also the intangible asset for sustained advantage in competition’. Though C&C gained a competitive edge on quality, pattern design, and product shape and variety, competitors then started imitating its products using advanced technology. 4. Improving the Brand Name and Company Reputation. C&C’s management was committed to becoming the ‘number one’ brand in the Chinese and Asian markets, as well as in the world market. While it often took decades for traditional manufacturing firms to establish a worldwide brand, China’s ceramics industry

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lacked any famous brands. Chinese firms had failed to recognize the significance of brand identity. C&C recognized the need to establish a brand identity strategy (White, 2000). 5. Establishing a Sales Network. C&C recognized the need to target both national and international markets. Domestically, it established a national sales network while expanding marketing activities into Asia and other global markets.

C&C’ S R ESTRUCTURING P LAN C&C’s strong business plan won the support of officials. Zhang’s strategy included restructuring the factory, updating the factory’s manufacturing technology, and upgrading production facilities. His biggest challenge was in reengineering the factory to be flexible and adapt to changing market needs. C&C’s strategic response included a three-step rescue plan that focused on technology renovation, ownership restructuring, and the acquisition of hightechnology manufacturing facilities. 1. Obtaining Funding for Renovations. C&C’s management team proposed acquiring high-speed production technologies, instituting international production standards, and producing premium ceramics. Since C&C was not listed in China’s Eighth Five-Year National Plan (1990–1995), which included firms that qualified for technical renovation, Zhang had to obtain a hearing in Beijing. After presenting his plan to a panel of experts, the ministry’s decision-makers approved his plan. Zhang then sought funding for the project, but was turned down by financial institutions which found it too risky. In desperation, he visited Rongji Zhu who was responsible for China’s production and financial sectors. After waiting at the gates of the State Economy and Trade Commission for an entire week, Zhang was able to meet Zhu. In the end, he was awarded $4 million from the reserves of the State Economy and Trade Commission to fund his project. 2. Corporate Restructuring. Zhang believed that C&C’s long-term success depended on his being able to find a foreign joint venture partner. Such a relationship could provide additional capital, management expertise, product information, market access and distribution channels, tax privileges, and more management autonomy through less government intervention. In fact, to attract and encourage foreign investment, the Chinese tax regulation then stated that the joint venture enterprises could enjoy two-year tax exemption and threeyear half tax waiver. Therefore, he and his team sought investors in Great Britain, the US, Germany, Japan, and Hong Kong, but with little success. Potential investors were not impressed with C&C’s dismal factory and considered such an investment equivalent to ‘throwing money into the fire’. Undaunted, Zhang attended the 1991 Guangzhou Ceramics Exhibition where he met Zhaofeng Li, president and chairman of the Board of Directors of the Hong Kong Zhaofeng Ceramics Group Corporation. Li had dreamed of becoming king of the Chinese ceramics business and had been looking for a competent domestic partner. Zhang’s capability, confidence, and sincerity were

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well suited to Li’s ambition. They first established a partnership, and later a joint venture, Chongqing Zhaofeng Ceramics Co. Ltd., with $1.25 million invested by Li and $3.75 million by C&C. Zhang committed to ‘employing the best people, using the best manufacturing facilities, manufacturing the best products and creating the best organization’. 3. Renovating Production Facilities. The joint venture’s success depended on upgrading C&C’s production capabilities. After reviewing available options, Zhang and his partner decided to import the most advanced foreign manufacturing equipment available. The new facility was designed to ensure that it would rank amongst the best for at least 20 years. German manufacturing equipment was selected, which gave C&C the most automated production line in the world. Zhang’s goal was to produce 6 million ceramic pieces by 2000.

P RODUCING PREMIUM Q UALITY C ERAMICS To produce the best quality products, C&C purchased the ceramic formula from the Germany Ceramic Research Center, a formula developed to use Chinese raw materials that met the standards of German five-star hotels. In addition, it obtained 30 sets of blueprints of the best German designers’ ceramic patterns. Zhang’s goal was to meet Japanese ceramics firms’ quality standards.

INTEGRATING INFORMATION SYSTEMS Inadequate or unusable information, and slow product development cycles, hampered C&C’s process innovation and functional creativity. In 1995, Zhang implemented a computer integrated manufacturing system for ceramic production from the Chinese government’s ‘863 High-Tech Program’. His goal was to integrate information technology and modern management technology with manufacturing technology to optimize C&C’s time to market, quality, cost and service processes. The computerized system integrated sales, production, purchasing, storage, accounting, and personnel functions. It allowed workers, technologists, and managers to visualize solutions and work together on complex systems. It improved production flows and efficiencies and also allowed the development of computer networks, database management, and product engineering systems. Electronic data systems were developed for computer-aided design of shapes, decals and mould, as well as computer-aided process planning for ceramic products. To further reduce development time and broaden its technical base, C&C developed partnerships with universities, research institutes and other companies. They helped integrate computer-aided design data, simulation results, work schedules, and project status information into the company’s engineering data management systems. Ceramic manufacturing has a high demand for product moulds. A mould is only good for one design. Computerized system supports functional cooperation and design integration for the shapes, patterns, technology, and tools required to shorten C&C’s product development cycle. Historically, mould making depended on the operator’s experience and skills, and was expensive because of

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high failure rates. Computer aided design-based mould making standardized the mould manufacturing process. Computerized system also provided a threedimensional computer-aided designing capability for decorating ceramics. The computer-aided pattern design system and computer-aided mould system were integrated. C&C’s ceramic product engineering design system and ceramic enterprise management information system were integrated for product data management. Through software, customers participated directly in the design of new or customized ceramic products. Through rapid 3-D ‘virtual’ prototyping, the cost and time required to design, produce, and deliver a new prototype ceramic sample to the customer has been cut dramatically. This has improved customer satisfaction and facilitated product contracts. Simulations addressed problems like decal deformation for complex curves and decal positioning. Three-dimensional computer-aided designs could be used to test concepts and show product variations without building physical models. The integration of computer-aided design and simulation databases provided faster and simpler communication with engineering partners. Simulations of the assembly and production processes reduced manufacturing set-up costs and time. In-process design software allowed inexpensive experimentation, yield prediction, workstation design, process layout, alternative testing, threedimensional analysis, network manipulation, quality control, and interface timing capabilities that would otherwise be expensive. Integrated computerized system allowed rapid distribution of products, and market feedback that added value to ceramic innovations in preferred patterns and shapes, colors, and decoration. Furthermore, the integrated computerized knowledge-based system provided design coordination, manufacturing monitoring, and logistic controls needed to find and source innovative solutions worldwide.

A DDING H UMAN C APITAL Zhang believes that ‘everything in the firm is accomplished by people, and, thus, ‘our organization is only as good as our people’. In 1993, Zhang began recruiting the best people from Jingdezhen, a leading ceramics manufacturing town in China. ‘I went there without attracting any public attention, talked to people and studied who were on top of the cream for ceramic operation. Then I came to each of them, telling them the bright future they could have with C&C in their self-actualization. I promised them several things that were almost impossible at that time: 1) I would give them ten times the pay they had with their company then; 2) I would buy them a house for their families; and 3) I would change their resident status from a small town to Chongqing City. This was the first daring and pioneering act ever in Chongqing, which is one of the only four cities controlled by the central government, thanks to the special approval from both the Mayor and the party secretary of the Chongqing municipality. So, I have all of them: the best in ceramic

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design, the best in furnace, the best in mould, and the best in product pattern and decoration. Had it not been for these people with the skills and experiences that were passed down for thousands of years in ceramic operation, C&C would not have made such brilliant success today.’ C&C also recruited top managers from Shenzhen, one of the first areas in China to experiment with the market-economy. Employee development and training was considered critical. Zhang set an example by earning an MBA from Chongqing University. Technical and marketing personnel were sent abroad for training and market research. C&C also conducted ‘devil training’ classes (originated in Japan), which focused on new management ideology, good team spirit, good health, and good eloquence. By the end of 1999, one third of the company’s employees had received some form of college education–unusual for traditional Chinese manufacturing firms.

IMPROVING M ARKETING Zhang’s marketing strategy was to conquer the domestic market with his premium products. Zhang realized that premium products alone did not guarantee success in the Chinese marketplace. A well-known brand, strong company reputation and identifiable trademark were all part of his strategy to establish global leadership. Huatao in Chinese and CHN & CHN in English were C&C’s brand names. Huatao in Chinese means china or ceramics of China and originated from the words of encouragement written for the company by Chinese President Zemin Jiang when he visited the organization. CHN-CHN stood for both Huatao as well as Chongquing china/ceramics. The trademark of two Cs facing each other symbolized the shape of a plate. Zhang started public advertisements in 1995 and positioned C&C in the high-end segment of the domestic ceramic market. The promotion reached its climax in 1999 when the Great Hall of the People ordered 250,000 pieces of ceramic products from C&C for the 50th Anniversary of the People’s Republic of China. As a result, C&C became ‘China’s First Brand in China’. In 1996, C&C began building a regional exclusive-dealership system which ensured that dealers made good profits. Once the market was developed and the distribution system was in place, an agent would be hired to further develop the market. This was effective in developing, cultivating, and expanding markets within China. Applying ABC pricing, exclusive agents enjoyed the most favorable A price system. If there were no exclusive agents in a province, C&C sold to wholesale agents using the B price system. The C price system was applicable for big department stores or supermarkets. To improve customer access in 2000, the ‘Projects of Two One Hundreds’ focused on establishing 100 special it stores throughout the country, plus 100 special it counters in nationally known department stores, supermarkets, and hotels. C&C is now the undisputed leader in terms of sales volume, market share, production, and design. C&C has also established a worldwide exclusive distribution channel. In 1998, 95 per cent of C&C’s products were sold in the domestic market although international markets were more lucrative. By the end of 2000, the ratio between

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national and international sales reached 30:70. In 2000, Zhang sold products in more than 20 countries. He planned to export 80 percent of his products to international markets in 2001. In most countries, C&C manufactured for local companies and sold the products under their names. In the US, for example, Oneida was a major partner of C&C. Oneida Ltd. was the world’s largest manufacturer of stainless steel and silver-plated flatware for both the consumer and food service industries, and the largest supplier of dinnerware to the foodservice industry. Oneida was also a leading supplier of a variety of crystal, glassware and metal serve-ware for the tabletop industries. Several other large ceramic US manufacturers also outsourced their production to C&C. Zhang’s sales pitch was, ‘Why do you make your own products when I can provide the exact goods with better quality for almost half of your price?’

T ECHNOLOGICAL I NNOVATION To ensure technical innovations and new product developments, C&C established a national technical center for the Chinese ceramic industry. The center focused on new operating methods such as integrated computerized system and computer-aided design systems to increase efficiency and improve the capability of new product development.

C&C’ S C OMPETITIVE P ERFORMANCE Zhang’s initial goal was to be first in China, which was achieved in 1998. Domestic sales increased from 27.2 million yuan, in 1995, to 61.49 million yuan in 1999. Sales revenue for the first six months of 2000 was 26.46 million yuan. His goal of producing 6 million ceramic pieces was surpassed in 2000 by 1.2 million pieces, with product quality meeting Japanese standards. Zhang’s second goal was to be first in Asia, which was accomplished in 1999. Export income increased from 30.26 million yuan in 1995 to 115 million yuan for 1999. Export revenue for the first six months of 2000 was 44.81 million yuan, 509 per cent higher than 1995. Quality standards satisfied the requirements of Germany’s Rosenthal. Production reached 30 million ceramic pieces. C&C planned to raise production by 67 per cent in 2001. Zhang’s third goal is still on track: to be first in the world by the end of 2005 with production outputs of 80 million pieces and quality standards equal to Britain’s Royal Doulton.

C&C’ S O PERATIONAL PERFORMANCE C&C had also improved its operational capabilities as measured by cost management, quality management, market share, integrated management, process management, and information technology (Cravens, 1998; Enz and Siguaw, 2000; Kueng, 2000; Welfle and Keltyka, 2000; Willis, 2001). Cost Management. The application of sales and production management systems improved sales forecasts and production plans, thus eliminating excessive production and inventory. C&C’s carrying and handling cost of inventory was

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cut by 3.1 per cent per month, down from 11.5 million yuan to 9.36 million yuan. A further reduction to 8 million yuan was expected by year-end 2000. C&C reduced raw materials costs by 4.63 per cent per month, cutting costs from 1.26 million yuan to an expected 0.6 million yuan by the end of 2000. Decal papers and packing material costs were reduced by 2.87 per cent per month, from 8.12 million yuan to 6.72 million yuan with additional cuts of 1.2 million yuan expected by 2002. Quality Management. C&C was the first ceramics manufacturer to obtain both ISO9001 certification and the Geneva SGS International Quality Institute certification. Furthermore, C&C was awarded the US Federal Drug Administration (FDA) certificate for its use of lead-free and cadmium-free glaze technology. Market Position. C&C’s products are presented as national gifts, to country presidents and other governing officials, and is the product of choice for many five-star hotels. C&C was the first Chinese ceramics company to attain both domestic and worldwide brand recognition. It was awarded the First Brand of Ceramics for China by the China Assessment Center for Famous Brand of the State Quality and Technology Control Bureau. C&C received AAA certification for brand recognition and AA certification for brand influence. Information Systems. It had standardized its processes and information systems which allowed it to communicate and coordinate activities with national and international firms. Integrated computerized system provides timely and correct sales, production, purchasing, accounting, and marketing information. The data for products, material lists, and inventories have been standardized, which facilitates information sharing. The integrated information systems clarify responsibilities for all departments and standardized management methods. The integration of electronic data system and management information system integrated C&C’s ‘material flows’, ‘information flows’, and ‘capital flows’. C&C was the only Chinese ceramic firm recognized by the State Science and Technology Ministry as a model enterprise for its use of integrated computerized system technology by meeting industry, national (GB) and international standards (ISO). Process Innovations. C&C was recognized in the Eighth Five Year Plan as a national model for reorganization and reconstruction in the ceramics industry, and is classified as one of China’s high-technology enterprises. It won first prize for its First Class New Production of National Light Industry, and won first prize for Science and Technology Progress in Chongqing.

Conclusion Under China’s prior centrally planned economy, competition was considered inappropriate. State enterprise managers simply administered central government policies as though China was one big company. Competition for markets, products, or prices was forbidden and people, capital, and natural resources

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were allocated according to the national plan. Managerial competences, technological innovations and broad product offerings were discouraged. The infrastructure was void of any economic incentives. While C&C demonstrates the progress being made in China, other state enterprises continue to face strategic challenges unfamiliar to most western firms. The old system restricted the transformation of state enterprise capabilities and structures. Since 1992, state enterprises have been required to shift their sole dependence from the government to a dual dependence on both the government and the marketplace. Chinese executives had to cultivate relationships with local governments since they control critical resources, such as timely access to technical licenses or capital (Kornai, 1986; Khanna and Palepu, 1999). Today, government protection from foreign competition continues to wane as stateowned enterprises are forced to compete in open markets with joint ventures and foreign-owned companies. As illustrated by C&C, state enterprise managers are challenged on every front. In the Chinese ceramics industry, C&C fought for survival. It changed its structure to a joint venture enterprise in 1993 and then imported new product and production technology. It took advantage of tax breaks from both the state and local governments to purchase advanced manufacturing hardware from Germany. It aggressively recruited the best people in the industry and used advanced integrated computer systems to integrate business processes. Today, C&C is well on its way to becoming a global leader in the world ceramics market. Figure 11.2 summarizes the range of challenges facing state enterprises, including: (a) rapid globalization; (b) technological change, (c) inadequate regulations and infrastructure; (d ) immature networks; and (e) increased competition. State enterprises are busy changing their organizational structures to become competitive and free of central planning ideology. Most common responses include (a) revising product-market objectives and strategies,

Fig. 11.2: Challenge-Response Model for China’s State Enterprises

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(b) acquiring new technologies and skills, and (c) restructuring organizations, including corporate ownership, processes and operating procedures. Such responses are crafting state enterprise strategies. As shown in the C&C case, product and process developments, technical innovations, brand development, and new market entry can create formidable competitors and successful companies. As managers find a strategic fit between their business environment and organizational strategy, we should expect to see continued improvement in performance and market positions. New ownership and organizational structures, greater innovation, increased market share, technological developments, improved profitability and quality, information integration, and product development were the outcomes of C&C. Other state enterprises are responding in similar ways and achieving similar outcomes. While not all state enterprises have been as successful as C&C, they are adopting advanced management techniques and developing strategies that rank with the world leaders. State enterprises are overcoming decades of central planning, bureaucratic government leadership, and limited internal control. Challenges to build competitive product lines and to compete in local and international markets demands world-class management techniques. As seen in the C&C example, Chinese firms can become major competitors in a relatively short time.

References Anonymous, ‘China airfreight buffeted by foreign carriers’, ChinaOnLine, 20 September 2001. Boulton, W.R. & M. Kelly (1999). Information Technologies in the Development Strategies of Asia. Washington DC: Office of Technology Policy, U.S. Department of Commerce. Chi, F.L. (2000). China’s Economic Reform at the Turn of the Century. Beijing: Foreign Languages Press. Cravens, D.W. (1998). ‘Implementation strategies in the market-driven strategy era’. Academy of Marketing Science Journal, 26(3): 237–241. Enz, C.A. & J.A. Siguaw (2000). ‘Best practices in human resources’. Cornell Hotel and Restaurant Administration Quarterly, 41(1): 48–61. Filatotchev, I., T. Buck, & V. Zhukov (2000). ‘Downsizing in privatized firms in Russia, Ukraine, and Belarus’. Academy of Management Journal, 23(3): 286–304. Gao, S. & F. Chi (1997). Reforming China’s State-Owned Enterprises. Beijing: Foreign Language Press. Hofer, C.W. (1973). ‘Some preliminary research on patterns of strategic behavior’. Academy of Management Proceedings, 46–54. Jefferson, G.H., & I. Singh (1997). ‘Ownership reform as a process of creative reduction in Chinese industry’. In A.M. Babkina (Ed.), Domestic economic

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modernization in China (pp.111–140). Commack, New York: NOVA Science Publishers, Inc. Khanna, T., & K. Palepu (1999). ‘The right way to restructure conglomerates in emerging markets’. Harvard Business Review, 77(4): 125–134. Kornai, J. (1986). ‘The soft budget constraint’. Kykios, 39(1): 3–30. Kueng, P. (2000). ‘Process performance measurement system: A tool to support process-based organizations’. Total Quality Management, 1(1): 67–85. Morrison, W.M. (1999). China’s Economic Conditions, Foreign Affairs, Defense, and Trade Division, National Council for Science and the Environment. Steinfeld, E.S. (1998). Forging Reform in China: The Fate of State-Owned Industry, Cambridge University Press. Welfle, B. & P. Keltyka (2000). ‘Global competition: The new challenge for management accountants’. Ohio CPA Journal, 59(1): 30–36. White, S. (2000). ‘Competition, capabilities, and the make, buy, or ally decisions of Chinese state-owned firms’. Academy of Management Journal, 43(3): 324341. Willis, A.K. (2001). ‘Aligning performance measurements with organizational strategies’. Hospital Material Management Quarterly, 22(3): 54–63. World Bank (1997). China 2020: development Challenges in the New Century.

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Development of Chinese Managerial Behavior

A 7-P Model based on the Forces of History and Culture* Kai Cheng Yu

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Ping Ping Fu

It is said that no single individual, whatever the extent of his/her knowledge, could possibly know the whole truth about the Chinese (Smith, 1894). 1 Nonetheless, in this chapter, we will attempt to do the impossible: put forward a model that presents seven major characteristics of average Chinese managers and the major transformative forces in history and culture that account for those characteristics. We hope to provide some hints for ourselves as well as our foreign friends to better analyze and understand the mind and behavior of Chinese managers. We want to do this simply because nobody has done it and there is a need for such a framework. China’s economic role in the world is becoming increasingly important. More and more social scientists are studying various social phenomena in China, trying to understand the historical and cultural reasons that have made the Chinese somewhat different and difficult compared to the open and confident Westerners (Chen, 2001). Most studies attributed the differences to the ancient Confucius and other Chinese traditional values, but very few scholars have paid an adequate amount of attention to the influence of China’s modern history on the Chinese people, specifically the influence of the Chinese Communist Party and the various political movements (Kelliher, 1994). However, all of those played an important role in forming the current Chinese culture.

* 1

We thank David Lamond for his help and comments. Arthur H. Smith was a missionary in China. He traveled extensively and recorded what he saw over the 20 years he lived in China. His book, Chinese Characteristics, published in 1894 influenced the Westerners and Japanese’s views of the Chinese but also the Chinese themselves. It was recently translated into Chinese and many of the characteristics he described are still remarkably similar to the current Chinese characteristics.

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Many researchers have also studied the characteristics of Chinese managers. They variously found that Chinese managers had major concerns with guan xi (connections or relationships), and ren qin (face and favor among people). In the business negotiation literature, the Chinese negotiators are seen as anxious to exploit agreed principles, and good at using the ‘sweet and sour’ approach (Fang, 1999).2 At the societal level, the Chinese people are portrayed as having a strong sense of family. Indeed, the country is viewed as a big family, in which people are very sensitive about this family (Bond, 1991), 3 not allowing any possible mistreatment of the country. Despite all this attention, few studies have attempted to comprehensively present the characteristics of the Chinese (Chen, 2001). In order to be able to refer to the forces that shape the characteristics we describe in our model, we are going to introduce six forces first. We will then discuss seven characteristics. Finally, we will explore the implications of having such characteristics for managerial behavior amongst mainland Chinese managers. The seven characteristics are, however, by no means comprehensive, but they do represent a collection of the major characteristics that can be easily observed in the Chinese from the mainland and the six forces will prove to be handy in understanding them.

The Six Major Forces The importance of cultural values derives from the fact that they can profoundly affect the attitudes, behavior, and performance of individuals, groups, or the organization as a whole, as well as shape managerial philosophies and styles (Adler, 1993). The culture that affects the attitudes, behavior, and performance of the Chinese managers is a product of many forces. Of all the forces that help shape Chinese culture, the six major ones are: (a) traditional Chinese values; (b) small producers’ mentality; (c) orthodox Marxist ideology; (d) prolonged practice of a planned economy; (e) leftist ideological trend; and (f) modern managerial philosophies.

1. TRADITIONAL CHINESE VALUES Although we criticized some Western scholars for neglecting the influence of modern Chinese history, we do agree with them that if we were to use one word to characterize the Chinese way of life over the last 2000 years it would be Confucian (De Bary, Chan and Watson, 1960). Confucianism is a Chinese philosophical tradition that has fundamentally shaped not only Chinese but 2

3

Tony Fang worked in a Chinese shipping company for four years where he was heavily involved in negotiating with Western shipbuilders and marine suppliers. In his book Chinese Business Negotiating Style, he recorded many real cases to illustrate the Chinese negotiating styles. A Canadian living and teaching at the Chinese University of Hong Kong for over 23 years, Michael Bond has very sound knowledge of the Chinese psychology and has written several books and many research articles on the subject.

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also East Asian mentality for 2500 years. Over a century ago, an American missionary in China had noted that Confucianism was the base, and all Chinese were Confucianists, as all English were Saxons (Smith, 1894). A century later, even though the Chinese do not explicitly identify themselves as Confucianist, the influence of Confucianism in the country is still observable. Indeed, the word ‘Confucianism’ has been almost synonymous with the words ‘Chinese traditional culture’. Therefore, to understand Chinese culture, we do need to first understand Confucianism, as is noted by Li Zehou (1986)—one of the best known historians in China. The ‘five constant virtues: benevolence (ren), righteousness (yi), propriety (li), wisdom (zhi), and fidelity (xin)’ in Confucianism were the guidelines for behaviors (Li, 1986). But ideologically, there are four major virtues in Confucianism: the class system; the obedience of subordinates to their superiors; the Doctrine of the Mean; and the use of ren qin. Class System. Confucius believed in maintaining the ancient rituals and proper ceremonies. According to the Confucians, anybody’s social status, no matter high or low, is determined at birth. The orders between emperor and subject, father and son, elder and younger brother, husband and wife, and friend and friend (the five cardinal relationships) are given and cannot be changed. By affirming and embracing patriarchy as the organizing principle of society, China’s imperial rulers solidified their absolute authority over their subjects as well (Farh and Cheng, 1999). Obedience. Of the five cardinal relationships mentioned above, three of them explicitly address social relations within the family (father-son, husband-wife, and brother-brother). Confucius placed a premium on seniority. The apex of the structure was the oldest living male, who was the leader of the family in all respects. It was assumed that with old age came wisdom gained in a long life experience. Therefore, the eldest male possessed absolute authority over the family. As the head of a family, he was expected to rule benevolently and justly and his commands had to be completely obeyed by all the family members. The family members, on the other hand, were expected to be absolutely obedient and loyal to the family head. Doctrine of the Mean. This doctrine is essentially about avoiding extremes. Confucius argued that any extreme idea would lead people astray and create disorder in society. He regarded the golden mean as the best virtue. Therefore, he urged people to control their emotions and refrain from desires in order not to lose insight and the ability to remain neutral. Ren qin. The fourth virtue is the use of ren qin (being kind or respecting the feelings of other people) as the standard for judgment. Generally speaking, ren qin is more important than laws in the eyes of the Chinese people. According to Confucianism, ren qin is an internalized virtue that is more powerful than laws. The influence of such beliefs can be seen throughout Chinese legal history. In the Han dynasty, there were laws stipulating that if a son reported his father’s crimes, the son would be heavily punished for being ‘buxiao’ (disobeying filial

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piety). The laws of the Qing Dynasty stipulated that if the father’s crime reported by the son did not exist, the son would be sentenced to death. If it did exist, the son would still be beaten and jailed for three years. The same applied to the wife should she report her husband’s or her parents-in-law’ crime. The influence of such beliefs is strongly felt even in today’s society, though not to that extreme. Chinese historian Li Zehou (1986) pointed out that Confucianism’s domination over Chinese traditional culture is by no means accidental. Compared with other schools of thought, Confucianism is more deeply related to ancient Chinese economic traditions and family legal practices. Active enforcement of Confucian ideologies can be seen in the socialization, education, and daily living practices. In fact, ever since Dong Zhongsu, a famous Confucian scholar in 134 AD, proposed the banning of all schools of thought except the Confucian school, emperors of all dynasties accepted Confucianism as the ruling value system and Chinese culture has almost exclusively been identified with Confucianism. However, it would not be accurate to discuss traditional Chinese culture without mentioning the influence of the Taoism and Buddhism, because traditional Chinese culture is molded by all three philosophical schools. Briefly, Confucianism deals with human relationships, Taoism deals with life in harmony with nature, and Buddhism deals with people’s immortal world (Li, 1986). Treating all three as philosophical schools, rather than different religions, the Chinese can follow all three teachings simultaneously. This foundation of Chinese culture has made the Chinese intensely practical and given them great power to absorb all things that are good and beneficial, irrespective of their origin. Chinese culture has survived and has been enriched by this power (Lee, 1995).

2. SMALL PRODUCERS’ MENTALITY Small producers (xiao shen chan zhe) mainly refer to peasants, which still count for over 80 per cent of the Chinese population. Historically, they were poor and owned little or no land. These conditions mean they were formed in a ‘dual nature’. On one hand, they were exploited by the landlords, and lived a very poor life; so they were not happy and wanted to change. Therefore, they reacted enthusiastically to opportunities that would help them change their lives. On the other hand, peasants were mostly illiterate. They did not have their own ideology and had to rely on the landlord, which made them very short sighted, conservative and narrow-minded. This is why ‘there were so many peasant revolts’ in history…and why they always lose, or, if they won, they were unable to change the social structure (Kelliher, 1994).4 So politically, they were thought to be revolutionary but incompetent to carry out revolution on their own; they were susceptible to reaction and superstition. In modern China, this ‘dual nature’ 4

D. Kelliher is one of the few scholars in our field to have studied extensively the impact of Chinese Communist Party on China although a lot has been written by people in other fields. Her article gave a very extensive discussion of the Chinese peasantry, how and why Chinese policies are so closely related to it.

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was viewed negatively, in that the peasants were seen to have a flawed political consciousness that threatened to infect the state of the Party. Ironically, the small producers’ short-sighted orientation and practical mentality can also be traced back to Confucian doctrine. For a Chinese, a sense of security can only be achieved by the incessant accumulation of family wealth which, in turn, enables family members to help one another in case of difficulties (Fang, 1999). So when they did not have anything, they would have a strong sense of crisis and would be ready to fight; but once they had enough accumulated, they would lose the interest in fighting and would be eager to go back to their stable life. The late Chairman Mao was able to lead the Chinese Communist Party to successfully establish the new China because his faith in peasants’ revolutionary capabilities and his ability to maximize their revolutionary instincts while minimizing their reactionary desires (Moore, 1966). He led a nationalist peasant movement to create a single nation-state that was rooted in the patrimonial traditions of the Chinese empire. However, the nature of being small landholders in business for themselves locked Chinese peasants into feudal values and beliefs, and instilled in them a petty bourgeois character, which has been a major factor influencing Chinese thought and behavior. As petty bourgeois property holders, peasants were allegedly obsessed with gaining land and dividing it equally. The absolute egalitarianism, Mao said in 1929, was the product of a handicraft and small peasant economy and a mere illusion of peasants and small proprietors (Mao, 1929). 5 Mao condemned such desire as ‘reactionary, backward, and retrogressive’. The establishment of collectivized farming in the 1950s can be viewed as a means to eliminate the individual farms that nourished peasants’ capitalist desires. Unfortunately, Mao himself was strongly influenced by the small producers’ mentality, which resulted in many policies and practices that took China out of the global mainstream, politically and economically, for almost three decades. These policies included the closed-door policy, the paternalistic leadership style and the non-differentiating reward system, the ‘big bowl’ policy. The system has lasted for so long and people who are able to join an organization and share outcomes were actually able to maintain that share. It is also how the widely known ‘the iron rice bowl’ came into being.

3. ORTHODOX MARXISM AND MAOISM Orthodox Marxist ideology consists of three components: philosophy, Marxist and Leninist political economics, and scientific communism. The Chinese Communist Party always emphasizes educating and instilling Marxist ideologies and theories in the minds of its members as well as the Chinese people. 5

Mao Zedong (Mao Tse-tung), the late chairman of P.R. China, wrote many essays and articles, which were collected in five volumes. This was taken from his essay entitled “On Correcting Mistaken Ideas in the Party” written in 1929. From the Selected Works of Mao Tse-tung. Vol.1, 1st edition, Foreign Language Press, Beijing.

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After the death of Chairman Mao, Deng Xiao Ping initiated large-scale economic reforms. Most of the policies drawn up during the Mao regime were reformed and business organizations restructured. As Kelliher (1994) pointed out, ‘disillusioned by Maoism, both Chinese and foreigners were anxious to believe that China had entered an age of atheoretical pragmatism’. However, she also recognized that, in reality, orthodox Marxist and Mao’s theories continued to have a powerful influence on the communist Party’s understanding of social reality. The Chinese Communist Party was founded in 1921 with assistance from the Communist Party of the former Soviet Union. The ties between the two parties remained close until the early 1960s, when the relationship broke down due to political reasons. However, contrary to common belief, Marxist ideology remains one of the Chinese Communist Party’s four cardinal principles: socialism, the dictatorship of the proletariat, Communist Party leadership, and MarxismLeninism/Mao Zedong thought (Deng, 1984). The past is of such paramount importance to national identity that to rewrite the nation’s history is to re-imagine the nation (Guo and He, 1999). Likewise, Mao Zedong remains the central dominant figure in Chinese political culture. He is still an imperial presence and is still revered. What informs China’s politics today is what has informed it for the last 50 years: a philosophy that mixes nationalism and communism and which is built upon the legend of Mao as founding father. Although Marxism may have lost credibility as an ideology, Marxist theories dominate pre-1978 Chinese literature on history, politics, and economics and influence no small proportion of what is written today. Finally, the attitudes and habits that developed in the Mao era linger on (Guo and He, 1999).

4. PROLONGED PRACTICE OF PLANNED ECONOMY After the new China was established, the Chinese government copied the highly centralized planned economy system of the former Soviet Union established in the early stages of its industrialization. However, the belief in the planned economy remained firm in the 1960s even after the relationship between the countries broke down. As the country adopted a closed-door system, it did not have much idea what else to do. The system remained unchallenged. However, not long after, the Chinese government started overall economic reform when the limitations of the planned economy became too obvious to ignore. It took the Chinese government over 20 years to see the need to make the change from a planned economy to a market economy system. However, the system has become a way of thinking to the managerial personnel in the stateowned enterprises. The prolonged practice of planned economy has robbed people of their creativity and innovation. It would be natural for them to hold on to the old ways of thinking as for as they can.

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5. LEFTIST IDEOLOGICAL TREND The leftist ideological trend, which started in the 1950s among the leading body of the Chinese government, reached its peak during the 10-year Cultural Revolution. After the liberation, agrarian land reforms engulfed the entire countryside and rich peasants and landlords were put on public trial and their land confiscated. In the cities, the business class was discredited and wiped out. By the late 1950s, party cadres at various levels had consolidated all authority in the society and created a society of organized dependency (Walder, 1983). Then came the devastating Cultural Revolution (1966–1976), which turned the entire society upside down (Li, 1986). During the 10 years, anarchistic ideologies such as bu po bu li (without destruction there can be no construction), zao fan you li (It is right to rebel against reactionaries), were all over which treated all managerial procedures as ‘supervising, controlling, and suppressing’ and urged people to ‘liberate themselves’. Economically, quality and effectiveness were ignored, efficiency or political debts were counted. Costs were not considered, only quantities were stressed upon to achieve the unrealistically high goals (Lee, 1995). People were expected to give up their personal interests and the means to motivate people were criticized. Absolute equality was actively pursued. As a result, the Chinese economy was on the verge of collapsing. Although the reforms started in the late 1970s, it put an end to the leftist trend. About 20 years of mixing the right and the wrong have left a big impact on the minds of the Chinese people.

6. MODERN MANAGEMENT PHILOSOPHIES There are at least two reasons for paying greater attention to the effects of foreign cultures on Chinese culture. First, the interdependence among different economies in the world is increasing. With China joining the WTO, the economic exchanges between China and the other countries will expand rapidly. As China introduces advanced Western technology into the country, it inevitably will get influenced by various other cultures. Second, the rapid development of modern communication technology as well as the increasing interaction with the foreigners will make it almost impossible to block the influence of foreign cultures as the Chinese government used to do in the past. The growing exposure to foreign managerial practices and philosophies has forced the Chinese managers to question or challenge the beliefs and practices they have held for so long. In fact changes have already taken place in ideologies as well behavior under the Western influence. For example, a study that compared values held by Chinese managers before and after the Tiananmen Square incident happened in 1989 found a growing spirit of ‘Chinese-style’ individualism (Ralston, Gustafson, Terpstra and Holt, 1995). There is evidence that filial piety is generally on the decline and no longer commands the same degree of observance it once did (Li, 1986), thus posing a big challenge to authoritarian leadership in Chinese culture that is rooted in the paramount value of filial piety and submission to authority noted as earlier.

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Based on research and our own anecdotal evidence, the above sources appear to represent the major influences on the thinking and behavior of contemporary Chinese managers. In the next section, we are going to introduce the ‘seven-P’ model and explore the influence of the above six major sources.

The 7-P Model The number seven seems to be a magic figure in managerial sciences. McKinsey’s 7-S framework caught on around the world as a useful way to think about organizing (Peters & Waterman, 1982). At the micro level, Steve Covey’s (1989) ‘7 Habits of Highly Effective People’ has been a hot guideline for individuals all over the world for the past decade. Trompenaars’ (1993) ‘the Seven Cultures of Capitalism’ have also been widely introduced in different countries. Most recently, Yemoas (1998) came up with ‘7-Survival Skills for a Reengineered World.’ We wanted to develop a model that would comprehensively present our managers. Like McKinsey, with a bit of stretching, cutting, and fitting, we also managed to make all seven variables start with the letter P and put them into what we call the 7-P model (See Figure 12.1). We note that 7 is also a ‘lucky number’ in Western societies and wonder whether, for the same kind of reasoning, it might have been more appropriate in Chinese culture to have developed an 8P model. We are, however, trying to represent this Chinese model in a Western context and so have settled on seven.

Fig. 12.1: The 7-P Model: Characteristics of Chinese Managers In China, where everything exists in relativity to something else, all the seven variables are connected to each other. Ironically, sometimes some Ps actually work against each other. However, just like the principle of yin and

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yang existing together, things that work against each other sometimes exist to serve different purposes. Now let’s briefly explain what each of the 7 Ps mean, and how it connects to each of the other Ps.

1. PATERNALISM Since family is the core social unit, power must be available to ensure the maintenance of family order and unity. Such power is concentrated in the patriarch, or the family head. The Chinese family is patriarchal. The power of the head is accepted and legitimized for this role as protector and maintainer of the family and its interests. He can expect, and receive respect and obedience from the rest of the family. The notion of family remains the only social or collective group that is really important to contemporary Chinese (Seligman, 1990), and the father figure as the family head continues to hold the legitimate power. As a result, it is very natural for the Chinese people to treat organizations as a prototype of a family, and to expect their leaders to be like fathers and they themselves assume the role of the son. Yang described this generalization process as ‘pan-familialism’, in which the Chinese simply generalize experiences and habits acquired in the family to other groups, so that the latter can be regarded as quasi-familial organizations (Yang, 1998). The long-lasting planned economy encouraged and helped to maintain the paternalistic leadership style because, under that system, leaders did not have to take much initiative in deciding the strategy, instead they needed to be forceful and ensure that the policies were implemented. Although the paternalistic leadership style is no longer as popular as it used to be, managers acting as the paternal leader of a family are still fairly common in Chinese organizations. Managers who are autocratic and expect people to follow their ideas, are often described as patriarchal. On the other hand, Chinese employees in Chinese organizations still expect their leaders to act like the head of a family and take care of all their problems, because to them an organization is still more or less a family, and they themselves should listen to the leaders. Such expectation is not as strong in foreign-owned or even joint ventures. This kind of mind-set was observed in interviews conducted by the second author for a recent comparative influence study of US and Chinese managers. The Chinese managers were generally cautious when they had different views from their bosses—they reported being reluctant to confront their bosses, whereas the US managers at the same level, holding similar responsibilities, seemed to have fewer concerns. They focused more on the job getting done effectively, whereas the Chinese tended to pay more attention to the manner in which it was done, because they are also concerned about the people involved.

2. PRINCIPLES COME FIRST Confucians argued that a country should be ruled by the doctrine of filial piety, which is one of the five constant virtues. They injected the family atmosphere into societal rule and treated the state as an extension of the family. Political

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relationships were like parent-child relationships. If the ruling class set a good example, the country as a whole would be at peace and would prosper. It is rooted in such original thoughts that leaders in China have always been encouraged to be good role models According to the Chinese Communist Party, leaders and managers should be ‘si xiang gong zuo zhe’ (ideological workers) similar to professional councilors in Western organizations who specialize in dealing with people’s ideological or psychological problems. They need to know how to ‘abide by principles’ while leading or managing their workforces. While following principles, they are also expected to be flexible in solving practical problems. The expectations of the Party for its members also reflects the characteristics of Chinese culture in the way people think. In his book ‘The Fifth Discipline’ Peter Senge criticized the Western segmentation approach to solving problems which result in people seeing the trees rather than forests. At the same time, he highly praised the Chinese systematic and holistic mode of thinking (Senge, 1990). Instead of being just problem solvers, the Party wants its members to be ideological workers who can identify the problem, diagnose the causes and find ways to deal with the root causes rather than the symptoms. There is no other place where Westerners can better observe this particular characteristic of the Chinese than at the negotiation table. Those who have negotiated directly or indirectly with the Chinese would note that the Chinese are keen on obtaining what they call ‘agreed principles’. A Western scholar who has been studying Chinese negotiation styles for many years divides the Chinese business negotiation process into two stages: the ‘opening moves’ and the ‘substantive negotiation session’. He points out that during the opening moves, the Chinese insist on reaching a ‘general agreement’ that they will later use to defend themselves (Pye, 1982). Others interpret this as a way Chinese negotiators use to secure a sincere commitment to working together to solve problems rather than go for a neatly decorated legal package (Seligman, 1990). Without the general principles, it would be difficult for Chinese negotiators to clarify details. But once they have obtained the ‘letter of intent’ from the opposite party, they will press the other side to live up to the ‘spirit’ of these principles (Pye, 1982).

3. POLITICAL ORIENTATION Chinese managers are widely known to have to deal with guan xi, connections, because they live in a network of relations. We used ‘politically oriented’ rather than ‘guan xi-oriented’ because the term not only contains the notion of guan xi, but also implies the need, the purpose as well as the environment in which guan xi is exercised. According to Mintzberg (1983), politics refers to individual or group behavior that is informal, ostensibly parochial, typically divisive and, above all, in the technical sense, illegitimate—sanctioned neither by formal authority, accepted ideology, nor certified expertise (though it may exploit any of these). Drory and Romm (1990) identified three ‘definition elements’ which characterize political behavior. These include a situation conditioned by conflict and uncertainty, the use of covert non job-related means to pursue concealed motives,

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and self-serving outcomes acting against organizational goals. Political behavior is thus typically regarded in negative terms (Buchanan and Badham, 1999). In China, guan xi means good connections. Guan xi ties the Chinese people together according to the different types they belong to. To them, the various types of guan xi can be measured on a continuum, with the type that is bound by blood (family members) on one extreme and the commercial type (people interact based on fair exchange) on the other. In between, depending on how people feel about the opposite party, they tend to create ‘quasi consanguinity’ and call them ‘uncles, aunts, brothers and sisters’ when they are not related by blood at all and the more people are treated so, the less the relationship becomes transactional. That is why Westerners often find it hard to figure out the exact relationship among people and yet the level of the relationship on the continuum one has with the people he/she is dealing with definitely makes a difference when doing business in China. A recent survey of Chinese citizens shows that 92 per cent affirmed the importance of guan xi in their daily lives, and 72 per cent preferred to use guan xi connections over normal bureaucratic channels to advance personal interests and solve problems (Yeung and Tung, 1996). Westerners who have done some business with China also know that getting in on the ground floor in China needs more than planning, funding, and a good product. They also need guan xi (Murphy, 1996). This Chinese practice of guan xi is as vital in contemporary society as it was centuries ago. Clearly, all these efforts made to advance personal interests and solve problems can be described as political behaviors according to Drory and Romm’s definition (1990). Without guan xi, nothing happens in China (Murphy, 1996). But why would that be the case? The reason guan xi is so important is because, to a large extent, China is a country ‘ruled by men’ (ren zhi) not ‘by law’ (fa zhi). The notion of rule by men can be seen as a result of the belief in morality as defined under Confucianism. According to Confucius, governance by ethics (li zhi) is preferred over governance by law (fa zhi), and men follow ethics, making China ruled by men. As Lee Kuan Yew, former Premier of the Republic of Singapore, put it, the Chinese use guan xi to make up for the lack of the rule of law and transparency in rules and regulations (Yeung and Tung, 1996). The predefined nature of guan xi dictates the political behavior of the people connected by this guan xi. The patriarchal system encourages the development of guan xi because the emphasis on personal power would naturally promote the practice of guan xi, since an individual (rather than institutional authority) defines what is permissible in a given context at a particular time. The high value for ren qin and the concerns for face also make it difficult for people to disregard guan xi. The line between the legitimate cultivation of reciprocal friendship and the corrupt practice of bribery is also difficult to draw, especially where there is a tendency to inflate the cost of the former. Moreover, the prolonged practice of orthodox Marxism, which was often far away from reality, often forced people to go around the rules and use guan xi to get things done.

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Therefore, managers in China more or less have to be politically oriented, utilizing various types of guan xi to fulfil various purposes.

4. PATIENCE AND PERSEVERANCE The term ‘patience’ embraces three quite different meanings: It is the act or quality of expecting long hardships, without complaint, anger, or discontent. It is the power or the act of suffering or bearing quietly or with equanimity any evil—calm endurance. It is also employed as a synonym of perseverance’ (Smith, 1894). These characteristics of Chinese are connected with their small producers’ mentality, their ‘disregard of time’ in ancient times and reinforced by the planned economic system in the modern times. The Chinese character ren (tolerance) vividly illustrates the meaning of the word. It consists of two parts—the top part, ren (the edge of a knife), the bottom part, xin (heart), suggesting an immeasurable capacity to endure hardships and misfortunes (Fang, 1999). Historically, people have been constantly struggling to eke out an existence from land. In order to live, it is necessary to have the means. Being extremely poor and having very limited means for survival, the Chinese have learned to put up with things. For centuries, the Chinese were willing to labor a very long time for very small rewards, because small rewards are much better than none (Smith, 1894). Poverty and struggle for survival taught them to wait without complaint and to bear with calm endurance. Patience has been a common theme in many Chinese classics. It is also regarded as a noble virtue of the Chinese people (Lin, 1939). However, in old times it was more a necessity for survival than anything else. At home or in organizations, under the patriarchal system, those at the bottom of the hierarchy had to wait patiently to get their share of things or for things to change. Often, they would find themselves wanting something but could not get it and their position did not allow them to fight for it, so the only choice was to wait. In modern times, the government advocated political equality, but to survive under a planned economic system, one still needed to be patient because there was not much one could do when things did not go their way. The Chinese patience is also most vividly displayed at the negotiation table. Pye wrote, the Chinese believe that patience is a value in negotiation, particularly with impatient Americans, and they freely use stalling tactics and delays (Pye, 1982). If you pick up any writings on negotiation with China, you are sure to come across descriptions such as: Chinese negotiators are patient and can stretch out negotiations to wear one down. Excessive entertaining in the evening can also take the edge off a foreign negotiator’s attentiveness (Hinkelman, 1994). Business negotiations in China are known to be more time consuming than is common in the West. Therefore it is advised that: To deal with the Chinese, you need patience, patience, and patience (Fang, 1999). Unfortunately, a negative result of patience is inertia. Many foreign expatriates working in China complain that their workers ‘never seem to worry’. They found it hard to instill in their Chinese employees’ minds ‘the sense of urgency’ and ‘a sense of time’. Although the corporate culture and other

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policies have changed that mentality a bit, they still find ‘it is hard to change their perceptions and their way of doing things’. According to them, this is also the reason that foreign companies prefer to hire young people who have just graduated from colleges rather than people with many years of real job experiences, because it is easier to change the young minds than the older ones.6

5. POLITENESS Politeness, li mao, is often interchangeably used with terms such as ‘courteous,’ ‘modest,’ ‘humble,’ ‘understanding,’ ‘considerate,’ and ‘well-mannered’ in China. Formally, there are four notions underlying the Chinese conception of politeness: respectfulness, modesty, attitudinal warmth, and refinement. Li mao is regarded as another virtue in China. Its root originates from the notion of Li (ceremony, propriety, rituals, and rules of conduct). Being one of Confucian’s ‘Five Constant Virtues’, li is a ritual of technicalities, which, like all technicalities, are important, not as the indices of a state of mind or of heart, but as individual parts of a complex whole (Smith, 1894). Like the other virtues, li or li mao (politeness) has been influencing the Chinese for several thousand years. It is almost impossible for a Chinese not to be influenced by the notion of li because like the invisible networks that connect people, there used to be three hundred rules of ceremony and three thousand of rules of behavior telling people how to behave. It would be unreasonable to expect people to remember all those codes, but it does not mean that the Chinese are not bound by such an intricate and complex mass of rules. Consequently, the Chinese have contrived to make their ceremonies an instinct rather than a requirement, when the code, like a set of holiday clothes, is always to be put on when the occasion for it arises. … On such occasions, not to know what to do would be for a Chinese as ridiculous as for an educated Western man to be able to tell, on occasion, how much nine times nine is (Smith, 1894). It is still quite common to hear the Chinese criticizing someone for bu dong li mao (not knowing how to be polite) or mei gui ju (not following the rituals) because those implicit rules of ceremony and behavior are deeply embedded in the minds of the Chinese and constantly influence their judgement and behavior. Chinese politeness often assumes the shape of a gift, which gives the recipient mian zi (face). Thus the notion of politeness is closely related to the notion of face, which has been heavily studied. Mian zi was described as ‘the most delicate standard by which Chinese social intercourse is regulated’ by a Chinese scholar over 60 years ago (Lin, 1939). It is so intricate that once rightly apprehended, the ‘face’ will be found to be in itself a key to the combination lock of many of the most important characteristics of the Chinese (Smith, 1894). Expressions such as ‘image’ or ‘dignity’ are not adequate because they usually involve the 6

These quotes and information were obtained from interviews by the second author from a group of foreign expatriates working in China, most of them were also Chinese but hired from Singapore, Taiwan, Malaysia by a US company. There were also managers from the US, Australia, and England.

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person himself/herself. The word face in Chinese society is not solely the responsibility of the individual, but is also influenced by the actions of his/her close associates, and how s/he is perceived and dealt with by others. Since it is equally important to give other people mian zi, it is therefore necessary to also be polite. This notion is also related to another Chinese expression ke qi. In China, if someone makes an effort to observe the rules in order to be considered jian li (following the rules of li), then the person is described as very ke qi. Literally, ke means ‘guest’ and qi means ‘air’ or ‘behavior’, together they can be interpreted as ‘behavior of guest’, or as any one of the terms mentioned above, polite, courteous, modest, humble, understanding, considerate or well-mannered. Ke qi is a basic principle observed by the Chinese in their everyday communication (Gao, Ting-Toomey and Gudykunst, 1996). It is also common with Chinese employees to appear ke qi. For example, Western managers often found it puzzling that on being praised, their Chinese employees would be embarrassed and insist that they did not do well enough or they did not deserve the honor.7 To the Chinese however, they were just exercising ke qi. Many professors in Western universities have also found that when they compliment their Chinese students for accomplishments, these students would appear uneasy and say they did not deserve the honor. When delivering a speech, they would first of all say they know very little in the area; when inviting guests to a lavish dinner at home, they would apologize for having prepared a simple meal. All these behaviors are normal to the Chinese because they all know ‘complacency leads to loss, while modesty brings gain’,8 and it is therefore better to self-handicap oneself rather than to accept the compliments.

6. PARTICULARISM Being particular, or particularism (also referred to as personalism), is the tendency to use personal criteria and relationships as a basis for decision-making and action (Farh, Earley and Lin, 1997) Findings from cross-cultural research have repeatedly shown that relationship or connectedness is one of the most emphasized values in the Chinese society (Hofstede and Bond, 1988). For instance, Trompenaars (1993) has shown that particularism is one of the most distinguishing characteristics of most Asian countries, including China. In fact, the Chinese tend to link not just people, but everything that exists in this world. As noted earlier, Peter Senge (1990) commented favorably on the Chinese mode of thinking, which seeks for connectedness among various phenomena in contrast to the Western way of analyzing things.

7

8

Those observations were based on the interviews the second author conducted with middle managers from dozens of organizations in China and our personal knowledge of the Chinese culture. It’s one of those sayings that everybody knows in China. It is said to have originated from Shang Shu, The Book of History, one of the four major books of Confucius.

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Personalism is people or relationship oriented. It emphasizes building specific trust-bonds between individuals and interpersonal harmony. Again, its historical roots lie in the core value of Confucianism, which defines a person being embedded in all kinds of relationships with others (Chen and Farh, 1999). In this sense, a person, embedded in all kinds of relationships, will be incomplete without the others (interdependence of the self). Despite the instrumental value of a relationship, the relationship itself enters a person’s self-defining process, i.e., a person’s relationship with others and others’ views about the person are part of the self-definition of the person (Chen and Farh, 1999), which is also why it is so important for people to be polite with each other and why people are so keen on maintaining their own mian zi as well as giving mian zi to others. The character of being particular has also to do with the fact that most people originally come from farming villages, where families are closely knit. In fact in rural China, it is still true that people, living in the same village, treat each other as being part of a big family. If one family has difficulties, the others would offer help. They call on each other just like we go from one room to another inside a house, without appointment or advance notice. After having lived in such an environment, it would be natural for one to think of the feelings and reactions of other people when taking an action or making a decision. The fact that all danwei (organizations people work in) are treated as large families also encourages people to be particular. Under the planned economy, every department or work unit had a fixed quota. People did what was needed to fulfil the quota and got more or less the same amount of reward, because compensation was not connected to performance. Those who tried to excel were ridiculed or discouraged by their colleagues who, due to the influence of the mentality of the small producers, suffer from hong yan bin (red eye disease). In that sense, people may not choose to be particular, always trying to be considerate to others, but they were compelled to do so in order to avoid being isolated from the rest of the group.

7. PATRIOTISM Patriotism has always been a lofty principle for the Chinese. At critical epochs in Chinese history, especially when there is likely to be a change of dynasties, single-hearted and resolute men often threw themselves into the breach, with a chivalrous devotion to cause which they espoused worthy of the highest devotion (Smith, 1894). Stories of these patriotic and heroic deeds have been passed from generation to generation. Patriotic education is built into the school curriculum from the kindergarten all the way to college. The results of such education are obvious. A study of youths in Shanghai in 1995 showed that patriotism was No. 2 on a list of important personal values (Yeung and Tung, 1996). Even the 1989 pro-democracy demonstrations in Tiananmen Square began as a patriotic movement by students who wanted to strengthen China through political reform. Since the founding of the new China, people have continuously shown their love for the country. They are never reluctant to show their dignity and their power to defend their country. For example, in 1960, when the country

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was amidst a lot of difficulties, including the break-up with the Soviet Union plus natural disasters, hundreds of thousands of people in over a dozen major cities took to the streets to demonstrate their support for the Japanese who were fighting against the US militarism. A few years later, the Chinese joined the Vietnamese people and defeated the US invasion of Vietnam. More recently, tens of thousands of youngsters taking to the streets to protest NATO’s accidental bombing of the Chinese Embassy in Yugoslavia in another example of their strong sense of national pride. In the Westerners’ eyes, there are two types of patriotism in China. One is truly patriotic. These people are proud of being a Chinese and are willing to defend their country whenever necessary. They are also very objective when evaluating anything from abroad, learning what is beneficial while maintaining what is better from our own. The other type is narrow nationalism. People holding this kind of sentiment either hate anything foreign or worship anything foreign (Yu, Chen and Chen, 1999). Yu pointed out three historical reasons for such sentiments. First of all, the Chinese are very proud of their country being one of the most ancient civilizations, and being in the leading position up till about 200 years ago. Second, the invasions by so many Western powers and the continuous losses to them in the past century have greatly hurt the Chinese sense of dignity, made them lose their face, and embedded in their heart a deep hatred for the Western invaders. Finally, after the founding of the new China, the people survived the blockade, the hostility, threat, and the isolation from the West, and betrayal of the Soviet Union, as well as numerous ordeals (Yu, Chen and Chen, 1999). All the experiences built into the Chinese emotions a mixture of pride, frustration as well as distrust towards foreigners. This is why the Chinese tend to be extra sensitive while dealing with the Westerners. For example, a newly-arrived foreign general manager in his endeavor to improve the relationship between the management and workforce and between foreign and local employees decided to greet them personally at the factory gate on Monday morning. It happened to be early winter and the general manager was wearing gloves. When other expatriates walked over, he sub-consciously took off his gloves, but did not do so when the Chinese employees walked over. This aggravated the level of mistrust. Another Japanese department head once asked the Chinese employees to raise their hands because he did not like seeing them sticking their hands into the pockets, but the Chinese objected to it vehemently. Some of the workers angrily asked him why he wanted them to do that, thinking that he wanted them to ‘surrender’. The incident rekindled the resentment and hatred of the Japanese that dates back to the Japanese invasion of China early in the 20th century.

SO WHAT’S THE USE OF KNOWING THIS 7-P MODEL? We have just presented all the 7 P’s and the historical and cultural reasons for the Chinese to have those seven characteristics. As Smith pointed out over a hundred years ago, the Chinese are ‘a bundle of contradictions who cannot be understood at all,’ even among the limited seven characteristics one can often

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find contradictions and paradoxes. However, understanding the historical reasons and the multiple value systems that the Chinese use to justify their behaviors will definitely help reduce the frustrations and misinterpretations. The 7-P model and the major sources presented in the paper are meant to be a tool to achieve the purposes. We all know that managerial style represents decisions about how managers carry out their functions related to planning, organizing, leading, coordinating, and evaluating (and the extent to which they favor one set of activities over another) the people they manage. However, due to the intricacy and the interrelatedness of these characteristics, it would not be wise to explore how each of the P’s affects Chinese managers’ behavior. Often one characteristic can trigger several different kinds of behavior, likewise, several characteristics can influence one particular behavior. Therefore, a holistic approach should be taken when trying to understand even just a single behavior. For example, if we remember the traditional values of order and status quo as well as the way the Chinese were ruled for many decades, we would understand why sometimes the Chinese managers do not take initiatives and tend to wait for orders to come down from above. One would also understand why they also take into consideration guan xi, and are so concerned about ren qin, while appearing disrespectful towards rules and laws in organizing and coordinating work, if one remembers the network environment they are in and the invisible ties that bound them together. Finally, knowing the principles of the five cardinal relationships, paternalism will enable us to find more appropriate ways to motivate or lead Chinese workers, and evaluate their performance in ways that will help win their commitment and loyalty to the company. Let’s take an on-going issue to illustrate the point just made. The planned economy resulted in Chinese state-owned businesses having too many employees. To survive in the market economy, the first thing they have to do is improve efficiency, and reduce the number of workers. In the west, most of the companies base their decisions on the company’s bottom line, although some are more humane and try to be more helpful to their laid off employees. However, Chinese companies have to consider many factors while laying off people: the difficulties the employees and their families will face, the workers’ contributions, and the impact of such decisions on society. Although the need for reforms and the pressure on the top management to be ‘tougher’ in dealing with such issues is strong, the influence of the traditional paternalistic values, the expectations of the employees, social pressure and the old way of management have all made it hard for them to be tough.

Conclusion The influence of culture is an extremely complicated phenomenon. To understand the influence of the Chinese culture over the behavior and mind set of the Chinese managers, one needs to have a systematic view. Such factors are often multiple

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and interrelated in nature. They may not be just black or white, rather they could be white in one aspect and black in another, and there may be grey areas in between. For example, many scholars think that traditional values are the core values in Chinese culture. However, if one observes Chinese contemporary history, it is very difficult to explain some of the major historical mistakes on the basis of traditional values alone, because the mistakes were the results of a combination of many factors, including indecisive ‘small producers’ ideology and leftists tendency. In fact, Deng Xiao Ping pointed out that ‘leftist’ is the most dangerous factor of all (Deng, 1984). It is also necessary to take a dynamic view when trying to interpret a specific attitude or behavior. The Chinese society is going through an unprecedented change. Various traditional values are also undergoing major changes and many of them are being seriously challenged. For example, a senior worker was very upset when asked to sign a contract with the Japanese-Chinese factory. ‘I did not choose to go, but they asked me to and told me to sign this employment contract. Putting down my name there made me feel as if I were signing the agreement to sell myself,’ he revealed when asked about his reactions toward working in the factory. A middle-aged worker said, ‘I know working for a foreign company is being used as a money making tool, but they pay well. But my purpose of going there is to make money. I am not going to care about anything else except doing my job. When I make enough money, I will quit.’ A younger woman who was also hired by a joint venture said: ‘Foreign companies pay much higher because they have higher expectations. The fact that I am hired shows that I am capable. Recently I was promoted to be a supervisor. I am really proud of myself. People laugh at me, but I don’t care. They laugh at me because they cannot do so themselves.’ This example shows the effect of exposure to different historical period as a result of age on people’s attitude toward working for a joint venture. It also urges us to go deeper into the phenomena for interpretations of such differences. To the extent that behavior is culture enacted, the focus on guan xi, face and ren qin by previous writers about Chinese managers is simplistic and sometimes erroneous. Our contribution is that we have been able to develop a model of managerial behavior for Chinese managers that is truly a Chinese perspective instead of trying to interpret the nature of Chinese managerial behaviors through a set of Western lenses.

References Adler, N.J. (1983). ‘Cross-cultural management research: The ostrich and the trend’. Academy of Management Review, 8(2): 226–232. Bond, M.H. (1991). Beyond the Chinese Face, Hong Kong: Oxford University Press. Buchanan, D. & R. Badham (1999). ‘Politics and organizational change: The lived experience’. Human Relations, 52(5): 609–629.

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Chen, X.P. & J.L. Farh (1999). The effectiveness of transactional and transformational leader behaviors in Chinese organizations: Evidence from Taiwan. Paper presented at the Academy of Management conference in August, Chicago, USA. Chen, M.J. (2001). Inside Chinese Business. Boston, MA: Harvard Business School Press. Covey, Stephen R. (1989). The 7 Habits of Highly Effective People. New York: Simon & Schuster. De Bary, W.T., W.T. Chan & B. Watson (1960). Sources of Chinese Tradition. New York: Columbia University Press. Deng, X.P. (1984). ‘Uphold the four cardinal principles’. In Selected Works of Deng Xiaoping. Beijing: Foreign Languages Press, 166–191. Drory, A. & C.T. Romm (1990). ‘The definition of organizational politics: A review’. Human Relations, 43(1): 1133–1154. Fang, T. (1999). Chinese Business Negotiating Style, London: Sage Publications. Farh, J.L. & B.S. Cheng (1999). ‘A cultural analysis of paternalistic leadership in Chinese organizations’. In J.T. Li, A.S. Tsui & E. Weldon (eds.), Management and organizations in the Chinese context. London: Macmillan, forthcoming. Farh, J.L., P.C. Earley & S.C. Lin (1997). ‘Impetus for action: A cultural analysis of justice and organizational citizenship behavior in Chinese society’. Administrative Science Quarterly, 42: 421–444. Gao, G.P., S. Ting-Toomey & W.B. Gudykunst (1996). ‘Chinese communication processes’. In M.H. Bond (ed.), The handbook of Chinese psychology (pp. 280–293). Hong Kong: Oxford University Press. Guo, Y.J. & B.G. He (1999). ‘Reimagining the Chinese nation’. Modern China, 25(2): 142–171. Hinkelman, E.G. (ed.) (1994). Chinese Business: The Portable Encyclopedia for doing Business with China. San Rafael, CA: World Trade Press. Hofstede, G. & M.H. Bond (1988). ‘The Confucius Connection: From Cultural Roots to Economic Growth’. Organizational Dynamics, 16(4): 5–21. Kelliher, D. (1994). ‘Chinese Communist political theory and the rediscovery of the peasantry’. Modern China, (20)4: 387–416. Lee, S.M. (1995). Spectrum of Chinese Culture. Selangor Darul Ehsan: Pelanduk. Li, Z. (1986). On History of Ancient Chinese Thought. Beijing: People’s Publishing House. Lin, Y.T. (1939). My Country and my People. London: Heinemann. Mao Zedong (1929). ‘On Correcting Mistaken Ideas in the Party’. Selected Works of Mao Tse-tung. Vol. 1, 1st edition, Beijing: Foreign Language Press. Mintzberg, H. (1983). Power in and Around Organizations. New Jersey, Prentice Hall. Moore, B. Jr. (1966). Social Origins of Dictatorship and Democracy: Lord and Peasant in the making of the Modern World. Boston: Beacon. Murphy, I.P. (1996). ‘It takes guan-xi to do business in China’. Marketing News, 30(22): 12.

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Peters, T.J. & R.H. Waterman (1982). In Search of Excellence: Lessons from America’s Best-run Companies. New York: Harper & Row Publishers. Pye, L.W. (1982). Chinese Commercial Negotiating Style. Cambridge, MA: Oelgeschlager, Gunn & Hain. Ralston, D.A., D.J. Gustafson, R.H. Terpstra & D.H. Holt (1995). ‘Pre-post Tiananmen Square: Changing values of Chinese managers’. Asia Pacific Journal of Management, 12: 1–20. Seligman, S.D. (1990). Dealing with the Chinese: A Practical Guide to Business Etiquette. London: Mercury. Senge, P. (1990). The Fifth Discipline. New York: Doubleday/Currency. Smith, A.H. (1894). Chinese Characteristics, New York: Fleming H. Revell Company. Trompenaars, F. (1993). Riding the Waves of Culture. London: Brealey. Walder, A.G. (1983). ‘Organized dependency and cultures of authority in Chinese industry’. Journal of Asian Studies, 43(1): 51–76. Yang, K.S. (1998). ‘Chinese responses to modernization: A psychological analysis’. Asian Journal of Social Psychology, 1: 75–97. Yemoas, W.N. (1998). 7-Survival Skills for a Reengineered World. London: Penguin Books. Yeung, I.Y.M. & R.L. Tung (1996). ‘Achieving business success in Confucian societies: The importance of guan-xi (connections)’. Organizational Dynamics, 25(2): 54–66. Yu, K.C., W.W. Chen & W.Z. Chen (1999). Human Resource Management (in Chinese). Dalian Technology University Publishing House.

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An Integrated Theory of Management Geography

Japanese Hybrid Factories in the Three Major Regions Tetsuo Abo

In this chapter, we develop an integrated theory of ‘management geography’, using a comparative study of three different types of ‘hybrid factories’ of Japanese firms in three major regions—East Asia, Europe, and the US. Hybrid factories here refer to the Japanese transplants in overseas regions, which use a set of management techniques that is a hybrid of application of Japanese knowhow and adaptation to local knowhow and cultural imperatives (Abo, 1994; Abo 1998a, Abo 1998b, Abo, 2000). The extant economics and management theories have not explicitly dealt with an important aspect of geography. The abstract dimension of economic theory does incorporate differences in geographical distances. However, the literature does not actively address differences in the socio-cultural aspect of geography.1  We suggest that cultural differences are closely connected to the 1

The co-relationship between locational factors and comparative or competitive advantage of industries and nations has been addressed by Porter (1990) in his work, The Competitive Advantage of Nations, 1990. However, the extent of and the methodology for including cultural factors in Porter’s ‘diamond’ is not clear. Using Ricardian factor-based comparative advantage theory, he underlines the importance of ‘national attributes’ as a crucial factor that foster competitive advantage in particular industries, the role of the home nation as the source of the skills and technology, and importance of the economic structures, values, cultures, institutions, and histories (Porter, 1990: xii-xiii, 19, 69, 129). He proposes the ‘diamond’ as a system to determine the national competitive advantage in specific industries, which the successful leaders can take advantage of and which the governments can enhance (Porter, 1990:124 ff.). Thus, much importance is on geographic location factors at the level of the nations which exert great influence on the strategies of leaders or the policies of governments. However, he falls short of fully incorporating the role of culture and the co-relationship between location and culture. Though he does identify cultural factors as important, as they shape the environment that change slowly and play a role in competitive advantage in many industries (Porter, 1990:129), for him cultural factors decide only a part of ‘diamond’ and do not have a firm role to be incorporated into the core structure of ‘diamond’. For example, he (Contd.)

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historical contexts of the geography, and these historically differentiated cultures are one of the essential shapers of the comparative and competitive advantage of nations. Therefore, these cultural attributes can be thought of as transformative forces in the ‘management geography’ and the ‘economic geography’, which in turn explain the significant correlations between various business/management models, socio-cultural differences, and location distances. The proposed theory of management geography is illustrated using the findings of the Japanese Multinational Enterprise Study Group (JMNESG).2  The group has undertaken large-scale field studies since the early 1980s in North and South America, East Asia, and Europe and published several books and articles. The focal point of its work is to illuminate the different situations and patterns of ‘hybrid factories’ which are the mixture between Japanese and local management and production systems. In this chapter, we investigate some key findings and implications of the correlations of Japanese and various local business models in terms of the theory of ‘management geography’. Next we explain our theory of ‘management geography’, and verify the theory by comparing three types of business models corresponding to three major regions.

The Theory Our theory is based on a set of tiered concepts ordered hierarchically according to their chain of dependence. At the base is the basic determinant of the chain, and includes topography, natural resources, constitutions of people, and other locational factors. The locational factors shape socio-cultural frameworks which, in turn, have a formative influence on various business models through their impact on the natures of organizations. Then, various types of hybrid factories are at the top as the products of the influences of the business models in different geographies. In terms of academic discipline, the locational and socio-cultural factors are treated respectively in geography and management theory, and to some extent economics. Our theory of ‘management geography’ holds that it is critical to treat both locational and socio-cultural factors together, and integrate them into a more synthesized (comprehensive) analytical framework.

2

does not see the Japanese management-labor relations as cultural, but just a result of management policies such as lifetime employment (Porter, 1990:129). He expresses a similar viewpoint with respect to many Japanese advantages such as aggressive domestic rivalry, and cooperative suppliers, and asserts that his “theory hopefully provides a clear meaning. ‘Cultural’ factors are derived...from the ‘diamond’.” (Porter, 1990:420). In summary, there is no definite formula-based explanation in his book about the co-relationship between locational and cultural factors. JMNESG has undertaken field studies many times in North America (1986, 1989, 2000-2001), South America (2001), NIES (1992), ASEAN (1993), the UK (1997), and continental Europe (1998), including numerous additional or supplemental researches, and published a great numbers of books and articles in Japanese and English. The two main books in English are by Abo (1994) and Itagaki (1997).

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A conceptual overview of our theory is given in Figure 13.1.

Fig. 13.1: Conceptual Figure of Management Geography

LOCATIONAL FACTORS In traditional social sciences, historical differences and changes are the primary determinants of the differences in social and economic situations. However, in our theory, the geographical elements in terms of both locational differences as well as historical background are critical shapers of the socio-cultural context in a nation or region. While the locational factors are on the horizontal axis, the historical factors are on the vertical axis through which the chain of dependence unfolds over time. Locational factors include size (space and distance), layout (seaside, inland, island, mountain side, plateau, basin, plain, river, and so on), weather, natural resources, and human races. These factors play an important role in creating various differences and diversity of socio-cultural frameworks, and then, of the fundamental systems and organizations of societies. As a result, differentiated types of business models emerge, such as hunting vs. agriculture society, individualism vs. groupism, short term vs. long term orientation, competition vs. cooperation orientation, top down vs. worksite orientation, and differentiation vs. equality orientation. As an illustration, one can look at the Japanese case, as opposed to the American case. In Japan, we find very homogenous and inward-looking people who are products of the locational and historical environment i.e. small islands, Far East (a periphery far away from the western centers, and monsoon weather), mountain sides and basins, poor reserves of natural resources, a few limited number of races, and a very long history of being a closed-in country before the onset of the modern era. Japan has a unique set of social institutions and systems, group-oriented ways of communicating and behaving among familial people in a small world, worksite-oriented cooperative ways of working, and a unique style of cooperation and competition within a firm or between firms. The sociocultural backdrop to all this must be the cooperative style of working in the irrigation systems for rice culture-led farming, which is quite common in the monsoon region in Southeast Asia.

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SOCIO-CULTURAL FRAMEWORK Traditionally, there has been a strong rejection of cultural elements in social sciences. The discussions on ‘global standardization’, which gained particular popularity with the Information Technology revolution that diffused from the US into the world since the 1990s, overwhelm the significance of the sociocultural approach that stresses the difference in the performance of business models or management systems from society to society. Though the concept of standardization has been powerful in the globalization era, it has certain limitations. First, the recent information technology recession and declining American economy show the need to re-evaluate the faith in standardization. Further, the existence of different styles of market competition, each determined by distinct organizations and systems of firms, governments, and other institutions in various societies, also calls into question the empirical relevance and feasibility of standardization. Therefore, it is essential to study to consider the transformative influence of the socio-cultural approach on the organizational approach with respect to a business model or management system.

BUSINESS MODELS Organization theory, represented by Coase (1937) and Williamson (1975), seeks to develop the application of market fundamentalist theory to the organizational domain.3  According to the organization theory, an internal transaction within a firm can save costs compared with external market transaction costs between firms. The organizational theory specifies the necessary precondition for microlevel corporate management. However, it fails to clarify the qualitative differences between the corporate organization systems that stem from the socio-cultural backgrounds where these organizations locate. In that sense, the organization theory can be seen as a derivative of the global standardization approach. It can not adequately explain why there is such variation of forms of organizational administration, corporate governance, and management system, from country to country.

SUMMARY Therefore, to incorporate the distinct ways of organizational and managerial functions of firms in different locations into business and management models, the organization theory needs to be complemented with culture-oriented management theories which take into account knowledge and methodology of geography.

3

Marx (1867) made a useful suggestion about the nature and functions of market in that exchanges of wares (commodities) began where a community ends—at the point where a community has contacts with the other (foreign) community or the members of that community (p. 93).

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Theory in Practice: The Three Major Regions The relations among markets, organizations and business models in the US, Japan, and Europe are summarized in Table 13.1.

COMPARATIVE GEOGRAPHY OF MARKETS AND ORGANIZATIONS The key characteristics of markets and organizations are divided into three categories: market fundamentalism in Anglo US (and the UK), cooperative organization-orientation in Confucian Japan (and Asia), and regulative organization-orientation in Continental Europe.

A NGLO MODEL In the US, there is huge inland space with large variations in topography, plentiful natural resources and large variety of different races and kinds of people mostly composed of modern immigration from various regions in the world. It started as a colony; the external market was the most efficient institution to connect different types of atomic people and far distant locations that helped distribute various materials and resources to the appropriate places. Here, the necessary management resources are mostly procured as ‘ready-made’ products.

C ONFUCIAN M ODEL In Japan, as mentioned earlier, cooperative organization-orientation, in the form of internal market transactions within firms (e.g., long-term employment and training system) or even between firms (‘semi-internal market’ as Keiretsu or sub-contracting relation), is distinguished in the functions of market mechanism. Here, the necessary management resources are mostly prepared as ‘order-made’ products.4 

C ONTINENTAL M ODEL In (mainly Continental) Europe, many medium-size countries spread over a large land mass have common rivers, mountains, cultural traditions and histories. Here regulative organization-orientation exerts influence on the communities more strongly than in Japan not only in the forms of laws but also social customs. Long-term-orientation is partly based on stone culture and partly on the division of labor deriving from the relatively limited variety of style of living in terms of kinds of food, houses, and clothing which are largely supported by livestockfarming in the inland locations where seasonal change is not so clear.

4

Porter’s concept about ‘cluster’ is particularly effective to explain these ‘semi-internal market’ transactions (see Porter [1990], p. 148ff, pp. 153–154).

236

 

US (UK)

Japan (East Asia)

Continental Europe Regulative organization -orientation

Principal characteristics

Market fundamentalism

Nature of market

External market

Nature of organization

Rule and law-based administration Owners’ control

Cooperative organizationorientation Internal marketorientation in firms Group-based administration Employees’ control

Rigid demarcation, individual-based division of labor

Flexible demarcation, worksite-oriented, all members involvement

Corporate governance Management system

Internal market-orientation in community Social regulation-based administration Owner-employees’ joint control Regulation-based demarcation, specialist-led division of labor

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Table 13.1: Three Types of Market, Organization and Business Model in Three Major Regions

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AN ILLUSTRATION

OF

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DIFFERENCES

An important difference in the organization-orientations between Japan and Europe is ‘cooperative’ or ‘regulative’. One of the most popular regulative institutions in Europe is the national or local level qualification system of promotion and payment ladder in firms. This can be seen as a microscopic form of large bundled division of labor. With this system, such as ‘Tarif’ in Germany and ‘Cadre’ in France, it is difficult for the local Japanese transplants to apply the Japanese-style company level qualification systems which are more flexible in implementing individual-based evaluation and reward methods using wider job rotations and on-the-job training practices. The long-term employment system in Japanese companies comes from ‘cooperative’ aspect that stimulates a sense of togetherness. However, in most European companies, it is derived mainly from social regulations in the form of both laws and customs.

COMPARATIVE GEOGRAPHY OF BUSINESS MODELS Business models, styles of corporate governance and management systems also vary according to the differences in the nature of markets and organizations in the three regions. The system of corporate governance is owners’ control in the Anglo region, employees’ control in the Confucian region, and owner-employees’ joint control in Continental Europe.

A NGLO MODEL In the US, there was a popular era called ‘managerialism’ (Berle and Means, 1932) that began sometime after the First World War and stretched till the early post World War II period. Since then owners’ control led by big institutional investors has become increasingly dominant. This structure is most suitable for the US society in the sense that it is very market-oriented to have a relation of owners as principals vs. managers as agents. Under such a corporate governance structure, the typical American style management system is distinguished by narrow, rigid demarcation of authority and responsibility at the various levels of organizations. Thus, strictly organized individual-based division of labor systems work at many American corporations.

C ONFUCIAN M ODEL In Japan, the traditional structure of corporate governance is in contrast to the US and takes the form of ‘employees’ control’. For instance, there is the popular practice under which nearly all the presidents of Japanese companies are selected internally from the board members who are promoted from the ranks of ordinary employees. Similarly, the most significant feature of the Japanese style management system is that it is work site-oriented with the involvement of all the members. No stockowner can interfere inside corporate organizations, except when there is mutual holding of stock by financial institutions for the purpose of preventing a takeover of the corporation. Here is a very homogenous and

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egalitarian world where almost all the employees as ‘members’ work together not only for ‘us’ but also for ‘them’ with wider and very flexible demarcation.

C ONTINENTAL M ODEL In Europe, the corporate governance structure, characterized as ‘owneremployees’ joint control’, is apparently located just in the middle between the US and Japan, but is quite European-like in the sense that it is a product of the traditional two-party (democracy) system of the (class) society, which can be thought to be influenced by the wide bundled division of labor in (Continental) Europe. Co-determination (Mitbestimmung) through audit council (Aufsichtsrat) and employee representation council (Betriebsrat) in Germany is a typical example. Under such a governance structure, there are popular regulative institutions such as the national or local level qualification system of promotion and payment ladder. ‘Tarif’ in Germany and ‘Cadre’ in France are among the representative ones. The regulation-based medium size demarcation, a specialist-led division of labor with five to ten ladders of qualification, is implemented by the skilled people educated and trained at the social, external institutions such as occupational schools, and AZUBI (a conventional popular semi-social training sytem in firms of Germany). Thus, the extent of application of Japanese management systems is considerably restricted.

S UMMARY Our transformative theory of management geography highlights the differences and relations among geographical locations, socio-cultural backgrounds, and business models (market, organization, corporate governance, and management system). Next we discuss the research methodology used to provide empirical evidence for the transformative influence of management geography on the business models.

RESEARCH METHODOLOGY We test our hypothesis of causal relationship among the three elements of management geography, using a reverse approach. We first discuss the differences among the management systems, and then show how they are related to the differences in prior cultural environment and locational distances. The variation of hybrid factories reflects the influences of different business and management models, and thus, of different socio-cultural, and consequently, locational backgrounds. To assess the variation in management systems, we rely on the Application-Adaptation (A-A) model. The A-A model, developed by our group, seeks to determine the extent to which the Japanese-style production system, summarized in terms of 23 elements and six groups (see Tables 13.2 and 13.3), has been successfully introduced and applied at the foreign subsidiaries of Japanese enterprise. (Abo, 1994; Itagaki, 1997).

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Table 13.2: Hybrid Factories Evaluation of 6 Groups and 23 Items in the US, the UK, Continental Europe and East Asia 23 Elements-6 Groups

US

UK

GI–Work organization/administration 1. Job Classification 2. Job Rotation 3. Training 4. Wage 5. Promotion 6. Supervisor GII–Production control 7. Equipment 8. Maintenance 9. Quality Control 10. Operation Management GIII–Parts procurement 11. Local Content 12. Suppliers 13. Methods GIV–Team sense 14. Small Group 15. Information 16. Unity GV–Labor relations 17. Employment Policy 18. Employment Security 19. Union 20. Grievance GVI–Parent/subsidiary 21. Japanese expatriates 22. Power Delegation 23. Local Manager Total Average

2.9 3.7 2.4 2.6 2.9 3.1 2.9 3.3 4.3 2.6 3.4 3.0 3.0 2.7 3.9 2.5 3.2 2.5 3.6 3.5 3.6 3.4 3.4 4.4 3.3 3.6 3.7 3.6 3.6 3.3

3.4 4.4 3.3 3.5 2.8 3.4 3.4 3.5 3.9 3.0 3.6 3.6 2.5 1.9 2.7 2.9 3.3 2.7 3.6 3.7 3.5 3.3 3.4 4.2 3.0 2.8 2.4 3.0 3.0 3.2

Continental Europe East Asia 3.0 3.2 2.8 3.1 2.8 3.1 3.1 3.1 3.4 2.8 3.1 3.2 2.8 2.8 2.9 2.8 2.7 2.5 2.8 2.8 3.2 3.1 3.2 3.5 3.1 3.0 2.6 3.2 3.1 3.0

3.4 4.7 2.7 3.3 3.4 3.4 3.1 3.4 3.8 3.1 3.4 3.3 3.2 3.0 3.7 3.0 3.3 3.0 3.4 3.5 3.2 3.1 3.1 3.6 3.1 2.6 1.6 3.0 3.4 3.2

Table 13.3: Hybrid Factory Evaluation of 6 Groups in the US, UK, Continental Europe and East Asia   I. II. III. IV. V. VI.

Work organization/administration Production control Parts procurement Team sense Labor relations Parent/subsidiary Total Average

US

UK

Continental Europe

2.9 3.3 3.0 3.2 3.6 3.6 3.3

3.4 3.5 2.5 3.3 3.5 2.8 3.2

3.0 3.1 2.8 2.7 3.2 3.0 3.0

East Asia 3.4 3.4 3.2 3.3 3.2 2.6 3.2

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The A-A model emphasizes those aspects of the production system that are vital for achieving high product quality and efficient production over a wide range of operations. The focus is on employees’ strong sense of identity with the company, and on flexibility that derives from ‘genbashugi’ (work siteorientation) operations. The model was completed around the middle of the 1980s, just before the start of the bubble economy in Japan. Although there have been some changes in the Japanese system since the bubble burst, we nevertheless, continue to believe that the model is appropriate and useful as a prototype against which to contrast other models at home and abroad. Our hypothesis is that when Japanese firms ‘apply’ their technological advantages to foreign countries, they will face problems in ‘adapting’ to the local managerial environment. Various types of application and adaptation would generate a sort of ‘dilemma’, but consequently different ‘hybrid patterns’ of Japanese elements and local elements at the subsidiary plants. These patterns largely depend on socio-cultural backgrounds which, as already described, are greatly influenced by the historical and geographical contexts of each respective society. We use a five-point scale (hybrid ratio) to determine where to position the overseas plants of Japanese firms relative to the Japanese and the local models. A score of five indicates the highest possible degree of application (and consequently, the lowest level of adaptation—for example, a Japanese plant operating in Japan). Conversely, a score of one represents the highest degree of adaptation (and would reflect conditions at a non-Japanese plant operating in its domestic environment). There are three main transformative forces that might enhance the application scores: (a) ‘affinity’ in managerial environment stems from familiar sociocultural background between parent and subsidiary plants, which has been principally described above, (b) ‘strategic efforts’ implemented by each company with substantial costs, and (c) bringing-in of the ‘results’ of managerial resources from parent company. ‘Results’ and ‘Methods’ are two key terms used in ‘4-Perspective Evaluation’ (4-P-E) which is one of the important parts of our Application-Adaptation analysis methodology. The 4-P-E model looks at the substantive content of technology transfer. According to this evaluation, ‘Methods’ refer to the transfer of intangible elements such as the techniques and the knowhow that are necessary for building the organization and for carrying out personnel administration. This requires transplanting a considerable number of Japanese skills and technologies to the local soil (people). ‘Results’, on the other hand, concern the transfer of those visible elements of ‘ready-made’ hardware such as machines, parts, and even Japanese personnel. After they are repatriated, these elements might not leave any traces at all on local soil. Next, we discuss the findings of our evaluation of management geography in three major regions.

FINDINGS Figure 13.2 shows the hybrid evaluation using the six Group hexagon for the major regions.

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Fig. 13.2: Hybrid Factories—6 Groups in 4 (5) Major Regions

O VERALL PERSPECTIVE The most noticeable feature on the 6 group hexagons is the cross relationship of application scores on Work Organization/administration group and Parent/ Subsidiary group for the US and Continental Europe, on the one hand, and East Asia and the UK, on the other. While the scores of Work Organization at the transplants in East Asia (3.4) and the UK (3.4) are significantly higher than those in the US (2.9) and Continental Europe (3.0), the scores of Parent/subsidiary group in East Asia (2.6) and the UK (2.8) are much lower than those in the US (3.6) and Continental Europe (3.0). This cross relationship is symbolic in revealing that, it is far easier for the human-core part (all six items in the Work Organization Group are ‘Methods’related in 4-P-E) of the Japanese system to be transferred to East Asia (and to the UK!) even with much less commitment by Japanese parent mother plants and headquarters) [because of high ‘affinity’]. On the other hand, it is more difficult to transfer to the US and Continental Europe [because of low ‘affinity’] even though far more Japanese expatriates (human ‘Results’) are brought in the transplants there [regardless of ‘strategic efforts’ by paying much costs].

W ORK ORGANIZATION G ROUP Further, as shown in Table 13.2, in the Work Organization group, while the US has relatively high scores for Job Classification (3.7) as compared to Continental Europe (3.2) {though both are lower than East Asia (4.7) and UK

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(4.4)}, the US scores for Job Rotation (2.4), Training (2.6) and Wage (2.9) are very low. While the Japanese transplants in the US strategically tried to introduce wider demarcations (a critical precondition of the Japanese style flexible work organization), by dramatically reducing the number of job classifications to two or three from a couple of hundreds (in the cases of the traditional auto assembly plants of American companies), the practice could not match the other main elements in the work organization system so as to consistently correspond to the job classification system. The scope of job rotation for each operator is limited and the job-centered wage system cannot reduce that limitation. All the Japanese automakers such as Honda, Nissan, Toyota, Mitsubishi, Mazda, and Isuzu-Subaru tried to change the contradictory systems, but have not been able to overcome the limitation since the early 1980s. In East Asia, five items in the Work Organization group excluding job rotation are more consistently applied mainly because of higher socio-cultural ‘affinity’ between the regions and Japan. However, even here, the score for job rotation (2.7) is much lower than the other items because most Asian people do not like to be trained as multi-functional knowledgeable and skilled workers through wider and frequent job rotations. There are different levels of similarity even between East Asian countries: considerable difference between NIEs (Korea and Taiwan) and ASEAN (Thailand and Malaysia). The extremely high score for job classification (4.7) does not necessarily mean that the job classification systems in East Asia are almost the same as those in Japan, but only mean that there is no rigid high fence of demarcation as a system for work site people to be rotated, which is partly a result of the history in these countries where there is no tradition of division of labor. In Continental Europe, the application situations of six Work Organization group items are almost similar to the American one except for the higher score for Training (3.1 vs. 2.6 in US), suggesting the influence of the traditional regulative social-based training systems described above. In the UK, the scores are far closer to East Asia, except for Wage (2.8) which is one of the most hard unchangeable core of people’s way of working and living.

TEAM SENSE GROUP As shown in Table 13.2, on the Team Sense group, Continental Europe (2.7) is far below all the other regions (around 3.3), and has low levels for all three items (Small group 2.5, Information 2.8, Unity 2.8). Thus, in Continental Europe, there is little scope for the introduction of the Japanese management style that stresses the involvement of all members, which perhaps reflects the strong influence of two party-type social division of labor. On the other hand, for the three western regions, the scores of Small group (2.5 to 2.7) are as low as that of Continental Europe, suggesting that this element is the most typical Japanese and, to a considerable extent, East Asian style. In the case of the US as well as the UK, higher scores for Information (3.6) and Unity (3.5) compensate for the low level of Small group through activities designed to encourage ‘my-company sentiments’ such as all the level meetings,

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company releases, company picnics and parties, especially at auto assembly plants (‘strategic efforts’).

P RODUCTION C ONTROL G ROUP In the Production Control group, the divergence among the composing items is the smallest in four regions, since this group is the technical core to pledge the minimum productivity at the transplants. In the US, for example, the extremely high score for Equipment (4.3), as a result of earnest bringing-in of major machines and tools from Japan, is a representative case of compensating for the weak application score for Maintenance (2.6)—the main reason for which is narrow skilled specialist-orientation in the training system in the US.

P ARTS P ROCUREMENT GROUP In the Parts Procurement group, there are two notable features. First, the lower application scores (high local content ratios) in western regions, especially for Europe, are the result of the strong protectionist policies formulated by EU and NAFTA, and the developed manufacturing technology bases (though not the same types of technology) of suppliers in these regions. Second, the lower scores for Methods in western regions are the result of the weaker internal supplierassembler relations shown by the existence of Keiretsu, sub-contract systems, Kanban, and just-in-time system.

L ABOR RELATIONS GROUP In the Labor Relations group, there is a rough inverse relationship in the scores with the Work organization group among the regions: Work organization group (2.9 for US v. 3.4 for East Asia, with Europe in the middle) v. Labor relations group (3.6 for US vs. 3.2 for East Asia, with Europe in the middle). While both groups are human resource-related, the work organization group is ‘methods’related and labor relations group is policy (strategy)-related. In the US, Japanese companies are so keen in compensating for the low scores in work organization group that they are eager to implement policies to have more cooperative labor relations like in Japan through such practices as strict screening of new entrants, ‘non-lay off policy’ (without written contracts), and non-union plant policy, even at considerable costs.

Conclusions In this chapter, we developed a theory of management geography, and sought to verify it using our research results on hybrid factories in the US, Europe, and East Asia. Our analysis revealed potentially causal, or at least coincidental, interrelationship between locational distance and socio-cultural difference, and between the differences in the above distances and business models (corporate governances, management systems) in four regions.

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Our analysis does not presume an environmental determinism. The degrees of application and adaptation of hybrid factories are also affected by ‘strategic efforts’ of the parent companies and bringing-in of ‘results’ elements from the parent plants. Judging from the concerns of a management model, however, the final matter is the relation between the above findings and performance. In terms of profitability of foreign direct investment, in general, the earnings ratio is in a descending order: East Asia, the US and Europe.5  In East Asian countries, both business model conformity and low cost human resources must have contributed to such favorable performance. In the US, although the costs of ‘strategic efforts’, ‘results’ related applications, and expensive human resources must have been the highest, the advantages of economies of scale in the large and deep markets and learning effects of various high tech information technologies would be able to compensate them to a considerable extent. In Continental Europe, the costs to adapt to the distinct business model and the inefficiency to adapt to smallmedium sized markets and regulative social structures have placed sizable burdens on the earnings at the Japanese transplants. One must also consider the case of the UK where the hybrid structures at the Japanese transplants are very close to those in East Asian region. Thus, a business model, so far as the manufacturing sector is concerned, can be altered to a fair extent (Oliver and Wilkinson, 1988). This is an outcome of historical changes that have occurred in British society and economy. Traditionally, the British people have not been just European but also Anglo-Saxon who have behaviors typical of the American model (Dore, 1971). In future research, one needs to further explain the change of the socio-cultural framework of the UK toward an East Asian pattern. At any rate, this kind of change has nothing to do with any change of geographical location. In our analysis, we use very recent data about the changes of hybrid structures of Japanese transplants in the US which were collected during our research in 2000 and 2001. In addition, there have been some changes in the US until the mid 1990s. One of the remarkable changes was that ‘results’ preference approach had being gradually replaced by another approach preferring to ‘methods’ or ‘logic’ of the Japanese system, which means that the hybrid structures were altered to more flexible and work-site-oriented systems led by American people who understood the Japanese management system. However, this tendency may have been curbed again after the mid-1990s along with the ‘Information technology revolution’ (Cole, 1999; Abo, 2001a; Abo, 2001b). With respect to the changes in Japan after the crash of the bubble economy in the early 1990s, various weak points in the Japanese socio-economic systems have surfaced and the problems with the Japanese management systems have also become a big issue. These range from the corporate governance to the Japanese style relationships among business firms, banks, securities companies, and governments. In short, they reflect the problems with the cooperative and internal (so less market-oriented) transactions among various institutions. 5

Japan Ministry of Finance Statistics.

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The most popular opinion to revitalize Japanese economy is the ‘structural reform’ plan, which is most stressed by the present Prime Minister, Junichiro Koizumi, with an overwhelming support from Japanese people. This idea comes from the American model, largely influenced by the IT boom since the 1990s (Dore, 2000). However, our analysis indicates that there is no simple world standard and a certain limitation to change the whole system by carrying out ‘strategic efforts’ without socio-geographical ‘affinity’. The most dangerous effect of the ‘structural reform’ plan in Japan is its all-out pessimism about the potential of Japanese economy only because of a certain lag in the IT revolution from the US, regardless of the fact that Japan still has strong industries such as automobile, machine tools, and particularly various kinds of industrial parts and their materials, and, as a result, the huge current account surplus, and the world leading international and domestic individual financial assets (more than $10 billion). That pessimistic sentiment has led to such a serious loss of business confidence in Japan (Rosenoff, 1975) that they have not been able to spend enough money from their plentiful savings to keep Japanese economy more stable.6  Finally, the proposed theory of management geography can be used to interpret the logic or historical backgrounds of hegemony shift among nations or regions. This pertains to the reasons or the logic why a nation or region outstripped others in terms of technologies or economic power. The latecomers advantage theory (Gerschenkron, 1962) is one of the most influential theories. It explains the logic of catch-up but not much about ‘leap over’. If we seek the logic of outstripping, it is necessary to begin with the theory of ‘comparative’ advantage (in specific industries) of nations (Ricardo, 1817), and then incorporate factors pertaining to socio-cultural and geographical distances.

References Abo, T. (ed.) (1994). Hybrid Factory: The Japanese Production System in the United States , New York: Oxford University Press. Abo, T. (1998a). ‘Hybridization of the Japanese Production System in North America, Newly Industrializing Economies, South-East Asia, and Europe: Contrasted Configurations’. In R. Boyer, E. Charron, U. Jurgens and S. Tolliday, eds., Between Imitation and Innovation: The Transfer and Hybridization of Productive Models in the International Automobile Industry, New York: Oxford University Press.

6

Rosenoff (1975) stressed how ‘business confidence’, pessimistic or optimistic sentiments of people, can play great role at the critical phase of business cycles using the case of the economic recovery issue in the New Deal led by President F.D. Roosevelt. His point is that Roosevelt’s social reform policies were a milestone in the history of ‘welfare society’ in the US but so seriously destroyed the future prospects of conservative business people that they could not be active in carrying out production and investment activities, sparking the 1937 recession.

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Abo, T. (1998b). ‘Changes in Japanese Automobile and Electronics Transplants in the USA’. In H. Hasegawa and G.D. Hook, eds., Japanese Business Management, London: Routledge, pp. 80–106. (2000). ‘Spontaneous Integration in Japan and East Asia: Development, Crisis, and Beyond’. In G.L. Clark, M.P. Feldman and M.S. Gertler (eds.), The Oxford Handbook of Economic Geography, New York: Oxford University Press, pp. 625–648. (2001a). ‘Competition and Cooperation between the Japanese and British Management Models in the UK: International Transfer Problems of Intangible Management Systems’. In P. Banerjee and F.J. Richter, eds., Intangibles in Competition and Cooperation: Euro-Asian Perspectives, New York: Palgrave, pp. 111–124. (2001b). ‘Japanese Hybrid Factories in Germany: Survival in a different environment’. In The Procedings of Euro-Asia Management Studies Association, 2001 Annual Conference, Berlin, 31 October–2 November, 2001. Berle, A.A. and G.C. Means (1932). The Modern Corporation and Private Property, New York: Commerce Clearing House, Inc. Coase, R.H. (1937). ‘The Nature of Firm’. Economica 4: 386–405. Cole, R.E. (1999). Managing Quality Fads: How American Business Learned to Play the Quality Game, New York, Oxford: Oxford University Press. Dore, R. (1971). Japanese Factory—British Factory, London: Oxford University Press. (2000). Stock Market Capitalism: Welfare Capitalism—Japan and Germany versus the Anglo-Saxons, New York, Oxford: Oxford University Press. Gerschenkron, A. (1962). Economic Backwardness in Historical Perspectiv, Cambridge, MA: Belknap Press of Harvard University Press. Itagaki, H. (ed.) (1997). The Japanese Production System: Hybrid Factories in East Asia. Basingstoke: Macmillan. Marx, K. (1867). Das Kapital, Erster Band, Buch I, Dietz Verlag Berlin, 1960. Oliver, N. & B. Wilkinson (1988). The Japanization of British Industry, Oxford: Blackwell Publisher. Porter, M. (1990). The Competitive Advantage of Nations, New York: The Free Press. Ricardo, D. (1817). On the Principles of Political Economy and Taxation, London: John Murray, Albemarle-Street. Rosenof, T. (1975). Dogma, Depression, and the New Deal, Port Washington, NY: Kerrikat Press. Williamson, O.E. (1975). Market and Hierarchies, New York: The Free Press.

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Trans-Asian Context

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The Northern European Context

14

Acculturation of Cross-border Acquisitions Cowboys in Germany Thomas Steger

Mergers and acquisitions are normal events in today’s world economy, especially at the international level. It may be assumed that this is a topic for specialists in finance and law; as a consequence of this a lot of people consider these processes completed the moment the contracts are signed (Hofstede, 1991:227). However, a lot of important key variables, e.g., cultural barriers, inter-organizational communication, and organizational climate must be taken into account (Bartlett and Ghoshal, 1989, Covin et al., 1996, Fey and Beamish, 2001). Underestimating them may often be a reason for a lot of failures in this field (Müller-Stewens, 1992:333). Acculturation can be seen as a topic that integrates many of these variables. According to Berry (1980:215), acculturation is generally defined as ‘changes induced in (two cultural) systems as a result of the diffusion of cultural elements in both directions’. At first, we aim to develop the theoretical background presenting a model for a better understanding of the acculturation process in mergers and acquisitions. Then, a case study from an East German mid-size enterprise bought by a USfirm will be analyzed with special focus on acculturation. Finally, some implications for practice and further research are considered.

Theoretical Background ACCULTURATION AND THE NATIONAL FRAMEWORKS Despite the close economic relations between the US and Germany, there are a few cultural differences between them (Hofstede, 1991, Hazucha, et al., 1999). Special mention must be made here of the quite different legal systems (Pincus and Belohlav, 1996), especially with regard to the labor laws (e.g., dismissal procedures, and works councils). The differences between the US and Germany become even more visible when one takes into account the cultural differences between the Eastern and

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the Western parts of Germany. Since the fall of the Berlin Wall in 1989, the transformation process in East Germany created a highly distinguished framework which even let us speak of an ‘emerging country’. On the human level, there are not only some contrasts concerning power distance and uncertainty avoidance, but also individualism, masculinity, and long-term orientation (Lang, 1996).

ACCULTURATION AS A MANAGEMENT PROBLEM These differences can also be found at the management level between executives and their practices in Germany and the US. Hartmann (1963) profoundly analyzed the problems of American firms in Germany which exported American management philosophy, especially the unity of command, decentralized guidance, strict goal orientation, managerialism and human relations. In more recent publications about European-style management, several authors confirm such significant differences: Calori and Dufour (1995) refer to the European managers’ stronger orientation towards people, higher level of internal negotiation, skills at managing international diversity, and the capability of managing between extremes. On the other hand, Aaby et al., (1997) state a large risk-taking orientation of US managers, greater self awareness and a positive evaluation of inventive decision making, but also a relatively low conflict tolerance and a strong aversion to be dependent on others. Against this background, it is easy to understand that the implementation of management systems and management techniques is highly culture dependent and must, therefore, be handled with great care (Lang, 1993). A lot of mistakes and failures in this field in the emerging countries of Central and Eastern Europe during the last few years have prompted Holden (1997) to even speak about a ‘cross-cultural minefield’. At this point, Thomson (1996:30) proposes that ‘psychically close countries are not necessarily easy to manage, because assumptions of similarity can prevent executives from learning about differences’. Similarly, the complete opposite position (the greater the distance, the more successful the acculturation) seems to be very dangerous as well. As Sydow et al., (1995) note, there is a certain corridor of principally promising cultural distances between the extremes, which may be represented by an inverted U-curve.

ACCULTURATION MODEL In the past, a few models tried to integrate the problems of cultural diversity as well as those of acculturation strategies (e.g., Nahavandi and Malekzadeh, 1988; Thomson, 1996). The acculturation model presented here contains a few important modifications (Figure 14.1). First of all, it should be considered that with every merger and acquisition there are (at least) two different firms with their own culture and their own plans and strategies. It would be dangerous to underestimate this fact and to think the acquiring firm could eliminate this problem by imposing its will on the partner.

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Fig. 14.1: Model for Acculturation of Mergers and Acquisitions Moreover, the process of strategy making cannot be considered a rational planning process but is highly influenced by the national and organizational culture (Mintzberg and McHugh, 1985) and should be regarded as a cultural expression. Therefore, strategic congruence can be considered ‘the tip of the hard factors’— and cultural congruence ‘the tip of the weak factors’. One has to ask here how similar or how different these cultures and strategies are, and how much strategic and cultural congruence there is. The cultural and strategic congruence between two firms are closely connected with trust. Cycles of trust and distrust play an important role in the interactions during the process of acculturation (Gill and Butler, 1996) and can be seen as influencing the organizational climate (Fey and Beamish, 2001). The result of the interplay of strategic and cultural congruence and trust can be described as co-operative congruence or, in other words, the amount of fit between the two partners. It can be considered decisive for the amount of stress through the acculturation process. The larger this co-operative congruence, the smaller the extent of acculturative stress, and vice versa (Harvey and Miceli, 1999). Nevertheless, as already mentioned above, it must be emphasized that neither a huge amount of stress nor freedom from stress, but a certain corridor between these extremes should be achieved. Despite the merits of long and short term success identification and measurement, this variable is not included in our model. Co-operative congruence and acculturative stress may explain success or failure in certain situations, but they are merely dependent variables. Moreover, the qualitative methods used hereafter are not intended to provide some (statistically relevant) contingency data.

CASE STUDY The model introduced above is described in this section with the help of a case study of a mid-size enterprise in the equipment industry situated in a large city

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of East Germany. Between 1994 and 1998, during numerous visits, 31 interviews (duration 30 minutes–90 minutes) were conducted with different people from a wide social spectrum. This broad data should help provide important insights to the reader.

THE ACQUIRED FIRM The acquired firm that stands at the center of this—we call it Turncon—was established during the middle of the 19th century. After the political upheaval in 1989, the management had to struggle to find a company that was not only ready to privatize it but to guarantee that it would a protect a certain number of jobs and ensure that it would continue to grow. During that time, Turncon faced an enormous reduction of staff from 1650 to 250 persons. Finally, in July 1992, it was taken over by an American company.

T HE ACQUIRER The owner of the acquiring company was originally from Germany and had emigrated to the US in the early 1960s. The (cultural) transfer between the two companies therefore was (and still is) focused on the owner who commutes between East Germany and the US every three weeks.

A FTER A CQUISITION At the start, the new owner kept the two top managers (commercial director/ technical director), both originating from East Germany, who had led Turncon until the privatization. However, he fired the commercial director (who was highly appreciated by the staff) overnight and appointed a West German manager. After growing conflicts with his two ‘colleagues’, the technical director withdrew one year later. He was replaced by a younger East German manager. Subsequently, there were several conflicts at Turncon: such as quarrels between the management and the works council; months-long conflicts between white-and blue-collar workers about overtime payment; and a widely shared fear of staff reductions and firm closure. The problems that Turncon faced during this period can be understood— according to the model introduced above—as focal points of cultural and strategic (in-)congruence.

CULTURAL INCONGRUENCIES 1. PERSONAL CHARACTERISTICS

OF THE

NEW OWNER

The new owner is widely regarded—by himself as much as by many of his employees—as being highly influenced by American business philosophy. This includes positive aspects such as a charismatic personality, the conviction to reach the impossible, an intense work ethic, and high technological and financial skills.

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...we have a boss with whom you can steal horses. Well, this is a person who is profoundly to be admired. (Interview 5, management executive, female) On the other hand, he is described as autocratic (even by himself!), as a person who emotionally fluctuates between extreme moods, and is often narrow minded—a person you never know how to react to. Moreover he seems to ignore many important aspects of Turncon (e.g., the level of existing technology, and the firm’s history). Then, he offended me in front of the whole executive team: “You have absolutely no overview— you cannot have any overview!” (...) In that moment, a cold shower went down my back, I still remember this, I will never forget this day. And fourteen days later I was still scared. I was scared of going to work and scared of doing anything... (Interview 31, management executive, male) His dominant concern is the search for the ‘ideal leader’ (whom he can not find inside of Turncon), short-termism (which puts pressure on the employees) and a strict goal and profit orientation (which is diffcult to achieve at an ailing unit). I am not a people beater, but I like people who (...) say: ‘I must achieve this in this space of time’, and this was never done here, not for forty years. (Interview 25, owner) Considering his central position as the firm’s owner, one can imagine that his traits not only provoke several personal conflicts but also foster existing ones.

2. THE OWNER’S LEADERSHIP STYLE The new owner’s leadership style is a logical outcome of his personal characteristics. First of all, his appearance is quite impressive. He likes to stand in front of employees and talk matter-of-factly. This hard and direct form of communication often prevents an open discussion and discourages many of his listeners. While some management executives interpret this as a proof of confidence in the policy of the owner and his executives, the owner complains about the lack of discussion, unable to fathom the reasons for it. .... at the beginning he praises the colleagues a bit and afterwards there comes most often the wooden hammer ... that’s his style. And this time, there was nothing to praise, so it came right at the beginning ... (Interview 17, blue-collar worker, male) And then I ask: ‘Do you have any questions, do you want me to explain anything?’ No discussion ... that’s a nearly unbelievable situation for me. (Interview 25, owner)

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Another problematic aspect of the owner’s style is that he is after absent for weeks from the firm and, therefore, has to concentrate on the big picture. However he also tries to guide Turncon in a hands-on matter, spontaneously intervening on the shop-floor and is fastidious about minor details. This also regularly leads to unrealistic requirements, to the withdrawal of inconsiderate layoffs, and to intimidated employees who find themselves in a dilemma between flexible engagement on the one hand and stubborn rule on the other. As a result he is continuously overworked and often out of breath. ... Now I’m very sensitive to the detail and I try to perceive the large perspective and to realize it. (Interview 25, owner) Everybody here said: ‘We’ll never reach it!’ And I flew horizontally through the firm and we reached it. But this cannot be! (Interview 25, owner) The management executives were afraid of their boss, discouraged and reluctant to take decisions and sometimes even tried to identify with the owner by adopting his mannerisms and suppressing all criticism. ... and for this I have a very good master in my boss. (...) And then I said to myself: Now you must leave everything behind you, on the left and on the right, and you must dedicate yourself to nothing but to this task, to resolve the task your boss entrusted you with. (Interview 23, management executive, male) Nevertheless, the owner is not content with his executives’ attitude and performance and seems not to appreciate their servility. And this decision power of the middle and also partly of the higher management is not there. (...) and even—let’s say—a relatively low readiness to identify themselves with the firm. (Interview 25, owner) During 1996, the owner fired both directors. One of them appeared ‘completely broken’ and left the firm ‘with tears in his eyes’ (Interview 1, management executive, male). The problem is magnified by the fact that employees have a poor opinion of the management executives. ... and then he comes along and says: ‘I will always find a job anywhere’. What should I expect from such a man? This shows you—in our opinion—that he does not stand behind the firm. With his position and with the salary he gets, he ought to react in a different way... (Interview 15, white-collar worker, male)

3. CONTROVERSY IN INTERPRETATIONS OF THE FIRM’S PAST A typical example of cultural incongruence is the perception and interpretation of the past (and especially of the firm’s past) which constitutes a central focal

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point in our case. Though he does not directly accuse anybody, the owner’s opinion about the last decades (especially the years during socialism) is clearly negative and highly influenced by deep-seated prejudices. Formerly they have been dreaming on the technological level, and the time spaces and when it was to be finished were boundless. (Interview 25, owner) One should have told the firms: ‘Now you are all out and you can start anew’. Then the entrepreneur would have been forced to search for his employees. (Interview 25, owner) This view of the past differs from that of most employees. In order to seek legitimacy for what they have done over the years, they find themselves in a complicated situation—not the least by the owner’s ideas. Even some of the top management state that the owner dislikes East Germans. Some critical decisions taken in the past (e.g., the dismissal of the commercial director) are seen as for clear signals of this. In the past, the employees attached great importance to the value of their work (quantitative as much as qualitative), to the good climate in the workplace, and to the highly stable social system. Now they point to the lack of these attributes in Turncon. ... but today there is also a lot of trash and ridiculous things they want or wanted us to believe, which we did better in the old days. I could speak again about the consultants, nonsense! (Interview 24, management executive, male) On the other hand, a few management executives seem to have completely snapped their links with the past, perhaps to project the picture of a hard fighting market economist. Well the first decisive perception after the Wende was that one had to deal with the market economy. (...) And this meant, first of all, that our employees had to learn that one could not work anymore as before. (Interview 1, management executive, male)

STRATEGIC INCONGRUENCE 1. ACTIONS

AND

REACTIONS ABOUT CORPORATE POLICY

The corporate policy is shapped by the owner’s personal ideas and plans. This often leads to internal misunderstanding, i.e., it is somewhat amazing to see the diametrically opposize perceptions that the owner and employees have about company policy. A good example is the job policy: the owner is very proud of the fact that he sacked almost no one during the last few years; he gloats over the fact that he has exceeded the commitments he made to Treuhandanstalt (the German privatization agency) on jobs and investment. On the other hand, he does not

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create a sense of security among the employees who fear they could lose their jobs any day, which acts as a ‘performance barrier’ for a lot of employees. Moreover, many of the employees say they have absolutely no knowledge of the owner’s strategies; they are very suspicious about official versions of corporate policy (even if it is reported in the local newspaper!) and sometimes conjure up strange ideas and scenarios. ... I would not dare to mention an appraisal... because we do absolutely not know how his strategy looks like, we do not know it, I don’t know, if anybody in the firm knows it at all. (Interview 17, blue-collar worker, male) Mr too, in fact did not buy this firm. He presented a concept, presented a little bit and he got it. That’s it and nothing else. (...) as far as I know (...) when he sells the firm today, at his own will, he loses nothing. (Interview 3, workers’ council member, male) A lot of employees feel that they are ‘walking over the bog’ (Interview 3, works council member, male)— they cannot perceive a common strategy or a common guiding principle. Some management executives seek their profit in backing the owner, identifying themselves completely with what the owner does (especially versus external people), but without a clear idea about what they are (blindly) following.

2. CONCEPTS

OF

PERSONNEL DEVELOPMENT

The owner’s attitude (or prejudice) against the East German people of Turncon must also be considered the guiding principle for his human resource activities. The people he is looking for are those bred on American-style ideals: young, innovative and very efficient people who identify themselves more with the top management than with the employees. Therefore I should have a new technician, a young one, who has also learned what I have learned, as a young man in America. (Interview 25, owner) Unfortunately, such people can hardly be found in Turncon and the owner cannot rely on his management executives to create them. He is convinced that he must personally transfer these ideas and, therefore, attempts to adapt the people to his personal style. He does not seem to realize that by his ruthless behavior, he prevents people from developing in that way. Moreover, he does not take into account the people’s past and their traditional virtues and working values (e.g., technical skills, work commitment, readiness for sacrifice). I must train them now, as I recognized (...) that the transfer via my executives did not function (...) So I have—more and more—to educate them step by step for their work. (Interview 25, owner) There is little attempt at personnel development through training, and management education, which is more or less seen as an unnecessary cost. So,

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the management executives try to follow (and copy) the owner’s ideas and behavior, whereas the employees are forced to make autodidactic efforts—if any. They are forced to learn on the job without any clearly defined goals and a lot of trial and error. ... I say, that’s a model for me, with this man I would like to co-operate (...) Well, you must see this positively, in all points. One can learn a lot from him... (Interview 2, management executive, male) ... that you must create the skill to find the essential, otherwise a lot of things perish... that you really know what it depends upon, otherwise you cannot work any more. (...) There you also need a lot of experience, well, when a new man starts working here, it is surely quite hard for him, he will blunder along ... (Interview 8, white-collar worker, female)

3. THE SOCIAL-POLITICAL ENVIRONMENT The owner—who is steeped in American values—finds it hard to fathom the social market economy system of Germany. Entrepreneurship does not exist in Germany any more. You are just an inspirator, you have–let’s say–certain liberties, but in the most circumstances you are very limited. (...) You are not even able, as quickly as the situation moves, to create new innovations to compensate, that’s not possible. That’s even not possible in an industry and with the average attitude of a blue-collar worker in Germany. That’s different in America. (Interview 25, owner) This opinion is not limited to a general level but implies statements with direct connection to the situation at Turncon, although it refers to actions not allowed in the German legal framework. With us in America, when the orders don’t come in, and when I’m not able to build the bridges any more, then the employees are called in and are told: ‘We are sorry, no orders, we will lay you off, (...)’ Then they are grateful that they get some money for 14 days, without having worked for it. (Interview 25, owner) This constitutes the starting point for various conflicts: the people of the works council (as also the union) find themselves provoked and sometimes even blackmailed. The workers are intimidated and very suspicious of the owner’s promises, sometimes even paralyzed and defeatist. We have not the same lobby and the possibilities as the Post or Telecom who say: ‘Well, we go on strike as long as he blackmails us’. For me that’s a kind of blackmail. (Interview 3, works council member, male) ... in fact, the only thing that I have in mind, what I always say, is this fear among the people, what will be now. (...) I say, this is in fact the worst thing,

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this feeling, will you grow older in this firm for a few years more or will it stop at some time? (Interview 4, white-collar worker, female)

TRUST/DISTRUST , CO - OPERATIVE (IN -)CONGRUENCE AND ACCULTURATIVE STRESS: THREE VICIOUS CIRCLES The six focal points discussed above are not independent but inter-dependent. Moreover, as it was described in the acculturation model, they are inter-related with cycles of trust and distrust (Gil and Butler, 1996). The outcome of all this we defined as co-operative congruence and acculturative stress. In our case study, three vicious circles can be identified which clearly describe these dynamic processes. There are: 1. Global vs. Local Activities. After privatization, the owner first tried to stay in the background directing the affairs at Turncon through his two top managers (Figure 14.2). However, after a few months, the low performance forced him to take the initiative, also under the pressure from the banks (‘You are our man!’– Interview 25, owner). He fired one of his directors, went personally on stage and attempted to influence the people with his charismatic personality and his engagement.

Fig. 14.2: Vicious Circle I: Global vs. Local Activities The owner’s leadership style which was already described as very emotional, interventionist and almost military, and his engagement with the workers which often shifts between charming and aggressive frightens the people, especially on the shop floor and makes them feel very insecure. In the face of the owner’s strong personality, most workers and even management executives either withdraw or try to completely identify with him. Neither attitude results in a higher level of performance. The owner feels frustrated by the shortcomings and becomes even more convinced of the need to intensify his engagement and the vicious circle goes on.

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2. Ideal vs. Reality of Social and Legal Structures. The owner was used to the social and legal structures of the US for over 30 years (Figure 14.3). Now, he has to realize that in a few important aspects—and especially in its guiding assumptions—the social and legal structures of Germany are markedly different from those in the US. He recognizes a lack of freedom in his role as an entrepreneur and complains about this in many ways. Nevertheless, he attempts to realize his plans and ideas (e.g., flexible layoffs, direct communication with the workers, and bypassing the works council). Several conflicts arise because the owner’s actions violate existing laws (e.g., layoff right, rights of the works council). While the owner feels discouraged and limited by these structures, the workers become increasingly insecure while trying to divine, what the owner has in mind. All this creates a climate that prevents a good working atmosphere and a higher performance. The owner feels convinced once more that the social and legal structures are barriers to better performance and that he has to fight against them: the vicious circle turns anew.

Fig. 14.3: Vicious Circle II: Ideal vs. Reality of Social/Legal Structures 3. Different Interpretations of the Past. The owner has a quite critical perception of Turncon’s past and therefore he interprets a lot of aspects (e.g., productivity, work attitudes) in a negative manner (Figure 14.4). From this several statements and ideas arise (e.g., closing up the firm and rebuilding it anew, importing workforce from abroad), which provoke and terrify a lot of people in his environment, especially when these ideas seem to become the reality (e.g., with the dismissal of the first commercial director). As a reaction, a few people suppress their past and try to change their personality. Others make some counter-attacks blaming some new (negative) attitudes and processes in the firm. All this leads to a consolidation of traditional attitudes and beliefs of the employees and of the management executives (even if

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suppressed). The performance is not supported but actually hindered by these controversies. This even strengthens the negative perceptions and interpretations of the owner and his will to change them—the vicious circle turns anew.

Fig. 14.4: Vicious Circle III: Different Interpretations of the Past

DISCUSSION At the end of our research in 1998, the firm faced a very critical situation. Beyond the acculturation problems described above, it faced losses and a high turnover among management executives (in spite of a drastic situation in the labor market), both of which were markedly influenced by those processes. When the situation improved in 2000 and 2001, all the problems were not eliminated but only swept under the carpet. Although this case study does not provide any statistical data about clearcut contingencies between acculturation and the success or failure of mergers and acquisitions, its outcomes should not be generalized and there might be some lessons to be learned from it.

DISCUSS YOUR BELIEFS! The lack of communication can easily be perceived inside the firm. Instead of a mutual exchange and growing understanding of cultural identity, people permanently reproduce their (old) values and interpretations about one another. Therefore, a broad discussion about values, norms and reality constructions— in the context of a firm’s vision or strategy creation workshop covering management executives and even some employees’ representatives—could be helpful. This would give the different groups of the firm the possibility to not only state their ideas and goals but also their problems and anxieties. Such a value discussion can be considered a basic factor for a successful process of cultural understanding (Fiedler and Steger, 1996). Moreover, it could help overcome the classical short-termism by a commitment to a vision for the long run (Laverty,

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1996). A necessary condition for this would be the initiation of the acculturation process by the most powerful party (in this case the owner) and a climate of openness and reciprocal acceptance. This proposal may not be that unrealistic if one takes into account the owner’s wish to have discussions. In fact, some employees state that his door is always open to discuss the problems of the people.

CONSIDER THE SIGNALS YOU SEND! It could be very helpful if leading management executives (and especially the owner) tried to provide employees with positive signals. The promotion of a sense of job security, would improve the interaction between the owner and the employees. Job security is a critical factor for employees, especially those on the shop floor. This could even create some benefits because of the readiness for sacrifice among employees in East Germany (Schmidt, 1995). Moreover, the owner would be well advised to reflect on how certain decisions, actions, and behaviors will be interpreted by different groups and different people, not only outside but within the firm. The approach of symbolic management (Pfeffer, 1981) could therefore deliver some interesting instruments for ‘internal PRactivities’, although, as Lang and Wald (1992) warned, it should be handled with care considering the different schemes for interpretation of different people and groups.

MAKE STRUCTURES VISIBLE

AND

RELIABLE!

It is easy to understand that (the mode of) control strongly influences important variables of the daily work, e.g., creativity at work (Oldham and Cummings, 1996) or work initiative (Frese, et al., 1996), especially in a situation of extreme instability. This impact is even greater and more negative if the employees and even the management executives do not know what kind of competencies they really have and how long the current level of delegation will last. Although the owner cannot completely change his leadership style, the definition of certain rules and principles would help the people of the firm to act in a more stable climate and, to really commit themselves in a more active manner.

P ROMOTE HUMAN RESOURCE M ANAGEMENT (HRM)! One of the most striking deficits of Turncon is the lack of human resource management. Certainly, this situation is not unique and can be found in a lot of small, especially in the list of the highly recessive environment in East Germany. Nevertheless, personnel management should not be reduced to a ‘hire and fire agency’. A well adapted strategy for personnel development, for example, might provide the firm with the kind of people the owner is looking for. Modern HRM literature (e.g., Becker and Gerhart, 1996; Hiltrop, 1996) presents a broad overview of instruments for this, even with respect to small and mid-size enterprises.

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PROVIDE A LEARNING CLIMATE! Last but not least, the case study showed once more that acculturation processes require substantial learning on both sides (Villinger, 1996) and that cross-cultural competencies consist of more than the ability to speak a foreign language. On the basis of a sincere acceptance of the other, managers from abroad should reflect on their values and behavior in order to come to a deeper understanding of their new environment. Or, in the words of Shanahan (1996:318): ‘we must have crossed, and perhaps recrossed, boundaries in order to occupy a position of real understanding beyond those boundaries’.

References Aaby, N.E., M. Marinov & S. Marinova (1997). ‘Managers’ characteristics: Results from an exploratory comparison of young managers in Bulgaria and USA and its implications for management education in Bulgaria’. Journal for East European Management Studies, 2, 22–34. Bartlett, C.A. & S. Ghoshal (1989). Managing Across Borders, London: Century Business. Becker, B. & B. Gerhart (1996). ‘The impact of human resource management on organizational performance: Progress and prospects’. Academy of Management Journal, 39: 779–801. Berry, J. (1980). ‘Social and cultural change’. In H.C. Triandis & R.W. Brislin (eds.), Handbook of Cross-cultural Psychology, Boston: Allyn & Bacon, 211– 279. Calori, R. & B. Dufour (1995). ‘Management European style’. The Academy of Management Executive, 9: 61–73. Covin, T.J., K.W. Sightler, T.A. Kolenko & R.K. Tudor (1996). ‘An investigation of post-acquisition satisfaction with the merger’. Journal of Applied Behavioral Science, 32: 125–142. Fey, C.F. & P.W. Beamish (2001). ‘Organizational climate similarity and performance: International joint ventures in Russia’. Organization Studies, 22: 853–882. Fiedler, A. & T. Steger (1996). ‘Das Verhältnis der Werktätigen zur Arbeit in ostdeutschen Industriebetrieben: Beharrung oder Neuorientierung?’. In M. Becker, R. Lang & D. Wagner (eds.), Personalarbeit in den neuen Bundesländern, Sonderband der Zeitschrift für Personalforschung, München and Mering: Hampp, 75–96. Frese, M., W. Kring, A. Soose & J. Zempel (1996). ‘Personal initiative at work: Differences between East and West Germany’. Academy of Management Journal, 39: 37–63. Gill, J. & R. Butler (1996). ‘Cycles of trust and distrust in joint-ventures’. European Management Journal, 14: 81–89. Hartmann, H. (1963). Amerikanische Firmen in Deutschland, Köln and Opladen: Westdeutscher Verlag.

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Harvey, M.G. & N. Miceli (1999). ‘Exploring inpatriate manager issues: An exploratory empirical study’. International Journal of Intercultural Relations, 23: 339–371. Hazucha, J.F., S.A. Hezlett, S. Bontems-Wackens & A. Ronnqvist (1999). ‘In search of the Euro-manager: Management competencies in France, Germany, Italy, and the United States’. In W.H. Mobley, M.J. Gessner & V. Arnold (eds.), Advances in Global Leadership, 1, Grenwich (Conn.): JAI Press, 267– 290. Hiltrop, J.M. (1996). ‘A framework for diagnosing human resource management practices’. European Management Journal, 14: 243–254. Hofstede, G. (1991). Cultures and Organizations, London: McGraw-Hill. Holden, N.J. (1997). Russia as a cross-cultural minefield: Implications for the conceptual development of cross-cultural management studies, Paper presented at the International Association for Cross-Cultural Competence and Management (IACCM) conference, Vienna. Lang, R. & P. Wald (1992). ‘Unternehmenskulturen in den fünf neuen Ländern’. Zeitschrift für Personalforschung, 6: 19–35. Lang, R. (1993). Nationalkulturelle Unterschiede und ihre Konsequenzen für Management und Marketing in Ostdeutschland und Osteuropa. Paper presented at the conference ‘Management and Marketing’, St. Petersburg. Lang, R. (1996). ‘Wandel von Unternehmenskulturen in Ostdeutschland und Osteuropa—Offene Fragen und Problemfelder der Forschung’. In R. Lang (ed.), Wandel von Unternehmenskulturen in Ostdeutschland und Osteuropa, München and Mering: Hampp, 7–21. Laverty, K.J. (1996). ‘Economic “short-termism”: The debate, the unresolved issues, and the implications for management practice and research’. Academy of Management Review, 21: 825–860. Mintzberg, H. & A. McHugh (1985). ‘Strategy formulation in an adhocracy’. Administrative Science Quarterly, 30: 160–197. Müller-Stewens, G. (1992). ‘Organisationspsychologische Aspekte bei der Integration von Unternehmensakquisitionen’. In W. Busse von Colbe & A.G. Coenenberg (eds.), Unternehmensakquisition und Unternehmensbewertung, Stuttgart: Schäffer-Poeschel, 331–341. Nahavandi, A. & A.R. Malekzadeh (1988). ‘Acculturation in mergers and acquisitions’. Academy of Management Review, 13: 79–90. Oldham, G.R. & A. Cummings (1996). ‘Employee creativity: Personal and contextual factors at work’. Academy of Management Journal, 39: 607–634. Pfeffer, J. (1981). ‘Management as symbolic action’. In B.M. Staw & L.L. Cummings (eds.), Research in Organizational Behavior, 3, Greenwich (Conn.): JAI Press, 1–52. Pincus, L.B. & J.A. Belohlav (1996). ‘Legal issues in multinational business strategy: To play the game, you have to know the rules’. The Academy of Management Executive, 10: 52–61. Schmidt, R. (1995). ‘Die Bedeutung der sozialen Beziehungen für die ostdeutsche Produktionsmodernisierung’. Berliner Journal für Soziologie, 5: 455–462.

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Shanahan, D. (1996). ‘From Language Learner to Multicultural Manager’. European Management Journal, 14: 315–320. Sydow. J., A. Windeler, M. Krebs, A. Loose & B. van Well (1995). Organisation von Netzwerken, Opladen: Westdeutscher Verlag. Thomson, J.N. (1996). ‘Takeovers and acculturation: Linkages from East German privatisations to Workforce Integration’. Journal for East European Management Studies, 1(4): 25–46. Villinger, R. (1996). ‘Post-acquisition managerial learning in Central East Europe’. Organization Studies, 17: 181–206.

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Employees as ‘Co-Intrapreneurs’

An Evolving Perspective for Managing Change in the Germanic Context 1 Rolf Wunderer

The growing pressure to compete, the globalization of the economy as well as the transition of an industrial economy to a ‘knowledge-based’ service economy place a higher demand on employees to increase their level of performance. In the modern context of a post-industrial economy, the workforce can no longer be understood only as a factor of production, but has become a strategic determinant of success (e.g., Blyton and Turnbull, 1992; Jackson and Schuler, 1999). Human Resources in particular are not primarily to be seen or treated as ‘cost component’, but as a potential source for added value and long-term investment. Furthermore, the transition in basic values favor a combination of independence and creative teamwork as well as service and result-oritented activity (Ulrich, 1997; Ulrich et al., 1999). Seeking alternatives to command-and-control, new post-bureaucratic models of organizations, based on co-ordination, emphasize the need for decentralizing authority and development of team-oriented designs. Decision-making processes and entrepreneurial activities need to be conveyed to the level of each individual in the organization in order to tap their specific competencies and knowledge for the future success of the company. Accordingly, management practice and leadership theory have developed concepts, that recognize aspects of ‘internal entrepreneurship’ sometimes under a different name. Entrepreneurship in organizations serves as a strategic core competency which opens non-copyable competition advantages. In this context, our approach for describing and explaining co-intrapreneurship offers a comprehensive and integrated framework for situational applications. 1

This chapter is adapted from ‘Employees as co-intrapreneurs–a transformation concept’, Leadership & Organization Development Journal, 22 May, 2001, pp. 193–211 (MCB University Press, ISSN 0143–7739), with permission.

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In this chapter, the basic elements of an integrated process towards cointrapreneurship are presented using experiences of the firms in the Germanic context. These elements refer to the goals, context, key competencies, motivation and identification, coordination and leadership and specific target-oriented policies. The results of empirical investigations are integrated to support our approach and to refer to its practical relevance.

The Concept of Co-Intrapreneurship CHANGE AND CO-INTRAPRENEURSHIP Changes in the business environment and management philosophy have led to an increasing number of companies demanding internal entrepreneurship, not only from their managers, but from all employees. To quote a few examples— mostly from corporate visions or management principles: l

l

l

l

l

Everyone behaves in an intrapreneurial, non-bureaucratic and productive manner. (IBM) We ask our employees to be ‘entrepreneurs’ in their own affairs, to recognize the precise strengths and competitive advantages of their business, to believe in themselves and in success. (Siemens) We build on independence; i.e., we pre-determine a framework.… We promote and reward intrapreneurial behavior and the willingness to take a risk. (Ciba) We think, decide, and behave in an intrapreneurial way. (UBS–Swiss Bank Corporation) Outstanding and innovative products and services will be the focus and essential components of value-driven management. This requires a management philosophy, which is based on intrapreneurial thought and behavior. (DaimlerChrysler)

Ideas relating to entrepreneurship were primarily introduced in Germany by independent pioneer-entrepreneurs, who not only preached ‘corporate social partnership’ but also practised and implemented it. However, once they had retired, their model was often not continued or abandoned. A further feature of these historical initiatives was an orientation towards financial models of participation and co-determination. What was primarily discussed and recognized as a normative concept of social small and medium-sized enterprises (SMEs) in the 1950s and 1960s, is now developing as a management concept for global players. Today, economic and socio-ethical themes such as co-determination or shared ownership are no longer the focus of attention. They have been replaced by demands on contemporary and efficient (Knowledge) Management (Krogh et al., 2000)—particularly by large enterprises striving for cultural, organizational and strategic change.

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OBJECTIVES OF CO-INTRAPRENEURSHIP Entrepreneurship can be defined as the process of eliciting or evoking value from new and unique combinations or re-arrangements of resources in an uncertain and ambiguous environment. Consequently, internal entrepreneurs can be understood as co-operating organization-members, who innovate, identify and create business opportunities, assemble and co-ordinate new combinations or arrangements of resources, so as to yield or enhance value. Therefore, the objective of intrapreneurial activities is to safeguard and to increase the corporate value in the long-term by optimizing the benefits for the central stakeholders. Even more than the marketing or person oriented (Foxall and Minkes, 1996) or conventional approach of ‘Intrapreneurship’ (Pinchot, 1985), a ‘Co-(operative) Intrapreneurship’ combines the organization-internal competition with a longterm, win-win-oriented co-operation. Consequently, co-intrapreneurial development can be understood as socially effective processes that support all members of an organization and their co-operating interaction.

Elements of the transformative process The essential elements are systematized in figure 15.1, and are discussed below.

(A) GOALS 1. Added value for the company and the creation of benefits for the central stakeholder groups are ranked higher than maximizing benefit for one stakeholder group. The main objective is to safeguard or increase the ‘company value’ in the long term with and by creating benefit for all central stakeholder groups. This does not support an unbalanced orientation towards just one group of stakeholders. The so-called stakeholder approach has been discussed in management theory since the 1960s (Freeman, 1984; Rappaport, 1997). In accordance with this approach, it is the management’s duty to record, assess, and where possible, satisfy the needs and demands of the central stakeholders and thereby increase the company’s value. In countries which lack raw materials, and in our service and knowledge-based post-industrial society, the latter are the most important source of added value (Baumol, 1959; Clarkson, 1995). Companies that want to recruit and promote employees as co-intrapreneurs in the long term, must recognize them as partners and refrain from using them as stakeholders’ investment goods. It means that co-intrapreneurs are entitled to a tangible benefit of the added value which is co-created by them (Beam and McFadden, 1998). However, our co-intrapreneurial approach is a concept of intrinsic motivation and behavior, which should not be distracted by extrinsic incentives (e.g., payment) that may undermine or drive away the inherent motivation (Frey, 1997; Deci and Ryan, 1985; Ryan and Deci, 2000).

Behavioral objectives: – communal thinking, – common performance, – conjoint responsibility; – mutual sympathy, – co development, – fair profit-sharing.

Goal of transformation: active and efficient support for corporate strategy by problemsolving, socially competent and implementation-oriented thinking and acting by as much as possible employees from all hierarchy and functional areas

Goal of the corporation: added value to secure the corporation by creating benefits for central stakeholders

(A) Goals

Implementation

Co-intrapreneurial Motivation (situation oriented) – valence – instrumentality – success expectancy

Co-intrapreneurial Basic Motivation/ Identification (person oriented) – risk taking – Org. citizen behavior – commitment

Co-intrapreneurial Key Competencies – problem-solving skills – implementation skills – social competencies

(C) Potential

Interactive leadership – target/result-oriented – visionary, inspiring, individual

Structural leadership – culture (e.g. innovation) – strategy (e.g. empowerment) – organization (e.g. decentralized) – qualitative staff-structure

Co-intrapreneurial Leadership concept

Co-intrapreneurial Concepts of Coordination – internal market (competition) – social network (co-operation)

(D) Co-ordination

(E) Policies

– leadership guilding principles for managers

– behavior and development guiding principles for employees as Co-intrapreneurs

Co-intrapreneurial Guiding principles

Co-intrapreneurial Selection + Development – targeted advancement – self, team, organization development

Fig. 15.1: From Employees to Co-Intrapreneurs: An Integrated Framework

Resources – personal – financial – informational – natural – technical

Macro-Context – Political-and legal system – Economic system – Society system – Technology system Micro context – Culture – Strategy – Organization – Personal structure

Needs of central stake-holders – Customer – Employees – Share-holder – Suppliers – Society – Environment

(B) Context

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Co-Intrapreneurship

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(B) CONTEXT 2. The macro- and micro conditions, as well as the resources, are the basic conditions for the co-intrapreneurial transformation process.

THE M ACRO

AND

M ICRO C ONTEXT

The macro context concerns the surrounding field of the company; e.g., politics, law, economic, societal and technological environment. Current contextual changes—like increasing competition and globalization as well as cultural value shifts—require engaged co-intrapreneurial employers on a broad base. The fundamental conditions of the internal company form the micro context. The arrangement of these dimensions determines to what extent co-intrapreneurship will be promoted or restrained.

S TAKEHOLDER Since enterprises live in exchange with their environment, the interests and needs of its stakeholders determine to a considerable degree both the possibility and the necessity for a ‘lived co-Intrapreneurship’. In times of homogeneous products, a co-intrapreneurial approach, supporting pace, reliability, quality, or friendliness can facilitate the focus towards customers and service. This sustains and increases the enterprise value, and contributes to broader societal interests, e.g., an increase of the gross national product or a lowering of unemployment.

R ESOURCES The extent to which Co-Intrapreneurship will be successfully implemented, depends on the availability of personnel, financial, informational, natural and technical resources. Thus, the generation and realization of new ideas presupposes not only a sufficient stock of information, but often also financial and technical means as well as energetic support by the surrounding social and economic field.

(C) POTENTIAL 3. Selection and advancement concentrates on a few key co-intrapreneurial competencies rather than a catalogue of general, technical or job-specific characteristics. Personnel management still prefers concepts stemming from its bureaucraticadministrative history (Ulrich, 1997). This explains why appraisal instruments rarely comprise less than 15–20 criteria. The estimation of potential is driven by an assessment of employees’ professional and behavioral characteristics; with special criteria added for managers. Conversely, applications of the ‘key qualification concept’ appear to be more appropriate to promote internal enterprise, by concentrating on a few extra-functional competencies. In our own approach, only three key competencies were selected, namely conceptualization competencies (creative problem-solving for restructuring and continuous improvement),

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implementation competencies (effective persuasiveness and enforcement), and co-operative self-organization (social competencies).

Fig. 15.2: Co-Intrapreneurial Key-Competencies Conceptual and implementation-oriented competencies have been selected from the area of intellectual competencies. Schumpeter (1912) emphasizes that creativity alone could easily end in daydreaming. In order to avoid this, all creative talents should focus on achieving strategic corporate goals. He considers the central criteria for his entrepreneurial concept to be the ability and motivation to implement by persuading and enforcing new solutions to problems. It is essential that these competencies be used efficiently. It is common knowledge, in theory and in practice, that the problematic nature of implementation is often critical to the success of transformation processes. For this reason, it is often embarked upon reluctantly. Concerning social competencies for entrepreneurial behavior, only a limited amount of material in the literature was found. We refer to a basic definition by Preiser (1978) who describes social competency as a successful combination of autonomy and co-operation. This ability and the motivation to behave accordingly can be characterized as ‘co-operative self-organization’. We hold that a concept of co-intrapreneurship can only be successfully implemented and further developed if essential social competencies are guaranteed and practised within a team and in cross-functional co-operation. According to Pinchot, an intrapreneur can also achieve short-term success in internal markets with a masterly application of micro tactics or politics à la Machiavelli (1950). Pinchot’s (1985) 10 commandments manifest some of these: 1. Come to work each day willing to be fired. 2. Circumvent any orders aimed at stopping your dream

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3. Do any job needed to make your project work, regardless of your job description. 4. Network with good people to assist you. 5. Build a spirited team: Choose and work only with the best. 6. Work underground as long as you can—publicity triggers the corporate immune mechanism. 7. Be loyal and truthful to your sponsors. 8. Remember it is easier to ask forgiveness than for permission. 9. Be true to your goals, but be realistic about the ways to achieve them. 10. Keep the vision strong. However, co-intrapreneurship requires long-term, mutual and trust-based cooperation within a social network (Axelrod, 1984), which Pinchot has integrated in his recent modification of the commandments (Pinchot and Pellmann, 1999). This distinguishes co-intrapreneurship from the classical definition of an individualistic entrepreneur’s and the conventional intrapreneur‘s role. Concerning the dissemination of the co-intrapreneurial key competencies, we found in our empirical studies the results shown in Figure 15.3. Our studies suggest that in socially stable organizations, which are based on the division of labor and long-term operations, close internal co-operation in conjunction with the ability and willingness of employees to work in a team within a social network are essential for an efficient co-intrapreneurial practice. In addition to these social competencies, there are two other key qualifications for co-intrapreneurial behavior: creative problem-solving and the operative ability to implement and accomplish.

Fig. 15.3: Dissemination of Co-intrapreneurial Capacities and Motivation (N=116, Wunderer & Bruch, 1999) 4. Co-intrapreneurial motivation and identification are first analyzed separately from relevant competencies and promoted in a targeted manner.

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Our research into the nature and the distinctive features of the three selected key co-intrapreneurial competencies has led us to elevate the identification and motivation of employees in addition to the development of competencies. After all, a competency approach does not automatically guarantee that the potential identified by a company will also be appointed in that company—not even to support issues that have been strategically selected. Bass (1985) even defines leadership as ‘the change of motives or habits’. In the context of the shift of employees’ values towards post-materialistic and leisure-oriented structures (Inglehart, 1989), managers are faced with specific tasks. Above all, this concerns the significance of an employee’s own tasks as a central source of identification as well as the decline in importance of financial incentives. According to the process-driven motivation theory (Lawler, 1991, 1994; Vroom, 1964), the primary role of leadership is to influence the assessment (valence) of strategic goals and methods; here we are referring to transformational leadership. During a survey (Wunderer, 1999:47) HRM managers from large companies were asked to respond to the question: ‘Which instruments could be used to support co-intrapreneurial behavior?’ They ranked the top five instruments as follows: (a) Management by Objectives, (b) Individual area of responsibility, (c). Targeted selection of personnel, (d). Participative/delegative leadership, (e). Personnel training and development.

O BJECTIVE-

AND

PERFORMANCE- ORIENTED MOTIVATION

The aforementioned responses particularly favor transactional, i.e. objectiveoriented and performance-oriented management (Bass, 1985). In contrast, concepts for monetary benefit-sharing were considered to be less important. It is important to know the extent to which employees assume that their commitment will bring them success. This assessment of the probability of success will be considerably influenced by the degree to which one, not only as an employee but also as a manager, attributes success or failure to oneself or to others (attribution theory of motivation–Weiner, 1990). Management is also associated with the extent to which individual aspects of motivation contribute to the tasks performed. With reference to Maslow’s (1987) and Herzberg’s (1973) classical concepts, it is important to support individual employees as they strive for more ‘growth motives’ (e.g., responsibility, team motivation, challenging tasks) or ‘hygiene factors’, such as the condition of one’s workplace or material incentives. With this coincides the need to reduce motivational barriers as entrepreneurially oriented employees are already motivated, but can become demotivated. A climate of demotivation and negativity stifles organizational change, risk-taking, and proactive behavior, while increasing stress and communication breakdowns (Meyer, 1978; Spitzer, 1997; Longenecker et al., 1999). Therefore, as part of a proactive co-intrapreneurial approach, structural and interactive strategies as well as measurements for preventing and overcoming demotivation and work alienation will be essential (Spitzer, 1997; Kanungo, 1982).

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IDENTIFICATION P ATTERNS AS PERSON-RELATED C O - INTRAPRENEURIAL B ASIC M OTIVATION The identification patterns of individual employees are less dependent upon the situation because they are specific to the person and they are constant but growing (Ackermann, 2000). It is crucial to know the following: whether or not employees see their customers and products or services above all as objects of identification; to what extent do they demonstrate voluntary commitment or take on extrafunctional roles; how efficiently do they implement what they know; how much is it part of their personality to seize opportunities or to be motivated by cooperation; and finally how strong is their commitment and loyalty to their own organization, in the sense of ‘organizational citizenship’ (Moorman, 1991; Smith et al., 1983). Organizational citizenship supports co-operation and co-intrapreneurship by preventing problems, creating general ‘sportsmanship’ and taking on extraresponsibilities (Bovens, 1998). Amazingly, (self) motivation has neither been addressed as a theme in (neo) classical economics, nor in discussions about knowledge management. Conclusion: Motivation and identification are, at first, to be analyzed separately from relevant competencies and promoted in a targeted manner. This reduces over-generalized results for both areas. Values, which constitute a corporate culture, should correspond with employees’ individual values and motives or at least be compatible with them. Selection and advancement should occur in accordance with a few key co-intrapreneurial competencies instead of a wide catalogue of general, technical or job-specific characteristics.

(D) CO-ORDINATION AND LEADERSHIP 5. A configuration of market and social network as systems of co-ordination modify and substitute the classical leadership model of hierarchy and bureaucracy. The definition of internal entrepreneurship is closely connected to marketoriented concepts of control/command. Schumpeter (1942:84) considered structural conditions more as constraints, which the typical entrepreneur avoids, breaks through, or redesigns. We distinguish between four concepts for internal control, which tend to be used simultaneously, but with differing importance. They are hierarchy, bureaucracy, internal market, and social network, as illustrated in Table 15.1. Prominent features of the internal social network—also occasionally referred to as a clan or ‘corporate family’ (Ouchi, 1981)—include mutual co-operation, human relations and emotional exchange. In this primarily social transaction, it is not cash value that is created—but (expected) motives and intentions are equally valued. Trust is the prevalent medium of coordination (Parsons, 1951). Social transaction is distinguished by mutual trust in long-term, non-specified, or nonspecifiable returns for actual performance, the hope of long-term fairness and commitment, as well as stakeholder orientation (Clarkson, 1995). Human or, to

274

Concept Basis of legitimization Management philosophy Emphasis of role Prevailing orientation towards reference groups Specific indicators of competencies/ qualifications (selection)

Hierarchy Technocracy l l

l

l l

l

l l

power decisions/ instructions instruction-related subordinate satisfaction of managers ability and willingness to adapt reliability operative ability and willingness to implement

Bureaucracy/ Network l l

l

l l

l l l l l

professionalism rules/ regulations professional expert loyalty to the system and personal satisfaction competence experience reliability rule-orientation justice

Internal Social Market l

co-operation trust

l

relationship-oriented

l

l l

l

l l l

l

colleague/co-worker satisfaction of managers/ colleagues and employees ability to establish relations fundamental beliefs understanding individual and mutual support mutual trust

Internal Market l

competition performance

l

profit-oriented

l

l l

l l

l

l

intrapreneur customer satisfaction (internally as well as externally) ability to be innovative willingness to take a risk ability to implement and enforce opportunity- and profit- orientation

TRANSFORMATIVE ORGANIZATIONS

Table 15.1: Systems of Co-ordination

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be precise, social capital has recently been defined as the totality of all relations in a network, which is itself considered to be an accelerator of change (Nohria and Ghoshal, 1997) referring to the meaning of mutual values and concepts (Witt, 1998). Generally, social networks produce a stronger and more long-term effect due to the emotionally sound relationships between the participants in the internal market, as opposed to professional relationships in a bureaucracy. Furthermore, in comparison to a hierarchy, a social network and internal markets are less instruction-driven and less organized by others, but more proactive and more lateral. Internal market control is subject to specific conditions, especially compared with the (neo)classical model of external control via anonymous markets and short-term orientation. These include the long-term formation of personal social connections in accordance with the concept of infinite games (Axelrod, 1984). A co-intrapreneurial organization can be approached through internal markets organized by decentralized profit centers or ‘value-added centers’. Both systems of co-ordination lead to a new and specific cultural and organizational mix between market and social exchange, that can be characterized as an ‘internal social market economy’ in which its players are viewed as ‘cointrapreneurs’. In this combination of cooperation and competition, we and the majority of practitioners we have interviewed (see Figure. 15.4), envision a desired, and effective system of co-ordination for co-intrapreneurship. Hierarchy and bureaucratic control still apply, but have and will become less important.

Fig. 15.4: Systems of Co-ordination Today and 2010 Source: Survey of HR-Managers from 28 international Swiss companies, Wunderer & Dick 2000.

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6. Structural-systemic management and development define the conditions which promote interactive and transformational management that is appropriate to both the situation and employees. Bill Hewlett once said: ‘I am convinced that men and women want to produce good and creative work and that they will achieve this once they have the appropriate environment!’ This is confirmed by economic studies, which were unable to prove a significant connection between extrinsic incentives or profit sharing and the motivation to succeed (Frey, 1997). With this in mind, we emphasize the adoption of structural measures to create the desired context, i.e., a work situation, which promotes co-intrapreneurship. Structural management can be accomplished by adopting four approaches: co-intrapreneurial culture, strategy, (self) organization, and personnel structure. These are integrated correspondingly into four levels (person, department, company, and society). The influence of one, for example, corporate culture alone is insufficient, as it only constitutes one of the 16 fields of design.

CULTURE The transformation from bureaucracy towards a co-intrapreneurial culture requires shifts in cultural variables. First, these shifts involve the development of corporate and management culture by adopting management values that promote co-intrapreneuship. We recommend that these are recorded and anchored in corporate and management principles in order to encourage and support entrepreneurial collaboration. Furthermore, our approach to cointrapreneurship also considers the ongoing societal transitions of basic values and the increasing need for leisure time. Companies of tomorrow will constructively integrate central values and key features of the private world into the working context. Finally, the ability to convert the actual culture of the company to the envisioned co-intrapreneurial culture is critical for success.

S TRATEGY Strategy connects valuable objectives with appropriate measures. Here, customerdriven strategic orientation will be particularly important because employees are also focused on the internal market. Equally significant is the use of supportive management instruments such as ‘Management by Objectives’ or ‘by Exception’, because they are the center of transactional leadership (Bass, 1985). In addition to this result-oriented approach, co-intrapreneuship can be deployed effectively by cooperative management styles. However, it must be noted that the mere announcement of new organizational structures does not correspondingly change the conventional ideas of employees.

O RGANIZATION

AND

P ERSONNEL - STRUCTURE

Finally, the design of the qualitative personnel structure is important, whereby the focus is on co-intrapreneurial competencies and motives. These characterize the personnel prerequisites and chances for the transformation process towards

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co-intrapreneurship. As social competencies are only changeable on a long-term basis, there is a particular need for a befitting and potential-oriented recruiting and selection.

THE STATUS

OF

INTERACTIVE LEADERSHIP

Every company can consider itself fortunate if it has charismatic leaders (Conger, 1989) at all levels, who can successfully implement previously developed entrepreneurial structures with their employees’. ‘There is nothing wonderful about being an effective manager… If it were necessary for saints, poets, or top class scholars to fill their intellectual position, organization on a grand scale would simply be absurd and impossible’ (Drucker, 1993). In his statement regarding ‘ideal managers’, Peter Drucker says the needs of large organizations must be satisfied by ordinary people who can achieve exceptional performance. With charismatic management, there is a danger that employees will become infantile, particularly if those affected cease to reflect upon their influence process (Manz and Sims, 1991). Bass’s (1985) concept of Transformational Management, based on the transactional approach, appears to be more suitable for our specific theme than the charismatic ‘hero approach’. With the help of the following three managerial tasks, employees can develop more demanding values and objectives: 1. Formulate an inspiring vision and demand respect, trust, and loyalty. 2. Introduce new ideas and improve employees’ understanding, as well as their perception of and ability to solve problems. 3. Increase motivation and self-confidence in personal abilities: and achieve this by individually supporting the employees. In our own surveys regarding the preferred manager type, it was evident that those interviewed (students and managers) significantly preferred transformational managers in contrast to gripping-enthusiastic charismatic managers, because they encourage self-control and self-development. 7. Proactive self-control and self-organization in the context of structural management reduces Tayloristic control by others. F. W. Taylor’s maxim is well known: ‘Workers have no need to think because managers do that for them.’ Recently, this principle has regained its importance in practice. However much it is essential that managers remain responsible for stimulus, coordination, situational interpretation, and final decisions, the focus for co-intrapreneurial orientation is different. Appropriate leadership and a supporting context of structural management by culture, strategy and organization should center on promoting competent and motivated employees. However, the foundation for employees’ attention, reflexivity, participation in decision-making, involvement in negotiations, and sharing of responsibilities lies in their ability and motivation to be voluntarily committed (Walton, 1987) and to be proactive via manager-control and coached self-control (Manz and Sims, 1987). Generally, according to the subsidiarity principle, the

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manager should only intervene if a particular employee is overburdened by the tasks in a particular situation. After appropriate personnel selection and training, this should be an exceptional rule for special cases (Management by Exception). Management principles based on the ‘systems approach’ (Drucker, 1993; Stacey et al., 2000) also consider the self-control concept to be a functional prerequisite for success in terms of the design, development and control of organizations.

(E) POLICIES (SELECTION DEVELOPMENT AND ADVANCEMENT) 8. Differentiated (self) selection, placement and development in accordance with a specific typology approach prevent demands for exclusive or utopiancollective behavior. Classical personnel management is still—under bureaucratic as well as under legal postulates—distinctly shaped by collective personnel strategies. However, these are insufficient for successfully promoting internal entrepreneurship. As an alternative, it is recommended that employees be divided into teams based on their co-intrapreneurial abilities and attitudes to avoid the utopian idea that one may win all employees over. In this context, a co-intrapreneurial typology is more appropriate. First, it differentiates among employees according to their cointrapreneurial capabilities and motivation. In the second step, distinguished measures for selection and advancement and their situational implementation can be developed. In our typology we attempt to make a distinction between employees according to their co-intrapreneurial competencies and motivation. Our own surveys of three studies with Swiss and German companies with four typology groups—described in figure 15.5—are particularly relevant here. Realistic models for the advancement and development of CoIntrapreneurship demand a rejection of exclusive approaches (e.g., only for senior management) or of over-generalized ideas focusing on collective changes in behavior for all employees. Our typology enables a differentiating analysis and strategy according to the category of behavior, key capabilities, phases of development and single components. In this way, it avoids utopian demands of ‘perfect’ co-intrapreneurial behavior from all employees and promotes a purposeful and differentiated team building. 9. Target-group-development complete team-related and individualized employee development. A target-focused orientation allows specific treatment of different levels of employees. According to their level of problem solving competencies and social competencies, we distinguish employees who withdraw internally, employees with little co-intrapreneurial competencies, co-intrapreneurially motivated employees and co-intrapreneurs. Furthermore, we add sub-employers who are relatively autonomous (e.g., managers of profit-centers). With this typology, each target group can receive appropriate support and development. The following figure illustrates a simplified model based on this typology:

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Fig. 15.5: Typology for Analyzing Internal Entrepreneurship (3 Studies of German and Swiss Companies, N=240, 1998–1999)

Fig.15.6: Typology for Differentiated Support of Co-Intrapreneurship

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In the context of promoting target groups, team development plays an important role, particularly because it can provide employees—with different levels of maturity (Hersey and Blanchard, 1987)—with important balances and opportunities to socialize. This has been confirmed by investigations on project groups, quality circles and especially within semi-autonomous group-works (Collins, 1995; Teare et al., 1997) . Even less-competent employees can be purposefully included into group tasks in a co-intrapreneurial manner. The promotion of teams and target groups should, therefore, take priority over collective personnel policies which concentrate on general programs. Moreover, the team can suitably distribute different roles requirements to individual members (Margerison and McCann, 1985). 10. Self-development and on-the-job development conducted by managers are ranked higher than central personnel development and off-the-job advancement. Ultimately, the development of co-intrapreneurial potential is a task, that must be performed or conducted primarily by the employees themselves in the context of their individuation process (Jung et al., 1972). Self-development engages employees in a particular way as they are at the same time personally concerned and can act accordingly. Advantages of the cooperative self-development process are that they: 1. 2. 3. 4.

correspond to aspirations for direct self-responsibility enable situation/need-specific solutions ensure higher level of acceptance and for sustainability of commitment offer alleviation and relief for managers.

However, unqualified employees should not be overtaxed with demands of self-development which they are unable or unwilling to fulfill. Here, the priority should be to focus on the distribution of tasks according to the aforementioned typology approach as well as measures for selection. It is important that line managers assess the extent to which objectives can be achieved by employees and that they provide the necessary coaching or motivation for increasing the capacity for self-organization and development. The manager is also mainly involved in on-the-job development. According to our own surveys with 41 HR-directors of well-known Swiss global players (Wunderer and Dick, 2000), this includes: ‘participation in projects, empowerment through more important and varied tasks, leadership by delegation, job rotation, more responsibility for special tasks, and coaching or mentoring. Furthermore, the survey confirmed the increasingly decisive role of the transformation concept in the context of change management. Additionally to enhance the co-intrapreneurial abilities of existing members, it will be important to design specific corporate training and development activities’ (Schuler, 1986).

CONCLUSION This chapter has presented an integrated framework of co-intrapreneurship. This approach corresponds to an increasing number of companies demanding internal

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entrepreneurship as a needed requirement of corporate practice. The advancement of internal entrepreneurship poses extraordinary challenges for the management. According to our surveys in 1997 and 1999 (Wunderer, 2001), HR managers from the Germanic context believe that they should play a more active role in implementing and practising co-intrapreneurship. The model proposed is, perhaps, of broader relevance. If employed appropriately, co-intrapreneurship can put efficient collaboration and consensus into practice. In this way, members of the organization can experience a sense of fulfillment and enhancement, in that their work provides different entrepreneurial challenges and that they have sufficient autonomy and a social network to face and reconcile them. The benefits of co-intrapreneurial process can by no means be achieved overnight. The principle should be incremental-co-intrapreneurship gains by means of continuous improvement. The transformation from an envisioned ideal culture to one of practised culture of co-intrapreneurship, and thence benefits from this culture, has been introduced. Increasingly, companies have taken the initial steps by altering their corporate vision accordingly. Its extensive implementation will require further theoretical and practical efforts which will also help to improve the recognition and the handling of problems and the aforementioned inherent limitations and problems of the concept. However, all in all, we can let ourselves be guided by the maxims of P.H. Kotler: ‘There are three types of companies: those who make things happen, those who watch things happen, and those who wonder what happened!’.

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Functional Flexibility in the Norwegian Context Strategic Adaptation vs Competence Orientation

Paul N. Gooderham

l

Bente R. Løwendahl

l

Odd Nordhaug

Over the last decade, the concept of the ‘flexible firm’ has been fully established. An important source of this concept derives from the research conducted in the UK in the 1980s by John Atkinson (1985) that resulted in a flexible firm model, generally referred to as the ‘core-periphery’ model. In terms of this model, the firm requires ‘core’ employees to maintain and develop its functional flexibility and ‘peripheral’ employees to provide it with numerical flexibility. In short, while the core employees secure the firm’s creativity and innovative capability, peripheral employees are predominantly engaged to perform routine tasks. While the former usually have long-term, full-time employment, the latter are more or less employed on a non-standard basis, particularly on a part-time basis (Clifford, Morley and Gunnigle, 1997). While this broad distinction as a surface phenomenon has received support from Handy (1996) and Burton-Jones (1999), there is fundamental disagreement regarding the transformative dynamics underlying this development. Some explanations rest on a strategic adaptation thesis, while others emphasize a shift from routinized mass-production to customized knowledge-based production. However, neither of these theses has been subjected to empirical testing. The purpose of this paper is to test these two competing theses by focusing on the dynamics of functional flexibility in manufacturing firms. We focus on the factors inducing the drive to develop among core employees those competencies associated with the concept of functional flexibility. First, we present a background including the specific Norwegian context. Next, the concept of functional flexibility is discussed and, thereafter, the two alternative factors in functional flexibility. Finally, we test these different factors empirically, using a sample of firms drawn from a range of manufacturing industries in Norway.

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The Norwegian Context Since World War II, Norwegian manufacturing companies have been exposed to three distinct management paradigms. In the period spanning 1945 to 1970, there was a strong orientation towards both operative and strategic planning. Management was dominated by engineers whose focus was on production processes on the basis of a conviction in the virtues of rational and careful planning (Byrkjeflot and Halvorsen, 1996). This remains the case today for many companies. Comparisons on a European level, for instance through the Cranet surveys, indicate that Norwegian companies to a large degree elaborate visions, policy documents, written strategy, and personnel policies to a much greater extent than their counterparts in most other West European countries (Nordhaug, 1997). However, during the 1970s and 1980s, there were increasing indications of the influence that the socio-technical experiments of the late 1960s were having on management thinking (Thorsrud and Emery, 1970). There were clear signs of a growing interest in ‘softer’, more human resource-oriented methods and procedures for managing in the manufacturing industry. Human resource management specialists increased their influence and impact on the top management during this period, thereby paving the way for more sophisticated ways of managing human resources and the organization at large and an increasing scepticism towards the classical rational planning paradigm. Flexibility in the sense of devolving decision-making and experimentation with work processes to employees had entered the Norwegian management thinking. During the 1990s, the socio-technical approach—a product of a relatively technologically stable world—was supplemented by management thinking that had its basis in a resource-based view of the world. An empirical study of competence development in Norwegian companies revealed that top managers ranked intangible or immaterial assets as the most important resources for the company’s degree of economic success (Nordhaug and Gooderham, 1996). Among these assets were not only the company’s and the products’ reputation and good customer relations, but also the competence of the management and other employees. Resources such as capital assets and technology were ranked significantly below these intangible assets. One tangible indication of the impact of this shift in management perspective was that the Norwegian state initiated an array of supportive arrangements designed to stimulate and assist companies in improving their competency bases. Largely due to path dependency, it is reasonable to suppose that contemporary Norwegian manufacturing firms provide a spread of management forms ranging from the strategic planning paradigm to the more recent resource-based paradigm. It is precisely this spread of forms that makes Norway a valuable empirical context for studying the driving forces behind the development of functional flexibility.

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Functional Flexibility Within recent organization and strategy theory, it has become commonplace to argue that as a result of a variety of forces that include technological advances, globalization and information diffusion, firms are facing increasingly less stable and more complex environments (Pfeffer, 1994; Prahalad and Hamel, 1994). As a result, the traditional organizational form characterized by specialization, vertical control and centralized decision-making is increasingly regarded as inadequate in relation to the external demands being made on firms (e.g., Kanter, 1989; Stone and Eddy, 1996; Løwendahl and Revang, 1998). These demands may be summarized in terms of two dimensions, environmental stability and environmental complexity. Environmental stability refers to the rapidity of technological change that has to be dealt with. The greater the pace, the more problematic it is to develop routines and the more critical employee innovative ability becomes. The other dimension, environmental complexity, refers to the degree to which product standardization may be achieved. Mass production and corresponding economies of scale are problematic if the firm has to meet the needs of increasingly heterogeneous customers who demand customized products or services. In short, firms operating in this changed environment need a strong customer focus coupled with a management approach that ensures quality control is conducted not on the basis of routines and vertical control, but on the basis of flexible, decentralized systems. A core challenge involved in dynamic organizations is the development of functional flexibility. Although there are no precise definitions concerning the capabilities underpinning functional flexibility among core employees, those researchers that have employed the term indicate that a psychological contract between a firm and its core employees is a characteristic of functional flexibility (e.g., Atkinson, 1985; Burton-Jones, 1999; Standing, 1997). The main body of this contract is that the latter are expected to continually maintain and enhance their adaptability, creativity and competence levels. Although their job security is superior to that of peripheral employees, failure to do so will ultimately result in their being marginalized. Another aspect of functional flexibility relates to the nature of the part of the organization in which they are employed. It is delayered and non-hierarchical thereby granting core employees considerable individual discretion. However, there is a strong expectation that core employees will have the ability to constructively employ this individual freedom on behalf of the firm. Finally, functional flexibility is predicated on the ability of the core employees to participate in multi-disciplinary teams assembled on a project-byproject basis. Thus, core employees have to develop five capabilities to achieve, functional flexibilty: adaptability, creativity, a learning orientation, independence in job execution, and interactive communication skills. In its broadest sense, functional flexibility is associated with the increase in less stable and more complex environments. However, the question is whether variations in the drive to develop the necessary capabilities for functional

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flexibility among core employees at the firm level are a function of strategic adaptation to external forces or a product of proactive, competence-oriented responses by firms (cf. Hrebiniak and Joyce, 1985).

HYPOTHESES S TRATEGIC ADAPTATION

AND

FUNCTIONAL FLEXIBILITY

At the micro level, Astley and Van de Ven (1983) distinguish deterministic and voluntaristic explanations of firm behavior. The former spans a number of theories that view firm behavior as being shaped by the exigencies that confront it. ‘Change takes the form of “adaptation”; it occurs as the product of exogenous shifts in the environment. The manager must perceive, process and respond to a changing environment and adapt by rearranging internal organizational structure to ensure survival or effectiveness’ (Astley and Van de Ven, 1983:248). In terms of Atkinson’s core-periphery model, functional flexibility is a function of firm strategic adaptation in which firms are viewed as adopting the model as a strategic response to competitive pressures. The assumption is that firms operate on the basis of explicit strategies. Indeed Atkinson (1985:15) argues that ‘the chosen business strategy of the organization’ is likely to be ‘the major influence’ on the choice to develop the model. There is an assumption that firms operate on the basis of explicit strategies that are a product of competitive pressures. Another aspect to Atkinson’s model is that in the new hypercompetitive business environment, numerical flexibility will be a prerequisite enabling the firm to channel scarce resources into enhancing its functional flexibility. Thus, it may be surmised that the cost-saving measures associated with numerical flexibility, that is some variant of non-standard employment such as part-time employment, will tend to precede the development of functional flexibility. Finally, since Atkinson (1985:14) views the core-periphery model as one that will ‘persist beyond the current labour climate’, it may be assumed that clearly formulated personnel policies will emerge to provide the necessary human resource underpinning. In short, in terms of the strategic adaptation core-periphery model, functional flexibility is perceived as dependent on extensive competition together with explicit business and personnel strategies and the introduction of some variant of numerical flexibility such as part-time employment. From this, the following five hypotheses can be derived: Hypothesis 1: Firms’ intentions to develop functional flexibility are positively affected by their having a clearly formulated business strategy. Hypothesis 2: Firms’ intentions to develop functional flexibility are positively affected by their having a clearly formulated personnel strategy. Hypothesis 3: Firms’ intentions to develop functional flexibility are positively affected by the degree of competition they are currently confronting. Hypothesis 4: Firms’ intentions to develop functional flexibility are positively affected by the degree of competition they expect to face in the future.

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Hypothesis 5: Firms’ intentions to develop functional flexibility are positively affected by the proportion of part-time employees in their workforce.

C OMPETENCE ORIENTATION

AND

FUNCTIONAL F LEXIBILITY

Astley and Van de Ven (1983) also identify voluntaristic explanations of how firms respond to the challenges of competitiveness. A number of approaches fall within this broad category, of which the more recent competence orientation approach is of particular relevance, given our focus on the concept of functional flexibility (for example, Nordhaug and Grønhaug, 1994). This approach is derived from the resource-based view of value creation in firms and emphasizes competence development as paramount to the creation of new opportunities. In this context, human resource development becomes critical as a means for the firm to generate and take advantage of new opportunities, rather than as a reactive means of coping with rapid environmental change. Prahalad and Hamel assert that the most valuable resource for a firm in terms of ability to generate economic rent is located in its competence and capabilities (Hamel and Prahalad, 1989; Prahalad and Hamel, 1990; Hamel, 1994; Hamel and Prahalad, 1994). As spelled out by Barney in his so-called VRIO-framework (1991, 1997), if a resource is to be a potential source of competitive advantage for a firm, customers must perceive its product or service manifestations as valuable, rare, without equivalent substitutes, and difficult to imitate. Moreover, the firm must be organized in such a way that it is able to reap the potential benefits from these resources. Few such advantages are long lasting, so that an organization’s capacity to improve its existing skills and develop new skills may be the most critical competitive advantage of all. Very much in line with this line of reasoning, Prahalad and Hamel (1990) claim that, in essence, competition is about the proactive acquisition and development of unique competences that make ‘a disproportionate contribution to customer-perceived value’ (Hamel, 1994:13). These resources, referred to as ‘core competences’, are applicable across several market segments or business units, can be applied to new products and services, and give the firm a sustainable competitive advantage (Prahalad and Hamel, 1990). In short, integral to the concept of core competence is an assumption that competence development is the bedrock of competitive advantage. ‘In the 1990s, the challenge will be to enfranchise employees to invent the means to accomplish ambitious ends’ (Hamel and Prahalad, 1989:76) which in turn is dependent on ‘… the inventive capacity of individuals and small teams’ (Hamel and Prahalad, 1989:66). In these authors’ view, this capacity is best achieved not through the traditional strategic planning and adaptation mode, but rather through the development of strategic intent based on a strong competence orientation. From this point of view, firms’ intentions to develop functional flexibility can be seen as a function of a conception that competence development is not an option, nor an employee fringe benefit, but rather a prerequisite for significant competitive advantage. This will involve a consciousness that identifying and building competences is, in general, the key to any attempt at increasing the

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firm’s quality focus and customer focus. In addition, one may expect a similar attitude when it comes to the introduction of new production technologies, to organizational change, and to the broadening of job-related tasks. On the basis of the competence orientation approach, we may posit: Hypothesis 6: Firms’ intentions to develop functional flexibility are positively affected by the degree to which their management in generally assumes that quality improvement requires competence enhancement. Hypothesis 7: Firms’ intentions to develop functional flexibility are positively affected by the degree to which their management in generally assumes that improvement of customer treatment requires competence enhancement. Hypothesis 8: Firms’ intentions to develop functional flexibility are positively affected by the degree to which their management in generally assumes that introduction of new production technology requires competence enhancement. Hypothesis 9: Firms’ intentions to develop functional flexibility are positively affected by the degree to which their management in generally assumes that organizational change requires competence enhancement. Hypothesis 10: Firms’ intentions to develop functional flexibility are positively affected by the degree to which their management in generally assumes that a broadening of job-related tasks requires competence enhancement.

S TRUCTURAL CONTROLS

AND

F UNCTIONAL FLEXIBILITY

In addition to testing the above hypotheses, our analysis will include three structural variables that capture important aspects of firms. First, we control for the existence or non-existence of a human resource management department or personnel unit. The reason for this is that such a department may represent a more professional attitude to the development of functional flexibility and may, therefore, positively impact its development. Second, we control for the effect of firm size and, third, for the effect of industry.

Research Method In order to test the hypotheses, we will make use of a data set containing Norwegian business firms. The data were collected through a telephone survey. The sample of firms included in the survey (the sampling frame, sampling procedure, and achieved sample), the measurement of variables, and the data collection procedure are described below.

SAMPLE The sample of firms was drawn from a survey of privately-owned companies. The total number of such firms in Norway is about 113,000. Many of them are,

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however, either inactive or too small to be considered relevant for an organizational study. Sampling was therefore limited to companies with more than five employees, and the sampling was further confined to nine major manufacturing industries that were specified in advance. These procedures produced a nationwide sampling frame of about 20,000 firms from which 4,000 firms were randomly drawn. A detailed analysis of the planned sample showed that the sample was representative both geographically, in relation to the selected industries, and with regard to firm size. Altogether, a good fit between the sampling frame and the sample was obtained. A response rate of 32 per cent was achieved producing a sample of 1,291 firms. Further investigation demonstrated that the overall non-response did not cause any particular geographical or industry-wise bias. Distribution of firms by industry and by geography in the planned sample closely matches that of the achieved sample. For this study, we have excluded firms with fewer than 50 employees. The substantive reason for this is that smaller companies often do not have the managerial staff necessary for full-fledged strategic planning and human resource management routines. We were left then with a sample of 266 firms. Since missing values reduced this by 40 firms, it was decided to replace these with mean estimates.

O PERATIONALIZATION

AND

M EASUREMENT

Our study includes both perceptual and factual measures. How accurately people report on factual issues depends on their knowledge, interpretation of questions, and propensity to provide correct answers. If survey questions are unequivocal, the measures normally demonstrate high reliability. Perceptual measures may be further sub-divided into attitudinal measures (questions about the respondents’ traits or subjective experiences) and judgmental measures (questions about uncertain issues external to the respondent). Only judgmental measures were included in this study. In addition to knowledge and willingness to respond accurately, judgmental measures require judgmental skills on the part of the informant (Campbell, 1955). The informants used for this survey were the most knowledgeable managers (the highest-ranking HRM manager in larger firms and the top leader in small and medium-sized firms), and hence there is every reason to believe that the reliability of the judgmental measures is generally high. Beliefs that a need for competence enhancement is a prerequisite in relation to five critical potential future situations—an increase in quality focus, an increase in customer focus, introduction of new production technology, organizational change and the broadening of job-related tasks–are judgmental measures. Each response was scored on a five-point scale ranging from ‘none’ to ‘very much’. The same applies to both the current and the expected intensity of competition. Having a written strategy document or not, and a written personnel policy or not, are both factual, dichotomous variables. The proportion of part-time employees is also a factual variable as is the presence or not of a human resource

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management department, firm size, which is, operationalized as the log of the total number of employees, and industry. In the analysis we have used the construction industry as the reference category. Finally, it is argued that the dependent variable, intentions to develop functional flexibility, is also a factual variable. It is operationalized as an additive index composed of five equally weighted items spanning intentions to develop interaction skills, learning skills, creativity, increased adaptability, and independence in job execution in the next four to five years. The items pertain to core employees defined as technical and professional staff with higher education. Each was measured on scales ranging from one to five. The operationalization of variables is summarized in Table 16.1. Table 16.1: Operationalization and Measurement Variable Intentions to develop functional flexibility

Clearly formulated strategy Clearly formulated personnel policy Degree of competition currently operating within Degree of competition expected in the near future Proportion of part-time employees Degree to which it is believed that quality improvement requires competence enhancement Degree to which it is believed that improved customer focus requires competence enhancement Degree to which it is believed that introduction of new production equipment/technology requires competence enhancement Degree to which it is believed that organizational change requires competence enhancement

Operationalization Additive index (5=low, 25=high) comprising: firms’ intentions to develop the following capabilities in core employees during the next four to five years (five-point scales): Interaction skills Learning capacity Creativity Adaptability Independence in job execution A written strategy document: 1 (yes)-2(no) A written personnel policy: 1 (yes)2(no) Perceptual measure: 1 (low)-5 (high) Perceptual measure: 1 (low)-5 (high) Percentage, continuous variable Perceptual measure: 1 (very small)-5 (very large) Perceptual measure: 1 (very small)-5 (very large) Perceptual measure: 1 (very small)-5 (very large) Perceptual measure: 1 (very small)-5 (very large) (Contd.)

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Table 16.1: (Contd.) Degree to which it is believed that a broadening of job-related tasks requires competence enhancement Presence of an HRM department Log of size

Perceptual measure:1 (very small)-5 (very large) Dichotomous variable Number of employees, continuous variable Construction industry as reference category

Industry

V ALIDITY

AND

RELIABILITY

Research has shown that the respondents’ tendency to produce socially desirable answers, to display a positive image and to give biased answers to sensitive questions is stronger in relation to telephone interviews than when postal questionnaires are applied (Colombotos, 1965). In the present study, however, none of the issues that were covered can be regarded as being particularly sensitive. Thus, the possibility that there may have been some tendency to give more positive and socially legitimate answers than is objectively the case is regarded as being very modest. Inspection of the distribution of the dependent variable indicated two outlier cases with values that were discontinuous with the other values. These were removed in order to enhance the meeting of the assumption of approximately normal distributions thereby reducing the sample to 264. This resulted in a dependent variable that ranged from 10 to 25, with a mean of 18.8 and a standard deviation of 3.28. Thereafter a test of reliability or consistency of the additive index that constitutes the dependent variable was carried out. Cronbach’s alpha which normally should not be lower than .70 was measured to .87. This reflects that we are indeed measuring a coherent, consistent variable.

EMPIRICAL RESULTS As an initial step a bivariate Pearson correlation matrix was generated for the variables contained in the hypotheses. This is displayed in Table 16.2 together with means and standard deviations. The overall picture is that the inter-correlations between the independent variables are rather modest, with only one exception: the current degree of competition is strongly correlated with expectations of future competition (.57). This is of course unsurprising as one would expect that the best predictor of the expected severity of future competition would reside in the current level of competition. Another pattern was that the dependent variable is in general very weakly correlated with the variables generated on the basis of the strategic adaptation approach, whereas it is substantially more strongly correlated with the variables stemming from the competence orientation approach. Thereafter we assessed the causal impact of each of the independent variables on the firms’ intentions, including the control factors, to develop functional

*p<.05; **p<.01

Mean

S.D.

V1

V2

V3

V4

V5

V6

V7

V8

V9

18.82

3.28

1.11

0.30

–.07

1.16

0.37

–.10

3.87

0.90

.09

–.05

.03

3.94

0.80

.19**

–.05

.04

1.73

1.17

.00

–.04

.02

4.04

0.74

.31**

–.01

–.08

.19**

.16** –.11*

3.80

0.78

.29**

–.10

.01

.16**

.21**

.05

.34**

3.48

1.01

.29**

–.02

.04

.08

.19**

.07

.23**

.34**

3.30

0.83

.23**

–.04

.00

.06

.06

.17**

.11*

.23**

.12*

3.47

0.83

.31**

–.01

.00

.12*

.10*

.03

.20**

.30**

.34**

V10

.18**

.57** –.17** –.07

.28*

TRANSFORMATIVE ORGANIZATIONS

V1 Intentions to develop functional flexibility V2 Clearly formulated strategy V3 Clearly formulated HRM policy V4 Current degree of competition V5 Expected degree of competition V6 Proportion of part-time employees V7 Quality improvement requires competence enhancement V8 Improved customer treatment requires competence enhancement V9 New equipment/ technology requires competence enhancement V10 Organizational change requires competence enhancement V11 Broadening of work tasks requires competence enhancement

294

Table 16.2: Descriptive Statistics and Bivariate Correlation Coefficients (Pearson’s r; N=264).

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295

flexibility among their core employees. This is done by means of a multiple regression analysis that enables us to consider the partial effects of each of the independent variables. Tests for multi-collinearity were conducted that demonstrated satisfactory results, with tolerance values ranging from .40 to .89 (Norusis, 1995). The results of the regression analysis are shown in Table 16.3. Table 16.3: Regression Analysis of Firms’ Intentions to Develop Dynamic Capabilities in their Employees. (Standardized Regression Coefficients: Missing Values Replaced with Means Estimates; N=264). I. Strategic Adaptation Approach H1: Clearly formulated strategy H2: Clearly formulated personnel policy H3: Degree of competition currently facing H4: Degree of competition expected in near future H5: Proportion of part-time employees II. Competence Orientation Approach H6: Conception that quality improvement generally requires competence enhancement H7: Conception that improved customer treatment generally requires competence enhancement H8: Conception that introduction of new production equipment/technology generally requires competence enhancement H9: Conception that organizational change requires competence enhancement H10: Conception that a broadening of job-related tasks requires competence enhancement III. Control Factors Having or not having an HRM department Log of size Industry: Food, beverages, tobacco Pulp and paper Chemicals and chemical products Metals Machines Electrical appliances Vehicle parts and accessories Timber and wood products

–.06 –.06 .01 .07 –.04

.16* .05 .20** .11 .12 –.07 .18* –.04 –.04 .01 –.06 .02 –.00 –.02 –.03

R2=.221: *p<.05; **p<.01

The R2 amounts to .221, indicating that the regression model has some powers for explaining the observed variation in firms’ intentions to develop functional flexibility. However, it is clear that the vast bulk of its explanatory power originates not from the variables derived from the strategic adaptation approach, but from those deriving from the competence orientation approach. As the table indicates, the main finding is that whereas none of the hypotheses derived from the strategic adaptation approach is supported, two of the

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hypotheses deriving from the competence orientation approach are. The new production technology variable has an effect that is statistically significant at the .01 per cent level, whereas the variables relating to quality improvement are significant at the .05 per cent level. In addition, the effects of organizational change and the broadening of job tasks are also relatively pronounced and in the predicted positive direction, although neither of them achieve statistical significance at the. 05 per cent level. The effect of improved customer treatment is minimal. We observe that of our control variables only size has any significant impact. One possible explanation of the effect of size is that it may be construed as an indication of success that in turn is a product of the development of a commitment to competence enhancement. Regarding the HRM departments’ lack of impact, one possible explanation may reside in the devolution of responsibility for competence development to line managers. The lack of industry effects indicates the generality of our findings across manufacturing firms.

Conclusions The analysis indicates that variations in firms’ intentions to develop functional flexibility among core employees are best understood not as a product of variations in external competitive forces currently faced by firms, nor as a result of variations in their discrete strategic decision making. Rather they are a consequence of variations in firms’ competence orientation. In other words, variations in intentions to create functional flexibility would appear to be strongly associated with a belief that competence development is a precondition for initiatives involving new technology and a strengthened quality focus. The findings are based on a sample of Norwegian firms. It may be objected that Atkinson’s strategic adaptation based model evolved in the context of UK developments. In other words while it may not be appropriate to explain variations in functional flexibility in Norway it might be to the UK. Certainly recent research by PriceWaterhouseCoopers (Batten and Walker, 2001) suggests that UK firms are less likely to invest in long-term growth than their European counterparts and that they have a pronounced tendency to respond to market fluctuations to meet shareholder demands. However, this matter can only be settled by future empirical research. One possible interpretation of the findings is that they may indicate that corporate strategy and market forces have ceased to play a dominant role as determinants of firms’ intentions to build functional flexibility. This should not be interpreted as in any way indicating that the level of competition confronting firms has decreased. Instead, we would suggest that it should be viewed as indicative of the significance internal resources have for managers when it comes to further developing their organizations. Hence, our findings for Norwegian manufacturing companies should be conceived of as supporting the resource-based view of the firm (e.g., Barney, 1991) as opposed to the strategic positioning school (e.g., Porter, 1980). It is conceivable that it will become correct to say that ‘strategy matters but that learning decides’, since it would appear

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that a steadily stronger emphasis is being put on internal learning processes and competence development in modern work life. The question that is increasingly being raised is whether the importance of corporate strategy in its traditional forms is declining. An illustration of this is to be found in a recent issue of the management journal, European Business Forum (2002), devoted to asking a selection of leading strategists to debate and discuss the question: ‘Does strategy really matter anymore?’ Unfortunately, there is no available data on the role that competence orientation plays in firms based in countries other than Norway. However, our thesis is that our findings may be assumed to be indicative of a general development in those countries where cultures are characterized by low uncertainty avoidance (Hofstede, 1991). In those countries, firms tend to rely less heavily on rules, strict procedures, and rigid long-term planning than is the case with firms in high uncertainty avoidance contexts where risk aversion is widespread. In other words, low uncertainty avoidance is assumed to be conducive to the implementation of more organic management modes and thinking as opposed to strategic planning and written policy statements. Given that our thesis is correct, we would expect that competence orientation has established itself as a core feature of the management of firms in countries such as Denmark, Sweden, United Kingdom, Ireland, Singapore, the US, New Zealand, Canada, Australia, the Netherlands, and South Africa. we would anticipate that strategic adaptation plays a more important role than competence orientation in countries such as Japan, Austria, Germany, Greece, Portugal, Italy, Spain, France, Belgium, Turkey, Pakistan, Taiwan, Korea, and most South American countries. Likewise, there is reason to believe that there is a substantial correlation between the relative impact of competence orientation, on the one hand, and the use of collaborative management practices, on the other. The latter, which describes the degree to which the top management communicates the company’s vision, strategy, and policies directly to the employees, may also fruitfully be seen as an integral part of an organic management system directed at creating active participation by individual employees. A recent study of the use of collaborative practices in firms in six European countries demonstrated that Danish, Norwegian, and UK companies exhibited high scores on this dimension, whereas French, Spanish, and German firms did not (Gooderham, Nordhaug and Ringdal, 1999). In our view, this suggests that firms in the former countries have a strong competence orientation while firms in the three latter countries do not. However, this remains to be investigated through future empirical research.

References Astley, W.G. & A.H. Van de Ven (1983). ‘Central perspectives and debates in organization theory’. Administrative Science Quarterly, 28, pp. 245–273.

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Atkinson, J. (1985). ‘The changing corporation’. In D. Clutterbuck (ed.), New Patterns of Work, Aldershot: Gower, pp. 13–34. Barney, J.B. (1991). ‘Firm resources and sustained competitive advantage’. Journal of Management, 17, pp. 99–120. (1997). Gaining and Sustaining Competitive Advantage, Reading MA: Addison Wesley. Batten, M. & D. Walker (2001). Europe’s models—a business view’, European Business Forum, 5, pp. 37–40. Burton-Jones, A. (1999). Knowledge Capitalism, Oxford University Press. Byrkjeflot, H. & T. Halvorsen (1996). ‘The institutionalization of administration in Norway, 1950–90’. In R.P. Amdam (ed.), Management Education and Competitiveness, London: Routledge, pp. 171–192. Campbell, D.T. (1955). ‘The informant in quantitative research’. American Journal of Sociology, 60, pp. 339–342. Clifford, N. and M. Morley & P. Gunnigle (1997). ‘Part-time work in Europe’. Employee Relations, 19(6): 555–567. Colombotos, J. (1965). ‘The effects of personal vs. telephone interviews on socially acceptable responses’. Public Opinion Quarterly, 29, pp. 457–458. European Business Forum (2002). Issue no. 8. Gooderham, P.N. and O. Nordhaug & K. Ringdal (1999). ‘Institutional and rational determinants of organizational practices: Human resource management in European firms’. Administrative Science Quarterly, 44(3): 507–531. Hamel, G., ‘The concept of core competence’. In G. Hamel & A. Heene (eds.), Competence-Based Competition, Chichester: John Wiley and Sons. Hamel, G. & C.K. Prahalad (1989). ‘Strategic intent’. Harvard Business Review, May–June, pp. 63–76. (1994). Competing for the Future, Boston: Harvard. Handy, C. (1996). Beyond Certainty: The Changing Worlds of Organizations, London: Arrow Books. Hofstede, G. (1991). Culture and Organizations. Software of the Mind, London: McGraw-Hill. Hrebiniak, L.F. & W.F. Joyce (1985). ‘Organizational adaptation: strategic choice and environmental determinism’. Administrative Science Quarterly, 30, pp. 336–349. Kanter, R.M. (1989). When Giants Learn to Dance, London: Simon and Schuster. Lowendahl, B. & O. Revang (1998). ‘Challenges to existing strategy theory in a postindustrial society’. Strategic Management Journal, 19, pp. 755–773. Nordhaug, O. (1997). Annerledeslandet Norge. (Norway: A Deviating Country). Working paper. Bergen: Norwegian School of Economics and Business Administration. Nordhaug, O. & P.N. Gooderham (1996). Kompetanseutvikling i næringslivet (Competence Development in Norwegian Business.), Oslo: Cappelen Akademisk Forlag. Nordhaug, O. & K. Gronhaug (1994). Competence Resources in Firms, International Journal of Human Resource Management, 5(1): 89–106.

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Norusis, M.J. (1995). SPSS 6.1. Guide to Data Analyses, Englewood Cliffs, NJ: Prentice-Hall. Pfeffer, J. (1994). Competitive Advantage Through People: Unleashing the Power of the Work Force, Boston: Harvard Business School. Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press. Prahalad, C.K. & G. Hamel (1990). ‘The core competence of the corporation’. Harvard Business Review, May–June, pp. 79–91. (1994). ‘Strategy as a field of study: Why search for a new paradigm?’. Strategic Management Journal, Summer Special Issue, 15, pp. 5–16. Standing, G. (1997). ‘Globalization, labour flexibility and insecurity: The era of market regulation’. European Journal of Industrial Relations, 3(1): 7–37. Stone, D.L. & E.R. Eddy (1996). ‘A model of individual and organizational factors affecting quality-related outcomes’. Journal of Quality Management, 1(1): 21–48. Thorsrud, E. & F.E. Emery (1970). Mot en ny bedriftsorganisasjon (Towards a New Way of Organizing Work), Oslo: Tanum.

TRANSFORMATIONAL FORCES IN THE AMERICAN CORPORATE SYSTEM

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The Anglo Cultures Context

17

Transformational Forces in the American Corporate System

Managing Changes in the Production Methods and Workforce Organization Tetsuji Kawamura

One of the most salient features of the recent world economy, in which globalization, mega-competition, and market economy fundamentalism are getting an impetus, is the sustained growth of the US economy in the 1990s. Mega-competition refers to the worldwide phenomenon that global megacorporations conduct severe competition in the global markets all over the world. It includes cross border mega mergers and alliances among those mega corporations. Market economy fundamentalism means such recent tendencies towards pro-market-mechanism orientation, especially among policy makers, that the market mechanism can solve all the socio-economic as well as political problems in the world. The US economy began its expansion around March 1991. By the early 2000s, the length of its economic expansion reached 106 months, exceeding the longest peacetime boom in the late 1960s. An active expansion loop seemed embedded in the economy: major US companies increased their profits after a big bout of restructuring in the 1980s and 1990s; this pushed up stock prices, which stimulated consumer spending. Private business investments also led the economic expansion. Most discussions emphasize that pro-IT (Information Technology) investment policies and the infrastructure improvements by the Clinton administration spurred IT investments. The application of IT to business by the major US companies helped improve productivity, and led to economic growth, though the role of IT is far from conclusive (US Department of Commerce, 1998, 1999). New venture companies in the IT field such as AOL, Yahoo, Amazon, and CISCO Systems emerged. The prospect of their high returns provided the focus of stock price hikes, especially in the NASDAQ. The Dow Jones Index also started accelerating in 1995, reaching 8000 in 1997 and more than 10,000 in early 1999. It reached a historic peak in early 2000. The unemployment rate decreased to just over 4 per cent, substantially below the level once considered a natural

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rate. However, price indices remain stable. It appears that the economy is experienced non-inflationary sustained growth (Table 17.1). Largely because of income growth, coupled with expenditure cuts, US budget deficits disappeared after 29 years. The federal budget turned a surplus in the 1998 fiscal year. The New Economy gathered force in these situations, with its proponents even insisting that business cycles have disappeared in the US economy. IT revolution would bring about a new economic structure of Eternal Prosperity, they argued (Webner, 1997; Krugman, 1997). The excellent performance of the US economy was in sharp contrast to that of Japan and the EU in the 1990s. Japan went through its serious Heisei Recession, largely, as a direct consequence of the collapse of the Bubble Economy in the late 1980s. The EU trailed the US and Japan in terms of competitiveness and has barely achieved in reduction of high unemployment levels of more than 10 per cent of the working population. In contrast to the economic prosperity in the 1990s, the US faced serious problems of economic decline and de-industrialization in the late 1970s and the early 1980s. Unprecedented huge trade deficits, a declining share of the world export market, slackening productivity growth, lower profitability, decreased real wages and increased price elasticity of imports—in all these measures of competitiveness, US industries were facing serious problems (Cohen and Zysman, 1987). In the late 1970s, the US suffered from typical stagflation. Unemployment rates remained high around 7–8 per cent, whereas the price hike was near the 10 per cent level. During the transition to the floating exchange rate system, the US dollar depreciated against major foreign currencies like the Yen and the DM among others. US military superiority was also seriously challenged after the defeat in Vietnam. In the late 1970s, the Soviet Union’s invasion of Afghanistan and the prolonged hostage crisis in the American embassy in Teheran typified the deterioration of the US military prestige. The second oil crisis in 1979 might be traced to the decline in US politico-military power. All of these events suggested the end of the postwar politico-economic regime of Pax Americana. Some explanation of the postwar Pax Americana perspective is appropriate. The dollar crisis in the late 1960s resulted in hyperinflation and the collapse of the postwar international monetary regime, which was built on the US dollar and fixed exchange rate system. The world economy plunged into a severe recession in 1974–1975, which highlighted the end of the postwar long-sustained growth era. Stagflation was precipitated in major advanced nations in the late 1970s. Those successive events should be broadly understood as the decline of the economic systems under the postwar Pax Americana regime, established on the predominant economic power of the United States. The decline of a stable postwar regime brought about various mismatches in existing socio-economic structures and even political systems in many countries and areas. Strong pressures for reform and reorganization of these institutional arrangements emerged. Consequently, the world economy has been shifting into a stage of dynamic transformation, which still continues. The Pax Americana perspective leads us to focus on the structural changes of the US economy as the major source of

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these impacts, because the US constituted the nucleus of the postwar Pax Americana politico-economic regime. However, when we compare and contrast the US economic situations in the 1990s with those in the late 1970s, the significance of the 1980s emerges. The US, facing major economic difficulties in the early 1980s, might grope toward ways to revitalize and reindustrialize its economy. The eventual structural changes can be interpreted as preparing for the prosperity of the 1990s. Thus, the 1980s could constitute an important era of US economic transformative organization.

Literature Review Reaganomics, the economics of the Reagan administration, is now increasingly reappraised as a major source of the excellent performance of the US economy during the 1990s. It was once criticized for its unorthodox theory and its consequences of huge twin Federal budget and current-accounts deficits: However, the de-regulation or market-mechanism-oriented policies, based on a neo-conservative philosophy, may be re-evaluated to make appropriate prescriptions for the ailing American economy of the 1980s (Niskanen, 1988). Coupled with the collapse of the Socialist economies in Russia and Eastern Europe, a current of market economy fundamentalism is gathering force. American-style economic reforms and restructuring methods of business are now permeating the entire world. Experts increasingly advocate the reform and reorganization of the world economy based on the American Standard, which must be the Global Standard. Therefore, American economic reforms after the 1980s had a strong impact on the rest of the world and accelerated the world economic transformation. On the other hand, it is quite possible to criticize Reaganomics or market economy fundamentalism as a main cause of recent world economic instability, especially as a factor in the world financial and economic crises in the late 1990s. They have been so severe that they brought back the bitter memories of the Great Depression in the 1930s and world economic crises before World War I. Deregulation of the New Deal regulatory rules and restrictions and the liberalization of financial markets increased systemic risk in the world financial system. World financial markets have become complexly interwoven through high-tech financial technologies such as derivative trades and computerized dynamic portfolio management techniques. The unstable US dollar value increases exchange rate fluctuations and accelerates speculative capital movements. Those circumstances make world financial markets more vulnerable to chainreaction type crashes, and seriously affect real economies. Such systemic risk has been illustrated in the recent successive financial crises of Japan (in the last part of 1996, climaxing in 1997), Southeast Asia (in mid-1997 and 1998), Russia (in the summer of 1998), Brazil and other Latin American nations hit by the Russian crisis (in August/September in 1998, climaxing in the first part of 1999). It can be said that these financial crises have revealed the limitation of financial market liberalization or American-style Market Economy Fundamentalism. The instability introduced by the meltdown of the internet economy and the events

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of 9/11 suggests that the world economic system is still in flux, and has not yet been fully reorganized into a new stable regime, compared with the 1950s and the 1960s. However, it is not appropriate to attribute all the causes of prosperity or instability only to policies. Evaluations of policies should be done in terms of their effects on the actual economic changes. Therefore, it is necessary to examine what actually happened in the US economy after the 1980s in order to clarify whether the economic reforms in the 1980s prepared the ground for prosperity in the 1990s. It is also a prerequisite to re-examine the effectiveness of Reaganomics as a means of revitalizing the American economy. In fact, in the 1980s, many studies ranging from journalistic or superficial ones to academic ones, were published to investigate the causes for the American economic decline. We should pay special attention to the studies by the MIT group (The MIT 1989 and Dertouzos et al., 1989). This was quite a inclusive study, examining many of the causes and limitations in the then-existing US economic and corporate systems, from management methods, corporate organization, production system, the relationship between government and private firms and even educational systems. They summarize the problems into six major aspects, while also revealing many problems of individual industry and company cases (The MIT 1989 and Dertouzos et al., 1989). These problems include: (a) Outdated strategies, (b) Short time horizons, (c) Technological weakness in development and production, (d) Neglect of human resources, (e) Failures of cooperation, (f) Government and industry at cross-purposes. However, we concentrate our focus on the most important aspect of their conclusions, i.e., the limitation of the US corporate system itself, because they articulate the existence of the real problems in the nucleus of the postwar corporate America and thereby clarify the fundamental character of American economic problems in the 1980s. However, the MIT studies do not offer a full account of why the thenexisting US corporate system itself faced limitations and malfunctioned as a whole in the late 1970s and the 1980s. We examine these in the following section and try to investigate the underlying logic of economic reforms and reorganization in the 1980s, thereby clarifying what really changed in the 1980s. Actually, successful cases of reforms and restructuring in major industries and companies had already emerged in the 1980s. It might be possible to draw from them certain definite ideas concerning the logic of renovation of postwar corporate America.

Hypothesis Our hypothesis holds that certain factors made it inevitable to reform and restructure postwar corporate America in the 1980s. Here we note the arguments about the ‘crisis of mass production economy’, which Piore and Sabel developed in their mid-1980s’ book (Piore and Sabel, 1984), partly based on the Fordist frameworks of the French Regulation theory by Agglietta, Boyer, Lipietz and others. Piore and Sabel emphasize that the America mass production system and the corporate system based on it became

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dominant in the postwar US economy as well as in other advanced economies. The system constituted the nucleus of the postwar economic regime. However, it faced a crisis in the early 1970s and began to break down thereafter. They summarized the causes of the crisis into five major elements: (a) social unrest; (b) floating exchange rates; (c) the first oil shock and the Russian wheat deal; (d) the second oil shock; (e) high interest rates, world recession and the debt crisis. However, their arguments put particular emphasis on the wrong policy responses to external shocks that aggravated the failures. The crisis eventually emerged (Piore and Sabel, 1986:181–183). They do not necessarily grasp the causes of the crisis in terms of the structural changes of the postwar politicoeconomic regime itself or the postwar Pax Americana regime. One reason might be that their accounts mainly developed in the early 1980s. If the postwar Pax Americana regime was the inseparable framework of the postwar corporate system, then the ‘crisis of mass production economy’ was not limited to the US economy. Most of the other advanced economies faced similar problems in the early 1970s. We assume that the decline and disintegration of the postwar Pax Americana politico-economic regime especially constituted the fundamental cause of the crisis. Our major hypothesis is that the lost basis and frameworks of the US postwar corporate system in the late 1960s and the 1970s constituted a fundamental cause of its crisis. It made US economic reforms and reorganization in the 1980s inevitable. The most salient character of the US postwar corporate system was the Mature Oligopoly regime, which incorporated three major subsystems, i.e., the bureaucratic controls and organizational structure, the American-style mass production system and traditional labor relations. The preconditions under which this system worked were being lost by the early 1970s as a result of the dissolution of the integrity of the postwar Pax Americana regime, the nucleus of which was the US postwar corporate system itself. Therefore, an interactive process of decline in the US postwar corporate system and in the postwar Pax Americana politico-economic regime progressed in the late 1960s and 1970s. Two factors which emerged in the late 1960s and the 1970s were the most important in this context: (a) increased cost pressures, and (b) rising market uncertainty under the intensified market competition. The progress of those factors in the late 1960s and the 1970s constituted the foremost problems for the working of the US postwar corporate system. First, energy and labor costs rose sharply because of the advancing hyperinflation in the late 1960s and the early 1970s, and then again in the late 1970s. In the late 1960s, inflationary economic expansion was accelerated in the process of the final phase of the dollar crisis. The first oil crisis in the 1973 decisively aggravated the inflationary spiral. The CPI increased more than 10 per cent in the late 1960s and the early 1970s. Responding to this price hike, wages rapidly increased through price indexation system of wage—that was an institutional apparatus of the postwar wage determination. The price indexation of wages through COLAs (Cost of Living Adjustments) prevailed more positively in increasing the number of labor contracts, leading to a hike in contracted wage rates in the 1970s. This decisively worsened the wage-price inflationary spiral

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structured in the postwar corporate system, resulting in the ‘wage explosion’. Inflation continued even in the stagnating economy and the US economy experienced a typical stagflation in the late 1970s. Then, the second oil crisis hit the economy in 1979. Second, the worldwide low growth of the major advanced economies in the late 1970s, coupled with the large-scale income transfer to OPEC countries, seriously shrank market demand, and accelerated international competition. The major US manufacturing companies faced immense internal and external competition, especially from Japan and Asian NIEs. In the commodity-type or low-tech products sector, competitive pressures were increased from the lower wage areas of East Asia and Latin America. This led US companies to not only cut costs and increase efficiency, also to shift to high value-added products. The mature industries with middle technologies or more standardized technologies, such as automobile, electric machines, steel, and non-electric machines, faced severe price competition and had to respond to them through more product differentiation. Those situations increased the necessity to accelerate innovations in the product and process technologies. They helped promote the technological progress as a whole and especially the growth of micro electronics (ME) and information technology (IT). Third, the widening foreign exchange rate fluctuations under the floatingexchange rate system made the standards of international competitions unstable. Cost and price differences fluctuate in accordance with exchange rate changes, thus altering the competitive positions among domestic and foreign companies. This also forces the major companies to reorganize their international procurements activities and overseas production networks. As a result of these developments in the 1970s, the greater instability of market demand and uncertainty severely damaged the mature oligopoly regime of the postwar corporate system in major US industries (i.e., automobile, electric and other machines, steel industries, among others). The high cost structure increased competition, and enhanced instability and uncertainty of the market— all of these made it very difficult for the American major industries to maintain their mature oligopoly regime. We assume they also revealed the inherent limitations of the American-style (Ford-Taylor type) mass production system and the postwar traditional labor relations, which worked under the mature oligopoly regime in those industries.

TRANSFORMATIONAL ASPECTS OF THE AMERICAN CORPORATE SYSTEM There are two major aspects of the reforms and restructuring movements of the US economy in the 1980s. First, the US major companies streamlined and reshuffled their business structure, established under the mature oligopoly regime. Another noteworthy aspect was the active M&A (Merger and Acquisitions) movements in the 1980s. Second, they strengthened their efforts to establish management structures for swift decision-making and to build more flexible

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production systems as well in order to accommodate enhanced market uncertainty and intensified cost pressures.

M&A MOVEMENTS

AFTER THE

1980S

M&A movements in the US were quite active after the early 1980s. The long inflation originating in the 1960s provided the context for M&A in the 1980s as many companies were under-valued. When the total stock value of a company is less than its total asset value, it becomes cheaper to buy out this existing company than to take on new investment. The effect of the Reagan Administration policies should be taken into account as well. They relaxed anti-trust restrictions and deregulated the financial markets. This provided a favorable environment for an active period of M&As. On the one hand, M&A movements in the 1980s accompanied the securities market boom and other financial boom as well, especially in the mid-1980s. New methods of M&A financing such as LBO (Leveraged Buyouts) through junk bond techniques helped promote speculative money games especially in the late 1980s. Drexel, a leading promoter of junk bond techniques, rapidly grew up till the collapse of LBO finance in the late 1980s. Many famous greenmailers or corporate raiders like T. Boon Pickens, Donald Trump and others were rampant in takeovers and other M&A activities. It should be reminded that the collapse of the speculative money games in the late 1980s caused a worldwide recession in the early 1990. This was a negative consequence of the M&A boom in the 1980s. However, we also have to note that 1980s’ M&A movements included major companies’ efforts to reshuffle and reorganize their business structure. Although many M&A money games were played by giant corporations and even small firms, some real restructuring took place. In particular, the liquidation of conglomerates that had developed by the late 1960s, occurred through deals in which they sold off unprofitable peripheral businesses and concentrated their management resources on the lucrative core business. This provided a very important reinforcement of the importance of ‘core competence’. Some companies tried to shift their jeopardized major operations into new fields. One typical case was US Steel. The firm bought Marathon Oil and other companies and thereby shifted their main business to the oil and information and telecommunication (Matsui and Okumura, 1987). Another case was Westinghouse which bought NBC and other companies and moved away from the electric business. The reorganization of business structure of major US companies included another important aspects of renovation of management methods and downsizing of corporate organization. Matching the mature oligopoly regime, they had established complicated management structures, with bureaucratic and hierarchical organization to deal with widely diversified business lines. However, facing the difficulties in maintaining the matured oligopoly in the late 1970s and the 1980s, they tried to reduce middle management strata and make the corporate organization flatter to cut management costs and promote quick decision-making

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to cope with increased market uncertainty (Galambos and Pratt, 1987). Successful cases such as Xerox, General Electric, and mini-mills in the steel industry were already reported in the 1980s (Dertouzos and others, 1989). Two further comments are necessary here. First, the downsizing and streamlining of business structure by the major US firms have been conducted with the full use of IT, including networking technologies of the Internet and Intranet. This presumably constituted another accelerating factor for IT innovations since the 1980s. Second, M&A movements in major US industries were a reincarnation of the historical security capitalism nature of the US economy, under the pressures of reinforcing ‘core competence’ and the urgently needed reindustrialization.

IMPROVING COMPETITIVENESS

AT THE

PLANT

AND

SHOP-FLOOR LEVEL

As we have seen above, the renovation of business structure and downsizing of management provided important mechanisms for American major companies to solve the difficulties that arose in the 1980s. However, we also have to examine other important aspects of their efforts to improve competitiveness at the plant and shop floor level. Those efforts included the following important aspects: 1) shutdown of unprofitable plants and large scale staffing cutbacks; 2) productivity improvements mainly through the installation of new capital equipment and new technologies to substitute capital for labor; 3) so-called Japanization. Although they had different directions, those movements had the primary effect of dynamically transforming the American-style simple mass production system and traditional labor relations. Thereby, they accelerated the structural changes of the US postwar corporate system. At the same time, we have to note that they included the accelerating factors of the microelectronics technologies and information technology innovations. Concerning the first point, we might simply look at the automobile industry case. In 1979, there were 69 car and truck plants in the US. By the early 1990s, 20 of these were closed or shutdown (of which 16 were car plants). There were eight new factories and five renewals. The number of auto assembly plants decreased to 57 in 1991 (Rubenstein, 1992:3). Even in the booming 1990s economy, major companies still kept planning plant shutdowns and permanent large-scale layoffs, a remarkable phenomenon of the 1990s boom. The second aspect accompanied the reduction of product lines and thereby tried to reinforce the concept of mass production. This direction represents a logical extension of the traditional Ford-Taylor type mass production system. We can see a typical case in the Chrysler’s efforts after the financial crisis in the early 1980s (Belzowski, 1998:254–259). However, this contained a definite limitation. As we have discussed above, drastic changes in the business environment took place in the late 1970s and 1980s—i.e., increased energy and wage costs, intensified international competition, rising instability and uncertainty of the markets, and so on. They antagonistically affected the inflexible Ford-Taylor type mass production system, which is characterized as simple mass production of widgets to pursue economies of scale. Abernathy’s ‘Productivity

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Dilemma’ (Abernathy et al., 1983) appeared more keenly there. They were exerting strong dissolving pressures on the postwar US corporate system in the major industries, which was a synthesis of the mature oligopoly and the American-style (Ford-Taylor type) traditional mass production system (Piore and Sabel, 1984). In this context, we have to note the widespread application and progress of microelectronics automation and other information technology in the 1980s. It was generally believed that these new technologies would save energy and labor costs and enhance the flexibility of production lines. They were especially expected to be effective tools to help establish polyvalent factories, which might accommodate increasingly needed product diversification and lead-time reduction. Thus, technological innovations in production in the 1980s had to make its way beyond simple mechanization or mechanical automation. In place of inflexible old-type specialized machinery, FMS (Flexible Manufacturing System) and CIM (Computer Integrated Manufacturing) and other microelectronics automation technologies were installed, anticipating more flexible production lines. Thus, microelectronics technologies and information technology accelerated their progress because they were expected to be the effective means to deal with the drastic changes in business environment since the 1970s. The preferential taxes of the Reagan administration were supposed to play a significant role in this context. Investments in computerization and other information technology substantially increased in the 1980s. However, it should be emphasized that a basic problem remained. The smooth functioning of these new technologies could not be fully accomplished under the traditional Ford-Taylor type mass production system and work organization. This becomes clear when examining the GM case. GM was, of course, one typical case among many companies that pursued microelectronics automation in the 1980s. GM spent $40 billion for plant modernization and new equipments, $2.5 billion to acquire Ross Perot’s EDS and $5.2 billion to buy Hughes. They also invested several billions in the new Saturn Project. However, it was reported that in their Hamtramck plant, for example, although they introduced thorough microelectronics automation within the traditional mass production system, they faced serious operational problems. The networking rate of the production lines remained extremely low at around 20 or 30 per cent (Keller, 1989). On the quite contrary, the new plant of GE’s MABG (the Major Appliance Business Group) in Columbia, Tennessee was one of the most successful cases through thorough reengineering and reorganization of the production system and of management methods (Magaziner and Patinkin, 1989, Chapter 2). These cases suggest that the traditional US corporate system needs new developments or reengineering, especially in labor management to smoothly put in place polyvalent production lines built on microelectronics technologies and information technology. Several important points follow here. First, a new system of labor-management cooperation is necessary for the installation of these new technologies. The introduction of FMS or CIM, the

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major forms of microelectronics automation, directly conflicts with the traditional job control unionism of labor unions. Within the logic of the FordTaylor type production system, the management installs these new technologies mainly for the purpose of labor substitution. It provokes workers’ resistance because it tends to eliminate a number of jobs and hence to displace workers. Second, more importantly, new skill formation is needed. The continuous operation of microelectronics automated production lines particularly relies on maintenance works and improvement of equipment, if necessary. It needs the workers’ new enriched skills that Kazuo Koike defined as modern skills (Koike, 1993). Job Rotation and on-the-job training provides workers with effective means of accomplishing new skill formation. However, the fixed job assignment methods of the traditional American-style mass production system prevent newtype skill formation. Workers are only expected to conduct a particular fixed job for widget making. Moreover, we have to note that microelectronics automation per se brings less flexibility than versatile manual labor. So, microelectronics automation, if introduced within the traditional Ford-Taylor type mass production system, cannot fully achieve the flexibility that is needed to accommodate the changing business environment in the 1980s (Suzuki, 1994). For those reasons the alternation of the production system itself was increasingly needed in the US major industries in the 1980s. This should include the required renovation of the simple Ford-Taylor type mass production work organization and labor management methods, as well as labor relations, more broadly. On the one hand, it highlighted the superiority of the Japanese style management and production system. Japanese methods drew wide attention as a new production management system that could achieve more production flexibility and cost reduction at the same time. It was quite natural that an MIT study group in the late 1980s emphasized the outstanding features of the Japanese production system. They articulated it as a new concept of Lean Production System in their comprehensive international comparative studies of industrial productivity (Roos et al., 1990). However, we should note that the MIT group’s Lean Production System concept does not fully refer to the necessary reformation in labor management and labor relations. Japanization was one of the remarkable features of production method innovations in American major industries in the 1980s, especially in automobile, electric and general machinery, and steel. Facing increasing challenges from Japanese competitors, they introduced important elements of the Japanese-style management and production system to reorganize traditional mass production system. They encountered difficulties especially in labor management and labor relations. One important aspect of Japanization is the application of JIT principles to production flow management, as the MIT group emphasizes. The Kanban system or other similar devices of IT are made use to achieve the principles. The relations

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with suppliers are changed from an arm’s-length basis to a more Keiretsu type basis. However, to establish an effective JIT procurements system with suppliers, for example, it is necessary to maintain labor peace across the whole system. Otherwise, work stoppage even at one supplier breaks down the whole system. Japanization has not been limited to the narrow Lean Production aspect, in this way. It encompasses the labor management methods and even labor relations in general. For another thing, one of the unique methods of the Japanese-style management and production system is the use of small group activities such as Quality Control circles, to accomplish higher quality and efficiency relying on active worker involvement. Active participation of the versatile-skilled workers, who have accumulated deep knowledge about the production processes and work procedures, are a significant prerequisite for effective small-group activities. Job rotation based on the team system, as well as on-the-job training, provides effective measures for nurturing such versatile workers. It also helps activate Kaizen or improving activities of work procedures and equipment. However, to introduce the team system, the rigid job assignment system should be changed through the simplification of job classification or single status system for production workers. It is also necessary to give long-term employment or job security to workers and to establish an appropriate personnel management system1 . It should be emphasized that the Japanization of production system and labor management methods contains significant innovations in the Ford-Taylor type work organization and labor management. It has constituted important aspects of the worldwide transformation of American-style mass production system. Recent Supply Chain Management methods are also based on logic similar to the Japanese production system. Relying on IT, a more flexible and efficient integrated system of total business operation processes is established, from procurement to fabrication, distribution, and sales activities. In this way, innovations in the production management methods in the 1980s constituted a fundamental discrepancy with the work rules and the job control unionism of traditional US labor relations. Actually, as Kochan and others emphasize—and as we will see later on—nonunion-type labor management and labor relations have more affinity with the productive application of microelectronics automation and new information technologies. They have more in common with the major elements of Japanese-style labor management. It was no coincidence that Japanese challenges were more remarkable in such industries as automobile, steel, electric machinery and general machinery, where traditional American labor relations were typically established. Traditional American labor relations were placed under strong pressures in the 1980s. Next, we have to examine major changes in American labor relations.

1

For a detailed account of the characteristics of Japanese-style management and production system, see Kawamura (1994).

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T RANSFORMATIONAL F ORCES AND THE AMERICAN W ORKFORCE M ANAGEMENT It is widely argued that American labor relations experienced structural changes in the 1980s and afterward. First, the wage determination process substantially changed. Two-tier wages prevailed. Lump-sum payments expanded. The traditional automatic wage formulas, such as the cost of living adjustment were weakening. Second, so-called ‘concession bargaining’ spread. Third, there was an increasing tendency towards workers’ involvement and labor-management cooperation. Much attention has been paid to the changing business environment in the 1980s, which induced such changes. Some labor economists emphasize the significant changes in American industrial relations. Freedman argues, for example, that these changes were deep and far reaching, and consequently American industrial relations experienced a historical transformation in the 1980s (Freedman, 1988). However, Dunlop emphasizes that many of the changes in industrial relations in the first half of the 1980s were transitory, short-run and reversible, or simply differed according to the local environment (Dunlop, 1988:30). He argues that the core system of the American labor relations, which he formulated as the so-called Dunlop Model, remained unchanged. Dunlop Model: The two-tier wages were a new phenomenon in wage and salary scales that provided lower rates for new hires in the same job classification, compared with incumbents. The first half of the 1980s saw its expansion, especially in such industries as food chain stores or airlines that had a large number of new employees and high worker turnover. Ten per cent of labor agreements in 1980 to 1986 contained two-tier wage agreements. However, Dunlop argues that they were rather temporary responses to increased competition in the early 1980s, for both contractual and non-contractual wages. When the competitive pressures eased, they might eventually disappear. He also points out that a third of labor settlements by the late 1980s included provisions of the lump-sum payments. The lump-sum payments are measures to constrain overtime earnings and costs, vacation pay, sick pay, and other fringe benefits, without increasing the basic wage rates in the next period. However, he argues, that similar to many other compensation changes in the 1980s, they would be short-run and temporary. From World War I onwards, the escalator clauses of wages prevailed during the inflation periods, but disappeared in deflation periods (Dunlop, 1988:29–30). ‘Concession bargaining’ also spread in the first half of 1980s. Labor unions conceded historical gains in past collective bargaining to secure job security or re-training programs. This was widely seen in the 1980s and reappeared in the early 1990s recession. We might assume that this power shift in the collective bargaining system would cause a substantial change in the wage determination process and in other work rules. However, although he admits that the 1980s was an era of concession bargaining, Dunlop emphasizes that it was a response to the intense product-market competition of the era derived from enhanced international competition, exchange rate policies, other macroeconomic policies,

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and the deregulation of airlines, trucking and telephones and the like. Therefore, he notes, it was largely over. The average weekly earnings rose by 22 per cent from 1981 to 1986, compared with a 22 per cent decline from 1929 to 1933. The increase in wage rates in the 1980s was greater than the rise in the cost of living, even in 1979 to 1980. From those facts, he insists that the extent of workers’ wage concession was not so substantial in the 1980s (Dunlop, 1988:30). Dunlop also admits the spread of labor-management cooperation and worker involvement. He remarks that many instances of worker participation received widespread attention in the 1980s: A sharp decline in the percentage of estimated working time lost in large strikes (involving 1,000 workers); the emergence of exceptional agreements between the United Auto Workers (UAW) and Saturn (General Motors), and the UAW and NUMMI (General Motors); the worker participation programs at Ford Motor Co., AT&T, Xerox and a number of major private companies (largely excluding the public sector). He also notes that the expansion of worker participation in stock ownership, the trade-off of wage and fringe concession for a share of ownership in some companies in financial difficulty and the election of labor organization candidates to a few board of directors were seen as symbolic of the new era of cooperation. However, he argues, labor-management cooperation has a long history as joint consultation in the UK and the US. In terms of the historical standards, the recent labormanagement cooperation was not so great and not a quite new phenomenon. In short, he denies the historical transformation argument of American labor relations in the 1980s. He emphasized the transitory and peripheral nature of the changes occurred in American labor relations in the 1980s. Freedman Model: On the quite contrary, Freedman stresses the historical significance of the changes. They were, he argues, much deeper and more far-reaching than what the traditional labor-management conflicts theory illustrated. Freedman emphasizes the changes of business or macro-economic environment in the 1980s, which were exogenous to the labor relations per se, as the primary cause of this historical change. He stresses the effects of deregulation, and intensified competition from non-union sectors as well as foreign competitors. He argues that they constituted the major sources of the greatest influences or pressures on management in labor relations. The new phenomena, that appeared in the 1980s were the outcomes of the changing strategic responses by the management, and he insists that the basic structure of the American labor relations experienced an irrevocable transformation as the result of these developments (Freedman, 1988:36). Freedman pays special attention to the intensified competition among others. He remarks that the causes of it were not transitory and cyclical, but long lasting and irreversible ones. The heightened competition was not limited to the early 1980s recession and lasted even afterward. Management negotiators were forced to consider the wage rates, fringe benefits, and productivity within particular operation or business units. Therefore, it became the major concerns for the management how to reduce unit labor costs of particular product lines below a certain competitive level.

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Freedman emphasizes two major results. First, wages came to be far more responsive to economic conditions at the industry and firm level, and even the product-line level, than they were in the 1970s. The management, instead of following the industry-wide pattern, got increasingly more concerned with their operating costs. Traditional pattern bargaining has been consequently declining. At the same time, as management changed their strategies toward more flexibility of operations, various new wage techniques emerged. It brought about the decline of automatic wage formulas such as cost of living adjustment. Two-tier wages, lump-sum payments and gain-sharing, though which was quite limited in actual contacts, widely used as flexibility tools. They reflected the management efforts to link wages with output level and production costs, as well as profitability. He admits that they are not necessarily novel because the parallels can be found in previous non-union wage systems; what is new is that bargaining involve all kinds of variations that make wages more responsive and adjustable to competitive pressure at the product-line level. Second, the management was trying to make employment itself more flexible, as seen by the increasing layoffs, outsourcing of business services, and increasing use of temporary workers and freelancers in the 1980s. He argues that the use of contingent workers and contracting out have always been available management tools. They were used in the past as buffers to maintain ‘core’ workers, who had implicit job security, with high penalty costs required to downsize them. However, the recent practices were new because they were a part of the efforts to make labor costs even more variable and work force redeployment even less expensive. They were used as the flexibility tools of employment. The use of temporary workers and part-timers, he insists, provided a new device of Kanban employment for the management to gain more adaptability and flexibility in order to gain power for rapid downsizing and cost-cutting (Freedman, 1988:37–38). Actually, Dunlop also pays similar attention to changes in the business environment. His argument is more specific than Freedman’s. Freedman generalizes the changes as just an intensification of ‘competitive pressures’. Dunlop discusses five specific aspects. First is the macroeconomic policies aspect. Tax cuts and expanded defense expenditures caused unprecedented budget deficits. Tight monetary policy and high interest rates brought down inflation. However, they produced a severe recession, an overvalued dollar, and unprecedented trade deficits. The US became the world’s largest debtor nation. In this macroeconomic setting, he argues, industrial relations parties were more subject than ever to international product-market competition. Second, deregulation affected the labor relations in airlines and master-freight trucking. Similar consequences arose in railroads and telephones, to a lesser extent. Third is technology. New technologies brought about new work environments in some sectors. Patterns of relations in new high technology firms differed considerably from those of traditional heavy industries. The differences were the consequences of different labor markets, skill levels, and workforce expectations, as well as in management ideology or reactions to the malfunctions of union-management relations.

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Fourth, there have been changes in long-term demographic trends: the rapid expansion of women in the workforce, the growth of Hispanic labor force, the decline in the rate of growth of the work force, the aging of the population, the shift of population to the South and West, greater formal education levels. Fifth, he notes that the political climate affected industrial relations in the 1980s. The hostility between an Administration and the labor movement were unmatched in this century and the labor relations agencies produced reverses in policy and uncertainties that did not encourage cooperative problem solving or consultation (Dunlop, 1988:30–31). Dunlop thus admits the emergence of new elements in the business conditions, although he only enumerates them. However, he refrains from the conclusion that they have fundamentally transformed American industrial relations, for some of them last long while others do not. In short, Dunlop emphasizes peripheral and transitory nature of those new elements in American labor relations in the 1980s. He assumes that the basic structure of the American industrial relations remains intact. However, his arguments are questionable because the new phenomena continued even beyond the recession in the early 1990s. For example, a survey of employers conducted by the Bureau of National Affairs finds that lump-sum payments receded in the late 1980s and early 1990s, when 21 per cent of the responding firms expected the negotiations on lump-sum payment with labor, and this figure rose to 26 per cent in 1996. Further 16 per cent of the firms without two-tier wages in the existing contracts were going to introduce them. This was the highest level since 1984. Only 22 per cent of collective agreements include COLA, with 30 per cent were trying to eliminate it. Another 14 per cent hoped to cease these payments during the term of the contract. Many firms also wanted to reduce the burdens of medical insurance payments and other fringe benefits (UAW, 1996; BNA, 1996; Monthly Labor Review, various issues). These facts suggest that their changes were more permanent. Freedman’s arguments of historical transformation may be more viable. In any case, these arguments differ on how to evaluate the historical nature of changes in the business environment. In this context, we can further examine another version of the arguments about historical transformation developed by Kochan, Kats, and Mckersie (1986). They re-examine the theoretical framework of the Dunlop Model. Kochan et al., argue that the changes in the early 1980s reflected not only the gradually developed environmental pressures but also the organizational strategies that had tacitly progressed for years. The developments in the 1980s marked a fundamental departure from the principles and practices that evolved from the 1930s New Deal labor legislations and the post World War II collective bargaining system (Kochan et al., 1986:4). Kochan et al.: Kochan et al., note that the Dunlop Model, which provided a major theoretical framework of labor relations in the 1950s and 1960s, was only effective so long as the environment and the practices of actors were stable. However, such a static theory based on fixed key actors and centering the union sectors is not sufficient to grasp the dynamism of the current transforming

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American labor relations. They insist on a fundamental reappraisal of the industrial relation theories (Kochan et al., 1986:7). From this perspective, Kochan et al., (1986) proposed a new theoretical model to grasp the dynamism of industrial relations. They distinguish three different institutional levels of industrial relations, i.e., (1) long-term strategy and policymaking level, (2) collective bargaining and personnel policy level, (3) workplace and individual/organizational relationship level. At each level, three key actors of the labor relation system i.e., employers (management), labor unions, and government, interact with each other. In this three-tier model, they especially emphasize strategic choices by the key actors to respond to the environmental changes Kochan et al., note that the economic crisis in the late 1970s and the recession in the early 1980s promoted the strategic decision of the managers at the longterm strategy and policy making level to avoid labor unions in order to make production systems more flexible and to respond to the reduced demands and increased pressures for further cost cutting. Consequently, a new, more sophisticated non-union model of personnel management and work organization rapidly spread in the 1980s. They include the new model that had been pursued in non-union firms or sectors in the 1960s and 1970s. Kochan et al., make it clear that the characteristics of the new work organization and dispute settlements as well as personnel management in the non-union models were quite different from those in the traditional union models. They conclude that the spread of the new non-union model has transformed the American industrial relation system itself. First, at the collective bargaining level, concession bargaining and labor management cooperation was accelerated. Labor unions became more concessionary under the aggressive strategy of management as the menace of layoffs and unemployment extended even to core union members with higher seniority. These tendencies brought about the transformation of the bargaining structure, including the decline of ‘pattern bargaining’, shifts of the roles and function of in-company labor management staff, more emphasis of lump-sum payments and changes in strike patterns, and so on. A power shift to the first line supervisors and line managers occurred, away from labor specialists who had been deeply committed to the traditional labor relations of collective bargaining and grievance procedures. The top management increased their concerns with personnel management and labor relations. It considerably affected the collective bargaining process and procedures between labor unions and major companies (Kochan et al., 1986:128–137). Second, at the workplace and individuals/organizational relationship level, innovations and experiments in organizational and personnel management policies in non-union firms and industries seriously affected union sectors. It brought about increasing concerns with quality of life and widespread experiment and extension of the non-union type practices (Kochan et al., 1986). Kochan et al., emphasize the significant reversal of the traditional ‘spills-over’ effects from the union to the non-union sectors. They criticize Dunlop on that ground.

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Kochan et al., also emphasize the long lasting and structural nature of the remarkably increased competition from foreign companies and non-union competitors after the 1970s. The pressures powerfully worked on American industrial relations through the strategic choices of the management at the longterm and strategy level to promote the new non-union model. They caused fundamental changes in the institutional settings of postwar traditional labor relations. Consequently, the American industrial relation system itself transformed. We might still raise some questions about Kochan et al.’s arguments. For one thing, as Dunlop stresses, it is necessary to make a quantitative evaluation of the extent to which the non-union model prevails in the American labor relations. However, we would like to emphasize here, in particular, the irrevocable and structural nature of major changes in economic environment. Whether US industrial relations really experienced historical changes depends on how we evaluate that point. In fact, it divides the judgments of Dunlop and Freedman, as we have seen above. Integrated View: We have already examined the inevitability of the economic reforms and reorganization of the US economy in the 1980s. According to our above discussions, the new phenomena in American labor relations after the 1980s should be understood as very important aspects of the historical changes of the US economic structure in the 1980s and even afterward. The focal point was the decline of the postwar Pax Americana politico-economic regime. It brought about hyperinflation and the energy cost and wage explosion in the late 1960s and the early 1970s, and eventually ended the postwar stable ‘sustained growth era’. Meanwhile, the low growth of the US economy as well as the world economy and the shift to the floating exchange rates system in the late 1970s brought about heightened market uncertainty and intensified competitive pressures. This eroded the prerequisite conditions of the postwar cooperate system of the US and, in turn, accelerated the decline of the postwar Pax Americana systems. These forces dissolved the mature oligopoly regime in US major industries. They also revealed fundamental limitation of the Americanstyle simple mass production system and traditional labor relations, as Piore and Sabel emphasize (Piore and Sabel, 1984). Therefore, the postwar corporate system of the US fell into a crisis by the late 1970s, which was a synthesis of the mature oligopoly, the American-style (Ford-Taylor type) traditional mass production system, and the postwar traditional labor relations. In fact, taking the automobile industry case, we may refer to the power of the unions to set industry-wide wage levels and to relate these in patterns based on the market power of strong domestic producers, or industries sheltered by regulation. That was possible in the era when US enterprise dominated the world, when US technologies were the most advanced, American capital was the major source for other countries’ economic growth, and US businesses had a very firm grip on all the domestic and most of the world markets. But now ‘the external world economic and business world will not return to that era’ (Freedman, 1989:36).

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CONCLUSIONS We have examined the major transformational aspects of the US economy, and their influence on the workforce management during the late 20th century. We hypothesized that the decline of the postwar Pax Americana regime constituted the basic cause of the crisis of postwar corporate America. Facing up to this crisis, American major companies inevitably undertook major restructuring and reorganizing efforts of their postwar corporate systems. They tried to dissolve their conglomerate business operations, downsized their management structures and organization. They introduced some major alteration to their mass production methods, and, corresponding to it, took strong initiatives to change their labor management and work rules. This brought powerful pressures on labor management and employment systems, as well as the broader spheres of labor relations. Consequently, the US postwar corporate system established in the 1950s and 1960s experienced a substantial structural transformation after the 1980s. We raised one basic question in the first part of this chapter, i.e., to what extent the good performance of the US economy is the direct outcome of the effects of the economic reforms and reorganization in the 1980s. We saw the excellent performance of the US economy in the 1990s. Industrial competitiveness of the United States revived, and profitability of the major companies was stronger than ever. Their increased profitability definitely led US economic expansion in the 1990s. In this context, we have to note one remarkable fact that the historical rise of unit labor costs decisively slackened and even declined after the early 1980s (Figure 17.1). It was possibly one of the major results of the structural changes of US labor management and labor relations in the 1980s. It 1982=1.00 1.6 Output per capita Output

1.4

Hourly earnings Real hourly earnings

1.2

Unit labor cost

1

0.8

0.6

0.4

0.2

1990

1989

1988

1987

1985

1984

1983

1982

1980

1979

1978

1977

1975

1974

1973

1972

1970

1969

1968

1967

1965

1964

1963

1962

1960

1959

1958

1957

1955

1954

1953

1952

0

Fig. 17.1: Unit Labor Costs, Wages and Output in the United States Source: US Department of Labor, BLS, Monthly Labor Review, various issues.

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may have eliminated the inflationary spiral structure or ‘downward rigidity of wages and prices’, incorporated in the US postwar corporate system (Kawamura, 1995). It may be one of the significant causes of the ‘high growth without inflation’ in the 1990s. However, we should still consider other factors. For example, these developments might be partly a result of productivity growth induced by increased output. Higher stock prices and the increased financial returns of stock market boom could have accelerated the output expansion. This is, in a sense, the effect of a ‘stock-market-boom-driven economy’, so to speak. We should also take into account the other factors, such as the productivity growth of the ‘New Economy’, i.e., non-conclusive productivity increase induced by the IT revolution (Table 17.1), and the price decline of oil and other primary products after the Asian currency and financial crisis (International Monetary Fund, 1998, 1999; World Bank, 1998). Yet, the analysis presented here can help a more systematic assessment of these factors with respect to the specific situation of each firm, and suggest new directions for dealing with the effects of the internet meltdown and 9/11. Table 17.1: Economic Indicators of the United States in the 1990s (Annual Percentage Changes) Real GDP Consumer price index Unemployment rates (per cent of labor force) Productivity, manufacturing Unit labor costs in manufacturing Nominal effective exchange rate Import prices Oil prices Nonfuel commodity prices

1992–95

1997

1998

2.7 2.9

3.9 2.3

3.5 1.6

6.5 3.6 –0.5 –0.2 1.6 2.0 6.2

5.0 4.0 – 10.3 –4.3 –5.4 –3.3

4.5 3.4 1.2 4.9 –5.8 –31.1 –13.9

Source: IMF, World Economic Outlook, October 1998, Table 2.14.

References Abernathy, W.J., K.B. Carl & A.M. Kantrow, Industrial Renaissance, New York: Basic Books, Inc. Abo, T., ed. (1994). Hybrid Factory, New York: Oxford University Press. Council of Economic Advisers, Economic Reports of the President, recent issues. Center for Economic Development (1983). Productivity Policy: Key to the Nation’s Economic Future, New York. Cohen, S.S. & J. Zysman (1987). Manufacturing Matters, New York: Basic Books, Inc.

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Deoringer, P.B. & M.J. Piore (1971). International Labor Markets and Manpower Analysis, Lexington Books, MA: Heath. Dertouzos, M.L., R.K. Lester & R.M. Solow (1989). Made in America, Cambridge, MA: The MIT Press. Dewey, D. (1990). The Antitrust Experiment in America, New York: Columbia University Press. DiFilippo, A. (1986). Military Spending and Industrial Decline, Westport, CT: Greenwood Press. Dunlop, J.T. (1958). Industrial Relations Systems, New York: Henry Holt and Co. (1988]. ‘Have the 1980s changed US industrial relations?’. US Department of Labor, BLS, Monthly Labor Review, May. Dunning, J.H. & R. Nura (1996). Foreign Direct Investment and Governments, NJ: Routledge. Fligstein, N. (1990). The Transformation of Corporate Control, MA: Harvard University Press. Freedman, A. (1988). ‘How the 1980s have changed industrial relations’, US Department of Labor, BLS, Monthly Labor Review, May. Galambos, L. & J. Pratt (1988). The Rise of Corporate Commonwealth, New York: Basic Books Inc. Goodman, M.R. & M.T. Wrightson (1987). Managing Regulatory Reform, New York: Praeger. Halberstam, D. (1986). The Reckoning, New York: Avon Books. International Monetary Fund (1998), (1999). World Economic Outlook. Kawamura, T. (1988). ‘Black Monday’. In S. Furihata (ed.), Nihon Keizai, Tokyo: Ochanomizu-shob. (1994). ‘Characteristics of the Japanese Production System and Its International Transfer Model’. In T. Abo (ed.), Hybrid Factory, New York: Oxford University Press. Kawamura, T. (1996). ‘ME Automation and the Japanese Production System— Assimilation and Transformation’. In M. Itoh and Y. Okamoto (eds.), The Information Revolution and Market Economy, Tokyo: Fujitsu Books. Kawamura, T. et al. (eds.) (1995). The Modern World Economic System, Toyo Keizai Shinpo-sha. Keller, M. (1989). Rude Awakening, New York: William Morrow and Company, Inc. Kelley, M.R. (1989). ‘Alternative forms of work organization under programmable automation’. In Stephen Wood (ed.), The Transformation of Work, London: Unwin Hyman, pp. 235–246. Kochan, T.A., H.C. Katz & R.B. Mckersie (1986). The Transformation of American Industrial Relations, New York: Basic Books Inc. Koike, K. (1993). ‘Chiteki Jukuren Sairon’ (A Reappraisal of Intelligent Skills), The Review of Japan Labor Study, No. 402, July. Koike, K. & I. Takenori (1987). Jinzaikeisei no Kokusaihikaku (International Comparative Study of Human Resources Development), Tokyo: Toyo Keizai Shinpo-sha.

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Krugman, P. (1997). ‘How Fast Can the US Economy Grow’. Harvard Business Review, July-August, pp. 123–129. Levy, F. (1998). The New Dollar and Dreams: American Incomes and Economic Change, New York: Russell Sage Foundation. Lunsbery, R.D. (1989). ‘Rosikankei no Kouzou Henka—kokusaihikaku no siten kara, Structural Changes of Labor Relations—from a perspective of international comparison’. Japan Institute of Labor Economy. Magaziner, I. & M. Patinkin (1989). The Silent War, New York: Random House. Marglin, S.A. & J.B. Schor (ed.) (1990). The Golden Age of Capitalism, Oxford: Clarendon Press. Marris, S. (1985). Deficits and the Dollar, Washington, DC: Institute for International Economics. Matsui, K. & K. Okumura (1987). Beikokuno Kigyo-Baishu, Gappei (M&A in the United States), Tokyo: Toyo Keizai Shinpo-sha. The MIT Commission on Industrial Productivity (1989). The Working Papers of the MIT Commission on Industrial Productivity, Cambridge, MA: The MIT Press. Niskanen, W.A. (1988). Reaganomics, New York: Oxford University Press. Piore, M.J. & C.F. Sabel (1984). The Second Industrial Divide, New York: Basic Books Inc. Rubenstein, J.M. (1992). The Changing US Auto Industry, NJ: Routledge. Roos, D., J.P. Womack & D. Jones (1990). The Machine that Changed the World, New York: Macmillan Publishing Company. Slater, R. (1993). The New GE, Homewood, Ill: Business One Irwin. Suzuki, Y. (1994). Nihonteki Seisan Sisutemu to Kigyo Shakai (The Japanese Production System and Corporate Society), Hokkaido: Hokkaido University Press. United Auto Workers (1996). ‘What employers want in 1996 bargaining’. US Department of Commerce, Industrial Outlook, various issues, USGPO. (1998). The Emerging Digital Economy, GPO. (1999). The Emerging Digital Economy, GPO. US Department of Labor, Bureau of Labor Statistics, Monthly Labor Review, various issues. Volcker, P. & T. Gyohten (1992). Changing Fortunes, New York: Times Books. Volpato G. (1986). ‘The Automobile Industry in Transition: Product Market Changes and Firm Strategies in the 1970s and 1980s’. In S. Toliday and J. Zeitlin (eds.), The Automobile Industry and Its Workers, Cambridge: Polity Press/Blackwell, 193–223. Webner, S. (1997). ‘The End of Business Cycle’. Foreign Affairs, 76(July/August): 65–82. The World Bank (1998). East Asia: The Road to Recovery, The International Bank for Reconstruction and Development/The World Bank, September. Yates, B. (1983). The Decline of the American Automobile Industry, New York: Empire Books.

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Internationalizing the American Franchise System

The Value of Resources, Agency Capabilities and Strategic Intent Ilan Alon

The internationalization of franchise systems began in the 1960s (Welch, 1989). Early internationalization of franchise systems was in sectors which reflected the US lifestyle, such as fast food restaurants and retail establishments (Huszagh et al., 1992). The growth in the number of US franchised units operating abroad was estimated at around 17 per cent a year. Hoffman and Preble (1993) predicted that most US franchisors will have foreign outlets by the year 2000. Despite the increased globalization of US franchising systems, empirical research has been scarce (Ackerman, Bush and Justis, 1994; Fladmoe-Lindquist, 1996). There is a need to study the transformative factors in the internationalization decisions of US franchising systems. Franchising has been associated with the service sectors in general, and the retailing industry in particular (Cross and Walker, 1987). Much of the retailing industry is franchised, accounting for about $900 million a year in sales, approximately 40 per cent of all retail sales (Rubel, 1995). Root (1987) argued that international expansion through franchising is very attractive to retailing firms because it allows them to enter a foreign market with low levels of financial involvement and risk. This was true in the international expansion strategy of Marks and Spencer. ‘For Marks and Spencer, the advantages of franchising are that it allows the company the opportunity to expand its global presence, and establish the St. Michael name in new markets, with minimal capital investment’ (Whitehead, 1991:11). International franchising companies in retailing can be thought of as associations of locally owned businesses working under the operating umbrella of the franchisor. This allows a small consumer-oriented firm to take advantage of the regulatory structure of a small firm and the economies of scale of a multinational company (Feketekuty, 1988). This chapter builds on the previous studies on the organizational determinants of international franchising (Shane, 1996b; Fladmoe-Lindquist, 1996; Huszagh et al., 1992). It advances the current knowledge of international

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franchising in a number of ways. First, previous empirical research has focused on the agency explanations of international franchising (Shane, 1996b). While the resource-based explanations of international franchising have been conceptually developed (Fladmoe-Lindquist, 1996), they have not been empirically tested in any known study. This chapter combines the transformative role of resources and agency factors in explaining the internationalization decisions about American franchising systems. Second, past research on international franchising aggregated across industries (e.g., Shane, 1996b). Dant et al., (1998) wrote that these aggregations may obfuscate the results because of industry differentials in technology and profit margins. Franchising, for example, is used in varying proportions by industry. Company characteristics and operating environments differ among industries. Finally, the effect of company capabilities on the decision to internationalize varies across industries. This chapter utilizes the retailing industry because most of the retailing industry is franchised, making it a good testing ground for the transformative factors in internationalization of franchising systems. Finally, much of the previous research on international franchising focused on the country characteristics which motivate franchisors to expand their operations there (Hackett, 1976; Arthur Andersen, 1996). External characteristics, however, cannot explain why some franchisors within the same industry internationalize, while others do not (Shane, 1996b). This chapter, therefore, concentrates on the organization-related transformative factors in the international franchising decisions. This chapter uses Burton and Cross’ definition of international franchising. They defined international franchising as ‘a foreign market entry mode that involves a relationship between the entrant (the franchisor) and a host country entity, in which the former transfers, under contract, a business package (or format), which it has developed and owns, to the latter’ (Burton and Cross, 1995:36). This definition is used because it allows the host country entity to be either a franchisee, a sub-franchisor, or it can be an entity in which the franchisor has made an equity investment. Burton and Cross (1995) claimed that, theoretically speaking, the international franchising mode of entry should be treated as a separate construct because: (a) characteristics of the business stay the same regardless of who is the owner, and (b) ownership can be transformed with relative ease, even after operations have been established, without any noticeable difference. Shane (1996b:86) concluded that ‘the use of franchise contracts appears to be an important long-term strategic choice in its own right for international service firms.’

Model Development In this chapter, two research streams of international franchising are integrated: resource based and agency theories. Both have been used in the past to explain the decisions about international franchising. However, these theories used differing causal connections, which combined, enhance the overall explanation of transformative factors in international franchising decisions. Using previously

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established measures of resources and agency variables, this chapter formulates five hypotheses designed to capture the transformative factors in the American decisions to internationalize the franchising systems in the retailing sector. See Table 18.1 for a summary of the variables, measurements, and hypothesized relationships. Table 18.1: Measurement of the Variables and Hypotheses Hypotheses

Variable

Measured As

Relationship

H1

Size

Positive

H2

Age

H3

Growth

H4

Bonding

H5

Dispersion

Total number of units Number of years since franchising began Per cent change in number of units Ongoing payments/ Initial investment 0 = Some of the states 1 = All the states

Control Variables B6 Financing B7 B8 B9

Time Start-Cost Fran Age

Positive Positive Negative Positive

0 = Not available 1 = Available Years $ Number of years since firm began

Briefly speaking, the resource based explanations of international franchising propose that franchising companies will internationalize only after they have developed enough resources to allow them to compete in a global setting. According to agency based explanations, franchisors will seek international franchisees when it develops appropriate monitoring capabilities to prevent opportunistic behavior by the franchisee.

RESOURCE-BASED EXPLANATIONS For international expansion, the need for resources is pronounced because environmental differences and cultural and lingual dissimilarities often require modifications in product/service and the ability to adapt quickly and effectively to change. This is especially true in recent years as franchisors from developed countries have been entering emerging countries with different economic, political and cultural structures. Fladmoe-Lindquist (1996) showed that franchisors must possess key resources before being able to internationalize successfully. The franchising system acquires these resources over time as it gains experience in the domestic market. Huszagh et al., (1992) wrote that international franchisors have greater cumulative experience, scale economies, product differentiation, capital requirements and

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benefits of headquarters. This allows them to erect entry barriers against new firms and to compete successfully overseas. As the franchising firm grows by developing additional franchised outlets, it develops the resources which allow it to acquire the firm characteristics that are needed for international expansion. The size, or the number of outlets a franchising firm has, directly influences the yearly profits it generates. The more franchisees are in the franchisor’s system, the higher the total receipt of fees and royalties. Economies of scale in purchasing, promotion, research and development, monitoring, and quality programs can facilitate cost reductions that would allow a franchisor to compete effectively in international markets. In the retailing industry, economies of scale in purchasing, planning, and controlling resulted in cost savings to the firm, which translated to higher profits and more resources available for international expansion. The advantage of economies of scale in retail franchises is demonstrated by the growth of multi-establishment firms such as Blockbuster, Seven Eleven, McDonalds, and Baskin-Robbins (Feketekuty, 1988). The size of the franchising firm also facilitates cost reduction in the centralization of some business functions by the franchisor. ‘The organizational development of large retail operations has facilitated functional specialization within retailing, which in turn has contributed to retailers’ improved capacity to exploit international opportunities’ (Akehurst and Alexander, 1995:4). The more units that the franchising system has, the more efficient are the monitoring and performance measuring capabilities. This is because the mere volume of these comparisons have the potential to generate more educated routines for identifying shirking (Huszagh et al., 1992). Monitoring capabilities reduce the costs of opportunism by the franchisee, allowing international expansion through franchising (Shane, 1996b; Fladmoe-Lindquist, 1996). The size of the franchising firm also influences its market power and credibility. ‘It would be easier to raise a comparable amount of capital for a franchised unit of a large franchise than a small one’ (Huszagh et al., 1992:16). Bigger firms with more outlets are more well known and have more leverage in raising capital both domestically and internationally. Domestic capital can be used to help in the expansion of international franchisees when the foreign capital market is inadequate. There is also a greater probability that bigger franchising firms have saturated the domestic market and are looking for growth through international expansion (Shane, 1996b). The more outlets the franchise system has, the more likely it will saturate the market and look for expansion overseas. An example of a firm that aggressively seeks expansion through international franchising partly because it saturated the domestic market is McDonalds. Past research indicates that bigger franchising firms have a higher preponderance for units outside the US (Hackett, 1976; Walker and Etzel, 1973). Aydin and Kacker (1990) showed that smaller franchising systems are less likely to seek international franchisees than bigger ones. Huszagh et al., (1992) found a significant positive association between the number of units and the decision to

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internationalize in both 1967 and 1988. However, they expected that technology, in particular in telecommunications, would mitigate the influence of scale on the internationalization of franchising systems in 1988. This was not the case. A recent survey by Arthur Andersen (1996) revealed that franchisors with over 86 units were more likely to belong to the International Franchise Association and have franchises operating outside the US. Eroglu (1992:24) wrote ‘since larger franchise systems have more resources to allocate, and a higher capacity to absorb failure, they are expected to influence management’s risk perception inversely such that the larger the system size, the less the possible impact of cost and, therefore, the lower the overall perceived risk associated with international expansion.’ Therefore, the bigger the franchising system, the greater the possibility that it will seek international franchisees. It is also likely that the older the franchising firm, the more resources will it have. This is because it will have more experience borne out of operating domestically. Experience should make an older firm more cost efficient and, therefore, more competitive in domestic and international markets. In franchising, experience in site selection, store layout, procurement and operation policies can facilitate cost reductions based on improved knowhow (Huszagh et al., 1992). Therefore, experience and knowhow would allow an older franchising firm to successfully transfer the operating system of a franchise to a foreign market with greater ease than a younger franchisor. Past research (Hackett, 1976; Walker and Etzel, 1973) as well as recent research (Arthur Andersen, 1996; Huszagh et al., 1992) on franchising showed that older franchisors are more inclined to have international franchisees. When franchisors without international franchises were asked why their company did not have franchises outside the US, the number one reason given in 1995 was that the company was too young (Arthur Andersen, 1996). Eroglu (1992) proposed that the older and more experienced a franchisor, the lower the amount of perceived risk associated with internationalization, and the more likely the franchisor will seek international franchisees. Huszagh et al., (1992) showed that the age of the franchising system was positively related to its decision to internationalize in both 1967 and 1988. ‘These findings imply that experience is still a powerful tool for dealing with the physical and cultural distance inherent in franchising overseas. The inability of technology to substitute for experience appears to be borne out by these results’ (Huszagh et al., 1992:14). Therefore, the older the franchisor, the more likely it will seek international franchisees. The greater the rate of growth in the number of outlets, the more resources the franchising firm has, and the more likely will it internationalize. Shane (1996b) pointed out that the higher the growth of the franchisor, the more successful it is and, therefore, the more resources it may have to devote to its globalization efforts. ‘One could argue that more successful firms should be more interested in overseas expansion because their greater resource slack and greater ability to obtain resources from capital markets should make them better able than less successful firms to absorb the risks and costs of such expansion’ (Shane 1996b:81). The growth rate also indicates that the business system developed by the franchisor is attractive to potential franchisees. Fast growth of a franchising

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system is an indication that the business is successful and is a selling point for the franchisor who wants to lure domestic and international investors. Therefore, it is hypothesized that the higher the rate of growth of the franchising system, the more likely will it seek international franchisees.

AGENCY EXPLANATIONS The focus of the agency theory is to minimize agency costs, espcially those associated with shirking and monitoring costs. Based on these premises, Shane (1996b) developed a model that explains the internationalization of the US franchising system as a function of bonding and learned monitoring capabilities. Shane (1996b) claimed that franchisee opportunism can be reduced through exante bonding mechanisms, or a pricing structure that requires high initial investment relative to royalties. The franchising firm controls the ratio between the initial payment and the ongoing payments. In this fashion, it controls the bonding. The higher the level of bonding, the lower the probability that a franchisee will act opportunistically. This is because: (a) the franchisee fee accounts for one-half of the total investment of the franchisee, (b) the franchisee invests a major portion of his/her wealth in the business, (c) the standard franchising agreement allows franchisors to revoke the contract without the return of the fee if the franchisee does not obey a strict format, and (d ) the cost of termination increases the higher the initial fee relative to the ongoing fees. ‘As the threat of opportunism is greater in international franchising than domestic franchising, one would expect to find higher franchise fees relative to royalty and advertising rates among companies that intend to expand overseas’ (Shane, 1996b:77). Shane measured the ex-ante bond as a ratio between the initial fee and the ongoing fees and found support for the hypothesis that ex-ante bonding increases the likelihood of internationalization of the franchise system. International franchising operations require that the franchisor manage a remote location. Since remote locations have higher monitoring costs (Combs and Castrogiovanni, 1994; Brickley and Dark, 1987; Norton, 1988), franchisors can price their business system in such a manner that the franchisee bears the risk. This is done by increasing the initial investment relative to the ongoing payments, or decreasing the royalties relative to the franchise fee. In this situation, the franchisor is in a position to gain the franchise fee regardless of whether the business entity succeeds or fails. The advantage of using this price bonding variable is that this ratio is controlled by the franchisor. Combs and Castrogiovanni (1994:42) defined royalties as the ‘proportion of the present value of intangible resources that cannot be incorporated into the up-front fee due to the unpredictability of unit sales’. Since international sales of US franchising systems are more unpredictable overseas than domestically, international franchisors would rather receive more of the money up-front, rather than over time in the form of royalties. A survey by Arthur Andersen (1996) showed that the initial franchise fees of international units tend to be the same or higher, while the ongoing payments tend to be the same or lower. This result is consistent with Shane’s (1996b) finding on the effect of price bonding.

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Therefore, firms operating in international settings are more likely to have greater price bonding. A second method of minimizing opportunism is through the development of monitoring capabilities. Monitoring capabilities are critical to the success of the international franchisor (Fladmoe-Lindquist, 1996). Shane (1996b) found support for the hypothesis that better monitoring skills increase the propensity of franchisors to internationalize. He measured monitoring skills as a multiplicative composite index consisting of the number of franchised units, the percentage of franchised outlets, and the age of the franchise system. There is no theoretical reason why a multiplicative measure was used. Furthermore, the variables are likely to be correlated, obfuscating the regression coefficient results. For this reason, this study uses the measure of geographical dispersion for monitoring capabilities. According to the agency theory, franchisors with dispersed units require greater monitoring capabilities (Fladmoe-Lindquist, 1996). Franchisors with many franchisees in heterogeneous locations across the US are better poised to take advantage of economies of scale in promotion and monitoring because such locations incorporate differing levels of return and risk (Huszagh et al., 1992). Therefore, franchisors which are national in scope are more likely to internationalize because they have the monitoring capabilities in their domestic operations. The foreign subsidiary becomes an extension of the domestic operation. This is especially true for franchisors which first seek international expansion in Canada, or other English-speaking countries. All other things equal, the more dispersed the domestic franchising operations, the greater the monitoring capabilities, and the more likely the franchisor will seek international franchisees. The geographic dispersion hypothesis can also be explained by the domestic saturation hypothesis. The greater the geographical scope of a franchising operation, the more likely the franchisor exhausts domestic marketing opportunities, and thus the more likely that it will to internationalize (Shane, 1996b). Domestic saturation, therefore, can lead the franchisor to consider international opportunities for growth. Therefore, the greater the geographical dispersion of franchisees in the franchisor system, the more likely it is that the franchisor will seek international franchisees.

C ONTROL VARIABLES Four variables are controlled for: (a) provisions of financing, (b) time, and (c) start-up costs. Provision of financing is controlled for because such arrangements in the international environment necessitate knowledge of capital markets and the legal environment. Shane (1996b) proposed that provision for financing can complicate international business relationships hindering the desire of these franchise systems to internationalize. On the demand side, however, financing options may attract a prospective foreign franchisee and, therefore, influence the franchisor to internationalize. Since provision of financing is a factor that may influence the decision of the franchisor to internationalize, this variable is taken into account.

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Numerous researchers pointed to a trend in the globalization of US franchising systems. However, it is not clear whether this trend is caused by firmlevel variables or because of external or structural changes in the industries. For this reason, this study controls for time. Start-up costs are controlled for because they constitute a major portion of the investment in a franchising system. Shane (1996b) stated that a negative relationship is expected between the start-up costs and the internationalization of the US franchisor because: (a) capital markets are less efficient in foreign settings making it difficult to raise large sums of money, (b) high start-up costs make the franchising concept less desirable to potential foreign franchisees, and (c) it is more complicated to set up an expensive franchise contract. On the other hand, high start-up costs act as an additional price bond which, as predicted by the agency perspective, increase the likelihood of internationalization. Furthermore, the globalization of capital markets may moderate the effect of start-up costs on the decision to internationalize. Huszagh et al., (1992) found that start-up costs were not a distinguishing factor between domestic and international franchisors in both 1967 and 1988 but asserted that start-up costs may re-emerge as a differentiating factor between domestic and international franchisors, and not because of the efficiency of capital markets. They theorized that downturns in the US business cycle would diminish the success of franchisors to sell their system domestically. Therefore, to maintain their growth rate, franchising systems will look for development abroad. Although not statistically significant, they observed that most of the internationalization efforts of the US franchising systems in 1967 were in the lowest range of the start-up costs, while most of the internationalization activities of US franchising systems in 1988 were in the highest range.

METHODOLOGY This study uses logistical regression to test the effect of five independent variables and three control variables on a dichotomous dependent variable–the decision to internationalize. Data from 1990 to 1997 used in this study were collected by Entrepreneur Magazine, which publishes a yearly ‘Franchise 500’ survey. According to the editors of the magazine, the ‘Franchise 500’ listing is the best, most comprehensive and longest standing survey of franchises in the world. This data set includes key firm characteristics of over 1000 franchisors. These characteristics include: (a) the nature of the business, (b) the year the business began, (c) the year franchising began, (d ) where the franchisor is seeking franchisees, (e) the number of franchisee and company owned outlets, ( f ) the franchising fee, (g) the start-up costs, (h) the royalties, (i) the type of financing that is available, and ( j ) franchise 500 ranking. This data set was used in both domestic franchising (Combs and Castrogiovanni, 1994; Martin and Justis, 1993) and international franchising (Shane, 1996b) studies. Although the inclusion of franchisors in the survey is voluntary, several researchers have shown that no serious biases exist in the data (Castrogiovanni, Justis and Julien, 1993; Combs and Castrogiovanni, 1994).

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Combs and Castrogiovanni (1994) wrote that bias in the data appears minimal because ‘franchisors have considerable incentive to be listed since this is a good form of free advertising geared especially to their targeted audience, potential franchisees’ (p. 42). Furthermore, the magazine itself validates about 80 per cent of the data through the Uniform Franchise Offering Circular (UFOC), a prospectus required by US regulation containing key information.

MEASUREMENT DEPENDENT VARIABLE This study attempts to discover the factors that influence American franchisor decision to internationalize. The dependent variable is the intention to internationalize measured by the indication in Entrepreneur that the franchisors are seeking international franchising agreements. ‘Intentions represent the likelihood or tendency that an individual or group will undertake a specific action or behave in a particular way with regard to an issue or object’ (Eroglu, 1992:22). Shane (1996b) wrote that although intent to expand is not the same as actual expansion, this proxy is well suited for examining the internationalization of franchisors. This is because: (a) behavioral intentions often provide information on actual behavior, (b) the intention is real because Entrepreneur records it from the UFOC, and (c) intended strategy provides information about the plans and strategies of the franchisor (Shane, 1996b). Eroglu (1992) added that intentions are managerial useful substitutes for actual behaviors and are better than attitudes in model building applications. Included in the intention to internationalize measure is the desire to internationalize using master, direct international franchising, and joint venture agreements. This study, therefore, does not differentiate between the various contractual means of expansion.

INDEPENDENT VARIABLES There are five predictor variables for the intentions of franchisors to internationalize:—size, age, growth, bonding, and dispersion. The size of the franchising system is measured using the firm’s total number of units. The age of the franchising firm is measured using the number of years since inception. The growth rate was operationalized as the annual growth rate in the total number of units. The three measures—age, size and growth rate—have been used in the past literature as proxies of franchisor’s resources (Carney and Gedajlovic, 1991; Combs and Castrogiovanni, 1994). Bonding was operationalized by Shane (1996:80) as ‘the ratio of the initial franchise fee paid to the franchisor divided by the percentage royalty and advertising fee’. As mentioned earlier, this pricing structure measured the amount of bonding because a high ratio would mean that the franchisee had high stakes. The order of the ongoing royalties to initial investment was reversed and measured as royalties divided by the initial fee. This allows the inclusion of franchisors which do not charge royalties at all, without making special assumptions. The zero point of the bonding variable is meaningful because it means

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that the franchisor is taking no financial risk and the entire payment for the franchising system is made initially. Advertising fee is not included in the price bonding variable because Entrepreneur has ceased collecting this data and advertising practices are different from one country to another. Finally, geographical dispersion is measured using a dummy variable indicating whether the franchisor is operating in all or some of the states.

C ONTROL VARIABLES As mentioned previously, three control variables are included: provision of financing, time, start-up costs, and industry. Provision of financing is measured as a dummy variable indicating whether financing is available. As financing makes international operations more complex, Shane (1996b) proposed that a negative relationship exists between presence of financing and the desire to internationalize. The start-up costs are measured as all of the initial costs other than the franchise fee. Combs and Castrogiovanni (1994:41) wrote ‘high start-up costs suggest that the franchisee is the primary party risking loss of appropriable quasirents. These quasi-rents may actually provide an additional incentive for the franchisee to act in accordance with franchisor wishes in order to avoid quasirent appropriation.’ The time variable is included to account for the trend in the internationalization of US franchising. A positive linear trend in internationalization is tested. We control for industry by focusing on the retail sector only.

RESULTS OF THE TRANSFORMATIVE FACTORS MODEL The retail sector included 367 observations of 158 companies. Table 18.2 shows the descriptive statistics of the independent variables and the correlations among them. The retail logistical model is shown in Table 18.3. The model provides support for both resource-based and agency hypotheses. The model chi-square is highly significant at p < 0.001. This test parallels the global F-test in ordinary least square regressions. The results provide strong evidence that organizational factors relating to resource-based and agency theories are responsible for the internationalization of some franchisors within the retailing sector.

R ESOURCE-B ASED EXPLANATIONS The resource-based theory appears to provide information on whether a franchisor will decide to internationalize. The size of the firm is significant and positively related to the decision of franchisors to internationalize. Likewise, the growth in the number of outlets is also significant and positively related to the franchisor’s intention to internationalize. Bigger and faster growing firms may have more resources which would allow them to expand overseas. These results are consistent with the hypothesized relationships. Although the age of the firm is significant, the coefficient reveals a negative relationship to the dependent variable. According to this result, younger retailing

Table 18.2: Descriptive Statistics and Correlations of the Variables for the Retail Sector

n = 367 min max mean sd Size Frage Grow Bond Disper Fin Age Time Start

Size X1 0 6,705 184.04 438.64

age X2 1 119 17.80 19.08

growth X3 –0.88 22 0.59 1.94

bonding X4 0 1 0.26 0.09

dispersion financing X5 X6 0 0 1 1 0.62 0.28 0.49 0.44

Frage 1.00 .34 –.03 –.00 .16 .03 .32 .05 .15

Grow

Bond

Disper

Fin

1.00 –.18 –.23 .19 .12 .83 .05 .56

1.00 .04 .01 –.02 –.13 .01 –.06

1.00 –.06 .09 –.20 –.01 –.30

1.00 .02 .06 .16 .19

time X7 0 7 3.44 2.37

start cost X8 0 975.5 138.31 142.95

Age

Time

Start

1.00 .09 .29 .04

1.00 .03 .47

1.00 .08

fran age X9 1 69 9.46 11.45

1.00

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Dependent Variable: Mean = 0.25886; SD = 0.43860; Number of Cases: 0 (Domestic) = 272; 1 (International) = 95; Total = 367

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Table 18.3: The Retail Logistical Model Iterations 5 Log-likelihood –189.663002 Log-likelihood with only a constant term –209.871332 Chi-squared (8) = 40.417 @ P < 0.001 Variable Constant H1 H2 H3 H4 H5

Size Age Growth Bonding Dispersion

Control Variables B6 Financing B7 Time B8 Start Costs

Hypotheses Positive Positive Positive Negative Positive

Coefficient –1.51 0.00 –0.02 0.12 –0.41 1.01 0.87 –0.01 –0.00

Std. Error 0.44 0.00 0.01 0.07 0.81 0.30 0.29 0.06 0.00

T-ratio –3.40 1.93 –2.22 1.83 –0.51 3.42 2.98 –0.12 –0.88

firms are more likely to internationalize than older ones, ceteris paribus. This result may be partly because younger firms are more adventurous and willing to take chances with their franchise system overseas, and start-up franchising companies are more aggressive in recruiting foreign franchisees for collecting franchising fees. The explanation of the age variable may be industry related. High levels of domestic market saturation in the retailing sector may drive a franchisor to seek opportunities for growth overseas early in its life cycle. The forces which have motivated the internationalization of retailers are: (a) saturated and highly competitive national markets, (b) slow population growth in most developed markets, (c) little innovation in the domestic market because of planning controls, and (d ) restrictive domestic regulatory environment (Daniels, 1993). Given these constraints in the domestic environment, it is no wonder that more and more retailers are seeking expansion through international franchisees early in their life cycle. It is also possible that younger retailing firms are more innovative or more technologically advanced, given their ability to be born and survive in a highly competitive environment. In order to compete and gain economies of scale, brandname recognition and market penetration quickly, small franchisors may internationalize early in their life cycle. Whether internationalization creates competitive advantage or competitive advantage lead to internationalization is akin to the chicken-and-egg debate.

A GENCY E XPLANATIONS The logistic retailing model also provides support for one of the agency theory variables. Both of the hypothesized relationships have the expected sign in the

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coefficient but only the dispersion variable is significant. There is a negative but insignificant relationship between the price bonding and the decision to internationalize. However, this relationship may be a reflection of random sampling error. Unlike Shane’s (1996b) study, the price bonding variable was not significant for this model. The inability to confirm Shane’s (1996b) results may be attributable to the fact that each industry was isolated and examined over time. Shane’s model covered all franchising and was cross sectional. Since Shane (1996b) combined all industries in his model, inter-industry variations in the price structure may have strengthened the statistical association he found. This study investigates the intra-industry variations in the price structure and data are limited at the company level. Therefore, the results do not unanimously support Shane’s (1996b) findings. There is evidence in the literature that there is a relationship between the price structure of domestic and international franchises, regardless of the mode of entry, i.e., master franchising, area development, or direct international franchising. A survey by Arthur Andersen (1996) found that franchisors tend to charge higher initial fees and lower ongoing fees to the foreign affiliates in comparison to their domestic ones. Therefore, it is believed that the higher the price bonding in the price structure of the franchisor, the more likely will it seek international franchisees, masters, and area developers. The geographical scope of the franchisor is the most significant variable in the model. As hypothesized, it is positively related to the decision to internationalize. The significance of the dispersion variable for the retailing sector may be indicative of the importance of developing monitoring skills in the domestic context. Physical dispersion within the US may allow the franchisor to develop the monitoring systems necessary for overseas expansion. Dispersion in the domestic market may necessitate that franchising firms develop sophisticated monitoring systems of their franchisees. This positions them advantageously for international expansion. Furthermore, the greater the geographical scope of operation, the greater the likelihood of domestic saturation. As mentioned earlier, market saturation in the retailing sector may have contributed to the internationalization of retail franchise systems. These results are consistent with Shane’s (1996b) findings that agency theory may help explain the internationalization of US franchising systems.

C ONTROL VARIABLES In the retail logistical model, financing options were significant and positively related to the internationalization of these franchising systems. This may be the case because attractive financing terms entice prospective franchisees from overseas. Therefore, the demand for the US franchising may play an important role in the decision of retailers to expand their franchising systems abroad. The relationship between time and the internationalization of franchising systems was found to be negative and insignificant. It seems that the trend toward internationalization over time has been accounted for, at least partly, by the

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changes in the franchisors’ organizational characteristics. The trend of internationalization may be a result of maturity in the product life cycle of the franchising industry. Finally, the coefficient for the start-up costs was negative and insignificant in relation to the intention to internationalize.

CONCLUSIONS The factors identified in this study helped explain the occurrence of international franchising in firms within the same industry. The results of the model in this study were largely consistent with expectations. The sign of all the coefficients, except for the age variable, confirmed the hypotheses, and four out of the five independent variables were significant. The amount of resources and the ability of franchising firms to monitor their franchisees and reduce opportunistic behavior explained intra-industry internationalization patterns. However, the results for the age variable were non-intuitive from the resource based perspective. This study suggested that the older the firm, the more resources will it have and, therefore, the more likely is it to seek international franchisees. The results in this study showed to the contrary: the sign of the coefficient was negative and significant for the retailing sector. This may be the result of aggressive behavior of younger firms in the retail sector or a strategic necessity due to market saturation and highly competitive domestic environment. It is possible that younger franchising firms may be ignorant of the risks involved in international expansion. Therefore, their decision to internationalize from the very start may be a result of their daring nature and the desire on their part to collect franchisee fees from their foreign affiliates. Another explanation for these results can emerge from examining different types of franchisors. Using factor analysis, Carney and Gedajlovic (1991) found five types of franchisors: (a) rapid growers, (b) conservative expansive, (c) franchise converts, (d ) mature franchises, and (e) unsuccessfuls. It is the first group of franchisors that may have contributed to the result of the age variable. This group of franchisors is young (franchise for 4.1 years), large (156.7 units), low priced (125K total investment), and very fast growing (53.3 outlets per year). They also seek growth overseas early in their life cycle. Carney and Gedajlovic (1991:615) wrote ‘the expansion objectives of the rapid growers extend beyond the boundaries of their home province’. Some young companies may have a global product or service which may have global acceptance from the very start.

M ANAGERIAL IMPLICATIONS Franchising firms need to develop enough experience with differing locations embedding varying levels of risk and return in the domestic market before attempting to internationalize. The development of resources necessary for internationalization has been noted in past research and confirmed by this study. This study supports the position that establishing a strong resource base in the domestic context is an important determinant of internationalization. Mendelsohn (1994:62) wrote ‘even if the franchise business can command a

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substantial initial fee, it will be incurring expenses long before it receives anything.’ Furthermore, to reduce the risk of opportunism by franchisees, franchisors can structure the price of the franchise in such a way that they will get most of the money up-front in initial fees. This study supports the position that price bonding, reflected in a high initial investment relative to the ongoing costs or royalties, can bond the foreign franchisee to the agreement and minimize shirking as well as the need for monitoring.

F UTURE RESEARCH There are a number of potentially fruitful future research streams that can emerge from this study. It seems the external variables, for example, the ones relating to host country variables, cannot explain why some franchisors within each industry internationalize, but may be able to explain why some industries have more international presence. A study of the external factors of international franchising can supplement this work, leading to comprehensive explanatory models of international franchising. Another interesting future research is to investigate the finding that younger firms are more likely to have international franchise outlets. Although many franchisors attempt to internationalize early in their life cycle, their probability of succeeding may be different from firms which are older and more experienced. Shane (1996a) found that most franchising firms fail within the first 10 years of operation. The effect of age on the success in international ventures shows potential as a future research avenue. Finally, future research should concentrate on other industries to allow for a greater base of comparison. It is hoped that future studies will review the results obtained in this study in order to further facilitate the understanding of the internationalization process of franchising systems.

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The Positive Psychology of the Transformative Organization

A Fresh Perspective and Evidence from the Anglo Context Paul T. P. Wong

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Vipin Gupta

Any organization, be it a for-profit corporation or a non-profit educational institute, is a collection of individuals, with their unique combinations of genetic make-ups, cultural heritage, family background, attitudes, biases, needs and personal agenda. It is never easy to bring these different individuals together and turn them into a harmonious, productive high-performance organization. The psychosocial dynamics involved are complex and intricate; it takes a great deal of care and competence to keep the dynamics of interactions positive. The positive psychology of culture-climate management is concerned with the psychosocial dimensions of corporate culture and work climate of organizations. More specifically, it is interested in transforming organizational cultureclimate for optimal functioning of individual workers as well as the organization as a whole. It aims to maximize resources needed for organizational survival and success. For any corporation to be healthy and productive, four cores areas are important: (a) financial capital in terms of investments and profits, (b) technological capital in terms of cutting-edge software and hardware, (c) human capital in terms of knowledge, expertise, and creativity, and (d ) social/emotional/spiritual capital in terms of relationship, morale, meaning and purpose. Of these, the fourth area is the most difficult to manage and most difficult to quantify, but has become increasingly prominent over the recent years for two related reasons. First, in a knowledge economy, the most valuable resource is human capital. Second, in order to unleash human potential, corporate leaders need to know how to manage the emotional economy (Coffman, GonzalezMolina, and Clifton, 2002). The recent Enron collapse is instructive. How could America’s seventh largest corporation suddenly descend to bankruptcy overnight? What has contributed to its unexpected, quick demise? Currently, there are more than 10

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separate committees investigating possible wrongdoings and illegal activities, such as fraud and insider trading by Enron’s senior management. Based on available information, it appears that Enron made its money with smoke and mirrors and maintained its reputation through inflated profit reports. With a set of off-the-books, unregulated private partnerships to take on debts, hide losses and inflate revenues, Enron was able to keep bond rating agencies happy. It was able to sustain the elaborate scheme of deception by refusing to disclose to analysts, who questioned where the money came from. The popular view is that the auditors turned a blind eye to questionable accounting practices because they did not want to lose the lucrative consulting fees. Under mounting pressure, Enron’s eventual disclosure of its overstatement of profits in November 2001 immediately triggered the collapse of the company and its bankruptcy filing on December 2, 2001. A special panel of Enron’s Board has recently issued a 217-page report condemning Enron’s management for inflated profits and the failure of control at every level. According to Eichenwald (2002), ‘As oversight broke down at Enron, the report states, a culture emerged of self-dealing and self-enrichment at the expense of shareholders. Accountants and lawyers signed off on flawed and improper decisions every step of the way.’ In essence, social/emotional/spiritual (SES) dimension of corporate culture has played a key role in Enron’s collapse. The executives created a culture of greed, corruption and deceit, but their house of cards could not survive the wisdom and forces of the marketplace. Enron used to own a lot of real assets. It was one of the leaders in technology related to gas and oil. It had hired many talented and competent workers. Yet, it failed to maintain a relationship of openness and trust with employees. Staff members who questioned the wisdom of some of Enron’s decisions and practices were either ignored or silenced. Sherron Watkins, who dared to warn Enron chief executive officer Kenneth Lay of the elaborate accounting scheme, was demoted from her executive suite to a ‘skanky office’ (Morse and Bower, 2002–2003). There was little regard for meaning and ethics beyond the bottom line. Enron’s deficiency in SES capital proved to be fatal! SES capital is difficult to manage because workers come from different cultures, with very different values, beliefs, habits and expectations. However, they all share the basic human needs for belonging, connectedness, trust, meaning, and purpose. An important challenge for managers and leaders is how to manage and enhance the SES capital of their organizations in the context of global competition. The development of SES capital is closely related to organizational culture and work climate. A corporate culture of greed and selfishness will result in a negative work climate and reduce SES capital. On the other hand, a corporate culture of integrity and valuing the employees will contribute to a positive climate and increase SES capital. In this chapter, we emphasize that competency in culture-climate management is vital in maintaining high performance in an organization. We identify both toxic and healthy corporate cultures and explicate the process of cultural

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transformation through an analysis of both surface and deep structures in the work climate. We highlight the importance of enhancing SES capital on a sustained basis. We will also discuss the implications of transformative culture for management.

Corporate Culture Culture typically includes the totality of socially transmitted behaviors, beliefs, attitudes, human thoughts and creations. It affects every aspect of our lives— how we perceive the world, how we act and react, and how we express our feelings. Generally, corporate culture refers to the prevailing, implicit values, attitudes and ways of doing things in a company. It often reflects the personality, philosophy and the ethnic-cultural background of the founder or the leader. Corporate culture dictates how the company is run and how people are treated and promoted. According to Reh (2002), ‘It is the leader’s job to provide the vision for the group. A good executive must have a dream and the ability to get the company to support that dream. But it is not enough to merely have the dream. The leader must also provide the framework by which the people in that organization can help achieve the dream. This is called company culture’ (p.1). Corporate culture is often different from its public image. It is not uncommon for corporations and government offices to have their mission statement mounted on the wall declaring, among other things, that they strive to create an environment in which everyone is treated with dignity and respect. However, in actual practice, both employees and customs are treated as things to be utilized and exploited. Many companies, such as Enron, publicly advocate the ethics of being honest and caring while, in practice, they are engaged in deception and scheming for short-term gains. However, organizational cultures that do not genuinely practice positive values will not do well in market economy in the long run; Enron’s collapse is a case in point. It is essential to understand how different types of corporate cultures may either facilitate or inhibit organizational efforts to improve performance and increase productivity. More importantly, we need to develop the knowledge and skills to foster corporate cultural change. Cameron and Quinn (1998) pointed out the importance of transforming organizational culture in order to adapt to changing times. They have developed an assessment instrument to identify four types of cultures, namely, market culture, advocacy culture, clan culture, and hierarchy culture. Such a typology of culture offers alternative ways in which the firms organize in different regional contexts. Here, we propose a different typology to distinguish between toxic and healthy corporate cultures:

TOXIC CORPORATE CULTURES The following corporate cultures are described as toxic because they are dysfunctional in terms of relationships and adjustment to changing times. They

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tend to create unnecessary emotional tumult, stress and conflict, and poison the work climate. Toxic corporate cultures drain emotional energies, deplete the valuable SES capital, and contribute to organizational decline. 1. Authoritarian-hierarchical Culture: The big boss alone makes all the major decisions behind closed doors. Even when the decisions are harmful to the company, no one dares to challenge the boss. The standard mode of operandum is command and control, with no regard to the well being of employees or the future of the company. Authoritarian leaders dislike clearly spelled-out procedures and parameters in decision-making as much as they hate due processes of appeal. They prefer ambiguity, uncertainty, and absence of boundaries because in this kind of situation they are not bound by any rules, and they can do basically whatever they want. They make up rules along the way to suit their needs. Thus, in dealing with Case A, they set up rule A, but in an exactly different situation in dealing with Case B, they set up a much harsher rule B, because B does not belong to their inner circle. One of the common strategies of authoritarian leaders is ‘divide and conquer’. By pitting one vice-president against another, one department against another, they consolidate their power. In this kind of culture, employees are to be controlled, manipulated, and occasionally pacified like little children. Workers are motivated by fear rather than by love for the company or passion for the work. They are expected to do what they are told without questioning. The main criterion for promotion is loyalty to the boss, rather than competence and commitment. As a result, star performers who dare to question some of the administration’s decisions are sidelined or let go, while those who obey the boss blindly and are willing be the hatchet men get promoted. Hierarchies are not necessarily bad in and of themselves. Some sort of hierarchy in terms of boundary, decision-making and responsibility is inevitable. However, when hierarchies are used to control and abuse workers, then many personnel problems ensue. Hierarchies without accountability and checks and balances tend to have a corrupting influence on ambitious, autocratic leaders. When a dysfunctional boss makes irrational decisions based on his neurotic needs, the entire company suffers. When the leaders’ primary concern is how to keep people under control in order to feel secure in their position of power, they create an oppressive work climate. They keep on piling up more and more rules and regulations to control employees; often the rules are downright absurd and harmful to the company. Worse still, most of the rules are ambiguous enough for the management to interpret and enforce differently, depending on whether the offender is considered a friend or a foe. Some paranoid leaders even plant informers throughout the company to spy on individuals whose loyalty is suspect. Invariably, this kind of authoritarian control discourages employees’ initiatives and creativity, and turns them into demotivated, under-performing workers. 2. Competing-conflictive Culture: There is always some sort of power struggle going on. Leaders are plotting against each other and stabbing each other in the

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back. Different units and even different individuals within a unit are undercutting each other to gain some competitive advantage. There is a lack of trust and cooperation. People often hide important information from each other and even sabotage each other’s efforts to ensure that only they will rise to the top. There is no regard for the larger picture and the overall goal of the company. It is every man for himself. Both management and workers are obsessed with their own survival and self-interests. As a consequence, the organization is fragmented and there is wastege of valuable resources because of duplications and sabotage. Such intense competition within the company creates a climate of divisiveness, conflict and mistrust. A house divided cannot long survive in a highly competitive economy. 3. Laissez Faire Culture: There is a vacuum at the top, either because the leader is incompetent and ignorant, or because he is too preoccupied with his personal affairs to pay much attention to the company. Consequently, there is an absence of direction, standards, and expectations. Therefore, each department, in fact each individual, is free to do whatever it wants. The leadership void will also tempt ambitious individuals to seize power. Chaos and confusion are the order of the day. No one has a clear sense of where the company is going, and employees receive conflicting directions and signals. Often, decisions are made in the morning only to be nullified in the afternoon. Given the lack of direction, oversight and accountability across-the-board, the morale declines and productivity plummets. In this kind of culture, the company either disintegrates or becomes an easy target for a hostile takeover. 4. Dishonest-corrupt Culture: In this culture, greed is good, and money is God. There is little regard for ethics or the law. Such attitudes permeate the entire company from the top down to individual workers. Bribery, cheating, and fraudulent practices are widespread. Creative accounting and misleading profit reports are a matter of routine. Denial, rationalization, and reputation management enable them to carry on their unethical and often illegal activities until they are caught red-handed or exposed by correcting forces of the market. When managements are blinded by greed, their judgment becomes distorted and their decisions are seriously flawed; as a result, they often cross the line of no-return without realizing it. Enron serves as a good example. 5. Rigid-traditional Culture: There is a strong resistance to any kind of change. The leadership clings to outdated methods and traditions, unwilling to adapt to the changes in the marketplace. They live on past glory. Any change poses a threat to their deeply entrenched values and their sense of security. Workers are discouraged or even reprimanded for suggesting innovative ideas. Their accounting, marketing and delivery systems are no longer compatible with the fastpaced technology-driven marketplace. Their products and services fail to respond to changing market demands. Their mantra is ‘We have always done things this way.’ As a result, the world passes them by, and eventually they are left with an empty shell of their former self. The five types of toxic cultures are not mutually exclusive. For example, a corporation may be both authoritarian and traditional. Similarly, a corporation

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can be both authoritarian and corrupt. When a company suffers from multiple diseases, drastic operations are needed to save it from demise. Unfortunately, not many managers are competent to make the diagnosis and prescribe the treatment for toxic corporate cultures. How to transform toxic corporate cultures presents challenge to senior management.

HEALTHY CORPORATE CULTURES 1. Progressive-adaptive Culture: There is openness to new ideas and a willingness to take risks and adopt innovations. It is a flexible culture that adjusts quickly to shifting market conditions. It does not value the certainty and security of remaining the same; the only certainty it values is that the company must always ride the waves of change. It is future-oriented and innovative. This culture is compatible with the entrepreneurial spirit of creativity, boldness and taking ownership. The management strives to be on the cutting edge and encourages continuous development of workers. There is a pervasive, restless creative energy, constantly seeking and creating new ideas and new markets. The company celebrates every innovation, and every discovery. Excitement is in the air. Employees are all caught up in the adventure. This culture is the opposite of the rigid-traditional culture. 2. Purpose-driven Culture: The leadership articulates and crystallizes the purpose of the company effectively so that there is a common purpose, a shared vision for all the workers. Everyone knows what the core values and priorities are, and everyone knows where the company is going. Workers are highly motivated because they are committed to the same set of core values. More importantly, the overarching purpose tends to go beyond the bottom line. All great companies endure because they serve a higher purpose. One example is Anita Roddick, founder of The Body Shop. She has a clear vision, a higher purpose for her company: The Body Shop will be an ethical, caring company, that it will care about the environment, human rights, animal protection, and the community. This vision is incorporated into all aspects of her corporate goals and practices. Purpose-driven is different from task-driven. For example, some Christian organizations want their employees to do more and more work with less and less pay; employees are told that they need to sacrifice in serving God because what they do is a mission. However, while the employees are toiling away, the management reaps the benefits of such a dedicated cheap workforce and basks in the glory of success; to the leaders, the task of generating more income comes before the purpose of serving God. In such cases, the leader uses vision as a ploy to manipulate and exploit naive and gullible employees for self-gain. In a truly purpose-driven organization, a clear sense of mission permeates every aspect of the organization, especially the practices and conduct of the senior management. In other words, there is no disconnect between the organization’s mission statement and actual practices. 3. Community-oriented Culture: There is a strong emphasis on collectivity and cooperation. The leadership attempts to build a community in which people

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respect, support each other, and enjoy working together. This is very different from the kind of authoritarian collectivism in communist states where the state controls the business, and everyone has to toe the party line and work for the state. A community-oriented culture goes beyond team building and aspires to create an authentic community in which every worker is treated as a valuable member. It requires members from different work groups to treat each another in a positive, supportive way in order to boost the overall morale of the entire organization. Such a community requires collaboration and communication throughout the organization. Management involves and empowers all staff members in a combined effort to improve efficiency and productivity, such as required by Total Quality Management, but does not impose its will on the employees without extensive consultation. The key to successful communitybuilding is communication and consensus building. It requires the removal of barriers and discourages unilateral and arbitrary decision-making. The prevailing ethos of a community-oriented culture is teamwork. For teamwork to be effective, team building training becomes an important part of personnel development. Typically in team building, groups are created in each work area and group members interact and work together to identify and resolve issues that affect individual and group performance. Guidelines are provided for interactions among team members. Team members work together in a mutually supportive atmosphere. Team members know the role they play in achieving end goal. Often teamwork does not work. One of the main reasons is that the dominating culture of the organization encourages a mindset of individualism and self-interest. Teamwork is more likely to work when it is embedded in a community-oriented culture. To create a sense of community, the management needs to provide a trusting and safe environment in which workers are free to express their ideas rather than try to ‘fit in’ and please the managers. The emphasis on community building also creates a climate of cooperative problem solving and a willingness to share information and expertise. In such a company, there is a healthy acceptance of diversity and a willingness to listen and to learn from others. A communityoriented culture is just the opposite of a competing-conflictive culture. Many organizations, especially the religious ones, often pay lip service to community building. They preach brotherhood, cooperative efforts, and the need for a united, harmonious community. They even claim that their organization is like a family. However, their treat employees like children who are to be seen, not heard. They provide no forums for meaningful dialogue and offer no mechanisms for meaningful input in decision-making. Authoritarian leaders only know how to do pseudo-community-building by issuing decrees and preaching the importance of unity. By unity, they mean uniformity in thoughts and conformity to their decrees. Anyone who dares question them is treated as a troublemaker to be ostracized or expelled. They have no interest in dialogue, consultation or consensus building; that would be too risky to their authority. Communication is always one way—from the big

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boss to all the workers. Community building is always one way—the big boss has only one blueprint for the organization, one that facilitates central control. Thus, in the hands of an authoritarian leader, community building becomes yet another ploy to deceive employees and make the organization more controllable. A community-oriented culture is inherently contrary to authoritarianhierarchy. It is amazing how willingly dictators attempt to wrap themselves with lofty slogans such as community building, serving with a purpose and servant leadership to deceive and manipulate employees. The real tragedy is that even though most employees can see that the emperor has no clothes, they are too scared to say anything—they do not want to lose their jobs, and they rationalize that the leader must have a good reason for doing what he does. In a truly community-oriented culture, everyone has a voice because everyone is important. Furthermore, a community-oriented culture also cares about the large community in which they work, and even the global community of humanity. It fosters a strong social conscience, a communitarian spirit. It is concerned with such issues as poverty, environmentalism, human rights, and sustainable progress. It believes that the company not only gives back something to the society, but also helps create a healthy world to live in. 4. People-centered Culture: There is a genuine caring for each worker in the organization. Everyone is valued and validated, regardless of their positions in the company. The organization cares for the whole person—body, soul and mind— in terms of meeting their basic needs for learning and growth, for belonging as well as the need for meaning and spirituality. Each worker is encouraged to develop his or her full potential, personally and professionally. Such a culture will create a climate of mutual respect and genuine civility. Organization care for employees is based on organizations’ deep-seated core values and practices. The focus is on meeting workers’ needs, promoting their best interests, and valuing their contributions (Liedtka, 1996, 1999). It involves setting up the necessary infrastructure to facilitate caregiving, such as providing support systems, and employee assistance and development programs. People-centered organizations which embrace the core ideology of caring may have different ways of expressing its core values (Collins and Porras, 1994; O’Reilly and Pfeffer, 2000). Nevertheless, caring needs to be implemented on a consistent basis. For example, HP’s core ideology of ‘Respect and concern for individual employees’ and 3M’s core value of ‘Respect for individual initiative’ are incorporated in all aspects of organizational practices. Herb Kelleher of Southwest Airlines is another example. He treats every employee as a valuable member of the team. As chairman and CEO, he has created a positive climate of safety, trust, and respect. A people-centered culture is diametrically opposed to an authoritarianhierarchical culture. However, one may argue that a benign dictator can be as caring as an authoritarian parent. True enough. But benign dictatorship can never replace a people-centered leadership because deep down people do not want to be controlled, no matter how benign the controller may be. Only a

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people-centered culture grants individuals dignity and respect, and treats them as valuable members of the organization. The above mentioned four cultures are positive because they create a positive work climate conducive to productivity and job satisfaction. They contribute to high-performance without explicitly linking reward to performance. The ideal company should possess the attributes of all four types of healthy corporate cultures. One of the key competencies in management is to create and maintain a healthy corporate culture.

Cultural Transformation and Transformative Culture Culture is not just a state, but also the vehicle for corporate transformation. Toxic cultures can kill a company loaded with money and talent. Positive cultures can make a less endowed company grow. A special kind of positive culture is the transformative culture, which is a culture that is oriented towards renewal and growth. It is constantly devoted to discovering and generating innovative ideas, and finding a better way of doing things without compromising its positive core values. While cultural transformation serves the purpose of turning a failing company into a profitable one, a transformative culture goes one step further by ensuring that the valuable SES capital is developed and renewed on a sustained basis. We first describe the process of cultural transformation—for that is the foundation of any transformative organization. We then discuss how to develop a transformative culture.

The Process of Cultural Transformation A diverse domain of management and leadership skills can be brought to bear on cultural transformation. These skills include: (a) assessment and diagnosis of present corporate culture, (b) strategic planning and intervention with respect to organizational restructuring, leadership retraining or change of leadership, (c) management and implementation of cultural change, (d ) developing and articulating the new vision, (e) adopting new standards, policies and practices across-the-board, and (f ) on-going education, dialogue and information sharing with the clear and unmistakable message that things will be done very differently. Cultural transformation is possible only when the Board of Directors and senior management realize that unless their toxic culture is transformed into healthy one, they will not survive in a very competitive world, where SES capital becomes increasingly important. The inability to manage the emotional economy can destroy a company with a great deal of financial and technical resources. The competitive edge can be found in the positive psychology of investing in SES capital. Though culture itself is slow and difficult to transform overnight, the managers and leaders can influence work climate more directly and, thereby, set in motion the forces for forces of transformation. They can learn new attitudes, new leadership styles, and new ways of interacting with employees. Re-education

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of the senior management is of ultimate importance because they set the tone for the entire company. Real change must first take place in the upper echelons of the company. In the event that the CEO refuses to change his or her ways, then a change of leadership is necessary to save the organization from its own toxicity. Work climate refers to workers’ perception of the psychosocial aspects of the organization. To a large degree, it reflects the prevailing culture of the company, but it also reflects a worker’s personal experience in a particular unit. The work climate represents both the psychological atmosphere and the physical environment at work. Generally, the work climate can be measured in two ways. Most climate surveys available in the market measure the surface structure in terms of workers’ expressed satisfaction or dissatisfaction with working conditions, compensation package, management competency. Surface measures may also include employees’ assessment of the organization as being happy-unhappy, warm-cold, and friendlyunfriendly. Sometimes, surface structure may also include employees’ attitudes towards management and the organization; these attitudes may range from likedislike to trust-distrust. Another way to measure work climate is to assess its deep structure, which is rooted in organizational core values and the underlying psychosocial dynamics. Deep structure measures primarily reflect corporate culture, while surface structure primarily reflects subjective feelings of satisfaction or dissatisfaction. The former provides an explanation for the latter. There are seven dimensions of the deep structure: (a) Controlling– Empowering, (b) Oppressive–Supportive, (c) Secretive–Open, (d ) Suspicious– Trusting, (e) Divisive–Unifying, (f ) Disrespectful–Respectful, and (g) Political– Professional. These dimensions are closely linked to various types of corporate cultures. For example, an authoritarian-hierarchical culture is likely to be perceived as controlling and oppressive, while a person-centered culture is likely to be perceived as empowering, supportive and trusting. Thus, positive cultural transformation should be evident in improvement in relevant dimensions of the deep structure.

CLIMATE SURVEY An appropriate work climate survey should be conducted to identify issues that need to be resolved in order to improve morale and productivity. According to Allen and McCormick (2001), ‘the Work Climate Survey assesses the culture’s capacity to support individuals, group and organizational growth. Work climate helps determine morale, job stresses, recruitment, turnover, organizational learning, teamwork, employee health and productivity. In addition, workplace diversity and work/life balance goals are more easily reached with healthy work climate’. The Work Climate Survey reveals the level of three important indicators of a healthy culture—sense of community, a shared vision and a positive outlook in the organization. Based on the survey results, a Work Climate Report will

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provide specific recommendations for creating a healthier and more productive cultural environment at work. In most cases, nothing is done after the climate survey, even when the survey has clearly identified areas that need to be improved. For example, in one institute, the climate survey pointed out that the low morale and negative climate could be primarily attributed to the president’s office. Many demanded that the president be removed because he had been president for almost 30 years. Surrounding himself with a group of unprincipled yes-men, he had lost touch with reality and developed a God-syndrome. He behaved and talked with absolute authority like a mafia Godfather. He abused his employees psychologically and spiritually, even without realizing it. After whitewashing and doctoring the results of the climate survey, the dictatorial president met with his hand-picked board members for six hours to plot a strategy. Instead of fixing the problem, they decided to further increase the power of the president and his office. Four decisions were made: 1. The president was reappointed for another five-year term without any consultation in order to squash any movement asking for his resignation. 2. The president was to recruit a new human resource executive director, directly reporting to him, to ensure that all individuals to be hired would pass the president’s ‘obedience test’ and ‘loyalty test’. This measure would increase the likelihood that new employees would not create problems for the president in the future. 3. The president was to add additional HR personnel to manipulate and appease employees in superficial ways, such as giving them the occasional Staff-appreciation day, and developing a human resource website to profile new staff members and spin how great things were at the organization. 4. The president was to axe departments that were known to be critical of him and to expand departments that were supportive of him, without any regard to productivity and market demands. Thus, the net result of the climate survey was to increase the president’s power, (which was the root cause of low morale) and get rid of individuals who were critical of him. These steps were taken to ensure that the president would look better in the next climate survey. This is an example of the abuse of climate survey. A more common misuse of climate survey is to identify several individuals and have them dismissed. In many cases, this may even create more problems. For example, in the above case, removing the president in and by itself would not have improved the climate, if the corporate culture remained unchanged. He hand-picked a successor, who was cloned in the president’s own image— tough, ruthless, cunning, power-hungry and very skillful in the political games of control. The president, even at the age of 65, refused to have any succession plan or any due processes in looking for his successor, that he could install his clone and continue his legacy of power and control.

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The proper use of climate surveys is to identify the toxic corporate culture responsible for the negative work climate and then start the process of cultural transformation. All band-aid approaches to improve climate will eventually prove futile if the underlying toxic culture remains the same.

CULTURE-CLIMATE TRANSFORMATION In times of change, such as the merging of companies with different corporate cultures or a change of national government, culture-climate management becomes vital. More importantly, when there are changes in macroeconomic environments, such as from a communist society to a market economy, or from state-owned company to a private enterprise, organizations not only undergo structural changes, but also cultural transformation. In such situations, cultureclimate competences are crucial, if the leaders are to adjust to drastic and turbulent cultural shifts. Kozminski (1993) has pointed out that in such situations managers need to promote cultural change in order to effect organizational change. Outstanding leaders are cultural architects and climate engineers. As culture architects, they are able to transform and shape organizational culture so that it will stay healthy in spite of turbulent social changes. As climate engineers, they are able to prevent relational problems, trouble shoot difficult areas, and enhance the overall work atmosphere. Cultural transformation automatically improves the work climate, but small steps to improve the climate will facilitate cultural transformation. Effective climate transformation builds upon the competencies in emotional intelligence, cultural intelligence, spiritual intelligence, personal growth, effective communications, and team-building. These are emerging areas of management education. One of the most critical aspects of climate management is communication, which is the essence of connection with people. By improving the positive to negative ratio in communication, it is possible to improve the work climate considerably. The positive includes all positive things one can do and say, while negative includes all negative, detrimental things one says and the unco-operative, hurtful things one does. When all members of the organization make a concerted effort to increase the positive and decrease the negative, then the work place will become more pleasant. Though waste is traditionally measured in terms of defective products and machine downtime, psychosocial domain generates wasteful activities of greater import to organizational productivity and competitive advantage. Psychosocialrelated waste is generated through: l l l l l

Unnecessary conflicts created by thoughtless remarks Draining of emotional energies in coping with abuse by bosses Loss of motivation because of rude remarks by bosses Unnecessary turf fights and power struggles Unnecessary mistakes and duplications because of refusal to share information

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Unnecessary mistakes because of refusal to consult Loss of valuable human resources because of oppressive, negative work climate High absenteeism because of low morale and a stressful work climate Wastage of creative talents and ideas because of autocratic, authoritarian leadership

Many companies fail because of an accumulation of the above wasteful activities. Ignoring the culture-climate competency attributes not only to loss in productivity and profits, but also to the human toll of suffering and attrition problems.

COMMUNITY BUILDING Community building lies at the heart of culture-climate transformation. There have been various attempts to build a healthy culture through community building. For example, Dr. Scott Peck, co-founder of Foundation for Community Encouragement, has been promoting community building based on a system of norms governing healthy group behaviour. Dr. Scott emphasizes the acceptance of paradoxes and the importance of authenticity. He wants to create ‘a culture of genuine civility as opposed to the pseudo-civility of traditional diplomacy’ (Peck, 2002). Others have also attempted to bring community building into organizational life. These include Amitai Etzioni, Peter Senge, John Gardner, and David Bohm. In most corporations, there is a widespread sense of disconnectedness between the senior management and workers and between individuals within each department because personal agenda and self-interest tend to dominate. According to David Bohm and Mark Edward (1991), in order to achieve optimal organizational functioning, there has to be a fundamental acceptance of the communitarian orientation. Community building is a foundational task in organizational transformation. It is fundamental because it is essential to create a climate of trust, openness, cooperation and harmony. There are several managerial tools in community building. One promising tool is dialogue (Bohm and Nichol, 1996). Gerard and Teurfs (2002) define dialogue as ‘a group communication process aimed at exploring the nature and power of collective thinking and how it shapes the culture of a group. When we learned that one of the dialogue’s primary purposes is to affect a transformation in collective consciousness, we recognized its potential in the area of organizational change.’ There are four building blocks in the ‘technology’ of dialogue (Gerard and Teurfs, 2002): 1. Suspension of judgment: We are prepared to hold our positions and beliefs ‘lightly’ as if they were suspended for reconsideration. We are willing to stay open to new and alternative view of reality and

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relationships, and see other people’s points of view. This is the essential first step to creating a climate of trust and safety. 2. Identification of assumptions: We are willing to peel away layers of assumptions, inferences and generalizations underlying our judgments and opinions. By identifying our assumptions, we will be able to discover our own incomplete or incoherent thoughts, and the roots of our misunderstandings and differences with others. This is a necessary step in building common ground and consensus. 3. Listening: We will go beyond active listening by developing our capacity to be fully present psychologically and open to whatever meaning that may arise from both individual and collective levels. 4. Inquiry and reflection: We are prepared to dig and explore deeper and deeper into matters that concern the group in order to reach a new level of understanding and achieve a breakthrough in solving the problem. It is quite apparent why dialogue can contribute to organizational coherence and harmony. On the other hand, command-and-control will impede the art of dialogue and engagement.

A STUDY IN

OF C ULTURE -CLIMATE T RANSFORMATION NEW YORK CITY O RGANIZATIONS

In late 2002, we interviewed several senior managers in New York city firms with a view to learning about the role of a deep-structured work climate in promoting the art of dialogue and engagement, and thus in community building. The interviews were conducted with the help of the business policy students of Fordham University, under the supervision of Vipin Gupta. All interviews were taped and transcribed for the purposes of analysis. Several exemplar corporations emerged reflecting different dimensions of deep work climate, as explained below: 1 . Controlling–Empowering: Control is a trait deeply rooted in the consciousness of most organizations. Many managements believe that the environment is constantly in a state of entropy, and control from the top is needed to forge and maintain order in the organization. They fear that loss of control would cause the employees to go in different directions, and would diffuse and disperse the resources in several different unrelated directions. Therefore, all the working of those organizations is oriented towards exercising different forms of control, including strategic control, financial control, and operating control. Our interviews indicated the J.P. Morgan Chase Model as peculiarly conducive to empowerment, as opposed to mere delegation of authority guided by an entrenched control and authoritarian mindset. We interviewed a vice president of J.P. Morgan Chase, who emphasized that the strategic orientation of the firm is to attain and grow leadership positions by differentiating its products and services across all its

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businesses and markets. The firm believes that leadership positions it to create value for the clients, investors, and employees. All of the businesses set targets to achieve leadership standing and bolster their position in the markets they chose to compete in. According to the interviewee, leadership is something that ‘takes the initiative to have a view and make something happen. We aim to ensure that everyone in the firm has the skills, experience, and confidence they need to be a leader.’ In the ongoing quest for leadership development, the firm is seeking to promote strategic talent management and mobility—having strong leadership positions allows the firm to attract the best and brightest talent and to offer them a broad portfolio of mobility opportunities for personal development and advancement. Further, the approach allows the firm to also specialize in ‘client leadership’—by helping to bring the full capabilities of the firm to clients and capture incremental growth opportunity from selling innovative, value-added products to each client. 2. Oppressive–Supportive: In many organizations, the work climate becomes quite oppressive and burdensome for the employees as well as for the suppliers and customers. Here, the employees are fearful that if anything goes wrong, they would be held accountable and fired from the job. Similarly, the suppliers are under threat of not receiving payments if the firm is unable to sell the products, and the customers are concerned if the product they buy is indeed appropriate for them. The Genovese Drugstore Model can be an effective intervention under such situations. Genovese is a major drugstore chain in New York City area. In the store, there are always employees walking the floors, helping customers find the items they need. The employees are specifically trained to exude friendly and helpful attitudes toward all customers. Genovese has a unique way of executing its strategies. For instance, at the beginning of the holiday season, the store holds a special meeting and explains where the extra inventory for the holiday will be located. Some employees are assigned to ensure that as the shelves empty, inventory is brought out or reordered. The employees never tell the customers ‘I can’t find it’ or ‘I don’t know about it’. They find a colleague or a manager who can answer the customer query, locate the product, or immediately order the product. Another aspect of the Genovese culture is to develop long lasting, reliable, and loyal relationships with its suppliers. Genovese strives to advertise new products for loyal suppliers, even if those products are not yet highly popular with the customers—in return, if the organization ever faces financial hardship, these loyal suppliers are generally more lenient with payment. 3. Secretive–Open: The organizations often seek to promote excessive competition among the employees and, in the process, hinder open communication and collaboration. They worry that the employees may not be able to survive the cutthroat competitive environment, and leave the organization any moment. Therefore, they strive to keep much of

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their corporate information secret, lest that should be leaked out to their competitors. Such hyper-competition mania hinders innovative imagination and initiative. The model of Trans World Marketing (TWM), a leading Point of Purchase (POP) Display Manufacturer, holds much promise as an alternative. TWM is known for its leadership in introducing innovative solutions to improve the POP fixtures it produces and embracing new challenges to meet the clients’ needs. Our interviewee from TWM explained that the foundation for the firm’s success lies in the assignment of each project to a designated Project Management Team. The team structure enables a culture of ownership and commitment to the entire project and involves the same members from start to finish. Each team member is an active contributor to the success or failure of a project, and has full information about the project. The products are delivered just-in-time to launch the advertising campaigns within the designated timelines nationwide. Strong relational partnerships with both clients and vendors enable TWM to be informed of any situations that develop. The result is an innovative product that communicates the firm’s commitment to producing quality point-ofpurchase displays. 4. Suspicious–Trusting: Typically, most organizations are suspicious of the motivations of anybody whose service they are dependent on—be it their suppliers or their employees. Following the resource dependency theory, they believe that it is best not to depend on any supplier or employee, and seek duplication of the skills of their key suppliers and key employees. In return, the suppliers and employees are also constantly wary of the intentions of the firm, and feel that if they cooperate with the firm in codifying their know how, then the firm may try to negotiate a higher margin for itself by threatening to shift its business or job to other entities. Based on our interviews, we identified the Home Depot Model as particularly attractive for cultivating a climate of trust and in diffusing suspicions. Home Depot is the market leader in home improvement industry in the US. We interviewed an assistant store manager of Home Depot in New York City, who emphasized a distinctively strong relationship of the firm with its suppliers. ‘Suppliers are paid before we get the merchandise in the store so they trust us and know that they are going to get paid. We have a high trust rapport. When our own customers return merchandise and the suppliers don’t want to take it back; we simply throw it out hassle free. Our suppliers in turn help; they come to our stores and stock the shelves with their products and they service their own displays. They even wear aprons now and help the customers when they can.’ A similar climate of trust is nurtured with the employees. The interviewees explained how they ‘groom more leaders than any other business’. The workers are referred to as associates, implying that they are partners in the business. Constant on-site and off-site training is offered, focused on producing the most qualified associates and managers, so that the customers are proud to

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shop at Home Depot, and the associates are proud to work at Home Depot. The climate of trust is reinforced by HomeDepot’s six core cultural values: (a) Respect, (b) Customer Service, (c) Value, (d ) Safety, (e) Diversity, and (f ) Entrepreneurial Spirit. Further, these values are driven into the employees, thereby creating a uniquely professional workplace. 5. Divisive–Unifying: Many organizations believe in a trade-off among the interests of various stakeholders of the firm. Following Marxist views, an inherent division is frequently expected and inferred between the shareholders and the workforce, between the shareholders and the managers, between the managers and the workers, and among workforce (who wants more wages), shareholders (who want more profits), and customers (who want lower prices). But successful firms adopt a different mindset. Our interviews indicated the Merrill Lynch Model as uniquely effective in cultivating the requisite positive psychology. Merrill Lynch is an internationally renowned financial services firm. We interviewed a senior vice president at Merrill Lynch, who emphasized the role of forming and preserving unified relationships in the firm’s competitive advantage. The relationships are key to a firm’s capability to respond to the different needs and expectations of different clients, and to gain new business through referrals given by existing clients. They require a positive psychology embedded in the deep culture of the firm, its network of relationships, and its very identity ‘Our corporate culture at Merrill Lynch is the sum total of what we believe and think, how we work together as colleagues and how we conduct ourselves as individuals. It is the way we treat our clients, our shareholders, our fellow employees, our neighbors and the public in general. It is who we are,’ he said. Within the firm, there exists an environment that emphasizes the importance of teamwork. Each employee is trained to focus on the needs of the clients, and to do so, it is important to utilize the knowledge and experience of other financial advisors. Thus, a climate of sharing is cultivated within a culture that is otherwise highly individualistic and materialistic. Such an attitude also cultivates a climate of trust, and enables their clients to communicate freely about their needs, so that the firm is able to determine the right opportunities and resources to meet those needs. 6. Disrespectful–Respectful: Frequently, organizations strive to adopt world class practices, such as respect for the dignity of employees. But most such initiatives remain only on surface, while at a deep rooted level the suggestions and potential of the employees remain underdeveloped and ignored. A 75-year old accounting firm, Anchin, Block, & Anchin’s Model appears to be quite effective in creating a climate of professional respect. Our interviewee observed that the firm’s climate of respect sets the ‘integrity, work ethic, and goals of the company and looks for opportunities to develop and grow.’ It encourages employees to be very proactive, to be creative, and to take the initiative if they

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come up with any new ideas, business opportunities, or ways to enhance the processes in place. This climate helps the company to enhance and sustain its competitive advantage. In this environment, employees are inspired to work to their maximum creative potential and to come up with better ways to serve the client. By serving its customers in a superior way, the firm is able to communicate its climate to the outside community, which has contributed greatly to the firm’s reputation and allowed it to survive and thrive despite rapid consolidation of rest of the accounting industry in the city and the nation. 7. Political–Professional: Politics is deemed as a necessary, and even unavoidable, evil in most organizations. Different departments of the organizations seek to promote their own interests, and seek to influence corporate decision-making towards allocation of more resources to their pet projects. Instead of using arbitrary notions and assumptions, it is important to develop a sense of reason and professional stewardship for a constructive work climate. The UBS Paine Weber Model stood out as an exemplar in our interviews. UBS Paine Webber is the world’s largest credit bank. Our interviewee from the firm observed that the company makes a point to know everything about the individual customers. ‘We want to know about our client’s parents, children, spouse, retirement goals, mortgage, schools, cars, other expenses and other investments. We want to know who their attorney is and their accountant so we can develop strategies that are best for them. We are like a doctor working with a patient history. Our competitors don’t do this to this extent, and that’s like a doctor taking a look at you, and prescribing something, without running any tests.’ said the interviewee. The firm uses a sophisticated computer program to professionally process all the information gathered, and develop intelligent decisions based on that. In summary, the challenge for the firms lies in transforming the climate of control and oppression, secrecy and suspicion, division and disrespect, and politics into one of healthy empowerment, support, openness, unified consciousness, respect and professionalism. A culture of innovative communication and service is an important foundation for such a transformation.

CONCLUSIONS Traditionally, the culture-climate management was founded on the principle of management by values (Blanchard, O’Connor and Ballard, 1997). The focus was on creating a positive and healthy culture by implementing core beliefs and values throughout the organization. These core beliefs and values were also expected to hold the firm in good shape with respect to its larger social system, involving many stakeholders, such as customers, suppliers, and communities. Specifically, it was believed that the core values help sustain the relationships in order to keep the system healthy.

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However, culture-climate management in a transformative organization goes beyond commitment to shared values. The real challenge for managers and leaders is to create a healthy culture and a positive work climate on a daily basis even in areas that are not regulated by shared core values. Culture-climate competency demands a fundamental shift in thinking and a critical self-assessment. After all, there is little benefit of enforcing shared values on people who are psychological healthy and positive in their own right. In these situations, an open communication and exchange of values and ideas through an open, ongoing, dialogue can help avoid degeneration of climate, and can cultivate foundations for a strong and constructive culture. At a broader level, we need to reclaim the vibrant and dynamic ethos of the community and respond to the physical, emotional and spiritual potential of employees and other stakeholders. That is why we emphasize the SES capital and culture-climate competencies for transformative organization. We propose that we need to go further than following the Gallup path (Coffman et al., 2002), which emphasizes competent management of emotional economy and the skills needed for achieving bonding between employees and customers. We need to be equally concerned with how to create bonding between management and employees, as well as between workers. The positive psychology of how to create positive cultures and climates requires not only emotional intelligence, but also cultural and spiritual intelligence. We need to develop cultural intelligence with respect to both corporate and national cultures; this encompasses cultural sensitivity, understanding, knowledge and skills. A lack of cultural intelligence is largely responsible for the failure of many mergers between companies with different corporate and national cultures; it may also account for the failure of many international partnerships. Cultural intelligence demands a great of attention from researchers, educators and mangers. Leong and Wong (2003) have provided a contingency model of optimal function. They point out that optimal functioning depends on the cultural context. This is just one of the possible directions for research on cultural intelligence. Spiritual intelligence addresses such issues as meaning, purpose, and spiritual hunger. Wong (2002) has provided a compelling case that healthy organizations need to recognize that workers are also spiritual beings, and spirituality can play an important role in fostering work satisfaction and productivity. The new frontier of management lies in the positive psychology of optimal functioning because the most valuable resources as the human capital and the SES capital. Competencies in managing SES capital will be the key to the survival and success of companies in an increasing competitive global market.

References Allen, J.R. & R. McCormick (2001). Work Climate Survey: Examining the Social fabric of organizational life. http://www.healthyculture.com/Rsheets/ Climatesurvey.asp

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Blanchard, K., M. O’Connor & J. Ballard (1997). Managing by Values, San Francisco, CA: Berett-Koehler Publications. Bohm, D. & M. Edwards (1991). Changing Consciousness: Exploring the Hidden Source of the Social, Political and Environmental Crisis Facing Our World, San Francisco, CA: Harper. Bohm, D. & L. Nichol (ed.) (1996). On Dialogue. New York: Routledge. Cameron, K.S. & R.E. Quinn (1998). Diagnosing and Changing Organizational Culture: Base on the Competing Values Framework, Baltimore, MD: AddisonWesley Publications. Collins, J.C. & J.I. Porras (1994). Built to Last, New York: HarperCollins. Coffman, C., M. Gonzalez & J.K. Clifton (2002). Following this Path: How the World’s Greatest Organizations Drive Growth by Unleashing Human Potential, New York: Warner Books. Eichenwald, K. (2002). Enron Hid Big Losses in Culture of Greed. http:// gomemphis.com/mca/business/article/0,1426,MCA_440_969454,00.html Gerard, G. & L. Teurfs (2002). Dialogue and Organizational Transformation. http://vision-nest.com/cbw/Dialogue.html. Kozminski, A.K. (1993). Catching Up? Organizational and Management Change in the Ex-Socialist Block, Albany, N.Y.: State University of New York Press. Leong, F.T.L. & P.T.P. Wong (2003). ‘Optimal functioning from cross-cultural perspectives’. In Bruce Walsh (ed.), Counseling Psychology and Optimal Human Functioning, Mahwah, NJ: Lawrence Erlbaum Associates. Liedtka, J. (1996). ‘Feminist morality and competitive reality: A role for an ethic of care?’. In Business Ethics Quarters, 6: 179–200. (1999). ‘Linking competitive advantage with communities of practice’. In Journal of Management Inquiry, 8, 5–16. Morse, J. & A. Bower (2002–2003). ‘The party crasher’. In Time. pp. 43–46. O’Reilly, C.A. & J. Pfeffer (2000). Hidden Value. Boston, MA: Harvard Business School Press. Peck, M.S. (2002). A word from M. Scott Peck, M.D. http://www.fcecommunity.org/peck.shtml. Reh, F.J. (2002). Lessons learned from Enron: Say ‘No’ to ‘Yes-men’. http:// management.about.com/library/blanks/bl_enron.htm Wong, P.T.P. (2002) ‘Creating a positive, meaningful work place: New challenges in management and leadership’. In B. Pattanayak & V. Gupta (eds.), Creating Performing Organizations. Thousand Oaks, CA: Sage Publications, pp. 74–103.

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The Latin Cultures Context

20

Sense-making in Change Interventions

Lessons from Argentina Carlos Altschul

When you are invited to participate, you ask and they generally answer. As soon as you listen things become clear. You become a witness, and at times, you can turn information into knowledge, sometimes even wisdom. If they think you’re OK, they’ll ask you in again. So stay in your place so they’ll know where to find you. And be careful about the place you choose to fill. Which will be marginal in their culture and marginal in yours. It’s a place you build as you look at them. Letting them give you the data. The place you’ll occupy is already in their minds. If your approach is adequate they’ll keep the place open. They must know you are always about to leave and that they can leave whenever they choose to. That it’s you who are sitting down and they who stand. (Or can do so). Your power lies in giving them that place. And in forgetting all you learned. —Carlos Altschul Changes take place daily in organizations and the desire to institute transformation is pressing. Within this context, significant contradictions emerge as management experts’ suggestions (Hesselbein, Goldsmith and Beckhard, 1987; Drucker, 1988) are compared with programs implemented after the installation of the new economy in Argentina (López, 2000; Melamed, 2002). The virtues of excellent programs as, for example, Added Value Chains, Balanced Scorecard, Benchmarking, Business Process Reengineering, Competency Based Performance Management, Customer Relationship Management, Just in Time, Kaizen, Knowledge Management, Non-Manipulative Sales, Organizational Learning, Project Management, Self-Managed Teams, Toyota Production Systems, Simultaneous Engineering, Total Quality, value-based management, and others, do not measure up to the expectations and investments made.

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In Latin America, change interventions benefit from practices developed elsewhere. Still, to successfully implement change processes, leaders 1  bear in mind the predominant cultural constellations and the consequent adaptive management practices: the data collected may be similar, the information processes may resemble one another, but the wisdom to be derived requires another framework. Practitioners working on the margins enjoy the privilege of heterodoxy (Altschul, 1995; Altschul et al., 2002b; Ogliastri et al., 1998). Simultaneously, as a consequence of global impact, societal crisis, professional multidiscipline and personal growth, leaders adopt reflective, partnership building approaches, and managers develop as skilled facilitators (Kanter, 1989). Thus, change interventions exhibit the emergence of intertwined strands of leaders, managers and consultants, counterparts who leverage competencies, team up with other third parties and initiate, energize and install substantive changes within a transcending mode. These are significant inroads, i.e., forcible or serious encroachments, forays in organizations that traditionally resist such advances (Altschul, 2002; Altschul et al., 2002b; Kosacoff et al., 2001). On the basis of five change interventions in companies—developed in overseas divisions under the auspices of corporate umbrella programs where expatriate executives made substantial contributions and the author served as consultant—and one in a community setting in Argentina2,  this chapter identifies the key actoral levers, and the operational and support decisions that produce sense making as illustrated in Figure 20.1. It also covers clinical space and approach considerations in the development of the new roles leaders play in associative relationships, of the role managers play as active facilitators, and of the role consultants play as questioning actors. It follows the gentle, good-willed reproof that holds that ‘processes are best improved by understanding and eliminating the influences that inhibit their growth’ (Lewin, 1946).

Argentina as a Research Context Change interventions depend upon actoral, operational and support levers. In this chapter, we draw upon the insights from the experiences of the organizations in Argentina3 which provides a unique and interesting context for researching change interventions in organizations.

1 2 3

The word leader is used here not to identify the top executive of a firm, but those individuals who head change interventions. For a similar approach, see Senge (2000). The firms we will discuss participated in our study on condition of anonymity. All are recognized as outstanding performers by both industry experts and competitors. Readers in India may recall that Haire, Ghiselli and Porter (1966) pointed to the response similarities of Indian, Argentine and Chilean colleagues. They were interpreted to characterize those of middle managers in developing countries. GLOBE responses show the maintenance of this required pattern in leadership behavior, with the exception awarded to the role of autonomy, which was more highly valued by Argentine middle managers, than by Indian middle managers.

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Fig. 20.1: Actoral Levers Socially, Argentina continues to integrate large contingents of immigrants and, after years of dictatorial rule, is in the throes of democratic institution building. On the basis of public employment and of consequent social mobility, it always had a significant middle class. Its health, education and industry standards were superior to those of other countries in the region. This implies that employees of all levels have a high level of competence and professionalism. In complex organizations, Argentines exhibit cosmopolitan behavior. Economically and politically, however, it is a centralized society with an individualistic, authoritarian tradition, currently undergoing a major crisis of guidance (Altschul et al., 2002a). Employees accept that ‘most changes are for the worse’, they are habituated to ill treatment, ‘to an endless descending spiral of frustrations, the finitude of a positive interruption is unheard of and valued’. Some managers establish firm standards and lead with consideration, constituting the buen jefe, icon, Spanish for good boss, which describes leaders who inspire shared goals and cooperation, whose decisions are highly respected, and who were said to be an exception in GLOBE (Altschul et al., 2002a). In opposition to this tradition, the leaders of the change interventions need to be singular in that they must demonstrate several of the attributes required for unusual leadership; they should be administratively

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competent, modest, committed, autonomous, visionary, team oriented and humanist. Thus, bearing in mind the strictures of Argentine economic political society and the firmly established values of private society, leaders and managers need to act with operational common sense and respect for people, in order to bring about effective change interventions. They must do this by clearly conveying the nature of the situation, the chosen path, how the situation affects each person, and the initiatives that would assure success (Altschul, 1995). GLOBE testimonials mention that competent managers may be deemed exceptional, but highly visible leaders are autocratic, malevolent, self-centered, non-participative, and would not be credible in work organizations, as they would be negatively affected by current failures and unorthodox practices enacted both in the public and private spheres4 . Therefore, expatriate leaders and managers—or returnees with experience abroad—can play key roles in the development of the change interventions.

SCOPE OF CHANGE INTERVENTIONS Organizations improve to provide better services, to become more efficient, to conquer new markets, and to make more money. As executive decisions respond to external factors, managers establish new goals and guidelines, and other adjustments follow to adapt to, and in anticipation of, aggressive competition, legislation and social reactions. But change? Mintzberg (1989) points out that most large, mature organizations are run like ‘machine bureaucracies’ which result in the death of creativity and innovativeness. A technocratic business model may prevail in most organizations wherein hard economic, financial and technical factors are taken into consideration, and soft adaptations follow. A complex probabilistic model of acceptance and rejection is played out where, due to internal and external pressures, a need is felt to introduce change but does not lead to a shared, likely solution, its acceptance and institutionalization, but follows an oblique path where performance indicators are subject to debate, desirable outcomes produce turf wars, and a long period of rejection, discussion and adjustments follows before a compromise is politically attained. This is what happens most often: action evolves as a sluggish, filtering, trickling down operation that managers dislike being faced with. To describe problem-solving and decision-making practices in organizations, Pettigrew (1985) chooses the term contextualized research, which suggests it is a muddled through approach influenced by strong political process factors. Quinn (1980) uses the term incrementalism, which played a minor role at the time, that of indicating to management that the leadership intended to introduce a different business model, and gave way to the creation of multi-disciplinary core teams, each one entrusted with a strategic initiative. No matter how clear their goals—‘you are invited to contribute in all matters related to the issues you’ve been assigned,

4

Reference is made to the breakdown of the Argentine economy.

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and will be assisted by teams of directors acting as sponsors’—several meetings were spent discussing the actual meaning of the assignment, which raised the suspicion that the task would eventually be declared illegitimate by the nonaction of the leadership that had entrusted them with it. Once the hurdles were overcome by the reaffirmation of the purposes of the program, the program gave way to divisional activities based on the reformulation of strategic and operational plans, goal setting and performance administration, as well as group conflict-solving interventions. Coordination of these three levels of intervention—company, division and group—should keep in mind the existence of three spaces: that of organizational culture, as participants perceive it in their daily lives and have come to accept as natural; that of experimental spaces created by each activity within the intervention, especially in its more reflexive instances, instituted by the presence of the diverse participants who attend as individuals invited to speak their minds; and by the expectations that each one may have for their organization when they let their imaginations flow freely. Change intervention will increase its breadth as it gradually extends to others and creates the dynamics between those three spaces, by bearing in mind both the realities, the issues and the dreams, that will have to be worked on before a transition is made.

S UMMARY Organization members look at—and watch out for—events, while actoral, operational and support levers flow and influence one another systemically: changes in one affect the others. However, this interaction can only be recognized after the fact insofar as the management team installs spaces for reflection.

W HY

IS

M ENTORING CRITICAL?

Change interventions imprint new meaning in participant experiences and organizational memories. Activities have a foundational impact and anchor future ventures on the basis of the symbolic overtones present in the nascent culture. Participants often name intervention processes on the basis of the name of the venue, the facilitator, or other secondary factors. Pablo Merino, a participating manager, said, ‘Programs are successful when they no longer carry a name’. How does information acquire new meaning? In one company, a factory was behind schedule. The project faced major difficulties: it required learning and becoming acculturated to a totally new technology; personnel came from five different countries and diverse occupations; the CEO as well as two key executives were new to the operation. After top management gained a working knowledge of the project, a strategic planning activity was announced with 30 key managers. Most participants had never attended such an activity and were doubtful about their own roles and its relevance. They perceived that ambitious goals had been announced (time schedules would be maintained and improved upon). Furthermore, they were surprised by the fact that the CEO regularly included his direct and indirect reports in both day-to-day and medium-term

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decision making, which surprised most employees, whose experience was in family organizations with paternalistic practices. The three days devoted to Strategic Planning presented and discussed information that managers had been ignorant of. Moreover, hierarchical considerations were left aside. The CEO’s management style and workshop design produced an agreement on key results, performance indicators, negotiations on mutual contributions, and relief because the tight time schedules had been kept secret, and had caused concern. Contentious issues, which had been kept hidden, were brought to light and several assigned to executive teams. In his closing comments, the CEO announced that such meetings would be held every two months to cover operational tasks and consensus building and include all the participants plus any others that joined the project at these levels. He suggested a name be given to the activity. This produced silence as most assumed he had a name thought out, so suggestions were slow in coming. When they did come, nobody backed them. A few suggested high-sounding names but were not supported. A few said it might be wise to discuss what the three days had meant to the company and other names were suggested. They concluded that they had devoted time to thinking before doing, so they called the activity ‘TIME OUT!, ’ in the basketball sense. ‘TIME OUT!’ did not come to mean the bimonthly follow-up activity but also the term used whenever a conflict was being hidden and the requisite climate had to be recalled from that first meeting. When facing a difficulty, a meeting was called and its spirit was invoked. It became the password whenever members of the work teams felt they were overpowered by the problem at hand. Strangely enough, the word was used even by people who had not attended those meetings but knew exactly what they referred to: something new. Facilitators create space and time instances for groups/communities to agree on the way words are used making certain that their connotations are discussed and agreed upon. Communal sense makes meaning grow. These develop into conversational processes that do not require formal meetings once they have been launched.

E XPERIMENTAL SPACE Lewin (1946) suggests that the facilitator’s role—herewith involving leaders, managers, internal and external consultants— develops within a field of stresses that embrace the three major concerns of the Social Sciences: to problem-solve, to teach and to research. Pertinence lies and is comprised within the virtual triangle constituted by these three assignments. Within this experimental field, facilitators enact the dynamics of Action Research. The crowns of the triangle, (its extremes), show potential occupancy, positions that can be taken on by the facilitator as he/she cooperates. It is self-evident that, strained between the three natural vertices of his task, he/she may alternatively occupy each of them at diverse stages, while they freely reconnoiter the open-walled space of the triangle. For example, in the extreme positions they shall alternatively act as a teacher, researcher and doer. As a teacher, they may suggest a method to frame a problem and prescribe ways drawn from accepted practice, i.e., from accumulated

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experience and technologies, as professionals who dominate a field and may channel intelligence; as a researcher, they will help others ponder on expeditious concerns from a wider, more distant perspective and will reflect solidarity, legitimizing the freedom of members of the client organization to open up to unknown perspectives; and, finally, as a problem solver when, to the extent that he has been invited to participate in developing an action plan, they will search for efficiency, restricting their view to specific case details to set aside disquiet. These three extreme positions help define a virtual triangle, a site/seat of maximum joint liability, limited tenure, no appurtenance, lacking organizational responsibility from which an exploratory process is oriented to practice. Each of the three apexes identify places occupied by diverse referents, and the intent to balance the three components responds to an idealization of a role that cannot be adequately covered and yet remains a challenge. The task involved is illustrated in Figure 20.2.

Fig. 20.2: Research Showing How to Extend the Frontiers of Search By knowing about discordancies arising from different demands, the facilitators may be able to create an experimental space for the client, in the face of such contradictory exigencies.5 This space creation (as illustrated in the ‘Time out!’ experience) includes stages in the gain-entry process.

 5

Similarly one can talk of tensions in three levels of involvement in the transformation intervention. Leaders, who as bridge-builders will be curious and will want to install something different, are (Contd.)

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G AIN ENTRY Client/consultant relationships are established as long as internal groups ascertain that the facilitators express value judgments that are reasonably consistent with the ideology tolerated for their role, that they show problem-solving abilities and can be included in the conversations that develop naturally in the client organization. With these limitations, the relationship evolves following foreseeable stages. These are acknowledged in interviews and long-term projects and refer to: l l l l

facilitators’ gain-entry period, reactions to their first interventions, awareness of the implications of their participation, acceptance of the fact that these implications require reframing the project, decision-making to institute such re-conceptualizations.

The following sequence may help explain these developments although they do not follow in a linear or a discriminated fashion, because in each stage participants advance at their own rhythm. 1. Acceptance/Rejection: The first stage is characterized by opposing feelings: disquiet provoked by the desire to evoke a questioning attitude and the attending resistances. Facilitators maximize their listening skills, tolerance and neutrality as they watch for the dramatic content of the discourse. Participants will open and close doors as they talk past one another. The specific nature of these internal filters in each organization helps facilitators construct preliminary working hypotheses on change intervention prognoses. 2. Reaction in the face of consultant’s first interventions— Positive/Negative Assessment: The participants’ reactions hinge on the facilitators’ interventions. If the consultants overcome this stage, a new issue will have been addressed and a new approach will have been made to the unique process that goes from datacollection to inference-making in that culture. The client—which may have been originally invested in the figure of an executive or a firm—becomes not a person, nor a position, but a community of practice that will henceforth serve as a referent and will be renewed as dynamic steps build up, and which will evolve as a new environment is recreated in daily practice even when the participants change as the discussion on topics require. 3. Awareness after the first mobilizations: Approach/partial isolation result from earlier stages. A relationship is built, in each participant in their own still executives and will want to fulfill their purposes, will have pragmatic time constraints, and will concentrate on opportunities lost. Managers, who as facilitators will want to develop new avenues of thought as a continuous enterprise, as middle managers will need to respond to their sectoral responsibilities and limit their commitment. Consultants who as practitioners will want to derive learning from the intervention, as external associates will want their roles and contributions to be validated, and act effectively here and now.

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manner, yet coming to light as groups/communities in charge of different assignments. The facilitators allow each one to consider his/her own issues under the light of project priorities and not keep them concealed. This influences participants to add or to retrieve information they were ready to provide, while others retract and move farther away. Participants elaborate or reaffirm emerging divisions that were latent earlier. The group will usually show these internal divisions in moves toward approach or partial isolation. 4. Acceptance of reconceptualization–Gradual assimilation/Expulsion: This stage is framed between firm expulsion or gradual assimilation of what has been produced until that time. In order to make inroads, this new conflict must be confronted: some may firmly back the products of their analyses and, although they may protect the original requirement, they will accept, with due reservations, what has transpired so far. Numerous alternatives will appear as new roles are played out: these will be of interest because they will run the gamut of potential learning in the existing culture. By this stage, re-conceptualization deriving from prior work will reaffirm or question existing habits, systems and criteria, and may energize innovation and help propel strategic initiatives. It is, however, likely that part of the group/community will guard against such advances and attempt to annul and discard novel options and alternatives. If so, this constitutes an opportunity to assay the surprises produced by the recent sense-making processes and to examine learning progress. 5. Decisions on implementation—Safeguards for action: Each project and each meeting includes these stages. As a meeting comes to an end, a circle is closed and inclusive practices are bolstered. With each closing, there is an implicit need to introduce changes in daily operations because, when the process refers to current difficulties and clarifies the implicit demand, specific improvements immediately become apparent. 6. Power distribution as the process evolves: Change intervention flattens the organization and destroys customary power bases. Authority is redistributed as individuals and teams reposition themselves dynamically around the key issues. These resulting processes send messages as to the degree to which the exercise of power in the predominant cultural constellation is consistent with a proposed business model. These processes develop singularly. If the intervention, and the concomitant relationships prosper, participants welcome and become habituated to the key actors’ methods. They may adopt some of their practices and they may participate in longer and more complex assignments with greater commitment. Simultaneously, they may perceive that people in other areas where they have not been active express resentment or criticism, starting specific projects themselves or indicating that they respect the methods in their own way. Habituated to status quo, characterized by the need to respond with consensually validated routines to perceived threats, they may not accept the fact that innovation arises from a different reading of well-known situations.

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Participants react because their authority system is upheld by an event, not a process, model. A key factor may be the need for control, with the continuation of the status quo. At that level, it can be understood as value confrontation. Since change implies changing the essence and introducing fundamental alterations, it violates accepted practice and insures that each step forward will require framework re-design. Contact with diverse frameworks evokes fear. As participants know they must seek help, and key actors seem to be protected, conflict, contamination and commitment are to be borne in mind. They are the stages of an on-going negotiation.

SYNTHESIS AND CONCLUSIONS Sense-making required for the initiation, maintenance and on-going implementation of change interventions is explained by: (a) decisions involving actors as reflexive practitioners—leaders as association builders, awakening managers and impertinent consultants; (b) operational decisions—the use of crises to institute new values, cultural re-accommodation, and gradual institutionalization; and (c) support decisions—umbrella, divisional, cross-divisional and group projects. Successful interventions are short-lived, no matter if they last several years. However, it simultaneously conveys that the results of the experiments are valuable and legitimate, but that the super-ordinate paradigms do not tolerate such innovations on an extended or long-term scale: the fact that the abovementioned cases were developed in a traditional society may be a witness to the obsolescence of current management criteria.

References Altschul, C. (1995). Reflexiones sobre el liderazgo. Buenos Aires: Cuadernos de ADPA. (2002). Estar de paso: Roles y Responsabilidades del Consultor. Buenos Aires: Granica. Altschul, C., M. Holzer, M. López, M.M. Preziosa & F. Ruffolo (2002a). A Crisis of Guidance: Argentine Middle Managers’ Reactive Responses to Management Icons. GLOBE Project. Philadelphia, PA: The University of Pennsylvania Press. Altschul, C. & others (2002b). Intervenciones Exitosas de Cambio. Buenos Aires: Unpublished manuscript. Argyris, C. (l970). Intervention Theory: Theory and Practice. Reading, MA: Addison-Wesley. Cohen, M.D., J.G. March & J.P. Olsen (1972). ‘A garbage can model of organizational choice’. Administrative Science Quarterly, 17: 1–25.

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Davenport, T.H. & L. Prusak (1998). Working Knowledge: How Organizations Manage what They Know, Boston: Harvard Business School Press. Drucker, P. (1988). ‘The coming of the new organization’. Harvard Business Review. 66(1): 45–53. Haire, M., E.E. Ghiselli & L.W. Porter (1966). Managerial Thinking: An International Study, New York: Wiley. Hesselbein, F., M. Goldsmith & R. Beckhard (eds.) (1997). The Organization of the Future. San Francisco: Jossey Bass. Kosacoff, B., J. Forteza, M.I. Barbero & E.A. Stengel (2001). Globalizar desde Latinoamérica: El caso Arcor. Buenos Aires: McGrawHill Interamericana. Lesser, E.L., M.A. Fontaine & J.A. Slusher (2000). Knowledge and Communities. Boston: Butterworth Heinemann. Lewin, K. (1946). ‘Action research and minority problems’. Journal of Social Issues, 2, 4, 34: 46. López, M. (2000). Percepciones, Valores y Significados en el Management de Empresas de Argentina de fin de Siglo. Tesis de Doctorado, Facultad de Psicología, Universidad de Buenos Aires. Martin, M. (1992). Cultures in Organizations. New York: Oxford University Press. Mintzberg, H. (1989). Mintzberg on Management. New York: Free Press. Moss Kanter, R. (1989). ‘The new managerial work’. Harvard Business Review. 89(6): 85–92. Ogliastri, E., C. McMillen, C. Altschul, M.E. Arias, C. de Bustamante, C. Dávila, P. Dorfman, M. Ferreira de la Coletta, C. Fimmen & S. Martínez (1999). Cultura y liderazgo organizacional en América Latina: El estudio GLOBE. Revista Latinoamericana de Administración, Academia, 22. Bogotá: CLADEA Uniandes, 29: 58. Pettigrew, A. (1979). ‘On studying organizational cultures’. Administrative Science Quarterly, 24, 570: 580. (1985). ‘Contextualist research: A natural way to link theory and practice’ in E. Lawler (ed.), Doing research that is useful in theory and practice. San Francisco: Jossey Bass, pp. 222–249. Quinn, J.B. (1980). Strategies for Change: Logical Incrementalism, Homewood Ill: Irwin. Schein, E.H. (1985). Organizational Culture and Leadership. San Francisco: Jossey Bass. Schon, D. (1985). The Reflective Practitioner: How Professionals Think in Action, Boston: Basic Books. Seely, B.J. & P. Duguid (2000). The Social Life of Information. Boston: Harvard Business School Press. Senge, P. (2000). ‘Reflection on “A Leader’s New Work: Building Learning Organizations”’ In D. Morey, M. Maybury & B. Thuraisingham (2000). Knowledge Management: Classic and Contemporary Works. Cambridge, MA: The MIT Press.

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Stamps, D. (1997). Communities of practice: Learning is social. Training is irrelevant? Training, Minneapolis MN: Bill Communications, Inc. Suárez, F. (1998). Crisis en las organizaciones, Enoicos, Revista de la Facultad de Ciencias Económicas, Universidad de Buenos Aires. Weick, K. (1979). The Social Psychology of Organizing, New York: Random House. Wenger. E. (1998). Communities of Practice. Boston: Harvard Business School Press. Zand, D. (1974). ‘Collateral organization: A new change strategy’. Journal of Applied Behavioral Science, 10(1) 63: 89.

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Cultural Symbols as Change Agents

International Joint Ventures in Mexico Anabella Davila

l

Edmundo Garcia

In this chapter, we study the cultural symbols using the case of an international joint venture based in Mexico—a joint venture whose ownership is 70 per cent Mexican and 30 per cent American. Most of the international studies conducted on Mexican work culture are based on Hofstede’s (1980) dimensions of cultures— uncertainty avoidance, masculinity-femininity, individualism-collectivism, and power distance. Nonetheless, Weisinger and Salipante (2000) criticized the adoption of Hofstede’s framework arguing that it provides a partial approach to the study of labor cultures, given the few dimensions included in the framework. These authors concluded that such a framework results in conceptions of cultures as unitary, established and historical. Studies on work culture are also criticized in terms of their levels of analyses. D’Iribarne (2001) criticized studies of greatscale comparisons that pretended to characterize cultures by the values obtained in any dimension. In addition, most studies fail to recognize the posture under which the study of work culture is undertaken in organizations (Alvesson, 1993; Davila and Martinez, 1999; Smircich, 1983). Berlin (1996) proposed that the study of organizational culture in the Latin American business context is useful to understand the local management practices that impede the fulfillment of the values that foreign companies espouse. The study of organizational culture provides a broader understanding of diverse organizational phenomena, which comparative studies apparently do not achieve due to their level of analysis. Sargent and Matthews (1998) recommended in-depth case studies under the anthropological perspective to investigate specific manifestations of the Mexican management culture in international contexts—joint ventures, multinational subsidiaries or maquiladoras—that is, to develop detailed descriptions of organizational phenomena and the contexts in which they occur (Boyacigiller and Adler, 1991). In order to understand the role of strategic alliances for the Mexican organizations in an international context we need to advance in this direction.

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Although there are considerable advances in the knowledge of the Mexican labor culture, most of the research is based on what Robles (1998) defined as a series of dominant stereotypes from which Mexican work culture was interpreted during the first half of the 20th century. In this sense, there could be biases in trying to understand today’s transformations within the Mexican labor culture. Cultural studies analyzed by De la Cerda and Núñez (1993), Robles (1998), and other international researchers (Knotts and Tomlin, 1994; Kras, 1990; Lawrence and Lewis, 1993) portrayed the Mexican manager and worker as lacking the modern industrial processes or being considerably opposed to them. Given this, there appears to be a need to take a different theoretical position in order to learn about Mexican management practices in a global context. In this research, we use the symbolic perspective of cultural theory in an attempt to discover how Mexican management culture in a joint venture is constructed and interpreted. The study of central symbols is particularly useful in organizational contexts in which cultural identity is problematic (Lindsley, 1999)—as is the case in joint ventures. In this case study, we analyze the central symbols in an organization to determine whether there are new constructs that define the Mexican management culture in an international context—a joint venture. The research question is: What are the meanings derived from the central symbols that provide cultural norms on which the operation of the joint venture is based? We begin our investigation with a look at the cultural symbols and their influence on the interpretation of the organizational culture. We study the most common culturalbased management practices found in the administration of Mexican companies and, through the case study, we discuss the symbolic forms and meanings that define the transformed culture in this joint venture.

Symbolism and Organizational Culture The symbolism perspective (Dandridge, Mitroff and Joyce, 1980) emerges from the social sciences interpretative paradigm and its relation to organization theory (Burrell and Morgan, 1979). Schultz (1994) says such a perspective provides an answer to the question: What does the organization mean for its members? The central assumption of this perspective is that members of the organization create the meaning of organizational reality and they define it in order to react to it. The objective is to understand the symbols and meanings while the members of the organization create them. Organizations stay alive because their members share a culture instead of formal objectives and policies. Beliefs are transmitted through rituals, ceremonies, histories, or myths—and not by rules, leadership, authority or regulations. Therefore, within the symbolic perspective, the definition of organizational culture is a socially constructed pattern of symbols and meanings. Cultural Symbolism, unlike other perspectives—rationalism or functionalism—perceives organizations as human systems that are expressed through patterns of symbolic actions. Cultural Symbolism assumes that human beings define and create reality through actions. Human actions do not happen because

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of a mechanical relation of cause-effect or by a necessity of organizational survival. Instead, actions happen as a result of the social construction of what they mean. Social constructions are meanings collectively created in each human interaction (Schultz, 1994). Therefore, the researcher analyzes an organization with the intention of identifying the pattern of meanings through several symbols. Schultz (1994) recommended that the process of interpreting the organizational culture begins by distinguishing between symbols—physical, behavioral, and verbal—and more general symbolic expressions constituted by the interpretative patterns between symbols. Therefore, we need to first identify and describe symbols, and later interpret their meanings. An object or an action becomes a symbol when organizational members give it a meaning beyond its nature (Hatch, 1993). Some meanings are consciously created in order to obtain a deliberate effect; others could be subtly generated and reveal a great deal about organizational life. Moreover, different meanings could be associated with the same phenomenon, and different phenomena could have the same meaning. By this, Schultz (1994) recognized the multiplicity of organizational reality and recommended that the study should be concentrated on a few significant symbols. In contexts where organizational reality is a compound of multiple identities—as in a joint venture—social creation of meaning is altered and identification of symbols becomes problematic. Joint ventures are commonly defined as organizations constituted by the unification of unrelated capital investors. As a matter of strategy, joint ventures are recommended to obtain access to new markets or state-of-the-art technology (Contractor and Lorange, 1986). Generally, investors belong to societies of different development levels and, because of this, their management styles are different. Literature on international joint ventures stresses that these organizations represent high risks due to the elevated index of failures in the short term. Failure or instability in a joint venture is caused mainly by cultural differences that emerge during the organization’s management. Few studies recognize that joint ventures are by nature problematic given the multiplicity of their cultural identity (Meschi and Roger, 1994). We next discuss the methodology used to assess cultural symbols.

METHODOLOGY OF THE STUDY The organization selected for the study was chosen with great deliberation. First, it had already surpassed the six years that the literature assumes is turbulent for an international joint venture; having initiated operations in 1980. Second, the Mexican partner in this joint venture has all the characteristics of a large Mexican organization (Castañeda, 1998). It is a subsidiary of a diversified business group governed and operated by descendants of the founding family. Finally, the general director of the joint venture (who is a co-author of this chapter) committed himself to the objective of the research and allowed the participation of the lead author as an observer. The main method employed for data gathering and analysis was participant observation as described by Spradley (1980). We registered observations from

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three different points of the organization: the human resources building, the administrative building, and the engineering area inside the manufacturing plant. We started with descriptive observations and obtained a general perspective of the social scene; later we continued with focused observations in order to discover the instances of greater relevance for the members; finally, we made selective observations, focusing only on social scenes that contained collective interpretations through actions, conversations or objects. The observation was conducted during a four-month period. The data collection was based on two methodological concepts: theoretical sampling and theoretical saturation (Glaser and Strauss, 1967). After periods of data gathering and analysis, we specifically used the theoretical sampling process that guided decisions on subsequent data collection and visits to the field. The process of data collection concluded when theoretical saturation occurred, that is to say, when no additional data provided new information with respect to the investigation. Grounded theory is the discovery of the theory from data systematically obtained and analyzed in a social investigation (Glaser and Strauss, 1967). It allows the construction of concepts that emerge from the context in which they have originated. Thus, we discovered theory as it emerged. From the analysis of the observations, we identified key informants and we sought their permission to follow them in their daily routine. Thus, we obtained the forms in which they interpreted and reacted to their world. We had access to non-confidential archival information and we used it as a confirmation for categories found during the observation process. These archival documents included announcements of the human resources department of the Mexican partner, an internal bulletin of the Mexican partner, a magazine of the American partner, internal information of performance, announcement board that reported graphs of productivity, production, accidents, attendance and shift changes or new rules. Cultural symbols and their meanings were identified in accordance with the suggestions made by Schultz (1994). Experiences that were most significant to the members of the organization were distinguished. In each phase of the analysis, there were symbols that—in relation to other symbols and associated by the members of the organization through their discourse and actions—allowed us to interpret things and events as significant expressions. In other words, the transformed cultural map emerged from descriptions of the same meaning for diverse symbolic incidents—content—and when several meanings were manifested by specific symbolic expressions—context. To ensure the trustworthiness of this study, we used the recommendations of Lincoln and Guba (1985). We demonstrate the credibility with the triangulation of methods: participant and systematic observation over a long period of time, and document analysis. We also triangulated sources of data by means of selected informants at all administrative levels, formal and informal documents, and daily written communications. We asked selected informants for their confirmation of our interpretations. In some cases, we formally asked for an appointment to share with informants the research findings; at other times we used this strategy without notice when some members approached us to ask for the results of the research and we asked them for their opinions. Thus, we ensured that our biases

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as researchers did not affect the results. To transfer the findings of this research, we provide a description (Geertz, 1973) of the organizational phenomena. Next, we present the details of the research context to understand the core elements of Mexican management culture, to guide the assessment of cultural symbols in the context of the international strategic alliance.

National Context of Research–Mexico Studies that describe Mexican management practices are limited and dispersed. De la Cerda and Nuñez (1993) reinterpreted more than 40 studies that compared Mexican management practices with American practices, and derived the following characterizations of Mexican organizations: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Mexican organizations tend to be family managed. Organizational structures are hierarchical and autocratic. There is a great distance between members of the upper and lower hierarchy. Jobs and tasks are based on traditions and customs. Organizations lack human resource management systems. Decisions are centralized at the upper organizational levels. There is an absence of horizontal relationships. Norms and authority figures are rigidly respected. There is a lower sense of self-development and self-accomplishment. Distrust in work teams. Passive time vision. Unwillingness to inform employees about organizational plans and practices. There is limited conscience for productivity and efficiency.

Mexican society is the product of a mixture of two pure races—Spanish and native Mexican Indian. Spain, as the conqueror and coloniser did not reproduce its institutions in Mexico; instead, it constructed economic forms of exploitation in order to maintain its imperial power in Europe. This caused Mexican society of the 14th century, already racially mixed, to identify itself with the European society in all its dimensions. Eventually, Spain lost its economic interest in Mexico at the time that the US became an economic and political world leader. This process influenced Mexican society to enter a transformation that put its national identity in imbalance. Some manifestations of the Mexican society are a result of the identification with the US—its powerful neighbor. Since the second half of the 20th century, Mexico has lived in ambiguity with its national identity not easy to define. On one hand, Mexican society in general manifests the necessity to return to its traditions, rediscovering and admiring the indigenous culture from which it arose. On the other, hand, it is surrounded by expressions of an international popular culture, as is the case of the adoption of the Disney characters by native Indians in Women Island (Weinbaum, 1997). The country is also went through a political and an economic transition that is immersing it in global industrial development. In this sense, business organizations are part of the national identity reconstruction process, given their role in the industrial

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development of the country. Therefore, we found that Mexican enterprises, as part of this reconstruction process, experience ambiguity in their identity since they use traditional management practices and adopt and adapt modern administration forms. In some recent studies, we found descriptions of cultural based management practices of a society with a national identity that is in transformation. To better understand the processes of transformation of the national identity of the Mexican society, see Fuentes (1992) and Galeana (1999). Morris and Pavett (1991) found that despite different management styles at twin plants—one in Mexico and the other in the US—the Mexican plant did not report significant differences in productivity when compared with the American plant. The authors’ conclusion is that the management style of both plants was in harmony with the local social culture. Later, the same conclusion was maintained in a similar study in which the Mexican management style was compared with others of the same corporation in countries such as Spain, Italy, and Britain (Pavett and Morris, 1995). In another study, Martinez and Dorfam (1998) identified the role of executives of medium-sized companies in Mexico City. Executives defined their roles as managers including being paternalistic leaders. In order to subsist, medium-sized Mexican companies, depend more on social commitment and the forms in which this is acquired—i.e., family and governmental relationships— than the support of a competitive national financial system. Despite this, executives manifested a real preoccupation with the efficiency and competitiveness of their companies. Sargent and Matthews (1998) described a considerable diminution of expatriates in multinationals that operate in Mexico as they found a high management capacity for the operation of the subsidiaries. Foreign executives described their Mexican counterparts as being part of a new generation with university-level studies, the ability to speak English, and open-mindedness to the introduction and adaptation of modern management production practices i.e. Japanese techniques. Nonetheless, the conclusion of these authors is that, these companies were characterized as having a simultaneous rejection and acceptance of external cultural influences of foreign production models. It is likely that this manifestation emerges when the subsidiary in Mexico has a higher resource dependency on the foreign corporation which influences decisions or administrative practices (Martinez and Ricks, 1989). Lindsley (1999), on the other hand, found that social stability and confidence in the organization were the central symbols that maintained hegemony and balance among family, organization, and community in the Mexican Northwest border assembly plants. Lindsley (1999), Martinez and Ricks (1989), Martinez and Dorfam (1998), Morris and Pavett (1991, 1995) and Sargent and Matthews (1998) found in the hierarchical relationships of superior toward subordinates what Lindsley (1999) defined as patronage relationships. These are relationships where the affiliation is emotional, loyalty is reciprocated and there is a personal obligation to take care of subordinates. The context in which these relations occur is in a hierarchy

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that prevents subordinates from confronting their superiors in ideas or actions, thus the perception of a deficient hierarchical communication. To sum up, the Mexican labor culture in the international context is described as reactive to a necessity to accept modern management models and practices derived from developed countries and, at the same time, using traditional manifestations to demonstrate their competitiveness.

ORGANIZATIONAL CONTEXT OF THE RESEARCH: MEXICAN-US JOINT VENTURE The company studied by us was founded in 1980. It is a joint venture between a diversified Mexican economic group founded in 1930 and an American auto parts company that is a subsidiary of one of the world’s largest and oldest car builders. The joint venture has approximately 1,200 employees. Fewer than 150 are employed in management and administration while the rest work in the manufacturing operations. Personnel of the American counterpart occupy only two administrative positions—the finance manager and the plant’s quality control manager. The other positions are managed, administered, and operated by Mexican personnel. The structure of the organization projects four hierarchical levels—the general director of the joint venture, the area managers, the superintendents and supervisors. This organizational structure has existed for more than 10 years.

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We found that most of the reality in this organization revolved around work meetings. Formal work meetings were identified as symbolic actions because members of the organization attributed a special meaning to them. Members described work meetings as the time and place where important subjects were discussed. The organizational level of the members that participated in the meeting did not matter. Members discussed important subjects that were later implemented on ‘the floor,’ as they called the plant. The first meaning of a meeting ascribed by most members—managers and administrative personnel—was that it was a participation symbol. Some meetings were defined as rituals, that is, a symbolic act that was performed systematically and was related to a specific situation. Employees attended different meetings linked to specific objectives, and did not attend just because of their level in the hierarchy. The meetings conducted during the time of this study were: operations, results, organizational committees, projects, controller, planning, divisional, and board. We focused the study at the managerial level to differentiate it from the blue-collar worker. However, we did not study the board meeting, as it was held in the American partner’s headquarters in the US and we could not attend it. The dynamics of some meetings were similar in that there was a protocol; other meetings differed for the same reason. For example, the protocol in some meetings was to write a list of employees who attended, to write a summary of

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the agreements reached during the meeting and to finish the meeting on time. During meetings in which this protocol was not used, nothing was documented, and it was more of an informative nature than a decision-making format. To follow a protocol in a meeting meant that the attendees were there to make decisions. The dynamics of these meetings had another interpretation; most became devoted to ‘ceremonies’. There were meetings where participants witnessed how members of the upper organizational hierarchy conducted the decision-making process. In all the meetings—rituals or ceremonies—higher-level employees sat at the head of long worktables, while members of the lower hierarchy sat in the most distant places. For this reason, discussions were easy to follow: They were based on hierarchies—from manager to manager or from manager to superintendent, and so on. We describe some meetings as ‘ceremonies’ because, according to several administrators, participants of the meetings ‘put on a show’. The performance was offered to a captive audience that included employees of the lower hierarchy, visitors from the Mexican partner, representatives of the American partner, and from other subsidiaries of the American partner, and the lead author. These ceremonies lasted until the meeting finished. Sometimes, the dynamic process was broken by commentaries not related to the meeting’s objective. For example, jokes were always brought up in the middle of a discussion. Members joked about their own work, about their personal relations with their spouses, or other employees’ spouses. Other interruptions included talk about the importance of organizing social events during the development of work teams. Managers, superintendents, quality inspectors, human resources personnel, and the controller attended the operations meetings, which ran daily from 9:00 to 9:15 a.m. The meeting protocol was not followed here, but they did follow a script. That is, the meetings directed by the manufacturing superintendent began with the reading of the last product lines manufacturing report. (This report included the products manufactured in the night shift that ended at 7:00 a.m. the same day). The issues addressed immediately included several subjects: an explanation of the products’ manufactured level, commentaries on the complaints of some clients or suppliers, warnings of upcoming visitors such as governmental inspectors, or special requests. Most of the manufacturing operations were developed in cross-functional committee meetings. The meetings of these committees followed the established protocol. The most active committees were managerial, training and development, quality and productivity. Members of these committees were people in charge of organizational functions. The issues addressed in these meetings were mainly related to planning of daily operations. Advances on the planning program were always reviewed and delays or problem in implementation were discussed. Another type of meeting was the projects meeting. The implementation of manufacturing projects had to be done by the plant employees like engineers or technicians. Hence, representatives of several functional areas were appointed to participate at these meetings. On two occasions, an external consultant was

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hired to coordinate the development of projects related to human-development motivation programs. For some employees, participation at these meetings was a break from the pressure of work at the plant. The controller and results meeting had the same format. Each participant in these meetings reported advances or results of the operations of the previous month for analysis. Members of the upper hierarchy always directed these meetings and made the commentaries. Others were expected to participate, but this never happened. The controller meetings were passive and slower than the results meetings. The most active participants were the managers who always questioned the others when they fell short of the expected standards. Some subordinates used these meetings to expose the unfinished work of others. One of the most active and participatory meetings was the planning meeting. This meeting had a ‘general’ character, because all departments of the organization—including union workers—were represented, and it was in the company auditorium. The dynamics of this meeting had the following characteristics: Each manager or subordinate responsible for a project explained its advances or delays. When the explanation involved problems with other departments or the lack of cooperation from some members, the general director of the joint venture questioned those members in front of the whole audience.

THE CULTURAL MAP OF THE JOINT VENTURE A subsequent analysis of these meetings—and the mode in which members in these meetings behaved—indicated that a web of meanings was developed through cultural symbols. Participants exhibited a sense of self-criticism. The self-criticism manifestations were related to the performance of all the departments of the company, without exception. For them, to self-criticize meant the need to surpass the standards of the plant operations. Employees expected their colleagues to perform and upbraided them if they did not; despite this, they maintained cordial relations. There was an atmosphere of friendship that counteracted the highly critical meeting behaviors. For example, during some meetings, members offered trenchant criticism, but, at the end of the meeting, they were friendly towards each other. In their eagerness to maintain a sense of self-criticism, employees were rigid and methodical. They attended their meetings on time, they listened to the issues discussed and acted immediately, they participated when they were asked to do so, and they took their work seriously. Since the joint venture belongs to the auto-parts industry, it is under constant pressure. Organizational members are continuously required to lower manufacturing costs. This was the explanation for the atmosphere of self-criticism that prevailed at each meeting. For some managers, the self-criticism emerged from the joint venture’s organizational performance evaluations. The company had frequent evaluations by internal and external stakeholders, as well as self-studies. From the perspective of two representatives of the American partner, managers and administrators of the joint venture had an obsession with being evaluated. They saw the evaluation methodology imposed by the Mexican partner headquarters as time consuming.

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Nevertheless, employees of the joint venture exhaustively used performance indicators to constantly evaluate the business. In spite of this seeming obsession, the company obtained the prestigious Quality National Award from the federal government days before this study began. During this investigation, the company obtained a qualification—similar to the Malcolm Baldrige National Quality Award from the US National Institute of Standards and Technology (NIST)— that placed it in a world-class category. Furthermore, the company has received many awards from clients and suppliers in the automotive industry. During this study, organizational members displayed a sense of order. All company activities were planned and no unexpected activities were observed. Desks, shelves and files were clear of papers and everything was filed in special places. The company’s operations were online and employees could access the information they need at any time. All employees worked with an agenda and they respected all agreements made during the meetings. They were accustomed to the pressure to maintain order. According to some subordinates, it is the work process and not the structural hierarchy that instilled this sense of order among them. One employee said: ‘... if you do not work with order, you are out of here.’ The sense of order was also evident in the self-studies, which occurred continuously. The need to have exact and opportune information to justify its actions made the members maintain order in their jobs and tasks. At some point of time at all meetings, members always spoke of the organization’s economic value. Managers and administrators said they had the obligation to keep the company running. The main preoccupation came from the general director of the joint venture. He used every opportunity to ask his managerial team to communicate this message to the employees. Discussions not only emphasized financial results, but also the fact that any planned activity had value, either immediate or deferred. The quest for economic value added a sense of urgency to daily activities. Organizational members lived under pressure to respond to many requests. The Mexican headquarters demanded certain standards for the management of the company; the headquarters of the American partner asked them to follow other standards; governmental agencies pressured them to fulfill their criteria; markets demanded top-quality products. This justified many meetings because improvement programs required adjustments through all the processes. This sense of urgency made them design better job processes. For example, the company initiated considerable expansion in the manufacturing area of the plant. To avoid increasing the labor force, the plant manager and the human resources manager devised methods that allowed the same personnel to cope with the increase in production. Finally, the self-criticism, this sense of order, the sense of economic value, and the sense of urgency were combined with the ‘unity sense’. Mexican employees felt particularly proud of the joint venture’s profits and of themselves because they knew they were the main actors for both partners. This sense of unity was based on the feeling that together they would be able to solve the company’s problems.

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Another cultural symbol demonstrated this sense of unity. For example, the Mexican partner transferred, in a short period, 16 employees from this joint venture to other subsidiaries as directiors. According to managers and administrators of the joint venture, this movement of personnel was intended to transfer the culture to other companies within the business group, though that has not occurred. For all of this, we have organizational members of a joint venture who interpret and react to this reality with self-criticism, order, a vision of economic value, a sense of urgency and unity. This reality is discussed in the next section.

DISCUSSION AND CONCLUSIONS Cultural Symbolism allows the interpretation of a multiplicity of realities, depending on each meaning, despite the same context. Organizational culture is described as a web of meanings that allows the integration of organizational members through significant relationships. In this case study, we found that the meetings were symbolic representations of the organizational life and were charged with great cultural meaning. Meetings meant something for the organizational members, and in each reality was constructed and reconstructed. The web of meanings was related to the sense of self-criticism, the sense of order, the sense of economic value, the sense of urgency, and the sense of unity. Each meeting established a pattern of cultural symbolism through conduct, dialogue, location, and actors. All these elements represented something transformative for the organizational members and, we can say, defined the joint venture’s organizational culture. To work in this company meant to meet with colleagues, criticize one’s work and the work of others, to search for added value that generates business, and to implement ideas as a group. From these findings, we could explore several lines of inquiry that could be relevent to the management of the internationalization process at Mexican organizations, as well as the theory on organizational culture. We had to ask ourselves whether the web of cultural meanings corresponded to the management practices of a Mexican organization or to the management of a modern organization because we did not find any references in the literature describing them. This reflection is oriented to comparative studies that give greater weight to the society’s labor culture as the main factor in the organizational culture. In this case study, we have an international joint venture in Mexico, with 99 per cent Mexican workers in an industry in which the country has competed directly since the middle of the 20th century. Characteristics of the Mexican companies identified by Castañeda (1998) and De la Cerda and Nuñez (1993) represented organizations that competed in stable and local contexts—those of the hierarchical structures. In this joint venture, we found horizontal communication through multifunctional work teams, committees such as task forces, informational and decision-making meetings, information online, innovation, a continuous work evaluation, and few hierarchical levels. As far as the human resources processis concerned, we found a

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sense of self-development, an urgent view of time, and respect for group agreements. Are these characteristics representative of modern management practices in Mexico? At the same time we identified the power distance dimension (Hofstede, 1980) in some work meetings—i.e., ceremonies. The question here is: How and under what circumstances do traditional management practices coexist with other forms of management? In this joint venture, both cultural manifestations coexisted as Lindsley (1999), Martinez and Ricks (1989), Morris and Pavett (1991, 1995) and Sargent and Matthews (1998) found in their studies. Other inquiries on the agenda: What do we know of the formation of cultures in contemporary organizations? When will ‘meaning’ acquire relevance in management models? It becomes necessary to investigate the form in which symbolic expressions become significant for those in the organized group, and to find the connections with the administrative systems. Along this line, symbolic expressions—work meetings—were significant for the organizational members because of their connection to administrative systems, forms of horizontal communication, and to a clear definition of work. All this influenced the social construction of the joint venture reality. Studies that investigate Mexican management style also leave aside the culture of the industry. Could these practices be a projection of industrial culture? If this is the case, the Mexican management team had the capacity to read the cultural context in which the company is immersed and to react opportunely. Nevertheless, given the unit of analysis—the joint venture as an organization— we can only conclude that its operation presents non-traditional management practices in Mexico. Therefore, new constructs that characterize Mexican management practices in an international context supported in this case study include: the sense of self-criticism, the sense of order, the sense of economic value, the sense of urgency, and the sense of unity.

References Alvesson, M. (1993). Cultural Perspectives on Organizations. Cambridge: Cambridge University Press. Berlín, M. (1996). ‘Business environment and corporate culture in Venezuela’. Organization Studies, 17(5): 843–855. Boyacigiller, N.A. & N.J. Adler (1991). ‘The parochial dinosaur: Organizational science in a global context’. Academy of Management Review, 16(2): 262– 301. Burrell, G. & G. Morgan (1979). Sociological Paradigms and Organizational Analysis. London: Heinemann. Contractor, F. & P. Lorange (1986). ‘Why should firms cooperate? The strategy and economics basis for cooperative ventures’. In F. Contractor and P. Lorange (eds.), Cooperative Strategies in International Business: Joint Ventures and Technology Partnerships between Firms, pp. 4–28, MA: Lexington Books.

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Castañeda, G. (1998). La empresa mexicana y su gobierno corporativo: Antecedentes y desafíos para el Siglo XXI. [The Mexican enterprise and its corporate governance: Background and challenges for the 21st century.] Mexico: Universidad de las Americas-Puebla y Alter Ego Editores. D’Iribarne, P. (2001). Administración y culturas políticas. [Administration and politic cultures.] Gestión y Política Pública, 10(1): 5–29. Dandridge, T.C., I.I. Mitroff & W.F. Joyce (1980). ‘Organizational symbolism: A topic to expand organizational analysis’. Academy of Management Review, 5(1): 77–82. Dávila, A. & N.H. Martínez (1999). ‘Un acercamiento crítico al concepto de cultura organizacional: Implicaciones para su estudio en organizaciones latinas’. (pp. 17–43). In A. Dávila and N.H. Martínez (Coordinadoras). Cultura en organizaciones latinas. [Culture in Latin organizations.] Mexico: ITESM-Siglo XXI. De la Cerda, J. & F. Núñez (1993). La administración en desarrollo: Problemas y avances de la administración en México. [Developing management: Problems and advances in the administration in Mexico.] 2nd edn. Mexico: Instituto Internacional de Capacitación y Estudios Empresariales. Fuentes, C. (1992). El espejo enterrado. [The buried mirror.] Mexico: FCE, Colección Tierra Firme, 2da. Reimpresión 1994. Galeana, P. (1999). Latinoamérica en la conciencia europea. Europa en la conciencia latinoamericana. [Latin America in the European conscience. Europe in the Latin American conscience.] Mexico: FCE, AGN, CCYDEL-UNAM, Facultad de Filosofia y Letras-UNAM y CONACULTA. Geertz, C. (1973). The Interpretation of Cultures. New York: Basic Books. Glaser, B.G. & A.L. Strauss (1967). The Discovery of Grounded Theory: Strategies for Qualitative Research. Chicago: Aldine. Hatch, M.J. (1993). ‘The dynamics of organizational culture’. Academy of Management Review, 18(4): 657–693. Hofstede, G. (1980). Culture´s Consequences. Beverly Hills, CA: Sage. Knotts, R. & S. Tomlin (1994). A comparison of TQM practices in U.S. and Mexican companies. Production and Inventory Management Journal, 35(1): 53–60. Kras, E. (1990). Cultura Gerencial: México-Estados Unidos. [Managerial culture: México-United States.] Mexico: Grupo Editorial Iberoamerica. Lawrence, J. & H.S. Lewis (1993). ‘JIT manufacturing in Mexico: Obstacles to implementation’. Production and Inventory Management Journal, 34(3): 31– 36. Lincoln, Y.S. & E.G. Guba (1985). Naturalistic Inquiry. Newbury Park, CA: Sage. Lindsley, S.L. (1999). ‘Communication and “the Mexican way”: Stability and trust as core symbols in maquiladoras’. Western Journal of Communication, 63(1): 1–31. Martinez, Z. & D.A. Ricks (1989). ‘Multinational parent companies’ influence over human resource decisions of affiliates: U.S. firms in Mexico’. Journal of International Business Studies, 20(3): 465–488.

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Meschi, P.X. & A. Roger (1994). ‘Cultural context and social effectiveness in international joint ventures’. Management International Review, 34(3): 197– 210. Morris, T. & C.M. Pavett (1991). ‘Management style and productivity in two cultures’. Journal of International Business Studies, 23(1): 169–179. Pavett, C. & T. Morris (1995). ‘Management styles within a multinational corporation: A five country comparative study’. Human Relations, 48(10): 1171–1191. Robles, L. (1998). ‘Estereotipos rotos. El debate sobre la cultura laboral mexicana (pp. 125–156)’. In R. Guadarrama (Coordinator). Cultura y trabajo en México. Estereotipos, prácticas y representaciones. [Culture and work in Mexico. Stereotypes, practices and representations.] Mexico: UAM, Juan Pablos Editor y Fundación Friedrich Ebert. Sargent, J. & L. Matthews (1998). ‘Expatriate reduction and Mariachi circle: Trends in MNC human resource practices in Mexico’. International Studies of Management & Organization, 28(2): 74–96. Schultz, M. (1994). On Studying Organizational Cultures: Diagnosis and Understanding. New York: de Gruyter. Smircich, L. (1983). ‘Concepts of culture and organizational análisis’. Administrative Science Quarterly, 28: 339–358. Spradley, J. (1980). Participant Observation. Florida: Holt, Rinerhart & Winston. Weinbaum, B. (1997). ‘Disney-mediated images emerging in cross-cultural expression on Isla Mujeres, Mexico’. Journal of American Culture, 20(2): 19– 36. Weisinger, J.Y. & P.F. Salipante (2000). ‘Cultural knowing as practicing: Extending our conceptions of culture’. Journal of Management Inquiry, 9(4): 376–390.

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Managing Change

Designing Organizations using the Evolutionary Perspective* Luca Solari

‘How do the individual parts like nerve cells, muscles, and joints of body interact in such a way that patterns of behavior emerge?’ Scott Kelso, 1995 (Preface) ‘Today I have been moulding plasticine and I made a little man who looked just like me; his limbs were so weak and he couldn’t move his mouth to speak and I could bend him into any shape I wanted him to be” The Housemartins, 1987 Patterns that emerge or plasticine that is molded are the metaphors of the quest for an organizational design model that can cope with external complexity (environment) and internal complexity (people), a quest that seems like the neverending quest for the Holy Grail. Once again existing theories of organizational change and organizational design are failing to explain successfully key features of transformative processes occurring inside firms (Taylor, 1992). But while some top managers advocate that increased competition lets ‘only the paranoid to survive’ (Grove, 1996), academics seem to limit themselves to ex-post accounts of the evolution of new organizational structures lacking the ability to propose a radically new paradigm (Brown and Eisenhardt, 1997). Indeed, from the analysis of the evolution of organizational form by Miles and colleagues (1997), it does appear that the description of new organizational forms by scholars follows experimentation by practitioners. Nevertheless, organizations face growing competition based on internal capabilities and are bound to explore new organizational assets that allow for *

I wish to thank the Department of Economics at the University of Trento which hosted me until December 2001 and several colleagues at Bocconi University who shared their comments on earlier versions of this chapter. Financial support for this research was provided by the Italian National Council for Research (CNR) program ‘Agenzia 2000’—project n. CNRG00D7BE.

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faster changes (Jackson, 1997). The relevance of internal organization is demonstrated by the evolution of theorizing and research on strategy (Wernerfelt, 1984; Grant, 1995) which relies more on organizational capabilities and competencies (Teece et al., 1997; Hamel and Prahalad, 1989) or institutional capital (Oliver, 1997), than on strategic moves and positioning (Porter, 1980), thereby advocating more investment by top managers on internal organization assets. Organization theory seems mainly concerned with macro-level research paradigms (Donaldson, 1995) which do not seem to provide any normative implications for managers involved in organizational design activities. Therefore, organizational design is left to mere imitation of standardized approaches like business process re-engineering (Hammer and Champy, 1993) or to the creativity of individual practitioners. Most organization theory debate revolves around Anglo-Saxon researchers, and recent design fads (like Business Process Reengineering etc.) spread from the US to other countries. Extensive research on crosscultural differences (Hofstede, 1980) demonstrated that differences in values and norms affect the viability and effectiveness of organization design alternatives. Nevertheless, advocates of change in organizational design are starting to call for new paradigms from different perspectives (Brown and Eisenhardt, 1997; Miles et al., 1997). Some scholars identify in self-organization a new form to contrast traditional hierarchical forms (Garud and Kotha, 1994). Others advocate that organizational learning practices can lead to the modification of existing organizations and provide an environment that is more absorptive for change (Cohen and Levinthal, 1990). Moving from radically different perspectives, Weick (1979) and Aldrich (1979) proposed to look at loosely coupled systems as innovative forms of organizational design. Finally, Brown and Eisenhardt (1997) explore change processes in the computer industry and clearly state that the lack of a new paradigm limits the scholars’ ability to interpret change in contemporary organizations. In our view, interpreting evolutionary change will require the adoption of a very different idea of organizing and explicitly considering the impact of national cultures. Specifically, a clear distinction should be made between high-context and low-context cultures (Hall, 1977) when it comes to organization design. From the point view of the search for a higher level paradigm (Brown and Eisenhardt, 1997), evolutionary theories, one of the most popular scientific paradigms to be developed (Dawkins, 1976), provide a clear account of transformative change and organization without design. The evolutionary metaphor in organizational theory is by no doubt a successful one, but it clearly limited itself to analyzing macro-level events (Hannan and Freeman, 1989) with some notable exceptions (Burgelman, 1991). Most criticism raised by evolutionary theories revolves around the issues of determinism and chance (Donaldson, 1995; Grandori, 1995). Contrary to these criticisms, evolution is by all means a nondeterministic process as Darwin’s foreword to the ‘Origins of species’ clearly demonstrates. Provided that the hidden forces of evolution can shape complex structures through time by a casual but continuous interplay of simpler

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components and processes, conscientious intervention by people can increase the speed of transformative change through evolutionary processes. Nevertheless, even the evolutionary approach to organization design faces problems related to cultural and institutional differences. The spontaneous emergence of local adaptive changes is favored by cultural contexts where formalization of organizational practices and passive adherence to rules play a lesser role, like high-context cultures as are prevalent in the Latin European societies. The other side of the coin is apparent for low-context cultures where the spontaneous emergence of behaviors and practices is severely limited by cultural constraints. Nevertheless, the potential of evolutionary theories as a paradigm to design organizations is underestimated. In this chapter, we develop an evolutionary based perspective to organizational design, and demonstrate how the evolutionary paradigm can shed deeper and novel insights into the very concept of organization.

The Traditional Paradigm of Organizational Design Organization theory originated from the very simple needs to understand organizations and to improve their viability. In more detail, research on organizational design should help clarify the rules/principles that can guide in dividing labor among units (people, work groups, departments, organizations) and integrate their efforts toward a common goal. Therefore, organizational design deals with activities to be performed (and related technologies), people who are expected to perform at least part of these activities, and goals. Every work arrangement or organization design originates from such a set of choices. In principle, therefore, the adequacy of a given organization design could be judged by the level of attainment of given goals (emerging from the interplay of interest coalitions within the organization, or constrained by external institutional and/or competitive factors—Crozier and Friedberg, 1977; Scott, 1995). In reality, goals are inherently ambiguous (March and Olsen, 1976) and more and more scholars are admitting that the implicit high order goal is simply survival of a given organization and viability of a specific organization design should be judged consequently (Meyer and Zucker, 1989). Though organizational theory originated from the need to understand organizations and develop managers’ skills in designing them, organizational design which was at the roots of contingency theory has been experiencing a progressive sunset in contemporary organizational theory. In this analysis, we provide a brief account of traditional organizational design approaches, and contemporary approaches that emerged to contrast their main limits.

THE FOUNDATIONS OF ORGANIZATIONAL DESIGN Following Simon (1947), traditional approaches to organizational design view organization structure as a tool to improve problem-solving ability of collective actors (Grandori, 1995). Organizations institutionalize solutions to problems

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and increase by these means the human ability to cope with problems at large. In this perspective, organization design aims at identifying work arrangements that best contribute to this ability. As Van de Ven and Poole (1995) pointed out, Simon’s view of change can be described as teleological and organizational design is exactly the tool to achieve change in this perspective. Moving from the preceding considerations, we identify five common pillars of traditional approaches to organizational design as embodied in existing practices both at managerial and professional level.

A. ORGANIZING AS PREDICTING BEHAVIORS THROUGH INCENTIVE AND CONTROL SYSTEMS Designing organization is traditionally considered a tool with the goal to reduce uncertainty in the behavior of a system composed of differentiated parts to be coordinated (Lawrence and Lorsch, 1967). Organizational design aims at identifying a pattern of actions to be performed within the organization and to assign these actions to the responsibility of a job, defining a task (Galbraith, 1977). The choice of this pattern of actions can be variously dependent on the external environment (Burns and Stalker, 1961), the organization’s strategy, and the top management or designer’s choice. Organizational design therefore has the goal to reduce unpredictability of tasks. The problem faced by organizational design is rooted in the very nature of human behavior which is inherently difficult to predict (Perrow, 1967; Galbraith, 1977). The designed organization is, therefore, made viable through a set of actions whose goal is to ‘force’ people to put in place adequate behaviors. These actions are embodied in incentive and control systems. Organizational design inherently aims at reducing discretion in behaviors, though in different degrees, by setting behaviors that are expected for the optimal performance of the overall organizational system. As a consequence, variety in behavior is reduced by every effort to design the organization.

B. MANAGEMENT

AS THE

‘SUPREME ORGANIZER’

In traditional efforts at designing organization, the definition of tasks and roles requires somebody to choose which set of tasks and roles are to be considered appropriate. Traditional organizational design requires a designer whose role is to define adequate behaviors to be enacted within the organization. The ‘supreme organizer’ defines tasks and roles and devises control and incentive systems to foster his design on the basis of the goals of the organization. In much the same way, it is clear that within the organization there must be somebody entitled to take the ‘final’ decisions on existing problems. Hierarchy is at the very root of organizational design and embodied in it.

C. DESIGN INFORMATION FLOWS

VS .

COMMUNICATION FLOWS

Traditional organizational design considers the problem of information within the organization mainly as a problem of information transfer. The nature of

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meaning associated with information is rarely present in organizational design. Organizational structures must facilitate information transfer, while communication flows are considered as a side effect of the informal organization. Hierarchy is the most relevant information channel, though organization can profit from other parallel communication channels (Guetzkow, 1965; Galbraith, 1977) that are not designed, but emerge as a consequence of social dynamics.

D. NO AMBIGUITY

OF

GOALS

AND

MEANS

The definition of an organization’s design does not consider the difference of goals within the organization or implicitly deals with it using control and incentive systems. The goals are the goals of the designer and the structure that is designed does not incorporate conflicting interests. Organization theory has demonstrated that goals and means are by no way clear and defined within organizations (March and Olsen, 1976), but organizational design has not yet incorporated these findings: goals are taken for granted and means are clearly defined.

E. STABILITY OF (INTERNAL AND EXTERNAL) CONTEXT MEANS S TABILITY OF O RGANIZATIONAL SOLUTION In traditional organizational design, stability of both internal and external contexts should not call for any kind of intervention on the existing structure. The common matrix of organizational design is actually derived from contingency theory. If roles and tasks were designed considering a well-defined context, then the organization could keep operating in the same way. There is no clear evidence of the need to design organizations that can enhance creativity and innovation. If the context is stable, the existing organizational asset must be optimized without making efforts in the search for alternatives. In summary, traditional organizational design emphasizes hierarchy within the organization arena, and assigns a relevant role to management. Predictability of tasks is associated with the ability to better design roles and structures. As a result, efficiency seems the parameter to be optimized while little attention is given to the ability to modify existing organizational setting to improve creativity and variety. Human resources are, in turn, interpreted within a behaviorist approach (Watson, 1924); if subject to correct incentive and control system, everybody can act any kind of behavior. Moreover, it should be mentioned that this approach suffers from some sort of cultural bias. Following Hofstede (1980), national culture has been considered a factor affecting the performance of alternative modes of organization design. While the traditional approach suits a low-context culture (Hall, 1977), where people verbalize much more background information, and tend not to be well informed on subjects outside of their own interests, a high-context culture will react differently. When background information is implicit, like in highcontext cultures, people often send more information implicitly, have a wider ‘network’, and thus tend to stay well informed on many subjects. Therefore, the traditional approach is ill-suited to high-context cultures where much of the

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shared knowledge is not mediated by external, formal networks, but by interactions and social structures among members. As each of these five pillars has been subject to increasing criticism, a handful of alternatives have emerged. The limits of these alternative explanations of organization is that they fail to address all the five pillars, and mostly limit themselves to a few of them. Therefore they do not represent a real alternative, but a criticism within the same hierarchical paradigm of organization, and this could be due to a cultural bias of researchers within the Anglo-Saxon world where formalized practices seem to exert a more intense impact on behaviors of organizational actors.

CRITICISM WITHIN A TRADITIONAL PARADIGM We will now briefly review existing alternatives to the pure traditional view of organizational design. Most contributions on the limits of existing organizational design approaches are actually limited to one or two articles and/or books and have never received widespread attention. We identify the two major approaches which are commonly considered by scholars and practitioners.

SELF-ORGANIZATION Garud and Kotha (1994) use the brain metaphor to envision a new paradigm for organizational theory. Their approach contrasts radically ‘scientific management principles employed to design traditional production systems’ ( Garud and Kotha, 1994:694). They advocate that production systems should be characterized by: multi-channel mapping, isomorphic mapping, dynamic networks, modularity, shared division of labor, tuning, and updating of routines and competencies. Their approach is rooted in the idea of self-organization within the production system and clearly criticizes some of the five pillars. The self-organization approach, though, appears to accept the idea that organization design is designed and this requires somebody to state goals and decide on change actions to be achieved. Therefore, the role of hierarchy is not explicitly challenged and it seems ‘to exit the door to enter through the window’.

ORGANIZATIONAL LEARNING Organizational learning has its roots in the consideration of the limits of existing organizations (Argyris and Schon, 1978; Senge, 1990). Hierarchy favors a singleloop oriented problem-solving activity and seldom allows for a more complex and richer double-loop learning. Hierarchy tends to slow down the process of problem analysis and prevents faster adaptation to changing contingencies. The difficulty of double-loop learning leads hierarchical organizations to diminish their ability to cope with change and innovation and, therefore, increases their inertia. Dealing with change means designing new patterns of activity that allow learning to take place within the organization. Though impressive and legitimated by practitioners, the idea of a learning organization seems to neglect two of the shortcomings of traditional hierarchical

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organizations: behaviorism and role of managers and hierarchy. Behavior of people can be directed toward learning just by providing the adequate mix of control and incentive systems. Top managers within a learning organization are present and assume the role of the supreme decision makers. Table 22.1 summarizes how the alternative approaches differ from the traditional paradigm. In conclusion, the alternatives to traditional organizational design approaches grasp some of the shortcomings of previous approaches, but fail to provide a radically different paradigm. Table 22.1: Alternative Approaches to the Traditional Paradigm

l l

l

l

l

Traditional organizational design

Selforganization

Organizational learning

Behaviorism Role of manager

yes yes

? yes

Information flows vs. communication channels Ambiguity of goals and means Stability

yes

no

? yes (at least in the end) no

yes

yes

no

yes

no

no

N EW O RGANIZATIONAL THEORIES, NEW O RGANIZATIONAL D ESIGN A PPROACHES? Organizational design that attracted much attention within the contingency framework seems rather neglected in more recent organizational theories (Williamson, 1975; Pfeffer and Salancik, 1978; Scott, 1995; Hannan and Freeman, 1989). Transaction cost economy (Williamson, 1975) is mostly concerned with the choice of the appropriate boundaries to be set to the internal organization than with the definition of the appropriate organizational design. Still amidst recent approaches it is the only one to consider explicitly the choice of alternative organizational assets (market vs. hierarchy). Resource dependence (Pfeffer and Salancik, 1978) explains the behavior of actors within the organization by explicitly recognizing power as a powerful source of action. Organizational design has an impact on power distribution and alternative organizational structures represent threats and opportunities for different interest coalitions (Crozier and Friedberg, 1977), but resource dependence does not give any indication as to how they should be designed. Neo-institutional theory (Scott, 1995) provides an interesting background for the analysis of the limits of discretion in choices within the organization. Organization design may stem from powerful external influences that favor mimetic behaviors. Population ecology of organizations

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(Hannan and Freeman, 1989), finally, explicitly underestimate internal organizational design, by advocating inertia as a key factor of survival of organizations. Organizational design is, therefore, being left to practitioners who widely employ a contingent framework. Therefore, all new paradigms in organization theory failed up to now to provide the bases for a radical innovation in organizational design for this failure. We can identify at least three reasons. First, globalization and innovation are pulling attention over broad strategic issues at the inter-organizational level. Second, these theories did not confront contingency theory in its very field (internal organization), but tried to de-legitimate it as a source of knowledge on organizations. Third, many new paradigms did not have anything to add to contingency theory at the intra-organizational level. The third reason is certainly the most relevant to this work. Neo-institutional theory cannot explain how and why a new organizational design can emerge, but at most its diffusion. Transaction cost economy limits itself to extend contingency theories to inter-organizational links, but does not add much to internal organization design. Resource dependence depicts organizations as power arenas but does not provide any tool to determine how conflicting interests can interact in a stable organizational design. All these approaches seem to imply that organization design ‘simply follows’, people adapt with no resistance and conform their behaviors to rules and procedures. Clearly this picture is a biased one, when we are confronted with what happens within organizations in different cultural contexts.

COMPARING TRADITIONAL AND EVOLUTIONARY PERSPECTIVES ON ORGANIZATIONAL DESIGN Evolutionary theories have long been exploring change mechanisms adopting approaches that focus on the analogy with the processes of natural selection. Change occurs following a natural and continuous cycle of variation generation, selection and retention (Van De Ven and Poole, 1995). Though evolutionary theories have long been concerned with macro-level processes of change and have provided insightful findings, some researchers (Burgelman, 1991) have extended evolutionary thinking to the understanding of intra-organizational processes, as structuring and strategy making. Organizations generate variation (embodied, for example, in knowledge or establishment of new routines), operate selection (by means, for example, of internal decision-making processes and human resource management systems), and promote retention (by means, for example, of formalization of change, and institutionalization of new ways to do things). Can evolutionary theories represent an alternative paradigm for organizational design, one that overcomes the limits of the traditional one? We will now address this issue by confronting the evolutionary paradigm with the five pillars of traditional approaches.

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1. ORGANIZING AS PREDICTING BEHAVIORS THROUGH INCENTIVE AND CONTROL SYSTEMS Designing organization in an evolutionary perspective cannot define sets of behaviors that are more or less adequate. In an evolutionary framework of organizational design, behaviors are the unit of selection. Their emergence is the source of variation that constitutes the input of the evolutionary cycle. Behaviors are acted by people on the basis of their freedom, and within a social and institutional context that can never be as strong as to completely determine behaviors. Therefore, organization design cannot aim at predicting behaviors and acting on systems to make desired and actual behaviors consistent. The role of design is to let as many behaviors emerge and select some of them to become new practices within the organization.

2. MANAGEMENT

AS THE

‘SUPREME ORGANIZER’

In an evolutionary approach, the role of a central agent is not necessary. As behaviors cannot be predicted, the role of management as an organizer is severely limited. The management could at most retain a role as a potential source of variation or as the main actor of selection, but managers must limit to learn from the experience of new behaviors within the organization. Their roles are more concerned with learning from others’ experiences and helping people experiment without repeating past mistakes. Hierarchy as decision flow is severely limited.

3. DESIGN INFORMATION FLOWS

VS.

COMMUNICATION FLOWS

In an evolutionary perspective, communication flows are vital. Information cannot be confined to hierarchical flows (Guetzkow, 1965), but need redundancy. Variation can emerge as a product of sensemaking (Weick, 1995) and communication is at the root of such a process. Engineering of evolution is a matter of engineering of information transformation and transfer. An evolutionary-based organization needs to design communication flows as redundant as possible in order to let variation diffuse throughout the organization. A central problem is the availability of information on new behaviors that emerged and were experienced by actors within the organization. People need to be able to connect directly to each other and share their experiences. Vertical communication channels do not allow for such a process to emerge.

4. NO AMBIGUITY

OF

GOALS

AND

MEANS

The inherent ambiguity of goals and means is accepted within an evolutionary paradigm as a natural force interacting with the evolutionary cycle. Organization design is not a stable equilibrium based asset, rather a dynamic and changing setting of interaction rules. The balance among differing goals and means is reinforced by the action of selection at the organization level. An evolutionary cycle does not aim at something in particular, but keeps trying to create new

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behaviors and select them according to selection criteria (survival of a behavior). An organization can definitely select behaviors on the basis of power or internal social desirability criteria, favoring behaviors consistent with the perceptions of a dominant coalition (though pretty much the same would happen in a traditional hierarchical organization) if these criteria allow the organization to survive. While in a hierarchical organization these processes are difficult to be changed (as managers can leverage their hierarchical power), in an evolutionary base organization design actors can ban these criteria and ask for new selection criteria which are more consistent with the goal of survival. The absence of hierarchy makes everybody committed to (and responsible for) the survival of the organization.

5. STABILITY OF (INTERNAL AND EXTERNAL) CONTEXT MEANS S TABILITY OF O RGANIZATIONAL SOLUTION Organizations are never the same even when they perform the same tasks. Variation is a continuous process that stems from the very nature of people who do not need the stimulus of internal or external situations to identify new ideas or behaviors. Therefore, an evolutionary paradigm of organizational design recognizes the powerful force of change as a principle in everyday functioning of the organization. The organization must be designed to allow for variation and not for stability. The interplay of environment and the organization can best be described as a co-evolutionary process. If the environment is unchanged, the organization has the goal to act in order to change it and prevent being trapped in its competencies.

DEVELOPING THE EVOLUTIONARY ORGANIZATIONAL DESIGN APPROACH After demonstrating that the evolutionary paradigm is radically different from the traditional paradigm we detail the characteristics of the new paradigm of organizational design. The identification of the basic units of evolution is by no means easy. McKelvey (1982) proposed to call them comps. Nelson and Winter (1982) in their evolutionary approach identify routines as the basic units of their theory. Both comps and routines do not exist without behaviors that enact them. In our view, therefore, an organization is a collection of people who act, and action is embodied in behavior, which is the basic element for organizing. Behaviors are originated by will (or chance) and can be influenced by the external context (society, organization culture, and organization design) or appear as a product of random variation. Behaviors, once emerged, can evolve and acquire legitimacy through imitation by others or establishment of societal or organizational rules. Any real process of change at any level (top or operations) within an organization has a counterpart in a change in behaviors. The determinants of behaviors are not observable (Levati and Saraò, 1998) and therefore, organizational design can operate only on behaviors. Therefore, behaviors are the real inputs of the evolutionary cycle (Baum and Singh, 1994). Change within an organization is a matter of change in the behaviors acted by people working within its boundaries. Organizational design in an evolutionary perspective must deal with the interplay of variation, selection,

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and retention of behaviors. No matter that variation, selection, and retention could be random or planned or both, behaviors appear and may or may not be adopted throughout the organization. Job design, definition of decisional rights, institutionalization of norms and practices, and establishment of rules for transferring and enforcing prescribed behaviors represent the context within which a behavior is acted, or emerges. On the basis of this discussion, we formulate the following propositions: Proposition 1: Behavior is the smallest unit of analysis within organizational design. Proposition 2: The forces operating on behaviors are variation, selection, and retention. The nature of the evolutionary cycle of behaviors within the organization is complex. Chance and design interact in defining the outcomes of this process. Behaviors, once they emerge, can be imitated by other actors, or be codified by the organization, or be repeated by the same actor who originated them, or simply disappear. The organization is at every given state of time a collection of behaviors acted by different actors, with a differing level of discretion. Discretion is a consequence of job design (defining levels of responsibility between managers and subordinates), level of formalization of rules, incentive and control systems, and personal characteristics of people. Discretion can be limited by organizational design, but no system can emerge which eliminates discretion at all levels. Therefore, discretion acts to let variation (new behaviors, new ideas, new practices) emerge within the organization. This process can be partially designed when an organization allocates the task of changing to a well-defined department or team. In a complex system, unintentional variation (from the organization’s point of view) greatly overcomes internal variation. Unintentional variation in behaviors can be fostered by a setting where innovation and change are nurtured, people are constantly hired, discretion on new behaviors is enhanced, managers act as coaches, organizational assets are interpreted as a tool and not as prescription. Selection depends upon the existence of a set of information that can prove that the new behavior can be more effective for the organization. The survival of a new behavior is a direct consequence of the ability of the organization to evaluate its consequences and allow it to be noticed and analyzed. The chance of a new behavior to survive depends on the actors’ individual characteristics (their will to diffuse the new behavior, their commitment to the organization, their propensity to change, their openness), the organization (incentive and control systems for change, management styles oriented toward change), and the visibility of the consequences of the new behavior (in terms of economics or legitimacy). After selection, a new behavior is scanned to understand whether its outcomes originated from its specific quality or from chance. The institutionalization of a specific behavior starts at this level and can lead to an intentional design process. The speed of this process is directly linked to the dissatisfaction with the pre-existing behaviors, the existence of slack resources, openness of the organization, individual and cultural resistance to change, and visibility of behaviors by critical actors.

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Retention depends on the chance of a behavior to be noticed by other actors and institutionalized accordingly. Once defined, the new behavior should be spread throughout the organization and adopted by other actors. The effectiveness of this process depends upon the acceptance of prescriptions by the actors within the system, the power of actors institutionalizing the new behavior, and the resistance to change of actors. On the basis of this discussion we formulate: Proposition 3: Variation, selection, and retention are partially due to chance, and partially governed by an organizations deliberate efforts. Behaviors and their evolution are affected by broad institutional and cultural factors. The way behaviors emerge and are selected within organizational settings clearly interacts with the way behaviors emerge and are selected in society at large. When we consider different national culture or institutional environments, we need to incorporate their influence into organization design. As I speculated before, high-context cultures provide the ideal ‘milieu’ for the emergence of an evolutionary approach to organizational design. The lower level of verbalization and formalization of norms, and the richer social context allow new practices to be experimented with and diffused through socialization, while traditional approaches are limited by resistance to conform to formalized rules and procedures, external to the social context. On the ontrary, an evolutionary approach to organization design within a low-context culture requires an explicit effort to re-create the same context of a high-context culture and therefore needs to be complemented by formalized structures and practices, which resemble traditional design approaches, like the self-organization or organizational learning approaches we described earlier. On the basis of this discussion we formulate: Proposition 4: Within high-context cultures, variation, selection, and retention provide a more effective way to design organizations. Proposition 5: Within low-context cultures, variation, selection, and retention need to be complemented by traditional approaches to be effective. The evolutionary cycle within the organization lets behaviors emerge and spread throughout the system. The ability to survive at the organizational level is a direct consequence of the generation of behaviors. Variation and selection at the population level operate on different organizations as a set of different behaviors. Co-evolution of organization and environment stems from evolution of behaviors within different organizations. The ability to define internal tools to foster variation and selection criteria that are consistent with evolution at the population level is the main force of survival. Unfortunately, organizations often define designs that limit variation and that select on the basis of criteria that are focused internally and on the past instead of being focused externally and on the future. Traditional organizational design cannot fill this gap, while evolutionary

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organizational design incorporates change in selection criteria and maximizes variation in behaviors. On the basis of this discussion, we formulate: Proposition 6: The survival of an organization is linked to the quality of relationship among evolution at the population level and the evolution of behaviors. In summary, evolutionary theories can help us in designing organizational assets that can improve existing processes of organizational learning, building a bridge between a generation of variation at the individual level and diffusion of selected variety at the organizational level. On the one side, organizational structures provide the stable boundaries to organizational activities and people, rewarding people, selecting ways of doing things and reproducing them by means of norms, rules, hierarchies, and decision-making processes. On the other side, organizational structures allow for experimentation that takes the form of changing jobs and activities day by day. The extent of the impact on selection and variation is dependent upon the way organizational structures are designed and on the cultural and institutional context in which they operate. Designing organizations within an evolutionary perspective is a matter of choosing how to manage and channel the flow of variation, and how to manage the process of selection and retention. The extent and the ability of a single organization in exploiting these internal resources, coupled with the impact of chance and external factors, lie at the roots of continued performance and survival.

The Organization as a Selective Arena An evolutionary model of organizational design will have the properties of what we call selective arena. This organizational design is based on the idea that behaviors compete within the organization to gain access to resources that can institutionalize them. Behaviors are in search of a codification that allows them to be recognized, formalized and spread throughout the organization. The selecting context is defined by economic resources to be dedicated to institutionalization of behaviors (i.e., time and money of internal or external designers) and by legitimacy in the eyes of actors. The survival of an organization is contingent on the outcomes of this internal process, as well as on the external environment, and the actions of other organizations. Successful change therefore is the outcome of a more complex set of processes (see Figure 22.1). Organizational design in such a context must aim at enhancing an organization ability to deal with the interplay of these processes, avoiding: 1. a temporal lag between change in the environment and organizational design (inertia); 2. overstaffing in central staff; 3. unfavorable contexts for the experimentation of innovation in behaviors.

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Fig. 22.1: The Levels of Change In order to design an organization as a selective arena, we need to: 1. identify the sources of prescription of behaviors and evaluate them. Organizational culture, management styles, and HRM practices will always play a major role 2. identify the sources of variation and existing tools to monitor variation and make it visible throughout the organization 3. de-structure the existing organization carefully removing systems designed to inhibit variation and distributing discretion at lower levels allowing chance to operate. The organization as a selective arena is composed of units experiencing three processes: 1. Experimenting: generation of variation in behaviors to be spread throughout the organization 2. Coding: analysis of the outcomes of new behaviors and their desirability for the organization; subsequent codification of new behaviors 3. Transfer: diffusion of coded behaviors throughout the organization. The three processes will be present in each unit, though experimenting will probably play a major role in operations and sales, while coding and transfer will be more specific of staff. While this approach could be easily fostered in

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high-context culture organizations where we could limit ourselves to removing barriers to successful recombination of behaviors. In a low-context culture, it should be necessary to devise procedures which formalize variation, selection, and retention and explicitly aim at re-creating the dynamics of evolutionary change.

CONCLUSIONS We propose to look at an organization as something very different from a set of jobs. Organizations are vital systems that continuously generate transformative change. We often design them as systems that must reproduce a set of behaviors according to centrally defined goals and rules. Change is an unpredictable process; so why should we limit change processes within the organization and artificially reduce our ability to produce change? One reason might be that organization design evolved in low-context cultures where formalization and adherence to externally defined norms is common. If we look at high-context cultures, instead, we are faced with organization design processes which closely resemble evolutionary processes of variation, selection, and retention. In this chapter, we suggest that the evolutionary approach to organization design, though widely advocated by researchers (Brown and Eisenhardt, 1997), can actually provide an alternative to the traditional approach, but its effectiveness will be moderated by cultural and institutional factors. Clearly, the advantages of the evolutionary paradigm need to be further explored. First, we need to develop a strategy for empirical research on the validity of evolutionary theories on the ground of organizational design. The empirical strategies are not easy as the evolutionary process within the organization is a continuous process and its outcomes are usually lagged in time. A potential strategy is to employ retrospective analysis of change or to identify a set of behaviors that lead to success/failure in an industry and analyze how they emerged in some organizations and not in others. Second, after collecting data on the empirical validity of this approach, we need to develop a set of normative implications for managers to design their organizations better, differentiating the approach in different cultural and institutional settings. There are several potential limitations to this model. First, the propositions we formulated define a normative approach to organizing and are, therefore, harder to test. Second, evolutionary theories always leave the flavor of an expost tautology. Organizations that are better fit survive, but we can configure what ‘better fit’ means only by looking at surviving organizations. Third, can we really think that an evolutionary-based system devoid of the order of hierarchy could emerge? As clearly demonstrated by Haken (1983), in synergetics the behavior of a complex system in the neighborhood of critical points is governed by few collectives modes (the order parameter), that ‘slave’ all other modes. Thus, we need to identify ‘slaving principles’ in management, but we only can deal with hierarchical organizations and we have no proof that a completely evolutionary system could resist internal chaos and survive.

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Jackson, D. (1997). Dynamic Organizations: The Challenge of Change, London: Macmillan Press Ltd. Lawrence, P.R. & J.W. Lorsch (1967). Organization and Environment. Managing Differentiation and Integration, Boston: Harvard University Press. Levati, W. & M.V. Saraò (1998). Il modello delle competenze, Milano: Franco Angeli. March, J.G. (1965). Handbook of Organizations, Chicago: Rand McNally. McKelvey, B. (1982). Organizational Systematics: Taxonomy, Classification, Evolution, Berkeley, CA.: University of California Press. Meyer, M.W., L.G. Zucker (1989). Permanently Failing Organizations, Newbury Park: Sage. Miles, R.E., C.C. Snow, J.A. Mathews, G. Miles & H.J. Coleman Jr. (1997). ‘Organizing in the knowledge age: Anticipating the cellular form’. Academy of Management Executive, 11(4): 7–19. Nelson, R.R. & S.G. Winter (1982). An Evolutionary Theory of Economic Change, Cambridge, Mass.: Harvard University Press. Nonaka, I. & H. Takeuchi (1995). The Knowledge Creating Company, Oxford University Press. Oliver, C. (1997). ‘Sustainable competitive advantage: Combining institutional and resource-based views’. Strategic Management Journal, 18(9): 697–713. Perrow, C. (1967). ‘A framework for the comparative analysis of organization’. American Sociological Review, 32(2): 194–208. Teece, D.J., G. Pisano, G. & A. Shuen (1997). ‘Dynamic capabilities and strategic management’. Strategic Management Journal, 18(7): 509–533. Pfeffer, J. & G. Salancik (1978). The External Control of Organizations, New York: Harper & Row. Porter, M. (1980). Competitive Strategy, New York: Free Press. Scott, W.R. (1995). Institutions and Organizations, Thousand Oaks: Sage. Scott, Kelso, J.A. (1995). Dynamic Patterns. The Self-organization of Brain and Behavior, Massachussets Institute of Technology. Senge, P.M. (1990). The Fifth Discipline, New York: Doubleday/Currency. Simon, H.A. (1947). Administrative Behavior, 2nd edition 1957, New York: Macmillan. Taylor, F.W. (1992). Processo a Taylor, Edizioni Olivares, Milano (Italian translation from Scientific Management. Taylor’s testimony before the special house committee, Harper & Brothers, 1947). Van de Ven, A.H. & M. Scott Poole (1995). ‘Explaining development and change in organizations’. Academy of Management Review, 20(3): 510–540. Watson, J.B. (1924). Behaviorism, New York: W.W. Norton. Weick, K. (1979). The Social Psychology of Organizing (2nd edition), Reading, Mass.: Addison-Wesley. (1995). Sensemaking in Organizations, Thousand Oaks, CA.: Sage. Wernerfelt, B. (1984). ‘A resource-based view of the firm’. Strategic Management Journal, 5: 171–180. Williamson, O.E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications, New York: Free Press.

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The Diverse Global Context

23

Multinational Ethical Capability1

A Source of Competitive Advantage Paul F. Buller

l

Glenn M. McEvoy

Multinational corporations (MNCs) face several questions regarding the appropriate business practices to use in different countries in which they compete. MNCs face challenges in determining the right product, market, finance, and human resource management strategies across different national cultures. Increasingly, among the many questions MNCs face are those concerning business ethics, that is, the rightness or wrongness of certain business actions across cultures. There is little guidance in the literature about how an MNC can enhance its capability in dealing with international business ethics. Recent writings on international business ethics suggest that decisions regarding appropriate ethical actions are complex and multifaceted. This chapter reviews current approaches to addressing questions of ethics in a cross-cultural context. It then builds on Litz’s (1996) contention that sound ethical practice is an overlooked potential source of competitive advantage to the MNC. A discussion of the resourcebased perspective of competitive advantage serves as the foundation of our proposition that ethical capability is a sustainable source of competitive advantage. The chapter concludes with an integrative model underlining how transformational leadership, organizational learning, and human resource management (HRM) are integral to building MNC capabilities in global ethics.

ETHICAL CAPABILITY The central premise of this chapter is that an MNC’s ethical capability may be an overlooked source of competitive advantage. Ethical capability is defined here as an organization’s ability to identify and respond effectively to ethical issues in a global context. Ethical capability involves firm-specific: (a) knowledge

1 This chapter is adapted from Journal of World Business, Vol. 34, No. 4, 1999, pp. 326–343, ‘Creating and Sustaining Ethical Capability in the Multinational Corporation’ with permission from Elsevier Science.

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and skills to understand ethical frameworks and respond effectively to crosscultural ethical situations; (b) leadership, team work, and organizational culture that facilitate ongoing dialogue and learning about global ethics; (c) human resource systems and other organizational practices that acquire, develop, and sustain these capabilities. The proposed positive relation of ethical capability to competitive advantage is built on a resource-based perspective of the firm. This perspective argues that firm-specific resources and capabilities, that are valuable, rare, and inimitable, are sustainable sources of competitive advantage. Before developing this argument further, it is important to understand the nature and challenges of global ethics.

FRAMEWORKS FOR EXAMINING CROSS-CULTURAL ETHICS Several frameworks and algorithms have been proposed to address business ethics in a global context (Buller et al., 1997; DeGeorge, 1993; Desai and Rittenburg, 1997; Donaldson, 1996; Jackson, 1997). These frameworks suggest that there is no simple answer to the question of what is right and what is wrong ethical behavior across different national cultures. Donaldson (1996), for example, observed that US businesses have tended to adopt one of two extreme positions when faced with ethical questions across cultures: relativism or absolutism. The relativist perspective takes the familiar stance ‘when in Rome, do as the Romans do’. At the other extreme, the absolutist perspective argues that the home country cultural (and ethical) values must be applied everywhere as they are at home. According to Donaldson (1996), ‘Companies must help managers distinguish between practices that are merely different and those that are wrong. For relativists, nothing is sacred and nothing is wrong. For absolutists, many things that are different are wrong. Neither extreme illuminates the real world of business decision making. The answer lies in between’ (1996:52). Donaldson (1996) proposed several core values that broadly define the moral imperatives for MNCs and provide a moral compass for global business practices: respect for human dignity, respect for basic rights, and good citizenship. He then provided a set of algorithms which guide decision making in situations where ethics collide across cultures. He proposed the concept of ‘moral pluralism’ to show how the outcome of these algorithms can range from the MNC insisting on its own (home country) ethical principles to the MNC accommodating the ethical values of the host country. Thus, while Donaldson concludes that there is a set of core values that can serve as a basic threshold for all MNCs, there also should be ‘moral free space’ that allows for judgment based on the unique circumstances involved in a given situation. DeGeorge (1993) also proposed several international moral norms that can be applied to MNCs. In contrast to Donaldson, he argued that the complexity of multinational situations makes the use of simple algorithms inadequate. Rather, he suggested that each situation requires judgment and moral imagination. He offered a number of guidelines, particularly for MNCs operating in less developed countries, and for dealing with issues of hazardous products or processes and

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corruption. In addition, DeGeorge identified three types of ethical conflicts: (a) pressures on individuals to violate personal norms, (b) inconsistent cultural norms, and (c) host country versus home country interests and values. Each of these types of conflicts ultimately needs to be resolved at a higher level of influence, a concept he termed ethical displacement. Ethical displacement involves the development of sufficient policies, procedures, structures, rewards, and background institutions to reinforce ethical practices. Jackson (1997) observed that MNCs ‘face an intricate multilayered array of cultural, ethical, and legal norms. The presence of such normative complexity and depth signals the need for ethics programs that assimilate such characteristics’ (p. 1128). He suggested a number of pragmatic steps toward building a ‘cosmopolitan’ culture of ethical awareness in the MNC. This cosmopolitan culture is one that is neither relativistic or absolutist, but that is sensitive to cross-cultural differences regarding ethics. Such a culture goes beyond simple rule formulations or ethical algorithms, and is characterized by a higher level of moral sensitivity based on ongoing education and collaboration among decision makers across cultures. This notion of a cosmopolitan culture is similar to Vega’s (1997) concept of ‘common norming’ in which conflicting parties attempt to find the common moral ground through ongoing dialogue. Buller et al., (1997) have proposed a pragmatic framework to guide managerial decision making in situations involving cross-cultural ethical conflict. Their model, based on conflict management theory, suggests that there is a continuum of at least six possible alternative strategies for responding to cross-cultural ethical conflict ranging from adaptation to the host country’s ethical standards to complete insistence on the application of home country standards. They provide a decision tree to guide managers through the decision process in situations where ethics collide across cultures. The decision tree is intended to encourage contingency thinking and identify plausible courses of ethical action. In summary, these emerging frameworks are consistent in their view that making appropriate ethical decisions in the MNC is a complex process. For our purpose, we propose three possible general responses of the MNC when faced with a cross-cultural ethical conflict: relativism (i.e., adopting the local norms), cosmopolitanism (i.e., identifying the common moral ground), and universalism (i.e., enforcing universal moral principles).

E THICAL CAPABILITY AS A SUSTAINABLE SOURCE OF C OMPETITIVE A DVANTAGE We build on the resource-based theory of competitive advantage by proposing that ethical capability is a potential source of sustainable competitive advantage. We then describe how a firm’s leadership, learning processes, and human resource management activities can be a primary means through which ethical capability is created and sustained in the MNC.

RESOURCE-BASED PERSPECTIVE

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A prominent emerging perspective in the strategic management literature is the resource-based view of the firm (Wenerfelt, 1984; Barney, 1991). Resource-based

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theory proposes that a firm is defined by the resources it controls. Further, it assumes that all competitors are not homogeneous but they differ, based on the resources they possess and on the basis of this the performance of firms differs. If a firm possesses resources that are valuable, rare, inimitable, and the firm has the organizational capability to exploit them, it possesses a sustainable competitive advantage (Barney, 1991). Three general types of resources can be a source of competitive advantage: physical capital (e.g., plant, equipment, finances), organizational capital (e.g., structure, planning, systems), and human capital (e.g., skills, judgment, adaptability). Note that the sources of advantage include both tangible and intangible resources. Barney (1991) and Senge (1990) have argued that certain firm-specific, intangible sources of advantage (such as organizational history, culture, and learning) can be particularly important to sustaining competitive advantage precisely because these resources are extremely difficult to imitate. Perceiving interdependence acknowledges the stakeholder perspective of the firm. With respect to the MNC, important stakeholders include host country institutions as well as the MNC’s foreign suppliers, customers, and employees. According to stakeholder theory, a firm that recognizes and effectively satisfies the diverse needs of its various stakeholders will be able to sustain its institutional legitimacy (Freeman, 1984). For example, effectively balancing the needs of various stakeholders can lead to enhanced corporate reputation (Royal Society for the Encouragement of the Arts, Manufacture and Society, 1996), increased solidarity, commitment, loyalty, and productivity of employees, and lower costs in maintaining a complex network of suppliers, customers, agents and geographically dispersed employees, particularly in globalization strategies (Zadek, 1998). In addition, an organization’s ability to engage in ongoing, constructive dialogue with its various stakeholders can be an important source of competitive advantage (Fulmer, Gibbs, and Keys, 1998). As Sharma and Vredenburg (1998) found, such dialogue can lead to the development of greater capabilities for stakeholder integration, higher order learning, and continuous innovation, which in turn can contribute to competitive advantage. Thinking ethically involves the resource of ethical awareness. In the context of the MNC, ethical awareness includes an understanding of the various ethical frameworks (e.g., utilitarianism, rights-based, justice) as well as sensitivity to the differences among ethical perspectives across cultures. As noted above, effective dialogue among stakeholders can be an important source of organizational learning. Dialogue is a process of collective thinking and exploration of underlying assumptions, beliefs and values. According to Fulmer et al., (1998): When organizations must ‘unlearn’ previously unsuccessful patterns, dialogue offers a path to follow. As companies move to global operations, dialogue becomes even more important… (p. 15). The organizational learning that emerges from the dialogue among diverse stakeholders in the MNC allows for greater awareness of and sensitivity to the ethical values, beliefs and practices across cultures. This organizational learning can be a highly sustainable source of advantage (Senge, 1990).

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Responding effectively involves the resource contribution of effective issues management, that is, taking the appropriate ethical action in a timely manner. Discerning the appropriate ethical response in an international context is complex and the ability to apply a relevant cross-cultural ethics model is critical to the decision-making process. This capability assumes that, the first two capabilities— perceiving interdependence and thinking ethically—are in place. In addition, it involves the requisite structures, processes, and procedures of creating and sustaining ethical behavior and decision-making. As long as MNCs develop the capability to perceive, deliberate about, and respond effectively to ethical issues across cultures they will be able to enhance their competitive advantage. These capabilities can be developed through effective dialogue with international stakeholders and through organizational practices designed to facilitate organizational learning and appropriate action regarding global ethics. In the next section, we argue that the MNC’s human resource management system can be a primary means for developing ethical capability.

HUMAN RESOURCES MANAGEMENT

AS A

KEY SOURCE

OF

ADVANTAGE

Assuming that ethical capability can be a source of sustainable competitive advantage, how can such capability be developed? There is a growing consensus that the key to developing competitive advantage in MNCs is the effectiveness of the human organization (Bartlett and Ghoshal, 1995; Pfeffer, 1994; Pucik, Tichy and Barnett, 1992). MNCs can enhance their competitiveness by integrating their human resource management activities with their strategic goals (Schuler, Dowling, and De Cieri, 1993; Taylor, Beechler and Napier, 1996). These socalled strategic international human resource management (SIHRM) systems are optimally designed in accordance with the MNC’s strategic challenge i.e. achieving the appropriate balance between global integration and local responsiveness (Taylor et al., 1996). Strategic choices for the MNCs include focusing on multidomestic strategy (i.e., emphasis on meeting local needs), global strategy (i.e., emphasis on global efficiency), or transnational strategy (i.e., simultaneous emphasis on local responsiveness, global efficiency, and worldwide organizational learning) (Bartlett and Ghoshal, 1995). The appropriate international strategy is largely a function of industry characteristics and firm resources. The challenge of effective strategic human resource management in MNC’s is to design human resource systems and practices that are consistent with strategy. In this regard, Taylor et al., (1996) suggested three possible MNC orientations regarding human resource management practices: adaptive (i.e., adapting to practices in the host country), exportive (i.e., imposing home country practices), or integrative (i.e., using some combination of best practices regardless of origin). In addition to strategy, an MNC’s approach to SIHRM may also be determined by the relative influence of home country and host country culture, values and practices. Table 23.1 summarizes possible configurations of strategy, human resource management, and ethical responses for the MNC. While separate literature on

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international strategy, human resource management, and ethics suggests that approaches should differ based on the relative importance of local versus global demands, it is not clear how strategy, human resources, and ethics are (or should be) best integrated in the MNC. For example, a company following a multidomestic strategy may well employ an adaptive approach to human resource management. It does not necessarily imply that this company would also follow a relativistic approach to ethics. There may be some ethical issues (e.g., employment of child labor) that might require the MNC to follow a universal policy (e.g., a code legislating against child labor) under any circumstances, even if local customs and values allow the employment of young children. Alternatively, a global strategy may require some consistency across cultures regarding human resource and ethics practices. However, there may be instances (e.g., gift giving or nepotism) in which one could argue from an ethical perspective that local values and norms should be honored. Although beyond the scope of this paper, a fruitful avenue for future research would be to develop and test various configurations of strategic, human resource management, and ethics practices of MNCs. Table 23.1: Possible Configurations in the MNC Local Responsiveness ......................... Global Consistency Private Strategy HRM Ethics

Multidomestic Adaptive Relativist

Transnational Integrative Cosmopolitan

Global Exportive Universal

Taylor et al., (1996) argued that an effective SIHRM system ‘should be constructed around specific organizational competencies that are critical for securing competitive advantage’ (p. 960). Barney and Wright (1998) have shown how resource-based theory applies specifically to human resource management as a source of competitive advantage. They proposed that human resource practices contribute to competitive advantage only if they provide value (i.e., enhance cost leadership or differentiation), are rare, are difficult to imitate, and the organization has the system and practice in place to derive the potential of its human resource. To the extent that a firm can develop firm-specific skills, effective team work and culture among diverse employees, and human resource systems that are synergistic across the disparate organizational units, the firm can harness valuable, rare and inimitable resources. Thus, ethical capability would include firm-specific: (a) knowledge and skills to understand ethical frameworks and respond effectively to diverse ethical perspectives across cultures; (b) leadership, team work, and organizational culture that facilitates effective ongoing dialogue on ethical differences; and (c) human resource management and other organizational practices that create and sustain these capabilities. Thus, we would argue that ethical capability in a global context is certainly one source of competitive advantage that an SIHRM system could build.

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AN INTEGRATIVE MODEL FOR CREATING AND S USTAINING E THICAL CAPABILITY Specific ways in which the MNC’s human resource (HR) function can help to build and maintain ethical capability include three primary interrelated aspects that are shown in Figure 23.1: transformational leadership, enhancing organizational learning and implementing specific HR practices. Each of these elements is described next. It is important to acknowledge, however, that while we are focusing on the role of the HR function, ethical capability is developed in partnership with line managers, HR professionals, ethics officers, and other employees. However, as Ulrich and Lake (1990) have shown, the HR function can play a key role as a catalyst for developing and maintaining ethical capability. We build on their work in the following discussion.

Fig. 23.1: An Integrative Model for Creating and Sustaining Ethical Capability

TRANSFORMATIONAL LEADERSHIP The process for creating and sustaining ethical capability is best initiated and facilitated through transformational leadership on the part of the CEO and other key leaders, including those responsible for human resources. Transformational leaders articulate a vision that includes ethical principles, communicate the vision in a compelling way, and demonstrate consistent commitment to the vision over time (Tichy and Devanna, 1986). Tichy (1993) described transformational leadership as a complex drama played out over three stages: Awakening, when the need for change is recognized; Envisioning, when a vision is created and employees become committed to it; and Re-architecting, which entails the creation of an organization to support the vision. In the awakening stage, leaders must carefully articulate why the move to ethical capability is necessary and generate broad support for change among other key leaders in the organization. Part of working through this initial stage is recognizing and addressing points of

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resistance to change. There are a number of reasons why managers and employees might resist adopting new skills and organizational practices necessary for creating ethical capability. The transformational leader must be sensitive to these sources of resistance while instilling a compelling motivation to change. The envisioning stage helps overcome resistance by engaging employees in a definition of what ethical capability will look like for the MNC. Collaboration among the MNC’s various stakeholders is essential in developing this vision or mind set. Re-architecting involves building the requisite structures, systems, policies, and practices to support the vision of ethical capability. The reputation for strong ethical cultures in companies like Johnson & Johnson, Motorola, Royal Dutch/ Shell, Texas Instruments, and others can be traced directly to transformational leaders who consistently, by their words and deeds, signaled the importance of commitment to high moral standards (Moorthy et al., 1998).

ENHANCING ORGANIZATIONAL LEARNING Ulrich and Lake (1990) state that at the heart of building organizational capability (and by extension, ethical capability) is creating “shared mindsets” among the internal and external stakeholders of the company regarding its strategic goals and the processes to reach those goals. In developing a shared mindset, it is critical that the senior HR managers, in partnership with other senior managers in the MNC and from the overseas affiliates, develop consensus on the appropriate HR agenda, including specific attention to the challenge of cross-cultural ethics (Eisenstat, 1996). Successful MNCs have learned that they cannot simply export practices that are effective domestically to overseas operations. As Table 23.1 suggests that while exporting human resource management or ethics practices might be appropriate under certain conditions, other possible configurations might be required. Developing the capability to deal with this complexity demands that the organization learns from its international stakeholders. Several conditions facilitate organizational learning. First, it is critical that top managers of the MNC provide leadership in recognizing the value of human resources and developing a broader cross-cultural understanding and sensitivity (Barney and Wright, 1998). Second, the MNC must engage its various international stakeholders, including employees from home and host countries, in a collaborative effort to find the common ground with respect to human resources and ethical practices (Donaldson, 1996). Cross-cultural dialogue is an important tool for developing new mindsets and creating shared meanings (Fulmer et al., 1998). For example, Snow, Davidson, Snell, and Hambrick (1996) have described how MNCs can use transnational teams to develop values, policies, and practices to achieve global efficiency, local responsiveness, and organizational learning. Through ongoing research, dialogue, and action learning, these transnational teams can create a set of human resource management practices and ethical principles that could be applied in various contexts in which the MNC operates (Fulmer et al., 1998; Luthans, Marsnick, and Luthans, 1997). The outcome of this collaborative effort would be a set of human resource practices that are adaptive, integrative, and/or exportive, and a set of moral

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principles that are locally responsive, cosmopolitan, and/or universal in their application across different situations (see Table 23.1). The ultimate goals of this initial organizational learning process are: (a) to establish a corporate code of ethics that is globally integrative yet locally responsive and consistent with the models of global ethics described above; (b) to create mechanisms for an ongoing process of organizational learning and responsiveness; and (c) to create an ethical culture across all MNC operations. Based on a clear corporate code of ethics and a continuous learning process, the MNC can develop specific management practices to shape and reinforce an ethical corporate culture. These practices are described fully below.

IMPLEMENTING SPECIFIC HRM PRACTICES As noted, an international code of ethics is a necessary, but not sufficient, step in building ethical capability. Codes of ethics are essential in providing clear direction about ethical behavior in various situations. However, employees must have the ability, motivation, and the organizational support, to understand and implement the code of ethics. Moreover, formal codes, rules, and legal guidelines cannot cover all possible situations and do not obviate the need for moral judgment and imagination (DeGeorge, 1993; Donaldson, 1996). So, ethical capability must be further enhanced through developing specific human resource management practices linked to cross-cultural ethical competencies. Below we focus on the major human resource activities of selection, training and development, appraisal, compensation, and organization design and change, although other organizational activities are relevant in building ethical capability. It is also important to recognize that there is not one prescribed set of human resource management practices for MNCs to follow. Rather, specific practices should vary (e.g., adaptive, integrative, exportive) depending upon the strategy of the MNC and the unique cultural characteristic of the country in which it operates (Luthans et al., 1997; Taylor et al., 1996). While ‘shared mindsets’ (i.e., assumptions, values, and beliefs) are at the heart of ethical capability, these core values and beliefs must be created and reinforced by the various management practices that govern employees’ behaviors in the organization. Human resource management practices that are central to shaping ethical values, beliefs, and behaviors can be organized into three general areas: generating competencies, reinforcing competencies, and sustaining competencies. Generating Competencies: Generating competencies involves acquiring the necessary ethical values and behavior through the selection processes and/or developing values and behavior through training and development. Selection: Top executives agree that one of the most important things they can do to influence the firm’s performance is to hire and promote the right people. Staffing decisions in the MNC are particularly complex. For example, in many MNCs, lower level employees tend to be host country nationals, while higher level managers tend to be parent country expatriates, often without much

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intercultural experience (Bell and Harrison, 1996). One reason for the traditionally high failure rate among US expatriates is that selection criteria for these managers historically has emphasized technical, rather than relational or cultural, skills (Mendenhall, Dunbar, and Oddou, 1987). It is now widely recognized that relational and intercultural skills also are critical to expatriate effectiveness (Tung, 1993). Intercultural competence may allow expatriate employees to be more effective because it better equips them to ‘cope with the stress of acculturation’ (Bell and Harrison, 1996:50). Due to the challenges of global ethics, selection criteria for managers and other employees working across cultures should certainly include ethical competence (e.g., moral development), sensitivity to differences in ethics across cultures, and ability to make sound decisions in situations when home and host country ethics collide. Previous cross-cultural experience would certainly be valuable. Other useful selection criteria would include, adaptability, flexibility, and the capacity to learn in the face of changing conditions. Of course, staffing decisions should be made based on: (a) a thorough needs analysis to identify the specific jobs to be filled as well as the knowledge, skill and ability needed for effective performance; (b) careful screening of candidates based on multiple structured interviews and other valid selection procedures; and (c) realistic job previews that communicate the kinds of situations that the new employee is likely to face. The screening of candidates should also include an assessment of ethical awareness, sensitivity, and responsiveness perhaps through the use of ethical dilemmas that are likely to confront employees in the company. In addition, MNCs should expand their search for job candidates beyond the domestic labor pool to attract the best global talent. Leading companies such as Unilever and IBM have developed a sophisticated databases that enable managers and human resource professionals to identify qualified job candidates from across their international operations (Snell, Snow, Davison and Hambrick, 1998). Ideally, these databases would include information about employees’ experience, competency, and preference. Such systems would be valuable in staffing management, human resource and other relevant job positions (e.g., ethics advisors/committees) with individuals who are sensitive and responsive to the diverse moral values and issues across the MNC’s operations. Training and Development: Training and development activities also are important in building ethical capability. Resource-based theory suggests that training in firm-specific rather than general skills creates greater potential for competitive advantage because firm-specific skills are rare, valuable, and difficult to imitate (Barney and Wright, 1998). Therefore, to the extent possible, ethicsrelated training should emphasize firm-specific rather than general moral issues, principles and practices. Training and development activities can enhance several types of competencies. First, all employees must be trained to understand and apply the MNC’s code of ethics, as well as the multitude of international laws and codes of conduct. Training in various ethical frameworks and models is also warranted. Beyond that, cross-cultural training can be effective in developing greater cultural awareness and ability to interact across cultures (Black and

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Mendenhall, 1990). Presumably, this kind of training also would be effective with respect to cross-cultural differences in ethics. Bell and Harrison (1996) suggested that cross-cultural training should emphasize both content (e.g., knowledge of other cultures) and process (e.g., how culture influences cognition and behavior). However, as Husted, Dozier, McMahon, and Kattan (1996) have observed, cross-cultural training may be more effective in transmitting attitudes rather than moral reasoning across cultures. For this reason, some have suggested that selection of individuals with diverse cultural experience may be preferred to cross-cultural training in generating ethical competencies in the MNC (Bell and Harrison, 1996; Jackson, 1997). An alternative approach that addresses some of the shortcomings of crosscultural training is cross-cultural team building for transnational teams, used by such companies as Motorola, Shell, Ford, and Glaxo-Wellcome (Snell et al., 1998). This approach goes one step further than traditional cross-cultural training programs by ‘developing coherent work processes that take advantage of differences on the team by establishing ground rules and protocols that integrate members. When coupled with training in conflict resolution and negotiation skills, cross-cultural team building can substantially improve integration and efficiency’ (Snell et al., 1998:153). Motorola’s Ethics Renewal Process provides one example of how organizations can implement this approach (Moorthy, DeGeorge, Donaldson, Ellos, Solomon and Textor, 1998). With a trained core of senior executives, Motorola’s Director of Global Leadership and Organizational Development facilitates ethical awareness, skill development, and team building in diverse teams of managers in the company’s foreign operations. The teams identify ethical issues and collaborate on possible solutions. Particular attention is paid to dialogue on local ethical perspectives that may differ from the Motorola corporate code of ethics. Local ethics committees are formed, trained in various ethical frameworks, and authorized to develop policies and guidelines to address local ethical issues. For example, Motorola has developed specific guidelines for gift giving in Japan that differ from the company’s guidelines on gift giving in other countries. The products of these local ethics committees are then shared with other similar committees around the world. To date, Motorola has formed 14 ongoing ethics committees across its global operations. Clearly, this kind of comprehensive approach to cross-cultural ethics training and development can enhance the organizational learning process and create the firm-specific knowledge and skills that contribute to sustainable competitive advantage. Reinforcing Competencies: Once they have been acquired or developed, crosscultural ethical competencies must be reinforced through performance appraisal and compensation/rewards systems. Performance Appraisal: Appraisal processes should signal clearly the MNC’s standards and expectations regarding ethical behaviors. To be effective, ethical standards should include both behavioral and outcome measures. In addition, employees should receive timely and regular feedback regarding their performance. Effective performance feedback reinforces behaviors that are consistent

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with expectations and helps the employee make any necessary improvements. Finally, the performance appraisal process itself (i.e., appraisal interviews, goal setting, feedback, coaching) can be an effective tool for enhancing trust and communication between managers and employees. Increased trust and communication can in turn reinforce the shared mindset regarding ethics in the MNC (Barney and Wright, 1998). Performance expectations regarding ethics should also be developed between the MNC and its suppliers and customers (Donaldson, 1996). It is incongruent when the MNC has high internal ethical standards while its own suppliers and customers engage in unethical behaviors. Ideally, acceptable ethical standards should be jointly developed with suppliers and customers. This process will help to clarify for managers the kinds of suppliers and customers with which the MNC can do business. And, as with internal appraisal processes, effective processes designed and implemented with suppliers and customers also can enhance trust and communication reinforcing a shared mind set regarding ethics. Rewards and Recognition: One purpose of performance appraisal is to provide a systematic basis for allocating rewards. To be effective, compensation and recognition systems should be: (a) linked directly to ethical behaviors and outcomes; (b) timely; (c) visible; (d) durable (i.e., produce long-term motivation); and (e) contribute to a shared mindset regarding ethical values and behaviors (Ulrich and Lake, 1990). In addition, thoughtfully designed reward systems include both monetary and non-monetary rewards linked to ethical performance. Effective leaders, such as Jack Welch at General Electric, are renowned for their prompt, hand-written notes acknowledging exemplary employee performance (Byrne, 1998). This type of informal recognition can provide strong reinforcement for company values. An example provided by Donaldson (1996) emphasizes the power of recognizing and rewarding ethical behavior: ‘Around 1950, a senior (Motorola) executive was negotiating with officials of a South American government on a $10 million sale that would have increased the company’s annual net profits by nearly 25 per cent. As the negotiations neared completion, however, the executive walked away from the deal because the officials were asking for $1 million for “fees”. CEO Robert Galvin not only supported the executive but also made it clear that Motorola would neither accept the sale on any terms nor do business with those government officials again. Retold over the decades, this story demonstrating Galvin’s resolve has helped cement a culture of ethics for thousands of employees at Motorola’ (p. 60). This example also demonstrates the particular challenge of linking rewards with appropriate behaviors in instances where ethical and other outcomes (e.g., financial) may be in conflict. The MNC must be clear about its priorities and reinforce them accordingly in order to reduce employees’ ambiguity under these circumstances. Sustaining Competencies: Organizational mechanisms for sustaining ethical competencies over time include organization design (e.g., structure and reporting relationships), communication, and ongoing capacity for change.

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Organization Design: The central purpose of organization design is to allocate and coordinate the key tasks that must be completed to create and sustain competitive advantage. Consequently, emphasis should be placed on organizing those tasks and resources that add value, are rare and inimitable (Barney and Wright, 1998). In building ethical capability, the HR department adds value through its selection, training, appraisal, and compensation activities that are linked to ethical behavior (Schuler et al., 1993; Taylor et al., 1996). Ideally, these activities are internally consistent and continually aligned with the organization’s needs as it evolves in a changing global environment. In this respect, organization design is best viewed as a process for continually identifying key tasks and modifying the reporting relationships, responsibilities, and coordinating mechanisms to accomplish those tasks. Further, in a dynamic, global environment, organic forms such as networks, team-based organizations, and temporary structures, can enhance organizational learning, stimulate moral imagination, and allow for greater flexibility and responsiveness to changing conditions (Fulmer et al., 1998; Nonaka and Takeuchi, 1995; Snell et al., 1998). Another aspect of organization design is creating partnerships with suppliers, customers, and other organizations that can enhance the organization’s competitiveness. Effective strategic alliances can produce resources that are valuable, rare and difficult to imitate (Barney, 1991). International partners are sources of learning regarding different ethical values and practices. Through exploring different perspectives, partners may discover common ethical ground or forge a cosmopolitan ethical culture that achieves a higher level of moral development (Donaldson, 1996; Jackson, 1997). Additionally, MNCs have a moral obligation to support their organizational units and employees by developing appropriate structures, systems, policies, procedures, and other background institutions to reinforce ethical practices (DeGeorge, 1993). In this regard, an increasing number of MNCs are establishing ethics officers, advisors, ombudsmen, and/or committees to focus more attention on ethical issues and practices (Center for Business Ethics, 1992; Ethics Officer Association, 1997). The HR function can be instrumental in facilitating the staffing of these positions with individuals of diverse cultural perspectives. Many companies have found that it is important for the ethics function to be visible and accessible, as well as somewhat independent, within the organization. This type of structure may provide quicker access and greater confidentiality for employees who have concerns about ethics. Communication: Clear and consistent organizational communication is central to creating and sustaining a shared mindset of ethics in the MNC. As noted earlier, there is no question that the CEO and other top managers are critical in establishing ethical capability in the MNC. Top managers signal expectations by their words and, more importantly, by their example. Moreover, effective global companies like Royal Dutch/Shell (The Shell Report, 1998) and Motorola (Moorthy et al., 1998) have developed explicit statements of their global ethics principals and values and made them available to their employees throughout the world. The worldwide web, e-mail, and other communication technologies

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have made it possible for these and other companies to solicit real time feedback and facilitate ongoing discussion regarding their ethical values and principles. In addition, many companies have established ethics hotlines via telephone or computer to provide immediate and confidential support for employees facing ethical dilemmas. In countries where the telecommunications infrastructure is less developed, ‘hot boxes’ (manual systems) provide a means for communication. These various approaches provide an essential infrastructure for ongoing dialogue on ethical practices throughout the MNC. Ongoing Capacity for Change: Paradoxically, a key task for transformational leaders is to instill in the organization an ongoing capacity for change (Tichy, 1993). Several activities are central in creating a capacity for continuous improvement in ethical capability: (a) conducting periodic audits of the ethical and cultural climate; (b) developing a vision and a plan for continually improving ethical capability; (c) understanding and overcoming possible points of resistance to change; and (d) identifying and implementing the right tasks, structures, processes, systems, and other resources necessary to develop and sustain ethical capability. The HR function, in partnership with key managers and ethics professionals, can be instrumental in facilitating this process of ongoing organizational change and improvement.

SUMMARY MNCs operate in a context of diverse, sometimes conflicting, moral values and norms. The emerging consensus is that companies must become more sensitive to cross-cultural ethical differences and more sophisticated in applying the appropriate ethics in any given situation. This global ethical capability can be a sustainable source of advantage for the multinational corporation because it involves developing resources that are valuable, rare, and inimitable. The organization can enhance its ability to exploit and sustain its ethical capability through an integrative approach, derived from transformational leadership, ongoing organizational learning, and the design and implementation of its human resource management practices.

References Barney, J. (1991). ‘Firm resources and sustained competitive advantage’. In Journal of Management, 17: 99–120. Barney, J. & P. Wright (1998). ‘On becoming a strategic partner: The role of human resources in gaining a competitive advantage’. In Human Resource Management, 37(1): 31–46. Bartlett, C. & S. Ghoshal (1989). Managing Across Borders: The Transnational Solution, Boston: Harvard Business School Press. (1995). ‘Changing the role of top management: Beyond structure to purpose’. In Harvard Business Review, 73(1): 86–96.

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Bell, M. & D. Harrison (1996). ‘Using intra-national diversity for international assignments: A model of bicultural competence and expatriate adjustment’. In Human Resource Management Review, 6(1): 47–74. Black, S. & M. Mendenhall (1990). ‘Cross-cultural training effectiveness: A review and a theoretical framework for future research’. In Academy of Management Review, 15: 113–136. Buller, P., J. Kohls & K. Anderson (1997). ‘A model for addressing cross-cultural ethical conflicts’. In Business and Society, 36(2): 169–193. Byrne, J. (1998). ‘Jack: A close-up look at how America’s #1 manager runs GE’. In Business Week, June 8, 90–106. Center for Business Ethics (1992). ‘Instituting ethical values in large corporations’. In Journal of Business Ethics, 11: 863–867. DeGeorge, R. (1993). Competing with Integrity in International Business, NY: Oxford University Press. Desai, A. & T. Rittenburg (1997). ‘Global ethics: An integrative framework for MNEs’. Journal of Business Ethics, 16: 791–800. Donaldson, T. (1996). ‘Values in tension: Ethics away from home’. In Harvard Business Review, September–October, 47–62. Eisenstat, R. (1996). ‘What corporate human resources brings to the picnic: Four models for functional management’. Organizational Dynamics, Autumn, 7–22. Freeman, R. (1984). Strategic Management: A Stakeholder Approach, Boston: Pitman Publishing Inc. Fulmer, R.M., P. Gibbs & J.B. Keys (1998). ‘The second generation learning organizations: New tools for sustaining competitive advantage’. In Organizational Dynamics, Autumn, 7–20. Husted, B., J. Dozier, J.T. McMahon & M. Kattan (1996). ‘The impact of crossnational carriers of business ethics on attitudes about questionable practices and form of moral reasoning’. In Journal of International Business Studies, second quarter, 391–411. Jackson, K. (1997). ‘Globalizing corporate ethics programs: Perils and prospects’. In Journal of Business Ethics, 16: 1227–1235. Luthans, F., P. Marsnik & K. Luthans (1997). ‘A contingency matrix approach to IHRM’. Human Resource Management, 36(2): 183–200. Mendenhall, M., E. Dunbar & G. Oddou (1987). ‘Expatriate selection, training, and career pathing: A review and Critique’. In Human Resource Management, 26, 331–345. Moorthy, R., T. Donaldson, W. Ellos, R. Solomon & R. Textor (1998). Uncompromising Integrity: Motorola’s Global Challenge: 24 Global Case Studies with Commentaries. IL: Motorola University Press. Nonaka, I. & H. Takeuchi (1995). The Knowledge-creating Company: How Japanese Companies Create the Dynamics of Innovation, New York: Oxford University Press. Pfeffer, G. (1994). Competitive Advantage through People. Boston: Harvard Business School Press.

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Pucik, V., N. Tichy & C. Barnett (eds.) (1992). Globalizing Management: Creating and Leading the Competitive Organization, New York: Wiley. Royal Society for the Arts, Manufacture & Commerce (1996). Tomorrow’s Company: The Role of Business in a Changing World. London: RSA. Schuler, R., P. Dowling & H. De Cieri (1993). ‘An integrative framework of international human resource management’. In International Journal of Human Resource Management, 1: 717–764. Senge, P.M. (1990). The Fifth Discipline. New York: Doubleday. Sharma, S. & H. Vredenburg (1998). ‘Proactive corporate environmental strategy and the development of competitively valuable organizational capabilities’. Strategic Management Journal, 19, 729–753. Snell, S., C. Snow, S. Davison & D. Hambrick (1998). ‘Designing and supporting transnational teams: The human resource agenda’. Human Resource Management, 37(2): 147–158. Snow, C., S. Davison, S. Snell & D. Hambrick (1996). ‘Use transnational teams to globalize your company’. Organizational Dynamics, Spring, 50–66. Taylor, S., S. Beechler & N. Napier (1996). Toward an integrative model of strategic human resource management’. In Academy of Management Review, 21: 959–985. The Shell Report (1998). Statement of General Business Principles. London: Shell International. Tichy, N. & M. Devanna (1986). The Transformational Leader. New York: John Wiley & Sons. Tung, R. (1988). ‘Career issues in international assignments’. Academy of Management Executive, 11, 241–244. (1993). ‘Managing cross-national and intra-national diversity’. Human Resource Management, 32, 461–477. Ulrich, D. & D. Lake (1990). Organizational Capability: Competing from the Inside Out. NY: John Wiley & Sons. Vega, G. (1997). ‘Caveat emptor: Ethical chauvinism in the global economy’. In Journal of Business Ethics, 16, 1353–1362. Wernerfelt, B. (1984). ‘A resource-based view of the firm’. In Strategic Management Journal, 5: 171–180. Zadek, S. (1998). ‘Balancing performance, ethics, and accountability’. In Journal of Business Ethics, 7, 1421–1441.

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Behavior of Firms during Economic Liberalization

Conceptual Propositions and an Integrative Model Sougata Ray

During the past two decades, a number of countries have been moving from an insular, command and planning oriented economy towards an increasingly liberalized, globalized, and market oriented economy. The rapid and widespread adoption of market-based policies and administrative reforms in these countries are popularly known as economic liberalization. As a result, both domestic and foreign firms in these countries have been facing significantly different environmental contingencies than those faced in a regulated era. One of the prime concerns for strategic management as a field of inquiry is the phenomenon of strategic adaptation of firms, i.e., how firms achieve a proper ‘fit’ with the environment through changes in strategy (Summer et al., 1990). Strategic adaptation is an outcome of this alignment achieved through the interplay of strategy content, strategy-making process, and the internal and external contexts of organizations (Miller and Friesen, 1984; Rajagopalan and Spreitzer, 1997). Therefore, strategy literature is replete with studies that demonstrate and examine the contingency linkage of strategy and environment. However, most of these studies have been conducted in the contexts of market-driven economies where firms are by and large free from the governments’ direct intervention and control. These economies have never undergone economic reforms of such magnitudes that experienced by many Asian, East European and Latin American countries in recent years. Though economic liberalization has a history of almost two decades in different country contexts, firm-level studies on the impact of economic liberalization are very limited (Ray, 2003). Whatever firm-level research is available in the form of case studies by the World Bank (e.g., Corbo and Melo, 1985) or by other researchers (e.g., Okoroafo, 1997) are incomplete and have many drawbacks. In these studies, neither the organizational variables such as structure, systems, resource endowments, leadership, and managerial processes

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are considered nor the performance implications for differences in strategic behavior are drawn. Though some researchers (e.g., Luo and Peng, 1999; Okoroafo, 1997) have adopted the contingency approach and explored the links of strategy with either environment or performance or both, but they have often used an inductive methodology to develop theories by studying a few firms, rather than explicating the usefulness of already existing theories. In this chapter we have outlined the major environmental contingencies faced by firms arising out of economic liberalization. We have also identified some other important contingency factors that influence strategic behavior of firms as established by previous research. Based on various management theories of adaptation, we have then proposed an integrative model outlining the relationship among these contingency factors, corporate strategy and performance in this context. The model highlights the relative importance and significance of various factors explaining strategic adaptation of firms in a liberalizing economy.

Economic Liberalization—An Overview Economic liberalization is associated with a number of economy-wide policy and administrative reforms, cutting across sectors such as trade, banking, and commerce, capital and labor markets. Regulatory policies are done away with or modified to facilitate the entry of private and foreign investors in a bunch of industries, supply of resources, and raising of funds from the domestic and international capital markets. Before reforms were initiated in these economies, firms faced various constraints in obtaining funds to finance their investments. Often state-owned financial institutions and banks were the only sources of funds for firms in these economies. However, in the liberalized era, a proliferation of financial services firms provides several alternative sources of funds to industry. The deregulation of interest rate structure also allows banks and financial institutions to set the interest rate depending on their perception of risk. Thus, the terms of lending vary across firms depending on various factors such as reputation and performance of firms, composition of their business portfolio, and strategic plans for the future. While these reforms provide a better supply-side environment to firms, deregulation, privatization and globalization measures also result in a highly competitive domestic market. The reduction in tariffs results in lower protection to domestic firms from foreign imports. In the area of public sector, in exchange for greater autonomy, governments reduce or stop budgetary support to stateowned enterprises, divest equity to private investors to bring in more accountability in their management, and also force them to augment their own financial resources. Economic liberalization offers a host of new opportunities for expansion, diversification, internationalization, divestment, consolidation, mergers and acquisitions, forming strategic alliances and joint ventures.

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CONCEPTUAL FRAMEWORK The discussion here points to the fact that between economic liberalization and a firm’s strategic behavior there is an intervening construct—the business environment of the firm. Being open systems, firms need to adapt to the changing environment (Katz and Kahn, 1966). In a review, Romanelli and Tushman (1986) identified three models of evolution of firms—an external control model, a strategic management model, and an inertial model. However, since then, another model, the resource-based theory of the firm (Wernerfelt, 1984), has gained prominence. These models are divided about whether adaptation is an outcome of managerial choice or is an environmentally determined phenomenon (Astley and Van de Ven, 1983). External control model subscribes to the environmental determinism perspective, in which the firms’ evolution, performance, and survival are controlled by the attributes of their business environment. The main proponents of environmental determinism are the population ecology scholars (Hannan and Freeman, 1977), the institutional theorists (DiMaggio and Powell, 1983) and, to a large extent, contingency theorists (Khandwalla, 1977; Lawrence and Lorsch, 1967; Thompson, 1967). They consider adaptation as an environmentally determined process where the management has few options and little effect on the success of the firm. The main thesis of population ecology is that resources are dispersed in the form of niches and are relatively resistant to manipulations by individual organizations. This makes the adaptation to different niches difficult. Firms either fit into niches and succeed, or are selected out and fail (Hannan and Freeman, 1977). Institutional theory emphasizes that firms’ behaviors are constrained and determined by the normative and regulatory pressures prevalent in the environment, which also ensures similarity and homogeneity of organizational forms (DiMaggio and Powell, 1983). Similarly, contingency theory outlines a limited role of managers to respond to the changing environment by continuously adapting to the emerging contingencies. Viewing firms as a total system, they observe that managers are only a component of the system, which is technically constrained by environment (Bourgeois, 1984). The focus of managerial decision making is not on choice but on gathering correct information about changes in the environment and examining the consequences of alternative responses (Astley and Van de Ven, 1983). The deterministic view also finds support from the classical Industrial Organization perspective. Industrial Organization economists have studied the change in organizations’ conduct related to production, pricing and positioning of output (differentiation, vertical integration, cartel formation) in reaction to the demand and supply dynamics of an industry. According to this perspective, an organization can neither influence conditions nor its performance and it is its industry structure that determines organizational strategy and performance (Bain, 1968; Porter, 1981). The conclusion is that differences in structural characteristics of industries or domains and various niches in the market do exist with varied

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attractiveness providing non-uniform opportunities. In a more recent work, Porter (1991) brought the concept of national diamond in explaining organization-level differences within a nation: The local diamond consisting of factor conditions, demand conditions, related and supporting industries, market structure, and competition not only restricts the availability of strategic choice, but also the ability of organizations to adopt particular strategies and their effectiveness. However, the deterministic viewpoints do not preclude the existence of the strategic choice, they suggest that environmental pressures severely limit the strategic choice to managers (Astley and Van de Ven, 1983). On the contrary, the main thesis of the strategic management model is that managers have sufficient choice to decide on a firm’s course of action which, ultimately, decides its performance, survival, and evolution (Lado, Boyd, and Wright, 1992). Strategic evolution is constrained but not wholly predicted by prior pattern of activities (Romanelli and Tushman, 1986). Entrepreneurial managers at different levels in the organizational hierarchy play a crucial role in riding over the context and chart out the future of organization (Bartlett and Ghoshal, 1993). The strategic management model owes its origin to a seminal article by Child (1972) on strategic choice. The strategic choice theorists posit that environment should not be viewed as a set of imposing constraints as it does not play a deterministic role (Child, 1972). Organizations can construct, eliminate or redefine the objective features of their environment, can manipulate and influence it through various environment management processes and, thereby, purposively create their own measures and reality, and choose their own course of actions to attain a desired goal (Pfeffer and Salancik, 1978). This explains the diversity in strategy and structure of organizations operating in a similar environment. Viewing organizations as social systems, proponents of the resource dependence model (Pfeffer and Salancik, 1978) hold that organizations depend on different agencies in the environment for their resources and, in turn, influence the provider of resources. They portray the organization as an active participant in its relationships with different components of the environment and can be viewed as involved in power games external to the organization. For them, the managers manage their external environment as well as the internal organization, ‘and the former activity may be as important, or even more important, than the latter’ (Aldrich and Pfeffer, 1976:83). Accordingly, objective environment is secondary to the managerial decision making as the environment perceived by the managers becomes the reality (Child and Keiser, 1981). This contributes to the variation in responses to the environment among organizations as managerial perceptions of different organizations are different. Managers possess the leverage to influence both objective and perceived environments. The normative schools (Andrews, 1971; Ansoff, 1965) voice a similar proposition: environment offers opportunities to be exploited by firms as it views strategy as the preemptive actions to external opportunities and threats with a concern to match the organizational capabilities to environmental demands.

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The inertial model postulates that history and internal context of a firm matter (Hannan and Freeman, 1984). The population ecology theorists while focusing on single organizations have highlighted the role of organizational inertia leading to selection. Similarly, the evolutionary scholars argue that history matters as the present context of an organization is the reflection of its historical evolution, which constrains future direction of evolution (Nelson and Winter, 1982). The inertia surrounding current strategy develops because of commitment (Ghemawat, 1991). The earlier decisions on product/market, organizational purpose, geographical location, and technology can not be altered frequently because of commitment to the earlier choices. This limits the availability of strategic choice from one point in time to the other. As a result, organizations show a general tendency to preserve their earlier strategy rather than radically changing it (Hannan and Freeman, 1984). Political interests and institutionalized culture developed over a period of time also abet inertia and pose resistance to change (Tushman and Romanelli, 1985). It is time consuming to abandon those activities and discover new procedures, and change becomes inefficient and uncertain (Hannan and Freeman, 1984). Thus, the institutional, individual, and economic adjustments that accumulate over time become less easy to change and perhaps more risky to change (Huff, Huff, and Thomas, 1994). The resource based view of the firm (Penrose, 1959; Petraf, 1993; Wernerfelt, 1984) and a closely related content area the knowledge-based view (Conner and Prahalad, 1996) postulate that firms can be conceptualized as bundles of resources, which are heterogeneously distributed across organizations and resource differences persist over time. The resource position of a firm primarily determines the means to compete in a business and the direction to which it should grow (Penrose, 1959). Possession of certain idiosyncratic resources and deployment of these resources to implement fresh value-creating strategies that cannot be imitated easily by competitors helps firms achieve and sustain superior performance (Conner and Prahalad, 1996; Eisenhardt and Martin, 2000). Thus, the resource based model takes the position that the real source of competitive advantage of a firm lies very much inside the firm, in its possession of various idiosyncratic and specific non-tradable assets, and how efficiently and effectively managers utilize these assets (Barney, 1994). We must recognize that competing theories in strategic management only highlight the different slice of a complex reality. Managers choose strategies guided by their perceptions of environment and resource position of the firm. Their choice and implementation of the strategies are influenced by the organizational inertia prevailing due to the size, age, structure, and strategic predisposition of the firm. Finally, the efficacy of strategy implementation and performance of a firm largely depends on its possession and effective utilization of valuable resources. Figure 24.1 depicts a conceptual framework that incorporates the main constructs and their possible relationships as discussed above. This framework presents a contingent and holistic viewpoint culling the wisdom from multiple theoretical perspectives.

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VARIABLES OF THE INTEGRATIVE MODEL C ORPORATE STRATEGY VARIABLES The most critical choices in corporate strategy are the choice of businesses (scope or configuration)—which product and what customer to serve and how to manage the interlinkages of different businesses (organization) to better utilize corporate resources. Therefore, strategic management at the corporate level involves mainly one of the following four activities: portfolio management, restructuring, transferring skills, and sharing activities across businesses (Porter, 1987). Transferring skills is conceptually similar to the concept of leveraging core competencies (Prahalad and Hamel, 1990). Strategy literature has three dimensions related to scope such as vertical scope, product scope and geographical scope (Barney, 1994). Vertical scope and product scope respectively indicate the vertical and horizontal spreads of product market choices and together outline the total domain or scope of business of a firm (Ansoff, 1965). In a pioneering study of multinational firms, Stopford and Wells (1972) identified the extent of area diversification, i.e., geographic scope, as an important growth strategy. Geographical scope captures the geographical spread of both factor and product markets. Again, geographical scope has two aspects—spread of business activities in the domestic market and spread in the international market, i.e., extent of internationalization. In our model, we include these two dimensions related to scope, namely, business scope and geographical scope. Firms are also concerned about decisions regarding how much to produce, how many manufacturing and other facilities, and the size of the organization in terms of structure and number of employees. The complexity in management also increases with technical intricacy of products and processes (Mintzberg, 1979). All these add to a different dimension called diversity of operation. Finally, there is another dimension of corporate strategy called sharing of resources, which indicates the common use of tangible and intangible resources by different constituents of a firm either simultaneously or sequentially or both. However, sharing of resources is essential for exploiting the economy of scope (Teece, 1980). Thus, we find that there are at least five key dimensions of corporate strategy—business scope, geographical scope, scale of operation, diversity of operation, and sharing of resources. The changes in these corporate strategy dimensions together constitute the corporate strategic behavior of firms during economic liberalization.

E NVIRONMENT VARIABLES A firm’s environment has been defined as the aggregate of those external factors that have impacts or the potential to have impact on its functioning (Thompson, 1967; Emery and Trist, 1965). Environment is also the source of constraints, contingencies, problems, and opportunities that affect the terms on which an organization transacts business (Khandwalla, 1977). This attribute of environment

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indicates its munificence which is governed by the presence of various resources in an environment and the competition among firms for those resources. There are many possible sources of environmental influence such as bargaining power of customers, intensity of competition and regulatory influence, which can broadly be classified into two—intensity of market forces, and regulatory intensity. In a more regulated environment, the role of market diminishes as the government, rather than the market, regulates the behavior of firms (Desai, 1993). With increased regulatory intensity, the intensity of market forces is likely to diminish and vice versa, as regulation and market forces often work at cross purposes. A dimension called competitive intensity is slated to capture the net effect of the opposite effect of market and regulatory forces. To conduct business, a firm has to transact directly with many individuals and organizations. Moreover, political turmoil, transport and other forms of strike pose problems, create uncertainty, and influence transaction costs incurred by a firm. This attribute of environment may be termed as environmental efficiency. Some authors (Kogut, 1991; Porter, 1990) have considered institutional environment in a country as major constituents of the national environment of a firm. However, these factors have hardly been incorporated in the operationalization of environment by mainstream organizational researchers (Peng and Heath, 1996). This dimension of business environment finds particular relevance, as one of the major thrust areas of economic liberalization has been to bring down the transaction costs by improving institutional framework, essential to attract foreign direct investment.

INERTIA VARIABLES Factors such as sunk costs in plant, equipment, and personnel, the dynamics of political coalitions, and the tendency for precedents to become normative standards generate inertia to change (Hannan and Freeman, 1984). Miles and Cameron (1982) observe that characteristics of past strategic response to environmental changes constrict the nature and range of strategic choice that may be feasible for firms. There are highly diversified firms, moderately diversified firms and single business firms. A concept called diversity status captures this difference in strategic predisposition of firms. This concept captures the effect of corporate strategy in the earlier period by taking stock of the corporate portfolio in terms of number of businesses and relative importance of the businesses captured in their percentage contribution to firm’s total revenue before the economic liberalization was initiated. Further, the model includes two other variables of the firm, namely, size and age, to capture the effect of inertia on strategic behavior and performance of firms.

O RGANIZATIONAL R ESOURCE VARIABLES RBV conceptualizes resources more broadly than the classical economic view of resource as land, labor, and capital (Wernerfelt, 1984). Along with land or property, labor and capital, it also includes various legal (e.g., patent), informational, relational (e.g., goodwill and brand image) and other organizational

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resources (e.g., competence and capabilities) (Grant, 1991). There is a fundamental connection between resources and value chain activities (Porter, 1985). Resources of a firm arise from performing activities over a period of time, acquiring them from outside, or some combination of the two (Porter, 1991). When more than one basic resource is linked together by a wide range of bonding mechanisms, technology, management information and control systems, and various formal and informal organizational processes, they lead to capabilities of firms. These complex resources are also termed as capability and competence. Prior activities over time accumulate complex resources in the form of skills and routines. Complex resources in a firm are developed around a group of inter-related activities along the value chain (Porter, 1991). We have identified three types capabilities, namely, business specific capability, entrepreneurial capability and growth management capability that are likely to have a bearing on corporate-level strategic behavior of firms. Business specific capability is the confluence of functional level capabilities such as marketing, manufacturing, research and development, and reputation in the main areas of business. Entrepreneurial capability captures the ability to recognize and identify opportunities, conceive and manage projects. Similarly, growth management capability captures the ability to manage growth that is developed through earlier experiences in expansion, diversification, mergers and acquisitions.

P ERFORMANCE VARIABLES The measurement of performance is a very controversial issue in literature and no agreement has been arrived at (Meyer and Gupta, 1994). Researchers (Rapaport, 1986) suggested that stock market adjust or compensate for deficiencies in the accounting data. While operating performance provides an evaluative referent and indicates the results of past and present responses, market performance indicates the future outcome of a response (Keats and Hitt, 1988).

PROPOSITIONS FOR THE INTEGRATIVE MODEL The following develops propositions linking various dimensions identified above.

E FFECT

OF

ENVIRONMENT ON CORPORATE STRATEGY AND P ERFORMANCE

Economic liberalization provides easier and more economical access to various resources and better business opportunities to most firms. This resource and opportunity rich environment leads to higher environmental munificence (Pfeffer and Salancik, 1978). Munificent environment creates condition for growth and profit (Dess and Beard, 1984). With the increase in environmental munificence, managers perceive more opportunities and aspire for growth and also aim at achieving higher return on investment. As the regulatory entry barriers are removed, firms that spot the opportunity for diversification enter new industries. Munificence in the domestic environment allow firms to become more competitive and spread operations in other more profitable geographical markets

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(Vernon, 1966). The strategic initiatives of modernization and expansion help firms attain critical scale, reduce cost, and improve quality essential for becoming globally competitive. Greater opportunity for diversification in new industries helps firms reduce their risks in the existing business. Also, distribution of risks across businesses and geographical markets with higher environmental munificence enhances firms’ performance (Keats and Hitt, 1988). Greater environmental munificence motivates firms to increase the scale of operation, business scope and geographical scope and helps achieve better performance. Thus, it is proposed that: Proposition 1A: Munificence has direct positive relations with scale of operation, business scope and geographical scope. Proposition 1B: Munificence has a direct positive relation with profitability. Increased demand of customers for higher value for money puts pressure on firms to improve the main line of business. To become more responsive to the market forces, firms flatten the organization structure by reducing layers of decision making. The extent of competition and lack of profit in the principal forces firms to diversify into new industries (Delios and Beamish, 1999). This leads to greater business scope. If the prospects for growth and profitability within related industries are limited, diversification is made into unrelated area (Bowman, 1982). A highly competitive situation demands better coordination and more exchange of resources among different business units and divisions as that helps reduce cost and helps the firm become more responsive to customer needs. Thus it is proposed that: Proposition 2A: Competitive intensity has direct positive relations with business scope, diversity of operation, and sharing of resources. Proposition 2B: Competitive intensity has direct negative relations with scale of operation. Proposition 2C: Competitive intensity has a direct negative relation with profitability. Environmental efficiency directly contributes to reduction of uncertainty faced by firms. Uncertain product demand and input supply create contingencies for diversification (Caves, 1980; Chandler, 1962). Thompson (1967) observes that firms create a buffer of excess capacity under uncertainty. Uncertainty in the supply of raw materials and finished goods such as that arising from political strikes force firms to be closer to the input and output market. Firms often set up manufacturing and marketing facilities in different regions to minimize this uncertainty in the supply of resources and finished goods and to be closer to the market and serve the customers better. These strategic initiatives lead to a greater geographical scope. Recognition and bureaucratic procedures delay implementation of strategic decisions of firms and create complexity in boundary spanning activities (Thompson, 1967). As a result, diversity in the firm’s operation increases. The

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reduction of regulatory control reduces the complexity of task environment (Khandwalla, 1977) and, in the process, helps reduce complexity in operation. Thus, it is proposed that: Proposition 3: Environmental efficiency has direct positive relations with geographical scope, business scope, and diversity of operation.

E FFECT

OF

INERTIA

ON

CORPORATE STRATEGY

AND

PERFORMANCE

The growing body of strategic change research has identified various barriers to change (Rajagopalan and Spreitzer, 1997). Researchers (e.g., Ghemawat, 1991; Oster, 1982) observe that firms with a longer history have problems with making strategic changes that are at odds with their existing capabilities. During the preliberalization period, many firms had diversified into unrelated businesses with small capacities because of the long history of the industrial licensing system adopted by the governments (Chaudhuri et al., 1982; Kaura, 1987). Some firms and business groups diversified into a number of businesses for higher growth, without any concern for technical or marketing synergies (Murthy, 1994). In the process, they developed varied strengths and weaknesses in different areas of operations that are likely to influence the strategic moves in the liberalized era. Studies have shown that in the last one decade many of the highly diversified giant US firms, faced with intense competition from firms from newly industrialized countries, have divested many of their businesses to reduce the size of the corporate portfolio of businesses (Markides, 1995). For similar reasons, in the liberalized environment, firms reorganize their business operations to achieve higher economies of scale, bring in more synergy, and become more focused. However, earlier investment decisions lock funds in inefficient and inflexible assets (Ghemawat, 1991) which not only retard the strategic response but also lead to poor performance. Earlier studies have shown that the stock market generally does not favor highly diversified firms (Keats and Hitt, 1988). Therefore, these firms often depend more on borrowings. This increases interest cost and reduces profit. Moreover, for less diversified and moderately diversified firms, strategic control of the top management is generally more efficient (Galbraith and Kazanjian, 1986), which means top management could bring about a greater and faster strategic change in single business and less diversified firms. Thus, it is proposed that: Proposition 4A: The initial level of diversification has direct negative relations with business scope and diversity of operation. Proposition 4B: The initial level of diversification has direct positive relations with scale of operation and sharing of resources. Proposition 4C: The initial level of diversification has direct negative relations with both profitability and market performance. Normative literature suggests that larger firms perform better because of greater slack, control on more resources, higher economies of scale and scope and higher bargaining power over customers, suppliers, and regulatory bodies

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(Hitt and Ireland, 1985). The alternative argument on the same issue is that firms are more responsive when they are small and become more rigid as they grow larger (Hannan and Freeman, 1984). Since large firms adopt diversification strategy to achieve growth in the regulated era (Chaudhuri et al., 1982), they seek to reduce the business and product portfolio, concentrate on increasing the scale of operation in selected business. Large-sized firms increase geographical scope for growth in the liberalized environment. To offset the handicap of bureaucracy associated with larger organizations, larger firms, endowed with greater slack resources, share resources across divisions more than others. As such, the following relationships of size with corporate strategy and performance variables are proposed: Proposition 5A: Initial size has a direct negative relation with business scope. Proposition 5B: Initial size has direct positive relations with geographical scope and sharing of resources. Proposition 5C: Initial size has direct negative relations with both profitability and market performance. The effect of age on organization has been extensively researched by organizational ecologists to explain and predict survival and failure primarily from three contrasting perspectives—liability of newness and the liability of adolescence and liability of obsolescence (Henderson, 1999). However, there is a general agreement that inertia is more for older firms than younger ones. Due to longer existence, aged firms have higher reputation in the market. Older firms tend to be more diversified, as growth through diversification was a more preferred route in the pre-liberalized period. In the post-liberalization period, older firms consolidate their businesses and reduce their business scope. They reorganize business portfolio around the core, which reduces the diversity in operation. On the contrary, younger firms make aggressive strategic changes (Hannan and Freeman, 1984). Stock investors treat younger firms more favorably as they are perceived to be carrying less baggage of regulated era and more responsive to emerging situation. Thus, it is proposed that: Proposition 6A: Age has direct negative relations with business scope and diversity of operation. Proposition 6B: Age has direct negative relations with both profitability and market performance.

E FFECT OF ORGANIZATIONAL RESOURCES ON C ORPORATE S TRATEGY AND P ERFORMANCE Selznick’s (1957) original concept of ‘distinctive competencies’ suggests that firms pursuing a particular strategy accumulate strategy specific competencies and prefer to choose strategies that benefit from these competencies. Hence, firms should

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organize their business portfolio around the core competencies (Hamel and Prahalad, 1994), as there are difficulties entailed in developing resources necessary to support radically different businesses (Petraf, 1993). Past reputation and skills built through years of hard work takes time to be replicated and builds the foundation for future reputation and skills (Lado et al., 1992). Firms accumulate reputation among customers, suppliers, bankers, and shareholders by building up long-term relationships and effectively serving them in a limited business domain. Rumelt (1995) argues that resources such as reputation and customer loyalty are damaged if a firm attempts to enter business far from its traditional domain. Hence, firms having strong reputation in a particular business benefit if their investment plans are made around that business. As observed by Penrose (1959) that the identification of ‘productive opportunity’ are largely governed by internal resources: the present product technology and manufacturing capability, the experience and knowledge of the market served, managerial expertise and technological capability for product and process innovation. Therefore, managers are governed by the ‘dominant logic’ and try to limit the diversity in their expansion and diversification moves (Prahalad and Bettis, 1986). Firms invest continuously in upgrading facilities and skills in the core businesses to remain competitive, and achieve higher profitability (Wernerfelt, 1984). Therefore, it is proposed that: Proposition 7A: Business specific capability has a direct positive relation with scale of operation and geographical scope. Proposition 7B: Business specific capability has a direct negative relation with diversity of operation. Proposition 7C: Business specific capability has a direct positive relation with profitability. Firms having higher entrepreneurial capability do not hesitate to venture into businesses even unrelated to their existing ones. They are aggressive in expanding the geographic base both in domestic and international markets. Therefore, it is proposed that: Proposition 8A: Entrepreneurial capability has a direct positive relation with scale of operation, business scope and geographical scope. Proposition 8B: Entrepreneurial capability has a direct negative relation with profitability. Higher growth management capability inspires firms to be aggressive and take the risk of diversification in both related and unrelated areas. They diversify aggressively into related and unrelated businesses, manage the diversity well, prove to be more efficient in allocating internal resources, and emphasize sharing of resources across business and product lines, plants and geographical divisions more than other firms. These firms take the route of merger or acquisition of

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sick units and turn them around to achieve fast growth. While this helps them achieve higher growth, profitability suffers. Thus it is proposed that: Proposition 9A: Growth management capability has a direct positive relation with scale of operation, business scope, diversity of operation, and sharing of resources. Propositon 9B: Growth management capability has a direct negative relation with profitability.

E FFECT

OF

CORPORATE STRATEGY

ON

PERFORMANCE

Firms that are willing and able to change to strategies more effective in an emerging environment should perform better than those firms, which are unable or unwilling to adopt appropriate strategies (Forte et al., 2000). Scale expansions or horizontal expansions (Ansoff, 1965) are by and large more successful than other strategies for generating higher return (Pennings et al., 1994). In fact, microeconomics theory provides a strong basis for the potential effect on scale of operation. Increase in scale helps firms reduce per unit cost of production up to a point. This has a dual benefit (Porter, 1980). Lowering of cost of production provides competitive advantage and boosts up sales growth. The benefits of scale are realized from every activity of a firm’s value chain (Porter, 1985). As firms operated at sub-optimal scales (Desai, 1993), the expansion of scale of operation improves profitability, and the firms adopting the strategy of scale expansion are viewed favorably by stock investors. Diversification has been the often-adopted route for growth and spreading of risk across market (Luffman and Reed, 1982; Rumelt, 1974). Although extensive research on diversification does not provide any conclusive evidence, it is generally believed that related diversification generates higher growth and return than unrelated diversification (Ramanujam and Varadarajan, 1989). The oft-cited reasons are that firms often face difficulties in integrating diverse market mechanisms, technologies, products, skills and other specialized resources of the unrelated business with those of existing businesses. The large-scale restructuring of a large number of diversified corporations around the world in the 1990s rising on the wave of the concept of core competencies (Prahalad and Hamel, 1990) symbolizes the dominant belief of the modern era that conglomerates fail to perform. However, some authors in the recent years have argued that in the emerging markets focusing on core competencies is not necessary and unrelated diversification may not lead to under performance. The main arguments are: markets and institutions are not well developed in these countries, hence a conglomerate can add value in dealing with capital, labour, and product markets and make better utilization of regulatory framework and enforcement of contracts; in absence of the well developed market, the corporate headquarters can play the role of the efficient market and corporate brands can be more easily and

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effectively utilised on a large array of businesses where entry in the business is more difficult than competing in the business (Khanna and Palepu, 1997). This contention of imperfect and under developed emerging market did not stand the recent empirical scrutiny (Kakani and Ramachandran, 2001). Underlying the debate on non-focus conglomerate strategies in the emerging markets is the assumption that the role of corporate advantage in shaping competitive advantage in individual businesses is overbearingly high and better management of the individual businesses may not be very critical in a less competitive market. However, when industries become competitive, this crucial assumption is challenged. Thus, we conclude that while increase in business scope due to careful diversification into profitable industries has a favorable impact on the firm’s profitability, greater diversity of operation due to unrelated diversification leads to lower profitability and erosion of market value. The link between geographical scope and performance is established in strategy literature (Delios and Beamish, 1999). Geographical dispersion is an effective strategy for risk dispersion (Kim, Hwang and Burgers, 1989). By covering a wider geographical market even within the country, firms spread the risk in the existing business and create new niches. In the face of heightened competition in the domestic market, firms may prefer geographical expansion to foreign markets to diversification (Buhner, 1987). Earlier researchers (e.g., Delios and Beamish, 1999) found positive influence of geographical scope on firms’ profitability. This strategy is valued highly by stock investors, having a favorable impact on market performance. So, the following relationships of various corporate strategy dimensions with performance are proposed: Proposition 10A: Both scale of operation and geographical scope have direct positive relations with profitability as well as market performance. Proposition 10B: Diversity of operation has direct negative relations with both profitability and market performance. Proposition 10C: Both business scope and sharing of resources have direct positive relations with profitability. H10D: Business scope has a direct negative relation with market performance.

CONCLUSIONS The integrative model summarizing the propositions is presented in Figure 24.1. It is an attempt to understand the effect of environment, organizational resources, and inertia on the content of corporate strategy and performance in a particular context, i.e., a liberalizing economy. The effort in this chapter has been to identify an integrative model based on the existing theories of strategic management, and contextual conditions in the liberalizing economies that influence their applicability. We also highlight the tensions and contrasts among the alternative theoretical assertions.

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Thompson, J.D. (1967). Organizations in Action: Social Science Bases of Administrative Theory, New York: McGraw-Hill. Tushman, M.L. & E. Romanelli (1985). ‘Organizational evolution: A metamorphosis model of convergence and reorientation’. In B.M. Staw & L.C. Cummings (eds.), Research on Organizational Behavior, Greenwich, CT: JAI Press. 7: 171–192. Vernon R. (1966). ‘International investment and international trade in the product cycle’. In Quarterly Journal of Economics, 80: 190–207. Wernerfelt, B. (1984). ‘A resource-based view of the firm’. In Strategic Management Journal, 5(2): 171–180.

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Organizational Design Under Post-modernization

What can we Learn from the World Values Surveys?

Vipin Gupta

l

Mathai B. Fenn

l

Ancheri Sreekumar

Recent research suggests that the societies around the world are experiencing the process of ‘Post-modernization’ (Inglehart, 1997). Post-modernization refers to a shift in priorities from economic efficiency, bureaucratic authority, and scientific rationality, towards greater human touch, individual self-expression, and equally empowered diversity. It seeks to incorporate metaphysical, cultural, and historical forces as the integrated elements of a new context that encourages conversation which fosters exchange between science and religion, technology and spirituality, economy and people, and culture and history. The emergence of democratic political institutions is a key element of post-modernization. Yet, post-modernization goes beyond the simplistic models of democracy as a form of representative governance, and calls for the representatives to adopt the principle of trusteeship—articulated so elegantly and forcefully by Mahatma Gandhi (1946). A distinct form of the organization—the Transformative Organization—is uniquely relevant to further the post-modernization milieu. The Transformative Organization pursues and peruses different transformations, changes, and learning with a post-modern sense of purpose, mission, and meaning. It seeks to ‘braille’ cultures to create a competitive advantage that energizes the lives of various people. To braille a culture calls for a deep appreciation of the meanings that various groups and sub-groups seek in their lives, and how these meanings are manifested in behaviors and intentions relevant for organizational functioning. As a transformative organization, the firms need to both uncover and discover the meanings that energize a culture, as well as craft these meanings into organizational functioning and services so that these meanings can be further enriched and cultivated. The meaning-centered competitive advantage of a firm has a great power to influence the firm and its individual employees, its supplier and customer network, as well as its national and international competitors and contacts. The

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meaning that Toyota brings to its competitive advantage, for instance, has a unique and distinctive effect on its suppliers, competitors, and customers, all of whom gain from learning how this meaning is realized through various management techniques. The relevance of Toyota derives not so much because of its practices—such as just-in-time, which have proved to be mixed bag of success and failures for the firms around the world—but to the overarching meaning of these practices for the development of the employees, the suppliers, and the customers. Similarly, while most overseas investments of Toyota have failed to provide the anticipated growth in productivity and profitability, the meaning underlying the intended competitive advantage based on offering work and learning opportunities to the overseas people has retained its significance and continued to influence the initiatives of Toyota and other firms in Japan. Inglehart (1971, 1977, 1990, 1997) has used the World Values Surveys to demonstrate a worldwide inter-generational and inter-temporal shift in emphasis from ‘Materialist’ values (emphasizing economic and physical security above all) toward ‘Post-materialist’ priorities (emphasizing self-expression, diversity, and quality of life). His work places this post-materialist shift within a broader context of inter-related pattern of economic development, cultural change, and political change, which goes together with the post-materialist shift. Postmaterialism goes along with a reduced emphasis on science, technology and economic development; greater priority on empowered gender and spiritual concerns; and stronger endorsement of democratic and issue-based forms of governance. These broader shifts are identified with ‘post-modernization’. Postmodernization holds considerable value for a transformative organization to incorporate the increasingly relevant cultural meanings in its operations, strategies, and competitive advantage. The post-modern dialogue sees development as going beyond modernization, and calls into question a focus on competitive advantage, which is seen as a materialistic orientation. At a more fundamental level, post-modernism offers scope for synthesis and balance among variety of worldviews and goals. In this chapter, we first review the concept of post-modernization. Then, we discuss Inglehart’s model of post-modernization that emphasizes the similarities in post-modernization trajectory across different cultures based on the World Values Survey data. Our re-analysis of the World Values Survey data highlights considerable diversity in the emerging post-modern trajectories around the world.

Concept of Post-Modernization Post-modernization, and the related term post-modernism, refers to a developmental trajectory that is non-linear; its focus goes beyond the exclusive concerns with economic growth and material motivations. Post-modernization implies an agency underlying the developmental process, while post-modernism can include evolutionary as well as deterministic approaches to this development. Indeed, most of the discourse on post-modernism has focused on either

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deterministic or evolutionary processes, and there is little understanding about the ability of firms to become effective agents for post-modernism. One of the most fundamental elements of the concepts of post-modernity (the state or condition of post-modernism) is an appreciation of the present and the future in terms of the history. The same concern is evident in other streams of research—post-structuralism, post-colonialism, post-consumerism, postmaterialism… a stream of posts, revealing the engagement that the present has with the past. The present is perhaps best interpreted as post everything, and in so doing we also create a unity of the past, a single past pointing to a single future. Below, we briefly describe the distinguishing elements of post-colonialism, post-materialism, post-structuralism, and post-modernism.

P OST -C OLONIALISM The political ideals of the enlightenment expressed during the French Revolution as ‘Liberté, Egalité, Fraternity’, afforded the right to self-governance. This put it in direct confrontation/conflict with the economic and expansionist passion for colonies. The liberation (or loss, depending on the side one is on) of the colonies was a direct effect of these ideals. While ideologically the colonies brought civilization to savages, it also proved to be its own undoing since it carried within its own ideals the seeds of doom for the idea of colonialism. The first post (in no particular order) is thus involved in the issue of self-representation, of voice. The politics of voice and power also finds echoes from feminism, a discourse that speaks of colonization of a different kind. Post-colonial discourse is also about subaltern studies and the project of re-writing/re-defining history.

P OST -M ATERIALISM Post-materialism represents the value shift accompanying a behavioral shift, reflected in changed consumer preferences…post-consumerism. Post-materialism is a word that signifies the consumer’s growing disenchantment with the ‘grow more consume more’ approach represented in the growth model of development. The post-materialistic, post-consumerist society is also linked to what Toffler (1981) calls the post-industrial society, where the factory as a way of organizing work and output is no longer the most desirable form. The essential features of the post-industrial society are seen as the growing predominance of the tertiary (services) sector over the primary (agriculture and mining) and secondary (manufacturing) sectors of the economy (Heilbroner, 1976). Simultaneously, there are enhanced priorities on the role of knowledge-based inputs and education. Further, there is a decrease in the highly polarized class conflict of traditional (industrial) capitalism with the emergence of less hierarchical organizational structures relevant for the new knowledge economy. This concept of a postindustrial society is related to the technology-induced change and development. Toffler (1981) identifies the invention of the first programmable digital computer during the Second World War as the marker for the Third Industrial Revolution.

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P OST -S TRUCTURALISM The structuralist hoped to build a system of knowledge based on binaries. Strongly influenced by earlier attempts at a semiotic analysis of language, the structuralist anthropologists viewed culture as a system of symbols, each set off against the other in the same way words are expressed in terms of other words in a lexicon (Levi-Strauss, 1966). The relationship between the signifier and the signified turned out to be the house that was built on sand. The shifting sands of difference put paid to any hopes of fixing meanings in a static network of references. Deconstruction demonstrated that the house of cards is as fragile as it appears to be, and what appear to be distinct posts may indeed be connected in more ways than one. The post-colonial interest in ‘Voice’ and engagement with multiple histories of the subaltern kind questions modernity’s arrow of time directly. The challenge to logical positivism raises serious doubts about the ability of science to solve problems through technology.

P OST-M ODERNISM If post-structuralism is eternally linked to the polemic of structuralism, postmodernism is similarly linked to modernism. Modernism, the celebration of modern society over its two preceding stages, is linked with another product of the era, positivism. Post-modernism is critical of Compte’s description of progress in societies. It questions at the same time the self-evident validity of the Eurocentric worldview through a critique of positivism, as well as the arrow of time (trajectories), as far as development of societies are concerned. The dethroning of the arrow of time, and the idea of progress raised epistemological questions for the engine of modernity—Science. It challenged the logical-positivist view that science is a project of progressive uncovering of the truth about the universe. The paradox is that at some level these differences do jostle against each other rivaling for their own semantic territory, yet not quite avoiding treading on each other’s toes. So, there is some meaning in locating these posts somewhere close to each other in semantic space. However, it does raise serious doubts about the question of whether we can determine a single post-modern axis, which can be statistically derived. But then if entropy can be mathematically described, perhaps ‘lack of unity’ itself could be statistically represented as a scale. But in identifying the managerial implications of these posts in general, and post-modernism in particular, it is important to be aware of the traces on which these meanings have been built.

Key Features of Inglehart’s Model THE CONSTRAINED-SEQUENTIAL POST-MODERN TRAJECTORY Inglehart’s (1990, 1997) model comprises two inter-related predictable trajectories—modernization and post-modernization, capturing the development

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of post-industrial and industrial societies respectively. Though each trajectory is defined to be independent of one another, typically the modernization generates and facilitates the movements along the post-modern trajectory. According to Inglehart (1990, 1997), each nation experiences development along each trajectory, though the movement is constrained by historical heritage. In some cases, history supports a rapid movement, while in others it constrains the movement and puts the nations with shared historical heritage as low in development on modernization and post-modernization trajectories. The economic development leads to specific, functionally related changes in mass values and belief systems, though culture retains a large society-specific aspect that is historically constrained. As Inglehart and Carballo (1997:37) observe, ‘Crosscultural variation does not simply reflect the changes linked with modernization and postmodernization processes: to a great extent, each society works out its history in its unique fashion, influenced by the culture, leaders, institutions, climate, geography, situation-specific events, and other unique elements that make up its own distinctive heritage.’ Some critical aspects of historical heritage include the secular-rational properties of Confucianism and Communism, and the colonial ties, reinforced through mass migrations, of the English-speaking Anglo societies. Similarly, the Catholic church influenced the Latin European societies; and the Catholic church, Hispanic heritage, and mass migrations worked in the Latin American societies. Inglehart and Baker (2000) note that these historical forces shape shared cultural heritage of the society through society-wide educational institutions and mass media, rather than through formal affiliations of people with religious and ancestral groups.

M ODERNIZATION

AND

P OST- MODERNIZATION DIMENSIONS

Inglehart and Baker (2000:21) identify two dimensions on which the cultures become differentiated as a result of the differences in their economic development. The first, termed as traditional/secular-rational authority, is ‘linked with early industrialization and the rise of the working class’, and reflects the process of modernization. The second, termed as survival/self-expression values, ‘reflects the changes linked with the affluent conditions of advanced industrial society and with the rise of the service and knowledge sectors’, and reflects the dynamics of post-modernization. Traditional/Secular-rational dimension differentiates between the syndrome where religion is very important and where it is not (Inglehart, 1997). Traditional worldview, prominent in pre-industrial and pre-modern societies, reflects an emphasis on obedience to traditional authority, particularly deference to God that goes with deference to the family and the nation. They idealize large families and have high fertility rates, and reject divorce and take a pro-life stance on abortion. They have protectionist attitudes towards foreign trade, and a passive uncritical approach to politics. On the other hand, in a secular worldview, prominent in industrial and modern societies, authority is legitimized by rationallegal norms, linked with an emphasis on economic accumulation and individual achievement.

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Survival/Self-expression values dimension reflects how unprecedented levels of wealth and the emergence of the welfare states in a post-industrial society give rise to a shift from scarcity norms emphasizing hard work and self-denial, to post-modern values emphasizing the quality of life, subjective wellbeing, and related post-materialist priorities on self-expression. Post-modern societies are characterized by a syndrome of interpersonal trust, tolerance, subjective wellbeing, and self-expression, along with an enhanced priority on environmental protection, emancipation of women, and demands for participation in decisionmaking in political and economic sphere. In contrast, for the people who must survive the economic and physical insecurity, the tolerance of foreigners and out-groups and gender equality are threatening. The emphasis is on the traditional gender roles and authoritarian political outlook, along with a faith in the materialist concepts of science and technology. Inglehart (1997) validated the universality of the post-modernization thesis, by analyzing individual-level data on the materialism/post-materialism dimension for various cultural zones separately. A four-item index of post-materialism was first proposed by Inglehart (1971), and validated using individual-level survey data from six European nations. Inglehart (1977) showed that the four items were related to a broader 12 item pool of indicators, with six items tapping materialist emphasis on physical and economic security clustering together, and five of the six items tapping post-materialist needs for belonging and selfexpressing also clustering together. Inglehart (1997) showed that five of the six post-materialist items loaded positively, and the six materialist items loaded negatively, on the first principal component in the separate factor analysis, for 15 Western European nations, four Latin European nations, two Confucian Asian nations, 11 ex-socialist/socialist nations, India, and Australia. The exception was the post-materialist item ‘more beautiful cities’ that tended to load along with materialist items suggesting that the concept of urbanization is not necessarily related to the aesthetic post-materialist values. Further, ‘economic growth’ appeared as post-materialist value, not materialist value, in ex-socialist/ socialist zone. Moreover, materialism/post-materialism appeared as the second principal component, not the first, in the case of India where the first factor reflected a polarization between emphasis on economic priorities and emphasis on maintaining domestic order. Inglehart reported that the value system of the industrially advanced nations differs systematically from that of the developing and lower income nations. In the 65-society sample, all 19 societies with GNP per capita of over $15,000 were high on both the dimensions, while those with less than $2000 per capita GNP were low on both. Further, the first, traditional/secular-rational, dimension had 0.65 correlation with industrial workforce, and –0.49 correlation with agriculture workforce, indicating that it is related to the shifts from pre-industrial to industrial society. GDP per capita influenced both the dimensions, in separate regressions for eight cultural zones. The influence of industrial workforce was stronger for secular-rational dimension, and that of service workforce was greater for self-expression dimension.

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The historical heritage constrained these effects. All Confucian Asian and ex-Communist societies showed relatively secular values, despite varying industrialization. Conversely, the historically Roman Catholic societies evidenced traditional values, despite proportion of industrial workers similar to that of Confucian and ex-communist societies. Once the effects of GNP per capita and workforce structure were controlled, historically Confucian societies and excommunist societies scored highest on traditional/secular-rational dimension; while the historically Catholic societies scored the lowest. In contrast, historically Protestant societies score highest on survival/self-expression, while exCommunist societies and historically Orthodox societies scored the lowest (Inglehart and Baker, 2000:39). GNP per capita and workforce structure accounted for 42 per cent of the variation in dimension one, and 63 per cent in dimension two. With three cultural zone dummies, the explanation rose to 70 per cent and 84 per cent respectively. Thus, ‘Changes in GNP and occupational structure have important influences on prevailing worldviews, but traditional cultural influences persist’ (Inglehart and Baker, 2000:31). The comparisons among Wave One, Wave Two and Wave Three data showed that the 20 advanced industrial societies, ‘increasingly emphasized selfexpression values’ (Inglehart and Baker, 2000:41). Most (60 per cent) of them also ‘moved toward secular-rational values’. In contrast, the five ex-Soviet societies that experienced economic collapse moved toward survival values, with only two of them becoming more secular-rational. Further, of the eight lower-income nations, two moved toward secular-rational and six moved toward self-expression values. Taken together, these results capture the shifts along the survival/selfexpression dimension as a result of enhanced economic and physical security.

RESEARCH DESIGN OF THE WORLD VALUES SURVEYS World Values Surveys have been conducted in four waves—1981–1982 (24 nations), 1990–1991 (43 nations), 1995–1998 (50 nations), and 2000–2001 (in progress). Inglehart and Baker (2000) used data for 50 nations from 1995–1998 wave and another 15 European nations from 1990–1991 wave, for a total of 165,594 respondents. The surveys were conducted using structured face-to-face interviews in native languages. In most cases, representative national samples were taken from a universe of all adult citizens, ages 18 and older. In some of the emerging markets where representative samples in terms of urbanization, region, income, literacy, gender, age, and occupation could not be taken, appropriate weights were applied to make the samples replicate the national population parameters, particularly in terms of education. A two-stage stratified random sampling was deployed. First, locations were randomly sampled to represent types of locations in proportion to their populations, and then individuals were sampled randomly within the selected locations. The surveys were carried out by professional survey organizations usually belonging to the Gallup chain in most of the Western societies; and by the national academies of science or university-based institutes in other societies.

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The survey questions were designed to be of comparable meaning to people across 65 societies. The questions were not about nation-specific issues, such as whether the girls wear headscarves, but included themes meaningful in all cultures—such as whether religion or authority is important. The survey built on previous cross-national survey research, and was subjected to extensive pilot testing, and inputs from social scientists from all around the world. The two dimensions reflecting modernization and post-modernization were initially measured using factor scores of the principal components analysis for select 22 variables, based on the Wave two data (Inglehart, 1997). Later, Inglehart and Baker (2000) used data for 10 variables on which data were available for both Wave two and Wave three nations. The 10 selected variables covered a range of topics: five of them reflected the first dimension and the other five captured the second dimension. The two- factor solution accounted for 70 per cent of the variation in the 10 variables at the societal level. Varying scales were used to measure the 10 selected variables. For instance:

ILLUSTRATIVE INDICATORS OF TRADITIONAL VS . S ECULAR R ATIONAL F ACTOR 1. How important is God in your life? Please use this card to indicate—10 means very important and one means not all important. 1 2 3 4 5 6 7 8 9 10 Scored as: Rating 2. Here is a list of qualities which children can be encouraged to learn at home. Which, if any, do you consider to be especially important? Please choose up to five (from a list of 11). Scored as: [reverse Autonomy Index] average of obedience and religious faith—average of independence and determination [Higher scores = more traditional authority]

SELECTED VARIABLES LOADING

ON

SURVIVAL/SELF-EXPRESSION FACTOR

1. Taking all things together, would you say you are (read out, reversing order for alternate contacts) (a) Very happy, (b) Quite happy, (c) Not very happy, (d ) Not at all happy, Scored as: Rating 2. Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people? (a) Most people can be trusted, (b) Can’t be too careful Scored As: Rating [Higher scores = More survival values]

DIVERSE POSSIBILITIES WITH POST-MODERNIZATION Along with certain predictable and constant elements, relevant for all the societies of the world, post-modernism also respects the diversity in different societies. These diversities or variations are not only a reflection of some historical

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constraints, but also an outcome of the varying manifestations of postmodernization. Each of these manifestations may be equally viable and defensible, and relevant for the core quality of life and wellbeing concerns of postmodernization. The common cultural concerns could be addressed quite differently across societies, as a result of their varying worldviews, primal orientations, and historical experiences. For instance, in some societies, shifts towards greater confidence in democracy could go along with other elements of post-modernization. In other societies, more critical attitudes toward democracy could emerge, which focus on the possibility that the majority-based representation may preclude the interests and voluntary participation of the minorities, and instead emphasize empowerment and engagement of the minority groups underrepresented at the societal level. Similarly, in some societies, shifts toward greater acceptance of alternative lifestyles (such as abortion and divorce) could go along with post-modernization, while in others post-modernization could go along with discovery of new meaning in religion and spirituality and attempts to mitigate the elements that necessitate abortion or divorce. Therefore, it would be appropriate to differentiate four domains of values. 1. Capturing materialist/post-materialist emphasis on subjective wellbeing, termed as Quality of Life Domain. 2. Capturing the fulcrum of subjective wellbeing, further divided into Religiondefined and Job-defined Lifestyle domains. 3. Capturing a public expression of subjective wellbeing, termed as Civic Governance domain. Using the indicators from the World Values Surveys, we identify Quality of Life domain in terms of higher satisfaction with life, low controls of the government on the freedom of people, high environmental consciousness, high tolerance, less workaholicism, and flexible family structures. The Quality of Life Index reflects a distribution of values around the world associated with the materialism/post-materialism dimension. Next there are two inter-related domains: (a) religion-defined lifestyle, and (b) job-defined lifestyle. The religion-defined lifestyle captures an emphasis on religious faith, belief in God, belief in afterlife, respect for authority, rejection of alternative lifestyle (such as abortion and divorce), and a sense of pride. In contrast, the job-centered lifestyle composite captures an emphasis on generous and empowering job. In practice, post-modernism is consistent with a variety of scores on this index, ranging from a job-defined life style to a religion-defined lifestyle, or any combination of the two. Though modernization and the related emphasis on secular authority typically implies a focus on job-defined lifestyle, during the post-modern phase there emerges a more critical evaluation, with diminished priorities on instrumental job-centered rationality and growing appreciation for the religion-centered spirituality and meaning. Finally, the Civic Governance domain represents confidence in national government, satisfaction with national politics, and support for democracy. The

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Civic Governance index is not necessarily related with either modernization or post-modernization, and can be present in all societies depending on their history and culture. With post-modernism, economic and human wellbeing may lead people to endorse the national governance and to be active in civil participation for sustaining this wellbeing. On the other hand, such wellbeing may encourage people to raise their expectations from the governance, to become open to discovering better governance mechanisms, and to discount the need for active civic participation. In the US, for instance, there has been a long-term decline in civic participation (Putnam, 2000).

M EASUREMENT The items for the proposed factors were identified using the combined Wave two (1990–1991) and Wave three (1995–1998) data for the World Values Survey. Since different items in the survey were measured on varying scales, all the items were converted to a common scale of 0 to one. The scores on each item were aggregated to the society level. The Cronbach alpha reliability of each of the scales exceeded the norm of 0.70. The items used to measure each of these scales loaded at least 0.69 on the respective scale in the factor analysis. Thus, the scales used to construct the factors were unidimensional and reliable. The four domain factor composites constructed from these scales also had Cronbach alpha reliability exceeding 0.70. The correlation between the two Lifestyle factors was not significant—suggesting that the religion and the job can be substitutes or complements in any given society.

SOCIETY SCORES Following the procedure suggested by Hofstede (1980), the domain scores of each society were converted to an index ranging from 1.00 to 2.00 using the formula given below: 1 + [(Maximum score – Society Score)/(Maximum score – Minimum score)] The scores of each society on the three indices are given in Table 25.1. Table 25.1: Society Scores on Four Post-modernization Indices Society

Argentina Armenia Australia Austria Azerbaijan Bangladesh

Quality of Life Index

Religiondefined Lifestyle Index

Jobdefined Lifestyle Index

Civic Governance Index

1.55 1.00 1.83 1.65 1.13 1.21

1.56 1.32 1.41 1.34 1.53 1.90

1.46 1.36 1.63 1.61 1.33 1.57

1.20 1.13 1.35 1.36 1.53 1.83 (Contd.)

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Table 25.1: (Contd.) Belarus Belgium Bosnia Herzegovina Brazil Britain Bulgaria Canada Chile China Colombia Croatia Czech Republic Denmark Dominican Republic Estonia Finland France Georgia Germany—former East Germany—former West Ghana Hungary Iceland India Ireland Italy Japan Latvia Lithuania Macedonia Mexico Moldova Northern Ireland Netherlands Nigeria Norway Pakistan Peru Philippines Poland Portugal Romania Russia–Moscow Russia–Tambov Russia South Africa (black) South Africa (white)

1.18 1.79 1.22 1.38 1.86 1.20 1.90 1.51 1.27 1.63 1.50 1.39 1.86 1.49 1.24 1.81 1.73 1.04 1.69 1.79 1.23 1.32 1.90 1.14 1.81 1.62 1.45 1.25 1.22 1.23 1.52 1.03 1.78 2.00 1.22 1.74 1.22 1.37 1.30 1.21 1.50 1.23 1.36 1.14 1.17 1.53 1.29

1.23 1.24 1.53 1.70 1.38 1.15 1.46 1.68 1.14 1.73 1.29 0.99 1.03 1.74 1.13 1.21 1.22 1.55 1.00 1.07 1.97 1.22 1.45 1.61 1.74 1.47 1.03 1.12 1.42 1.44 1.58 1.48 1.77 1.12 1.93 1.19 1.77 1.76 1.88 1.68 1.49 1.47 1.01 1.36 1.17 1.78 1.77

1.62 1.63 1.35 1.49 1.60 1.44 1.44 1.42 1.57 1.86 1.50 1.31 1.65 1.34 1.55 1.62 1.74 1.62 1.52 1.44 NA 1.37 1.43 1.29 1.52 1.56 1.21 1.60 1.41 1.32 1.34 1.41 1.60 1.45 1.07 1.60 NA 1.66 1.48 1.72 1.36 1.59 1.57 1.54 1.58 1.65 1.62

1.18 1.29 1.53 1.25 1.60 1.29 1.16 1.46 1.99 1.22 1.49 1.20 1.47 1.18 1.36 1.36 1.30 1.22 1.33 1.47 1.65 1.32 1.46 1.41 1.42 1.14 1.33 1.24 1.26 1.15 1.24 1.19 1.41 1.42 1.35 1.70 1.44 1.38 1.45 1.23 1.26 1.18 1.01 1.02 1.06 1.28 1.72 (Contd.)

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Table 25.1: (Contd.) Society

South Korea Slovakia Slovenia Spain Spain–Andalusia Spain–Basque Spain–Galicia Spain–Valencia Sweden Switzerland (French speaking) Switzerland (German speaking) Taiwan Turkey Ukraine Uruguay US USA–Puerto Rico Venezuela Yugoslavia–Montenegro Yugoslavia–Serbia

Quality of Life Index

Religiondefined Lifestyle Index

Jobdefined Lifestyle Index

Civic Governance Index

1.60 1.32 1.50 1.60 1.56 1.78 1.71 1.67 1.87

1.28 1.30 1.25 1.42 1.57 1.28 1.31 1.35 1.02

1.99 1.24 1.22 1.55 1.61 1.54 1.57 1.67 1.47

1.38 1.08 1.29 1.37 1.45 1.36 1.35 1.38 1.48

1.77

1.21

1.33

1.41

1.85 1.36 1.14 1.11 1.55 1.73 1.61 1.35 1.21 1.24

1.13 1.42 1.74 1.34 1.36 1.73 1.91 1.81 1.24 1.22

1.49 1.23 1.01 1.53 1.34 1.40 1.36 1.02 1.29 1.39

1.47 1.44 1.38 1.15 1.34 1.44 1.44 1.07 1.47 1.31

Source: Derived from World Value Survey database.

Some notable findings are discussed below. First, the Nordic societies—Denmark, Norway, and Sweden—score high in Quality of Life index, job-defined lifestyle index, as well as Civic Governance index, and but low in religion-defined lifestyle index. Here the primary focus is on the quality of life, job as opposed to religion, and voluntary and democratic governance. The Germanic societies—Germany, the Netherlands, Austria, and Switzerland—score high in Quality of Life index, low in religion-defined lifestyle, but moderate in job-defined lifestyle index and Civic Governance index. Both Nordic and Germanic societies emphasize high quality of life that is not defined by religion. Second, the Southern Asian societies—India, Bangladesh, and the Philippines —score highest in Civic Governance index, but lowest in Quality of Life index. They tend to score high on religion-defined lifestyle index, and low on jobdefined lifestyle index. These societies value democratic governance, believe in religion, are not focused much on jobs, and have low quality of life. Third, the Anglo societies—US, UK, Canada, and White South Africa— score high on Quality of Life index, as well as on religion-defined lifestyle index. Their scores on job-defined lifestyle index and Civic Governance index are also

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above average. In these societies, there is a more critical attitude towards the attitude of democracy—the rule of majority—towards minorities, and also a greater revival of spiritual well-being issues. Fourth, the Latin European societies—such as Spain, France, Italy, and Belgium—score high on Quality of Life index and job-defined lifestyle index, but below average on religion-defined lifestyle index and on Civic Governance index. Here, critical attitude towards democratic working is related to the jobbased issues, as opposed to the spiritual awakening. Fifth, the Confucian Asian societies—such as Japan, China, and South Korea—tend to score high on Civic Governance index, but below average on the other three indices. These societies appear satisfied with the way their national governments are being run, but feel that their quality of life could be much improved. Here, the role of job-defined lifestyle appears to have attenuated compared with the past, when these societies were known to emphasize life in terms of jobs. It is also possible that these societies accept jobs as they are, and do not seek well paying and empowering jobs. Further, religion is not an important aspect of lifestyle in these societies. Sixth, the Latin American societies—such as Venezuela, Mexico, and Chile— tend to score high on the religion-defined lifestyle index, but low on the jobdefined lifestyle index, Quality of Life index, and Civic Governance index. Here, religion is an important fact of life. Jobs are given less priority, often because the government functioning is viewed with a highly suspicious and critical attitude, and poor government functioning adds to a sub-optimal quality of life. Finally, most of the Eastern European societies—such as Russia, Poland and Romania—tend to score low on all the four indices with some variations. Here, neither religion nor job is an important aspect of people’s life in the transitional phase; the quality of life has deteriorated, and the government’s functioning is still unstable and evolving. The above findings suggest a significant variation in the trajectories of different society groups.

INDEX VALIDATION To validate the four domain indices, the results of correlation with four- and 12item post-materialism indices, traditional/secular-rational authority, survival/ self-expression values, Human Development index, and Gender attainment (Gender Development index/Human Development index) are given in Table 25.2. As predicted, the Quality of Life index is most strongly and positively correlated with the Post-materialism indices, Survival/well-being values dimension, and Human Development index. In contrast, the religion-defined lifestyle index is most strongly and negatively correlated with Gender attainment and traditional/secular authority. These findings are consistent with the findings of Inglehart: in post-material societies, there is a greater thrust on the quality of life, while the secular societies tend not to have religion-defined lifestyle. The job-defined lifestyle index is not related with any of the validation indices, but showed a weak positive correlation (r = 0.28; p < 0.05) with the Quality of

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Life index. Similarly, the Civic Governance index is weakly and positively correlated with the survival/well-being values only. Table 25.2: Validation Correlation of Post-modernization Indices Quality of Life Index Human Development Index 1999 Gender Attainment 1999 Traditional/Secular Authority Survival/Wellbeing Values Postmaterialism 4-item Postmaterialism 12-item

Religiondefined Lifestyle Index

Jobdefined Civic Lifestyle Governance Index Index

63 60

.74** .24

–.57** –.48**

.23 .22

–.12 –.18

73 73 73 71

.45** .93** .82** .84**

–.88** –.29* –.13 –.14

.15 .17 .09 .14

–.07 .27* .06 .10

**Correlation is significant at the 0.01 level; *Correlation is significant at the 0.05 level.

CONCLUSIONS: IMPLICATIONS FOR TRANSFORMATIVE ORGANIZATION Our findings suggest that the Quality of Life domain of post-modernization is associated with post-materialism. But post-modernization is not a single trajectory, but can be differentiated in terms of lifestyle and governance domains. It is usually associated with the adoption of secular authority and gender attainment, with a job-defined focus. However, sometimes there may be an emphasis on religion as a source of meaning and spirituality. Finally, effective governance system and voluntary contributions may occur even without postmaterialist elements of post-modernization. On the other hand, some postmaterialist nations may become critical about their governance and democracy and, therefore, take a passive attitude towards political activism, and instead seek alternative means for community participation. Thus, though the most distinguishing feature of post-modernization is the post-materialist quality of life domain, (i.e., being happy and satisfied with the life, an emphasis on the time for leisure, and societal fairness), quality of life is not necessarily a pre-requisite for post-modernization. Instead, post-modernizaton reflects a dynamic process capable of generating higher quality of life, by developing a power to have say in the society, to enjoy leisure, and to actualize ideas in a fair milieu, i.e., to make the society more enriching and fulfilling. Towards this end, the secular authority is a positive catalyst, but spiritual power of religion could also help by providing a meaningful mission. Further, democratic and voluntary governance may occur even without post-materialism or adoption of work-centered authority. The diverse trajectories of post-modernization can have implications for firms, which are the principal agents of wealth creation and work engagement

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process in societies. Transformative organizations intending post-modern cultural changes as well as the organization theorists mapping such organizational culture changes would benefit by taking a worldview of diverse trajectories of postmodernization than a single unidirectional trajectory. The one-directional social construction of post-modernization can blind firms as well as theorists to this possibility of diversity. What trajectory prevails in a particular context will depend on geographical, historical as well as cultural forces, with inter-regional variations within countries as well as between countries. The empirical findings of this study certainly point to the diversity. While the trajectories would vary, some of the broad parameters of postmodernization of organizations could be identified and would consist of fuzzy boundaries that de-differentiate the firm, its suppliers, customers, shareholders and other stakeholders. De-differentiation occurs across vertical and horizontal levels and leads to empowerment of the marginalized such as women, blurs the distinction between work and life, and ensures free information flow. While what trajectory becomes a source of sustainable advantage (competitive as well as collaborative) will be determined for some firms, others that are powerful will be able to construct the trajectory that then get associated as the trajectory of advantage (especially from a perceptual, cognitive and social construction perspective on the nature of advantage). Such trajectories would then contribute to the enrichment, diversity, and development of the trajectory of the larger society, in both substantive as well as cognitive and socially constructed ways. Organization theorists as well as social researchers have the opportunity to use a combination of the deterministic, evolutionary, and agency-driven frameworks for inquiry into transformative organizations that respond to postmodernization. A deterministic framework would lead to inquiry into which organizations post-modernize using what trajectory and why; an evolutionary perspective would allow for an understanding of the formative and ecological catalysts, while an agency approach would lead to an inquiry into the type and processes of interventions in post-modernization actively indulged by firms and those that lead to sustainable advantages for the firm. An agency approach would be consistent with the strategic models of management, while the deterministic and evolutionary perspectives could be related to the organizational ecology studies. Firms can influence the workings of a post-modern milieu through their management of individual as well as collective mind (Wegner, 1987). Usually, the performance-generating role of the firms is constrained, and does not ensure full human development and quality of life development. Katz (1982), for instance, reported that the R&D teams in firms add value, but undergo a degenerative process over time: ‘The upward slope in performance probably reflects the positive effects of learning and team building as new project members contribute fresh ideas and approaches while also developing a better understanding of each other’s capabilities, of the technologies involved, and of their working relationships. Such positive effects, however, appear to taper off for teams whose members have continued to work together for a long period of time’ (Katz, 1982:98).

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The learning of the members of a team allows them to develop new products and services, but only part of their knowledge is captured in these products and services. Further, within a firm, new members who join the organization are evaluated on the basis of their fitting into the normative learning, and therefore are at a disadvantage compared with the original members. Time thus may make the organization less egalitarian and more hierarchical in terms of the people relationships, thereby undermining the voluntary, democratic process. To sustain a free democratic process, egalitarian relationships, and valueadding quality of life, a transformative type of organization is called for. In general, a belief that a teammate is effective at something generates a concurrent belief that the teammate is not effective at something else, since the likelihood that a person is effective at several activities at the same time tends to be low. In a pre-modern milieu, the limits applied to the capabilities of teammates tend to be far higher, than in a post-modern milieu—where each person may indeed be believed to have an unlimited potential. One way to avoid the maturity of learning is to ensure the flow of transformative energy through a focus on the non work-context dependent knowledge. For instance, the firms can discover how the customers extract more value through the offered products and services through other complementary offerings. It would be useful to study the skills and capabilities of suppliers not being used by the firm. Further, they should seek to appreciate new products and technologies that do the same job at a lower as well as higher cost but with different service and quality parameters. They can also identify how the workers not deemed fit by the firm are being employed by others. Such transformative (or transformation generating) organization can help firms sustain the voluntary, democratic values in a meaningful manner, and also support a spiritual connection of the work, along with growing quality of life, for a dynamic, vibrant, postmodern society.

References Bell, D. (1973). The Coming of Post-Industrial Society, New York: Basic Books. Gandhi, M.K. (1946). Harijan, March 31. Heilbroner, R.L. (1976). Business Civilization in Decline. New York: WW Norton. Hofstede, G. (1980). Culture’s Consequences: International Differences in Workrelated Values, London: Sage Publications. Inglehart, R. (1971). ‘The Silent Revolution in Europe: Intergenerational Change in Post-Industrial Societies’. In American Political Science Review, 65(4): 991– 1017. (1977). The Silent Revolution: Changing Values and Political Styles among Western Publics, Princeton: Princeton University Press. (1990). Cultural Shift in Advanced Industrial Society, Princeton: Princeton University Press.

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Inglehart, R. (1997). Modernization and Postmodernization: Cultural, Economic and Political Change in 43 Societies, Princeton: Princeton University Press. Inglehart, R. & M. Carballo (1997). ‘Does Latin America Exist? (And is there a Confucian Culture?): A Global Analysis of Cross-cultural Differences’. In Political Science and Politics, 34–46. Inglehart, R. & W. Baker (2000). ‘Modernization, Globalization and the Persistence of Tradition: Empirical Evidence from 65 Societies’. In American Sociological Review, 65(1): 19–55. Katz, R. (1982). ‘The effects of group longevity on project communication and performance’. In Administrative Science Quarterly, 27: 81–104. Levi-Strauss, C. (1966). The Savage Mind, University of Chicago Press: Chicago. Putnam, R.D. (2000). Bowling Alone: The Collapse and Revival of American Community, New York: Simon and Schuster. Toffler, A. (1981). The Third Wave, New York: Bantam Books. Wegner, D.M. (1987). ‘Transactive memory: A contemporary analysis of the group mind’. In B. Mullen & G.R. Goethasis (eds.), Theories of Group Behavior, 185–208, New York: Springer-Verlag.

Appendix I Components of the Four Domains of Indices I. QUALITY OF LIFE INDEX (ALPHA = 0.90) NEGATIVE CODED SCALES Dissatisfaction with life (alpha = 0.95) [Higher score = more dissatisfaction] V10. V11. V64. V65.

Taking all things together, not very happy Poor state of health Satisfied with the household’s financial position All things considered, satisfied with life as a whole these days

0.94 0.90 –0.94 –0.96

Government control of people’s freedom (alpha = 0.90) [Higher score = greater government control] V87-3.

The government should be the owner of business and appoint the managers V104105b. The goal of making sure this country has strong defense forces should be given top priority for the next 10 years

0.79 0.84

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V104105c. The goal of seeing that people have more say about how things are done at their jobs and in their communities should be given top priority for the next 10 years V106107a. Maintaining order in the nation should be given top priority in this nation V106107b. Giving people more say in important government decisions should be given top priority in this nation V106107d. Protecting freedom of speech should be given top priority in this nation

–0.90 0.86 –0.73 –0.78

Low environment consciousness (alpha = 0.90) [Lower score = more environment consciousness] V42. Haven’t chosen household products thought to be better for the environment V43. Haven’t decided for environment reasons to reuse or recycle something rather than throw it away V45. Haven’t attended a meeting or signed a letter or petition aimed at protecting the environment

0.95 0.95 0.83

POSITIVELY CODED SCALES Tolerance (alpha = 0.92) [Higher score = more tolerance] V19. Tolerance and respect for other people is not an especially important quality for children to learn at home V51. Okay neighbors with a criminal record V55. Okay emotionally unstable neighbors V58. Okay neighbors with AIDS V60. Okay homosexual neighbors

–0.72 0.85 0.88 0.95 0.95

Less Workaholicism (alpha = 0.82) [Higher score = less workaholicism] V69. Don’t like work so much that often stay up late at night to finish it V70. Making parents proud with my work is not a key goal in life V71. Don’t make a lot of effort in work to live up to what friends expect V72. Work is what makes life worth living, not leisure

0.77 0.86 0.77 –0.81

Flexible Family (alpha = 0.89) [Higher score = less flexible family] V61. Even when jobs are scarce, men should not have more right to a job than women V92. Disagree that child needs a home with both a father and a mother to grow up happily V93. Disagree that a woman has to have children in order to be fulfilled

0.88 0.93 0.90

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II. RELIGION-DEFINED LIFESTYLE INDEX (ALPHA = 0.91) NEGATIVELY CODED SCALES Lack Spiritualism (alpha = 0.96) [Higher score = less spiritualism] V9. V22. V180. V182. V183. V190. V191.

Low importance of religion in life Religious faith is not an especially important quality for children to learn at home Not brought up religiously at home Not religious Don’t believe in God God is very important in life Don’t find comfort and strength from religion

0.95 0.88 0.76 0.90 0.94 –0.97 0.88

Rejecting afterlife (alpha = 0.96) [Higher score = more rejection] V184. V185. V186. V187. V188.

Don’t Don’t Don’t Don’t Don’t

believe believe believe believe believe

in in in in in

life after death Soul Devil Hell Heaven

0.91 0.88 0.94 0.92 0.97

Rejecting authority (alpha = 0.76) [Higher score = more rejection] V13.

Parents have a life of their own and should not be asked to sacrifice their own well-being for the sake of their children V24. Obedience is not an especially important quality for children to learn at home V114. Against a change in the way of life to greater respect for authority

0.82 0.87 0.79

Alternative lifestyle (alpha = 0.92) [Higher score = more alternative lifestyle] V197. V198. V198. V200. V201. V202.

Believe Believe Believe Believe Believe Believe

that that that that that that

homosexuality is justifiable prostitution is justifiable abortion is justifiable divorce is justifiable euthanasia is justifiable suicide is justifiable

0.85 0.87 0.78 0.90 0.81 0.90

Lack of Pride (alpha = 0.74) [Higher score = less pride] V4. Family is not very important in life V205. Not at all proud of my nationality

0.89 0.89

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III. JOB-DEFINED LIFESTYLE INDEX (ALPHA = 0.82) POSITIVELY CODED SCALES Generous job (alpha = 0.82) [Higher score = more generous job] V75. V77. V79. V81.

Good pay is important aspect of a job Good job security is important aspect of a job Good hours is important aspect of a job Generous holidays is important aspect of a job

0.81 0.73 0.88 0.81

Empowering Job (alpha = 0.85) [Higher score = more empowering job] V76. Not too much pressure is important aspect in a job V80. An opportunity to use initiative is important aspect in a job V83. A responsible job is important aspect in a job V85. A job that meets one’s abilities is important aspect in a job

0.79 0.87 0.87 0.81

IV. CIVIC GOVERNANCE INDEX (ALPHA = 0.75) NEGATIVELY CODED SCALES Poor national governance (alpha = 0.93) [Higher score = poorer governance] V137. V140. V142. V143. V144. V145.

Don’t Don’t Don’t Don’t Don’t Don’t

have have have have have have

much much much much much much

confidence confidence confidence confidence confidence confidence

in in in in in in

the legal system labor unions national government political parties parliament civil service

0.87 0.79 0.80 0.90 0.89 0.87

POSITIVELY CODED SCALES Satisfaction with national politics (alpha = 0.90) [Higher score = more satisfaction] V152. The political system as it is today is going on very well V165. Dissatisfied with the way the people now in national office are handling the country’s affairs V166. Generally speaking, this country is run for the benefit of all the people, as opposed to a few big interests looking out for themselves

0.90 –0.94 0.90

ORGANIZATIONAL DESIGN UNDER POST- MODERNIZATION

Support for democracy (alpha = 0.93) [Higher score = more support] V154. Having a strong leader who does not have to bother with parliament and elections is a bad way of governing this country V157. Having a democratic political system is a bad way of governing this country V160. In democracy, the economic system does not run badly V161. Democracies are not indecisive and have too much squabbling V162. Democracies are good at maintaining order V163. Democracy has problems, and is not better than any other form of government

0.79 –0.90 0.86 0.81 0.94 –0.86

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26

463

Concluding Comments on Transformative Organizations Vipin Gupta

In each cultural context, members develop their own set of practices and values to address issues such as the relationship of individuals to groups, distribution of power and resources among members of groups, and choice of priorities among different goals. As firms in each society interact with the changing environment, they must find ways to balance and integrate divergent cultural approaches they encounter in the new context. They must also decide whether principles, practices, and strategies that make sense in the first cultural context are equally relevant to the new context. As they build organizations that span spatial and temporal boundaries, they must consider a diverse set of cultural variables that shape the attitudes and motivations of their varied constituencies. Perlmutter (1969) underscored the costs of mentoring geocentric managers who were historically trained through living and working in several nations. In his 1969 article on the evolution of multinational corporation, he noted, ‘The economic rewards, the challenge of new countries, the personal and professional development that comes from working in a variety of countries and cultures are surely incentives, but companies have not solved by any means the human costs of international mobility to executives and their families.’ Since the 1970s, a substantial body of knowledge has accumulated to help improve managers’ familiarity with multiple cultural contexts. Under the Human Relations Area Files project initiated by Murdock (1972), a vast amount of literature on each community was pulled together in a central database. Subsequently, two major studies—Hofstede (1980) and Trompenaars (1993)—were published with crosscultural data on selected cultural dimensions. Additional large-sample insights into the cultural differentials have been provided by the studies of Schwartz (1994) and Inglehart (1997). The GLOBE (Global Leadership and Organizational Behavior Effectiveness) research program has further sharpened and refined the cultural knowledge to support the development of cultural management as a disciplined training methodology (House et al., 2003). In the GLOBE program, the cultures of the world have been classified into 10 cluster groups: Anglo, Latin America, Latin Europe, Nordic Europe, Germanic Europe, Eastern Europe, Confucian Asia, Southern Asia, Middle East, and Sub-Sahara Africa.

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This book has investigated the significance of the cultural factor in entrepreneurial leadership initiatives related to the development and sustaining of a transformative organization—an organization that is focused on the management of change through superior and effective learning about the diversities of cultural approaches and discovery of the techniques to make these approaches meaningful and fruitful for a given cultural context. It has relied on the contributions related to five major cultural regions: Southern Asia, Confucian Asia, Nordic/Germanic Europe, Anglo, Latin America and Latin Europe. Thus, it offers a distinct and holistic approach for understanding the transformative challenge in the new economies competing and collaborating on a global cross-cultural landscape. In the concluding section, we present a summary of key findings. Thereafter, the role of technology and the societal culture in transformative organization is discussed. A transformative potential index is proposed to assess the effects of societal culture, and data for various cultural regions on this index presented using GLOBE study. Then, the role of entrepreneurial leadership is highlighted as key for transformative organization under emerging market situation of low transformative potential index. The effectiveness of entrepreneurial leadership in emerging markets is illustrated using a case study of the Infosys model. Directions for further research are underlined.

Summary of Key Findings The first challenge of the transformative approach is to understand the cultural realities of the context where the organizational initiative has to be undertaken. In the first part of this book, a variety of contributions highlighted the nature of the cultural context of the new Asian economies. For instance, consider the following excerpts from some of the chapters: The GRIDCO chairman recounted the nature of various activities performed by him during the reform program as follows: ‘During the period when the working groups were functioning, my role was more of that of a facilitator. About 50 per cent of the time I was functioning as the chairman of OSEB and the remaining as a chief executive who was heading an organization in transition. There was a theoretical concept of reform that was put forth by the World Bank and consultants and then there were the ground level realities of reforming the organization. I acted as a link between them.’ (Chapter 3) Like Japan, Indian organizations have frequently used seniority-based promotions and rewards. The use of seniority system implies that Indian organizations value person-based attributes. In fact, most Indians believe that age is associated with wisdom. Unfortunately, unlike Japanese organizations, Indian organizations do not assess enhancement of skills alleged to be associated with seniority. (Chapter 6) One of the most popular regulative institutions in Europe is the national or local level qualification system of promotion and payment ladder in firms. This can be said as a microscopic form of large bundled division of labor. With this system, such as ‘Tarif ’ in Germany and ‘Cadre’ in France, it is difficult for the

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local Japanese transplants to apply the Japanese-style company level qualification systems which are more flexible in implementing individual-based evaluation and reward methods using wider job rotations and on-the-job training practices. (Chapter 12) What we learn from the above is that the knowledge gained from other contexts is like a script of a play or film, which needs to be creatively interpreted and enacted in a manner that is meaningful for the participants. A script is an unfinished work of art, which outlines the concept of an action that conveys the perceptions of the scriptwriter. A script, which is essentially two-dimensional in nature, must be filled in with details of the context that are supplied by the director, actors, costume designers, set designers, musicians, and others, to create a three-dimensional experience. A play, film script or musical score comes to life only through the additional efforts of interpretative artistes like actors, dancers or musicians and teams of technicians and artisans as well as directors, conductors and producers. If the scriptwriters assume that the play or screenplay is just the script, then they may have a tendency to fill the script with too many minor details, which would overload the other members of the production team and also confuse the audience. A good scriptwriter is one who leaves the details to the creativity of the artistes and the technicians, and to the imagination of the audience, so that the theater becomes an enriching experience for all concerned and allows them a spiritual awakening transcending the specific matter and the original context of the script. Alternatively, if the directors and the artists do not creatively interpret a script, then even the best script may fail to have an impact on the audience. In other words, an open and creative collaboration and exchange is critical to make a living play out of a lifeless script, and to ensure that the audience appreciates the value of the play going beyond what might be gained just by reading the script. Otherwise, it is difficult to explain the craze created by movies such as Harry Potter whose stories are widely known to their prime target audience, and of the plays based on the well-known works of Shakespeare. In the second part of the book, a variety of insights about the transformation in different cultural contexts were presented. As an illustration, the following are the excerpts from three major cultural contexts covered: Northern Europe, Anglo, and Latin America. Ideas relating to entrepreneurship were primarily introduced in Germany by independent pioneer-entrepreneurs, who not only preached ‘corporate social partnership’ but also practised and implemented it… Today, economic and socioethical themes such as co-determination or shared ownership are no longer the focus of attention. They have been replaced by demands on contemporary and efficient (Knowledge) Management—particularly by large enterprises striving for cultural, organizational and strategic change. (Chapter 14) Japanization of the production system and labor management methods contain significant innovations in the Ford-Taylor type work organization and labor management... Recent Supply Chain Management methods are also based on logic similar to the Japanese production system. Relying on IT, a more flexible and efficient integrated system of total business operation processes is established,

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from procurement to fabrication, distribution, and sales activities. In this way, innovations in the production management methods in the 1980s constituted a fundamental discrepancy with the work rules and the job control unionism of traditional US labor relations. (Chapter 16) Thus, bearing in mind the strictures of Argentine economic political society and the firmly established values of private society, in order to develop effective change interventions, leaders and managers need to act with operational common sense and respect for people, and do it clearly conveying the nature of the situation, the chosen path, how the situation affects each person, and the initiatives that would assure success. GLOBE testimonials mention that competent managers may be deemed exceptional, but highly visible leaders are autocratic, malevolent, self-centered, non-participative, and would not be credible in work organizations as they would be negatively affected by current failures and unorthodox practices enacted both in the public and private spheres. (Chapter 19) Each of the above highlights a different challenge of transformation specific to the focal cultural context, each arising to some extent as a result of the emergence of Japan and other new Asian economies during the post-war period in general, and over the last few decades in particular. In Northern Europe, the transformative challenge has been one of giving self-determination responsibilities to the workforce in a growing number of domains pertinent to the new knowledge economy so that they may become a willing and integral partner in the learning and entrepreneurial value-addition process. The professional qualifications and a well-defined national system for the appraisal of skills has been the key to developing self-management initiatives at the workforce level. The Anglo region, on the other hand, has taken a more strategic approach with leadership focusing on the integration of technological solutions with the organizational principles vindicated by the Japanese development. The central challenge has been a shift from a view that deemed workforce purely as a cost that is best avoided through capital investments to a perspective where workforce becomes a source of advantage if it can flexibly exploit the available and the advancing technological solutions. In the past, new capital investments in machinery and automation inadvertently meant a loss of jobs. Though automation enhanced throughput, and thus value-added per employee, in reality many of the employees were made redundant and did not contribute anything real to the overall value-added. In the transformed scenario, the technological solutions are designed to enhance the value added by the workforce in ways that make the services provided by each worker more—not less—meaningful. For instance, customer relationship management technologies allow the customer service representatives to better appreciate the needs of the end-consumer and to more effectively execute the expansion of product offerings through strategic crossselling. In other words, the transformative force in the Anglo context has been a shift from a view of favored workforce as dumb, with whom relations need to be established only because the workforce would not otherwise perform, to a view that appreciates the smartness of the workforce.

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Finally, in the Latin American context, the leaders have found it difficult to persuade people to adopt new organizing principles from Confucian Asia, Northern Europe, and Anglo regions. Traditionally, the Latin American babies often were given a godfather (compadre) chosen from among the members of the locate elite. This practice, known as compadrazgo, was intended to provide the children with useful connections in later life. Compadrazgo carried with it reciprocal obligations such as help from the godparent in finding employment, with loyalty in voting on the part of the godchild. As a result, the loyalty of the workforce in the Latin American context is often not with their bosses, who are seen as more interested in the welfare and interests of their close circle of family members and god-siblings and god-children. Due to a thrust on personalism, a more generalized loyalty towards the organizational welfare is also lacking, as the organization is seen as being governed by the senior managers. A transformational approach is one that recognizes the space of the individual workers and shares a learning conversation with them as a person. A facilitator who does not carry a baggage of self-interest—such as an outside consultant or an expatriate— is given charge of the change interventions, and the focus is on inspiring voluntary involvement of the workforce by making them aware of the self-expression and emotional meaning enhancing potentialities of the new approaches. Rather than addressing specific disputes between the management and labor, the facilitator faces the psychoanalytic challenge of creating a meaningful interest in the new ideas. Management of transformation is not a one-off thing. For an organization to remain healthy, it is essential to foster openness and dynamism of the work climate, as opposed to freezing it into a static and unchanging state. The transformative organization tries to foster values and practices that are attuned to continuous cultural development, with a sense of discovery of scripts from different cultural contexts and enacting those scripts in ways that enrich one’s own cultural context. It entails drawing upon the competencies of not just the top managers and leaders, but also the workforce at the grassroots and the outside stakeholders. The transformative organizations have a culture of dignity, where an open dialogue contributes to a continuing exchange of values, beliefs and practices, and a better understanding of the appropriate situations for the application of these values, beliefs and practices.

The Role of Technology The thrust of this book has been on the cultural aspect of the transformation organization. It is guided by a perspective that appropriate work culture practices are essential for effective exploitation and development of technological capability, and for a culturally meaningful lifestyle. An alternative view may hold that the work culture practices are essentially defined by technology, and limited technological capability makes it difficult for the organizations to introduce self-entrepreneurship initiatives as in Northern Europe, or strategic enterprise-wide reengineering and integration initiatives as in the Anglo nations. Under this perspective, the changes in work practices go hand in hand with the introduction of new technology and, at any point in

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time, the observed work practices are best feasible in a particular context. In reality, however, without any specific strategic intent or appropriate cultural basis, the introduction of new technology does not necessarily contribute to a substantive change in work culture. A case in point is Jammu and Kashmir where due to weak links with the technology providers on account of the relative isolation of the state from the rest of India, the firms have found it difficult to contextualize the applications of technology. Neelu Rohmetra (1998) studied Jammu and Kashmir Bank to investigate if information technology has resulted in any change in the work culture. The findings showed that computerization did not offer timely and better solutions to the customers in fulfilling their requirements. Besides, it could not facilitate a shift from routine tasks to more quality time with customers for personal consultancy. All unit heads wished to have some computer resource controlled exclusively by them. Due to this non-planned proliferation, the management information system function grew disproportionately. Still, many managers were not satisfied with computerized outputs and asked to cross check them with the manual ones. Manual as well as computerized systems led to mismatch of figures, increasing the stress. Over the recent years, scholars have highlighted the need to build human capital through training and development for successful and productive implementation of automation, computerization, and information technology. Though human capital investments are critical for allowing an effective use of technology and for improving the human resource and information technology interface, they are not always the best alternative for a firm’s investments. A firm, especially in an emerging market context, has to cope with a very high cost of capital, and has only limited funds at its disposal. The demands for investments are immense, including for research and development, brand building, relationship-building, information technology, and training and development, and the firms must prioritize and select among these various investment options. However, when the workers are self-motivated to learn, then organizational investments in people development can be more productive. Thence, enhanced productivity of the workforce becomes a self-sustaining catalyst for a variety of investments in sophisticated training, research, branding, relationships, and technology for further value-added.

ROLE OF SOCIETAL CULTURE–DEVELOPING A TRANSFORMATIVE POTENTIAL INDEX Societal culture plays an important role in the transformative potential of an organization. Societal culture refers to an enduring pattern of shared values, beliefs, practices and assumptions that distinguish one group of people from another (Hofstede, 1980). There is increasing evidence that global competitive advantages can be gained through cultural considerations. Conventionally, the focus of inquiry has been on management practices that are consistent with societal culture for high performance organizational design (Earley, 1994).

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Conversely, it is held that the management practices inconsistent with societal culture are likely to impede organizational effectiveness (Newman and Nollen, 1996). Another way of approaching the role of societal culture is to recognize that different configurations of societal culture may be associated with different organizational qualities. For instance, Hofstede (2001) observes that the societal culture dimensions of uncertainty avoidance and power distance have an influence on the quality of organization. A societal culture (a) high in uncertainty avoidance and high in power distance is likely to be associated with the organizational quality of standardized bureaucracy, with an emphasis on standardized work processes; (b) high in uncertainty avoidance and low in power distance is likely to be associated with the organizational quality of professional bureaucracy, with an emphasis on professional qualification and skills of the workforce; (c) low in uncertainty avoidance and high in power distance is likely to be associated with the organizational quality of authoritarian bureaucracy, with an emphasis on family paternalism; (d ) low in uncertainty avoidance and low in power distance is likely to be associated with the organizational quality of mutually adjusting adhocracy, with an emphasis on market type fluidity. Finally, one may be interested in specific target quality—such as the potential of the society to nurture transformative organization, or what may be termed as ‘transformative potential’. It would then be possible to identify a configuration of societal culture that would be conducive to the attainment of the target quality and to authenticate the relationship between that benchmarked configuration and the measures of target quality. Specifically, the steps involved in this process are: 1. Define the target quality (in our case, transformative potential), 2. Develop a benchmarked configuration of societal culture for attaining the target quality, 3. Authenticate the relationship between the behavioral benchmark and the measures of target quality.

T ARGET Q UALITY –T RANSFORMATIVE P OTENTIAL We define transformative potential as the potential of an organization to develop sustainable transformation because of the positive and dynamic features of its societal culture.

B ENCHMARKED CONFIGURATION

OF

SOCIETAL CULTURE

We rely on the GLOBE program to develop a benchmarked configuration of societal culture in which organizations with high transformative potential are likely to emerge. GLOBE has collected data on cultural values and practices and leadership attributes from 18,000 managers in 62 societies. In GLOBE, nine dimensions are used for a systematic understanding about the culture of each society: (a) Performance Orientation, (b) Assertiveness Orientation, (c) Future Orientation, (d ) Humane Orientation, (e) Institutional Collectivism, (f ) Family

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Collectivism, (g) Gender Egalitarianism, (h) Power Distance, and (i) Uncertainty Avoidance. Performance Orientation was derived from McClelland’s (1961) work on the need for achievement. Hofstede’s (1980) construct of Masculinity was used as a basis to develop the two distinct dimensions: Assertiveness Orientation and Gender Egalitarianism. Assertiveness Orientation is rooted in the interpersonal communication literature (Sarros and Woodman, 1993). Gender Egalitarianism is similar to the United Nations Development Program’s (UNDP) concept of Gender Empowerment. Future Orientation is derived from Kluckhohn and Strodtbeck’s (1961) Past, Present, and Future Orientation dimension, and from Hofstede’s (2001) Long Term Orientation, which focuses on the temporal mode of the society. Humane Orientation has its roots in Kluckhohn and Strodtbeck’s (1961) work on the ‘Human Nature is Good versus Human Nature is Bad dimension’. Institutional Collectivism captures (inversely) the same construct as Hofstede’s Individualism. Family Collectivism measures pride in and loyalty to the family, and is derived from the Triandis et. al.’s (1988) work on in-groups. Power Distance and Uncertainty Avoidance are based on Hofstede’s (1980) work. GLOBE measured each cultural construct in two ways: cultural practices focused on how things are (referred to as ‘As Is’ construct), and cultural values focused on how things should be (referred to as ‘Should Be’ construct). The items used to measure both practices and values were identical, but the respondents were asked to evaluate them both in as is as well as should be terms. The construct validation of the GLOBE cultural scales is available in Gupta, Sully and House (2003). The major implications of each of the nine dimensions are as follows: 1. Performance Orientation: The performance orientation dimension reflects the extent to which a society encourages and rewards improved performance, goal-oriented behavior, and innovation. Performance oriented cultures encourage people to be in control, using their experience, intelligence and skills to navigate the currents towards their goal. When faced with obstacles, they encourage a diligent and conscientious use of analytical perspectives, such as brainstorming, weighing the options, and plotting the course—thus such societies tend to be adaptable and versatile. Such societies also encourage diversity of perspectives and religious ideologies to foster a more versatile response-ability. 2. Assertiveness Orientation: The dimension of assertiveness orientation is associated with a strong consciousness, expression, articulation, and communication of one’s thoughts, feelings, beliefs, and rights; in public, political and social forums, and is related to physical and psychological aggressiveness and confrontation. Assertive societies emphasize social skills and communication, direct personal influence and expression, and overall inter-personal effectiveness. Assertive orientation also contributes to people being more politically astute— they are willing to ask for what they want, deny what is not in their interest, and articulate positive and negative messages to others in an open manner. 3. Future Orientation: The dimension of future orientation is reflected in behaviors such as planning, preparing and investing for the future. In long-term

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oriented cultures, a strong concern for virtue allows a pragmatic integration of morals and practice. As such, the material and spiritual are more integrated. The value of future orientation, with its emphasis on sacrifice, savings and persistence, is associated with a spiritual force to search for the meaning of life beyond the habits of consumption and attraction of materialism. Such positive, meaningful psychology and visualization have an important influence on the capacity of the human body and mind to effect changes over time. 4. Humane Orientation: The humane orientation dimension is concerned with generosity, compassion, and empathy for others. Societies with high humane orientation strive to use reason, the lessons of history, and personal experience to form an ethical/moral foundation and meaning in life. While respecting an unrepressed freedom to pursue individual interests, these societies encourage responsibility and consideration for others. They are founded on civil virtues such as honesty, uprightness, truth, sincerity, integrity, and fairness. The dispositions of greed, envy, hatred, and cheating are checked, and there is limited emphasis on hedonic pleasure, personal comfort, and material success. 5. Institutional Collectivism: Institutional collectivism construct reflects inducements and rewards for collective behavior and norms, rather than incentives and rewards for individual freedom and autonomy. Such collectivism is exhibited in preferences for closer work relations and higher involvement with one’s social unit. In institutionally collectivist cultures, people are encouraged to seek self-critical and self-improving orientations as a means to pursue the cultural goals associated with interdependence and trust. In this manner, institutional collectivism emphasizes shared objectives, interchangeable interests, and respect based on socially legitimized and institutionalized criteria. 6. Family Collectivism: The family collectivism construct is associated with pride in affiliation and a general affective identification with, and a general affective commitment towards, the family, group, community, and nation. It represents a high degree of emotional attachment and personal involvement in the larger group, thus fostering a focus of the people in the overall interests of the group. However, responsibility and identity begins with the immediate group, and then gradually and weakly extending externally. As a result, family collectivism may also be associated with degenerative tendencies such as corruption and nepotism. 7. Gender Egalitarianism: The gender egalitarianism construct reflects the absence of gender-dependent division of roles, expectations, evaluations, and power in a society. In gender egalitarianism societies, there are fewer gender stereotypes that characterize women as passive, weak and deferential and primarily domestically oriented. More than economic modernization, it reflects an inherent understanding between men and women, enhancing their ability to work together in social and economic spheres. Gender egalitarian societies not only tolerate diversity, but also emphasize understanding, respect, and nurturing of diversity.

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8. Power Distance: The power distance construct reflects the extent to which members of a cultural group expect and agree that power should be shared unequally. Power distance is readily valued at a cultural level when used for social causes, such as through the practice of both empowerment and productivity. Power distance is also associated with monopolistic orientation: endorsement of the differentials in the performance capacities of various groups based on their accumulation of the private and intellectual properties. However, unless constrained in some manner, power in high power distance may be exercised in an aggressive manner for self-aggrandizing purposes, to the detriment of the society. 9. Uncertainty Avoidance: The uncertainty avoidance construct focuses on the extent to which people seek orderliness, consistency, structure, formalized procedures, and laws to deal with naturally occurring uncertain as well as important events in their daily lives. Uncertainty avoidance is also associated with the social reliance on experts, technology, money and material possessions, as well as social organization, legislation, and governance. Material accumulation and technological advancements, for instance, can help in dealing with the uncertain changes in the environment, and allow exploitation of newly emergent opportunities in an entrepreneurial fashion while containing the risks. Based on the above, we propose that the societal culture dimensions of performance orientation, assertiveness orientation, future orientation, humane orientation, institutional collectivism, gender egalitarianism, and uncertainty avoidance are positively related with the transformative potential of the organizations. In contrast, the societal culture dimensions of family collectivism and power distance are inversely related with the transformative potential of the organizations. Therefore, we define transformative potential Index as follows: Mean (performance orientation, assertiveness orientation, future orientation, humane orientation, institutional collectivism, gender egalitarianism, uncertainty avoidance) æææææææææææææææææææææææææ Mean (family collectivism, power distance) The average scores for the 10 GLOBE cultural clusters on the Transformative Potential Index are given in Table 26.1, separately for practices and values measures of the cultural dimension constructs. There is no significant difference among various cultural clusters on the value-based transformative potential index. However, there exist statistically significant differences among various cultural clusters on the practice-based transformative potential index. Specifically, the three Protestant culture clusters—Nordic, Germanic and Anglo—show significantly higher scores on practice-based transformative potential index, while the Confucian culture cluster shows average scores. On the other hand, Sub-Sahara Africa, Southern Asia, and Latin Europe are moderately weak in practice-based transformative potential index. Finally, Middle East, Eastern Europe and Latin America are significantly low in practice-based transformative potential index.

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Importantly, the societies value transformative potential index (mean=1.17) more than they practice it (mean=0.79). In all societies, except New Zealand and Denmark, value-based transformative potential index exceeded practice-based index. Danish society, for instance, is distinctive for its high prominence to history, with very wide time frames, in the media. Danish media regularly contains stories about or references to history, not necessarily as a ‘background’ for today’s events, but just as anecdotes that appear to serve little more than an entertainment value (Ekecrantz, 2001). In such a situation, there is a sense of appreciation for the existing transformative practices, and further transformation in such practices is not necessarily deemed of high value. Table 26.1: Mean Scores for Practice-based and Value-based Transformative Potential Index, by Cultural Clusters

Nordic Europe Germanic Europe Anglo Confucian Asia Sub-Sahara Africa Latin Europe Southern Asia Middle East Eastern Europe Latin America Overall

Practice-based Transformative Potential Index

Value-based Transformative Potential Index

1.04**+ 0.92**+ 0.90**+ 0.79 0.78*– 0.77*– 0.73*– 0.72**– 0.71**– 0.70**– 0.79

1.13 1.21 1.12 1.18 1.19 1.20 1.21 1.13 1.16 1.20 1.18

*: p<0.05; **: p<0.05; +: significantly high; –: significantly low

A UTHENTICATION

OF THE

TRANSFORMATIVE P OTENTIAL I NDEX

Table 26.2 reports correlation of practice-based transformative potential index with several measures of transformative effectiveness in social, economic, technological, and political domains in each society. The data was drawn from Gupta and Chhokar (2003) database of GLOBE Education and Research Foundation, originally taken from published sources such as World Bank and United Nations. The societies that score high on practice-based transformative potential index tend to devote a greater share of their national income to education and health, live longer lives, and have more developed human resources and more women in governance positions. They also have higher per capita incomes, greater tertiary employment, more stock market wealth, less income inequality and a low unemployment rate. There is greater mass usage of technological resources such as Internet, telephones and personal computers in such societies. Finally, such societies offer high civil liberties and a transparent governance system, with little or no corruption. Thus, we conclude that the proposed transformative

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potential index does measure the potential of the organizations in a society to realize sustainable transformation. Table 26.2: Correlates of Practice-based Transformative Potential Index Measure of Transformative Quality Social Domain – Human Development Index – % women in government – % Education expenditure/GDP – % Health expenditure/GDP – Life expectancy at birth in years

Pearson’s Correlation Coefficient 0.51** 0.40** 0.46** 0.40** 0.40**

(n=56) (n=52) (n=55) (n=55) (n=55)

0.67** 0.44** 0.65** –0.46** –0.38**

(n=61) (n=54) (n=52) (n=48) (n=48)

Technology Domain – Telephone main lines per capita – Mobile phones per capita – Personal computers per capita – Internet hosts per capita

0.67** 0.58** 0.79** 0.70**

(n=55) (n=55) (n=50) (n=56)

Political Domain – Civil liberties – Lack of corruption

0.50** (n=57) 0.68** (n=55)

Economic Domain – GNP per capita – % service workers – % Stock Market Capitalization/GDP – Gini Index of income inequality – Unemployment rate

**: p<0.01

FURTHER MANAGERIAL AND RESEARCH CONSIDERATIONS F ROM TRANSFORMATIVE P OTENTIAL T RANSFORMATIVE ORGANIZATION

TO

The foregoing analysis suggests that it would be easier for the firms to sustain their transformations in a society with high practice-based transformative potential index, because in such societies the social, economic, technological and political institutions are likely to be better developed and more sophisticated. On the other hand, it would be quite challenging for the firms in low practice-based Transformative Potential Index societies to sustain their transformations. The concept, technique, and methodology of transformative organization would, therefore, be most relevant and valuable for the firms in such societies to realize their valued transformative potential. The GLOBE study suggests that value-based leadership can be quite effective in forging an ideological foundation for the transformational initiatives (Hartog, House, Hanges, Ruiz-Quintanilla, and GLOBE, 1999). However, value-based leadership has not been easy to enact in many societies. According to Robert

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House (1996), a key impediment is the lack of appropriate institutional foundation: ‘All scholars who have attempted to explain value based leadership agree that it must be based on the articulation of an ideological goal. However, since ideological goals often challenge the status quo, their expression is often suppressed. Opportunity to articulate such a goal, whether in stressful or nonstressful situations, can thus be considered as one of the situational requirements for a person to emerge as a value based leader. It is perhaps lack of such opportunity that accounts for the absence of value based leaders, under condition of suppression of democracy, of protest movements in totalitarian countries.’ Therefore, there is a need to develop a leadership that can focus on the transformative potential values aspired by the people in most societies, and use that as a basis for transformative interventions. Thereby, the organizations would be able to offer more meaningfulness, spiritual well being, self-expression, and emotional fulfillment, to their employees by emphasizing the value of transformative potential, and making efforts to actualize this potential in their practices. Such an approach would facilitate a focus on how to create and develop the supportive social, economic, technological and political institutions. There would be less concern with the inherited quality of the institutions, and more interest in actualizing the valued and preferred quality of institutions. One possibility is to rely on entrepreneurial leadership for discovering and executing opportunities for transformative interventions. Entrepreneurial leadership is a ‘leadership that creates visionary scenarios, that are used to assemble and mobilize a ‘supporting cast’ of participants who become committed by the vision to the discovery and exploitation of strategic value creation’ (Gupta, Macmillan, and Surie, 2003). Entrepreneurial leaders are most effective in situations where the funds are tight and human resources are drained where windows of opportunity must be identified to mobilize resources and gain workers’ commitment to incremental value creation. To do this requires the combined creation of a vision and a cast of supporters capable of enacting that vision: there is little relevance of a vision where the cast of supporters cannot enact, and of a cast of supporters without a suitably compelling vision. Entrepreneurial leaders therefore seek to envision proactive transformation of the firm’s exchange system to mobilize support from a workforce to enact the new value-creating networking system. However, entrepreneurial leaders are not necessarily heroes— more often they have humble origins and they have a deep appreciation of the values and ethos of the community around them, and of the practices that the community would like to see transformed (Gupta, Macmillan and Surie, 2003). Gupta, Macmillan and Surie (2003) identify entrepreneurial leadership to be distinctively more effective in the Protestant cultures, compared to the rest of the world. Their finding is consistent with the thesis of Weber (1930:224), who held that the Protestant ethic is associated with leadership in entrepreneurship, because it emphasized ‘the sinfulness of the belief in authority, which is only permissible in the form of an impersonal authority’. Table 26.3 gives the mean scores of 10 cultural regions, using data derived from the GLOBE Study

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and reported in Gupta, Macmillan and Surie (2003). The data indicates that entrepreneurial leadership is also highly effective in the Southern Asia cluster, and there is no significant difference between the efficacy of entrepreneurial leadership in the Southern Asia cluster and Protestant cultures clusters. Interestingly, another cultural region with strong efficacy of entrepreneurial leadership based on GLOBE data is Latin America. The chapters contained in this book suggest that in Latin America, a high significance is attached to the role of leaders in helping the workforce to see positive and creative meaning in organizational initiatives. Table 26.3: Mean Scores on the Effectiveness of Entrepreneurial Leadership in Different Cultural Regions on a scale of 1 to 7, 1 = Very Strongly Counter-effective, 7 = Very Strongly Effective Cultural Region Anglo Nordic Europe Latin America Southern Asia Germanic Europe

Mean Effectiveness 6.19 6.13 6.13 6.10 6.09

Cultural Region Latin Europe Sub-Sahara Africa Eastern Europe Confucian Asia Middle East

Mean Effectiveness 5.98 5.98 5.91 5.85 5.67

Source: Derived from Gupta, Macmillan and Surie (2003).

Surprisingly, in Southern Asia, the effectiveness of entrepreneurial leadership stands out despite the cluster’s notably high scores on power distance and family collectivism (Gupta, Surie, Javidan, and Chhokar, 2002). Since Southern Asia shares several of the institutional constraints with other emerging markets that suffer from low practice-based transformative potential, the techniques, methodologies and approaches used by the firms in Southern Asia to execute entrepreneurial leadership should be insightful. The Southern Asian model of entrepreneurial leadership can help managers around the world gain better appreciation of how to discover window of opportunities within a constrained institutional setting, and how to mobilize the cast and envision scenarios for sustainable transformative interventions.

SOUTHERN ASIAN MODEL

OF

ENTREPRENEURIAL LEADERSHIP

Though it is difficult to identify one model of entrepreneurial leadership specific to all the firms in Southern Asia, some fundamental and common elements can be identified that pervade several leading firms in many cultures and sub-cultures of Southern Asian cluster. At its very root, the Southern Asian model of entrepreneurial leadership is founded on the Doctrine of Karma. People believe that their present personality and socio-economic status have largely generated from their actions and lifestyles in previous births (Gopalan and Rivera, 1997). Individuals are reborn into wealthier and happier families if they perform their moral duties well in their previous birth (known as the Doctrine of Dharma).

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Similarly, people believe that if they perform their moral duties well in this birth, they will accomplish a better life in their subsequent births. However, the effect of the present actions is seen as not independent of the influences of behaviors from the prior births and before this birth. Therefore, people believe that to improve the future situation, a great deal of planning, learning, experience, and support is needed. To envision a transformational scenario, they often seek to rely on their elders, superiors, and teachers. They also take a cautiously optimistic outlook towards their present situation believing that they would someday, somehow get the needed support and opportunity to redeem their past lapses in moral responsibilities. Contributing to the community by helping friends and relatives in need are deemed important to help maintain this sense of optimism, order, and serenity in the society. In addition, the Southern Asian consciousness sees time as comprising of several phases. The present phase is believed to be the ‘Kali Age’ (the impersonal machine age) where evil and immorality predominate, as opposed to a stronger prevalence of purity and goodness in the earlier phases (Saha, 1992). The entrepreneurial leaders are therefore expected to strive to rekindle and promote purity and goodness in the society. The leaders are not respected for the material wealth they have acquired or accumulated, but for their entrepreneurial behavior, or what is termed as ‘gyana’ (knowledge) orientation that is focused on serving the community with a unified consciousness, and thereby gaining a communion of the self (Atman) with the Almighty (the Brahman). This differs from the societies with a doing orientation, where emphasis is given on personal achievement, accomplishment, and accumulation of material wealth alone, for instance in terms of a calling from God as in the Protestant cultures (Weber, 1930). Similarly, the masses in Southern Asian society are respected not for their personal gains, but for their ability to provide for the material well-being of their families. Even students are respected for their sharing of knowledge and helping one another, rather than for their learning alone. Thus, each member of the society is expected to operate as an entrepreneurial cast. Further, dana (giving or offering) is recognized as an important dharma, or moral imperative, for all entrepreneurial leaders in the Southern Asian society. The Gift of food (anna dana) is the most common form of dana, that involves the sharing of food with others—both who have given the food to the person (such as teachers, ancestors and deities) as well as those who are dependent on the person (such as family members and visitors). On special occasions, food is also donated on a large scale to the impoverished people, and some food may be donated on a regular basis to a smaller group of people in need depending on what the person can afford (Sugirtharajah, 2001). Several other forms of gifts are well recognized, including donation of labor or physical service (shram dana). Because giving is an act of moral duty, dana does not carry an expectation of a return favor from the recipient (Sinha, 1978). These features have important implications for a transformative organization. For instance, suppose an organization negotiates a contract with a customer for delivery of certain products. As part of that deal, the customer informs it of new equipment, which enables expansion of the production scale and the lowering

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of costs. Grateful for this transformative insight, the organization may offer its products to that customer near or even below its costs, partly as its donation or consideration for the customer’s leadership (in terms of sharing the knowledge about the new equipment). Such a transfer of consideration may occur even without any implicit or explicit expectation for such gift on the part of the customer. Using an exchange costing approach, taking into account not just the added costs of various services, but also cost savings and growth from the customer advice, the entrepreneurial leaders can gain substantial business without falling victim to the forces of extortion and corruption.

INFOSYS MODEL

OF

ENTREPRENEURIAL LEADERSHIP

IN

SOUTHERN ASIA

Infosys, founded under the leadership of N.R. Narayana Murthy in 1981, has been consistently rated as Asia’s most admired company, the best employer, and the best in corporate governance and business ethics, and is the world’s second most valuable IT services company, after Accenture. Over the past 10 years (1993–2003), its turnover has grown about 200 times, from Rs 150 million ($5 million) to nearly Rs 30 billion ($600 million), and has continued to grow rapidly even after the meltdown of the new economy over the past few years. The principles of Karma (action), Dharma (morality), Gyana (knowledge), and Dana (gift) are at the core of the Infosys model of entrepreneurial leadership that has facilitated its rise to the top. Below we illustrate our proposition, drawing upon the factual information and interview data presented by Alam Srinivas in his two Outlook India reports (2003a; 2003b). Karma: Infosys puts a strong emphasis on old-fashioned performance evaluation to guide and focus-actions. It has been focused on becoming the master of the opportunity offered by the meltdown of the new economy, rather than falling a victim of the crisis situation. According to its CEO, Nandan Nilekani, ‘During the boom times, our focus was on scalability, how to ramp up operations in view of an ever-growing business. Suddenly, we had to change our mental model. We had to deal with competition, streamline cost structures and look at efficiencies.’ Earlier, Infosys pioneered in India the concept of making work a fun and leisure place—constructing gymnasiums, swimming pool, sauna, jacuzzi, jogging track, and tennis and basket ball courts in the office complex, and offering flexible work hours to its employees. But with the meltdown, it quickly refocused on an alternative mental model. The employees were requested to use leisure facilities only during the after-hours, and to work during the regular hours. Dharma: Infosys takes pride in its motto of being ‘a company by the people, for the people and of the people’. It has steadfastly rejected bribes and layoffs, and was the pioneer in India to introduce stock options for all its employees, thereby distributing the wealth generated through their efforts among them. Since the meltdown of the new economy, several thousand of its engineers were rendered surplus, but it reskilled and reutilized them. Its CEO Nandan Nilekani recently observed, ‘We have invested in extremely talented people. They were our assets and we had to keep these folks.’ Infoscion, as the Infosys employees

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are termed, is a synthesis of ‘Info+scion’, the word scion means, according to the Webster’s Dictionary, either ‘a shoot or a bud of the plant’ or ‘a descendant or an offspring (esp. of a royal family)’. Infoscion, thus, implies a product of the royal information family. Gyana: Infosys does not offer knowledge services to just its clients, but also practises it internally. The thrust of its business model is on monitoring, measurement, and methodology. Infosys is a metrics-based organization, where analyses and a numbers-based approach runs the show. Software systems are designed for the employees to log in how they spend their time during the day, and the time logs are used to measure the performance of each employee against best-ofbreed. Constant improvements in the operational processes are thus achieved, pushing the best-of-breed benchmarks continuously outside the frontier, and mid-project correction needs are made evident. The time logs also generate a database to assess the cost and the timeframe within which various activities can be performed, and to use that information to value the client projects. They also allow the managers to decide the best team composition for each project, and the role of each member. The gaps in the competencies of each member are identified, based on the best-of-breed database and client requirements, and full training offered to the team to realize high quality and efficiency, on a consistent and uniform basis, ensuring a repeat business from nine out of 10 clients. Though each employee is sub-specialized, s/he is also encouraged to have ‘strong domain knowledge’ so that the employees can be flexibly assigned to various assignments, without necessitating a layoff in absence of the projects requiring their specialized expertise. Dana: The Infosys founders, despite being worth several hundred million dollars $ each, live a middle class life, and are fully accessible to each employee including those doing menial tasks. They donate substantial funds to the community causes. These values are key to attracting the best and brightest talent in India, and—it has less than a 10 per cent attrition rate. Though the Infosys model of entrepreneurial leadership has worked well even after the new economy meltdown, a need to develop new transformative approaches remains in place. In 2003, global IT spending is expected to be in the range of $225 billion, of which about half would be on maintenance projects. Maintenance projects are low-margin and low-value contracts, conventionally performed by the smaller vendors since they are typically worth about $100,000– 200,000 per maintenance job. With the meltdown, Infosys has formed relationships with several Fortune 500 companies in the US, helping them to consolidate their maintenance jobs, which average about 100 annually, and forging longterm contracts for $100 million orders spread over five to seven years. The ‘monitoring, measurement, and methodology’ (M3) model of Infosys has helped it become more cost-effective compared with the smaller vendors, and enabled lower billing rates on these routine and predictable maintenance jobs. The conventional Infosys approach of assigning its engineers to one knowledge sector, one job competency domain, and one client, worked well when the employees worked on exciting project ideas. However, as the projects of several

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Fortune 500 type clients have become more maintenance-dominated, the employee frustration and exit becomes more likely if no client, job, and sector rotation is systematically organized for the employees. True, if the employees continue working with the same client, greater stability and predictability is offered to the clients, and there is less chance of things falling through in cracks. Similarly, if the employees persist with the same sector, the efficiency, uniformity, quality and consistency is sustained. If the job involves primarily routine and continuing maintenance, then the cost of retraining and re-assigning employees is also kept in manageable limits. However, when the employees work on the same job day after day, and year after year, inertia creeps into the organization. New ideas stop breeding, and the maintenance becomes a dry job, which receives little strategic attention from the next generation of top managers at the clients. On the other hand, if Infosys supports the entrepreneurial potential of its employees by offering them enriching opportunities, then the employees will continue to be its brand ambassadors and offer augmented value to the clients even on routine maintenance jobs. The clients would thereby become more productive in their operations, more cost-effective for the mass consumer market, turnaround their own fortunes, and pass on the benefits of their turnaround to Infosys through fresh and challenging projects. At that time, Infosys need not give up the maintenance jobs, but instead can outsource those jobs to various small and mid-sized firms in India and other emerging markets. The ‘monitoring, measurement, and methodology’ can be used to transfer learning about best-ofbreed benchmarks to these outside vendors. Infosys can thus become a true guru—an entrepreneurial leader who offers advisory and consulting services to clients on the high-end and vendors on the low-end, and thereby brings everybody to the same horizontal, albeit differentiated, plane for sustainable growth.

CONCLUDING COMMENTS While the Infosys Model is an exemplary illustration of a Southern Asian model of entrepreneurial leadership, it is not the only model to benchmark and learn from. Indeed, Southern Asian cluster is distinguished by its diversity, and by the unity in this diversity (Gupta, Surie, Javidan, and Chhokar, 2002). The major insight from the findings of this book is that this diversity and unity in diversity is pervasive across the globe—the organizations in each culture are focused on distinctive approaches for sustainable, meaningful, and profitable transformation for their various stakeholders. The CEO and top management study of the GLOBE program offers a new direction for researching and understanding diversities in the entrepreneurial leadership model in different cultures of the world. The GLOBE India Investigator Network is similarly engaged in carrying out interviews and surveys of CEOs and top managers in all the states of India, recognizing that each state of India is a mini-nation in its own right, with its distinctive formative forces, historical developments, and contemporary economics, politics, arts, culture, and language. Empowering entrepreneurial leadership to discover the value of these unique approaches would be the real key to perpetuate transformative

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organization throughout India. Similarly, it is imperative for the organizations worldwide to leverage and develop their own cultural endowments, and to perpetuate and exchange techniques and technologies for sustainable transformations at the local, national, regional, and international levels through future generations.

References Earley, P.C. (1994). ‘Self or group? Cultural effects of training on self-efficacy and performance’. In Administrative Science Quarterly, 39: 89–117. Ekecrantz, J. (2001). ‘Postmodern times? A comparative study of temporal constructions’. Paper presented at 15th Nordic Conference on media and communication research, Reykjavik, Iceland, 11–13 August. Gopalan, S. & J.B. Rivera (1997). ‘Gaining a perspective on Indian value orientations: Implications for expatriate managers’. International Journal of Organizational Analysis, 5(2): 156–179. Gupta, V. & J. Chhokar (2003). ‘External Database of GLOBE’. PA: University of Pennsylvania. Gupta, V., I.C. Macmillan & G. Surie (2003). ‘Entrepreneurial Leadership: Developing and Measuring a Cross-cultural Construct’. In Journal of Business Venturing, in press. Gupta, V., M. Sully & R.J. House (2003). ‘Construct Validation of GLOBE’s Societal Culture Scales’. In R.J. House, P.J. Hanges, M. Javidan, P. Dorfman, V. Gupta (eds.) & GLOBE. Cultures, Leadership, and Organizations: GLOBE Study of 62 Societies, CA: Sage Publications. Gupta, V., G. Surie, M. Javidan & J. Chhokar (2002). ‘Southern Asia Cluster: Where The Old Meets The New?’. In Journal of World Business, 37(1): 16–27. Hartog, J., R.J. House, P. Hanges, S.A. Ruiz-Quintanilla & GLOBE. (1999). ‘Emics and etics of culturally-endorsed implicit leadership theories: are attributes of charismatic/transformational leadership universally endorsed?’. Leadership Quarterly 10(2): 219–256. Hofstede, G. (1980). Culture’s Consequences, CA: Sage Publications. (2001). Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations, II Edition, CA: Sage Publications. House, R.J. (1996). ‘Path-Goal Theory of Leadership: Lessons, Legacy, and Reformulated Theory’. In Leadership Quarterly, 7(3): 323–352. House, R.J., P. Hanges, M. Javidan, P. Dorfman, V. Gupta & GLOBE (2003). Cultures, Organizations, and Leadership: GLOBE Study of 62 Societies, CA: Sage Publications. Inglehart, R. (1997). Modernization and Post-modernization: Cultural, Economic and Political Change in 43 Societies, NJ: Princeton University Press. Kluckhohn, F.R. & F.L. Strodtbeck (1961). Variations in Value Orientations, NY: HarperCollins.

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McClelland, D.C. (1961). The Achieving Society, NJ: D.Van Nostrand Co. Murdock, G. (1972), The Outline of World Cultures, 4th ed., CT: Human Relations Area Files. Newman, K.L. & S.D. Nollen (1996). ‘Culture and Congruence: The Fit between Management Practices and National Culture’. In Journal of International Business Studies, 27(4): 753–79. Perlmutter, H.V. (1969). ‘The tortuous evolution of the multinational corporation’. In Columbia Journal of World Business, 4: 24–31. Rohmetra, N. (1998). Human Resource Development in Commercial Banks in India, UK: Ashgate Publishing. Sarros, J.C. & D.S. Woodman (1993). ‘Leadership in Australia and its organizational outcomes’. In Leadership & Organization Development Journal, 14(4): 3–9. Schwartz, S.H. (1994). ‘Beyond individualism and collectivism: New cultural dimensions of values’. In U. Kim, H.C. Triandis, C. Kagitcibasi, S-C Choi, & G. Yoon (eds.), Individualism and Collectivism: Theory, Method, and Applications, pp. 85–122, CA: Sage. Saha, A. (1992). ‘Basic human nature in India tradition and its economic consequences’. International Journal of Sociology and Social Policy, 12(1–2): 1-SO. Sinha, J.B.P. (1978). ‘Power in superior-subordinate relationships: The Indian case’. Journal of Social and Economic Studies, 6: 205–218. Srinivas, A. (2003a). A Debugged Operating System, Jan. 27, outlookindia.com (2003b). Debugging The Infosys Story, Feb. 6, outlookindia.com Sugirtharajah, S. (2001). ‘Traditions of giving in Hinduism’. Alliance 6(3), http:/ /www.allavida.org/alliance/articles/2001/pr20011009%5F10.cfm. Triandis, H.C., R. Bontempto, M.J. Villareal, M. Asai & N. Lucca (1988). ‘Individualism and Collectivism: Cross cultural perspectives on self-in-group relationships’. Journal of Personality and Social Psychology, 54: 323–338. Trompenaars, F. (1993). Riding the waves of culture: Understanding cultural diversity in business, London: Economist Books. Weber, M. (1930). The Protestant Ethic and Spirit of Capitalism, London: George Allen & Unwin.

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Epilogue

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An Overview of the GLOBE Research Program Robert J. House

The Global Leadership And Organizational Behavior Effectiveness Research Program (GLOBE) is a four phase, long-term, multi-method, multi-phase, crosscultural research program concerned with the differential effects of leadership and organizational practices and values in 62 cultures. This research program is being conducted by about 170 members of the non-profit organization entitled the Global Scholars Network. Two books are forthcoming based on data that have been collected as part of Phases I and II of GLOBE, and data collection is now underway for Phase III of GLOBE. The four phases of GLOBE are briefly described below. GLOBE Phase I is concerned with scale development and validation of the GLOBE measurement instruments. GLOBE Phase II concerns tests of hypotheses relevant to relationships between measures of societal culture, organizational culture, and culturallyendorsed implicit theories of leadership (CLTs). Data collection and the major analyses for Phase II have been completed. (See House et al., 1998 and Den Hartog, House, Hanges, Ruiz-Quintanilla, Dorfman, et al., 1999 for published reports of the methodology and some initial findings resulting from Phase II). In GLOBE Phase II, questionnaire data were collected from 17,000 middle managers in three industries (telecommunications, food services, and financial services) in 62 cultures. The middle managers were employed in over 1,000 organizations. Responses to these questionnaires provided us with: (a) quantitative measurements of the 18 core GLOBE societal cultural dimensions for each culture studied, (b) 18 core organizational cultural dimensions, (c) 21 first-order factorial scales to measure specific leader attributes and behaviors of CLTs, and six secondorder factorial dimensions of global leadership patterns (or styles). These measurement instruments will be described below. The Dwight D. Eisenhower Leadership Development Program of the US Department of Education supported Phase I and parts of Phase II of GLOBE. The Social Psychology Division of the US National Science Foundation supported further data collection and analysis relevant to Phase II. Data collection and the major analyses relevant to Phase II have been completed. Some of the major findings from these analyses are reported below. Phase III is the research

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explained in this chapter. Phase IV will be laboratory experiments and field longitudinal tests of the major relationships identified in Phases II and III. In the remainder of this chapter, we present the theoretical definitions of leadership and culture, the theory that guides the GLOBE research, a brief summary of research conducted to date, and a description of additional writing and research to be conducted.

Theoretical Definitions Leadership: In this research leadership is defined as the ability of an individual to influence, motivate, and enable others to contribute to the effectiveness and success of the organizations of which they are members. This definition is based on extensive deliberation and discussion among 84 social scientists and management scholars representing 56 countries at the international meeting of GLOBE Country CoInvestigators (CCIs) held in August 1994 in Calgary, Canada. Culture: There is no consensually agreed upon definition of culture by social scientists. For the present research program, we define culture in two ways. From these two definitions we derive operational measures of culture used in the GLOBE research.

THE ENTITY DEFINITION OF CULTURE According to this definition culture is defined as that set of entities that induce common (or shared) attributes among members of collectives, differentiate one collective from another, and are passed on from one generation to another. The common attributes influenced by entities are the assumptions, values, beliefs, meanings, social identities, and motives of the members of the culture. Among the entities that induce these common cultural attributes are the major formal institutions such as the legal, educational, political, and social systems; the shared language and religion; and the constructions of history that are passed from one generation to another.

THE ATTRIBUTE DEFINITION OF CULTURE Culture is defined as a set of common (or shared) attributes (assumptions, values, beliefs, meanings, social identities, and motives) among members within collectives that permit meaningful interaction among members of the collective, differentiate one collective from another, and are passed on from one generation to another. This definition is usually operationalized in terms of values expressed by respondents on questionnaires.

THE GLOBE OPERATIONAL DEFINITION OF CULTURE For purposes of the Phase II GLOBE research program, societal and organizational culture were operationally measured by assessing questionnaire responses

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from 17,000 middle managers in the three industries described above, with respect to the values they endorse and reports of practices of entities in their societies. The value questionnaire responses concern respondents’ reports of their values with respect to nine cultural attributes. The entity questionnaire responses concern the respondents’ reports of practices of families, schools, work organizations, economic and legal systems, political institutions at both the societal as well as the organizational level, language and religion and the constructions of history passed on from one generation to another. The values and practices were measured with respect to nine core cultural attributes. The core GLOBE societal and organizational attributes are: (a) Uncertainty Avoidance; (b) Power Distance; (c) Societal Emphasis on Collectivism; (d) Family and Organizational Collectivism; (e) Gender Egalitarianism; (f) Assertiveness (the latter two dimensions were formerly referred to jointly by Hofstede {1980} as Masculinity); (g) Future Orientation; (h) Performance Orientation; and (i) Humane Orientation. Definitions of these cultural attributes can be found in House et al., (1998). As will be discussed later, the data collected in Phase II will be used, together with data to be collected in Phase III, to test longitudinal hypotheses derived from the theory described below. Table 27.1 shows an example of isomorphic value and practice scales at societal and organizational levels. Table 27.2(a) gives the second order factor dimensions of CLTs, and the first-order factor dimensions they are based on. Table 27.2(b) gives sample questionnaire items for measuring first-order factors. Table 27.1: Example of Isomorphic Items for the Culture Scales Organization As Is The pay and bonus system in this organization is designed to maximize: 1 2 3  4 5 6 7 Individual Interests

Collective Interests Organization Should Be

In this organization, the pay and bonus system should be designed to maximize: 1 2 3  4 5 6 7 Individual Interests

Collective Interests Society As Is

The economic system in this society is designed to maximize: 1 2 3  4 5 6 7 Individual Interests

Collective Interests Society Should be

I believe that the economic system in this society should be designed to maximize: 1 2 3  4 5 6 7  

Individual Interests

Collective Interests

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Table 27.2: (a) Second Order CLT Factors and the Scales/Items they are based on Charismatic/Value Based – Charismatic 1: Visionary – Charismatic 2: Inspirational – Charismatic 3: Self-sacrifice – Integrity–Decisive–Performance oriented

Team Oriented – Team 1: Collaborative Team Orientation – Team 2: Team Integrator– Diplomatic – Malevolent (reverse scored)– Administratively competent

Self-protective – self–centered–Status conscious – Conflict inducer–Face saver– Procedural

Participative – Autocratic (reverse scored) – Non-participative (reverse scored) –Delegator

Humane – Modest–Humane orientation

Autonomous – Individualistic–Independent –Autonomous–Unique

Note: These are Global CLT Dimensions. They comprise the 21 leadership subscales. The only exceptions are Autonomous which consists of questionnaire items, not subscales and Delegator which is also an item rather than a scale. Table 27.2: (b) Sample CLT Questionnaire Items and Response Alternatives Sample Leadership Items: Sensitive: Aware of slight changes in moods of others. Motivator: Mobilizes, activates followers. Evasive: Refrains from making negative comments to maintain good relationships and saves face. Diplomatic: Skilled at interpersonal relations, tactful. Self-interested: Pursues own best interests. Response Alternatives: This attribute/characteristic impedes or facilitates unusually effective leadership 1. Substantially impedes 2. Moderately impedes 3. Slightly impedes 4. Neither impedes nor facilitates 5. Slightly facilitates 6. Moderately facilitates 7. Substantially facilitates

THE GLOBE THEORY The theory that guides the GLOBE research program is an integration of implicit leadership theory (Lord and Maher, 1991), value/belief theory of culture (Hofstede, 1980), and structural contingency theory of organizational form and effectiveness (Donaldson, 1993; Hickson, Hinings, McMillan, and Schwitter,

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1974). The relevant and essential features of each of these theories are briefly described below. The integrated theory is then described.

IMPLICIT LEADERSHIP THEORY According to this theory, individuals have implicit theories (beliefs, convictions, stereotypes, and assumptions) about the attributes and behaviors that distinguish leaders from others, effective leaders from ineffective leaders, and moral leaders from evil leaders. Implicit leadership theories influence the values that individuals place on selected leader behaviors and attributes, and their acceptance of leader influence attempts and enactment of leader behavior. The following propositions express the major assertions of implicit leadership theory relevant to the GLOBE research program: 1. Leadership qualities are attributed to individuals, and those persons are accepted as leaders, on the basis of the degree of fit, or congruence, between the leader behaviors they enact and the implicit leadership theory held by the attributers. 2. Implicit leadership theories constrain, moderate, and guide the selection of leaders, the exercise of leadership, the acceptance of leaders, the perception of leaders as influential, acceptable, and effective, and the degree to which leaders are granted status, influence, and privileges. There is substantial experimental evidence in support of this theory (Lord and Maher, 1991; Hanges, Braverman, and Rentsch, 1991; Hanges, Lord, Day, Sipe, Smith, and Brown, 1997; Sipe and Hanges, 1997).

V ALUE/BELIEF THEORY Hofstede (1980) and Triandis (1995) assert that the values and beliefs held by members of cultures influence the degree to which the behaviors of individuals, groups, and institutions within cultures are enacted, and the degree to which they are viewed as legitimate, acceptable, and effective. The Hofstede (1980) value/belief theory includes four dimensions of cultural values and beliefs: individualism versus collectivism, masculinity versus femininity, tolerance versus intolerance of uncertainty, and power distance (stratification) versus power equalization. We have substituted two cultural dimensions labeled gender egalitarianism and assertiveness for Hofstede’s masculinity dimension. We also measured collectivism with two, rather than one, scale. Finally, we have added three additional dimensions: humane, performance, and future orientation. Respondents were asked to indicate the degree to which they observed societal practices with respect to each of these dimensions and the degree to which they believed the institutions in the society should engage in such practices. We refer to these responses as ‘as is’ and ‘should be’ responses. That is, the ‘as is’ responses described practices as they are and the ‘should be’ responses described what the respondents believed should be the appropriate level of each of the practices with respect to each of the dimensions. Two sets of

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questionnaires were used in each organization study. The first set asked respondents to answer questions relevant to their society. The second set asked respondents to answer questions relevant to their organizations. These two sets of questionnaires were administered to different subsamples of managers in each organization in order to prevent common method bias when relating the responses of the first set to the second set.

S TRUCTURAL C ONTINGENCY T HEORY The central proposition of this theory is that as organizations grow they must respond to organizational size, technological and environmental demands that are imposed on organizations if they are to survive and be effective. These demands are referred to as organizational contingencies. It is asserted that these contingencies influence organizational form and practices and that congruence between the demands of the contingencies and organizational form and practices is associated with organizational effectiveness. This assertion rests on the assumption that organizational contingencies impose demands on organizations that are so strong that it is imperative for all organizations to respond in essentially the same way to them in order to perform effectively and survive in competitive environments. While this is a popular theoretical perspective, its empirical verification is mostly limited to small sample studies of organizations in industrialized countries (Child, 1981). Hickson, Hinings, McMillan and Schwitter (1974) have asserted that the propositions of structural contingency theory are universal and culture-free. A diagram of the integrated theory is presented in Figure 27.1. 1. Societal cultural values and practices affect what leaders do. Substantial empirical evidence supports this assertion (House, Wright, and Aditya, 1997). Founders of organizations—the organizations’ original leaders—are immersed in their own societal culture, and they are most likely to enact the global leader behavior patterns that are favored in that culture. Founders influence the behavior of subordinate leaders and subsequent leaders by use of selective management selection criteria, role modeling, and socialization. Further, the dominant cultural norms endorsed by societal cultures induce global leader behavior patterns and organizational practices that are differentially expected and viewed as legitimate among cultures. Thus, the attributes and behaviors of leaders are, in part, a reflection of the organizational practices which, in turn, are a reflection of societal cultures (e.g., Kopelman, Brief, and Guzzo, 1990). 2. Societal cultural values and practices also affect organizational values and practices. Societal culture has a direct influence on organizational culture. The shared meaning that results from the dominant cultural values, beliefs, assumptions, and implicit motives endorsed by cultures result in common implicit leadership theories and implicit organization theories held by members of the culture (e.g., Lord and Maher, 1991; House, Wright, and Aditya, 1997).

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Fig. 27.1: Theoretical Model

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3. Organizational culture and practices also affect what leaders do. Over time, founders and subsequent leaders in organizations respond to the organizational culture and alter their behaviors and leader styles (e.g., Schein, 1992; Trice and Beyer, 1984; Lombardo, 1983). 4. Strategic organizational contingencies affect organizational form, culture and practices, and leader behaviors. Organizational contingencies (size, technology, environment) impose requirements that organizations must meet in order to perform effectively, compete, and survive. Organizational practices are largely directed toward meeting the requirements imposed on organizations by organizational contingencies (Burns and Stalker, 1961; Donaldson, 1993; Lawrence and Lorsch, 1967; Tushman, Newman, and Nadler, 1988). 5. Strategic organizational contingencies affect leader attributes and behavior. Leaders are selected and adjust their behaviors to meet the requirements of organizational contingencies. 6. Relationships between strategic organizational contingencies and organizational form, culture and practices will be moderated by cultural forces. For example, in low power distance cultures, we expect that forces that would ordinarily cause concentration of power at high levels will be weaker and, therefore, the relationship between such forces and organizational centralization practices will be lower. 7. Leader acceptance is a function of the interaction between CLTs and leader attributes and behaviors. Accordingly, leader attributes and behaviors that are congruent with CLTs will be more accepted than leader attributes and behaviors that are not congruent with CLTs. 8. Leader effectiveness is a function of the interaction between leader attributes and behaviors and organizational contingencies. Leaders who effectively address organizational contingencies will be more effective than leaders who do not. 9. Leader acceptance influences leader effectiveness. Leaders who are not accepted will find it more difficult to influence subordinates than those who are accepted. Thus, leader acceptance facilitates leader effectiveness. 10. Leader effectiveness influences leader acceptance. Leaders who are effective will, in the long run, come to be accepted by all or most subordinates. Subordinates will either be dismissed or voluntarily leave the organization led by leaders they do not accept. In summary, the attributes and practices that distinguish cultures from each other, as well as strategic organizational contingencies, are theoretically predictive of the leader attributes and behaviors, and organizational practices, that are most frequently perceived as acceptable, are most frequently enacted, and are most effective. Cultural Change. Thus far, the theory does not accommodate or account for cultural change. For example, globalization of economies and communication linkages may introduce new competitive forces and new common experiences, which may result in changes in any of the culture or leadership variables described above.

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The process of change is hypothesized to be guided by the set of relationships described above. There will almost certainly be resistance to new leadership and organizational practices when such practices violate existing collectively shared norms and expectations for leaders (Gagliardi, 1986). People resist new leaders when the new leader initially behaves in a manner inconsistent with perceivers’ implicit theories of leadership or stereotypes (Hanges, Braverman and Rentsch, 1991; Hanges, Lord, Day, Sipe, Smith and Brown, 1997; Sipe and Hanges, 1997). These laboratory studies show that the resistance to acceptance of a new leader is so strong that the functional relationship between leadership perceptions and other variables is nonlinear and discontinuous in nature. This research suggests that newly introduced practices will often be modified to accommodate existing norms in a culture specific (emic) manner, and that there may be substantial lags in the rate at which changes in the variables of the theory take place. Substantial additional theoretical development is required to reach a better description of the processes involved in cultural change. The likely resulting conflicts within cultural entities, the time lags and the feedback processes that will occur among the relationships, and the functional form of relationships are depicted in Figure 27.1. GLOBE Phase III is intended to contribute to the development of a theory of cultural change. The theory presented here is a framework to guide investigation of strategic organizational changes that have recently been initiated or are planned to be initiated in the organizations to be studied in Phase III. Here, we will briefly summarize the key findings resulting from the analyses of Phase II data. In two-scale development and validation studies conducted in GLOBE Phase 1 and replicated in Phase II, the scales were demonstrated to be all uni-dimensional and to have Interclass Correlation Coefficients (ICC KK) exceeding .86. ICC KK coefficients are summary estimates of joint within country respondent agreement, between country mean response differences, and mean within country internal item consistency. The societal level scales are significantly correlated with unobtrusive measures of their construct content (correlations ranged from .53 to .70, all p’s <.05). Table 27.2 also presents these correlations. In Phase II of GLOBE, aggregated reports (country means) of societal and organizational value dimensions (should be questionnaire responses) and practice dimensions (as is questionnaire responses) were ranked on each dimension. These dimensions were shown to be associated with theoretically selected leader behaviors. Some thirty single item leader attributes and behaviors were universally endorsed as contributing to or impeding outstanding leadership. Around thirty five leader attributes and behaviors were identified for which endorsement varied by culture. (see House et al., 1998; Hartog et al., 1999, for more detailed reports). Tests of the Phase II GLOBE hypotheses have been completed. The following is a report of the results of these tests: Hypothesis 1. The CLT dimension entitled Value Oriented Leadership will be universally endorsed. The component subscales that constitute the Value Oriented Leadership dimension are vision, integrity, dynamic, convincing,

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performance orientation, decisiveness, enthusiasm, optimism, inspirational appeal, encouragement, morale booster, motive arouser, and confidence builder. We hypothesized that value oriented leader behavior will be universally endorsed because the visions articulated by value oriented leaders stress end-values that are congruent with the values held by subordinates or followers (House and Shamir, 1993). End-values define the purposes of collectives and facilitate and enhance enduring and concerted collective action. Thus leader visions that stress end-values are more likely to be universally accepted and endorsed. Hypothesis 1 was strongly supported in GLOBE Phase II. More specifically, the aggregated mean responses in all 62 cultures were greater than six on a sevenpoint scale (see Hartog et al., 1999). Hypothesis 2. There will be significant positive relationships between theoretically isomorphic societal culture dimensions, organizational dimensions, and CLT dimensions. The rationale for this hypothesis is that the core dimensions of societal culture will influence both the legitimacy and acceptance of leader attributes and behaviors as well as the legitimacy and acceptance of organizational practices. This hypothesis was supported by Phase II data using hierarchical linear modeling. It was found that societal and organizational dimensions of culture were significantly correlated with isomorphic dimensions of leader behavior. Our findings are that selected theoretical combinations of the societal and organizational measures of cultural practices and values account for 10.8, 26.9, 7.0, and 11.9 percent of the variance in the following CLT dimensions respectively: team oriented leadership, participative leadership, humane oriented leadership, and value based/charismatic leadership. (See House et al., 1999 for a preliminary report of these findings). Hypothesis 3. Second-order factorially derived global dimensions of CLTs will be more strongly correlated with specific isomorphic organizational practices than with societal cultural dimensions. The rationale for this hypothesis is that organizational practices are more proximate and more relevant to the tasks and behaviors of managers than societal cultural values and beliefs. This hypothesis was not supported. CLTs were associated with both societal and organizational dimensions of culture, each accounting for approximately the same amount of variance in CLTs. Hypothesis 4. Societal values and practices will be significantly related to theoretically selected dimensions of organizational practices. This hypothesis was supported. The amount of variance in the organizational practice dimensions accounted for by the societal values and practices ranged from 9 to 15 per cent (all p’s < 0.05). All of the above findings are free of common method and common source bias because the societal and organizational dimensions as well as the CLT dimensions were collected from independent samples within each culture. These are perhaps the first set of empirical findings that permit a quantitative assessment of the relationships between cultural dimensions, organizational dimensions, and CLTs.

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In addition to these findings which were hypothesized prior to data collection, 30 country specific chapters will be published by Sage Publications in an anthology. These chapters report qualitative research based on interviews, focus groups, and media analysis and compare country specific quantitative data with worldwide data to arrive at unique insights concerning the culture of the specific countries described in these chapters. We have also created an ‘external data set’ derived from the Global Competitiveness Report, the Human Development Report and the World Values Survey (Inglehart, 1998). This data set consists of multiple indicators of country economic health, success in science and technology, and subjective psychological wellbeing, and physical health of the members of the society. We plan to relate the core societal dimensions to these indices. We will do this after having formulated theoretical models based on a review of the relevant economic literature and literature relevant to social capital theory (Coleman, 1988; Bourdieu, 1986). We mentioned this data set because it is a product of earlier GLOBE research, and a valuable intellectual property for future research. Further, there have been over 50 GLOBE-related scholarly publications and over 250 GLOBE professional activities such as presentations and symposia conducted at professional conferences or at universities, to date. In summary, the GLOBE research accomplishments to date consists of: (a) the development and validation of scales to measure societal and organizational dimensions of cultural practices and values, and CLTs, (b) tests of Phase II hypotheses based on data collected from 62 cultures, which consist of the assessment of the effects of societal level culture on organizational practices and CLTs, (c) identification of universal and culture specific dimensions of CLTs, (d) qualitative research reported in 30 completed country specific chapters to be published in the first GLOBE anthology, (e) creation of the external data set to investigate the relationship between societal cultural dimensions and several positive indicators of individual and societal health and country economic performance, (f) ranking of cultures based on their societal values and practices, and (h) over 50 scholarly publications and 250 professional GLOBE related activities.

GLOBE PHASE III For GLOBE Phase III, the specific cultures being studied include Austria, Australia, Azerbaijan, China, Colombia, England, Egypt, former East and West Germany (separately), Finland, Greece, Hong Kong, India, Ireland, Japan, Kuwait, The Netherlands, Nigeria, Poland, Qatar, Russia, Singapore, Slovenia, the South West Pacific Islands, Turkey, and the US. CCI teams from these countries were selected for GLOBE Phase III because they are all qualified to conduct this research. In India, Phase III research covers different states of India as separate samples. Whereas Phase II was concerned with search for CLTs, cultural practices (as is responses to questionnaires and unobtrusive measures) and values (should be responses to questionnaires), and their antecedents, Phase III will concern:

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(a) tests of structural contingency theory hypotheses, (b) analyses of relationships of the GLOBE societal dimensions to critical variables in the external data set, (c) assessment of the effects of congruence/incongruence between observed CEO leader behaviors and the CLTs of their cultures. The effects of CEO leader behaviors will be measured by objective measures of organizational performance such as organizational growth, sales, and return on investment. The effects of CEO leaders on their immediate subordinates will be measured in terms of the perceptions of the effectiveness of the top management team, and in terms of the satisfaction, commitment, and motivation of the immediate subordinates of the CEOs. Funds permitting, we will conduct follow-up studies after collecting the Phase III data to assess the longitudinal effects of CEOs on their organizations. I have recently engaged in such a longitudinal study that has demonstrated that CEO leader behavior accounts for approximately 25 per cent of the variance in economic performance of Fortune 500 firms operating and uncertain environments from 1989 to 1994 (Waldman, Ramirez, House, and Puranam, 2001). The follow-up studies referred to above will include assessment of the effects of CEO leadership and top management team (TMT) effectiveness on objective financial measures of organizational performance such as return on investment and organizational growth.

S AMPLES CCIs have made commitments to collect data from 40 organizations in each country, one-half of which are to be entrepreneurial and the other half nonentrepreneurial profit-making organizations. For the Phase III research program, an entrepreneurial firm will be defined as an organization, managed by its founder, which takes above average risks with respect to investment, products and markets, and reinvests substantial earnings rather than distributing them to owners or investors, for the purpose of rapid growth. Phase III will also assess the degree to which effective strategic organizational changes introduced by CEOs or top management teams are associated with the leader behavior of the CEOs and the effectiveness of the top management teams (TMTs), as assessed and reported by the team members. In subsequent followup studies referred to above, funds permitting, we would administer questionnaires and conduct interviews to determine the degree to which CEO leader behaviors and TMT effectiveness are predictive of effective strategic organizational change and the measures of organizational effectiveness.

PHASE III HYPOTHESES Hypothesis 1. Societal culture dimensions assessed in Phase II will predict isomorphic leader behavior enacted by CEOs assessed independently in Phase III. Hypothesis 2. Societal dimensions of culture measured in Phase II will predict TMT strategy formulation processes, characteristics of organizational practices and structure measured in Phase III.

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Hypothesis 3. Organizational practice dimensions assessed in Phase II will predict isomorphic leader behavior dimensions assessed independently in Phase III. Hypothesis 4. Strategic organizational contingencies (environmental uncertainty, technological uncertainty, and organizational size) will be more strongly associated with leader behaviors and organizational practices in Phase III than the core societal culture dimensions assessed in Phase II because the organizational contingency variables are more proximate and specific to the task environments of organizations than societal cultural variables. Hypothesis 5. Except under conditions of substantial organizational change, the more individual CEO leader behaviors measured in Phase II are congruent with CLTs measured in Phase III, (a) the more the leadership attempts by such individuals will be accepted and effective, (b) the more the individuals will be perceived as legitimate leaders, (c) the more highly motivated will be their subordinates/followers, and (d) the more committed will be their subordinates/ followers. Hypothesis 6. For purposes of introducing substantial organizational change, value based/charismatic leadership will be effective, regardless of the degree to which value based leadership is endorsed by CLTs. Hypothesis 7. CLTs measured in Phase II will predict observed leader behaviors in Phase III. The rationale for this hypothesis is that CLTs are espoused leadership theories of cultures which specify the behaviors that are widely believed to be appropriate and effective. Therefore, behavior that is consistent with the CLTs is expected to be more acceptable than behavior that is inconsistent with CLTs. Further, behavior that is inconsistent with CLTs will either not be permitted or will be strongly resisted. Consequently, the further a given leader’s behavior is perceived to depart from the CLT of the culture, the less followers will endorse the leader in terms of satisfaction, commitment and effective involvement in the leader’s goals and mission. Hypothesis 8. Leader behaviors measured in Phase III which are consistent with CLTs measured in Phase II will be more accepted, have more positive cognitive, affective, behavioral and performance effects on members of the TMT than leader behaviors that are inconsistent with CLTs measured at Phase II. Hypothesis 9. TMT effectiveness will be positively related to successful implementation of strategic organizational changes. Hypothesis 10. Value oriented leadership will be positively related to TMT effectiveness. In addition to tests of the above hypotheses with respect to variables that are associated with or predictive of leader behaviors and TMTs and their effects, we will also test several hypotheses derived from structural contingency theory. The structural contingency theory hypotheses to be tested concern the effects of organization size, technological uncertainty, environmental uncertainty, and environmental hostility on organizational form. In addition, we will test the

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hypothesis that the effectiveness of organizations will be a function of the fit between organizational form and strategy and the above organizational contingencies. Finally, we will test the hypothesis that relationships between organizational form and strategies, and structural contingencies will vary by societal culture, such that cultures which favor selected organizational forms and strategies will be either impediments to, or enhancement of, organizational responses to strategic organizational contingencies. For example, it is hypothesized that organizations in high uncertainty avoiding cultures will be resistant to formalization of organizational forms and strategies, and organizations in low uncertainty avoiding cultures will more readily adopt more formalization practices as predicted by structural contingency theory.

PHASE III QUESTIONNAIRES Questionnaires will be administered to six to nine executives who report to the CEOs of their respective organizations. These questionnaires concern CEO leader behavior, structural contingency theory variables, and measures of perceived effectiveness of the organizations studied.

THE MULTI -CULTURE LEADER BEHAVIOR QUESTIONNAIRE Based on the findings of Phase II, we have developed a Multi-Culture Leader Behavior Description Questionnaire (MCLQ) designed to elicit respondents’ reports of the behavior of leaders with whom they are familiar. TMT executives will describe the leader behavior of the CEOs in their organizations. The MCLQ has been translated into the native languages of all of the cultures studied in the sample. These questionnaires have also been back translated into English. We have checked the back translations for accuracy and made minor adjustments where the translations were not correct. The MCLQ reflects all of the CLT behaviors and attributes endorsed in Phase II as contributing to highly effective or ineffective leadership. For example, the leader attribute dimension reflecting leader integrity, an attribute identified on the basis of factor analyses in Phase II, has been operationalized to include several items describing behaviors that reflect that dimension. The leader integrity items of the MCLQ are ‘The leader deals with subordinates honestly… authentically…, fairly…, sincerely….’ A preliminary analysis of the MCLQ scales conducted in Australia from a sample of 232 high level executives has demonstrated that the scales have Cronbach alphas > .74. This questionnaire will be validated by same process as that applied to the Phase II questionnaire. The TMT members will also be asked to express their emotional and evaluative responses to the leaders, their willingness to support their leaders, their willingness to go above and beyond the call of duty in the interest of the leaders’ direction, their confidence in the leaders, their commitment to the leaders’ goals, and the like. A scale intended to measure subordinates’ commitment, effectiveness, satisfaction and motivation, entitled the CEMS scale has been developed in prior research by the Principal Investigator and two colleagues (House, Delbecq, and Taris, 1998).

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S TRUCTURAL C ONTINGENCY T HEORY S CALES The members of the TMT shall also be asked to complete the structural contingency questionnaire scales developed in Phase I. These scales were designed to measure organizational strategic contingency variables: size in terms of number of employees; the dominant technology of each organization in terms of the degree to which the work is repetitive, well understood, and controllable; and organizational environments in terms of competitiveness, hostility, and predictability/uncertainty (Donaldson, 1993; Hickson, Hinings, McMillan, and Schwitter, 1974). The scales to measure these constructs were adapted from questionnaires used in several prior studies in which their predictive and construct validity were established (Khandwalla, 1977). Earlier versions of these scales were administered in Phase II. Most of these scales were found to have adequate internal consistency and inter-rater agreement among respondents in the organizations studied. Those scales that were found to have weak psychometric properties have been supplemented with additional items. These scales will be validated using the same procedures as used in Phase I and Phase II. In Phase III, we will conduct the same validation procedures that were conducted with respect to the leader behavior, societal culture, and organizational culture scales in GLOBE Phase II. By using Phase II societal culture scores and data collected from an independent sample of executives in Phase III, we will eliminate the problem of common method bias with respect to relationships between measures of societal variables and other variables. We will also eliminate the possibility of common source bias by collecting measures of independent and dependent variables from different subsamples of TMT members within each organization studied. Further, we will collect independent measures of the leader’s effectiveness, and information concerning organizational financial performance as part of Phase III.

Search for Culture Specific Leader Behaviors and Organizational Practices Finally, in the interviews with the CEOs studied, CCIs will determine the country specific manifestations of the core leadership dimensions, and other country specific leader behaviors. The interviews will be content analyzed by the CCIs. The results of the content analysis will be summarized and integrated by the US team of researchers—the principal investigator and the four principal co-investigators (Paul Hanges, Mansour Javidan, Peter Dorfman, and Vipin Gupta). This procedure will provide substantial information concerning culture specific aspects of leadership.

EXPECTED CONTRIBUTIONS The GLOBE research is intended to contribute to the resolution of several theoretical social science issues as well as a wide variety of practical purposes.

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C ONTRIBUTIONS

TO

C ROSS C ULTURAL T HEORY

Social psychologists (e.g., Smith and Bond, 1993; Triandis, 1995), organizational psychologists (e.g., Schein, 1992; Triandis, Dunnette and Hough, 1994), and anthropologists (e.g., Kluckhohn and Strodbeck, 1961; Hofstede, 1980) assert that differences in societal cultures influence a wide variety of social phenomena such as self-definitions, individual expectations and assumptions about others, attitudes toward others, causal attributions, modes of social interaction, perceptions of one’s environment, expressions of emotions, preferences for leader behaviors, and global behavior patterns such as leadership and conflict management styles. While a few studies comparing behavior or attitudes in a limited number of cultures suggest support for these assertions (e.g., Bass, Burger, Doktor, and Barrett, 1979; Gerstner and Day, 1994; Haire, Ghiselli, and Porter, 1966), there are several unresolved issues concerning the roles of critical variables and the process by which differences in cultures influence behavior. The first issue concerns the relationships between dimensions of societal culture, individual values, attitudes, institutional practices, CLTs, and leader behavior. Proponents of value belief theory (Hofstede and Bond, 1988; Triandis, 1995) assert that cultures influence the values of their members which, in turn, influence the enactment, acceptance, and effectiveness of specific leader behaviors and global leader behavior patterns. As currently measured, cultural values are cognitively based judgments of the appropriateness or worth of behaviors and outcomes. As such, the values measured by most cross cultural investigators are actually attitudes (Smith, Peterson and Misumi, 1994). Attitudes are predictive of behavioral intentions and some behavioral responses to very specific stimuli and incentives in the short term but often not predictive of more generalized stable global behavior patterns such as leadership styles (Ajzen and Fishbein, 1970). Thus the effect of cultural values on global behavior patterns remain to be demonstrated empirically. In contrast, other scholars invoke implicit motive theory. Implicit motives are predictive of: (a) motive arousal in the presence of selected stimuli, (b) spontaneous behavior in the absence of motive arousal stimuli, and (c) long term (as long as 20 years) individual global behavior patterns such as social relationship patterns, citizenship behavior, child rearing practices, and leadership styles. Substantial evidence supports these assertions (McClelland and Burnham, 1976; McClelland, 1985; McClelland and Boyatzis, 1982; McClelland, Koestner and Weinberger, 1989; Spangler, 1992). Further, in his book The Achieving Society, McClelland (1961) has demonstrated the cross cultural relevance of implicit motivation theory. Specifically, he found that cultural expressions of achievement motivation that were stressed in children’s literature are predictive of long-term economic development of nations. At a later time, the CEO interviews will be transcribed from audiotapes and will be content analyzed for evidence of motive imagery of the kind specified by McClelland’s theory of human motivation. The availability of the interview transcripts will make it possible to test a number of major propositions advanced by McClelland including the effects of the leader

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motive profile which consists of high power motivation, power motivation greater than affiliated of motivation, and a strong disposition toward the exercise of power in a socially and morally responsible manner. Spangler (1992) has demonstrated this support in separate large-scale meta-analyses of the effects of the achievement and power motive. The second issue addressed by the GLOBE research concerns the influence of culture on the differential scope of leader. Focus groups, media analysis, and interviews conducted as part of GLOBE Phases I and II revealed that the concept of leadership, social status of leaders, and the amount of influence granted to leaders vary widely across cultures. In many cultures leaders are romanticized, glorified, and granted substantial influence in political, social, and economic policies and practices. In contrast, in the Netherlands, German-speaking Switzerland, and the Scandinavian countries, there is a marked absence of symbols that attest to the greatness of leaders. In these countries leaders are granted substantially less influence than in most other countries in the world. Thus cultures differentially enhance or constrain leaders and their influence. Unfortunately, there is little systematic evidence concerning the influence of culture on leader influence and status. The Phase II research on the differential CLTs held by cultures indicates the kind of leader attributes and behaviors expected of leaders. The qualitative research referred to above on country specific aspects of leadership will shed substantial light on the manner by which cultural forces influence leadership practices. We are also interested in understanding the leader attributes and behaviors that comprise cultural leadership syndromes or profiles. Unfortunately, little is known about culture-specific or universal components of cultural leadership syndromes or their manifestations. (For a discussion of this issue see Smith, Misumi, Tayeb, Paterson, and Bond, 1989). It is likely that there are some leader behaviors that are universally accepted and effective and some that are endorsed and effective in only selected cultures. Phase III of GLOBE research will identify the leader attributes and behaviors that are reported as universally accepted and effective and those that are culture-specific. Phase III will also identify the cognitive and affective responses to CEO behaviors, and the culture-specific manifestations of leader behaviors. Since the Phase III sample of countries represents a wide variety of cultures, the proposed research will also indicate the degree to which leader behaviors central to prevailing leadership theory are accepted and viewed as effective in each of the countries studied. Phase IV will test the causality of leader behavior on followers. In summary, the GLOBE research is designed to contribute to a better understanding of cross cultural and leadership theory by investigating the roles of cultural values, organizational values and practices, and implicit theories as antecedents to cross cultural variance in the social status granted to leaders, the amount of influence granted to leaders, and leader behavior. Phase III research will also enhance existing knowledge of culture-specific leader behaviors, culturespecific manifestations of leadership, and culture specific responses to leaders.

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POTENTIAL BENEFICIAL SOCIAL

AND

ECONOMIC APPLICATIONS

The GLOBE research program is expected to lead to increased communication between members of cultures who would not ordinarily interact with each other. Such increased interaction has the potential to result in increased cultural awareness and higher quality communication between nations. The CCIs, being indigenous to their cultures, are likely to influence and become change agents within their cultures at least with respect to those with whom they have contact in their roles as university faculty members, social scientists, and consultants. Participation in GLOBE provides CCIs with cross cultural knowledge. These CCIs, in turn, serve as country boundary spanners and will facilitate importation and dissemination of knowledge within their cultures. The more than 100 GLOBE related professional activities referred to above attest to this effect. CCIs in several nations are also likely to translate the products of the research (which will be at least three books and several scholarly articles) and thus increase the dissemination of this information to a wider number of countries. The chapters of the planned anthology will make culture specific reports on each of the cultures studied available to the public domain.

P RACTICAL R ELEVANCE Given the increased globalization of industrial organizations, and the increased interdependencies among nations in the past two decades, there is an important need for a better understanding of cultural influences on leadership and organizational practices. Increasingly, cooperative behavior across national borders is required to manage the complex technological, political, and economic interdependencies of nations. Yet, despite this need there is no theory of cross cultural leadership or organizational behavior that is informed by empirical investigation. The GLOBE research program is directed toward filling this knowledge gap. The findings of the study will be of relevance to people doing business with or negotiating across cultures. The final product of the proposed research, the publications in which the various cultures will be described and interpreted, will include a great deal of practically useful information about the leadership in the cultures studied. Cultural leadership syndromes will be described in terms of global leadership patterns as well as subscales which measure specific leader behaviors, both universal and culture specific. In addition, relationships between cultural, organizational, and leader behavior variables will be explicated. Our assessments will be both qualitative and quantitative. The countryspecific chapters to be included in the planned anthology will include media analyses of effective and ineffective leader behavior. The combination of quantitative and qualitative research will yield a description of the norms of the cultures studied relevant to leadership and organizational practices, the most and least preferred leader attributes and behaviors in the cultures studied, the constraints imposed on leaders by cultural proscriptions, and the behavior patterns and organizational practices commonly found in the cultures studied.

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The descriptions of cultural prescriptions and proscriptions will be useful for the design of cultural sensitivity and management education programs, and for enhancing the adjustment and effective interaction of individuals who work with individuals or organizations from the cultures studied. More specifically, this information will be useful to expatriates assigned to other than their native cultures, managers of diverse cultural and ethnic groups both domestic and abroad, individuals involved in the management of public and private international affairs, and those who conduct negotiations with commercial and political organizations in other cultures. Knowledge of the effective and ineffective leader attributes and behavior will be useful for selecting, counseling, and training individuals who are to be assigned to, or who work with, members of the cultures studied. Further, the resulting findings will be useful for informing potential managers of the kinds of behaviors and organizational practices that are acceptable and unacceptable in the cultures studied. Information concerning how leaders in various cultures can be effective, and the constraints imposed on leaders by cultural norms, will be useful to decision makers who need to understand the actions of leaders of other cultures. Further, the study findings concerning culture-specific effective leadership practices will be useful for the design of leadership training programs. Knowledge about cultural and organizational norms and practices in the cultures studied can be used to inform the formulation of meaningful prescriptions for managing in other cultures—for strategy and policy formulation, organizational improvement interventions, human resource management practices, and for the design of organization structures, and incentive and control systems. In sum, the findings of Phase II and III will provide a wide variety of information that can be used to enhance intercultural communication and collaboration and help managers and leaders in their adjustment, strategy and policy formulation, human resource management practices, and organizational practices. Thus, the resulting books and research reports are expected be a contribution that will have practical as well as theoretical value.

POTENTIAL ADDITIONAL USES

OF

GLOBE DATA

Funds permitting, the GLOBE data will be placed in the public domain. Sage Publications Inc. has contracted to publish the first GLOBE book, which is based on Phase II research, and also the anthology, which will consist of approximately 30 country specific chapters plus an introductory chapter and a concluding integrative chapter. The GLOBE Book 1 will be published 2004 and the first anthology will be completed by the end of year 2004. Once the GLOBE data are published, it will be possible to use the worldwide data for a wide variety of purposes beyond the tests of the hypotheses of the GLOBE Research Program. For example, countries can be compared with their trading partners or their major competitors with respect to cultural, organizational, or leadership practices that are relevant to improving trade between them, or with respect to practices that facilitate harmonious and productive trade.

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Concurrent and causal relationships between the variables under study and economic practices and outcomes can also be subjected to analysis. For example, the Phase II data can be used in econometric or sociological models and related to firm level practices such as forms of production organization, transfer of technology, pricing, risk-taking with respect to entry into new markets, investment with respect to research and development, and foreign investment practices. GLOBE Phase II societal data can potentially be related to country economic indices such as national levels of saving, distribution of wealth and social privileges, consumption levels and patterns, economic growth and development, and national productivity and efficiency. Country data relevant to these variables are either available in published form, or can be collected by GLOBE CCIs, other scholars, or interested government agencies or foundations. Much of this kind of data is included in the GLOBE external dataset. Thus, it will be possible to determine concurrent or predictive relationships between the study variables and such indices. The worldwide data collected in Phase II can also be analyzed to determine concurrent and causal relationships between the variables under study and many indices of social and physical well-being. For example, the variables to be investigated can be related to such variables as safety and quality of life, mortality and life expectancy rates, hygiene practices, preventive or remedial medical practices, stress levels, suicide rates, prevalence of epidemics, frequency of ethnic and border conflicts, indicators of social unrest, or violations of human rights.

ADDITIONAL PROGRAM RELATED ACTIVITIES Several related activities have taken place during Phase 1 of the research and several others are planned. Following is a brief description of these activities.

THE N ETWORK

OF

INTERNATIONAL SCHOLARS

It was expected that as a result of the participation of CCIs from every major region of the world, a network of international scholars would emerge. This has occurred. Several subsets of CCIs have conducted over 50 collaborative side studies and had presented their findings in regional and international meetings. As a consequence of the formation of this network; every CCI now has at least three contacts in every major region of the world. Regional networks, and plans for regional meetings, emerged in Eastern Europe, Latin America, Scandinavia, and the Pacific Rim. Since the average age of the CCIs is quite low, we expect the network of scholars to live on long after the completion of the multi-nation research program.

INVOLVEMENT

OF

SPECIALIZED CULTURE SCHOLARS

In future, we hope to involve other scholars who have extensive knowledge about the cultures investigated. Ideally, we would like to recruit one scholar, for each of the cultures studied, who has expert knowledge about that culture.

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These scholars will be asked to serve as consultants to review the reports of the CCIs and make recommendations relevant to the manuscripts produced by the CCIs in their respective cultures. Involvement of such scholars will accomplish two objectives. First, we hope to ensure that each country specific chapter to be included in the GLOBE anthology will be of the highest scholarly quality. Second, we hope to broaden the network of international scholars to include the specialized culture scholars.

D ATA P OOLING We are aware of scholars who have, or are, creating large cross-cultural data sets. If future funding permits, we plan to hold a conference in which these scholars will explore with us the possibility of pooling data sets. We expect there to be a substantial number of countries in which several scholars have collected data. We hope to form a network of these scholars devoted to data and idea sharing. By pooling data sets and sharing ideas, it will be possible to address a number of issues that cannot be addressed by owners of any one data set alone.

Conclusion We believe that GLOBE research has the potential to make substantial contributions to social science theory, to the education of future international managers, and to the practice of management. We expect that the data produced as a result of the GLOBE research will be useful for the conduct of additional scholarly studies and for social and economic applications. Hopefully, GLOBE research program will liberate current organizational behavior and leadership literature from dependence on single culture research and theory.

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Child, J. (1981). ‘Culture, contingency, and capitalism in the cross-national study of organization’. In L.L. Cummings (ed.), Research in Organizational Behavior, 303–356. Coleman, J.S. (1988). ‘Social capital in the creation of human capital’. In American Journal of Sociology, 94: S95–S120. Culturgrams (1998). Brigham Young University. Donaldson, L. (1993). Anti-management Theories of Organization: A Critique of Paradigm Proliferation. Cambridge: Cambridge University Press. Gagliardi, P. (1986). ‘The creation and change of organizational cultures: A conceptual framework’. Organization Studies, 7(2): 117–134. Gerstner, C.R. & D.V. Day (1994). ‘Cross-cultural comparison of leadership prototypes’. Leadership Quarterly, 5(2): 121–134. Haire, M., E.E. Ghiselli & L.W. Porter (1966). Managerial Thinking: An International Study. New York: Wiley. Hampden-Turner, C. & A. Trompenaars (1993). The Seven Cultures of Capitalism. New York: Doubleday. Hanges, P.J., E.P. Braverman & J.R. Rentsch (1991). ‘Changes in raters’ impressions of subordinates: A catastrophe model’. Journal of Applied Psychology, 76: 878–888. Hanges, P.J., R.G. Lord, D.V. Day, W.P. Sipe, W.C. Smith & D.J. Brown (1997). ‘Leadership and gender bias: Dynamic measures and nonlinear modeling’. In R.G. Lord (Chair), Dynamic Systems, Leadership Perceptions, and Gender Effects. Symposium presented at the Twelfth Annual Conference of the Society of Industrial and Organizational Psychology. Hartog, J., R.J. House, P.J. Hanges, S.A. Ruiz Quintanilla, P.W. Dorfman et al. (1999). ‘Culture specific and cross culturally generalizable implicit leadership theories: Are attributes of charismatic/transformational leadership universally endorsed?’. Leadership Quarterly, 10(2): 219–256. Hickson, D.J., C.R. Hinings, J. McMillan & J.P. Schwitter (1974). ‘The culturefree context of organization structure: A tri-national comparison’. Sociology, 8: 59–80. Hofstede, G. & M.H. Bond (1988). ‘The Confucius connection. From cultural roots to economic growth’. Organizational Dynamics, 16: 4–21. Hofstede, G. (1980). Culture’s Consequences: International Differences in Workrelated Values, London: Sage. House, R.J., A.L. Delbecq & T. Taris (1998). Value based leadership theory; empirical test (unpublished). House, R.J. & B. Shamir (1993). ‘Toward the integration of transformational, charismatic and visionary theories’. In: M.M. Chemers & R. Ayman (eds.), Leadership Theory and Research: Perspectives and Directions, 81–107, San Diego: Academic Press. House, R.J., P.J. Hanges, S.A. Ruiz-Quintanilla, P.W. Dorfman, M. Javidan, M. Dickson, V. Gupta & 170 co-authors (1998). ‘Cultural influences on leadership and organizations: Project GLOBE’. In W. Mobley (ed.), Advances in Global Leadership, vol. 1. JAI Press, pp. 171–233.

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House, R.J., N.S. Wright & R.N. Aditya (1997). ‘Cross-cultural research on organizational leadership: A critical analysis and a proposed theory’. In P.C. Earley & M. Erez (eds.), New Perspectives in International Industrial Organizational Psychology, 535–625, San Francisco: New Lexington. Inglehart, R. (1998). Human Values and Beliefs: A Cross-cultural Sourcebook, Ann Arbor, Mich.: University of Michigan Press. Khandwalla, P.N. (1977). The Sign of Organizations, New York: Harcourt Brace Jovanovich. Kluckhohn, F.R. & F.L. Strodtbeck (1961). Variations in Value Orientations, New York: HarperCollins. Kopelman, R.E., A.P. Brief & R.A. Guzzo (1990). ‘The role of climate and culture in productivity’. In B. Schneider (ed.), Organizational Climate and Culture, 282–318, San Francisco: Jossey-Bass. Lawrence, P.R. & J.W. Lorsch (1967). Organization and Environment. Cambridge, MA: Harvard University Press. Lombardo, M.M. (1983). ‘I felt it as soon as I walked in’. Issues and Observations, 3(4): 7–8. Lord, R. & K.J. Maher (1991). Leadership and Information Processing: Linking Perceptions and Performance, Boston: Unwin-Everyman. McClelland, D.C. (1961). The Achieving Society, Princeton, NJ: Van Nostrand. (1985). Human Motivation. Glenview, IL: Scott, Foresman. McClelland, D.C., R. Koestner & J. Weinberger (1989). ‘How do self-attributed and implicit motives differ?’. Psychological Review, 96(4): 690–702. McClelland, D.C. & R.E. Boyatzis (1982). ‘Leadership motive pattern and longterm success in management’. In Journal of Applied Psychology, 67: 737–743. McClelland, D.C. & D. Burnham (1976). ‘Power is the Great Motivator’. Harvard Business Review, March–April, 100–110, 159–166. Miller, D. & C. Droge (1986). ‘Psychological and traditional determinants of structure’. In Administrative Science Quarterly, 31(4): 539–560. Misumi, J. (1985). The behavioral science of leadership: An interdisciplinary Japanese research program. Ann Arbor, MI: University of Michigan Press. Schein, E.H. (1992). Organizational Culture and Leadership: A Dynamic View (2nd ed.), San Francisco: Jossey-Bass. Schneider, B. (1987). ‘The people make the place’. In Personnel Psychology, 40: 437–454. Schneider, B., H.W. Goldstein & D.B. Smith (1995). ‘The ASA Framework: An update’. In Personnel Psychology, 48: 747–783. Sipe, W.P. & P.J. Hanges (1997). ‘Reframing the glass ceiling: A catastrophe model of changes in the perception of women as leaders’. In R.G. Lord (Chair), Dynamic systems, leadership perceptions, and gender effects. Symposium presented at the Twelfth Annual Conference of the Society of Industrial and Organizational Psychology. Smith, P.B. & M.H. Bond (1993). Social Psychology Across Cultures: Analysis and Perspectives, London: Harvester Wheatsheaf.

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Smith, P.B., M.F. Peterson & J. Misumi (1994). ‘Event management and work effectiveness in Japan, Britain and the USA’. In Journal of Occupational and Organizational Psychology, 67: 33–43. Smith, P.B., J. Misumi, M.H. Tayeb, M. Paterson & M.H. Bond (1989). ‘On the generality of leadership style across cultures’. In Journal of Occupational Psychology, 30: 526–537. Spangler, W.D. & R.J. House (1991). ‘Presidential effectiveness and the leadership motive profile’. In Journal of Personality and Social Psychology, 60(3): 439–455. Spangler, W.D. (1992). ‘The Validity of Questionnaire and TAT Measures of Need for Achievement: Two Meta Analyses’. In Psychological Bulletin, 112(1): 140–154. Thompson, K.R. & F. Luthans (1990). ‘Organizational culture: A behavioral perspective’. In B. Schneider (ed.), Organizational Climate and Culture, 319– 344, San Francisco: Jossey-Bass. Triandis, H.C., M.D. Dunnette & L.M. Hough (eds.) (1994). Handbook of Industrial and Organizational Psychology, 2nd edn., vol. 4, Palo Alto, CA: Consulting Psychologists Press. Triandis, H.C. (1995). Individualism and Collectivism, Boulder, CO: Westview Press. Trice, H.M. & J.M. Beyer (1984). The Cultures of Work Organizations. Englewood Cliffs, NJ: Prentice-Hall. Tushman, M.L., W.H. Newman & D.A. Nadler (1988). ‘Executive leadership and organizational evolution: Managing incremental and discontinuous change’. In R.H. Kilman & T.J. Covin (eds.), Corporate Transformation: Revitalizing Organizations for a Competitive World, 102–130, San Francisco: Jossey-Bass. Waldman, D.A., G.G. Ramirez, R.J. House & P. Puranam (2001). ‘Does leadership matter?: CEO leadership attributes and profitability under conditions of perceived environmental uncertainty’. In Academy of Management Journal, 44, 134–143. Yukl, G.A. (1994). Leadership in Organizations (3rd ed.), Englewood Cliffs, NJ: Prentice-Hall.

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Notes on Contributors Anabella Davila is a professor of organization theory at the Graduate School of Business Administration and Leadership, Mexico. Her research interests include organization culture and identity and business history in Latin American organizations. She is a member of the Mexican National Researchers System. Her email [email protected] Ananda Sarkar graduated in computer science and engineering from Jadavpur University, Kolkata. He recently completed his Post Graduate Diploma in Management from IIM Lucknow. Currently, he is with Power Trading Corporation (India) Ltd. Ancheri Sreekumar, GLOBE India State Co-Investigator—Goa and Kerala, is a Fellow of IIM Ahmedabad, and Dean and Professor, Faculty of Management Studies, Goa University, Goa. He is currently Dean, DC School of Management and Technology, Kerala. His research interests are in tourism and education. His email: [email protected] Atul Mitra is Associate Professor of Management at the University of Northern Iowa, Ceder Falls, USA. His area of interest is human resource management including international compensation and rewards systems, merit pay, financial incentives and dysfunctional work behaviors. He has published in several refereed international journals, including Journal of Applied Psychology and the Journal of Organizational Behavior. His email: [email protected] Bente R. Løwendahl obtained his Ph. D. Wharton School and is a full professor in the Strategy Department of the Norwegian School of Management, Norway. Her research interests focus primarily on the role of highly competent (professional) individuals in firm competitiveness and value creation. She has published a number of articles as well as the recent book Strategic Management of Professional Service Firms (Copenhagen Business School Press, 1997) on topics related to this issue. Her contact email: [email protected] Bharat Kumar L. graduated from Government College of Technology, Coimbatore in 1998. He was with Tata Consultancy Services, Bangalore for around two years. He then completed his Post Graduate Diploma in Management from IIM Lucknow. Currently, he is with Suntec Ltd, Trivandrum. Carlos Altschul obtained his Ph. D. Iowa State University and is professor of International Negotiation at the FLACSO/University of San Andres/University of Barcelona graduate program in International Relations. He has lectured in

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France, Sweden and the Us and is the author of books on organizational change and negotiation, which he teaches at the School of Economics, University of Buenos Aires, Argentina. His contact email is: [email protected] David Watkins is Professor of Management Development and Chair of the Postgraduate Research Centre at Southampton Business School, UK. He is renowned entrepreneurship development expert, and advises both national governments and international organizations. Author of more than a hundred books, articles and academic papers, David Watkins was Founding Editor of International Small Business Journal and has recently established the Annual Review of Progress in Entrepreneurship, published by the European Foundation for Management Development, Brussels. His email is: [email protected] Deepak Kaul is professor and head of Distance Education at the Institute of Management Studies of Devi Ahilya University, Indore. His 29 years of experience include conducting management development programs and consulting with private and public companies. His areas of research cover quality, organizational development, and human resource management. His email is: [email protected] Edmundo Garcia is presently the Plant Manager of Vitro Flex, a subsidiary of Grupo Vitro (one of the world’s leading glass producer). He received his BS in engineering from the State University of Nuevo Leon, Mexico His email is: [email protected] Glenn M. McEvoy is professor and head of the Department of Management and Human Resources at Utah State University and also the Director of USU’s Management Institute. He is the author or co-author of three books and over 100 papers and presentations focusing on domestic and international human resource management, and employee selection, training, and performance appraisal. He currently serves on the editorial boards of Human Resource Management and the Journal of Management. His contact email: [email protected] Gyeong-Mook (GyMi) Kim is an assistant professor of management in the College of Social Sciences, Seoul, Korea. He received his DBA in management from Yonsei University. His current research interests are corporate governance, innovation, strategic alliances, and organizational change. His contact email: [email protected] Ilan Alon is associate professor of International Business at Crummer Graduate School of Business, Rollins College. He is the author, editor, and co-editor of seven books and over 60 published articles, chapters, and conference papers. Dr. Alon’s research focuses on international business, franchising and political risk assessment. He is also an international business consultant and a featured speaker in many professional associations. His contact email is: [email protected] J. Rajasekar is an associate professor at IIM, Indore. He is a DBA from Golden Gate University, San Francisco. His research and teaching interests are focused on corporate strategy and the competitiveness of diversified firms, particularly

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on issues relating to the global markets in which diversified firms compete, and the creation of value across multiple lines of business. His email: [email protected]. Jifu Wang obtained his Ph.D. from Auburn University and is an assistant professor at University of Houston, Victoria. He served as an executive in top management for several firms in the Shenzhen Special Economic Zone, China, and has rich management experiences in international business. His research interest includes international strategy and organizational change. His email is: [email protected] Kai Cheng Yu is a professor of management in the Dalian University of Technology. He was the head of the first Sino-US joint MBA program. He is the deputy head of China’s national Association of Behavioral Sciences and is also the President of the Chinese Business Case Research Association. His contact email is: [email protected] Kumkum Mukherjee GLOBE India State Co-Investigator–West Bengal, is an Assistant Professor, Eastern Institute For Integrated Learning in Management Kolkata. She obtained her Ph. D. in organizational behavior from Calcutta University. Her research and teaching areas include organizational behavior, organization development, leadership and managerial effectiveness. She has been a resource person in several in-company programs. Her email is: [email protected]. Luca Solari obtanied his Ph.D. from Bocconi University, Italy and is a professor of organization theory and management at the University of Milan, His research interests include organization theory, evolutionary processes, change management, and entrepreneurship. His work has been published in leading Italian journals and International Journal of Human Resources Management. His email is: [email protected] Mathai B. Fenn, GLOBE India Principal Co-Investigator and State CoInvestigator – Jharkhand and Sikkim, is an Assistant Professor at The Xavier Labour Relations Institute (XLRI) Jamshedpur, since 1998. He specializes in organizational behavior and marketing. His areas of interest include communications, e-marketing, and postmodernism. His email is: [email protected]. Mrinalini Shrivastava GLOBE India State Co-Investigator – Madhya Pradesh, is an Indian Police Service Officer. She is a specialist in HRD and has taught industrial psychology. Her research areas include reinventing employee training, human resource dimensions of TQM, and human resource accounting. Her mail is: [email protected]. Nitin Jain is the vice president of his family-owned and founded firm, Kumar Metalco, Aligarh. The firm trades under the Kumeco brand, producing brassware and other non-ferrous products for the building and furniture trades and specializing in the top end of the market. His email is: [email protected] Odd Nordhaug is a professor at the Norwegian School of Economics and Business Administration Norway. His publications include articles in Administrative Science Quarterly, Human Relations, International Studies of Management &

510

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Organization, the Management International Review, the European Management Journal, and Human Resource Management Journal. His main research interests are within international management, organization theory, and knowledge management. His contact email: [email protected] Paul F. Buller holds the Kinsey M. Robinson Chair in Business Administration at Gonzaga University, where he teaches courses in strategic management. He has been involved with research and consulting in business and government organizations on strategic management, global ethics, human resource management and organizational change. His articles have appeared in numerous journals, and he has co-edited Managing Organizations and People: Cases in Management, Organizational Behavior and Human Resource Management (6th Edition), SouthWestern Publishing. Paul Buller is past president of the Western Academy of Management. His email is: [email protected] Paul N. Gooderham is a full professor in the Department of Strategy and Management at the Norwegian School of Economics and Business Administration (NHH), Norway. He has published articles in journals such as Administrative Science Quarterly, Management International Review and Scandinavian Journal of Management. His main research interests are within international management and knowledge management. His contact email is: [email protected] Paul T. P. Wong is research director and professor of the Graduate Program in Counseling Psychology at Trinity Western University. His research areas include coping with frustration, existential attribution, stress appraisal, reminiscence, and personal meaning. Paul Wong is known for championing the development of meaning-centered counseling and therapy. His email is: [email protected] Ping Ping Fu is an assistant professor of management at the Chinese University of Hong Kong. She received her Ph.D. in organizational studies from State University of New York at Albany. Ping Ping Fu has been working on research in the leadership area and has presented findings on studies of influence tactics and leadership at various conferences and has published in Journal of Organizational Behavior, International Journal of Human Resource Management, the Journal of International Applied Psychology, the Asia Pacific Journal of Management, and Leadership Quarterly. Her contact email is: [email protected] R. Srinivasan is assistant professor of strategic management at IIM, Lucknow. He obtained his doctoral degree in Management from IIM, Ahmedabad. He has published articles and written cases in the areas of knowledge management, Internet strategy, and corporate strategy. He is co-author of the book titled Designing Knowledge Management Architecture. His email is: [email protected] Rajni Ravindran is a civil engineer, and a graduate of the Indian Institute of Technology (IIT) Madras in 1998. She later worked with Tata AutoComp Systems, Pune and then completed her Post Graduate Diploma in Management from IIM Lucknow. Currently, she is with Wipro-GE Medical Systems, Bangalore.

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Ramkumar Ganesan is a metallurgical engineer from IIT, Madras. He has also completed his Post Graduate Diploma in Management at IIM Lucknow. Presently, he is with Suntec Ltd, Trivandrum. Robert J. House is a professor of organizational studies at the Wharton School of the University of Pennsylvania. His main area of interest is organizational leadership and its cross-cultural manifestations, in which he is presently a primary investigator on the US National Science Foundation funded research program GLOBE. Robert House is the co-founder and executive editor of Leadership Quarterly, and has garnered a number of professional awards including the Irwin Career Award for Scholarly Contributions to Management. His contact email is: [email protected] Rolf Wunderer is a professor of business administration at the University of St. Gallen, Switzerland. He is the founder and director of the Institute for Leadership and Human-Resource Management at the University of St. Gallen. He has been a visiting faculty at the University of California, Los Angeles and Berkeley; and at the Hitotsubashi University, Tokyo. His contact email is: [email protected] Roma Puri GLOBE India State Co-Investigator, West Bengal, is a Fellow at the Eastern Institute for Integrated Learning in Management, Kolkata. Her teaching and research areas include HRM, accounting, business process reengineering, and managerial effectiveness. She has been a resource person in several in-company programs. Her email is: [email protected] S. Ramesh Kumar is a professor of marketing at IIM, Bangalore. He combines a rich mix of practical academic experience of over twenty years. He has published a number of articles and case studies in leading business newspapers, magazines and academic journals. S Ramesh Kumar has authored several market leading texts on marketing in India and has presented papers in national and international conferences including American Management Association Conference in the US, Europe and Singapore. His email is: [email protected] Seungwha (Andy) Chung is an associate professor of management in the School of Business Administration, and the Chair of the Entrepreneurship Joint Major Program at Yonsei University Seoul, Korea. His research interests include the development of venture firms, and corporate design and restructuring. He has published in several leading journals, including Strategic Management Journal and Korean Management Review. Andy Chung’s book titled Business Venturing for Wealth Creation is a best seller in Korea. His contact email is: [email protected] Shubhosree Dasgupta graduation in economics from Jadavpur University, Kolkata. She recently completed her Post Graduate Diploma in Management from IIM, Lucknow. At present, she is with Brainvisa.com, a knowledge management consultancy firm.

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Sougata Ray is faculty member and the co-ordinator of the Strategic Management Group at IIM, Calcutta. He received his doctorate from IIM, Ahmedabad. His research interests are in studying corporate responses to economic reforms, entry strategies of multinational firms in emerging markets, joint ventures and strategic alliances in the Asia-Pacific region, and entrepreneurship. He has contributed a number of research papers and case studies in journals, edited books, and conferences in India and abroad on these topics. His contact email is: [email protected] Srikumar K. graduated in production engineering from Madras University. He has also worked with Balmer Lawrie Freight Containers Ltd. for around three years. Currently, he is pursuing his doctoral studies in information technology and systems at IIM, Lucknow. Tetsuji Kawamura is director of Musashi University Research Institute, and Professor of Economics, Musashi Tokyo Japan. His email is: [email protected] Tetsuo Abo is Professor at Teikyo University, Tokyo, Japan. He is professor emeritus, University of Tokyo. He is also the director of the Japanese Multinational Enterprise Study Group, which has been doing research on the transplants of Japanese firms in the US, Latin America, Europe, and Asia. Tetsuo Abo is also the editor of several books and author of numerous articles and research reports. His email is: [email protected] Thillai Rajan is currently a consultant at Infosys Technologies Limited, Bangalore, India. He has a doctorate degree from IIM, Bangalore. His research interests include power sector reforms, infrastructure policy and financing, venture capital, and corporate finance. His email is: [email protected] Thomas Steger obtained Ph. D. from Chemnitz University of Technology and is an assistant professor of European management at the Chemnitz University of Technology, Germany. His research interests are in corporate governance and industrial relations with a special focus on Central and Eastern Europe as well as on cognitive phenomena in management. His email is: [email protected] V. Anand Ram is a professor in the organizational behavior area at IIM, Bangalore, India. He has worked on issues in managing people with several companies in the software industry. His email is: [email protected] Vipin Gupta is a core member of Integrative Team, GLOBE Project, and Principal Investigator and Initiator of GLOBE India CEO Study Project. He is an Assistant Professor at Grand Valley State University, and has previously taught at Fordham University. Vipin Gupta obtained his doctorate from the Wharton School, and has been a senior fellow there. He has co-edited Sage volumes on Cultures, Organizations, and Leadership: GLOBE study of 62 societies and Creating Performing Organizations: International Perspectives for Indian Management. He has also been an invited speaker and faculty at universities,

NOTES ON CONTRIBUTORS

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seminars and conferences in various parts of the world and in several different states of India. Dr Gupta has been a Japan Foundation fellow, a visiting researcher at the University of Tokyo, a member of Japanese Multinational Enterprise Study Group, a finalist in the United Nations worldwide competition on Cultural Origins of Variances in Development, and a gold medallist at the MBA program of the Indian Institute of Management (IIM), Ahmedabad. His research work includes analysis of societal and organizational cultures, clustering of societal cultures, performance measurement, technological growth, diffusion of Japanese investment networks overseas, entrepreneurial leadership, and management in India and China, using qualitative as well as quantitative methodologies, and primary as well as secondary data. His contact email: [email protected] William Boulton is a Professor of strategic management and director of the Center for International Commerce at Auburn University. He is the author of numerous articles and cases covering competitive strategy, technology and innovation management, boards of directors, and strategic planning. Willaim Boulton has been a visiting scholar in Japan and Germany, and has conducted a number of research studies for US government agencies on electronic manufacturing technologies and industrial development policies of Asian countries. His email is: [email protected]

INDEX

515

Index 4-Perspective Evaluation (4-P-E), 240 7-Ps, 11, 218–228 Abernathy, W.J., 308–309 absenteeism, 353 absolutism, 406 acceptance, 108, 368 accomplishment, 26, 108, 109, 113, 118, 119, 121, 122, 163, 224, 271 accountability, 139, 345 acculturation model/process, 250–251, 261, 365 achievements, 115 acquisitions, See mergers and acquisitions action research, 366 adaptations, adaptability, 18, 60, 120, 153, 287, 289, 292, 344, 362, 392, 412, 423 Added Value Chains, 361 Adenauer, Konrad, 72 administration, 234, 240, 241 advertising, 161–163, 165, 175, 176–177, 332 affinity, 240, 241, 242, 245, 311, 378 age variables, 331, 332, 334, 428 agency theory, 324, 328–329, 332, 334– 335, 455 agriculture sector, 131–132 Almighty (Brahman), 477 Alternate Dispute Resolution (ADR), 27 Alto, 167 Amazon, 301 ambiguity, 344, 377–378, 395–396 Anchin, New York, 357–358 Anglo culture/societies, 168, 452, 463, 464, 465; business model, 168, 237; investor orientation, 28; transformative organizations, 11–12, 14 Anglo-Saxon, 242 antagonism, 119 AOL, 301

Application-Adaptation (A-A) business model, 238–240 appreciation, 473 Argentina: community setting, 362; cosmopolitan behavior, 363; workforce, lack of confidence, 12, 14–15 Arrowpost.com, 98 Asian Development Bank (ADB), 68 assertiveness orientation, 470, 485, 487 assessment, 349; positive and negative, 368 asset divestiture/restructuring, 181–182, 184 assimilation, 369 assumptions, 354 Atkinson, John, 285, 288 attentiveness, 222 attitude development, 162–163 attitudes and beliefs, 27, 107, 259, 331, 341, 343, 349, 350 authoritarian culture, 344, 347–348, 353, 363, 446 authority, 217, 354, 369–370, 374, 377, 445, 449, 454, 475; and responsibility, demarcation, 237 autocratic, 253, 353 automation, 309–311 autonomy, 69, 270 awareness, 111, 164, 165, 172, 368 AZUBI, 238 balanced scorecard concept of performance, 181–182, 361 bankruptcy, 199 behavior, behaviorism, behavioral, 23, 28, 42, 107, 109, 269, 278, 331, 343, 381, 387, 390, 393, 395–96, 398, 400–401, 409, 490, 495, 496–497; commitments, 150; institutionalization, 397–399; shift, 443; See also values beliefs and practices, 17, 27, 29, 342–343, 358, 374, 408, 484, 488; See also values

516

TRANSFORMATIVE ORGANIZATIONS

belonging, 342 benchmarking, benchmarks, 116, 169, 171, 174, 361; configuration of societal culture, 469–473 benefit-sharing, 272 benevolence (ren), 213 Berlin Wall, fall of, 250 Bharatmail.com, 92, 98, 103 bias, 59 Bombay Suburban Electricity Supply Company, 69 bonding, 60, 328 bourgeois, 215 Braille, 441 brand name, branding, 11, 14, 162–167, 176–177, 200–201, 208, 428 Brazil: hit by Russian crisis, 303 bribery, 221, 343, 478 brotherhood, 347 Buddhism, 214 budget constraint, 65 buen jefe, 363 bureaucracy, bureaucratic, 67, 87, 208, 266, 269, 273, 275, 307, 432, 441 burnout, 192 business ethics, 48 business models, 233, 234; of ePost, 93– 96 business network and internationalizing process, 151–153 business process, 41–42, 186, 207; reengineering, 361 business scope, 427, 430, 434–435 buzz marketing, 161–163, 175–176 C&H Global, 172 CHN-CHN Ceramics (C&C), China, 11, 199–207 ‘Cadre’, 464 capability, capabilities, 61, 109, 110, 128, 170, 182, 201 capital, 428–430 capital infusion, 31 capital market, 66–67, 329–330 capitalism, 218, 443 caring, 29, 60, 343, 348 Case Corporation, United States of America, 172 cast enactment, 49–50 cause-effect, 375

Central Electricity Generating Board, United Kingdom, 66 Central Pay Commission, Fifth, India, 133 chaebols, 185 Challenge-Response Model, 198 change, change process, 2, 9, 11, 13, 18, 23, 25, 56, 80, 105–122, 125, 181, 187, 401, 419, 447; barriers to, 431; changing nature of, 25; co-intrapreneurship, 266; cultural resistance, 397–398, 412, 425; and environment and organizational design, 399; formalization, 394; of internationalization, 147–148; interventions, 364–370; transformative perspective, Coates of India (COI), Kolkata, 24–25, 28, 42; types, 25 change management, 6, 8, 9, 12, 107, 168, 280, 352; implications for, 4–18 China: ‘863 High-Tech Program’, 202; big bowl policy, 215; ceramic industry, 207; closed door policy, 200, 215; Communist Party, 211, 215– 217, 220; competition, 197; culture, 211–212, 227–228; gross national product (GNP), 197; individualism, 217; peasant society, 214–215; planned economy, prolonged practice, 212, 216, 219; political reforms, 225; state enterprises challenges, 198–199; tax regulation, 201; Tiananmen square incident, 217, 225; traditional values, 212–214, 228; transformative organizations, 6, 7, 8, 11; See also Confucianism Chongqing Zhaofeng Ceramics Co. Ltd, 202 CISCO Systems, 301 citizenship behavior, 498 civic governance domain, 449–450, 452– 454 class conflicts, 443 class society/system, 238; in China, 213 client/consultant relationships, 3, 368 Clinton, Bill, 301 coaching, 280 Coates Brothers PLC, United Kingdom, 30, 35 Coates Coatings India Limited (CCIL), 31 Coates of India (COI), Kolkata, 8, 23–42 co-determination, 266, 465

INDEX

codification, 400 cognition, 162–164 collaborations, 17, 39, 54, 87, 114, 128, 281, 297, 355, 412 collective bargaining, 312 collectivist, collectivism, 3, 17, 139, 347, 373, 485, 487 collectivity, 344–345 command and control, 344, 354 commercialization, 68 commitment, 48, 49, 50, 52, 60, 61, 62– 63, 81, 72, 74, 115, 148, 150, 153, 162, 227, 260, 273, 356, 370, 397, 408, 411, 425, 476 commitment, effectiveness, and satisfaction (CES), 55 communal domains, 25, 366 communication, 59, 145, 170, 175, 249, 260, 272, 352, 355, 358, 416, 417–418, 490; flows, 390–391, 395; horizontal, 383–384; interactive, 287; process, 353; technology, 217 communism, 215, 445–447 community building, 353–358 community participation, 454 community, 29, 48, 49, 50, 358, 369 community-oriented culture, 344–345 comparative economic advantage, 145 compensation and reward system (CRS), 4, 9, 17, 41, 59, 75, 121, 126–134, 170, 243, 312, 350, 417, 464–465 competence, competencies, 12, 13, 23, 28, 41, 48, 114, 168, 171, 207, 233, 261, 265, 269, 286, 361, 413, 429; development/ enhancement, 12, 14, 289–290, 293, 296–297; distinctive, concept of, 432; orientation, 28, 34, 42;—and functional flexibility, 28, 289–290, 296, 297; See also performance competing-conflictive culture, 344 competition, 1, 4, 17, 38, 40–41, 58, 125, 130, 161, 165, 175, 197, 198, 206, 208, 269, 288, 289, 293, 301, 305, 308, 312, 313, 334, 343, 354–356, 387, 389, 424, 425, 428; in ePost, 97–98 competitive ability, 28, 180; intensity, 430; performance, 205 competitive advantage, 6, 16, 105, 111, 115, 117, 118, 121, 125, 127, 130, 183, 265, 289, 334, 343, 358, 410, 435, 441;

517

ethical capability as, 405, 407; resourcebased perspective, 407–409 competitiveness, 7, 48, 66, 127, 138, 147, 179, 288, 302, 308–310, 318, 409 competitor, 441–442 complexity, complexities, 128, 406, 430 computer aided design systems, 203–205 Computer Integrated Manufacturing (CIM), 309 conceptualization competencies, 269–271 concern, 59 concession bargaining, 312 conduct, single standard, 26 confidence, 12, 14–15, 17, 35, 58, 168, 201, 245, 496 conflicts, 15, 352, 365, 369–370; transformation, 27 conformity, 244 Confucianism, Confucian Asian societies, values, 6, 11–12, 212–214, 221, 445– 447, 463, 464; business model, 235, 237–239 connectedness, 224, 342 conscientious intervention, 389 consciousness, 27, 354, 477 consensus, 281, 347, 366 consistency, 174 consolidation phase, 71, 76–79, 81, 422 Constrained-Sequential Post-Modern Trajectory, 444–447 constraints, 427 consultants, role in restructuring, 75–76, 77–78, 80 consumer, consumer’s, See customer contamination, 370 contentment, 105 contextual diversity, 16 continental business model, 235, 238 contingency theory, contingencies, 389, 391, 394, 422, 423, 427, 430, 486, 488– 493, 495, 497 continuous improvement, 270, 281 continuous learning, 127 contracts and relationships management, 4 control, 354–355, 358, 397; internal, 273; systems, 390–391, 393, 395; variables, 329–330, 332, 337–338 cooperation, cooperative, 113, 152, 157, 233, 244, 270–271, 304, 313, 344–345,

518

TRANSFORMATIVE ORGANIZATIONS

353; institutions, 235; organizations orientation, 235; self-organizations, 270 co-ordination, 17, 48, 113, 265, 273, 417; and leadership, 273–282 core competence, 289, 434 ‘core-periphery’ model, 285, 288 corporate advantage, 435 corporate culture, 222, 342, 343–349 corporate family, 273 corporate governance, 174, 234, 238 corporate revitalization, 185 corporate social system, 465 corporate strategy, 2, 168, 281, 427; effect on performance, 434–435 corporate values, See values corporatization, 68 corrective learning, 116–121 corruption, 111, 122, 221, 343–344, 473, 478 cost(s), 4, 6, 18, 28, 34, 48, 106, 186, 328, 330, 408, 463 cost control, cost management, 28, 174, 198, 200, 205–206 cost of living adjustments (COLAs), 305, 315 cost reduction, 145, 180 courteous, 223 Coviello, N. E., 148–150 creativity, 127, 285, 287, 292, 341, 342, 357–358, 391 cross-cultural, 4–5, 12, 250, 464; dialogue, 412; ethics, 406–411; training, 414–418; exchanges, 2, 7; learning strategies, 18; theory, contributions to, 498–499; variables, 445; See also cultural, culture cultural, culture, 12, 28, 116, 127, 167, 276, 388–389, 408, 484; attributes, 485; barriers, 4, 249; bias, 391; capital, 167; change, 67, 266, 455, 490; congruence, 12, 251, 252; constellations, 362; differences/diversity, 2, 231–232, 238, 249–250, 325; entity definition of, 484; globe operational definition of, 484– 486; heritage, 341; identity, 375; incongruencies, 252–255; influence, 378, 447, 499–500; and institutional settings, 401; intelligence, 359; management, 14, 342, 358–359; meanings, 442; orientation, 29; specific leader behaviors and organizational practices,

search for, 497–503; transformation, 343, 352–353;—in New York city organizations, 354–358;—and transformative culture, 349–358; understanding, 260; values, 138, 488;—shift, 269; variables, 11, 463 cultural salience, 29 customer, 35, 66, 153, 163, 269, 358, 428, 433, 455, 477–478; awareness, 4; behavior and attitude, 166–167, 177; bargaining power, 427, 431; caring, 60; decision making, 162; discipline, 66– 67; focus, 290–291; heterogenuous, 287; management, 181; needs, 6, 200; oriented restructuring, 182, 191; percieved value, 289; relationship, 2, 54, 286, 356, 361; retention, 61; satisfaction, 168; service, 6 Dainippon Inks and Chemicals (DIC), Japan, 8, 30–32, 41 dana, 477, 479–480 Darwinian, 2 debt reduction, 181 decency, 60 deception, 342 decision making process/power, 2, 26–28, 47, 57, 107, 152, 154–156, 224, 265, 277, 286, 287, 306, 307, 347, 366, 380, 383, 393, 394, 399, 406, 446 de-diversification, 184 degeneration, 121 demand and supply dynamics, 423–424, 430 democracy, 62, 441, 449, 453, 456 demotivation, 272, 342 Deng Xiao Ping, 216, 228 dependent variables, 186, 331, 332 deregulation, 303, 307, 313, 422 design information flows vs. communication flows, 390–391 detachment, and learning to discover, 109, 110–111 determinism, 388 deterministic processes, 17 development theory, 48 developmental learning, 111–121 devotional manifestation, 29 dharma (morality), Doctrine of, 476, 478– 479

INDEX

dialogue, 353–354, 408, 412 dictatorship, 348 differentiation vs. equality orientation, 233, 455 diffusion, 24; process, 117 dignity, 41, 223, 343, 349, 406 direction, lack of, 345 discernment process, 27 disconnectedness, 353 discovery learning, discovering, 15, 106– 112, 117, 121, 476 discretion, 397, 400 discrimination, 105, 108 dishonesty, 345 ‘disorientating dilemma’, 27 dissatisfaction, 350 Distribution Operations Agreement, 69, 77 distrust, 258–260, 350, 377 diversification, 181, 185, 309, 422, 427, 430, 432, 435 risk, 433–434 diversity, 4, 16–18, 107, 350, 357, 424, 427– 428, 430, 432–433, 441, 455, 480; See also cultural diversity divestiture/divestment, 187, 191, 422 divide and rule policy, 37 dividend cuts, 181 divisiveness, 345 domestic market, See market, domestic domestic saturation hypothesis, 329, 335 dominance, 253 double-loop learning, 392 Dow Jones Index, 301 downsizing, 62, 112, 121, 179, 191, 308, 314 Dunlop, J.H., 314–317 duplication of work, 352 Dutt, P.K., 37–38, 40, 41 dysfunctional practices, 110 East Asia: crisis, 10; profitability, 244; work organization, 241, 242 Eastern Europe societies, 452, 463 e-BillPost, 87, 96, 102, 103 Ecodrive, 165 Ecomenable, 95 e-commerce, 95 economic, economy, 6, 69, 130–131; development, 4; geography, 233;

519

inequalities, 135; reforms, See liberalization, deregulation; relations, 249; security, 446; value, sense of, 381–383 economic value added (EVA), 186, 189, 191 economies, interdependence, 217 economies of scale, 145, 147, 244, 308, 325–326, 329, 431 effectiveness, 4, 26, 52, 55, 62, 118, 173– 175, 176, 388, 409, 424, 476, 486, 490, 494, 496 efficiency, 26, 48, 69, 66, 126, 345, 367; change and, 187, 191, 441 ego, 107 Electricity Supply Industry (ESI), 65 electronic crimes, 94 e-mail, 85, 92, 96, 99 emotional: appeal, 3; association, 165; economy, 341, 349, 359; exchange, 275; fulfillment, 476; intelligence, 352, 359; reactions, 27 employee, employees, 3, 25; caring, 60; company and nation, co-development, 43; contribution, 138; control, 237; development, 54–55, 59, 204, 278–279; focus, 240; involvement, 169 Employee Provident Fund (EPF), 90 employment, 363; distribution, 154; full time, 285; part time, 288; relationship, nature in India, 134–140;— strategic compensation and reward systems (CRS), 126–134 empowerment, 12, 25, 27–28, 41, 59, 162, 280, 347, 354–355, 358, 441, 480 end-user, 153 enforcement, 270 Enron, 5, 24, 121, 341, 342, 343 entrepreneurial capability, 429, 433; leadership, 2, 10, 120, 122, 168, 414, 475–476, 480; spirit, 357 entrepreneurship, 5, 265, 465 entropy, 354 entrust.net, 95–96, 97 environment, environmental, 16, 289, 463; concerns, 28; determinism perspective, 423–424; differences, 325; effect of on corporate strategy and performance, 429–431, 435; efficiency, 430; hostility, 495; stability, 287; variables, 427–428

520

TRANSFORMATIVE ORGANIZATIONS

ePost initiative, 9, 85–88, 92–93, 103; competition, 98; privacy and security policies, 96, 97–98, 102; website, 93– 95 equality orientation, 233 equipment industry, 243, 251 equity divestment, 182, 183 e-shopping, 97, 103; scenario in India, 98, 104 Establishment Chain (Stages) Models, 148–149, 155–156, 158 ethical: capability, 405–406, 417;— integrative model for creating, 411; conflicts, 407; considerations, 29; displacement, 407 ethnic-cultural background, 343 ethnocentrism, 4, 149 Europe: business model, 235, 237, 244; corporate governance, 238; economy, 13; management style, 250; market, organizations and business model, relations, 235; mass media marketing, 177; post-competence culture, 28–29; regulative institutions, 464; team sense, 242; work organization, 241, 242 European Union (EU), 243, 302 evaluation, 121 evolutionary perspective/processes, 17, 388–401, 423–425, 455 excellence, 175 exceptions, 25 exchange, 113, 117, 119, 476; and learning to discover, 107–110 expectations, 26 experience, 25, 26, 27, 55, 57, 150, 414, 477 experiential learning and corrections, 29, 117–118 experimental space, 366–367 experimentation, 399 exploration, 49 export destinations, 155–156 export initiation, decision making, country/market choice and modes of entry, 154–156, 157 export market entry and behavior, dynamics of, 156–157 expulsion, 369 external control model, 423

Fabmart, 98 factor conditions, 424 failure, 121, 251, 272 fairness, fair play, 60, 273, 454 family, 219; collectivism, 471; and family business in India, 147 family-owned private corporations (FPCs), 132, 158 fast moving consumer goods (FMGC), 31 feedback, 58, 59, 415–416 feelings, 27 femininity, 373, 487 fidelity (xin), 213 Fifth discipline, 220 filial piety, 217, 218 fiscal deficit, 1, 71 fitness, 109 five cardinal relationships principle, 227 flexibility, 11, 13, 14, 28, 40–41, 48, 53, 66, 126, 140, 201, 238, 240, 242, 244, 285, 287–290, 306, 309, 314, 417 Flexible Manufacturing Systems (FMS), 309 Ford Motor Co., United States of America, 162, 164, 166, 304, 308–309, 310, 465 Foreign Direct Investment (FDI), 130, 148, 244 foreign exchange rate fluctuations, 306 foreign operations, 10 foreign production models, 378 forgiveness, 27 formative challenge, 47, 62 formative evaluation, 118; Wesman Group of India, Kolkata, 50, 52, 56– 58 formative force and transformative organization, 49–50, 55 Fortune 500, 2, 479, 494 Foundation for Community Encouragement, 353 fourth generation workers, 35 ‘Franchise 500’, 330 freedom, 58, 61, 367, 395 friendliness, 269 frustrations, 363 fulfillment, 24, 48, 52, 280, 281, 454 functional relevance, 110 functionalism, 374 functionality, 119

INDEX

Furnace Construction Company Ltd., United Kingdom, 54 future orientation, 470–471, 485 Gandhi, Mohandas Karamchand, 26, 441 genbashugi ‘(work site orientation), 240 gender egalitarianism/roles, 17, 28, 446, 447–448, 453, 471, 485, 487 General Electric (GE), 161, 308 General Motors (GM), 309, 313 generation shift, 6 Genovese Drugstore, New York, 355 geo-centric mindset, 4, 149, 463 geographic dispersion hypothesis, 328 geographical location, 425 geographical scope, 427, 430, 435 Germanic societies, 452, 463, 464 Germany: brand equity, 177; labor division, 464; printing ink industry, 31; privatization, 72; problem of US firms, 250, 252; social economy system, 257– 258, 465; social and legal structures, 259; training system, 238 Germany Ceramic Research Centre, 11, 202 global: community groups, 7; economy, 1, 6; impact, 362; integration vs. local responsiveness, 258, 409, 412; knowledge economy, 130; standardization, 234 GLOBE (Global Leadership and Organizational Behavior Effectiveness) program, 7, 29, 55, 138, 363, 463, 464, 473–475, 480; India Investigator Network, 480; operational definition of culture, 484–486; Phase II, 484; Phase III, 485, 493–497; potential additional uses of globe data, 501–502; practical relevance, 500–501; theory, 486–493 globalization, 2, 7–8, 10, 40, 42, 47, 122, 168, 198, 207, 269, 301, 323, 330, 394, 422, 490, 500 goals, 26, 30, 108, 128, 357, 364, 365, 389, 442, 476; and means, ambiguity, 391, 395–396 government, governance, 48; and industry, cross purpose, 304; and private firms, relationship, 304; role in change process, Orissa State Electricity Board (OSEB), 71–72, 74

521

Great Depression, 303 Grid Corporation of Orissa (GRIDCO), 69, 74, 76–79, 464 grieving, 27 group involvement, 157 groupism, 233 growth, 8, 331, 348; and development, 49; management, 433–434; motives, 272 guan xi, 220–222, 227 Gujarat Ambuja Cement, 174 Gujaratpatra.com, 98 gyana (knowledge), 477, 478, 479 harmony, 29, 157, 353–354, 378 ‘Hero approach’, 277 heterodoxy, 362 hierarchy, hierarchical, 13, 67, 138, 273, 275, 277, 344, 378–383, 391, 392– 393, 396, 401, 424, 456; See also authoritarian Hindustan Inks and Resins Ltd. (HIRL), 32 historical heritage, 447–448 Hofstede, G., 373, 391, 450, 485, 487 Home Depot, New York, 356–357 Honda Motors, 176, 242 Hong Kong Zhaofeng Ceramics Group Corporation, 201 hospitality, 29 hotmailindia.com, 92, 98 House, Robert, 29, 55 Hughes, United States of America, 309 human capital, 203–204, 341 human development, 381, 453, 455 Human Development Report, 493 human relations, 273 human resource management (HRM), 8, 135, 168–170, 261–262, 286, 289, 296, 304, 354, 394, 501; as a key source of advantage in multinational corporations (MNCs), 409–410;—practices, implementing, 413–418 humane, humane orientation, 3, 39, 471, 487 humaneness, 29 humanity, 27 humility and learning to discover, 107– 108 hygiene factors, 272

522

TRANSFORMATIVE ORGANIZATIONS

IBM, 266, 414 identity, identities, 5, 25, 60 implementation tactics, 8 Implicit Leadership Theory, 487 implicit motives theory, 498–499 import-substitution, 130 inactivity, 122 incentive and control systems, 112, 267, 390–391, 393, 395, 397; See also compensation and reward system incompetence, 109, 121 incremental change, 25, 57, 364 independence, 266, 287, 292 independent variables, 186–187, 331–332 India: economy, 130–131; software sector, 6 indiapost.org, 85 individual, individualism, 17, 27, 157, 217, 347, 357, 373, 487; behavior, 487; and groups, relationship, 233, 463; management, 455 industrial organization perspective, 423 industrial relations, 37, 42, 169, 312, 317 industrial revolution, Third, 443 industrialization, 130, 445 Industry Policy Resolutions, 135 inefficiency, 111 inequality, 475 inertia, inertial model, 423, 434; effect on corporate strategy and performance, 431–432, 435; variables, 428 inflation, 305, 306 information, 242, 390–391, 395, 501 information online, 383 information processes, 362 information sharing, 152, 349, 352 information systems, 206; integrating, 202–203, 208 Information Technology (IT), 1, 13, 61, 62, 66, 140, 169, 205, 234, 244, 301, 302, 306, 308–309, 465, 479 Infosys Corporation, 132, 478; model of entrepreneurial leadership in Southern Asia, 463, 464, 478 infrastructure, 1, 6 Inglehart, R., 442; Model, Key Features, 444–456 initiation, 370 innovation, innovative, 40, 48, 122, 127, 184, 200, 285, 310, 345, 358, 369, 383,

392, 394, 399, 433; trends in pay systems in India, 135–140 inquiry, 354 insights, 27 instability, 308 institution building, 120 institutional collectivism, 471 institutional framework, 428 institutional learning and corrections, 119–120 institutional theory, 423 institutionalization, 24, 394 integration, 1, 409, 412 integrative model/perspective, 28; propositions for, 429–435; variables, 427–429 integrity, 60, 342, 357, 491 intellectual capital, 125 intellectual manifestation, 29 interaction, 349, 395 Interclass Correlation Coefficients (ICC KK), 491 interconnectedness, 108 intercultural skills, 414 interdependence, interdependent relationship, 27, 128, 138, 408 international: competition, 306; economy, 302–304; management, 8, 503; market, See market, international; monetary regime, 302; moral norms, 406; scholars, network of, 502; society, 62 International Franchise Association, 327 International Monetary Fund (IMF), 185 International Money Transfer Service, 91 internationalization process: managerial implications, 336–337; perceptions, 148–157, 422 internet banking, 98 Internet, 6, 85, 91, 92, 95, 96, 102, 177 interpersonal relationship, 151 investor orientation, 23, 28, 34, 41, 42 involvement, 162–163, 237, 243, 277 Ipsen International, Germany, 54 Isuzu-Subaru, 242 J.P. Morgan Chase, New York, 354 Japan: compensation and reward system, 138–139, 465; Confucian values, 235; economy, 13, 240, 245, 302; financial

INDEX

crisis, 303; flexibility, 14; hierarchical society, 138; knowhow, 231; management system, 238, 242, 244; market, organizations and business model, relations, 235; printing ink industry, 31; production system, 465; recession, 4; social institutions and systems, 233; seniority systems, 138, 464; transformative organizations, 7, 8, 11–12; work organization, 241–242 Japanese Multinational Enterprise Study Group (JMNESG), 232 Japanization, 308, 310, 311, 465–467 Jiang, Zemin, 204 job classification, 241–242 job evaluation, 170 job growth opportunities, 133 job rotation, 242, 310, 311, 465 job satisfaction, 349 job security, 135, 261, 312, 314 Johanson, J., 148–149 Johnson & Johnson, 412 joint ventures, 15, 31, 54, 152, 172–173, 201–202, 207, 228, 373, 375, 381–382, 422 justice, 23, 27 just-in-time (JIT) system, 243, 310, 356, 361 Kabir Granthavali, 105 Kabir, Saint, relevance in organizational context, 9, 105–122 Kaizen, 169, 170, 311, 361 Kakinadaonline.com, 98 Kanban, 243, 314 Karma (action), Doctrine of, 476, 478 Keiretsu, 243, 311 Kelleher, Herb, 348 ‘key qualification concept’, 269 knowhow, 28 knowledge, 62–63, 392, 410, 501; based service economy, 265; codification, 49; driven goods and services, 130, 131, 133, 140; economy, 341, 443; management, 9, 105–122, 266, 361 Komatsu, 172 Korean stock exchange, 179, 185 LOI Thermprocess GmbH, Germany, 54 labor: costs, 6; division, 235, 237, 464; laws, 249; management, 310, 465;

523

market in India, 131–133, 138; productivity, 1; relations, 243, 305, 311–317, 428–430; See also workforce laissez faire culture, 345 land, 428–429 Larsen and Toubro (L&T) India, 10, 169– 177 Larsen, Henning Holck, 168 latecomers advantage theory, 245 Latin American societies, 11, 453, 463, 464, 465; change intervention, 362; entrepreneurial leadership, 476; hit by Russian crisis, 303; transformation, 7 Latin European societies, 446, 453, 463; transformation, 7, 12 Lay, Kenneth, 342 layoffs, 181 layout, 233 leaders, leadership, 7, 25, 49, 56, 58, 59, 258, 261, 273–281, 347, 353, 354–355, 364–365, 374, 407, 421, 484, 486–488, 490, 496–497; interactive, status, 277– 278; participative, 492; patriarchal, 56, 59, 213, 219, 221; perceptions, 491; potential nurturing and development, 171–173; transformational, 26; transformative perspective, Coates of India (COI), Kolkata, 23, 25–26, 28, 42; value- oriented, 475–476, 491–492, 495 Lean Production System, 310 learnability, 132 learning, learning skills, 2, 4–6, 17, 23, 30, 41, 48, 50, 57, 59, 105–121, 126, 184, 292, 348, 350, 361, 392–394, 408, 417, 455, 456, 477; and change management, 122; collaborative, 28; enhancing, 412–413; orientation, 287; Saint Kabir’s relevance, 105–122; transformative perspective, Coates of India (COI), Kolkata, 23, 24, 26–28, 42 Leftist ideological trend, 212, 217, 228 lending agencies, role in restructuring process, 72, 76, 81 Leninism, 215–216 letterpost.com, 98 leverage, 424 leveraged buyouts (LBOs), 307 Lewin, K., 106, 116 li mao, 223

524

TRANSFORMATIVE ORGANIZATIONS

Li, Zhaofeng, 201–202 liberalization, 2, 35, 38, 54, 122, 130, 161, 173, 303, 422–435 licensing, 431 lifestyle, job-defined and religion-defined, 449, 452–454 liquidation, 307 listening, 354, 368 localization vs. globalization, 47 locational factors in management geography, 232, 233, 238 logistic retailing model, 334–335 logistical regression, 330–331 long term orientation/perspective, 175, 185, 233, 235, 297 love, 107, 118, 342 loyalty, 60, 111, 158, 227, 342, 378, 408, 433 MIT group, 304 macroeconomic issues, 147 maintenance, 243, 291–293, 370, 390, 395 management, 423, 291–293; costs, 307; philosophy, 30; problem, acculturation as, 250; roles, 4; structure, 307; systems, 250; union, shared future, 40– 42; and workers, animosity, 35; See also organization, leadership managerialism, 237 manpower availability, 130–131 Mao Tse Tung, 215–216 Marathan Oil, United States of America, 307 market, marketing, 172–173, 192, 204– 206, 208, 273–281, 423–424, 428, 434, 464; capitalization, 168; choice, 427; conditions, 148–150; development, 147; domestic 325–327, 433; driven environment, 66; economy fundamentalism, 227, 235, 301, 303; forces, 430; international, 204, 326–327, 334, 433; management, 8; needs, 201; orientations, 151; responsiveness, 4–5 Marks and Spencer, 323 Maruti 800, 167 Marxist, Marxism, 221, 357 masculinity, 373, 487 mass production economy crisis, 304–310 materialism/post-materialism, 4, 443, 446, 449, 453

Mature Oligopoly, 305, 306, 307, 309 maturity, 280 Mazda, 242 McAuley, A., 148–150 McClelland, D.C., 499 McDonald, 166, 326 McKinsey, 120, 161, 218 Mean, Doctrine of, 213 meanings, 15, 23, 26, 28, 348, 383–384, 441–442, 449, 454, 484; social creation, 374–376; structure and frames of reference, 27 means, 391, 395 measurement, 450 mediation, transformative, 27 Meghdoot, 91 mental orientation, 17 mentoring, 280, 365–366, 463 Mercedez, 165 mergers and acquisitions, 2, 31, 249, 250, 306, 307–308, 422; acquirer, 252; acquired firm, 252; new owner, personal characteristics, 252–253;— leadership style, 253–254; in US after 1980s, 307–308 merino, Pablo, 365 Merrill Lynch, New York, 357 Mexico: management culture, 373, 377– 378; medium-sized companies, 378; society, 377 Miata, 165 micro electronics (ME), 306 micro-economic crisis, 1; issues, 148 Middle East, 463 middle managers, 61, 62–63 mindset, 172, 218; influence of culture, 227 mission, 26, 48–50, 53, 54, 67, 105, 106, 121, 122, 343, 441 Mitsubishi, 164, 242 mobility, mobilizations, 355, 368–369, 476 modern managerial philosophy, 212, 217– 218 modernity, 444 modernization, 35, 37, 53, 430; at Department of Posts of India, 85, 91; and postmodernization dimensions, 48, 445– 454;—implications for transformative organizations, 454–456

INDEX

money orientation, 228 monitoring, 325, 326, 328–329, 335, 337, 479 moral free space, 406 moral duties/obligation, 417, 477 morale, 192, 341, 345 morality, 26 motivation, 25, 26, 50, 112, 120, 127, 172, 267, 271–273, 278, 280, 356, 381, 413, 442, 499; See also compensation and reward system (CRS) Motorola, 412 Multi-Culture Leader Behavior Questionnaire (MCLQ), 496–497 multidivisional form (M-form), 59 multinational corporations (MNCs), 16, 18, 405, 406–419, 463 multinational enterprises (MNEs), 6, 130– 131, 132, 161 multinational management, 48 multi-skilling, 40–41 munificence, 429–431 mutual investment contracts, 127, 128, 130 mutual recognition, 27 mutual trust, See trust ‘my-company sentiment’, 242 myths, 374 NAFTA, 243 NASDAQ, 301 national culture, 391; and innovative compensation practices, 138–139 national diamond, concept of, 424 national framework, acculturation and, 249–250 national identity construction process, 377–378 National Power, United Kingdom, 66 natural resources, 232–233 ‘nay-lay off policy’, 243 negative work climate, See work climate, negative negativity, 272 negotiation, 250, 277 Nettlinx Ltd., 95, 96, 97 networks, 18, 391–392, 417; role in internationalization, 148, 151–157, 158 New York City, transformative Organization, 2–3, 354–358

525

Nike, 162, 176 Nilekani, Nandan, 478 Nintendo, 176 Nissan, 176, 242 Non Resident Indians (NRIs), ePost services for, 92, 96, 98 non-discrimination policy, 39 non-institutional theory, 393 non-manipulative sales, 361 Nordic societies, 452, 463, 464 normative challenge, 47, 48, 62 normative evaluation, Wesman Group of India, Kolkata, 48, 50, 55 normative schools, 424 normative standards, 428 normative utility, 50 norms and practices, 24, 53, 167, 260, 377; institutionalization, 397–398 North American Manufacturing Company, United States of America, 53 Northern Europe: transformation, 7, 465 Norway: privately-owned companies, 290–291 obedience, 213, 219, 445 obsolescence, 432 Oneida Ltd., 205 on-line authentication, 102 on-the-job-development, 280, 465 OPEC, 306 open mindedness, 5 openness, 39, 60, 61, 130, 174, 261, 353, 355–356 operation, operational, 431; diversity, 427, 430, 434; mode of internationalization, 153–154; scale, 427, 430, 434 opportunism, 328–329, 337 oppression, 355, 358 optimal functioning model, 359 optimism, 55, 61, 62, 173, 477 order, sense of, 382–384 ‘order-made products’, 234 organization, organizational: behavior, 8; capabilities/capability, 170, 387–388, 408, 424, 429; change, 175, 187; citizenship, 273; communication, 168; culture, 7;—symbolism and, 374–377; design, 417;—traditional paradigm, 389–399; forms, 126; functioning, 47,

526

TRANSFORMATIVE ORGANIZATIONS

62; organizational, See learning; orientation, 235, 237; psychology, 48; as a selective arena, 399–401 Orissa Electricity Regulatory Commission, 69 Orissa Hydro Power Corporation (OHPC), 69, 76 Orissa Power Generation Corporation, 68 Orissa State Electricity Board (OSEB), 8, 65, 67–81 orthodox Marxist and Maoism, ideology, 212, 215–216 outdated strategies, 304 output, 423, 430 outsourcing, 6, 48 outstripping, 245 over-confidence, 177 over-investment contracts, 127, 128, 132, 135 overstaffing, 399 ownership, 48, 62, 130 packaging concept, shift, 31 pan-familialism, 219 paradigm change, 25 parent/subsidiary group, 241 participation, 266, 277, 280, 368 particularism, 11, 224–225 passion, 342 past, different interpretations, 259 paternalism, See patriarchy patience and perseverance, 11, 222–223 patriarchy, 11, 56, 59, 213, 219, 221, 227 patriotism, 11, 225–226 patronage relationship, 378 pattern bargaining, 316 Pax Americana perspective, 302–303, 305, 318 pendulum change, 25 people orientation, 250 people-centered culture, 348–349 ‘people related process’, 128, 170 Pepsi, 163 perfection, 117 performance, 10, 23–24, 62, 73, 107–108, 118, 122, 127, 139, 174, 256, 258, 277, 349, 361, 376, 380–382, 390, 408, 413, 423–425, 431–434, 455, 487; assessment, 17; orientation, 470, 485; related

incentives/pay, 17, 66–67; and restructuring, relationship, 179, 180–192; and transformative organization, 50, 52, 59–61; variables, 429, 432 Performance Appraisal System, 59–60, 170, 415–416 personal development, concepts of, 256– 257 personal domains, 25, 111 personality attributes, 27, 59, 476 personnel management, 269, 316 personnel structure, organization and, 276–277 perspective taking, 108 perspective transformation, 26 persuasiveness, 270 Peter Principle of Incompetence, 109 placement, 278 planning, 59, 380–381, 477 policies, 278, 280 politeness, 11, 223–224 political, politics, 40, 269, 358, 445, 449, 480; conditions, 428; interventions, 37, 65–66; orientation, 11, 220; process, 364; relationship, 220; systems, 302 politicking, 60 polycentrism, 149 population ecology of organizations, 393, 423, 425 portfolio management, 427 positive attitude, positivism, 114, 444 positive work climate, See work climate, positive Post Office Savings Bank (POSB), 90 Postal Life Insurance (PLI), 89, 90 post-colonialism, 443 post-competence orientation, 28–29, 34, 41, 42 post-modernism, post-modernization, 442–448; diverse possibilities, 448–453 post-modernity, 16–17 post war economic regime, 305–306; mass production system, 304–305 Posts Department, India, 85–88; organization, 88–91; metamorphosis, 91–103 post-structuralism, 444 potential, 269–273 power, 342; control, 351; distance, 373, 472, 484, 487; distribution, 369, 393; struggle, 352

INDEX

power sector reforms in Orissa, 68–76; role of consultants, 75–76, 77–78; role of lending agencies, 72–73, 76; role of state government, 71–72, 74, 76–77; role of top management, 73, 74–75, 78–79; role of World Bank, 72, 79, 421, 464, 473 PowerGen, 66 pragmatism, 216 prejudices, 255 prestige, 25 price bonding, 331, 335, 337 price/sale ratio (PSR), 186, 191 Price Waterhouse Cooper, 298 pricing, 204, 328, 331, 423 principles primacy, 11, 219–220 printing ink industry, 30–32 private property rights, 47 private sector enterprises (PSEs), 132, 133 privatization, 252, 258, 422; of Indian postal service, 103; of power sector in Orissa, 68–70, 77; restructuring, 65– 67 privatized companies, management, 66 problem solving, 4, 27, 112, 269, 271, 277– 278, 366–368, 382, 389–390, 392 problems and anxieties, 15, 260 process-driven motivation theory, 272 process innovation, 206 process management, 205 product concept, 162, 165–166 product differentiation, 325 production control group, 243 productive opportunity, 433 productivity, 34, 37, 40, 111, 168, 301, 308–310, 349, 376, 380, 408 professionalism, 358 profitability, 13, 28, 34, 111, 184, 208, 244, 302, 433–436 progressive adaptive culture, 346 pro-market-mechanism orientation, 301, 303 promotions, seniority-based, 138, 464 propriety (li), 213 Protestant culture, 476 psychic distance, 149, 150, 155, 157 psychically close, 155, 157, 158 public ownership, 65 public sector undertakings (PSUs), 132, 133, 135

527

purification, 112 purpose-driven culture, 26, 346 Qing Dynasty, 214 quality, 6, 28, 34, 53, 56, 176, 184, 200, 208, 269, 380, 382, 476; control/ management, 169, 181, 198, 203, 205– 206, 287; focus, 290 quality of life domain, 449, 452, 454, 456 quasi consanguinity, 221 quasi-spot contracts, 127–128, 130, 132 race, 105 Raghavan, R, 171–173 Rao, M.Y., 74–75 rational planning, 251, 286 rationalism, rationality, 27, 374, 441 rationalization, 344 Raymond’s, 164 Reagan, Ronald, Reaganomics, 303–304, 307, 309 reality, 260, 353, 425 reason, sense of, 358 rebirth, doctrine of, 476–477 receptivity, reciprocal process, 26, 27, 114, 261 recognition, 17, 27, 170, 175, 416, 430 re-concentration, 182 re-conceptualization, 369 reconciliation, 27 recovering, 15 recovery stage’, 183 red cross, 3 referential learning and corrections, 119 reflection, 354 reformation, 121 refreeze, refreezing, 9, 106, 116 regenerative process, 15 regiocentrism, 149 regression coefficient results, 329 regulation, regulative institutions, 237– 238, 317, 374, 428, 431 reimbursement, 133 reinforcement, 49, 415 rejection, 368, 378 relationships, 23, 25, 181, 224, 275, 358, 368, 417, 463, 502; network, 6, 27, 28, 58, 114 relativism, 406; vs. universalism, 48 reliability, 9, 18, 53, 56, 86, 92, 269, 291, 293

528

TRANSFORMATIVE ORGANIZATIONS

religion, religious norms, 17, 29, 105, 106, 441, 445, 448–449, 452–453, 484 Remailemail.com, 98 remuneration, 133 ren (tolerance), 222 ren qin, 213, 227 renovation, 202 reorganization phase, 71, 74–76, 80 replication, 49 reputation, 5, 58, 112, 118, 200–201, 433 Research and Development (R&D), 10 reshaping, 181 resource(s), 114, 119, 125, 154, 269, 336; based theory, 286, 324, 326–328, 332, 423–424, 425;—perspective of competitive advantage, 407–409; building, 376; dependence, 393; effects on corporate strategy and performance, 432–434, 435; endowments, 421; quality, 50; sharing, 427, 434; variables, 428–429; wastage, 115 respect, respectfulness, 29, 35, 107–108, 223, 343, 346, 349, 357–358, 384, 406 responsibilities, 26, 48, 62, 66, 272, 280, 342, 367, 417 responsiveness, 4, 29, 48, 409, 412, 417 restructuring, 8, 10, 31, 49, 59, 65–67, 70– 76, 80–81, 112, 121, 175, 182–184, 208, 269, 301, 347, 434; at CHN-CHN Ceramics (C&C), China, 201–202 retention, 49, 394, 397, 398, 401 retrenchment, 10, 121, 182, 183, 184 reverse learning, 24 revitalization, 10 rewards, See compensation and reward system (CRS) righteousness (yi), 213 risk, 5, 272, 430, 433; aversion, 297; management, 174; perception, 130, 327, 337, 422 ritual manifestation, 29, 374 role models, 109, 110 Rosenthal, 205 Ross Perot, United States of America, 309 Royal Dutch, 412, 417 royalties, 328, 331 rule of law, 221 Russia: economic crisis, 198, 303

S. L. Smith & Co., 168 SSL (Secure Socket layer), 94, 97, 104 safety, 346, 354, 357 sales, 28, 201; subsidiaries, 148, 149, 156 Sanchay Post, 91 Sankalp, 91–92 satisfaction, 55, 115, 118, 350, 449 scepticism, 286 science, 441, 444, 446 Scott Peck, Dr., 353 secrecy, 355–356, 358 secular-rational dimension, 17, 446–448, 453 securities sell-off, 187, 189 security and privacy, 97–99, 256, 343 segmentation, 182 selection, 49, 394, 399, 413–414, 417; and advancement, 278–280 self (Atman), 25, 111, 477; and others, 108 self-actualization, 203 self-awareness, 108 self-centric entity, 5 self-change, 174 self-control, 109, 277–278 self-corrective approach, 119 self-criticism, 381–384 self-destruction without learning to develop, 115–116 self-development, 277, 280, 384 self-expression, 16, 441, 446, 447, 453, 476 self-generation of learning to develop, 113–114 self-growth, 108 self improvement, 170 self-interest, 347, 353 self-learning, 170 self-managed teams, 361 self-organization, 277–278, 280, 388, 392 self purification with learning to develop, 111–112 selfishness, 342 seniority systems, 138, 464 sense-making, 12 sensitivity, 414 service sector, 2, 111, 445–446 settlement-oriented mediation, 27 Shane, S., 328–329, 331, 335 shareholders, 357 sharing, shared, 27, 60, 112, 114, 357; information, 174; mindsets, 16, 127,

INDEX

412–413; ownership, 266, 465; values, 5–6, 48, 158; vision, 350 Shell, 412, 417 short term orientation, 275, 304; vs. long term, 233 Siemens, 266 SIHRM system, 410 sincerity, 201 Sinha, Yashwant, 130 size (space and distance), 233, 292, 331, 332, 428, 432, 495 skill(s), 4, 60, 109, 208, 250, 252, 292, 410, 412, 414, 427, 433–434, 456; based pay plans, 135, 138, 140; building, 169–171 small and medium-sized enterprises (SMES), 266 Small Industries Development Corporations, 147 small producers’ mentality in China, 212, 212–215 small scale industry in India, 146–147 snail-mail service, 85, 92 social, societal: capital, 47, 105, 115, 167, 275; change, 352; charter, 29; and communal institutions/systems, 26, 424; competencies, 270, 277–278; consciousness, 3, 348; constructions, 375, 384; desirability, 396; institutions and systems, 233; interactions, 498; investigation, 376; justice, 135; and legal structures, ideal vs. reality, 259; mobility, 363; networks, 184, 271, 273–281;—and internationalizing process, 152–153, 156–157; objectives, 135; practices, 105; problems, 3; relations, 213, 498; rewards, 133; roles, 109; security system, 41; transactions, 273; welfare, 28–29 social/emotional/spiritual (SES) dimension, 342, 347, 359 socialism, 255 socialization, 16, 214 Societal Culture-Developing A Transformative Potential Index, Role of, 468– 474 society and community, 25, 452–453 socio-cultural context, 12, 232–233, 234, 235, 238, 240, 245 socio-economic status, 476 socio-political environment, 257–258

529

socio-technical experiments, 286 software industry, 130 solidarity, 408 Som, B.N., 90 sophistication, 117 South Asia, 11, 168 South Korea: restructuring, 10; transformative organizations, 6, 8 Southeast Asia, 233, 303 Southern Asia: consciousness, 477; Model of Entrepreneurial Leadership, 476– 480 Southwest Airlines, 348 Speed Post Track-and-Trace, 91 Speed Post, 89, 91 spiritual, spirituality, 348, 441, 449, 454, 456; fulfillment, 119; intelligence, 359; orientations, 29, 34, 42, 105; satisfaction, 114 stability (internal and external), 126, 391, 396 staff-appreciation, 351 Stages Models, See Establishment Chain (Stages) Models stagflation, 306 stakeholders, 48, 267, 269, 273, 358, 408 State Financial Corporations (SFCs), 147 status quo, 107, 369–370, 475 stereotypes, 6 strategic adaptation, 13; and functional flexibility, 288–289, 295 strategic alliances, 2, 147, 373, 417, 422 strategic business units (SBUs), 59 strategic congruence, 252; incongruence, 255–257 strategic cultural scales, 30, 32, 34; types, 28–29, 34, 42 strategic differentials, 12 strategic efforts, 240, 241, 245 strategic initiative, 364 strategic leadership, 16 strategic management model, 423–424, 427 strategic planning, 286, 289, 297, 347, 366 strategy, strategies, 16, 26, 128, 172, 251, 276, 390, 409–410, 425; and environment, 421; making, 394 stress, 12, 112, 258–259, 272, 350, 366 structural changes/reforms, 245, 302–303 structural management, 277–278

530

TRANSFORMATIVE ORGANIZATIONS

structure, structuring, 128, 394 style of living, 235 sub-contracting relations, 147, 234, 243 Sub-Sahara Africa, 463 subsidies, 71 success, 251, 272 summative evaluation, Wesman Group of India, Kolkata, 52–55, 62 Sun Chemical, Netherlands, 30 superficial efforts, 110 Supply Chain Management, 2, 313, 465 support, 60, 355, 358, 411, 477 supremacy, 116 survival, 423–424; of the fittest phenomena, 2 sustaining competencies, 16, 416–417 Suvidha, 92 Swatch, 177 symbolic, symbols, symbolism, 15, 27, 166–167; association with brands, 163, 165 sympathy, 3, 39 systems approach’, 278 tacit knowledge, 127 talent attracting and retaining, 169, 171 Taoism, 214 Target Quality–Transformative Potential, 469 target-group-development, 278–280 tariff reform, 68, 73 Tasmania Electricity, 67 Taylor, 308–309, 310, 465 team development/team-building, 170, 278–282, 345, 352, 415, 455 teams, team spirit, teamwork, 4, 17, 57, 60, 113–114, 130, 139, 157, 242–243, 265, 272, 289, 347–348, 350, 356, 361, 364, 377, 383, 412, 417, 433, 492 technocratic business model, 364 technological, technology, 5, 23, 92, 327, 425, 441, 444, 446; advances, 287; advantage, 125; driven market, 343; innovations, 207, 208; role of, 467–480; weakness, 304; transfer, 240, 443 Texas Instruments, 412 Thatcher government, 72 Thums Up, 163 ‘TIME OUT’, 366, 367 time vision, 377

time, 384 tolerance, 487 top down vs. worksite orientation, 233 top management, 175, 286, 297, 316, 431, 494; role in change process, Coates of India (COI), Kolkata, 32, 34, 42, 55, 59, 61, 62; Orissa State Electricity Board (OSEB), 73, 74–75, 82 top management teams (TMT) effectiveness, 495; strategy formulation process, 494 topography, 232 total quality management (TQM), 43, 169, 170, 347, 362 total remuneration, 133, 139 TotalFina, France, 30–31, 35, 37 totality, 27 Toubro, S.K., 170 toxic corporate culture, 343–346, 348, 352 Toyota Production Systems, 361 Toyota, 169, 176, 242 trade deficits, 13 traditional vs. secular-rational factors, 446–448 training and development, 17, 41, 59, 66, 107, 170, 174, 238, 280, 356, 380, 417; in multinational corporations (MNCs), 414–418 Trans World Marketing (TWM), 356 transactional models, 26 transfer, 400 transformation, 59, 87, 97, 121, 175, 270, 280, 302, 361, 378; process, elements of, 267–281 transformative: factors model, 332–337; dynamics/forces, 240, 281; leadership, 411–412; mindset, 121; philosophy, 174; potential index, authentication, 473–474; potential to transformative organization, 474–476 transformative organization, 2, 6; Coates of India (COI), Kolkata, 24–28, 34–37; a model, 49–61, 125, 441; and perpetual learning, 120–121; and strategic compensation and reward systems (CRS), 130–132, 349, 416; theoretical model of, 28–42, 425 transnational corporations (TNCs), 4, 48 transnational solutions, 5 transparency, 60, 69, 112, 221, 473

INDEX

Treuhandanstalt (German privatization agency), 255 trial, 162–163 trickling, 364 trust, mutual trust, 3, 9, 35, 60, 61, 86, 107, 108, 111, 128, 153, 160, 258, 271, 273, 342, 346, 350, 353–354, 357; distrust, cooperative (in-) congruence and acculturation stress, 258–259 trusteeship, 26, 441 turnaround, 179, 183 Turncon, Gremany, acquisition by American company, 252–262 UBS Paine Weber, New York, 358 ubuntu, 29 uncertainty, uncertainty orientation, 117, 128, 138, 139, 297, 305, 308, 342, 373, 430, 472, 485, 495 underinvestment contracts, 127, 128, 132 understanding, 25, 26–27, 111, 354, 455 unemployment, 1, 269, 473, 301–302 unfreezing, 9, 106 unified relationship, 357 Uniform Franchise Offering Circular (UFOC), 331 unions, old and new, Coates of India (COI), Kolkata, 37–40; political affiliations, 40; shared future, 40–2 United Auto Workers (UAW), 313 United Kingdom, 155; flexibility, 281; privatization, 66–67, 72; society and economy, 244, 452; team sense, 242; work organization, 241 United States of America, 2, 155; advertising, 162; business ethics, 406; civic participation, 450; competition, 305– 306, 431; corporate system, transformational aspect, 304, 306–307; debt crisis, 305; economy, 13–14, 301–304, 306, 317; economic reforms and reorganization, 304; franchise system, internationalization, 323–337; Germany, economic relations, 249; inflation, 302; labour relation, 306; lifestyle, 323; market, organizations and business model, relations, 235, 244; multinationals, 4; National Science Foundation, 483; production control, 243; printing ink industry, 31; social

531

and legal structures/society; 237, 259, 377, 452; steam sense, 242; transformational corporate system/organizations, 14, 306–317; unemployment, decline, 301–302; work organization, 241–242; workforce management, 312–317;—women, 315 unity, 242, 382–383; lack of, 444 universalism, 48 Uppsala model of internationalization, 148–149 urbanization, 446, 447 utilitarianism, 408 utility restructuring, 71, 73, 75, 81 VRIO framework, 289 VSAT network, 91 Vahlne, J.E., 148–150 Vaitheeswaran, K., 98 validity, 293 Valspar Corporation, United States of America, 31 values and ideals/practices, value system, 2, 3, 5–6, 16, 17, 18, 23, 26, 27, 29, 53, 59–60, 62–63, 106, 112, 122, 177, 212– 214, 260, 265, 269, 275, 277, 293, 350, 357–359, 362, 373, 388, 408, 409, 418, 445–448, 463, 473, 475–476, 486, 487– 488, 484, 492, 498–499; addition, 61, 108; creation, 6, 112, 289, 425, 476; generation, 120; management, 106; shift, 443 variable pay, 130, 139 variation, 394–97, 399–402 Variation, Selection and Retention (VSR), 49 Vaswani, (Sr.), 53, 56–57 Vaswani, Rajan (Jr.), 54, 56–58, 59, 60, 61 versatility, 17 Vespa, 176 viability, 388 virtues, 219 visibility, 397 vision, 48, 50, 53, 55, 60, 61, 62, 411, 492 Voluntary Retirement Scheme (VRS), 42 wage-price inflationary spiral, 305–306 wages, 305–306, 308, 312 Wagon R, 167 warmth, 223

532

TRANSFORMATIVE ORGANIZATIONS

waste elimination, 61, 169 wasteful activities, 352 weaknesses, 30, 121, 304, 430 web server certificate, 97 Web-ellora.com, 98 well-being, 449–450, 453 Wesman Group of India, Kolkata, 8, 48, 53–63 Wesman Ipsen Furnaces Private Limited, 54 West Bengal: industrial atmosphere, transformation, 35 Western European nations, 446 Western Union Financial Services, United States of America, 91 Wharton School, 29 white and blue-collar workers, conflict, 252 Wide Area Network (WAN), 90 Wiedersheim-Paul, 148–150 willingness, 347 wisdom (zhi), 213, 362, 425 women, 315, 453, 473; See also gender, society work: alienation, 272; climate, 350–358;— negative, 352–353;—positive, 14, 359; culture/ethics, 4, 105, 252, 373; evaluation, 383; and life balance, 350; meetings as cultural symbols, 379–381; organization, 241–242, 243, 304, 308– 309, 310, 465; site orientation, 240 Work Climate Survey, 350–352

workaholicism, 449 workforce, 3, 12–15, 38–39, 113, 117, 131– 132, 161, 169–170, 174–175, 357; and management, relationship, 42; reduction, 66, 183; See also labor, downsizing, retrenchment working class, 445 working conditions, 350 workplace, socio-political context, 35; environment, 40 work-site organization, 244 World Bank, 68, 71, 72, 73, 76, 79 world-class, 6, 38, 168–169 World Trade Centre (WTC), terrorist attack, 2001, has heightened the responsive element, 2–4, 6 World Trade Organization (WTO), 197, 198 World Values Surveys, 447–448, 450, 493 World War II, 237, 286 Xerox, 308 xin (heart), 222 Yahoo, 301 Yew, Lee Kuan, 221 Yin and yang, 219 Zhang, Min, 200, 201–204 Zhongsu, Dong, 214 Zhu, Rongji, 201