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 explo