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Prof. Hrushikesha MohantyVice Chancellor, KIIT Deemed to be University

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Prof. S.N. MisraDean, KIIT School of Management

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Editorial BoardR. N. Subudhi, Editor, (Professor, KIIT School of Management )S.N. Misra (Dean, KIIT School of Management) Hrushikesha Mohanty, Vice Chancellor, KIIT Deemed to be UniversityArtatrana Ratha, Professor, St Cloud State University, USAAshish Dwivedi, Professor, Hull University Business School, Hull, UKB. K. Mohanty, Professor, IIM Lucknow, India Badar Alam Iqbal, Professor, Aligarh Muslim University, Aligarh, India Colin C Williams, Professor, She�eld University Management School, University of She�eld Damodar Suar, Professor, Indian Institute of Technology Kharagpur – India Rajen K Gupta, Professor, M.D.I. Gurgaon, India Saswata Narayana Biswas, Professor, Institute of Rural Management (IRMA), IndiaSushanta Mallick, Professor, School of Bus. & Management, Queen Mary, University of London Vinit Parida, Professor, Luleå University of Technology , Sweden Sumita Mishra, Asso. Professor, KIIT School of Management Sasmita Mishra, Asso. Professor, KIIT School of Management

EditorR. N. SubudhiProfessor, KIIT School of ManagementEmail: [email protected]

Parikalpana: KIIT Journal of ManagementDecember-2018 Volume-14(II)

CONTENTS

Determinants of Divided Policy: Study on Banking 1-18Sector of BangladeshMohammad Shahidul Islam

Challenges in Pursuing Confucianism in Globalized 19-30Business Scenarios – Reflections of few Native ConfucianOrganizations: A discourse through meta-analysisA V Ramana Acharyulu

Procurement and Budget Utilization Challenges: The Case of 31-44Public Universities in Amhara Regional States, EthiopiaAbayneh Kindie, Berhanu Endeshaw and Temtime Debre

Self-Driven Consumer Diagnostics Businesses in 45-57National Capital Region (NCR), IndiaVaishali Agarwal, Teena Saharan and A V Ramana Acharyulu

Opportunities and Challenges of Investment in Ethiopia: 58-76A case of North Shoa Zone of Amhara Regional StateGirmachew Kahsay and Gashaw Belete

Role and Future of Indian Media 77-84S.N. Misra and Sanjaya Ku. Ghadai

Macroeconomic Variables and Indian Stock 85-90Market Return: A studyBhaskar Biswas

Refinement of strategic action in working firm: 91-105An instrumental frameworkAjit Shrivastava

Structural Dynamics of Boards in Indian Public Sector Banks 106-131Nayantara Padhi and Kamal Vagrecha

Case Study

Ashok Leyland Ltd (ALL) ALL is Well: A Case Study 132-139

1

Determinants of Divided Policy: Study on BankingSector of Bangladesh

Mohammad Shahidul Islam

Associate Professor, BGMEA University of Fashion and Technology (BUFT)Dhaka, Bangladesh

[email protected]

DOI: 10.23862/kiit-parikalpana/2018/v14/i2/177858

ABSTRACT

A firm considers various factors when approaching a dividend policy decision. Toanalyze the determinants of dividend policy in the banking of Bangladesh, it hastaken the data of various financial indicators of sample banks. The pooled dataregression model is used for inferring the result. The result shows that the significantdeterminants are retained earnings to equity, size, lagged DPR. The decisionmaker, investors and other stakeholders should follow these findings.

Key words: Pooled data regression model, EPS, DPR, MM model, Lintner model.

1. Introduction

Dividend may be defined as the distributionof created value to the shareholders. It maybe form of ‘Cash Dividend’ or throughdistribution of stocks of the companywhich is known as ‘Stock Dividend’.Dividend policy may be defined as thetrade-off between the magnitude ofretained earnings and distributed cash orsecurities. Dividend decision should notmerely be taken to be a decision ofappropriation of profits to theshareholders. There are several complexissues in it. As such the factors influencingthe dividend decisions have always beenput under scanner by the experts andresearchers in the field of financialmanagement. Dividend payment of acompany is looked upon differently by

different sets of people associated with thecompany. For the investors, dividends arenot merely means of regular earnings butalso an important input for determining theworth and credential of the firm. Formanagers, dividend payment might welldetermine the level of investment inprofitable investment projects. Lenderslook at it carefully because they feel thatthe more the dividend payment, the lesswill be the amount available for servicingand redemption of their claims.

Corporate dividend behaviour is lookedupon in many ways by the experts in thearea of financial literature. Several theoriesevolved explaining corporate dividendbehaviour. One such theory is known as‘Signaling Theory’. According to thistheory, a firm uses dividend policy as a

Parikalpana - KIIT Journal of Management [Vol.14(2), December 2018]

Parikalpana - KIIT Journal of Management2

mechanism to signal outsiders regardingthe stability and growth prospect of thefirm. Aharony and Swary (1980), Asquithand Mullins (1983) etc. are the proponentsof the signaling theory of dividend decision.However, recent studies have notsupported this hypothesized relationshipbetween dividend changes and futureearnings (e.g., De Angelo, De Angelo andSkinner (1996), Benartzi, Michaely andThaler (1997)). Another theory in respectof corporate dividend policy goes by thename of ‘Incumbency Rent Theory’.Fudenberg and Tirole (1995) are theproponents of this theory. According to thistheory if managers enjoy private benefitfrom being in control, they individually andrationally, smooth dividends. So, in badtimes, they pay out too much dividends tolengthen their tenure and in good times,the managers are not to be worried abouttheir tenure in office and naturally opt forlower dividend payment. Again, there isthe ‘Agency Theory’ of dividend payment.According to this theory, dividend policiesaddress agency problems betweencorporate insiders and outsideshareholders. This theory suggests that,unless profits are paid out to shareholders,they may be diverted by the insiders forpersonal use or committed to unprofitableprojects that provide private benefits forthe insiders. As a consequence, outsideshareholders have a preference ofdividends over retained earnings. Thereis still another theory in the name of ‘TaxClientele Theory’. This theory is based oncomparative tax treatment associated with

cash received on account of currentdividend and cash to be received in thefuture as capital gains arising out of changein share price. This theory uses the relativetax advantage of paying dividend now orretaining the excess cash for future capitalgains in explaining the dividend behaviourof firms. This theory suggests that the taxon dividend (i.e., tax on current income)is greater than or equal to the tax on capitalgains (i. e., tax on future income). Again,tax on dividend is to be paid now whiletax on capital gains is to be paid in future.Thus, according to this theory the optimaldividend policy is no or very low dividendpayment. Brennan (1970), De Angelo(1991), etc. are the proponents of thistheory of dividend decision. Even after sucha long period of time since corporatedividend behaviour emerged as one of thewell-researched areas in financialmanagement, dividend decision is still oneof the thorniest puzzle in corporate finance.Least to say, factors affecting such adecision remain to be one of the areaswhere academicians and researchers areintrospecting and have to do a lot. In thisbackdrop, the present study looks into thepattern of dividend payments inBangladeshi context and analyzes thefactors determining such payment ofdividends.

2. Literature Review

The dividend payout ratio indicates thepercentage of profits distributed by thecompany among shareholders out of thenet profits, or what remains aftersubtracting all costs (e.g., depreciation,

3Determinants of Divided Policy: Study on Banking Sector of Bangladesh

interest, and taxes) from a company’srevenues. Most of the previous studies thatinvestigated the impact of agency theoryand transaction cost theory employeddividend payout ratios as a determinant ofdividend in lieu of dividend per share anddividend yield ( Rozeff, 1982; Lloyd,1985;Jensen et al., 1992; Dempsey and Laber,1992; Alli et al., 1993; Moh’d et al., 1995;Holder et al., 1998; Chen et al., 1999;Saxena, 1999; Mollah et al., 2002; Manos,2002; Travlos, 2002). .

According to Pandey (2001), pastdividend (DPRt-1) paid by the companiesis highly significant to the current dividendpayout ratios for all industries in the KualaLumpur Stock Exchange (KLSE).Generally, the higher coefficients andassociated t-statistics of DPRt-1 in theresearch imply the greater importance ofpast dividend in deciding the dividendpayment. His research is also proven withstrong evidence that the management ofMalaysian companies always considerpast dividend as a more importantbenchmark for deciding the currentdividend payment. Previous year’sdividend payment (LDPR) have beenregarded as the primary indicator of a firm’scapacity to pay dividends (Lintner, 1956),because it is assumed that the managementwill maintain a stable dividend policy.Furthermore, the information asymmetryhypothesis assumes that dividend policyis “sticky” or shows a tendency to remainat the level of previous dividends (Baskin,1989). Ahmed and Javid (2009) examinedthe dynamics and determinants of dividend

payout policy of 320 non-financial firms.The results consistently support that firmsrely on both current earnings per share andpast dividend to set their dividendpayments. The positive relationship ofdividend payout ratio (DPR) with thelagged dividend payout ratio is expected.

The decision to pay dividends starts withprofits. Therefore, it is logical to considerprofitability as a threshold factor, and thelevel of profitability as one of the mostimportant factors that may influence firms’dividend decisions. The theory suggeststhat dividends are usually paid out of theannual profits, which represents the abilityof the firm to pay dividends. Thus, firmsincurring losses are unlikely to paydividends. In his classic study, Lintner(1956) found that a firm’s net earnings arethe critical determinant of dividendchanges. Furthermore, several studieshave documented a positive relationshipbetween profitability and dividend payouts(Jensen et al, 1992, Han et al., 1999, andFama and French, 2002). Evidence fromemerging markets Al-Malkawi alsosupports the proposition that profitabilityis one of the most important factors thatdetermines dividend policy (see, forinstance, Adaoglu, 2000, Pandey, 2001,and Aivazian et al., 2003). The positiverelationship of dividend payout ratio(DPR) with the Earnings per share isexpected.A firm’s cash flow is a good measure ofthe firm’s liquidity and it is very importantto compare a firm’s liquidity position inrelation to its dividend payment. According


to Amidu and Abor (2006), cash dividenddistribution does not only depends on theprofitability of firms but also depends onthe free cash flow which is the amount ofoperating cash flow left over after thepayment for capital expenditures. Theempirical results of this study indicate asignificantly positive relationship betweencash flow and dividend payout ratios andthus the liquidity or cash-flow position canbe considered as an important determinantof the dividend payout ratio. Besides that,Chay and Suh (2005) also consider cashflow as a determinant of dividendpayments where firms facing high levels ofcash flow uncertainty are likely to pay lowdividends fearing cash shortfalls in thefuture. The positive relationship ofdividend payout ratio (DPR) with the cashflow is expected.

A firm which has high growth will havegreater need for external financing and thusthey may be motivated to establish a goodreputation with stockholders through higherdividend payout in order to insure accessto external equity that can capitalize thefirm (LaPorta, Silanes, Schliefer & Vishny,2000). However, the research conductedby Amidu and Abor (2006) also statedthat growth in sales were found to havestatistically significant and negativeassociates with dividend payout ratios.According to them, growth in sales is usedas proxies for the firm’s future prospectssince growing firms require more funds inorder to finance their growth and thereforewould typically retain greater proportionof their earnings by paying low dividend.

In addition, Jeong (2008) also supportedAmidu and Abor where sales growth isexpected to be negatively related to thedegree of dividend smoothing in term ofdividend payout.

Eddy and Seifert (1988), Jensen et al.(1992), Redding (1997), and Fama andFrench (2000) indicated that large firmsdistribute a higher amount of their netprofits as cash dividends, than do smallfirms. Several studies have tested theimpact of firm size on the dividend. Lloydet al. (1985) were among the first to modifyRozeff’s model by adding “firm size” asan additional variable. They considered itan important explanatory variable, as largecompanies are more likely to increase theirdividend payouts to decrease agencycosts. Their findings support Jensen andMeckling’s (1976) argument, that agencycosts are associated with firm size. Theywere of the view that for large firms, widelyspread ownership has a greater bargainingcontrol, which, in turn, increases agencycosts. Furthermore, Sawicki (2005)illustrated that dividend payouts can helpto indirectly monitor the performance ofmanagers in large firms. That is, in largefirms, information asymmetry increases dueto ownership dispersion, decreasing theshareholders’ ability to monitor the internaland external activities of the firm, resultingin the inefficient control by management.Paying large dividends can be a solutionfor such a problem because large dividendslead to an increase in the need for externalfinancing, and the need for externalfinancing leads to an increase in the

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monitoring of large firms, because of theexistence of creditors. Other studiesrelated the positive association betweendividends and firm size to transaction costs.For example, Holder et al. (1998)revealed that larger firms have better accessto capital markets and find it easier to raisefunds at lower costs, allowing them to payhigher dividends to shareholders. Thisdemonstrates a positive associationbetween dividend payouts and firm size.The positive relationship between dividendpayout policy and firm size is alsosupported by a growing number of otherstudies (, Eddy and Seifert, 1988; Jensenet al., 1992; Redding, 1997; Holder et al.,1998; Fama and French, 2000; Manos,2002; Mollah 2002; Travlos et al., 2002;Al-Malkawi, 2007). The positiverelationship of dividend payout ratio(DPR) with the firm size is expected.

A firm may have adequate earnings todeclare dividends, but it may not havesufficient cash to pay the same. Theliquidity position of a company is expectedto be positively related to dividendpayment. Current ratio and quick ratio hasbeen used as proxy to measure liquidityposition of the company by variousresearchers. Amidu and Abor (2006)found a positive relationship between cashflow and dividend payout ratios. Based onthe findings of the studies, it can bespeculated that there is a positiverelationship between the liquidity and thedividend payout ratio.In a modern corporate environment wherethere is a large separation between

ownership and management, conflicts ofinterest can arise between managers, insideowners (controlling shareholders), andoutside shareholders, such as minorityshareholders. Referring to this problem,Jensen and Meckling (1976) describe thefirm as a nexus of contracting relationshipsamong individuals. However, when themanager makes a decision, it tends to bein favour of the agent, rather than of thefirm. La Porta et al. (2000) illustrated thatmanagers may take advantage of theirauthority to benefit themselves by divertingfirm assets to themselves through theft,excessive salaries or sales of assets atfavourable prices to themselves.Accordingly, the ownership structure inlarge firms may influence dividends andother financial policies (Desmetz, 1983;Desmetz and Lehn, 1985; Shleifer andVishny, 1986; Morck et al., 1988;Schooley and Barney,1994; Fluck,1999;La Porta 2000; Gugler and Yurtoglu,2003). Several studies have suggestedthat dividend payouts can play a useful rolein reducing the conflict between inside andoutside owners. When insider owners paycash dividends, they return corporateearnings to investors and can no longer usethese earnings to benefit themselves (LaPorta et al., 2000).

A growing number of studies have foundthat the level of financial leveragenegatively affects dividend policy (Jensenet al., 1992; Agrawal and Jayaraman,1994; Crutchley and Hansen, 1989;Faccio et al., 2001; Gugler and Yurtoglu,2003; Al-Malkawi, 2005). Their studies

Determinants of Divided Policy: Study on Banking Sector of Bangladesh


inferred that highly levered firms lookforward to maintaining their internal cashflow to fulfill duties, instead of distributingavailable cash to shareholders and protecttheir creditors. However, Mollah et al.(2001) examined an emerging market andfound a direct relationship betweenfinancial leverage and debt-burden levelthat increases transaction costs. Thus, firmswith high leverage ratios have hightransaction costs, and are in a weakposition to pay higher dividends to avoidthe cost of external financing. To analyzethe extent to which debt can affect dividendpayouts, this study employed the financialleverage ratio, or ratio of liabilities (totalshort-term and long term debt) to totalshareholders’ equity. The negativerelationship of dividend payout ratio(DPR) with the leverage is expected.Several studies have been used to measurethe beta value, as a proxy for the systematicrisk where beta measures the stock’svolatility in relation to the market ( Rozeff,1982; Lloyd et al., 1985; Alli et al., 1993;Moh’d et al., 1995; Casey and Dickens,2000). This study uses price volatility(standard deviation) as a common proxyfor firm risk, which represents a firm’soperating and financial risk (Rozeff, 1982;Loyed et al., 1985; Jensen et al., 1992;Alli et al., 1993; Moh’d et al., 1995;Holder et al., 1998; Chen et al., 1999;Saxsena, 1999; Manos, 2002).

The dependent variable (DPR) used in theregression equations takes values over acontinuous range, but both RELATAX(relative tax rate: capital gain tax rate/

dividend tax rate) in the independentvariables take on distinct values becauseof the limitation of data. Tax-adjustedmodels presume that investors require andsecure higher expected returns on sharesof dividend-paying stocks. Theconsequence of tax-adjusted theory is thedivision of investors into dividend taxclientele. Modigliani [1990] argued that theclientele effect is responsible for thealterations in portfolio composition.Masulis and Trueman’s [1988] modelpredicts that investors with differing taxliabilities will not be uniform in their idealfirm dividend policy. They concluded thatas tax liability increases (decreases), thepreference for dividend payment alsoincreases (decreases). Tax-adjustedmodel assumes that investors maximizeafter-tax income. As far back as 1967,Farrar and Selwyn [1967] concluded thatin a partial equilibrium framework,individual investors choose the amount ofpersonal and corporate leverage and alsowhether to receive corporate distributionsas dividends or capital gain. RecentlyAmidu and Abor [2006] found a positiverelationship between tax and dividendpayout ratios.

The financial literature documents that afirm’s profitability is a significant andpositive explanatory variable of dividendpolicy (Jensen et al., 1992; Han et al.,1999; Fama and French, 2000).However, there is a significant differencebetween dividend policies in developedand developing countries. This differencehas been reported by Glen et al. (1995),

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showing that dividend payout rates indeveloping countries are approximatelytwo-thirds of those in developed countries.Moreover, emerging market corporationsdo not follow a stable dividend policy;dividend payment for a given year is basedon firm profitability for the same year. LaPorta et al. (2000) compared countries thathad strong legal protection forshareholders with those that had poorshareholder legal protection, and relatedthat to countries with inferior qualityshareholder legal protection. Theirconclusion was that shareholders will takewhatever cash dividend they can get fromfirm profits, where a dividend is perceivedas unstable. Wang et al. (2002) comparedthe dividend policy of Chinese and UKlisted companies, and found that theformer tended to vote for a higher dividendpayout ratio, than the latter. Moreover, UKcompanies had a clear dividend policy inwhich annual dividend increases and allcompanies paid a cash dividend. Incontrast, Chinese companies had unstabledividend payments and their dividendratios were heavily based on firm earningsfor the same year, not on any other factor.The latter finding was consistent with thatof Adaoðlu (2000), who stated that themain determinant in the amount of cashdividends in the Istanbul Stock Exchangewas earnings for the same year. Anyvariability in the earnings of corporationswas directly reflected in the cash dividendlevel. A similar result was reported byPandey (2001) for Malaysian firms. Al-Malkawi (2007) identified the profitability

ratio as the key determinant of thecorporate dividend policy in Jordan. As aproxy, this study measured firm profitabilityby the return on asset (ROA). Thepositive relationship of dividend payoutratio (DPR) with the ROA is expected.

A review of the literature revealed severalexplanations for the relationship betweengrowth opportunities and dividend policy.One explanation was that a firm tended touse internal funding sources to financeinvestment projects if it had large growthopportunities and large investmentprojects. Such a firm chooses to cut, orpay fewer dividends, to reduce itsdependence on costly external financing.On the other hand, firms with slow growthand fewer investment opportunities payhigher dividends to prevent managers fromover-investing company cash. As such, adividend here would play an incentive role,by removing resources from the firm anddecreasing the agency costs of free cashflows (Jensen, 1986; Lang andLitzenberger, 1989; Al-Malkawi, 2007).Consequently, dividends were found to behigher in firms with slow growthopportunities, compared to firms withhigh-growth opportunities, as firms withhigh-growth opportunities have lower freecash flows (Rozeff, 1982; Lloyd et al.,1985; Jensen et al., 1992; Dempsey andLaber, 1992; Alli et al., 1993; Moh’d etal., 1995; Holder et al., 1998). Severalstudies found that the sales/revenuesgrowth rate was commonly used as aproxy variable for growth opportunities(Rozeff, 1982; Lloyd et al., 1985; Jensen



et al, 1992; Alli et al., 1993; Moh’d et al.,1995 ; Holder et al., 1998; Chen et al.,1999, Saxsena, 1999; Manos, 2002;Travlos, 2002). Firms with manyinvestment opportunities have large cashrequirements and thus may pay lowdividends. This is the standard view takenby researchers in extant payout literature[see, for example, Rozeff (1984), Smithand Watts (1992), La Porta et al. (2000),Fama and French (2001), DeAngelo etal. (2006)].The impact of investmentopportunities on dividends will be negative.

De Angelo et al. (2006) pay attention tothe fact that dividends are paid usually bymature and established firms. They arguedthat firms with a low earned/contributedcapital mix are in the capital infusion stageand thus cannot afford to pay dividends,while firms with a high earned/contributedcapital mix are mature firms with largecumulative profits and thus are likely to paydividends. Consistent with their financiallife cycle theory, they found that theprobability of firms paying dividends tendsto increase with the earned/contributedcapital mix. I have used the retainedearnings-to-total equity ratio (RE/TE) asa proxy for the earned/contributed capitalmix. According to De Angelo et al. (2006),RE/TE has a greater impact on theprobability of paying dividends thanalternative measures of earned/contributedcapital mix such as the retained earnings-to-total assets ratio. Based on the financiallife cycle theory of dividends; I predict thatthe impact of RE/TE on dividends ispositive. Following Fink et al (2009), I

have defined age as the number of yearssince a firm’s listing date. The positiverelationship of dividend payout ratio(DPR) with the age of the firm is expected.

Huda and Farah (2011) explored thedeterminants of the dividend policy of firmsin the banking industry of Bangladesh.Dividend decision of a bank basicallydepends on its size, profitability, liquidityand retained earnings. The study is anattempt to find out the key dividenddeterminant variables and their impact overcash, stock and total payout ratio.Statistical techniques of simple andmultiple regressions have been used toexplore the relationships betweenvariables. The investigation results showthe predictor variables have a significantrelationship with stock payout and anapparent relationship with cash payout.Amongst all the independent variables,Net Income turns out to be most influentialindicator in elucidating dividend payouts.Sumaiya (2013) studied to determinefactors that have statistically significantimpacts on the dividend policy of bankswith multiple regression analysis and it isseen that bank profitability, growth, andsize are not significant in explaining bankdividend policy in 2006. However, theirrole in explaining dividend strengthens withtime till 2010. Ahmed and Mukit(2014)identified the impact of various factorsdetermining the firm’s dividend payingbehavior in the capital market ofBangladesh. They found that inBangladesh profitability, corporate tax andmarket to book value ratios are the

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significant determinants of dividend payoutratio and operating cash flow per share,current ratio and debt to equity ratio arethe insignificant determinants of dividendpayout ratio.

3. Problem Statement:

Study of dividend payments has a veryillustrious history. In 1956, John Lintnerhas laid the foundation for the modernunderstanding of dividend policy.According to him, dividends are sticky,tied to long-term sustainable earnings, paidby matured companies and smoothenedfrom year to year. Later, Miller andModigliani (1961) demonstrate that underthe condition of perfect capital market andzero taxes, dividends do not affect thevalue of the firm (Dividend Irrelevancetheory) and as such the shareholders areindifferent as to the payment of dividendand retention of profits. Consequently,managers are not to bother too much aboutthe incidence and quantum of dividendpayments. However, Gordon (1962) andWalter (1963), during the same timeperiod, prove dividend to be relevant forthe valuation of the firm and hence theshareholders are seen to be not at allindifferent as to the payment of dividendand retention of profits. From the aboveliterature review, we have taken thefactors, which influence on dividenddecision. It is observed that the researchwork in this field is not sufficient inBangladesh. This issue motivates us toconduct the study in this field. Previousresults also show that dividend rate ismore or less explained by a good number

of explanatory variables. But theexplanatory power of these variablescomes down considerably in the matter oftheir relation with dividend payout ordividend yield. The purpose of the studyis to identify the determinants of dividendpolicy decision and it nature of influenceon dividend decision in the capital marketof Bangladesh.

4. Research Questions and objectives

Study tried to answer a broad researchquestion, like, ‘What are the determinantsor factors of dividend decision in Bankingsectors of Bangladesh?’Objectives are:a) To analyze the determinants of dividend

policy in banking sectors ofBangladesh.

b) To suggest a comprehensive dividendpolicy framework for improving thedividend policies.

5. Research Design

Sample

The study is based on secondary dataobtained from published annual reports ofsample banks, monthly review of Dhakastock exchange and website of DSE. Thesample includes listed banks of DSE. It istaken 22 banks as sample. The sampleperiod is 20 years from 1994 to 2013 forstudy.

Hypothesis

H0: Dividend payout is not influencedby the factors: Lagged dividend payoutratio, Earnings per share, Cash flow,



Sale growth, liquidity, Institutionalownership, Sponsor ownership,Individual ownership, Leverage, Risk,Age, Size, Relative tax, Return onassets, Investment Opportunity,Retained earnings to equity.

Variables used in study

Dependent Variable: Dividend PayoutRatio (DPR)

Independent Variables: Lagged dividendpayout ratio, Earnings per share, Cashflow, Sale growth, liquidity, Institutionalownership, Sponsor ownership,Individual ownership, Leverage, Risk,Age, Size, Relative tax, Return onassets, Investment Opportunity,Retained earnings to equity.

Model & Methods

I have identified the dependent andindependent variables and have chosen theproxies for the variables depending on theprevious empirical evidences in this case.The study has run the Descriptive statisticsand multiple regression analysis based onthe selected proxies. In this approach,more emphasis is given to the previousstudies for identifying variables.Michaelsen (1961), Gerber (1988),Holder et al. (1998), and Saxena (1999)adopted this approach in their empiricalstudies.

This theoretical statement could be framedas:

DPRit = á + â1DPRit-1+ â2EPSit+ â3LEVit+â4CFit+ â5SGit+ â6SIZEit+ â7LIQit+ â8

OWN (SPONSOR)it + â9 OWN(INST)it+ â10 OWN(IND)it + â11 RISKit+ â12AGEit+ â13 RELATAXit + â14 RE/TEit+â15 ROAit + â16 INVEST OPPORTit +uit

Where,

Dependent Variable:Dividend Payout Ratio = Cash dividendper share/ Earning per share*100

Independent Variables:

DPRt-1 = Lagged dividend payout ratioEPS (Earnings per share) = Net Profit/Total SharesCF (Cash flow) = Net cash flow/ totalnumber of shareSG (Sale growth) = (Salest-Salest-1)/Salest-1*100SIZE (Size) = Log of Total AssetsLIQ (Liquidity) = Quick Ratio ((currentassets-inventory)/current liabilities)OWNIST (Institutional ownership) = No.of Share held by institution/total no. ofshareOWNSPONSOR (Sponsor ownership)= No. of share held by sponsor/ total no.of sharesOWNIND (Individual ownership) = No.of share held by individual/ total no. ofsharesLEV (Leverage) = Total liabilities/ totalassetsRisk = standard deviation of daily stockreturn over 365 days (Volatility)RELATAX (Relative tax) = Capital gaintax rate/ Dividend tax rate

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ROA (Return on assets) = Net income/Total assetINVESTOPP (Investment Opportunity) =(Net fixed assett -net fixed assett-1)/ netfixed assett-1*100


RE/TE (Retained earnings to total equityratio)= (Retained earnings/totalshareholders’ equity)*100Firm age (AGE) = Natural log of No. ofyears of listing on the stock exchange

Methods: Descriptive statistics and multiple regression analysis are used to to identifysignificant variables.


6. Analytical Results

Pooled Regression Model: Study on Banking Sector

Descriptive Statistics:

The descriptive statistics is shown in table-1 which represents the mean, standarddeviation of variables.

Descriptive Statistics Mean Std. Deviation N DPR 18.7825 24.00960 20 EPS 86.1455 190.79493 20 RE/TE 11.4086 4.95266 20 CF 1.2201E2 140.11235 20 SG 38.4963 29.12911 20 SIZE 10.6804 .76459 20 OWN(SPONSOR) 49.4912 10.33043 20 OWN(INDIVIDUAL) 37.1071 10.61277 20 OWN(INSTITUTION) 24.9410 65.53396 20 LEV 14.1881 2.54602 20 RISK 5.2389 2.69501 20 AGE 1.9218 .52824 20 RELATIVE TAX 1.5000 .00000 20 INVEST. OPPORT. 55.0126 36.75631 20 ROA 1.9881 2.92024 20 DPRit-1 18.7825 21.00960 20

Multi collinearity

The theoretical maximum value oftolerance is 1.00 and minimum value oftolerance is zero. From the table 5 & 6, itis observed that the tolerance of thevariable ROA, SG, RISK, OWN(sponsor), EPS, RE/TE, PE, CF, SIZE,OWN (individual), OWN (institution),LEV, AGE, INVEST.OPPORT are0.708, 0.882, 0.791, 0.774, 0.911,0.726, 0.708, 0.98, 0.852, 0.453, 0.914,0.884, 0.863, respectively which are highly

positive and more than zero. So, it isconcluded that the variables are free frommulticollinearity.

Auto correlation

The value of Durbin-Watson test of thismodel is 2.204 which is near to 2 andindicates the model is free fromautocorrelation (table-3)

Homoscedasticity

In the linear regression the error termis assumed to be homoscedastic

Table-1: Descriptive Statistics

13

constant across observations. Violationof this assumption is pernicious.Estimates of standard errors for theregression coefficients are biased andthe direction of the bias is not known apriori may inflate or deflate t-tests. The

Breusch- Pagan/ Cook-Weisberg testis used to test hetero-scedasticity in thisstudy as shown in table 2 by usingSTATA. A large chi-square wouldindicate that the hetero-scedasticity ispresent.

Table 2: Breusch- Pagan/ Cook-Weisberg test for heteroscedasticityTest Chi-square(chi2) Prob> chi2 Breusch- Pagan/ Cook-Weisberg test 8.13 0.112

From the table 2, it is observed that thechi- square value is small, indicatingheteroscedasticity is probably not aproblem. Here, the chi-square value is8.13(p=.0.112) and indicates theinsignificancy which indicates that theerrors have a constant variance (the datadoes not suffer from heteroscedasticity).

Coefficient of Multiple Determination(R2): The summary of the model is shown

in table 3. The table represents the R, R2,and adjusted R2. R is the values of multiplecorrelations co-efficient between thepredictors and the outcome. Where LEV,RE/TE, SIZE are used as a predictors. TheR value of model 3 is 0.763 which impliesthe strong relationship betweenindependent variables and dependentvariable.

Model Summaryd Model R R

Square Adjusted R Square

Std. Error of the

Estimate

Change Statistics Durbin-Watson R Square

Change F

Change df1 df2 Sig. F

Change 1 .539a .290 .251 20.78389 .290 7.355 1 18 .014 2 .678b .460 .396 18.65771 .170 5.336 1 17 .034 3 .763c .582 .504 16.91537 .122 4.682 1 16 .046 2.204 a. Predictors: (Constant), LEV b. Predictors: (Constant), LEV, RE/TE c. Predictors: (Constant), LEV, RE/TE, SIZE d. Dependent Variable: DPR

Table-3: Model Summaryc

The R2 shows the amount of variance ofDPR of explained by LEV, RE/TE, andSIZE. The value of R2 of the model -3 is0.582 which indicates that the independentvariables explain 58.2% of the dependentvariable (DPR). This representssatisfactory result for interpreting themodel.

Significance of the Model: F-test

ANOVA table is shown in table 4, whichrepresents the significance of the modelthrough the F-test. The F values of model1, model 2, and model 3 are 7.355, 7.23,and 7.426 which are statistically significant.It is interpreted that the Final model(model3) significantly improve the ability to



predict the outcome variable(dependentvariable).The F-statistics(F=7.42) of themodel 3 is significant at 5 percent level ofsignificant indicating that the model

ANOVAd Model Sum of

Squares df Mean Square F Sig.

1 Regression 3177.301 1 3177.301 7.355 .014a Residual 7775.459 18 431.970 Total 10952.759 19

2 Regression 5034.889 2 2517.444 7.232 .005b Residual 5917.870 17 348.110 Total 10952.759 19

3 Regression 6374.684 3 2124.895 7.426 .002c Residual 4578.076 16 286.130 Total 10952.759 19

a. Predictors: (Constant), LEV b. Predictors: (Constant), LEV, RE/TE c. Predictors: (Constant), LEV, RE/TE, SIZE d. Dependent Variable: DPR

provides significant explanation of variationin the dividend determinants of financialsector.

Table 4: ANOVAc

Significant of the Variables/Model parameters:

The result of model parameters is shown in table5. In the model, the Coefficient (B) values ofLEV, RE/TE, and SIZE are 5.961, -2.247, and11.096 respectively. It infers that the LEV, RE/TE, SIZE are significant determinants ofdividend decision.The final model (model 3) is explained, becausethis includes all predictors that make asignificant contribution to DPR. From the table6, it is observed in model 3 that the t value ofLEV, RE/TE, SIZE are 3.73(p=.002), -2.73(p=.015),2.16(p=.046) respectively which are significantat 5 percent level of significant. The p values ofthe independent variables, LEV, RE/TE, SIZEare less than .05 which also indicates thesignificance of the variables. So, finally it isconcluded that among the independentvariables LEV, RE/TE, SIZE are the significantdeterminants of dividend decision.In the model 3, the standardized betas of LEV,RE/TE, and SIZE are 0.632, -0.464, and 0.353respectively which also represents the

significant contribution of LEV, RE/TE, and SIZEon DPR.Non- Significant

From the table 6, it is shown that the model 3explains the contribution of determinants on theDPR. The coefficients of EPS, lagged DPR, CF,SG, OWN (SPON), OWN (INDIV),OWN(INSTIT) RISK, AGE, INVEST.OPPT, ROAare -0.005, 0.044, -0.321, 0.046, -0.154, 0.044, 0.12,-0.85, -0.242, 0.061, 0.063 respectively whichindicate the little impact of these variables ondividend decision. The t value of EPS, laggedDPR, CF,SG, OWN(SPON), OWN(INDIV),OWN(INSTIT) RISK, AGE, INVEST.OPPT, ROAare -0.026(p=.98), 0.225(p=0.825), -1.78(p=0.095),0.243(p=0.811), -0.842(p=0.413), 0.245(p=0.810),0.488(p=0.633), -0.481(p=0.638), -1.46(p=0.165),0.343(p=0.736), 0.271(p=0.79) which are notstatistically significant. So, it is concluded thatEPS, lagged DPR, CF, SG, OWN (SPON), OWN(INDIV), OWN (INSTIT) RISK, AGE,INVEST.OPPT, ROA are not significantdeterminants of dividend decision.

15C

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Summary of Findings:

RE/TE (Retained earnings to totalequity ratio):

The coefficient of RE/TE is -2.247 andthe t value is -2.73(p=0.015) which isnegatively significant. It indicates that theDPR is negatively related to RE/TEbecause a firm that plans to finance futureinvestment opportunities from retainedearnings would distribute lesser profits asdividends. Thus, retained earnings of thecurrent year are negatively associated withdividend paid.

SIZE (Size):

The coefficient of size is 11.096 and the tvalue is 2.16(p=0.046) which is positivelysignificant. The positive relationshipbetween dividend payout policy and firmsize is also supported by a growingnumber of other studies (Eddy and Seifert,1988; Jensen et al., 1992; Redding, 1997;Holder et al., 1998; Fama and French,2000; Manos, 2002; Mollah 2002;Travlos et al., 2002; Al-Malkawi, 2007).

As mentioned previously, larger firms paya higher cash dividend for several reasons.First, large firms face high agency costs asa result of ownership dispersion, increasedcomplexity, and the inability ofshareholders to monitor firm activityclosely. Hence, such firms pay a largerdividend to reduce agency costs (Jensenand Meckling, 1976; Lloyd et al., 1985).Second, as a result of the weak control inmonitoring management in large firms, alarge dividend payout increases the needfor external financing, which, in turn, leads

to the increased monitoring of large firmsby creditors. This may be a quality that isattractive to the shareholders (Sawicki,2005). Another explanation for thispositive association might be related tolarge firms’ easier access to capitalmarkets, and their ability to raise funds withlower issuance costs for external financing.Consequently, large firms are better ablethan small firms to distribute higherdividends to shareholders (Holder et al.,1998).

LEV (Leverage):

The coefficient of leverage is 5.96 and thet value is 3.73(p=0.002) which is positivelysignificant. Because, the, firms with highleverage ratios have high transaction costs,and are in a weak position to pay higherdividends to avoid the cost of externalfinancing. In some industries payout andleverage ratios are positively related whilein other industries the relationship isnegative. Mollah et al. (2001) examinedan emerging market and found a directrelationship between financial leverage anddebt-burden level that increasestransaction costs.

7. Recommendations

The companies should follow continuousdividend policy practices with a view toboosting investor morale as well askeeping stock market as safe harbor forinvestment and financing sector. Thedividend decision makers should considermainly the liquidity and earnings of thecompany for giving dividend to theshareholders. The decision maker,

17

investors and other stakeholders shouldfollow these findings.8. Conclusion

The purpose of the study is to identify thedeterminants of dividend decision of listedbanks in DSE. The significant determinantsare retained earnings to equity, size, laggedDPR. These findings will help the investors,dividend decision maker and other relatedparties in the capital market ofBangladesh.

References

Abu, ST . (2012). Determinants ofDividend Payout Policy: Evidence fromBangladesh. International Journal ofEconomic Practices and Theories, 2 (3),119-126.

Al-Kuwari, D. (2007). Determinants ofthe Dividend Payout Ratio of CompaniesListed on Emerging Stock Exchanges: TheCase of the Gulf Cooperation Council(GCC) Countries. PhD thesis, Universityof Wales-Cardiff, UK.

Alli, K., Khan, A. and Ramirez, G. (1993).Determinants of Corporate DividendPolicy: A Factorial Analysis. TheFinancial Review, 28, 523-547.

Al-Malkawi, H. N. (2007). Determinantof Corporate Dividend Policy in Jordan.Journal of Economic andAdministrative Since, 23, 44-71.

Amidu, M. & Abor, J. (2006).Determinants of Dividend Payout Ratiosin Ghana. Journal of Risk and Finance,VII, 136-145.

Anil, K., & Kapoor, S. (2008).Determinants of Dividend Payout Ratios- a Study of Indian Information TechnologySector. International Research Journalof Finance and Economics, 15.

Baker, K. and Powell,G. (2000). FactorsInfluencing the Dividend Policy Decisions.Financial Practices & Education.

Baker, H K., Theodore,E, and Powell, G.(2001). Factors Influencing the DividendPolicy Decisions of NASDAQ Firms.Financial Review, 38, 19-38.

Baker, H.K. and Powell, G.E. (2000).Determinants of corporate dividend policy:a survey of NYSE firms. FinancialPractice and Education, 10(1), 29-40.

Barclay, M. J., Smith,C. and Watts, R. (1995).The Determinants of Corporate Leverage andDividend Policies. Journal of AppliedCorporate Finance, 7 (5), 4-19.

Brav, A., Graham, J., Harvey, C. andMichaely, R. (2003). Payout policy in the21st century. Mass: NBER WorkingPaper Series.

Britain, J. (1966). Corporate DividendPolicy. Washington D. C. The BrookingsInstitution.

Farrelly, Gail E, H Kent Baker, andEdelman, R. (1986). Corporate Dividends:Views of the Policy Makers. AkronBusiness and Economic Review, 17 (4),62-74.

Frankfurter, G. M., and Wood, B. (2003).Dividend Policy: Theory and Practice. SanDiego, CA: Academic Press.



Gill, A., Biger, N., & Tibrewala, R. (2010).Determinants of Dividend Payout Ratios:Evidence from United States. The OpenBusiness Journal, III, 08-14.

Holder, M., Langrehr,F. and Hexter.J.(1998). Dividend Policy Determinants: AnInvestigation of the Influences ofStakeholder Theory, FinancialManagement, 27, 73-82.

Hsieh, J., and Wang,Q. (2006).Determinants of the Trends in AggregateCorporate Payout Policy. George MasonUniversity Working Paper.

Long, Jr. (1978). The Market Valuationof Cash Dividends: A Case to Consider.Journal of Financial Economics,235-264.

Lintner,J. (1956). Distribution ofIncomes of Corporations amongDividends, Retained Earnings andTaxes. American Economic Review,97-113.

Kanwer, A. (2002). The Determinants ofCorporate Dividend Policies in Pakistan:an Empirical Analysis.

Miller,M. and Modigliani,F. (1961).Dividend Policy, Growth, and the Valuationof Shares. Journal of Business, 411-433.

Mistry, D. S. (2010). Determinants ofDividend Payout Ratio: A firm Level Studyof Major Pharma Players in India. TheNEHU Journal, VIII (2).

Mosarof, M. (2006). Empirical Evidencefrom Determinants of Stock Price andReturn of Dhaka Stock Exchange. Journalof Finance and Banking, 8, 111-124.

Stata Corp. (2003). Stata StatisticalSoftware: Release 8.0, (StataCorporation, College Station, Texas).

Travlos, N., Murinde,V. and Naser,K.(2002). Dividend Policy of CompaniesListed on Young Stock Exchanges.Evidence from the Muscat StockExchange, Working Paper.

19

Challenges in Pursuing Confucianism in Globalized BusinessScenarios – Reflections of few Native Confucian

Organizations: A discourse through meta-analysis

A V Ramana Acharyulu

Professor, Indus Business Academy, [email protected]

ABSTRACT

Confucianism is defined by many scholars in different ways, looking at differentdimensions of Chinese way of life as existed and also based on the preaching ofConfucius during 500-400 BC. Today, looking at near stabilization of globalmarket dynamics by mid 2015, by when, Chinese and Indian businesses foundtheir own place in global markets, management researchers started to examinethe secrets of the success of Indian and Chinese businesses and recognize thedistinct differences between western management theories and concepts andmodels that had been operational till then and Indian and Oriental models.

It is in that context, that the author studied a few Chinese businesses –using Meta-Analysis methods to document their core basis of existence, their extent of believingand following Confucianism as a management doctrine.

Introduction

Confucianism is defined by many scholarsin different ways, looking at differentdimensions of Chinese way of life as existedand also based on the preaching ofConfucius during 500-400 BC. Readingthrough the literature, author chose todepend on the meaning provided by Yao,though it precincts an over-simplification,that Confucianism conveys an idea of away of life that is simple and humanistic(Yao, Xinzhong, 2000). While the historydocuments the growth, popularity andwide acceptance of Confucianism for along period, until late 19th century, it was

noted that it witnessed a decline with newideologies dominating Chinese life duringthe cascading decades of the 20th century.The resurgence of the Confucian ideologywas noted by acknowledging the influenceof Confucian work ethic in the rise of EastAsian economy in the late 20th century(Wikipedia, as visited on 25 Jan, 2018;Elman et al (ed), 2002).

The rise of Maoism in mid-20th centuryand the sweeping economic changesacross the globe under globalization forceslater, gave a new opportunity to Chinesebusinesses to participate and precipitateinto the supply chains of global businesses

Parikalpana - KIIT Journal of Management



and raise to seek market dominationpursuits during the 21st century. The adventof BRICS on one-side; near collapse ofRussian economy; and multiple bouts ofrecession in US economy, gave rise toincreased chances to Chinese businessesto succeed during the late 20th century(Acharyulu, 2007).Looking at near stabilization of globalmarket dynamics by mid 2015s, by when,on one side Chinese and Indian businessesfound their own place in global markets,on another side American and Europeancompanies felt challenged to retain theirdominance in dictating the forces ofglobalization, it started dawning onmanagement researchers that the secret ofthe success of Indian and Chinese (notnecessarily in that order) remain elsewherethan the western management theories andconcepts and models that had beenoperational till then. It is interesting to notethat Walter Kiechel III lamented in 2013itself, that since 1995, there is no newnoteworthy theory that emerged from thewestern business research on Strategycrafting and execution (Aurik et al, 2014).

If we look at the pioneering efforts ofSubhash Sharma on documenting andpropagating various distinct perspectivesof Eastern/ Indian Management Conceptsand theories, and relate them to the presentday (Sharma, 2006), it becomes clear thatcertain layers of Indian, Oriental, Asianmanagement philosophies have a distincttenor to drive business success, andsustainability. The persistent efforts ofSharma and Anantha Giri in pushing

through a series of initiatives to bringtogether research from distant corners ofthe world, in understanding the significanceof Confucianism and Vedanta in the realmsof social theorization in general and in thedomain of management theory specifically,offer some pertinent answers to thesustained successful business managementwould get unfolded from the Easternphilosophy, thought and theories as daysgo by.

Objectives of the study

It is in that context, that the authorattempted studying a few Chinesebusinesses –to decipher their core basisof existence, their extent of believing andfollowing Confucianism as a managementdoctrine guiding their businesses and seeif such a study could motivate a deeperpursuit in developing a new paradigm ofbusiness strategy using Confucianism andVedanta. The exercise is a beginner’sattempt, using meta-analysis of existingliterature as the methodology adopted, byrandom search of business cases ofcompanies that identified themselves asfollowing “Confucianism” in the conductof their business. The exercise lead tonoting some challenges similar tobusinesses that pursue competitivestrategies, while few challenges weredistinct to the organizational frameworksthat are built around Confucian philosophy,and a brief snapshot of these challengeswere offered and a discourse on theiruniqueness or otherwise was made, toargue that businesses are not immune tothe forces of globalization today, and that

21

their ability to face these challenges andsustain their core ideologies is hinged onthe beliefs and values that the leadershipbrings into the organization’s dailyoperations and hold their sustenance.

Methodology – Meta Analysis ofCases on Confucianism

The study pursued identification of caseson organizations that followedConfucianism and analysis of them forbusiness culture, ethos and organizationalphilosophy – with special reference toConfucianism and probe them for theirsuccess or otherwise, in relation to thebusiness philosophy and businessapproaches of these organizations. ABoolean search using the termsConfucianism, Chinese Businessesresulted in listing of four cases in HarvardBusiness Publishing repository (HBSP).These cases were then studied, analysedand an argument on their management isdocumented for the purposes of thisresearch.

Significance of Business Case Study andCases written through Case Research

In business management education, it isnow an established fact that case studypedagogy drives a majority of teaching-learning activity and teachers depend onsome of the global case houses and somelocal country level case repositories;prominent of these, Harvard BusinessPublishing (HBSP), and Case Center(erstwhile ECCH); and within India, IIMACase Center, IIMC Case ResearchCenter, IIMB center for Development of

Cases etc. These Institutions promote caseresearch, make available registered casesto teachers and students desirous oflearning through real life scenarios andsituations of a given organization, industryand economy. Cases presuppose that theyare picked up from business happenings,deal with authentic organizational scenariosand business challenges handled by peoplewho dig their hands into managerialdecision making and demonstrate theirmanagerial leadership.It is an accepted and established fact thatcase study method requires a well written,and peer reviewed article before it isregistered and published by one of the caseregistries and it authenticatesdocumentation of real life scenarios andbrings to the fore managerial challenges.In a majority of scenarios, cases are:problem oriented, descriptive, providedwith facts and figures; they support bothdiagnosis and prognosis, and offer multipledimensions of an organization’s activities,functions, their environment, leadershipand basic approach to business from a thirdperson perspective. It is alsoacknowledged that an analysis of businesscases, helps mirror their realities.As such, the author premised that thereexists an opportunity to view Confucianismfrom a pragmatic view of doing businesswhen it is attempted to do a meta-analysisof a few leading Confucian businesseswhose organizations are documented asbusiness cases in the world’s leadingbusiness case repository, Harvard BusinessPublishing (HBSP).

Challenges in Pursuing Confucianism in Globalized Business Scenarios...


The Study basis

Briefly stated, the four cases that arestudied in this exercise of meta-analysis arefrom diverse industries and with diverseorganizational characteristics. Brieflystated, they are:- A firm that was exploring making

stone paper (M/s Tethia Lungmeng),- A port machinery making firm

(ZPMC),- A power investment Corporation

(James Bowman), and- A kitchenware manufacturing and

marketing company (Nigbo FotileKitchenware).

Each of these business organizationsshowcase challenges and approaches intheir entrepreneurial pursuits, businessdevelopment choices and their peoplemanagement approaches and leadership.The paper attempts at finding the corestructure of each of these firms fromConfucian perspective and present thelearnings of the author.

Confucianism – a thought, a way of lifeor a philosophy?

The term Confucianism evokes severalimpressions into the thinking of a person;vividly presented by images of oriental life,a predominantly rural or agrarian societyand simple living modes manifested byChinese people of various classes. Theforemost of these thoughts conjure anunderstanding of a centuries old way oflife, known to have been put to back-burner in 20th century discouraged by

current polity, however, leads to asurprising inquiry of how it made a silentcome back during the gobalization era inChina.

Other countries in East Asia, continue tobelieve in Confucian way of life, showsuccess in competitive world, and offer are-look at Chinese way of life andmanagement. Such a flow of economicprocesses in these countries, tacitlyencouraged Chinese to re-discoverConfucian philosophy in order to developtheir own existential prowess and offer theirown answer to the western managementconcepts and models.

It is interesting to note here, that in Indiatoo, the last few decades witnessed aresurgence of Indian managementphilosophy, providing the Indianbusinesses an offer of a new paradigm ofunderstanding business and socialleadership. Approaches of SKChakraborty, Subhash Sharma, RCSekhar, Ananth Giri, Albuquerque,Mascarenhas and others have openedthinking and probing into Indian as well asEastern managerial thinking to gain insightsinto their influence in shaping currentmainstream discourse of managementtheories.

It is also the period when Westernmanagement theorists recognized thelament that no new strategy concepts havecome up to lead and shape globalcorporations since 1995. Walter KiechelIII, who was the editorial director of HBSPfrom 1998 to 2002 observed in one of his

23

interviews, and quoted by Aurik, Fabeland Jonk that “It’s tough to identify anybig new strategy ideas since 1995".

The History of Strategy and its futureProspects (Aurik et al, 2014), gave a verydetailed chronological overview of how themanagement thought has progressed inwestern academia, however, it has nottaken into account the growth of alternatemanagement thought and their increasingrelevance to understand the significance ofthese ideologies in firming up of thestrengths of Indian, Oriental and Asianbusinesses.The author, observed over the last twodecades, the reference to and use ofIndian, Chinese, Korean and Middle Eastbusiness successes as cases for study bythe top global business schools across theworld and within India has increased inleaps and bounds. A majority of the topauthors of business managementtextbooks started including Indian teachersand practitioners as co-authors andencouraged including increased number ofnon-American/ non-European Cases asintegral components of the text books aswell as reference resources for analysisand shaping management thought andlearning. This has happened predominantlyin the areas of strategy, marketing,leadership and ethics and corporategovernance, while other subject areas toofollowed suit, with increased frequency. Itwas noted that such a process andapproach, not only was showcasingwestern powerhouses, but also articulatinghow the home-grown business houses of

regions across the world succeed withtheir own special and unique managementmodels and approaches. Such anexpansion of vistas of learning, promptedthe author to confidently pick the task oflearning and understanding the Chinesebusinesses which follow Confucianism asthe basis and fulcrum of their businessmanagement, duly acknowledging that theyare part and parcel of various courses bysome of the best business schools and thatthey were frequently patronized by severalinstructors who access HBSP as the coreresource base for instructional material,with a hope and belief that the results willbe found relevant and meaningful.

Meta-Analysis of Confucian BusinessOrganizations

The meta-analysis follow the below patternfor each of the studied cases:

• Brief profile of the company;

• Challenges of the firm;

• Core tenets from the perspectives ofConfucianism; and

• Managerial challenges in terms ofpracticing Confucian values.

Overview of the Cases studied

The four cases studied presented thebelow four scenarios.

The first case was of a Chinese firm – whichwas developed, led and made a leader inits industry – following Confucianphilosophy from the beginning to end, bya Chinese entrepreneur, who picked thegauntlet of entrepreneurial challenges after



his prime work life, motivated by thenationalistic zeal and a fervoracknowledging the opportunities thrownopen by a globalized internationaleconomic scenario, in China and acrossthe globe.

The second case was a Chinese firm –founded and built in a competitiveenvironment, inspired by the successes ofcompetitive strategies in Western andEuropean economies and emulating themin Chinese globalized economy. Thisorganization, on crossing its learning curvein competitive business management,chose to transform into a Confucianorganization – managerially addressing theconflict between competitive forces andnative Confucian principles and practices,so as to consolidate its existence as aChinese business, serving Chinese.

The third one was a Chinese firm –founded and built on Confucian principles,by a descendent of Confucian clan, toprove the beliefs and values of Confuciusare relevant even in late 20th Century,facing fork in the road, addresses thechallenges of competitive pressures andseeks an answer to the pulls of westernmanagement approaches which seeminglyoffering a contrarian stand to the Confucianperspective. The case acknowledges theperils of temptations of a profit andcompetition oriented approach andacknowledges the need for restraint toresolve the dilemmas of leadership.

The last one was a case of an Americanfirm – attempting to partner with a

Confucian organization, finding difficulty inreconciling between the two philosophieswhile attempting to build the bridgesbetween the two.Case 1: ZPMC

Brief profile of the company

ZPMC is an organization set up by aConfucian disciple, Guan Tongxian, whosefirm, ZPMC, makes port machinery andcontainer machinery. Guan Tongxianstarted off his enterprise at an age of 59,with a motto that “any important port inthe world that has container handlingoperations should have containermachinery made in China”.With this motto, Guan Tongxian, 59, cameto Shanghai in 1992, leading thirteenpeople from Shanghai Port MachineryCompany to start a difficult venture withone million US dollars. As of 2009, ZPMChas assets of over 7 billion US dollars.However, the owner-promoter, GuanTongxian, makes only 50,000 US dollarsa year without holding any equities. He haskept such a low profile that even MBAprograms in top Chinese universities mightnot be aware of his success. Chinesetraditional culture has been playing aninfluential role in the personal growth ofGuan Tongxian. Guan was influenced bythe old generation of intellectuals in hischildhood: “At that time, there were oldXiucai and Jinshi in Beijing, and I followedthem to learn Chinese poems and listen tothem speaking of Confucianism thatpromotes an idea of ‘cultivating oneself,putting family in order, ruling the countryand giving peace to the world.’”

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Challenges of the firm

ZPMC is a firm that exemplifies that theConfucian way of enterprise is respected,supported and has potential to thrive andcontribute across the world. The growthof the firm to become a 7 billion US dollarcompany, with owner holding no equity,earning a frugal salary of 50,000 USD perannum, pursues a silent player philosophy,with a firm approach of not opening up tothe media and public relations exposurefor the company, which it is noted, is acore tenet of Confucian disciple.The leadership of Guan Tongxian wasfurther articulated by emphasizing “an ideaof ‘cultivating oneself, putting family inorder, ruling the country and giving peaceto the world”, in that order, as reflectiveof Confucian principles.The key challenges are centered on thechallenges of leadership succession at thetime of the announcement of his retirementand raises the question of “How can thisfirm maintain the legacy after the retirementof Guan Tongxian, and continue to beConfucian organisation?”

Managerial challenges in terms ofpracticing Confucian values

While this question has implications inaddressing the managerial challenges, italso throws open the need to understandhow Confucius attempted to explain themethods of handing over wealth from onegeneration to the next, which need to beinterpreted in deciding and accepting thesuccession of leadership in thisorganisation. How far and how well they

will be pursued and with what results, isrequired to be studied, by attempting thedsaga of post-Tongxian pursuits andfunctioning of this company. The casehighlights the corporate culture that wasnurtured by Tongxian, where, theframework for decision making isentrenched into every organisationalhierarchy and business responsibilities, thusgiving an implicit direction to the company’sway forward.

Case 2:

Ningbo Fotile Kitchenware Co:

Brief profile of the company:

Ningbo Fotile Kitchenware Co, is a high-end kitchenware making and marketingfirm, the market leader in the country, builton competitive strategy foundations,across the last twenty years, starting fromthe early years of a globalized Chineseeconomy. The case describes thecompany during 2008 – 2013 period, andrecognizes it as an organization thatactively introduced philosophies of thetraditional Chinese culture - such asbenevolence, justice, courtesy, wisdomand faith - into its management. Thecompany pursued these as part of its coremanagement values, with a firm belief thatthey will offset (m)any deficiencies thecompany felt, were inherent to practicingwestern management concepts in businessoperations and the company wanted tocreate a new Chinese enterprisemanagement model that steers clear of thedeficiencies of western models ofmanagement.



Challenges of the firm

The company, as it grew, realised that atthe core of the business philosophy lies aConfucian mind-set, but at the operationallevel, they emulated western methodsleading to competitive pressures atmultiple levels - as its decision makingprocess and approaches and businessproblem resolving methods were criticallydebated as contradictory to Confucianvalues and as those that evoked intensediscussions and reflections.

The key challenge of the firm revolvesaround a core question: “whether itsphilosophy is sustainable and applicableto modern enterprises generally in China?How can one integrate the westernmanagement philosophy with traditionalOriental culture? Is it really possible?”

Core tenets from the perspectives ofConfucianism

It was observed that the company built itsbusiness with a simple competitive businessmodel in the early years of promotingmodern kitchenware, emulating a westernlifestyle among its customers, and as such,practiced many western managementmodels in its marketing and salesoperations, even though it had a strategicintent in developing the firm as a Confucianculture-based management model in aworld of market competition. It firstintroduces the company’s background,including its start-up and developmentprocesses. It next describes thetransformation of FOTILE’s managementmodel from western philosophy to one

based on traditional Oriental concepts. Itthen shows how Confucianism is appliedin FOTILE’s management. In particular, itdescribes the applications of Confucianismin FOTILE’s HR management andperformance evaluation. The case offersinformation and description ofmanagement situations that may be usedto analyze the company’s culturalmanagement in comparison with thewestern corporation cultures. Anotherfocus of the case was the relationship ofthe company’s development strategy andits cultural construction, as well as the HRmanagement.


The case presents a multitude ofchallenges, as it was initially founded as acompetitive enterprise and its staffing,directing and control methods were alldeveloped around competitive businessmodel. As a competitive enterprise, thatpursued western model of businessconduct, created and nurtured competitivestrategies in an emerging economy, it facesimmense challenges in moving away fromthese, due to the cultural mores createdaround the performance parameters

The organization, realizing the need torelate to the larger society in which itfunctions and does business, in this context,China, attempted to become a Confucianorganization and deal with its customer andsupplier base, on the foundations ofConfucian tenets, especially with regardto handling quality compalints, after-sales

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service, where, while the recipients of theservice felt better responded, the staffstarted finding difficulties, mainly becauseof the cost considerations, depletingmargins and lost sales opportunities. Anarrowly defined implementation of theConfucian beliefs at workplace, withoutduly supporting the acceptance andadoption of the values into practices, leadsthe company face conflicts and lead to atemporary state of confusion in its workforce and their competitive demands onthe management and also in terms of theirown competitive performance in a marketwhere new players threaten the dominanceof an existing market leader

The company actively advocatedbenevolence, justice, courtesy, wisdomand faith - into its management, so as todiffuse the staff- management conflicts.However, while these were practiced withcomplete dedication at the top and itsmethods of percolating the ideology intolower layers was rather slow, and broughtin only as a tool to resolve conflict in anaggressive competitive environment;

There was an apparent dichotomy inperformance measurement approaches ofthe top management and the perceivedlack of understanding of how to practiceConfucian principles in day-to-daybusiness activities drew the middlemanagement into a state of confusion onhow to conduct daily business operations–

In terms of providing customer service, interms of compensation to staff andworkers; in terms of profitability and even

in terms of considerateness to competition,the clarity of who benefits in the short runand in the long run, was not communicated,thereby creating a bipolar division betweenfield work force and management team.

The case leads to discussion of how toimplement change and what are essentialin managing change, as advocated byConfucian analects, which sound akin tothe principles of moulding group opinionthrough a leader’s honesty in the midst ofcompetitive forces of profiteering bycompeting firms in the business.

Case 3 :Tethia Lung Meng: Brief profile of thecompany

TLM, a real estate firm that evolved into adiversified business conglomerate, eyeingexpansion and market dominance in manyareas, pursues a technology of convertinglimestone into paper as a blue oceanstrategy to build on a first mover advantageto penetrate the market and find an earlyprofitability proposition for the companyin the industry. However, dilemmas of thetop leader of the firm pull him apart to twosides, as his lineage as a descendent ofConfucian family restrains him frompursuing aggressive market strategies,while the market reading was forcing himto go beyond the normative behaviorexpected of him, to protect the firm fromlanguishing.In February 2011, TLM became the firstcompany to produce stone paper and offerbreak-through technological solutions toenvironmental challenges in conventional



paper making industry. Kong Ling Fa,TLM’s founder, obtained the technologyfrom Taiwan and wanted to be the pioneerin China, and he was tempted to evenmake a global debut. However, thetechnology transfer was limited by theprovider to a specific region in China only,thus tying the hands of the entrepreneur.

Challenges of the firm:

The case illustrates the concepts ofentrepreneurship, Confucianism andstrategy. One can gain insights aboutKong, the Chinese entrepreneurs’motivations, values, their developmentstrategies and their cooperation with thesupport of the Chinese local government.Kong’s main challenges include: TLMlicensed the technology from Taiwan andhad exclusive rights only in Anhui province.Although TLM was the first to producestone paper commercially, three othercompanies were in the process of startingup production. How should TLM exploitits first-mover advantage? How shouldTLM develop the resources and strategiccapabilities to ensure success? How couldit leverage on the reputation and experiencethat Kong and TLM had accumulated overthe years? Was it sustainable?


The organizational dilemmas crep into thechallenges, with the manifestations of greedin the mind of Kong, who, after obtainingthe license to use the technology and rightsto make stone paper only in the homeprovince of TLM, starts aspiring to take

stone paper to the entire country as wellas to the world markets.

He faces Confucian dilemmas of two-fold:

• Should the firm focus on how to offera technological benefit to the countryand global markets, withoutcompromising its commitment to thelicense provider or

• Should it leverage the first moveradvantages to establish marketleadership across its target markets?


The dilemmas loom large in the face ofKong, as he proudly claims himself to bea direct descendent of 76th generation fromthe family of Confucius and as a personwho has never compromised on Confucianvalues while doing business across the lastseven decades of his entrepreneurial life.It is being challenged by the perceivedneeds of the company to leverage on thecompetitive methods of capitalizing the firstmover advantage of a firm in an emergingmarket. Should the quintessential valuesof accepting the emergence of competitionas a way of economic life over-ride thecompulsions of building a market base andprofitability in given opportunistic moment?

Case 4 :

James Bowman and Private Equity Fund

Brief profile of the company

James Bowman, a founding partner of aprivate equity fund manager based in NewYork City, has travelled to China to meet

29

with a China Power InvestmentCorporation manager in the hope ofcultivating a business relationship. ButBowman is flabbergasted when themanager, in what is supposed to be anintroductory conversation, asks thatBowman deposit $800,000 into a Chinesebanking account. The money, the managerassures Bowman, will be returned to himwithin 30 minutes. This request, Bowmanunderstands, is about the principles ofConfucianism, which many in Chinaincorporate into their work and home lives.These principles involve building close,trusting relationships in business. Bowmanrealizes that he is being tested, and he isuncertain how to respond.

Challenges of the firm:

The challenges of James Bowman aredifferent from the previous three cases, asa westerner tries to decipher the ethos andmanagerial practices of a Chinese firm, withan intent to start commencing his businessin that country. The challenge was, howdoes one manage competing cultures(including principles, beliefs, and practices)when doing business with unknown?

Stated in a simplistic way, the case dealswith the scenarios of a business lead throwsa prospect of opening business in China;and while exploring the ways and meansof introducing the business into Chineseregion, the prospective client throws asurprise proposition even beforeexploratory discussions and the potentialChinese partner, operating on Confucianprinciples, conveys the value of the same

for building partnership between twounknown parties.


The Confucian principles involve buildingclose, trusting relationships in business.The American Prospector realizes that heis being tested, and he is uncertain how torespond. Secondly, the businessprospector, who is looking foropportunities to handle financial investmentbusiness, needs to appreciate that he isexpected to convey his trustworthy nature,in order to set up his business operationsin that country.

Managerial challenges in terms ofpracticing Confucian values: The caseshowcases

Conclusion

The four organizational scenarios offeredas cases that teach how to deal withConfucian organizations, convey thefollowing simple life truths:• Truthfulness• Trust• Humane approach to all• Responsibility towards own people,

own village, own land and country andall global citizens

• Considerateness to all – investors, staff,suppliers, customers and Competitors

• Distinguish competitiveness from profitmaking

• Steer clear the conflict betweenwestern management theories and theirlimited relevance to Chinese firms,



• Acknowledge that there is a need toadopt and adapt them to local cultureof way of life

— Being supportive to the community,to the society and to the humanity at large

A study of the above cases in a milieu ofcorporate degeneration across the cornersof the world, throws open the gauntlet ofhow to learn to practice ethics in businessenvironment, so as to be a role model tothe team within the organization as well asoffer a way forward to others too.Speaking of ethics and moral values, whilesome of them are region-specific andculture specific, there are universallyaccepted human values, which arerequired to be ingrained into the corporatephilosophies. For this purpose, twocountries, China and India offer a largecanvass and platform, to showcase thesuccesses of the businesses that followIndian and Confucian values, to alsopresent the conflicts that the presentgenerations face, due to their limitedexposure to these values and also to theskills and outlook that they expect us tocarry, to offer a committed and consciencefilled leadership, making it easily acceptableto those who would like to understand andappreciate them and pursue to leadsustainable businesses into the future.ReferencesYao, Xinzhong (2000). An Introductionto Confucianism. CambridgeUniversity Press. ISBN 0521643120h t tp s : / / en .w ik iped ia .o rg /w ik i /Confucianism as visited on 25 Jan 2018

Benjamin Elman, John Duncan andHerman Ooms (ed 2002), RethinkingConfucianism: Past and Present inChina, Japan, Korea, and Vietnam (LosAngeles: UCLA Asian Pacific MonographSeries)Sharma Subhash, (2007), Management inNew Age: Western Windows and EasternDoors, New Age Publishers, New Delhi.Acharyulu AVR, (2007), Impact ofGlobalisation on Indian RuralEnterprises, 2007, PhD Dissertation,Bharathiar University, Coimbatore.Aurik John, Martin Fabel and Gillis Jonk,(2014), The History of Strategy and itsfuture prospects, AT Kearney, New York,USA.Boon Siong Neo, Soon Ang, Gilian Yeoand Cheryl Lim, (2015), TethiaLungmeng: making paper from stone,Nanyang Technological University,Singapore, HBSP, Boston, USA.Baiyin Yang, Ang Gao and Lu Chen,(2010), A Late Bloomer: ZPMC CEOGuan Tongxian, China Business CaseCenter, HBSP, Boston, USA.Adrian Keevil and Andrew Wicks, (2012),James Bowman and CoopertreeCapital, University of Virginia, DardenBusiness Publishing, with HBSP, Boston,USAMinerva Classics, (undated), CompleteWorks of Confucius, Amazon Publishing,USA.Confucius, (undated), The Analects ofConfucius (from the Chinese Classics),Amazon Publishing, USA.

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Procurement and Budget Utilization Challenges: The Case ofPublic Universities in Amhara Regional States, Ethiopia

Abayneh Kindie1*, Berhanu Endeshaw1 and Temtime Debre2

1 Lecturer, Debre Berhan University, College of business and economics, Ethiopia2 Dean, Salale University, College of business and economics, Ethiopia

*corresponding author: [email protected]

ABSTRACT

This study reports on challenges experienced in the field of procurement andbudget utilization in the one hand and strategies ways to improve procurementand budget utilizations on the other hand within the public universities whichare found in Amhara Regional state, Ethiopia. This study used an exploratoryresearch design. Purposive sampling and snowball sampling were used in thisstudy. For the exploration, some of the key guiding questions of public procurementand budget utilization were raised for the staff and focal persons who are workingin three universities in the aforementioned state. Regarding Budget utilizationchallenges, the following were identified: (1) lack of adequate and experiencedbudget experts; (2) there is poor market-oriented cost estimation practice; (3)there is no accountability in budget utilization; (4) lack of continualdetermination and report of budget balance in ach budget codes, and institutionalregulation regarding Budget transfer; (5) delay in availability fund or delay ofrequested fund from ministry of finance and economic development. Ways toimprove budget utilization are: (1) assuring the availability of budget beforeentering in to obligation; (2) by encompassing well planned budget transfer; (3)properly preparing budget request document to Ministry of finance and Economiccooperation. The study concludes by recommending concerned bodies to workon training employees, transparency, accountability, getting qualified staff andetc. Since respondents of this study came from three universities in Amhara RegionalState, the results obtained may not be similar in other states in general anduniversities in particular.

Keywords: Procurement, Budget utilization, practices, challenges, strategies,public universities, Amhara Regional State, Ethiopia.

Introduction

According to Dobler and Burt (1998)procurement can be defined as “…theacquisition, whether under formal contractor otherwise, of goods, services and

works from thirdpartiesby contractingauthorities.” From this, procurement is theactivity of assessing, buying and receivinggoods, works and services. According toCane (2004), Procurement is central to




the government service delivery system.So, government promotes its aims byhaving procurement such as public,industrial or environmental policies.According to Thai (2009), allgovernmental entities of poor and richcountries are struggling in the countenanceof unrelenting budget constraints;government downsizing; public demandfor increased transparency in publicprocurement; and greater concernsconcerning efficiency, equity and fairness.Besides, Thai (2009), study pointed outthe policy makers have increasingly usedpublic procurement as a tool to achievesocioeconomic goals.

According to a report prepared by theEthiopian Procurement and PropertyAdministration Agency Public procurementin Ethiopia dates back to 1948. Thepresent Ethiopian government, underProclamation ¹ 649/2009, ensure that thepublic property, in which a significantquantity of public money is spend, isutilized in such a manner as to enable thegovernment device maximum benefit andmodernize the administration, hasestablished the Public Procurement andProperty Administration organization.Further, a new public procurementdirective and manual hasbeen issued.Public procurement is among the mostuntouched issues in Ethiopia as much asmy effort tofind background informationis concerned. In this study, the researchershave tried to comeup with ideas and createdialogue on the government’s publicprocurement practices. It also tried to

assess the procurement practices and thelegal and regulatory frameworks as wellasthe institutional set up of the federal publicprocurement system.Problem Statement

The role of procurement was to obtain thedesired resource at the lowest possiblepurchase price from a supplier (Bowersox,Closs, & Cooper, 2002); the governmentactivity procurement is vulnerable tocorruption. Accordingly, lack ofaccountability, transparency and integrityhas long been associated with publicprocurement. As a major interfacebetween the private and the public sectors,the study of (Bowersox, Closs, & Cooper,2002) address as public procurementprovides several opportunities for bothpublic and private performers to redirectpublic funds for private gain. Accordingto the Ethiopian ProcurementAdministration Directive (2010) and PPAreport and as well World Bank (2010),efficiently and effectively handling huge sizeof procurement outlay has been a policyand management concern.In addition, Public Universities in Ethiopiaengage in recreation a vital role in ensuringaccess through the investment of significantresources in financial assistance forstudents. In addition, Institutions also seekto maximize educational quality of theiremployees to increase productioncapacity. For this convenience, in Ethiopiathe federal government budget so calledpublic budget is a main source forconstructing and running universities nearby the community. The inputs, funds,

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procurements and expenditures due tomatters are core challenges whether or notthey are in line with government policies,procedures and regulations. Waweru,et.al., (2011), also states with thetremendous increase in university students’enrolments experienced in Ethiopian publicuniversities since years 2005, financing ofuniversity education has become topicalmatter among education stakeholders.This means that, universities face countlessfactors that increase costs by rising laborcosts, blocking rules, laws & policies,regarding with procurements, expendituresand others, unless the direction andsolution are provided for futureenhancement. Despite these issues,universities are searching for new andinnovative ways to cut costs or challengesin using government budget forprocurement and capital expenditureproperly while improving educationalquality.

However, procurement and budgetutilization in higher education in general isamong the most untouched issues inEthiopian public university as much as oureffort to find background information isconcerned. In this study, therefore, theresearchers tried to come up with ideasand create dialogue regarding procurementpractices and challenges; budget utilizationpractices and challenges of publicuniversities in Ethiopia in geral and inAmhara regional state in particular.Moreover, there were an effort to identifyways to improve on both procurement andbudget utilization.

Research Questions

According to the problem statement, thereare four very important questions that canbe asked:1. What are the procurement challenges

in the public universities in Ethiopia?2. How can public procurement in public

universities be improved?3. What are the budget utilization

challenges in the public universities inEthiopia?

4. How can budget utilization in publicuniversities be improved ?

General objective

To assess the procurement and budgetutilization challenges in Public universitiesin the Amhara Regional State and toprovide ways to handle over the identifiedchallenges.

Specific Objectives

• To assess the procurement challengesin the public universities in Ethiopia.

• To identify the budget utilizationchallenges in the public universities inEthiopia.

• To forward ways how can publicprocurement in public universities beimproved.

• To forward ways how can budgetutilization in public universities beimproved.

Significance of this study

The outcome of the study can be used forimproving the practices of procurement and

Procurement and Budget Utilization Challenges: The Case of Public ...


budget utilization in the mentioneduniversities and similar universities inEthiopia.The recommendation provided,are intended primarily for use by the higherofficials of the universities and who areinvoloving the areas. It will help them toassess what needs to be monitored,analysed, maintained, and fixed regardingto procrument and budget utilization. Thispaves way to see better practices inprocrumentand budget utilization in theuniversities with which, ultimately univesitycommunities will make substantialcontributions to the development of thecountry.

Scope of the study

There are many universities, which areadministered by federal government, inEthiopia. This study focused only on thoseuniversity which is found in the AmharaRegional State. Among those, threeuniversities, namely, Gonder University,Wollo University and Debre BerhanUniversity were included in the study asthese universities were expected torepresent and provide all relevantinformation provided by other universitiesand higher officials, directors and thosewho are working directly in theaforementioned subject were consideredfor this study as these groups providedpotential data on the challenges andremedies need to be made regardingprocurement and budget utilization.

Review of Related Literature

In this, relevant concepts and empiricalcontexts a literature review linked to

procurement and budget utilizationconcepts issues are presented regardingthe nature; principles; processes, methods;ethics; integrity, transparency,accountability, corruption and bid riggingin public procurement in general and publicprocurement in Ethiopia in particular.

According to Odhiambo and Kamau(2003: 10), public procurement isagreement means of acquiring or obtaining,products, construction works and servicesby the public sector from suppliers in thelocal and global market. According to(Mahmood, 2010: 103), procurement issubject to the general principles of fairness,equitability, competitiveness, transparencyand cost-effectiveness. According to Thai(2009), the principal hallmarks ofproficient public procurement are:Economy, Efficiency: Fairness,Transparency, Accountability and EthicalStandards, Public Procurement Processesand MethodsThe procurement acquisition Process isclosely tied to almost all other functionsincluded in an organization and also theexternal environment, Leenders et al.(1989). No procurements can beexpected to buy without knowing exactlywhat the using departments want.According to Leenders et al. (1989), thepurchaser should question the specificationand Supplier selection. This constitutes animportant part of the buying function, andessentially it involves the location ofqualified sources of supply and result inon time delivery of acceptable product andneeded services. According to Thai

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(2009), Analysis of bids, Preparation ofthe purchase order, Follow-up andexpediting, Receipt and inspection ofgoods, Clearing the invoices and payment,and Maintenance of records with commonmethods of procurement of OpenBidding, Two stage Tendering, Restricted,Tendering, Direct Procurement andRequest for Quotation.

According to Thai (2009), challenges ofpublic procurement can be seen as internaland external (organizational and non-organizational). In the Thai (2009) study,Internal Challenges are organizations abilityto accomplish procurement objectives andpolicies which is influenced byProfessionalism or quality of procurementworkforce; internal controls; Staffinglevels, Procurement organizationalstructure, Procurement regulations;legislative oversight; rules and guidance.External Challenges: environment factorsincluding market, legal environment,political environment, organizationalenvironment, and socio-economic andtechnological factors. According to SueArrowsmith (1998), by ensuringprocurement transparency, countries canenhance confidence and promotescompetition amongst suppliers. Effectiveand efficient procurement activities requirethe setting up of instruments oftransparency. According to Giraldo(2005), “it supports non-discrimination;facilitate participation by suppliersunfamiliar with the system; to improveinformation for market access negotiations;to improve the decision making process;

to widen the supply base; to exposegovernments decisions to public and socialscrutiny; to generate predictability ofprocurement decisions.” According Grantand Keohane (2005), it is universallyrecognized that the criteria for an open andtransparent public procurement systemshould at a minimum Public invitations,accessible information on the laws andregulations. Disseminating the evaluationcriteria to all bidders; Public inspection oftender decisions, an effective system ofdomestic review; Publication of tenderawards; and regulation of staff involved inpublic procurement

According to Soreide (2002), corruptioncan add 20 to 25 percent to the costs ofgovernment procurement. According toHeimler (2007), “bid rigging is anagreement between competitors overwhich firm will win a tender-often fromgovernment agencies”. Forms of bidrigging are: Bid suppression,Complementary bidding, and Bid rotation:

Public Procurement in Ethiopia

According to John Brooks and Demelash(2009), determining the proportion ofpublic expenditures held by publicprocurement in Ethiopia (and in othercountries too) is difficult. Ethiopia has beenundertaking procurement reforms since1998; and in 2002 the World Bankrecommended various procurementreform actions. Since more than 60percent of the country’s annual budget isspent through procurement. The FederalDemocratic Republic of Ethiopian



(FDRE) drafted a new public procurementlaws and regulations; namely “FederalGovernment of Ethiopia (FGE) FinancialAdministration Proclamation ¹ 57/1996”and “the Council of Ministers FinancialRegulations ¹17/1997.” Later on FDREestablished a public procurementproclamation under proclamation _ 649/2009. However, according to the WorldBank sponsored Country ProcurementAssessment Report (CPAR), which wasreleased in August 1998, these rules andregulations were not made on the basis ofinternationally recognized publicprocurement legal documents and thefederal procurement laws and regulationswere very weak and not comprehensive.Further, the regulation doesn’t put cleardistinction between procurement of goods,works and consulting services.

Methods and Measures

Research Design

The study adopted an exploratoryresearch design, qualitative approach, tocollect and analyze the challenges ofprocurement and budget utilization in thepublic universities. It is used in order toget a better understanding (Creswell,2002), enhanced information ofprocurement and budget utilizationspractices in the Ethiopia public Universitiesand to generate ways to improve bothprocurement and budget utilizationpractices. The study examined: (1) publicprocurement practices and its challenges(2) the way forward for publicprocurement, (3) the challenges of budget

utilization, and (4) the way forward forbudget utilization in Ethiopian PublicUniversities.

Research Approach

The qualitative research approach wasundertaken in the form of in-depthliterature review, in-depth interview andfocus group. It involves qualitative studiesusing focus group discussion and interviewof higher officials and thos who areworking directly in the aforementionedsubjects.

Population and Unit of Analysis

This study was purposely chosen threefrom the ten public Universities in Amhararegional State in Ethiopia; namely, WolloUniversity, Gonder University, and DebreBerhan University. These universitiesprovide potential data and can representremaining universities and carrying outwider and many types of disciplines(services) compared to other universities.Study comprised of higher officials (toplevel), directors and those who areworking in Procurement and budgetsections in the selected universities. Theintegration of these units of analysisprovided appropriate information on thechallenges of procurement and budget, andits remedies in both cases.

Identification of Challenges ofProcurement and Budget Utilization

In-depth literature review was conductedto identify the challenges of procurementand budget utilization that helped theresearcher in highlighting. This was

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followed by data collection from therealistic environment over the targetedsamples using two qualitative datacollecting techniques; namely, depthinterview and focus group discussionengaged in the field.Sampling Method

Purposive sampling and snowball samplingwere used in this study. The sample sizesof 15 participants (5 from each university)were selected for interview and include:procurement directors and officers(purchase pool unit), budget officers,finance director and officers, market priceassessment officers, audit director andofficers, anti-corruption and ethicaldirectors and users. Focus groupdiscussion members were selected usingnomination (chain referral sampling), onefocus group with 4-6 participants fromeach 3 university.

Research Instruments and DataCollection

Open-ended questions and additional adhoc questions were asked to clarify thegiven responses and enhance theproductivity of the interview process. Datafrom these sessions were recorded in noteform and summarized immediately aftereach session by researchers. Allcommunications during data collectionwere made in the local language, Amharic.All questions and data collected weretranslated into English for reportingpurpose in the study.

Guiding Questions: 1) what are theprocurement challenges in the public

universities in Ethiopia? 2) What are thebudget utilization challenges in the publicuniversities in Ethiopia? 3) How can publicprocurement in public universities beimproved? 4) How can budget utilizationin public universities be improved? 5) Ifany other suggestion for this study, pleasespecify it.

Subsequent questions were followed inresponse to the above depth-interview andfocus groups discussion.

Data Analysis

The qualitative data collected during all thedepth-interview and focus-group sessionswere analysed using frequencies, rankingsand content analysis.The resulting categories were analysed inrelation to the results of the literature reviewin order to see how well the set of dataobtained through the literature reviewrepresented the patterns in the set of codeddata. New patterns would emerge fromthe data that could be added to the resultsof the literature review.

Data Analysis and Presentation of theResearch Findings

Depth-interview and Focus GroupDiscussion were held with the followingmajor topics: i) Procurement challengesand ways to overcome the challenges, ii)Budget utilization challenges and ways toovercome the challengesProcurement challenges in PublicUniversities:

The following questions were raised at theinterview and focus group discussion



session, and identified the challenges asshown below.

Question 1: What are the procurementchallenges in the public universities inEthiopia?Excerpt i: extracted challenges whilediscussion session are: - procurement takeslong time, Delay in payment request, Delayin approval of payment request (delay onthe hands of: project advisor, projectofficer, and finance officer these which alllead to corruption. Pro-forma is usedinstead of request for quotation, threedifferent pro-forms are provided by onevendor who may have three differentstamps; Fro-forma process is notsupervised by independent persons, doneonly by procurement pool/unit; Suppliersare negotiating with pro-forma managingunits/ individuals; Pro-forma thresholdsometimes prepared deliberately bydividing requisition or demand into partsor sub amounts. Missing somespecification issues and Confusion withsome figures (forexample one packet penmay not contain exactly 50 piece of pen,one packet of paper might contain 400piece of sheet or some cases 500 of sheet);some supplies which are used for food incafeteria like egg, teff, rice lacksspecification; Lack of specialized staff whostate specification as technology change;Deliberately abusing stated standards/specifications by suppliers by givinganother meaning. For constructioncontract Bid winners/ suppliers notperform works on agreed time; Suppliersnot provided supplies as per agreement

or as per sample/specification. Flow ofprocurement is not transparent to othersuniversity community and it is not displayedsoon after finalizing of procurement;Responsible for procurement isindifference among procurement units inthe case of pro-forma procurement;Current market price assessment not takenaccountably; There is some variationbetween assessed market price andprocurement purchased price; there is timegap between assessed price and purchaseprice.Subsequent questions were followed inresponse to the above interview and focusgroups discussion. There were made aneffort to identify more challenges andsolutions until saturation of data reached.

Focus group discussed regardingchallenges of Procurement in theUniversities include: Purchase requisitionsof various property using departments andunits are not collected and compiled timelyas procurement time schedule or plan.Using departments or units needproperties and services at near time to theuse of properties and services to runoperation and serve their customers. Usersof properties do not worry about theprocurement procedures. Delay inpayment request and approval: this is delayby project advisor or project officer toapprove stage of activities done byconstruction contractor as per design oras required quantity, delay to approvepayment document or voucher all thesewhich leads to corruption. The pro-formaprocurement process was undertaken

39

alone the pool unit members. This wholedistribution and collection of pro-forma toand from suppliers perhaps undertake bysingle member of a pool because theyknow each other what are going on duringpro-forma which more resulted in lack ofdissemination of information to publiccommunitySetting and description of standards andspecification of an item which areemployed in a given procurement is achallenge. Consequently, in moreprocurement case specifications is abusedby suppliers or winners and affect thequality and quantity of properties andservices obtained via procurement.Contracts between university and vendorssometimes are not administered as peragreement. The construction and othertypes procurements have followed bycontract which gives right to bid winner tosale the properties and services to publicuniversities, and obligation to publicuniversities to pay the money amount ofthose properties and services toprocurement bid winners or vendors butSome vendors are not performing as percontract which affects quality, quantity andefficiency of the procurement

Some bidders win the bid by loweringprice and enter in to contract for supplyingprocurement for time contract, but theprice is fluctuating from time to time, in thiscase the law requires price adjustment.Consequently, it results in corruption unlessthe current price assessment is doneefficiently. As a result of depth interviewand focus group discussion, data from

excerpts i was coded and the followingsummarized challenges were identified andinclude: Delay in procreant, Pro-formaelusion, Specification (standard) setting,construction contract administration,Accountability and Transparency.

Ways to Improve Public Procrumentin Public Universities

The following major question was raisedat the interview and focus group discussionsession and identified the following waysas shown below.

Question 2: How can public procurementin public universities be improved?

Excerpt ii: extracted ways whilediscussion session are:- Accuratelyincluding assessed purchase requisition ordemand; Improving procurement staffskills; Awareness creation, developingtransparency and trust; Creating compliantservants; Having well trained technicalprofession for setting standards(specifications) and procurementdocumentation; Pro-forma flow shall besupervised and controlled independently;Accurate specification shall be stated fullyso as to prevents pro-forma elusion;University shall set new managerialmechanism for contract administration.Subsequent questions were followed inresponse to the above interview and focusgroups discussion. There were made aneffort to identify more challenges andsolutions until saturation of data reached.The following points are duly discussedregarding strategies (ways) to improveprocurement in public universities: Need



for purchase requisition nearly supervisedby procurement unit. To do thisprocurement unit shall approach toprospective users’ unit or departmentandfacilitate them to submit their needtimely to procurement unit. Publicuniversities shall have well trained technicalprofessionals who exercise their due carein setting standards and specifications of aproperty employed in procurement astechnology changes from time to time. Tomanage and control pro-forma dodging bysuppliers and vendors during purchaseprocess, public universities shall design newstrategies unless open bid is in use. Pro-forma process or flow shuld be supervisedidepedently. Internal control ofprocurement particularly to propertywarehouse shall effectively be operated toreduce re-purchase or purchasing of aproperty already in store. Marketassessment price shall reveal on the dateof pro-forma distribution. To create publictrust and transparency, it needs theprocurement statements of report in shortdescriptive ethical manner, way ofprocurement, resources employed inprocurement, bid winners or suppliers andresponsible units or teams of procurementthat shall be displayed on public board.

Budget Utilization Challenges in PublicUniversities in Ethiopia:

The following major question was raisedat the interview and focus group discussionsession and identified the following pointsconsidered as a challenge to budgetutilization in public universities.

Question 3: What are the budget utilizationchallenges in the public universities inEthiopia?

Excerpt iii: extracted challenges whilediscussion session are: - Lack of adequateand experienced budget experts; there ispoor market-oriented cost estimationpractice; there is no accountability inbudget utilization; Institutional regulationregarding Budget transfer; Delay inavailability fund from ministry of financeand economic development. Subsequentquestions were followed in response to theabove interview and focus groupsdiscussion. There were made an effort toidentify more challenges and solutions untilsaturation of data reached and the followingwere discussed regarding challenges ofbudget utilization in the universities include:Lack of continual determination and reportof budget balance in each budget cods;Qualitative analyses demonstrate that therewas no accountability in budget utilization,there is no market-oriented cost estimationpractice; Lack of adequate andexperienced budget experts is other issuethat contributes to worsen the problems,Lack of continual determination and reportof budget balance in ach budget cods andalso there is no evidence-based evaluationmechanisms in the budget utilization at eachlevel of the public unvisited; Weakness ofinternal control to follow budget utilizations

Ways to improve Budget Utilization inthe Public universities

The following major question was raisedat the interview and focus group discussion

41

session and the discussions identified thefollowing points to improve budgetutilizations practices in public universitiesas shown below.

Quesition 4: How can budget utilizationin public universities be improved?

Excerpt iv: extracted points whilediscussion session are:- Assuring theavailability of budget before entering in toobligation; by encompassing well plannedbudget transfer; properly preparing budgetrequest document to Ministry of financeand Economic cooperation; there shall becontinual determination and report ofbudget balance in ach budget cods.Subsequent questions were followed inresponse to the above interview and focusgroups discussion. There were made aneffort to identify more challenges andsolutions until saturation of data reachedand the following were discussedregarding strategies (ways) to improvebudget utilization in public universitiesinclude: Creating awareness andTransparency for budget unit staff in pricingin preparation of budget; Creating ethicalvalue and experts for budget unit staff inbudget utilization; Increasing internalcontrol and accountability of the publicuniversity. These emerging patterns andthemes above were generated throughconfirmation and reconfirmation thechallenges and strategies (ways) toimprove procurement and budgetutilization.

Summary of findings

The major challenges identified in

implementation of public procurement are:delay in procreant; pro-forma elusion ordodging; specification (standard) setting;contract administration (especiallyconstruction contract); accountability andtransparency.

The mechanism to improve procurementpractices are: accurately including assessedpurchase requisition or demand; Improvingprocurement staff skills; awarenesscreation, developing transparency andtrust; Creating compliant servants; havingwell trained technical profession for settingstandards (specifications) andprocurement documentation; supervisingand controlling of pro-forma procurementindependently; accurate specification shallbe stated fully so as to prevents pro-formaelusion; setting new mechanism for contractadministration by University. As it wassupported by participants in the discussion,a transparent procurement processrequires law-making and administrativeactions such as transparent procedures,fair pre-qualification actions, protectionagainst corruption, and transparent choiceof the winning bidder, also clear andcomprehensive bidding documents, andcontracts.Regarding Budget utilization challenges, thefollowing are identified: lack of adequateand experienced budget experts; there ispoor market-oriented cost estimationpractice; there is no accountability inbudget utilization; Lack of continualdetermination and report of budgetbalance in ach budget codes andinstitutional regulation regarding Budget



transfer; Delay in availability fund or delayof requested fund from ministry of financeand economic development.

Ways to improve budget utilization are:having expert staff, encompassing wellplanned budget and transfer; properlypreparing budget request document toMinistry of finance and Economiccooperation

Conclusions

As far as a practical contribution isconcerned, this study showed that thereare challenges in procurement and budgetutilization that need to be closely monitoredand improved by the management of theuniversities. The management could usethese aforementioned for being effectiveand efficient so as to achieve their goals.This extends to better delivery of services,for instance, teaching learning, andresearch and community service. Beingable to understand how various challenges(factors) impact on the procurement andbudget utilization would eventually enableuniversities to design the service-deliveryprocess in an efficient manner. Also, donein full awareness of the strengths andweaknesses of these and their effect mayhelp to allocate resources appropriately soas to deliver better service to students.Identifying the major challenges in bothprocurement and budget utilization andknowing startegies in such cases, have itsown importance for improving the servicegiven by the universities. Improveduniversity services would lead to improvingthe quality of education and thereby

producing better graduates and wouldtherefore play a significant role in thedevelopment of a country.

Limitations of the study

Since the respondents of this study camefrom three universities in Amhara RegionalState, It was very difficult to conduct focus-group discussions with higher officials, asthey were very busy. Some of the officialsin the area were also not cooperative forinterview and for showing accountingdocuments perhaps results obtained couldnot be similar in other states in general anduniversities in particular and this could limitthe generalizability of the results.

Recommendations

Informed with the challenges and solutionshas paramount importance so as to takemeasures in the following: Managers of theuniversities need to take corrective actionon delayance of procurement and pro-forma purchase. Managers of theuniversities have to provide training forthose who are developing specification.Great attention should be taken in thecontract Administration (especiallyconstruction contract) activities as this areahas much more capital is invested. Theuniversity has to work much onaccountability and transparency throughcreating awareness. The university has tohave qualified employees in order toeffectively and efficiently address itsobjectives. There is need to deal Ministryof Finance and Economic Developmentregarding delay in availability of fund.

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Possible further research

In order to improve the generalizability ofthe results, future studies should involve inother universities and conducting this typeof research with number of respondents.Despite the best efforts to identify thosechallenges, there might be unobservedareas that could be investigated asadditional challenges, and important forimproving procurement and budgetutilization practices. Hence it isrecommended that further interview andfocus groups discussion in differentuniversities should be conducted.

References

Bowersox, D. J., Closs, D. J., & Cooper,M. B. (2002). Supply Chain LogisticsManagement

Cane, P. 2004. Administrative law. 4thedition. London: Oxford University Press.

Creswell, J. W., &Maitta, R. (2002).Qualitative research. In N. Salkind (Ed.),Handbook of research design and socialmeasurement, pp. 143-184. ThousandOaks, CA: Sage Publications.

Dobler and Burt. 1998. Purchasing andSupplies Management: Text and Cases,Tata McGraw Hill, Delhi, India

Federal Democratic Republic of Ethiopia.(2009). The Ethiopian FederalGovernment Procurement and PropertyAdministration ProclamationGiraldo, R.L. (2005). A critic to theobjectives of the global public procurementinitiatives in the context of the WTO,Bogota Colombia,

Grant, R., W., and Keohane, R. O.(2005). ‘Accountability and Abuses ofPower in World politics, AmericanPolitical Science Review. 99(1)

Heimler, A. 2007. ‘Procurement andPublic Management’: The Fear ofDiscretion and Quality of GovernmentPerformance. Washington, DC: AEIPress

John Brooks, B. and Demelash, D.(2009). Public Procurement & PropertyAdministration Capacity DevelopmentProgram, funded by the CanadianInternational Development Agency

Leenders. 1989. Purchasing andMaterials Management, Richard D.Erwin, inc., USA

Mahmood, S.A.I. 2010. Publicprocurement and corruption inBangladesh: confronting

the challenges and opportunities. Journalof Public Administration and PolicyResearch

2(6):103–11.

Odhiambo, W. & Kamau, P. (2003).Public procurement: Lessons from Kenya,Tanzania and

Uganda. OECD Development CentreWorking Paper No. 208.

Soreide. (2004).”Advancing PublicProcurement: Practices, Innovationand Knowledge Sharing”, in Khi V. ThaiInternational Handbook of PublicProcurement, 234-261, Taylor & FrancisGroup, LLC



Thai, K.V. (2009). “International PublicProcurement: Concepts and Practices”,inKhi V. Thai International Handbook ofPublic Procurement, Taylor &FrancisGroup, LLC

Thai.K.V. 2009. “Challenges in PublicProcurement”, in Khi V. ThaiInternationalHandbook of Public Procurement, Taylor& Francis Group, LLC

Waweru, L. K.M., Abate, S., Huka, G.S.,& Dawe, S.M. 2011.Financing of highereducation in Africa: A case of Ethiopiapublic universities cost containmentmeasures, International ResearchJournals, 2(4):1089-1093.

World Bank. (2010). Ethiopia CountryProcurement Assessment Report, AddisAbaba, (2nd ed.). Boston: McGraw Hill.

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Self-Driven Consumer Diagnostics Businesses inNational Capital Region (NCR), India

Vaishali AgarwalAssociate Professor, Indus Business Academy, Bangalore

[email protected]

Teena Saharan

Associate Professor, UPES, Dehradun

A V Ramana Acharyulu,Professor, Indus Business Academy, Bangalore

[email protected]

ABSTRACT

The Indian Diagnostics services market is estimated around $ 3.5 billion. Themarket has witnessed a considerable growth rate since 2012 ($ 2.5 billion) and itis estimated to reach $ 5.5 billion by 2020. The diagnostic and pathological testmarket has a potential to grow at a CAGR of more than 17%. Currently, more than1,00,000 diagnostic and pathology labs including specialized laboratories,laboratories in hospitals and nursing homes, and small testing centres are operatingin India. Of these, only about 10 – 12 percent of the market is organized andcomposed of laboratories with proper accreditation3. The research reveals thatthere is an ongoing shift from unorganized and non-branded providers to theorganized and branded diagnostic chains that provide higher quality and reliableservices. The present paper attempts to offer insights into the Indian market withspecial reference to Delhi/ NCR (Noida, Faridabad, and Gurgaon), with regardto: current players in the diagnostics market, the consumer decision making processfor selecting diagnostic facilities, and an understanding of consumer preferencesand motivators and/or influencers of brand choice.

Key Words: consumer diagnostics, self-driven/ preventive diagnostics, consumerperception, consumer behaviour and decision making process.

Introduction:

The Indian Diagnostic services market isestimated around $ 3.5 billion. The markethas witnessed a considerable growth ratesince 2012 ($ 2.5 billion) and it is estimated

to reach $ 5.5 billion by 2020. Thediagnostic and pathological test market hasa potential to grow at a CAGR of morethan 17%.




to increase in demand driven by risingdisposable income, increase in lifestylediseases, rising consumer awareness andchanging regulatory landscape.

It is must for the companies operating inthe diagnostic business to understand theIndian consumer behavior before makingexpansion strategies in this market. Thepresent paper is based on a consumerresearch conducted to understand theIndian market with special reference toDelhi/ NCR (Noida, Faridabad, andGurgaon). It is expected that the outcomesof this consumer behavior research willoffer insights regarding current players inthe diagnostics market, the consumerdecision making process for selectingdiagnostic facilities, an understanding ofconsumer preferences and motivators and/or influencers of brand choice. This willgive the market players an understandingof the approaches adopted by variousplayers in seeking a sustainable entry intothe business.

It is an accepted premise by the industrythat a company must understand thedomestic consumer behavior so as tosuccessfully enter into the Indian consumerdiagnostic business and also to makeconcerted efforts to pursue either growthor diversification strategies in the industry;and to meet this objective, many acompany invests in conducting highlyfocused consumer research andunderstanding the multiple dimensions ofthe consumer diagnostics business in India.When such as study focuses on a marketlike Delhi/ NCR (Noida, Faridabad,

Currently, more than 1,00,000 diagnosticand pathology labs including specializedlaboratories, laboratories in hospitals andnursing homes, and small testing centersare operating in India (70 per cent offerpathology services and 30 percentprovide radiology and imaging such asMRI, CT scan X-ray and ultrasoundscan). Test volumes range from 50 to 100samples per day for one laboratory locatedin a small town to several thousand samplesper day for a major laboratory in a city.Currently, only about 10 – 12 percent ofthe market is organized and composed oflaboratories with proper accreditation3.

The research reveals that there is anongoing shift from unorganized and non-branded providers to the organized andbranded diagnostic chains that providehigher quality and reliable services. In thefuture, this market is expected to becomemore organized and consolidated as thegovernment exerts greater control and assmall and independent laboratoriesbecome franchisees in the hub and spokemodel of the larger players. The healthcareand diagnostics services are experiencingthe emergence of both domestic andinternational players in developinginnovative diagnostic tests and advancedhealthcare information technology solutionsthat help improve patient care. Thisindustry is driven by prescription baseddiagnostics and the focus on self-drivenand preventive diagnostics is meager. TheIndian Diagnostic Industry has ignored thesubstantial opportunities that are availablein consumer diagnostic sector due

47

Gurgaon), one can hope to gain invaluableinsights into the market, market players andconsumers as well, that can offer insightsinto the pan-India market as well. As such,the study done and the results obtained, isseen as a critical input in understanding thediagnostic services industry and itsconstituent players, and consumerpreferences and motivators or influencersof brand choice.

Research Methodology :

The major objective of this research wasto help one of the major diagnostic serviceproviders of Delhi and NCR region inmarketing their services directly toconsumers without being overly reliant onprescription based business. Theresearchers, working as independentconsultants, identified following researchquestions for the purpose of study:

• Who are the major players operatingin Indian diagnostic market?

• Who is the target audience for self-driven consumer diagnostics in Delhi-NCR?

• What is the consumption pattern –frequency, type of tests etc. acrossdifferent types of services?

• How these services are used and whatare the key needs that consumers seekto address through their self-drivenpurchase?

• What is the decision making processfor the selection of diagnostic serviceprovider and what all factors influencetheir decision?

The researchers made use of exploratoryresearch design and data was collectedwith the help of structured interview. Astructured interview survey design wasused because it was an efficient way ofcollecting varied amount of informationfrom the target audience pertaining to thediagnostic and pathology lab preference,motivators and media influencers. Thesurvey design used both open ended andclosed ended questions related to researchobjectives. The field survey wasconducted during 2016-17 and resultspresented early 2018.

The sample design selected for the surveywas agreed upon mutually between theproject assigned client and researchers, tosuit and meet the budgetary and time lineslimitations provided, without any bias eithertowards or against the funding client (theclient organization, Quest DiagnosticsServices, who assigned the study to theresearchers desired that the study is donewithout any bias towards either thecompany or to the industry, so as to ensurethe research and the findings are bias-free)Eligible respondents were adults betweenthe ages of 25 to 50. The selection ofsurvey respondents was done byconvenience sampling. The survey wasconducted in all regions of Delhi andNCR. A total of 832 respondents wereinterviewed with 100 percent responserate towards all questions of thequestionnaire. The demographiccomposition of the sample was as given inTable 1.

Self-Driven Consumer Diagnostics Businesses in National Capital....


Composition of Sample (n = 832) Location Age Gender* Income (in Lacs) Gurgaon: 135 Faridabad: 98 Noida: 125 East Delhi: 150 West Delhi: 125 North Delhi: 74 South Delhi: 125

25-30: 324 31-35: 200 36-40: 110 41-45: 90 46-50: 77 Above 50: 31

Male: 633 Female: 199

(i) < than 2.5:177 (ii) 2.5 – 5: 340 5 – 10: 248 10 & above: 67

Table 1: Sample Composition

(Source: Researchers’ data)*According to data the ratio of Female to Male working population of India is 1:3. Thus theratio of Female to Male is 1:3 (Approx.).

Major Players

Geographical Coverage

Business Model Network Remarks

SRL Diagnostics

Nationwide Hub & Spokes (Franchise model of sample collection)

4000 collection centers, 246 network labs and 11 large reference labs and 4 centers of excellence

Invested about INR 450 crore and open 45 new laboratories across India in 2014-154

Metropolis Nationwide Hub & Spokes (Franchise model of sample collection)

125 network labs, app. 500 collection centers

Looking to invest $ 8 million to add 35 more labs and 200 more collection centers5

Dr LalPath Labs

Nationwide Hub & Spokes (Franchise model of sample collection)

160 Clinical Labs and 1300 Patient Service Centers

Growing at a CAGR of 25%6*

Thyrocare Nationwide Hub & Spokes (Franchise model of sample collection)

Centralized set-up in Mumbai and 1200 collection centers

Planning to have a Laboratory in every Indian City with an Airport7

Table 2: Major Players

Tables and Charts

*Dr Lal PathLabs enjoy highest brand awareness and share of mind. It is growing at a rate muchabove the industry growth rate due to its consumer marketing strategies.

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The data analysis was done using simpledescriptive statistics (Graphs & Charts)with the help of using MS Excel.

Literature review:

Consumer diagnostics industry in India:According to CII-KPMG Report (2013),the Indian diagnostic services market isestimated around $ 3.5 billion. As perDiagnostic Testing & Technology Report(2013), the market has witnessed aconsiderable growth rate since 2012 at US$ 2.5 billion, and it is estimated to reach

US $ 5.5 billion by 2020. The diagnosticand pathological test market has a potentialto grow at a CAGR of more than 17%.

Currently, more than 1,00,000 diagnosticand pathology labs including specializedlaboratories, laboratories in hospitals andnursing homes, and small testing centersare operating in India (70 per cent:pathology services and 30%provide radiology and imaging such asMRI, CT scan X-ray and ultrasound).Test volumes range from 50 to 100

Chart 1: Frequently taken Diagnostic Tests

Chart 2: Prescription Vs Preventive Testing



samples per day for one laboratory locatedin a small town to several thousand samplesper day for a major laboratory. In a reportfrom Indian Diagnostic Service MarketOutlook 2015, only about 10 - 12% ofthe market is organized and composed oflaboratories with proper accreditation.

In the study conducted by Sahoo (2013)it was observed that the diagnosticsindustry was around 2.5 per cent of theoverall healthcare industry and it comprisesof around 40,000 independent path labsand more than 60,000 referral labscollection centers. Referral labs mainlyusing a high class logistics system to obtaintheir marketing and face value in the marketand they are successful doing these withthe accurate test results.

Consumer behaviour: According to Hoyerand Maclnnis (2007), ‘Consumerbehaviour reflects the totality ofconsumers’ decisions with respect to theacquisition, consumption, and dispositionof goods, services, activities and ideas by(human) decision-making units over time.’

The complex and unpredictable behaviorof consumers, and highly competitivemarketing environment has made itmandatory to understand the factorsgoverning consumer behavior towardsdiagnostics centers for the long-runexistence of a company (Sahoo, 2013).

In a survey report of Zhang, Chong andWang (2014) on community pharmaciesin Macau, it was indicated that that localresidents take price level as the mostimportant factor in choosing community

pharmacy and pay more attention to theproduct efficacy and quality in choosingproducts.

Rosenstock (1966) designed a conceptualmodel known as Health Belief modeldesigned to explain demand for bothdiagnostic and preventive (self-monitoring)visits to the doctors and hospitals.Rosenstock proposed a relationshipbetween the stage of readiness andintensity of stimuli in terms ofcommunication i.e. if readiness is high evena weak stimuli can work and in case oflow readiness a strong stimuli is required.We can interpret this with respect todiagnostic services as well. If a consumeris identified with a disease the prescriptionof tests by a doctor itself works. On theother hand for developing self-monitoringor preventive diagnostic market, thecompanies need to improve the readinesslevel of the consumers towards lifestylediseases or they need to use intensivestimuli in the form of communicationcampaigns.

Analysis and Findings: The key analysisbased on descriptive statistics is exhibitedin the charts below:

Major Players: The organized diagnosticmarket is equally occupied by majordomestic and international participants inIndia. The desk research revealed that onlya few players have a strong network oflabs and collection centers in Delhi NCR.Thus for this survey, brands considered inorganized diagnostic industry are –Metropolis Health Services, SRL

51

Laboratories, Dr LalPath Labs, QuestDiagnostics and Thyrocare. These playersare chosen on the basis of their collectioncenters and network of labs operating inthis region. Table 2 offers these details.

Frequently taken Diagnostic Tests: Ashift in the disease profile can be noticedfrom past decade. Previously,communicable diseases were the biggesthealth threat. Now, with adoption of someof the negative influences of modernlifestyles, chronic diseases includingdiabetes, heart disease, and cancer aregrowing in prevalence—all of whichrequire diagnostic testing.

The data collected from Delhi NCRsubstantiates above mentioned reasons.24% of the respondents have taken thyroidand the same number have undergonecomplete blood count test. 19% of therespondent underwent diabetic screen testand almost a similar number i.e. 18% ofrespondents had taken liver profile (Chart1). Most of these tests are routine in nature.

Prescription Vs Preventive Testing:The data further reveals the prime reasons/conditions which compel people toundergo diagnostic testing. Though theprescription based testing (49%) is themajor reason while self-driven monitoring(33%) is also picking up pace in the age-groups of 25-30 and 31-35 years as givenin (Chart 2). Thus, the opportunity forpreventive diagnostics exists in this regionand company has an opportunity todevelop its market in this category.

Frequent Health Check-ups:Additionally, majority of the respondents(56%) take diagnostic tests once a yearand another 23% undergo tests half-yearly.The percentage of monthly (6%) andquarterly (15%) testing is comparativelylow (Chart 3). Thus, the company candevise annual and half-yearly packages forits regular customers. At the same time thecompany can also educate it’s customersregarding the need and merits of frequenthealth check-ups.

Chart 3: Frequent Health Check-ups



Brand awareness for Diagnostic Labs:When the respondents were asked abouttheir awareness for a particular brand andits associated characteristic, it was foundthat Dr LalPath enjoy, the leading positionwith highest awareness (52%). SRL stoodat number two position with 22% brandawareness rate. Quest Diagnostic lags farbehind with just 5% brand awareness(Chart 4). This may suggest that the clientneeds to explore appropriate consumermarketing measures to build further uponits brand awareness and brand recallamong the consumers.

Key brand associations acrossBrands: Key factor of brand associationfor all the labs considered has been‘popularity’. Substantial number ofrespondents (42%) associate Dr Lal with‘being popular’ (Chart 5). This brandassociation of being popular can beattributed to the huge advertising spenddone by Dr Lal.

An equal number of respondents perceivedSRL laboratories as ‘being trustworthy andproviding quality services’ (26% each);Metropolis is perceived high on ‘qualityof service’ with 33% favorability. Apart

Chart 4: Brand awareness for Diagnostic Labs

Chart 5: Key brand associations across Brands

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from other factors, Thyrocare is perceivedslightly high on ‘being economical’ and‘being customer friendly’ amongst otherswith 14% and 11 % respectively. Quest isperceived as ‘being trustworthy’ with 27%responses.

Preferred Diagnostic Centers: Theresearch suggests that amongst the existingbranded/organized players, Dr Lal Path isthe most preferred diagnostic center by therespondents. The reason of preference canbe linked to its popularity (Chart 6).Significant number of respondentspreferred local/unorganized players fortheir diagnosis.

Recommendation and source ofrecommendation for choosingdiagnostic center: The possible reasonfor the preference could be attributed torecommendation from different sources(Chart 6). Further, when asked for sourceof recommendation, majority of therespondents (79%) with their doctor’srecommendation (Chart 7-a, 7-b).

Motivators for Diagnostics CenterPreference: The research furtherinvestigated the motivators for preferenceof diagnostics centers on following grounds-Source of communication, Convenience,Quality of Service and Price.

Chart 6: Preferred Diagnostic Centers

Chart 7: Motivators for Diagnostics Center Preference

Chart 7-A Chart 7-B



Source of Communication: Withreference to source of communication, itwas found that the Word-of-mouth(WOM) was the most preferred sourceof communication, followed by televisionand print ads (Chart 8-a).

Convenience: Due to the busy schedulesand hectic lifestyles, nearby collectioncenter and timely sample collection weregiven major importance by therespondents (Chart 8-b).

Quality of Service: The anticipatedfactors of the diagnostics industry areaccuracy of report, hygiene of thediagnostics lab followed by expertise. Notsurprisingly, the research also substantiatesthe same (Chart 8-c).

Price: The growing awareness of healthrisks and preventive measures calls forvalue packages (39%), whereinrespondents can go for multiple diagnosticstests at discounted prices. Another 38%

Chart 7-C Chart 7-D

Chart 8: Consumer Willingness to Shift

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of respondents shared that they will preferflat discounts. The company also has anopportunity to capitalize upon its loyalcustomers by providing them loyaltydiscounts (Chart 8-d).

Consumer Willingness to Shift: Despitehaving a preferred diagnostics center, morethan half of the respondents (53%) werewilling to shift their preferred diagnosticslab. No particular diagnostics centerenjoys extra-ordinary loyalty as each ofthem had around half of their consumerswilling to shift (Chart 9). It was interestingto note that the users of the most preferredDr LalPath Lab were also ready to shift(app. 50%) if provided with better choice.After analyzing the stated reasons to shift,it was found that consumers are lookingfor:1. Better Customer Service2. Low Prices3. Accuracy4. Better Deals/Offers/Discounts5. Convenience

This also provides an insight to thecompany that it can either capitalize onindustry hygiene factors such as accuracyand economy or can craft a niche for itselfby differentiating on better and friendliercustomer service. However, this requiresto be explored further.

Another 47% of the respondents were notwilling to shift from their current preferredlab on account of:1. Loyalty2. Satisfaction

Key Consumer Expectations from aDiagnostics Lab: When asked, what ismore important from a diagnostics lab, asignificant number (62%) preferred homecollection over discount offers (Chart 10).This again may be attributed to a ‘money-rich’ and ‘time-poor’ orientation.

Impact of Advertisements: The researchalso explored the impact of advertising onconsumer decision making process withrespect to diagnostics services. Therespondents were asked to recall the adsthey have seen in the recent past, to sharethe information regarding the call to actionmostly used by them to collect informationand to know if ads motivate them to go fora test and how advertising influence, theirlab selection (Chart 11).

Advertisement Viewership & BrandRecall: A large majority (622) ofrespondents have seen the diagnostics labadvertisements in recent past and whenasked to recall the brand were able to doso. As indicated earlier, Dr Lal benefitsfrom the highest mindshare followed bySRL (Chart 12). It’s quite possible thatDr Lal Path Lab’s benefits from high topof mind brand recall without havingexpanded the level of resource requiredreaching this level of popularity.

Preferred call to action: Surprisingly,significant number (44%) of therespondents prefer to visit the address toknow more about the diagnostics centeradvertised (Chart 13). A good proportionof the respondents also prefer to either callthe number or visit the website.



• Almost half (46%) of the respondentsvisit a collection center or call for homecollection after a trigger generated fromthe advertisement.

• A large majority (71 %) of therespondents said that they weremotivated to get a diagnostics test doneafter seeing an advertisement orpromotion.

• Another half (45%) of the respondentsshared that they are guided byadvertisements while selecting lab.

Preferred Medium: When asked aboutthe media consumed by the respondents,it was found that being an audio-visualmedium; Television is obviously gainingmaximum attention (Chart 14). Givensmart phones and internet penetration,online medium is also a close second.

Recommendations and Conclusions:

• The Indian diagnostics market is poisedto grow at a CAGR of 17% & above.This opens the consumer market forbranded players. Further shift is noticedfrom unorganized/ non-brandeddiagnostics labs to organized/ brandedlabs. Thus, thus is the right time for thediagnostic companies to build self-driven diagnostic brands bycommunicating directly to end-users.

• Tests such as full-body wellness,thyroid, liver, CBC, Diabetic, lipid etc.tests are most frequently taken byrespondents as self-driven monitoring/preventive check-ups on annually andhalf-yearly basis. The respondents in

the age-group of 25-30 and 31-35 andin the income bracket of more than5lacs per annum are more inclinedtowards self-driven diagnostic tests.

• A large majority of the consumerspreferred a based on recommendationsand Doctor’s recommendations play animportant role. However, availability ofcollection centers and local promotionhas made Dr Lal Path Labs to enjoysignificant mindshare and brand recallamong consumers. This suggests thatthe companies aiming to gain a mindshare in self-driven diagnostics shoulddevelop a communication programdirected at consumers.

• The research revealed that television isthe most consumer media but diagnosticcompanies can also make use of radioand digital channels in reaching out totheir consumers.

References:

Anwesha Sahoo (2013). A short studyon the patients’ attitude towards Indiandiagnostics industry. International Journalof Advanced Scientific and TechnicalResearch, 4(3), 396-400

Chaudhary, D. (2014, October 30). A hitwith investors, Dr Lal PathLabs opts togo the IPO way. Forbes India. RetrievedSeptember 27, 2016, from

CII-KPMG, (2013) A Report on Excellencein Diagnostic Care, CII, New Delhi

Dhavan, A (2015), 2015 HealthcareOutlook India, Delloitte Touche Tomatsu,Bengaluru, 2015

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Hoyer, W.D. & MacInnis, D. (2007).Consumer Behavior. Houghton Mifflin.USA

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Opportunities and Challenges of Investment in Ethiopia:A case of North Shoa Zone of Amhara Regional State

Girmachew Kahsay *, Gashaw Belete

Lecturer, Debre Berhan University, Dept. of Accounting & Finance,College of Business and Economics, Ethiopia

*corresponding author: [email protected]

ABSTRACT

This study has examined the opportunities and challenges of investment in NorthShoa Zone of Amhara Regional state of Ethiopia. The study adopts a qualitativetype of research design. Specifically the study surveys 50 investment projectsconveniently (ten percent of the total population of more than 490 investmentprojects). Also out of the 27 districts found in North Shoa Zone, 8 districts (Weredas)were selected as a sample purposively. The findings of the study revealed thatNorth Shoa Zone is becoming one of the best investor destinations in Ethiopia ingeneral and in Amhara Region in particular. The main reason for this is that; theZone has so many investment opportunities in all sectors, favorable weathercondition, availability of industry zone in Debre Berhan town, nearness to thecapital of the country and port Djibouti, better bureaucracy, favorable investmentpolicy, supply of land free of tender for industry sector, better infrastructures,better supply of raw materials, nearness to the market, availability of labor,Customs duty payment exemption on capital goods and construction materials,Income tax exemption from two to seven years, etc. even though the aforementionedfactors attract investors to the Zone, there are also some challenges that hinderthe investment activities of existing and potential investors. These are; elongatedbureaucracy in some offices, lack of decision making capability by some officers,shortage of sufficient loan supply, contentious power interruption, shortage offoreign currency, unfair tax assessment, limited supply of qualified labor in somefields, road and transportation shortage in some districts, less governmentsupervision, incentive, and follow-up, shortage of raw-materials, lack of qualityon some raw materials supplied locally, limited market linkage.

1. Back Ground of the study

The notion that raising the investment rateis key to long run growth that has been atthe heart of growth. The strong associationbetween investment and long term growthperformance is a well-established empiricalfact (Kuznets, 1973). Investment

constitutes an important macroeconomiccomponent that matters for economicgrowth (Collier and Gunning, 1999).According to Barton (2005), definitionsof investment tend to be broad and open-ended, with a list of specific types of


59

covered investments which are indicativerather than definitive. Mertonson (2010)noted that, the term ‘Investment’ is typicallyambiguous. Parker (2010) notes that,Economists usually reserve the terminvestment for transactions that increasethe magnitude of real aggregate wealth inthe economy. This includes mainly thepurchase (or production) of new realdurable assets such as factories andmachines.

Many developing countries (LDCs)particularly in Sub Saharan African (SSA)have relied on private investment to solvetheir economic problems. Specifically;private investment increases employmentopportunities; attracts foreign investorsliving and working abroad to invest in thecountry and increases new technology inthe country.According to the Investment ProclamationNo. 769/2012, the investment objectivesof the Federal Democratic Republic ofEthiopia are designed to improve the livingstandards of the people of the countrythrough the realization of sustainableeconomic and social development. Tounderstand the implications for businessand investment opportunities of the changesin Ethiopia’s business landscape that theGTP promises, a closer look at sector leveldevelopments is required. Henok et al(2013) point out a number of key sectors,taking into account each sector’s role inthe Ethiopian economy, the factors drivinggrowth and development in the sector. Asto the researchers knowledge thechallenges and opportunities of investment

in North Shoa has not been investigatedin a scientific manner. Thus, the purposeof this study is to identify the challengesand opportunities of investment in NorthShoa zone.

1.1. Statement of the problem

Private investment is one of the majorcontributors to economic growth anddevelopment in both developed anddeveloping countries. This is becausethrough investment, new technology canbe adopted, employment opportunitiescan be created, incomes can grow andliving conditions of the people can improvethus, ultimately leading to alleviation ofpoverty (Matwanga, 2000).

A good investment climate providesopportunities and incentives for firms toinvest profitably, create jobs and expandoutput, thereby increasing privateinvestment and growth. That is why thebetter the investment climate the higher thelevels of private investment are likely tobe (World Bank, 2010; Simon, 2005).However, in the poorest developingcountries, businesses frequently operate ininvestment climates that undermine theirincentive to invest and grow. Ignacio andSunil (2011) highlighted seven investmentclimate constraints that affect the rate ofprivate investment and the survival andgrowth of firms which are elaborated inliterature review part:

To understand the implications for businessand investment opportunities of the changesin Ethiopia’s business landscape that theGTP promises, a closer look at sector level

Opportunities and Challenges of Investment in Ethiopia: A case of North Shoa...


developments is required. Henok et al(2013) point out a number of key sectors,taking into account each sector’s role inthe Ethiopian economy, the factors drivinggrowth and development in the sector. Asto the researchers knowledge thechallenges and opportunities of investmentin North Shoa has not been investigatedin a scientific manner. Thus, the purposeof this study is to identify the challengesand opportunities of investment in NorthShoa zone.Industry, agriculture, construction, tourism,and service are the major sectors ofinvestment that this study was focused toidentify the challenges and opportunities.This study also tried to study the challengesand opportunities of investment in theZone. There are 27 districts in North Shoazone. Among these, 5 are townadministrations and 22 are districtadministrations.Based on the 2014 data obtained fromNorth Shoa Zone investment Office, thetotal 584 investment projects that are foundin North Shoa zone which found at differentstages of completion. Some are fullyoperating, some are operating partially,others are at the preparation stages to startoperation, and several are still at the earlystage of construction. Therefore, this studyfocused to identify challenges facinginvestment projects that are found atdifferent levels of operation. In addition,this study tried to identify the opportunitiesavailable for potential private investors ingeneral at the Zone level and specificallyby district level.

1.2. Research Questions

The main research questions that this studyanswered were;1. What are the challenges and

opportunities of private investment inNorth Shoa zone in general?

2. What are the challenges of investmentin North Shoa zone that faces existingprivate investors?

3. What are the challenges of investmentin North Shoa zone that faced byexisting and potential private investors?

4. What are the opportunities ofinvestment in North Shoa zone in eachdistrict city administration of NorthShoa Zone?

5. What are the opportunities ofinvestment in North Shoa zone forexisting private investors?

6. What are the opportunities ofinvestment in North Shoa zone forpotential private investors?

1.3 Specific Objectives

1. To identify the challenges facing theexisting and potential private investors

2. To explore investment opportunities ineach district and City Administrationsfound in North Shoa Zone that couldattract existing and potential investors.

3. To study the investment opportunitiesavailable at the Zone level in general.

4. To study the investment opportunitiesavailable at the Zone at each district.

5. To improve the Zone’s investment flowby forwarding the results of the study

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and the recommendation to policymakers.

2. LITERATURE REVIEW

Investment is a crucial pre-requisite foreconomic growth of a given country, sinceit allows entrepreneurs to set economicactivity in action by bringing resourcestogether to produce goods and services,and making the growth process moresocially and geographically inclusive, whichexpands the opportunities for poor peopleto participate in and benefit from growth.

Therefore, every government ensures thatits policies promote investments andgrowth. Investment raises the productivecapacity of the economy and promotestechnological progress through use of newtechniques. A study of literature shows thatthere are mixed views on public and privateinvestments and the matter is not yetsettled. Some takes a positive view ofpublic investment and states that publicinvestment stimulates private sector activitythrough the provision of education,infrastructure, health etc and in this waycrowds in private investments. Othershowever argue that public investmentsactually crowd out private investment andhinder economic growth.

There are many types of investment. Tosimplify, one can start by drawing a linebetween public and private investments,depending on whether the source of theinvestment is the government or the privatesector. A distinction should be madebetween public entities that operate as stateentities and those that act on a commercial

basis, operating like any business andcompeting with private sector entities. Tosimplify a complex status, which differsacross controls, we will note here that theactivities of the commercial “public” entitiesare often regarded and treated as privateinvestment.

Private investment is one of the majorcontributors to economic growth anddevelopment in both developed anddeveloping countries. This is becausethrough investment, new technology canbe adopted, employment opportunitiescan be created, incomes can grow andliving conditions of the people can improvethus, ultimately leading to alleviation ofpoverty (Matwanga, 2000). The privatesector is the main engine of growth inmarket economies. It flourishes anddelivers sustained growth when a numberof factors combine to produce a conduciveenvironment for the private sector todevelop. Private investment is a decisivepre-requisite for economic growth becauseit allows entrepreneurs to set economicactivity in motion by bringing resourcestogether to produce goods and services.

A good investment climate providesopportunities and incentives for firms toinvest profitably, create jobs and expandoutput, thereby increasing privateinvestment and growth. The literature showsthat the better the investment climate the higherthe levels of private investment are likely to be(World Bank, 2010; Simon, 2005).

However, in the poorest developingcountries, businesses frequently operate in



investment climates that undermine theirincentive to invest and grow. Businessesseek to maximize the risk adjusted rate ofreturn to investment after tax. Investmentclimate constraints serve to depress thepotential rate of return on investment,increase risk and/or prevent theentrepreneur from capturing the returns onoffer. Nebil,et at (2010) states domesticprivate sector in Ethiopia is still at an earlystage of growth due to the legacy of acommand economy.

Although some larger private companiesare now run by professional managers andboards of directors, most privatebusinesses are family or individual owned.Private sector has remained small becauseof various obstacles impeding its growth.Medium and large scale private investmentas a share of GDP has declined fromaround 8% in 2004/05 to around 6% in2006/0714. While registered investmentsare relatively high, actual investment ownsare much lower, since many registeredinvestments fail to materialize or do so veryslowly (Nebil, et at, 2010).A good investment climate not onlybenefits the private sector, but also societyas a whole. It can play a significant role inreducing unemployment by enablingenterprises to grow and increase theirprofitability. Ignacio and Sunil (2011)highlighted seven investment climateconstraints that affect the rate of privateinvestment and the survival and growth offirms: these are Macro level instability,Crime and corruption, Business regulationand licensing, Institutions and the legal

system, Taxation, Financial Constraints,Infrastructure.

3. Methods and Measures

3.1 Research Design

The researchers used qualitative type ofresearch design since qualitative researchis a system of inquiry which seeks to builda holistic, largely narrative, description toinform the researchers understanding of asocial or cultural phenomenon. Under thisqualitative research design the researchersapplied Survey research a researchmethod involving the use of standardizedquestionnaires or interviews to collect dataabout people and their preferences,thoughts, and behaviors in a systematicmanner. Other units of analysis, such asgroups, organizations or dyads (pairs oforganizations, such as buyers and sellers),are also studied using surveys, such studiesoften use a specific person from each unitas a “key informant” or a “proxy” for thatunit if the informant chosen does haveadequate knowledge or has a unbiasedopinion about the phenomenon of interest(Anol, 2012).

3.2 Target Population

All investment projects in all Weredas andin all city administration as well as allWereda and town administrationinvestment office employees / 27 Weredasand 492 projects were taken aspopulations for this study.

3.3 Sample and Sampling Techniques

Because this research studies thechallenges of investment at zone level,

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samples were taken mostly from differentsectors and from 8 different sampleWeredas. Our sample size was 10 % (50Projects) of the total more than 500population. The reason why 10 % of thepopulation was taken as a sample is to getenough representatives to conclude for thewhole population. The other reason wasto reduce the effect of the possible non-response rate on the outcome of theresearch. Then researchers were selectedthese 50 sample projects from 8 districtsout of 27.

The researchers selected Sample districtsby using purposive sampling. Researchersused purposive sampling due to thedifferent numbers of investment projectsfound in each district and the geographicaldistribution of districts from the zonecapital, Debre Berhan. In addition, theresearchers selected participant investors/investment projects/ by using conveniencesampling technique.

3. 4 Sources of Data

The researchers used both Primary andsecondary data sources. Primary datawere collected using questionnaires (aresearch instrument consisting of a set ofquestions (items) intended to captureresponses from respondents in astandardized manner); interviews andobservations (involves systematicallyselecting, watching and recording theconstraints and opportunities of investingin the selected district) from officials of theinvestment office, investors andbeneficiaries. The researchers also used

Secondary data obtained from reviewingof documents from North Shoa Zoneinvestment office.

3.5 Data Collection Instrument

The necessary data were collected by usingquestionnaires, interviews andobservations as well as by reviewingsecondary data sources documents.Questionnaires were used to collect datafrom investment office employees ofsample districts and from investmentproject Managers or owners of sampleprojects. Both open-ended and closed-ended questionnaires were used. Interviewalso used to collect data from Investmentoffice officials of sample districts and fromManagers or supervisors or owners ofsample projects to crosscheck the data thatis collected by using questionnaire.Furthermore, observation of sampleprojects and districts were conducted bythe researchers to see the visible parts ofthe opportunities and challenges ofinvestment such as land, infrastructure,whether condition, topography, altitude,raw material availability, etc.

3.6 Data Analysis Procedure

Data in this research that were collectedby using questionnaire analyzed by usingtabulation while the data that werecollected by using interviews analyzedqualitatively . The emphasis is on the statedexperiences of the participants and on thestated meanings they attach to themselves,to other people, and to their environment.In addition, the data that was collected byusing observation and by reviewing



different secondary documents were alsoanalyzed qualitatively.4. Results and DiscussionTable 1: Sex of Respondents

1. sex of respondents

Male Female Total

# 41 9 50 % 82% 18% 100%

Table 1 reveals the age of the respondents.As it is revealed 82% of the respondentswere male respondents and the rest 18%were female respondents.

Based on Table 2, 4% of the respondentsage found to be in the range 18-25 years,38% in 25-35 years, 50% in 35-50 yearsand the rest 8% in more than 50 years old.

2. Age of Respondents

18-25 25-35 35-50 >50 Total # 2 19 25 4 50 % 4% 38% 50% 8% 100%

Table 2 : Age of the Respondents

Table 3: Respondents’ Sector of investment

3. Respondents' Sector

of Investment

Agriculture Industry Construction Service Tourism Total

# 4 8 14 4 20 50

% 8% 16% 28% 8% 40% 100%

As Table 3 depicts the majority of respondents 20(40%) were from tourism sector.The rest 28%, 16%, 8%, and 8% were from construction, industry agriculture andservice sector respectively.

Table 4: Investment Projects’ Stage of Implementation

4. At what level of implementation does your project found? # of respondents Percentage (%) Fully Starts operation 22 44% Partially starts operation 16 32% Implementation 5 10% Pre-implementation 7 14%

Total 50 100%

The study result in Table 4 revealed that44% of the respondents said that theirinvestment project started a full operation.Whereas 32% of the respondents repliedthat, their investment project started a

partial operation. Respondents who saidtheir investment projects at implementationstage were 10%, while the rest (14%) saidtheir projects were at pre-implementationstage.

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Table 5(a): The year in which investors acquire investment license & start implementation

Year # of resp.

%age Year # of resp.

%age

5. In which year do you obtain investment Permit?(E.C)

1995 2 4% 1996 2 4% 2001 7 14% 1997 4 8% 2002 2 4% 1998 7 14% 2003 4 8% 1999 2 4% 2004 4 8% 2000 14 26% 2005 2 4%

As table 5 reveals most projects (26%)acquired investment license during the year2000 e.c /by the time the countrycelebrated the Millennium year/. During theMillennium year the country in general andNorth Shoa Zone in particular attractedmany local, foreign and Diaspora investors.

14% of the respondents replied that theyacquired investment license in 1998 e.c,before the Millennium and the samepercentage of respondents replied that theyacquired license in 2001 e.c. the rest ofthe respondents acquired license in theyear 1995, 1996, 1999, 2002, and 2005.

Table 5 (b) : The year in which investors start project implementation /E.C/

6. In which year do you Start Implementing your Project? (E.C)

Year # %age Year # %age 1996 - - 2001 10 20% 1997 3 6% 2002 3 6% 1998 3 6% 2003 2 4% 1999 - - 2004 4 8% 2000 11 22% 2005 6 12%

2006 8 16%

Table 5 (b) discloses the year in whichinvestors started project implementationafter the acquisition of investment license.As it is seen above the majority of theprojects (22 & 20%) startedimplementation in the year 2000 & 2001e.c, during the millennium and immediately

one year after the millennium. This wasbecause most projects acquired license inthe millennium year, 2000 e.c. The rest ofthe respondents 16%, 12%, 8%, 6% (3x),and 4% started implementation the year2006, 2005, 2004, 2002, 1998, 1997,and 2003 e.c.

Years investors take before stating implementation.

Soon (0 year)

1 Year

2 Years

3 Years

4 Years

5 Years

6 Years

Total

Number of respondents

14 15 9 4 4 2 2 50

Percentage (%) 28% 30% 18% 8% 8% 4% 4% 100%

Table 6: Time taken by investors to start project implementation after license acquired



The information presented in the above table 6 is presented using the chart below.

As shown in the above figure & table 6,the majority of the respondents (30%)replied that it took them 1 year to startproject implementation after acquiring theinvestment license. The second highestnumber of investors (28%) started projectimplementation immediately in the year theyacquired the investment license. The thirdhighest number of respondents (18%)

took 2 years to start projectimplementation. In addition, some of therespondents took 3 years (8% of them)and 4 years (the same 8%). Lastly, few ofthem took 5 and 6 years 2% each.Graphically, it is presented below. Fromthese it is clear that investors didn’t startimplementation on time as they proposedon their project plan.

Table 7: Land Acquisition Process for Investment

7. How do you evaluate the time taken to Acquire land for your investment project?

Short Moderate Long Very long Total # 6 29 6 9 50 % 12% 58% 12% 18% 100%

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Table 7 shows 12% of the respondentsreplied that it took them a short time toacquire land for their investment projects,while the majority of them (58%) said thatit took them a moderate time. On theother hand, 12% of the respondentsresponded that it took them a long timeto acquire land for their investment and18% of them said it took them a very long

time. As respondents responded to theopen-ended part of the questionnaire,there were some problems they facedwhile trying to get land for theirinvestment. The first obstacle they facedwas elongated bureaucracy. Someconcerned officers and employeesshowed the lack of making decisions andtaking a long time to make a decision.

Table 8 : Investment License Acquisition Process

8. How do you evaluate the time taken to Get an investment permit?

Short Moderate Long Very long Total

# 29 15 4 2 50 % 58% 30% 8% 4% 100%

Table 8 shows the rank of the time it tookinvestors to acquire an investment license.In general, most of the respondents (58%)said that they acquired an investmentlicense in short time, while 30% of themsaid they acquired investment licenses in

moderate time. On the other hand, few ofthe respondents (8%) replied that theyacquired the investment license by longtime process and the rest very few of them(4%) said it took them a very long time toacquire an investment license.

Table 9: Loan Supply Process for investment by Financial Institutions

9. What problems you faced while trying to get a financial loan from financial Institutions? # % Unable to get enough amount of loan 19 38% Unable to get the loan in short time 22 44% Shortage collateral assets 9 18% Total 50 100%


Table 9 shows 38% of the respondentssaid that they didn’t get the requiredamount of loan from financial institutions.The majority of them (44%) said they didnot get the loan in short time, even though

they get the required amount. The rest ofthe respondents (18%) said that theyfaced a shortage of collateral assetsrequired to obtain the loan from financialinstitutions.

Table 10: Trade License Acquisition Process

10. Have you got trade license without any problem?

Yes No Total # 50 0 50 % 100% 0% 100%


Table 10 shows all of the respondents(100%) replied they acquired a tradelicense without any problem. This shows

that the office that provided or thatprocessed the trade license was able tosatisfy all its customers.

Table 11: Construction Permit Acquisition Process

11. Have you got construction permit Without any problem?

Yes No Total # 37 11 48 % 77% 33% 100%

As shown in Table 11, the majority of therespondents (77%) replied that they hadacquired construction permits for theirinvestment construction works without anyproblem. On the other hand, 33% of therespondents replied they had encountered

problems during the acquisition of theconstruction permit. There was a shortageof engineers in the offices that permitted theconstruction work. In addition, elongatedbureaucracy or repetitive appointments toget the permit were facing investors.

Table 12: Investment License Renewal Service

12. Do you renew your investment Permit without any problem?

Yes No Total # 36 14 50 % 72% 28% 100%

As Table 12 depicts the majority (72%)of the respondents replied that they didnot face problems during the renewal ofinvestment license. On the other hand,28% of the respondents replied that theyencountered problems during theinvestment license renewal process.The most serious problem investors

pointed out was that in case the deadlineof the renewal of the investment permitwas passed even by one day, it was notpossible to renew it, which forced theproject to be paused by one year. Thiswas creating many problems to theinvestment projects and to the employeesworked on the projects.

13. Have you got sufficient and qualified labor/man power/ locally?

I get sufficient

I get partially

I can’t get any

Total

# 16 24 9 49 % 32.7% 48.9% 18.4% 100%

Table 13: Qualified Labor Availability Locally

Regarding the availability of qualified laborlocally, Table 13 depicts that 32.7% of therespondents said they had gotten qualifiedlabor sufficiently from locally. The majorityof the respondents (48.9%) responded

that they had gotten qualified labormoderately from locally. On the otherhand, the rest of the respondents (18.4%)replied that they did not able to get therequired qualified labor locally.

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Most workers were working simply byexperience not by getting formal skilledtraining. Only a few numbers of skilledlabors were available locally.Specifically, skilled labor wasunavailable in the following areas;aluminum work, glass-work, ceramicwork, gypsum work, etc. Even in these

areas, any technical colleges oruniversities did not give training. Askinghigh wage and showing low interest ofworking were also witnessed fromworkers. In districts, Hotels andRestaurants employed waiters and otherworkers from Addis Ababa as theycould not found skilled waiters locally.

Table 14 : Electric Power Supply

14. How do you evaluate the amount of electric power you are getting for your project?

Sufficient Moderate Insufficient Total # 8 35 7 50 % 16% 70% 14% 100%

As Table 14 depicts, only a few of therespondents (16%) replied they weregetting electric power sufficiently and themajority of the respondents (70%) repliedthey were getting electric powermoderately. On the other hand, 14% ofthe respondents replied they were gettinginsufficient power for their investmentprojects.Most respondents pointed out that therewas a continuous electric powerinterruption. This was creating seriousproblems for the whole sector in generaland manufacturing in particular. This

extended power interruption was causingsome projects to extend theirimplementation period beyond their plan.Some said the shortage of transformers,caused the interruption. Even some saidthe problem was not only powerinterruption but also the power had lesspower when available. Furthermore, therewas a limitation on the distribution of powerto project sites on time due to low serviceprovided by the Ethiopian Electric Poweroffice. Especially, the Electric office tooka long time to install power transformersin the Industry Zones.

Table 15 : Water Supply and Sewerage Services

15. How do you evaluate the extent of water and sewerage services you are getting for your project?

Sufficient Moderate Insufficient Total # 35 9 5 49 % 71.4% 18.4% 10.2% 100%

Table 15 shows the respondent’s responseon water supply and sewerage services fortheir investment projects. As shown, themajority of the respondents (71.4%)replied that they were getting water supplyand sewerage services sufficiently. Some

of the respondents (18.4%) replied theywere getting water supply and sewerageservices moderately. Few (10.2%) of therespondents replied that the supply ofwater and sewerage services they weregetting is insufficient.



As shown in the above Table 16, 10.2%of the respondents replied that they weregetting a very satisfactorytelecommunication service, while themajority (28.6%) of them replied that theywere getting satisfactorytelecommunication service. In addition,24.5% the respondents said they weregetting moderate telecommunicationservice. On the other hand, the rest of therespondents, 14.3% and 22.4% repliedthat the telecommunication service theywere getting was unsatisfactory and veryunsatisfactory respectively.

Many time both mobile and line networksbecame out of service because of shortageof the network. In addition, there was ashortage of maintenance on short time fromthe Telecommunication office when the linetelephones got out of service. Poor internetconnection was also another problemobserved.

But, currently researchers have witnessedthat there is huge improvement in coverageand quality of telecommunication services

16. How do you rate the quality of telecommunication services you are getting?

Very satisfactory

Satisfactory Moderate Unsatisfactory Very unsatisfactory

Total

# 5 14 12 7 11 49 % 10.2% 28.6% 24.5% 14.3% 22.4% 100%

Table 16: Telecommunication Services

Sometimes the water became unavailabledue to accidental damages on water linesand due to power interruption. In somedistricts, sewerage/waste water servicewas not convenient. Hotels andRestaurants dispose the wastewater by

transporting a long distance by labor. Thismade their work more difficult. In somedistricts, the water itself was rarelyavailable because the water projects runby the government sometimes took manyyears ahead of time to be completed.

due the expansion projects done by Ethio-telecom.

Summary of Findings

Even though, most investment projects areconcentrated around and in Debre Berhantown, a significant number of investorshave also invested in different districts ofNorth Shoa zone. The main reason forthe arrival many investors to the Zone arethe nearness of the Zone to the capital thecountry Addis Ababa, availability of abetter infrastructure, nearness of the Zoneto port Djibouti, availability of conduciveinvestment opportunities and conduciveinvestment environment, attractiveinvestment policy, supply of land free oftender to the industry sector, attractiveincentives and governmentencouragement, attractive weather andenvironmental conditions, availability ofraw materials, availability of trained andtrainable manpower, well positioned tolocal and international market, etc. Ingeneral, at the zone level the investmentopportunities are available for investors in

71

respondents replied they acquired a tradelicense without any problem. This showsthat the office that provided or thatprocessed the trade license were able tosatisfy all its customers. In the process ofInvestment License Renewal Service, outof the total 50 respondents the majority36 (72%) of the respondents replied thatthey had not faced problems during therenewal of investment license.

As respondents replied regarding theavailability of qualified labor locally, 16(32.7%) of the 50 respondents said theyhad gotten qualified labor sufficiently fromlocally. The majority of the respondents 24(48.9%) responded that they had gottenqualified labor moderately from locally. Onthe other hand, the rest of the respondents(18.4%) replied that they did not able toget the required qualified labor locally. Thechallenge here was that most workers wereworking simply by experience not by gettingformal skilled training.

Electric Power Supply is the blood of anyinvestment projects. In this regard, only afew of the 50 respondents 8 (16%) repliedthey were getting electric powersufficiently and the majority of therespondents 35 (70%) replied they weregetting electric power moderately. On theother hand, 7 (14%) of the respondentsreplied they were getting insufficient powerfor their investment projects.

In some districts, sewerage/waste waterservice was not convenient. Hotels andRestaurants dispose the wastewater bytransporting a long distance by labor.

all sectors; agriculture, industry,construction, tourism, social sector &mining.

5. Conclusion

The number of investors coming to northShoa zone of Amhara regional state isincreasing time to time. Especially in recentyears (after 2000 e.c) more and moreinvestors actually make North Shoa theirinvestment destination.

Land is the most important thing for theany investment project. As per the analysisof the questionnaire, out of the total 50respondents, the majority of them 29(58%) said that it takes them a moderatetime to acquire land. The main problemsfacing investors regarding land areelongated bureaucracy, lack of decisionsand taking a long time to make a decisionby employees and officers, lack ofcollaboration among engineers or expertswho work on the process of land supply,and problem of clearing the land on timefrom other party ownership.

Acquisition of Investment License is thefirst thing that investors get before startingthe work. In this regard, most of therespondents 29 (58%) said that theyacquired an investment license in shorttime, while 30% of them said they acquiredinvestment licenses in moderate time.Some Investors faced elongatedbureaucracy in the offices to get aninvestment license.

In the process of Trade LicenseAcquisition, all 50 (100%) of the



Currently researchers have witnessed thatthere is huge improvement in coverage andquality of telecommunication services duethe expansion projects done by Ethio-telecom.

5.2 Recommendation

Based on the finding of the studyresearchers forwarded the followingrecommendations.

Shortening the Bureaucracy in to “ShortTime” to provide investors the followingServices as the current bureaucracy istaking investors a “Moderate time” toacquire.

• Land• Investment license• Loan

In addition, educational institutions haveto work together with the industries fortechnology transfer, experience &knowledge sharing. Furthermore, the localeducational institutions are required to trainthose works that are currently working inthe projects simply by experience withoutgetting a formal training. Likewise, theinvestors and the managers of theinvestment projects need much training inthe areas of management skill, accounting,computer, tax, etc. This will integrate theindustries and educational institutionstogether to achieve a greater goal ofdevelopment.Improve the Electric Power Supply toinvestors; the existing trend of powersupply is full of continuous interruption andblackouts. To improve this situation, it is

better enhance the supply of power andthe supply of Transformers.Expand the market linkages for the goodsproduced and for the services providedby the investorsImprove decision making capacity ofofficers found in some offices. In additionthe public sector and the private sectorhave to work in cooperation so as to solveproblems together and so as to workthings together.Investors that don not start implementingprojects as per their project plan have tostart implementation as per their plan.Doing this has a dual benefit both to theinvestors themselves and to the country ingeneral. Investors can skip the pricechange to material and raw materials andthe projects can create job opportunities,can fill market gap, can generate taxrevenue to the government, etc.As stated in the analysis part, the mostserious problem investors pointed out isthat in case the deadline of the renewal ofthe investment license is passed even byone day, it is not possible to renew it, whichforces the project to be paused by oneyear. Here researchers recommended thatinvestment activities should not be posedfor one year because of the deadline ispassed. Rather it is more advantageous torenew the license on punishment eventhough the deadline day is over.

Investors have to solve their financialincapability so that they should have to usedifferent financing mechanisms in additionto loan, and personal sources such as

73

creating joint partnership with foreign andlocal investors.

Investors should have to hire professionalsto manage their businesses. Or if theinvestors themselves are managing theirproject, they should be professionallytrained ones. Otherwise it is rare to seeeffectively profitable investment project.

Investors have to improve theinappropriate land management, illegalexpansion of land, illegal use of land foranother purpose, and the inefficientutilization of natural resources so as tomake their business profitable and to useresources economically. In additioninvestors have to increase the lower wagerate they are currently paying to workersand employees. Doing this will attractprofessional and will motivate workers forbetter production and better performance.

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Ingersoll, G. L., &Eberhard, D. (1999).Grants management skills keep fundedprojects on target. Nursing Economics, 17,131-141.

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growth and informality - cross-countryevidence. Policy Research Working PaperSeries. The World Bank.

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Ministry Of Agriculture (MoA). (2013).Agricultural investment opportunities inEthiopia

Nebil, K., Gezahegn, A., Hayat,Y.,(2010).Enabling the Private Sector toContribute to the Reduction of Urban YouthUnemployment in Ethiopia. Produced anddistributed by the Addis Ababa Chamberof Commerce and Sectoral Associationswith nantonal support from the SwedishAgency for International DevelopmentCooperation, Sida.

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77

ROLE AND FUTURE OF INDIAN MEDIA

S.N. MisraProfessor & Dean, School of Management,

Kalinga Institute of Industrial Technology, Deemed to be University,Bhubaneswar, Odisha, India, Pin-751024

[email protected] & [email protected]

Sanjaya Ku. GhadaiResearch Scholar, School of Management

KIIT, Deemed to be University, Bhubaneswar, Odisha, India, [email protected]

ABSTRACT

Media acts as the fourth arm of democracy to supplement the Supreme Court in itsrole as the watchdog of the Constitution. It also acts as a talisman of commonman’s quest for socio economic justice. Noam Chomsky was the first to highlighthow through several filters, consent is manufactured from media by the corporatehouses. The paper brings how in the free market economy of India, similar filtersare being used to promote the cause of nationalism, branding contrarianviewpoints as “anti national” and muzzling dissent. The contrasting report ofGlobal Hunger Index (GHI) and Ease of Doing Business brings out the dissonancebetween the growth story and human development achievements, as reflectedconsistently in low Human Development Index (HDI). The paper laments thatmajority of the media do not cover the underbelly of rural distress, which theSocio-Economic Caste Census (SECC) Report (2011) captures. It also brings outhow there is a harmony between social and economic indicators in China ascompared to India due to strong political will. Of particular concern is thedistressing situation of malnutrition of children as brought out by the RapidSurvey on Children (RSOC) report. One more area which is at the heart ofimpacting human development indices is the quality of primary education. Sadlypost RTE Act 2009, guaranteeing right to education, the Annual Status of EducationReports (ASER) bring out how in terms of basic infrastructure and learningoutcomes, there is acute shortfall as compared to the expected levels. The secondaryeducation also shows a lack of vocational skill amongst children in the age groupof (14-18) which is seriously impeding their employability. The paper stronglyrecommends that the press must play its role as an independent sentinel in ademocratic system to project public opinion against apathy and high handednessof the governing class over the governed. A free media with an enablingenvironment and political neutrality is a surefire guarantee against potentialfascist tendencies.

Keywords: GHI, HDI, SECC Report, RSOC Report, RTE Act, ASER




Introduction

Democracy rests on three pillars viz.separation of power, checks and balancesof its institutions and accountability of theelected representatives to the people atlarge. The Indian Constitution provides forsuch a scaffolding; with the Supreme Courtacting as a watchdog to protect its sublimecharacter to ensure fundamental rights ofequality, freedom and life to its citizens.The court has carefully constructed a “basicstructure doctrine”, in the KesavanandaBharati Case (1973), so that theParliamentary legislative power comesunder the scanner of judicial review. Thiswas reaffirmed in the Minerva Mills Case(1980). Another arm of democracy thathas emerged as a very powerful deterrenceagainst transgression of individual freedom,deprivation of socio economic justice, hasbeen media. As the fourth arm ofdemocracy, it has become the barometerof people’s pulse and talisman of commonman’s hope. Benito Mussolini, the highpriest of fascism, had observed“Democracy is a kingless regime infestedby many kings who are sometimes moreexclusive, tyrannical and destructive thanone, if he be a tyrant. It is the fear of beingexposed by the media before the publicthat most of the politicians keep themselvesunder control to some extent”. Given sucha pivotal role, media must play aresponsible and unbiased role in playingits part without being influenced by anyparticular political party. It should treateveryone equally. It can be a catalyst fordemocracy to flourish and kindle the

embers of socio-economic justice ofordinary Indians, pitted against powerfullobbies and vested interests.

Perception of Media

Despite media’s proclivity towardssensationalisation the notion of guardian ofmedia as public interest and as a conduitbetween the governors and governmentremain deeply ingrained. Edward S.Herman and Noam Chomsky in theirseminal book “Manufacturing Consent:The Political Economy of the Mass Media”(1985) lamented how US media throughdifferent filters perpetuate editorial bias.Prominent amongst these are ownershipand profit orientation of the media ownerand large subsidy and patronage given bythe government to media to promote theirideology and viewpoint. Chomskyobserves that till disintegration of USSR(1988), “Communism bashing” was theeditorial filter. It has now been supplantedby “war on terrorism”.This paper tries to analyze how (a) filtersoperate in present day market driven India(b) sectors and issues where Indian mediais paying scant attention and (c) the wayforward.

Filters in India for Media

With growing ascendency of Hindutvaideology, the predominant filter in Indianmedia is how to promote nationalism andbash up the so called “anti-nationals”.Debate is frowned upon and a contrarianview point is often met with hostility andeven with physical force by organizedlumpen elements, with the subtle support

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of the state. India’s ‘growth story’ isanother filter where the media underplaysour disconcerting picture in terms of humandevelopment indicators. The recent WorldEconomic Forum meeting at (Davos)witnessed how the entire media wasgalvanized to sell India as the investmentdestination, by touting improvement in easeof doing business and Moody’s rating ofbeing a stable economy. Such one sideddiscourse does not take note of our patheticrating in Global Hunger Index which hasdecreased from 97 to 100 as per reportreleased by International Food PolicyResearch Institute (IFPRI). This indextakes note of percentage ofundernourished population, child wastingand IMR. The media also does not bringout the serious hiatus that exists betweengrowth and the human development storythat is seriously imploding the core fabricof India from within. One such segment isthe Rural India where 75% of India’spopulation inhabits bedeviled by seriousdeprivations on several fronts.

The Rural India’s Story

The Indian media often fails to providenews coverage to this segment as P.Sainath brings out how agriculturalcorrespondents in journalism have nowcome extinct. The farmer suicide is just afootnote in discussion, without debating onthe underlying reasons that perpetuatesthem and how to bring to book thoseresponsible for such human tragedy andaccountability of the state.

The Socio-Economic Caste Census(SECC) Report (2011) documents thepalpable neglect that India’s ruralsector is presently undergoing inseveral areas.

Table 1 : Major All India Findings (Rural)

Parameter % of Households

Land less 56% Casual labour 81% Salaried jobs 9.7% Income Less than Rs.5000 74.5% Access to Kisan Cards 3.6% Illiterates 36%

Source: SECC Report 2011

It would be clear that the land reformmeasures have not made anysignificant dent in rural India. Theland ownership remains heavilyskewed. The promise of financialinclusion for the poor farmers throughKisan Credit Cards and promises ofimprovement in regular employmentopportunity remain illusory. Close to75% of rural population earn anincome which is below the statutoryminimum wage to an unskilled labour.The promise of doubling farm incomein the budget of 2016-17 hasremained as a rhetoric.

Growth, Development Disconnect

The growth development disconnectafter economic liberalization in 1991 canbe summed up as the following tablewould show.

Role and future of Indian Media


Figure 1 : Growth & Development Disconnect

Growth DevelopmentSource: Economic Survey

This clearly shows how the growth in GDP,savings and exports nearly two fold, situneasily with low level of schooling andthere is lack of concern for infant &maternal mortality. 46% of children sufferfrom malnutrition which is indeed mostdistressing despite having flagship

programmes like the ICDS. There is hardlyany serious writing in the media ordiscussion on these distressing trends.It would therefore be interesting tocompare how China has fared comparedto India in terms of growth anddevelopment after economic liberalisation.

Figure 2 : Socio Economic Indicators: India and China (2016)

Source: World Development Indicator 2017

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It is quite clear that China has fared muchbetter both in terms of growth anddevelopment compared to India. Mostimportantly its growth story is coterminouswith human development of particularconcern is plight of children in India interms of micronutrient intake.

A Rapid Survey of Children (RSOC)(2013-14), by the Unicef documents theplight of our underfed children as broughtout in the following table.

Table 2: Micro Nutrient Suppleme-nt ation (6 months-59 month)

Type Vitamin “A” Supply

Iron & Folic Acid

Male 44.8 13.1 Female 45.6 13.8 Hindu 46.5 14.0 Muslim 37.5 9.5 Christian 54.5 21.4 Scheduled Caste 43.4 12.3 Scheduled Tribe 46 15.4 Others 46.4 13.5

Source: RSOC Report, 2013-14

It would be seen that there is very littlevariation in the matter of receipt ofsupplements amongst males and females,which is very low. This has severeimplication on children being underweightand suffering from night blindness etc. TheChristian community seems to have anedge over other religious communities.There is hardly any discussion in the mediaon these aspects.The Plight of Primary Education

Post RTE Act, there is a significant increasein access to primary education as it hasbecome a fundamental right (Article 21A).There is also discernible reduction ininequality between gender, caste and classin terms of access as mandated by theMillennium Development Goal (MDG).Yet the surveys by Annual Status ofEducation Report (ASER) bring out thedeplorable condition in the primaryeducation in terms of impact in quality byschools run by government. Basicinfrastructure and quality outcomes as thefollowing tables would reveal are verydisconcerting.

Table 3: Trends in Enrolment in Primary Schools % in Rural India & Learning Outcome

Parameter 2010 2011 2012 2013 2014 2016 Enrolment in Government School 71.1 69.6 67.0 66.8 64.9 96 Enrolment in Private School 24.3 25.6 28.3 29.0 30.8 30.5 Standard 5 children can read standard 2 text 53.4 48.2 46.8 47 48.1 48.1 Standard 5 children can do 3/1 digit division 35.9 24.9 24.9 25.6 26.1 26.0

Source: ASER Reports

This clearly shows that enrolment inprimary schools is on the increase, whilethe learning outcomes show a pathetictrend, with very little improvement over theyears. There is also a tendency to gravitate

towards private schoolings from 24.3% to30.5%, as they provide students betterexposure to English and more seriousteacher attention. The infrastructure facilityalso presents a disquieting picture.



Table 4 : Infrastructure Facilities: Comparative PictureParameter All India Kerala Gujarat Odisha

2014 2016 2014 2016 2014 2016 2014 2016 Library Books Available 78.1 75.5 94.7 93.6 92.3 87.8 88.0 82.1 Drinking Water Available 75.6 74.1 83.0 80.5 87.0 84.6 81.6 77.7 Girls Toilet Available & Usable 55.7 61.9 80.2 78.8 81.4 81.1 53.0 65.8 Computer Available 19.6 20.0 89.8 89.0 81.3 75.2 14.1 15.5

Source: ASER Reports

Annual Status of Education Report(ASER 2017)

The latest report of ASER brings out thedisquieting position in regard to rural youthin the age group (14-18). Some of thedisquieting findings are (a) 78% areengaged in agricultural work, (b) only3.7% are availing of any long termvocational training, thereby weakeningtheir employability. There is a shortageof 30-40% faculty in colleges, syllabus isoutdated and the degrees given havenothing in sync with the industry

requirement. Discontinuance of students(50%) by the child attaining the age of18, lack of interest (34%) in studies arethe other concerns. Harsh Mander in hisbook “Looking Away: Inequality,Prejudice and Indifference in New India”documents how there is complete apathyof the rich and middle class to the plightof the marginalized. Some of the tell talefindings of the ASER report (2017)covering 30000 children, cutting acrossvillages of 24 states in India, is shows thefollowing trend.

Table 5 : Learning Outcome of Adults in Rural India

State Identify Ownership on the Map

Applying Discount %

Read English

Bihar 17 44.2 55.9 Gujarat 64.1 16.4 64.3 Karnataka 82.4 57.9 55 Kerala 94.7 84.5 94.9 Odisha 45.8 37.3 68.9 Tamila Nadu 58.8 37.6 74.6 Utter Pradesh 13.9 33.1 37.4 Punjab 32.7 58.1 82.5 All India 42 57.7 58.2

Source: ASER, 2017

The data is self explanatory of the low levelof learning by adults in the age group of14-18 in rural India. This is adverselyaffecting employability of these childrenwho enter into the workforce.

The Way Forward

There is a clear evidence that India, despiteits strong democratic credentials, has notensured simultaneous improvement in itsgrowth and development parameters. The

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reason for this is the political apathy aboutto the plight of the poor. The focus hasbeen to sub serve the interests of thecorporate sector. Media, as the fourth armof the democracy, instead of unmaskingapathy and unholy nexus between thegovernment and the big corporate houses,has developed either a cozy relationshipwith the government of the day byshowcasing the government viewpoint orlooking the other way, for fear of reprisal.Prof. Amartya Sen had brought out howmedia in a democracy can be a powerfulinstrument against possible death due tofamine. While most of the Indian mediacover only urban India, analysts like Prof.Jean Dreze, P. Sainath and Harsh Manderare like whiff of fresh air as they bring outthe angst of the poor and the marginalizedin the rural and urban landscapepoignantly. What disturbed Chomsky inthe 1990s about media in the USA, is beingrepeated in India when the media ownersand government are giving largesse in termsof advertisements etc. to ensure thenationalistic card is played ad nauseam.

Freedom of press is not specificallymentioned as part of the Right to Freedom19(1)(a), in Indian Constitution. This isunlike the USA where the Bill of Rightsintroduced in (1791) prohibits Congressto make any law which abridges“Freedom of the Press”. The SupremeCourt in India, has however, beenassiduously acting as a watchdog to ensurethat the rights of media are not undulytrampled upon as in the case of BennettColeman & Co. vs Union of India Case

(1972). The eminent jurist Joseph Storywrote “It depends on the present age, ifthe national constitution will descend onits children in its masculine majesty; orshorn of its responsibility, it will becomean idle mockery”. The prevailingenvironment of fear and fascist tendenciesseem to have emasculated the role andcharacter of Indian media. It must,however, come out of this morass and playits primordial role as a great lamppost todefend the pristine character of ourConstitution and preserve our secular andmulticultural character.

References

Annual Status of Education Report(ASER), 2010-2017. ASER Centre, NewDelhi

Dreze, J. & Sen, A. (2013). “AnUncertain Glory India and itsContradictions”. Penguin Books IndiaPvt. Ltd, Panchsheel Park, New Delhi

Economic Survey, 2016-2017,Government of India. Retrieved from http://indiabudget.nic.in/survey.asp

Herman, E. S. and Chomsky, N. (1985).“Manufacturing Consent: The PoliticalEconomy of the Mass Media” RHUKPublisher.

Human Development Report,2016.Human Development forEveryone. UNDP

Kesavananda Bharati ... vs State OfKerala And Anr on 24 April, 1973.Retrieved from https://indiankanoon.org/



doc/257876/ and Mody, Zia. (2013). 10Judgements That Changed India.Penguin India

Mander, H. (2015). “Looking Away-Inequality, Prejudice and Indifferencein New India”. Speaking Tiger Books.

Minerva Mills Ltd. & Ors vs Union OfIndia & Ors on 31 July, 1980. Retrievedfrom https://indiankanoon.org/doc/1939993/

Rapid Survey on Children (RSOC)2013-14. Retrieved from http://wcd.nic.in/acts/rapid-survey-children-rsoc-2013-14

Report on International Food PolicyResearch Institute (IFPRI). Retrievedfrom http://www.ifpri.org/

Report on World DevelopmentIndicators, 2017. Retrieved from https://openknowledge.worldbank.org/handle/10986/26447

Sainath, P. (2000). “Everybody Loves aGood Drought”. Penguin India

The Integrated Child DevelopmentServices (ICDS). Retrieved from http://icds-wcd.nic.in/icds/icds.aspx

85

Macroeconomic Variables and Indian Stock MarketReturn: A study

Bhaskar BiswasAsst. Prof. of Commerce

Raja Rammohun Roy Mahavidyalaya. Radhanagar. Hooghly, West [email protected]

Abstract

India ranks sixth largest economy in the world by gross domestic product (GDP). In2018 India’s economy became the world’s fastest growing major economysurpassing China. The stock market is mirror of the economy. There are so manymacroeconomic variables like inflation, interest rates, GDP, FII investment; pricesof crude oil, exchange rate of currency etc. can affect the return of the stock market.The aim of the research work is to measure the year wise change in FII investmentin equity, year wise change in Brent crude oil price, year wise change in the INR-USD exchange rate and year wise change in the return of market (NIFTY) and findout relation between change in macroeconomic variables and the return of theIndian stock market for a period of ten years from year 2009- year 2018. Collectedsecondary data are analysed by statistical measures like mean, median, standarddeviation, skewness, kurtosis, correlation matrix, multiple correlation and regression.It was found that Change in FII investment in equity and NIFTY return and Changein INR-USD exchange rate and Change in Crude oil price are positively related. AndChange in Crude oil price is negatively related with Change in FII investment inequity and NIFTY return.

Keywords: Exchange rate, Gross domestic product, Inflation, Standard deviation,Skewness.

Introduction

India is a developing country. Indianeconomy is a mixed economy wherepublic sector and private sector operatesside by side. India ranks sixth largesteconomy in the world by gross domesticproduct (GDP). In 2018 India’s economybecame the world’s fastest growing majoreconomy surpassing China. The long termgrowth prospective of the economy is very

positive due to its young population,corresponding low dependency ratio,vigorous saving and investment rates andgrowing assimilation with the globaleconomy. Indian stock market has becomethe most wanted investment destination forinvestors of all over the world especiallyfor the investors of the developedeconomy. As the stock market is mirrorof the economy so return of stock market




is correlated with various economic, socialand political factors of India and the world.There are so many macroeconomicvariables like inflation, interest rates, GDP,FII investment; prices of crude oil,exchange rate of currency etc. can affectthe return of the stock market. Thesefactors can be discussed in the followingway:

Inflation is the rate at which the generalprice level of goods and services isincreasing and consequently thepurchasing power of home currency isdecreasing. Deflation is the opposite ofinflation. Both inflation and deflation arenot desirable for healthy economy. Thecentral bank of country takes monetarymeasures to curb inflation and deflation.

Interest rate is generally fixed by the centralbank of the country. Interest rates arelending and deposit rates. There are reporate and reverse repo rate which aredetermined by the central bank. Repo rateis rate at which the central bank borrowsmoney to the other banks and reverse reporate is the rate at which the other banksborrow money to central bank.

Gross domestic product is themeasurement in money of the market valueof all the goods and services finallyproduced in a year or during a period ofthree months. GDP is considered as themost powerful indicator of growth anddevelopment of the economy of a country.Agriculture and its allied services, industryand services are three main contributorsto the GDP of India. Indian economy grew

at 8.2% year on year in the second half of2018.

Foreign Institutional Investors of a countryare institutions and hedge funds of outsidethe country where they are investing.Generally FII are long term investors andin India they have played vital role in thedevelopment of the stock market over adecade.

Bench mark crude or marker crude is acrude oil that serves as a reference pricefor buyers and sellers of crude oil. Thereare three benchmarks for crude oil viz,west texas intermediate (WTI), Brentcrude and Dubai crude.

Exchange rate is the price of one country’scurrency in terms of other country’scurrency. Domestic currency and foreigncurrency are the two factors fordetermining the exchange rates. Exchangerate of currency is a vital thing forexporters and importers of a country.

Literature Review:

Bilson et al.,(2001) tested whether localmacroeconomic variables (money, goodsprices and real activity) have explanatorypower over stock return of 20 exchangesof emerging markets for the period 1985-1997. The results indicated that theexchange rate variable was clearly the mostinfluential macroeconomic variables.

Mohammad and George (2008) examinedthe role of macroeconomic variables onthe movement of prices of stocks of GhanaStock exchange. They used databankstock index to show stock market and

87

inward foreign direct investment, Treasurybill rate (measuring interest rate), consumerprice index (measuring inflation), thecurrency exchange rate as macroeconomicvariables. They studied short and long termrelation between macroeconomic variablesand stock market.

Gazi and Hisham (2010) observed therelationship between trade surplus,foreign exchange reserves, money supply,oil prices and the return of Jordian stockmarket. They found a negativerelationship between crude oil and stockmarket return.

Kuwornu and Nautwi (2011) examinedthe relationship between Consumer priceindex (inflation rate), Exchange rate andTreasury bill rate and return of Ghana stockmarket. They have used monthly data fora period from January 1992 to December2008. As conclusion they found thatconsumer price index and market returnof Ghana stock exchange are positivelyrelated while exchange rate and treasurybill had a negative impact on the stockexchange return.

Khan and Zaman (2012) found therelationship between GDP, exports,consumer price index, money supplyM2, exchange rate, foreign directinvestment, oil prices and the stockprices of Karachi stock exchange.Results of the study showed that GDPand exchange rate positively affect stockprices while consumer price indexnegatively affects stock prices. Othermacroeconomic variables of considered

for study are insignificant to the changesin stock prices.

Objective of the study:

The objective of the research work is tomeasure the year wise change in FIIinvestment in equity, year wise change inBrent crude oil price, year wise change inthe INR-USD exchange rate and year wisechange in the return of market (NIFTY)and find out relation between change inmacroeconomic variables and the returnof the Indian stock market for a period often years from year 2009- year 2018.

Research Methodology:

a)Selection and collection of data: Thepresent has used secondary data collectedfrom nseindia.com, nsdl.com,tradingeconomics.com. Here only threemacroeconomic variables viz., crude oilprice, INR-USD exchange rate, FIIinvestment in equity have been selected forthe study. Monthly data on crude oil price,INR-USD exchange rate, FII investmentin equity and return of NIFTY has beencollected, then year wise change havebeen calculated and the data has beencollected for ten years from year 2009 toyear 2018.

Analysis of data: For analyzing thecollected secondary data statisticalmeasures like mean, median, standarddeviation, skewness, kurtosis, correlationmatrix, multiple correlation and regressionhave been used to find out relationbetween macroeconomic variables and thereturn in NIFTY for ten years.

Macroeconomic Variables and Indian Stock Market Return: A study


Analysis and Interpretation:

Table 1 : Descriptive Statistics

Inference: The above table showed thedescriptive statistics of macroeconomicvariables and change in NIFTY return fora period of ten years from 2009-2018.The mean return of Nifty was 18.17 andmean of the Change in FII investment inequity is 493.69, Change in Crude oil pricewas 13.7 and mean of Change in INR-USD exchange rate 4.91. The standarddeviation of Change in FII investment inequity is1528.55, there was wide rangeof fluctuation in the FII investment frommean change (range of Change in FII

investment in equity is 4994.44). Thestandard deviation of Change in INR-USDexchange rate is 8.41 there was narrowrange of fluctuation in the Change in INR-USD exchange rate. NIFTY return andChange in FII investment in equity wereplaty kurtic and Change in Crude oil price,Change in INR-USD exchange rate waslepto kurtic. NIFTY return and Change inFII investment in equity were positivelyskewed and Change in Crude oil price,Change in INR-USD exchange rate wasnegatively skewed.

NIFTY return (%)

Change in FII investment in equity (%)

Change in Crude oil price (%)

Change in INR-USD exchange rate (%)

Mean 18.17 493.69 1.37 4.91 Median 12.50 1.75 -1.22 4.19 Standard deviation

28.63 1528.55 29.71 8.41

Kurtosis 3.36 9.82 -1.09 -0.595 Skewness 1.43 3.12 -0.30 -0.06 Range 106 4994.44 87 26.06 Minimum -20 -164.44 -47 -8.36 Maximum 86 4830 40 17.7 Sum 181.69 4936.85 13.71 49.14 Count 10 10 10 10

Source: calculated

Table 2: Correlation matrix

NIFTY return (%)

Change in FII investment in

equity (%)

Change in Crude oil price (%)

Change in INR-USD exchange

rate (%) NIFTY return (%) 1 Change in FII investment in equity (%) 0.198 1 Change in Crude oil price (%) -0.376 -0.036 1 Change in INR-USD exchange rate (%) -0.776 -0.060 0.446 1

Source: Calculated

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Inference: Table 2 showed correlationmatrix between macroeconomic variablesand change in NIFTY return for a periodof ten years from 2009-2018. It wasfound that Change in FII investment inequity and NIFTY return and Change inINR-USD exchange rate and Change inCrude oil price are positively related. Anincrease in FII investment in equity and

Change in INR-USD exchange rate willlead to an increase in NIFTY return andChange in Crude oil price and vice versa.And Change in Crude oil price is negativelyrelated with Change in FII investment inequity and NIFTY return. Also the Changein INR-USD exchange rate is alsonegatively related with Change in FIIinvestment in equity and NIFTY return.

R R2 F β0 β1 β2 β3 t value t value t value t value

Nifty return

0.79 0.63 3.36 **3.45 0.01 0.61 0.57 -0.13 0.90 ** -2.69

0.04

#Significant at 5% level table value(k,n-k-1)i.e.(3,6) degrees of freedom at 5% level is 4.76

* significant at 10% level ** significant at 5% level ***significant at 1% level Table value of t with (n-k-1) i.e. 6 degrees of freedom at 10%, 5%, 1% levels are 1.943, 2.447 and 3.707 respectively.

Table 3 : Multiple correlations and multiple regressions

Multiple correlation and multiple regression of NIFTY return on Change in FII investment inequity, Change in Crude oil price, Change in INR-USD exchange rate [Regression equationNITFY=â

0+â

1. FII investment in equity + â

2. Crude oil price + â

3. INR-USD Exchange rate]

Source: Calculated

Inference: The table 3 showed multiplecorrelations and multiple regression ofNIFTY return on Change in FIIinvestment in equity, Change in Crude oilprice, Change in INR-USD exchange rate.Where NIFTY return is dependentvariable and Change in FII investment inequity, Change in Crude oil price, Changein INR-USD exchange rate areindependent variables. The multiplecorrelation co-efficient is 3.36 which wasnot statistically significant as it was less than4.76. The co-efficient of multipleregressions between FII investment,change in crude oil price and nifty returnwere not statistically significant. But the co-

efficient of multiple regressions betweenChange in INR-USD exchange rate andnifty return was negative which wasstatistically significant at 5% level ofsignificance. So it can be said that increasein INR-USD exchange rate would lead toa fall or decrease in the stock market.

Conclusion:

It may be said from the above study thatChange in FII investment in equity andNIFTY return and Change in INR-USDexchange rate and Change in Crude oilprice are positively related. An increase inFII investment in equity and Change inINR-USD exchange rate will lead to an

Macroeconomic Variables and Indian Stock Market Return: A study


increase in NIFTY return and Change inCrude oil price and vice versa. AndChange in Crude oil price is negativelyrelated with Change in FII investment inequity and NIFTY return. Also the Changein INR-USD exchange rate is alsonegatively related with Change in FIIinvestment in equity and NIFTY return.This means that an increase in Change inCrude oil price would lead to a decreasein Change in FII investment in equity. Theco-efficient of multiple regressionsbetween FII investment, change in crudeoil price and nifty return were notstatistically significant. But the co-efficientof multiple regressions between Changein INR-USD exchange rate and nifty returnwas negative which was statisticallysignificant at 5% level of significance. Soit can be said that increase in INR-USDexchange rate would lead to a fall ordecrease in the stock market.

Limitation of the study:

The study had used secondary data andthe study was based on the availability ofthe data. The study has the followinglimitations:

1) The study was limited to ten yearsperiod from 2009 to 2018. Moreyears may be taken into consideration.

2) Three macroeconomic variables hadbeen considered for the study. Morevariables may be considered.

3) Limited number of statistical methodsand techniques had been applied.

References:

Bilson, C.M., Brailford, T.J., & Hooper,V.J.(2001). Selecting MacroeconomicVariables as Explanatory Factors ofEmerging Stock Market Returns, Pacific-Basin Finance Journal, 9(4), pp 401-426.

Khan, Muhammad Nauman., Zaman,Sharif (2012). Impact of MacroeconomicVariables on stock prices: EmpiricalEvidence from Karachi Stock ExchangePakistan, Business, Economics, FinancialSciences and Management, Advances inIntelligent and Soft Computing, vol. 143,pp 227-233.

Kuwornu, K.M.John., Nanturi, OwusuVictor (2011). Macroeconomic Variablesand Stock Market Returns: FullInformation Maximum LikelihoodEstimation, Research Journal of Financeand Accounting , vol. 2, no.4.

Gazi, Mainul Hasan and Hisham, Al Refai(2010). Can Macroeconomic factorsexplain equity returns in the long run? Thecase of Jordan. Draft 4-15/5/2010.School of Economics and Finance,University of Western Sydney, Australia.

Mohammad, A.A., George, T. (2008). DoMacroeconomic Variables play any rolein the stock market in Ghana, MPRApaper No. 9368, pp20-32

Address: 74/21/1, Pritinagar, MulajoreRoad PO: Jagatdal, 24 Paraganas (N).West Bengal. 743125

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Refinement of Strategic Action in Working Firm:An Instrumental Framework

Ajit ShrivastavaResearch scholar

Institute of Management Development & Research, [email protected]

ABSTRACT

This article presents a proposal of a conceptual model for process management ofdeploying actions for improvement by business processes. From the expectation ofthe customers and strategic decisions of the company, the model proposes a systemof unfolding and prioritization of improvement actions that most can contributeto the achievement of the strategic objectives. The proposal presented integratesseveral managerial concepts and practices such as and benchmarking, andsuggests the use of QFD matrices as an instrument of the deployment process andprioritization of improvements. The presentation of the proposal and its detailingare preceded by an introductory discussion on manufacturing strategy andimprovement management. Finally, some considerations are made about benefitsand limitations of the proposal.

1. Introduction

The increasing global competition that manyindustrial sectors are facing in recentdecades, coupled with rapid technologicalchanges and the proliferation of productvarieties, has created a new scenario inwhich industries, in order to remaincompetitive, are forced to continuallyimplement new technologies and bestmanagement practices. In this sense,several theoretical works have beenpublished, emphasizing the importance ofthe strategic management of themanufacturing function and themanagement of the quality with the aim ofachieving competitive advantage.

Regarding aspects intrinsic to the business(without considering aspects related to theeconomic and social environment in whichthe company is inserted), thecompetitiveness of a company will beconditioned to its performance indimensions such as cost, quality, reliabilityand deadlines and flexibility to suit thevariations in demand. As a company is notexpected to perform well in all thesedimensions, note that it is the prioritizationof these criteria that will determine thecontribution of manufacturing to theperformance of the business. Thus, theformulation of a manufacturing strategyshould give a strategic, rather than purelytactical, role to the manufacturing function,




In order to improve organizationalperformance, operations strategies suchas Total Quality Management (TQM), Business ProcessReengineering (BPR), Just inTime (JIT), benchmarking, and manyothers are generally adopted Firenze,R., Ahmed, N., & Montagno, R.(1996). Among these, special interesthas been given to TQM and BPRpractices. TQM is based on the principleof continuous improvement of productsand processes aiming at continuouslysatisfying customers’ expectationsregarding quality, costs, delivery andservices Ishikawa, K., & Loftus, J. H.(1990). BPR or Reengineering also aimsat customer satisfaction regardingquality, costs, delivery and services,however its approach to improvementis more radical. In the words ofHammer, M., & Champy, J.(1993). ”Reengineering is the” re-thinking “of the radical replanning ofbusiness processes to achieve drasticimprovements ...”. Despite this subtledifference, continuous improvement canalso lead to large increases in results, asproposed by reengineering,

Garvin, D. A. (1988). citing an ASQCreport, shows that customer satisfactionis dependent on a set of characteristicsintrinsic and extrinsic to the product andthat customer satisfaction will bedependent on what competitors canoffer. Thus, it can be seen that there is aclear relationship between thedevelopment process of manufacturing

strategies and management of qualityimprovement, since if quality strategies areused as part of the business strategy togain and maintain competitive advantage ,improvement projects should beprioritized taking into account thecompany’s performance levels vis-a-viscompetitors with regard to the product andthe size of the operation that are mostimportant to meet present and futuremarket demands.At the same time, many companies, in theeagerness to quickly embrace world-classmanagement practices such as TQM,BPR, and many other acronyms, devotelittle or no attention to the impact of thesepractices on the company’s strategicobjectives, market demands, andperformance against competitors. Although not often mentioned, non-alignment between operational strategiesand competitive business strategy can belisted as one of the causes of qualityprogram failure.Considering the above considerations, thisarticle presents a conceptual modelproposal for the deployment andprioritization of improvements based on acompany’s business and manufacturingstrategies, and therefore understood asstrategic improvements.In the next section, a brief theoreticaldiscussion is presented with the objectiveof establishing a theoretical reference forthe proposed model. Then the model, withits various elements, is detailed as well asa set of steps to guide the implementationprocess. Finally, some considerations are

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made about the potential benefits andlimitations of this proposal.

2. Manufacturing and ImprovementStrategy

A manufacturing strategy “... defines howmanufacturing will contribute to theachievement of business objectives...”. The contribution of manufacturing isachieved by deploying strategic decisionsin manufacturing areas to align thecompany’s manufacturing resources withits competitive strategy and increase itsability to compete in dimensions generallyclassified as quality, cost, delivery andflexibility. Decision areas are commonlyclassified as plant and equipment,production planning and control, humanresources, product design / engineering,organization and management.

The relative importance of performancedimensions or competitive criteria willdepend on customer and market demand(which in turn depends in part on theproduct life cycle stage) and performanceagainst competitors. It is the prioritizationof the criteria and the combination ofmanufacturing and market strategy that willdetermine how the company will compete.

Following this argument, Hill, T.(1999). proposes a model for formulationand revision of manufacturing strategy thatcomprises five iterative steps as follows:definition of objectives of thecorporation; definition of marketingstrategies to achieve thesegoals; assessment of how differentproducts win orders against

competitors; establishment of the mostappropriate way to manufacture this groupof products (choice of processes); providing the manufacturing infrastructureneeded to support production;This model, however, does not intend toconsider the unfolding of manufacturingpolicies and decisions by the use ofoperations.Another approach to the formulation of themanufacturing strategy is presented by,who developed an audit procedure thatguides the user through a logical processof identification of the objectives of themanufacture, measurement of the currentperformance, determination of the effectsof current manufacturing practices andidentification of the necessarychanges. This model is primarilyconcerned with identifying which andwhere changes are needed to align themanufacturing function, but does notcontemplate in an integrated manner thecomplementary process of deploymentand management of improvements. This isa limitation of the proposal,In parallel to the development ofmethodologies for the formulation ofmanufacturing strategies, countlesscompanies in different countries havelaunched TQM and BPR programs in thelast decades, aiming at customersatisfaction and continuous improvementof operations. As mentioned by Garvin, D.A. (1988). TQM and Reengineering arepowerful means of reshaping individualprocesses so that they more efficientlysatisfy existing customer categories.

Refinement of Strategic Action in Working Firm: An Instrumental Framework


Although these movements have createdlegions of enthusiasts, many are cases offailure. Disregarding all the possiblesetbacks inherent in the implementationprocess, Garvin, D. A.(1988). Commenting on the limitations ofTQM and Reengineering, assumes that there-planning of processes can be done in adivorced way from the rethinking of thebusiness strategy. The Japanese approachto guideline management Collins, B., &Huge, E. C. (1993), of establishing,deploying and implementing guidelines,attempts to fill this gap. However,management by directives, by deployingthem through vertically organized functionalgroups rather than processes (which flowhorizontally through functions) can resultin many gaps or overlaps and stimulateonly local optimizations.

Thus, while the literature on manufacturingstrategy does not adequately address theissue of continuous improvementdeployment, management practices basedon the principles and methodologies ofTQM or Reengineering do not fullyconsider the need to develop improvementefforts from the objectives strategic andbusiness processes of the organization.

3. Deployment and Prioritization ofImprovements

In order to contemplate the issuesdiscussed above, it is proposed that thedeployment and prioritization ofimprovement projects be done in astructured and systematic way, startingfrom the expectations of the clients and

strategic decisions, unfolding through thebusiness processes, and prioritizing thoseprojects that will further contribute to thecompany’s strategic objectives.

For this, it is assumed that concepts andpractices such as process mapping,performance measurement, benchmarking among others areemployed in an integrated way, in a logicalsequence of unfolding, as modelledin Figure 1.

Figure 1: Deployment andprioritization of improvements

The rationale behind this model is that theselected enhancement projects forimplementation should be those that mostcontribute to the efficiency andeffectiveness of the most critical businessprocesses or that most affect performancein the prioritized competitive dimensionsor criteria. It is therefore a systematicprioritization process in which:

• Competitive business dimensions areprioritized for improvement based onmore detailed research on customerexpectations and performance relativeto competitors;

• processes selected for improvementare those whose performanceimprovement may contribute to theimprovement of business performancein the priority competitive dimensions,and whose performance has provedinadequate from an internal diagnosis;

• improvement projects are prioritizedbased on the potential contribution to

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leverage process performance in criticaldimensions.

To support the process of unfolding andprioritization, the use of relationshipmatrices is also proposed. In the followingsections, the different elements of themodel presented in Figure 1 are brieflycommented.

3.1 Priority Dimensions forImprovements

Competitive priorities such as quality,cost, delivery and flexibility can be brokendown into more focused aspects such ascompliance, reliability, delivery times,timeliness of delivery, maintenance costs,process flexibility, among others Garvin,D. A. (1988). Other more unspokenforms of differentiation can be obtainedby researching customers and segmentsof target markets. The identification of

priorities can be complemented withinformation regarding the performance ofcompetitors in such items. Slack, N.,Brandon-Jones, A., & Johnston, R.(2017). proposes the use of a matrix ofcustomer expectations versuscompetitors to identify the needs forhigher priority improvements. Anotherway would be to elaborate therequirements table for Quality Housecustomers Hauser, J. R. and D. P.Clausing. (1988). where the relativeimportance of the competitive criteria,according to the customer’s voice, isweighted by the client’s performanceevaluation competitors and thecompany’s market strategy.

3.2 Mapping of Business Processes

Mapping and representation of businessprocesses are fundamental to understand



not only isolated processes, but also theflow of information and resources throughthe operational processes and processessupporting the internal value chain. Forexample, the American Centre for Qualityand Productivity (AQPC) defines elevenmacro processes, including primaryprocesses such as product and servicedesign, marketing and sales, and supportprocesses such as human resourcedevelopment and management or financialand resource managementphysicists. These macro processes can stillbe unbundled into sub processes,activities, and tasks.

In the context of enhancementdeployment, the mapping of businessprocesses aims to make explicit therelationship between performancedimensions and primary or supportactivities developed by the company toassist its clients.

Tools for generating process flowcharts ormore sophisticated tools for representingbusiness processes, such asARIS (Architecture for IntegratedInformation Systems), can be used forprocess mapping or modelling. Theimplementation of Enterprise ResourcePlanning (ERP) systems makes extensiveuse of process modelling for integration. Aproposal for process reengineering usingthe ARIS architecture for therepresentation of the current process andfuture process design is presented inThomas McDonald, Eileen M. Van Aken& Antonio F. Rentes (2002)

3.3 Performance Evaluation

Performance evaluation is essential todiagnose the root causes of problems orweaknesses in terms ofperformance. Information on processperformance can be obtained throughqualitative and quantitativeevaluation. Cause and effect diagrams,such as the Ishikawa, K., & Loftus, J. H.(1990). diagram, can be used for thispurpose. The Tree of Present RealityDettmer, H. W. (1997). of the Theory ofRestrictions, is also an excellent instrumentof performance evaluation. The objectiveof the ARA is to explain the interrelationsof cause and effect between undesirableeffects and root problems.

In addition to qualitative assessment ofperformance, quantitative assessment mayalso be used. As the performancemeasurement of operations can be usedas an instrument to direct the activity ofidentifying processes and dimensions of theoperations most in need of improvement,the proposed deployment of improvementsrepresented by the model of Figure1 suggests the use to manage the processof improvement, of a measurement systemwith performance indicators focused onprocesses and dimensions consideredcritical for organizational performance. However, it should be noted that in thefirst instance performance indicators willprobably not be implemented andtherefore one of the improvement actionswould be the design and implementationof a performance measurement system.

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In this sense, the definition of a set ofintegrated performance measures shouldbegin, parallel to the deployment ofimprovements proposed by the model, byidentifying:

• Competitive priorities based onbusiness and marketing strategiesand target customer expectations;

• Indicators that may reveal performancein such priorities;

• Business processes and activities thatmost affect performance on suchpriorities.

In addition, because business processesrepresent a hierarchical set ofinterconnected activities and tasks, genericperformance measures such as customersatisfaction, quality, and delivery must bedeployed in performance measuresfocused on the critical activities of criticalprocesses, as shown in Figure 2.

Figure 2– Example of unfoldingperformance measures.

It should also be noted that measures of

performance of internal operations shouldbe linked to measures of customersatisfaction and financial performancemeasures. On this aspect, the BalancedScorecard proposed by Kaplan, RobertS., and David Norton. (1992) as a systemof performance measurement and strategicmanagement, links performance measuresof internal operations to financialperformance. It is based on translating thecompany’s strategic objectives intomeasures of internal process performance,learning and growth linked to prospectsof customer satisfaction and financialresults.

3.4 The House of Quality as aMechanism of Deployment andPrioritization

The choice of processes for improvementcan still be aided by the use of the QualityHouse of the Quality Function Deployment(QFD) methodology Hauser, J. R. and D.P. Clausing. (1988). The Quality House isan array built from the deployment ofcustomer priority requirements, product or



process characteristics split based oncustomer requirements, relationship (fromrequirements to characteristics) andconversion of priority requirements intopriority characteristics of customers.products or processes.

Although originally proposed as a productdevelopment planning tool, Quality Housecan be used as a tool to deployimprovement actions. propose theapplication of QFD in the context ofstrategic planning. In the context ofimprovement management, some qualitymatrices can be used to systematize theprocess of deploying and prioritizingprocesses and performance measures, asdescribed and illustrated in Figure 3.

Figure 3 – The house of quality for thedeployment and prioritization ofprocesses and performance measures.

• Matrix of relationship of the prioritydimensions for improvement andbusiness processes (matrix I, Figure 3):the objective is to establish the

relationship between improvementpriorities and business processes inorder to explain the processes andactivities most critical to performancein the dimensions. It should be notedthat the development of the relationshipmatrix can lead to the identification ofthe need for new processes or activities;

• Matrix of relationship between criticalprocesses and priority measures(matrix II, Figure 2): the constructionof the matrix of criticalprocesses versus priority measureshelps to identify the need to deploygeneric performance measures inperformance indicators focused on theprocess results vectors new measuresfor new processes.

Thus, the development of these matricesshould contribute to focus attention on theprocesses and measures of performancemost important for the management ofperformance improvement in thedimensions considered as priority.

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3.5 Benchmarking

After establishing critical processes forimprovement, specific improvementactions should be defined. Performing process benchmarking can be veryuseful at this stage. Benchmarking isdefined as a process of continuousmeasurement and comparison of anorganization’s business processes againstbusiness leaders anywhere in the world togain information that will help theorganization take action to improve itsperformance. Benchmarking refers to thecomparison of similar processes ofdifferent companies, not necessarily in thesame segment or sector. Comparisons canalso be made with companies with betterperformance but not necessarily the bestin the class, as long as it is donesystematically and continuously.

The benchmarking activity can bedecomposed into basically five phases:identification of the object of study; partnerselection; data collection andanalysis; setting improvementgoals; implementation of improvementactions and monitoring of progress. Theactivity of identifying the object of studyor business process for whichthe benchmarking will be developed basically involves identifying the criticalprocesses for improvement in thedimensions or priority competitivecriteria. In other words, the proposedimprovement priorities presented in thisarticle not only promote the integration ofmanagerial improvement practices into a

single process, but also a step that mustprecede the development of managementstudies. Benchmarking.

In addition to benchmarking, otherquality tools can be used at this stage toguide the process of problem identificationand decision making. Once improvementactions are elected, performance goals areset, and implementation and progressreview are conducted, as discussed in thenext section.

4. A Conceptual Model for ManagingStrategic Improvements

It is the understanding of this author thatthe proposal of deployment andprioritization of improvement actionspresented in the previous section shouldbe part of a more comprehensive processthat is capable of contemplating thenecessary integration between strategicdecisions, deployment and implementationof improvement and revision actions ofprogress.

With this objective, a conceptual modelfor the management of improvements isproposed, in which it intends tocharacterize the process of translation ofthe strategic objectives in programs ofimprovements. The Figure 4illustrates thisstructure into three main iterative steps:defining the strategic direction; unfoldingimprovements; and implementation andreview of progress. The model alsopresupposes the existence of anorganizational infrastructure that supportsthe improvement management process, asshown in Figure 4.



Figure 4 – Conceptual model forunfolding and implementation ofstrategic improvements.

The first step, called strategic direction, ismore related to the integration betweenstrategy development and improvementmanagement processes, and is thereforeat the interface between these macroprocesses.

The implementation of strategic decisionsin structural or infrastructural areas of theproduction function is understood asalignment of the manufacturingfunction. Alignment actions are changes inthe way to organize or process productionin order to improve results and thereforewhen talking about alignment actions, weare talking about improvement and changeactions. However, some alignment actionsby their nature are only specified after thedeployment of the priority performance

dimensions by the company’s businessprocesses. This is typically the case forimprovement actions in manufacturinginfrastructural areas.

Therefore, if there is no mechanism orprocedure for deploying strategic decisionsto improvement actions, there is a greaterchance of incurring the error of investingin improvement actions that will not leadto the expected performance. Second,many alignment actions, especially whenit comes to infrastructure issues, will onlygenerate lasting improvement results ifthere is a process for managing theimplementation of improvements andreviewing progress.

Therefore, what is proposed here is thatthe process of unfolding improvements isdone in an integrated way to the processof developing strategic actions based oncompetitive criteria or priority decision

101

areas. This idea is illustrated in Figure5. The results of this stage, in whatconcerns the improvement, are thecompetitive priorities defined from thebusiness and manufacturing strategies andthe main areas of manufacturing that arecandidates for improvement. This first steptherefore directs the next process ofdeployment of improvements, as shownin Figure 2 and described in the previoussection.

Figure 5 – Elements of the strategicdirection step.

It should be noted that this is an iterativeprocess, that is, just as the manufacturingstrategy review process can lead to theidentification of the need for improvement,also the process of unfolding improvementsmay lead to the identification of the needfor realignment of some areas of themanufacturing function.

The third step is concerned withimplementing and analysing the progressof improvement actions, as shownin Figure 6. It basically involves planning,resource allocation, monitoring progressand feedback. The PDCA cycle can beused in this phase as a methodology forthe management of the process ofimplementation and monitoring ofimprovement actions.

Figure 6 – Elements of theimplementation step and progressreview.

Systematic review of progressand feedback are critical to assess whetherimprovement efforts are producing thedesired results, as well as to validate theimprovement strategy from the perspectiveof manufacturing and businessstrategies. In that sense, another importantpoint in monitoring progress is the use of a



performance measurement system. Thedevelopment and implementation of a setof performance indicators should at somepoint be part of the improvement actions,as will be discussed in the next section.

Finally, these steps should be supportedby adequate infrastructure andorganizational culture. With regard toorganizational infrastructure, a veryimportant aspect is the integration betweenthe various functions related to theprocesses in which improvements arebeing developed. Thus, multifunctionalimprovement teams should act as anelement of vertical integration betweenefforts to improve operations and strategicdecisions of top management andhorizontal integration among the variousfunctional organizations involved. Thus, theaim is to form a permanent centralcommittee that serves as a link betweentop management and the factory floor andalso to coordinate the process of

deployment and management ofimprovements,

5. Steps for Deployment andManagement of Improvements

The conceptual model presented abovesuggests that the process of unfoldingactions for improvements can be organizedin a sequence of steps, as indicated below:

Step 1: Team Improvement

Top management must recognize the needfor improvement and establish animprovement team that has the function ofguiding the improvement process as wellas serving as a link between topmanagement and the operational level.

Step 2: Product and Market

Collect and analyse information aboutproduct characteristics, customers andtarget markets, competitive priorities,business and manufacturing strategies, andareas for improvement. This step helps

103

you understand what dimensions andactivities are crucial to the business’scompetitiveness.

Step 3: Critical Dimensions forImprovement

Collect information on customerexpectations and perceived quality fordifferent customer / productcategories; ordering the requirements ofthe customers by the importance of theserequirements for the most importantcustomers. Also collect information aboutthe company’s performance against thecompetition in meeting theserequirements. This step helps identify theperformance dimensions most in need ofimprovement.

Step 4: Critical Processes forImprovement

Map all processes, primary and support,and understand their relationships to theperformance dimensions most in need ofimprovement. This step can be aided bythe construction of the matrix schematizedin Figure 3 (matrix I). Building this matrixis not mandatory, but it helps focusattention on processes and activities thatmost influence critical performancedimensions for improvement.

Step 5: Performance Evaluation

Conduct a qualitative or quantitativeevaluation of the performance ofprocesses and activities identified ascritical. Conducting a diagnosis of thecurrent situation is of fundamentalimportance in order to understand which

areas or activities are problematic andwhich need to be attacked. The use ofperformance indicators in this stage canreveal, objectively, problematic areas andprocesses; therefore, the implementationof a performance measurement system isof fundamental importance for themanagement of improvements.

Step 6: Prioritized Dimensions andProcesses for Improvement

After the analyses proposed in steps 2 to5 have been developed, the most prioritydimensions and processes / activities forimprovement are identified. From thispoint the process bifurcates: proposing andimplementing improvement actionsand; establish a system of performanceindicators that can serve as an instrumentfor managing the process of deployingimprovements.

Step 7: Implementing Actions

Next, improvement actions must beproposed, prioritized, andimplemented. For the development ofknowledge and understanding ofprocesses and activities, some qualitytechniques or tools can beused. Depending on thesituation, benchmarking studies can bedeveloped aiming at identifying bestpractices. For the proposition ofimprovements, business processmodelling, for example, can be usedThomas McDonald, Eileen M. Van Aken& Antonio F. Rentes (2002).

Step 8: Critical Measures



In parallel to the proposition ofimprovement actions, performancemeasures focused on improvement actionsmay be proposed. The first question to beanswered here is how to measure customersatisfaction and financial performance. Asoutcome indicators, these measures shouldin turn be related to the performancevectors or performance measuresdeployed from these outcome measures,as illustrated in Figure 2. The constructionof a relationship matrix as illustratedin Figure 3(matrix II) can help, from therelationship between processes anddimensions or performance measures, todeploy generic measures of results intoindicators focused on processes oractivities. In addition to the definition ofindicators, a performance measurementsystem should specify, among other things,measurement frequency, data origin,responsibilities for data collection, analysisand action.

Step 9: Feedback and Progress Review

The final step comprises evaluating theprogress achieved with the improvementsimplemented and analysing the extent towhich the implemented improvements aregenerating the expected results in terms ofbusiness performance to validate or revisethe improvement strategies from thatanalysis.

6. Final Considerations

This article presented a proposal for thedeployment and prioritization ofimprovement actions, emphasizing theneed to:

• Deploy operations improvementactions based on strategic decisions,customer expectations andperformance against the competition,in order to ensure that improvementefforts remain focused and integratedwith strategic and competitive issues;

• To deploy improvement actionsthrough the organization’s businessprocesses and activities rather thanthrough functional hierarchy;

• Systematizing the process of deployingand prioritizing competitive prioritiesand critical business processes.

It should be noted that for theimplementation of this proposal,considerable attention must be given to thedevelopment and establishment of anadequate performance measurementsystem so that quantitative information onprocess performance can be used to guidethe deployment of improvement priorities.Although this proposal is still being testedfor validation and consequently there arestill no significant results of practicalapplications, it can be foreseen that thisproposal is particularly valid for companiesthat depend mainly on the efficiency andeffectiveness of the operations to gain acompetitive advantage over thecompetition, such as is the case ofmanufacturing companies of componentsfor the automobile industry and durableconsumer goods in general and capitalgoods. For companies with strategies thatare mainly based on the differentiation ofproducts or services, this proposal maynot be justified.

105

At first glance, it may appear that in generalthe management of a company lacks amore elaborate system to identify whatneeds to be improved in operations tomaintain or gain competitiveness. However, as companies improve theperformance of their operations, the needsand actions for improvement become lessevident, so in such cases a structuredsystem can be made necessary.

Finally, the success of implementing animprovement management system asproposed here will depend primarily on thematurity of the organization’s organizationalstructure and information system and seniormanagement’s attitude toward changemanagement and improvement. On this,management should be concerned withaddressing the various aspects oforganizational learning, teamwork, andorganizational culture management in anintegrated and holistic manner.

Reference

Collins, B., & Huge, E. C. (1993). Management by Policy: HowCompanies Focus Their Total QualityEfforts to Achieve CompetitiveAdvantage. U.S.: Brown (William C.).

Dettmer, H. W. (1997). Goldratt’s theoryof constraints: A systems approach tocontinuous improvement. Milwaukee,Wisconsin: ASQ Quality Press.

Firenze, R., Ahmed, N., & Montagno, R.(1996). Operations Strategy AndOrganizational Performance: An

Empirical Study. United Kingdom:Emerald Group Publishing.

Garvin, D. A. (1988). Managing quality:The strategic and competitive edge.New York: Free Press.

Hammer, M., & Champy, J. (1993). Reengineering the corporation: Amanifesto for business revolution. NewYork, NY: HarperBusiness.

Hauser, J. R. and D. P. Clausing. (1988).“The House of Quality”, HarvardBusiness Review,

Hill, T. (1999). Manufacturing strategy:The strategic management of themanufacturing function. Basingstoke,Hampshire: Macmillan.

Ishikawa, K., & Loftus, J. H.(1990). Introduction to quality control.Tokyo: 3A Corporation.

Kaplan, Robert S., and David Norton.(1992) “The Balanced Scorecard:Measures that DrivePerformance.” Harvard BusinessReview 70, no. 1: 71–79

Slack, N., Brandon-Jones, A., &Johnston, R. (2017). Operationsmanagement. Cape Town: Pearson.

Thomas McDonald, Eileen M. Van Aken& Antonio F. Rentes (2002) UtilisingSimulation to Enhance Value StreamMapping: A Manufacturing CaseApplication, International Journal ofLogistics Research andApplications, 5:2, 213-232



Structural Dynamics of Boards inIndian Public Sector Banks

Nayantara PadhiAssociate Professor, School of Management Studies,

Indira Gandhi National Open University, New Delhi, IndiaEmail: [email protected]

Kamal VagrechaAssociate Professor, School of Management Studies,

Indira Gandhi National Open University, New Delhi, IndiaEmail: [email protected]

ABSTRACT

In the light of the Companies act, 2013 , RBI and SEBI norms with respect tocorporate governance in banks , a need was felt to analyse the structural dynamicsof board in Indian public sector banks. This study has been carried out in eightpublic sector banks of India. The major dimensions on the study focused on: a. theBank’s Philosophy on Code of Governance b. Board of Directors/ Board Issues c.Board Structure, Strength and Size d. Distribution of the Board e. WomenParticipation in the Board f. Board Meetings g. Committees of the Board. Byanalyzing the structural dynamics of the sample banks’ boards individually, itwas observed that the CG practices in the public sector banks are improving andfollowing the statutory requirements. One of the reasons for overall improvementin CG practice after 2012-13 has been the promulgation of the Companies Act,2013 which had made certain parameters of the present CG practices as mandatory.

Key words: Board, Board Committees, Board meetings, Women in board, Boardleadership

Introduction

As per Chapter IV of SEBI (LODR)Regulations, 2015 ,an optimumcombination of executive and non-executive directors is required with at leastone woman director in board and majorityof directors need to be from Non-Executive (i.e., 50% or more). In case theChairman of the board is a Non-executive

director then at least 33% of the board ofdirectors shall comprise of IndependentDirectors. On the other hand when theChairman is not a regular Non-executiveDirector, then at least 50% of the boardof directors shall comprise of IndependentDirectors. Although in cases where theregular Non-executive chairperson is a


107

promoter of the listed entity or is relatedto any promoter or person occupyingmanagement positions at the level of boardof director or at one level below the boardof directors, then at least 50% of the boardof directors of the listed entity shall consistof Independent Directors.

The Companies Act, 2013 stipulates thatat least one third of all Directors of thelisted companies must be independentdirectors, whereas under the SEBI listingagreement under Clause 49 does notspecify any specific requirement for thepercentage of independent directors wherethe Board has an executive Chairman.

The world over there is an increasing trendof diversifying the board by optingDirectors from diverse backgrounds. Awell-structured and diversified boardbrings a variety of skill sets and cognitiveprocesses which can catalyse change aswell as identify and address newopportunities. In this context, one of thecritical diversity measures is genderparticipation in decision making. Thiscritical measure can be measured by theparticipation of the women in boards.Simultaneously Sec. 149 of the CompaniesAct, 2013 stipulates that all listedcompanies, there should be at least onewomen director in the board.

An active board is a pre requisite forefficient running the company andproductive output, the pro activity of theboard can be measured by the number ofboard meetings held and the participationof the board members.

Under the Clause 49 and the provisionsof the Companies Act, 2013, the numberof committees varies widely. But Audit andRemuneration committees are mentionedin Clause 49.

For a company to be run efficiently thereshould be set processes to address thecorporate governance issues. Thecorporate governance issues should bedecided in a transparent and nonpartisanway. (One way to ensure this is that thecommittees which have been entrustedthese issues should consist of independentdirectors). During recent times few of theissues which have been plaguing thefinancial sector are a.) excessiveremuneration to the executives b.)Increased risk in the financial products soldc.) opaque nature of information providedby firms and d.) grievance redressal of theshareholders. One of the ways to addressthese issues is to have various boardcommittees looking and addressing theseissues and to ensure transparency, themembers of these board committeesshould be independent directors of theboard.

In the light of above, in this paper we aregoing to discuss about a.) board structureb.) committees of the board of the sampleIndian public sector banks.

PRESENT STUDY

The review of existing literature on theimpact of CG on firm’s performance givesa mixed result. Moreover, there is noIndian study till date which has focusedon the said topic post amendments of the

Structural Dynamics of Boards in Indian Public Sector Banks


Companies Act, 2013. Hence, there is aneed was felt to carry out an in-depth studyespecially in Indian financial institutions.

In order to assess the impact of CG onthe performance of FIs we haveundertaken the following processes

1. Analysis of the structural dynamics ofthe board attributes which are the maindrivers of CG practices;

2. Construction of an index to measureCG practices as envisaged in theCompanies Act, 2013 and SEBI(LODR) Guidelines, 2015. based onthe fact that the main driver of CG;

3. Assessment of impact of CG onfinancial performance of the FIs.

In this paper we are only highlighting onthe analysis of the structural dynamics ofthe board attributes which are the maindrivers of CG practices in Indian financialinstitutions.

Sample Selection

In the present study we have selected eightsample FIs consisting of eight public sectorbanks The basic criteria for selecting thebanks were:

1. Listed on the stock exchange;

2. Highest and lowest marketcapitalization in the list of top ten FIs inparticular category like public sectorbanks, private sector banks.

Data Sources

For the purpose of this study, majorly datawere collected from the annual reports of

the respective FIs, websites of NSE, BSEand RBI from its database on Indianbanks. The timeframe of analysis was fromFY 2011-12 to 2015-16.

In the following paragraphs we will berepresenting the findings bank wisecovering following dimensions of CGpractices in the banks as per statutoryrequirements.a. The Bank’s Philosophy on Code of

Governanceb. Board of Directors/ Board Issuesc. Board Structure, Strength and Sized. Distribution of the Boarde. Women Participation in the Boardf. Board Meetingsg. Committees of the Board

I. State Bank of India (SBI)

Founded in 1806, Bank of Calcutta wasthe first bank established in India and overa period of time evolved into State Bankof India (SBI). SBI represents a sterlinglegacy of over 200 years. It is the oldestcommercial bank in the Indiansubcontinent.

The Bank’s Philosophy on Code ofGovernance

State Bank of India is committed to thebest practices in the area of CorporateGovernance, in letter and in spirit. TheBank believes that good CorporateGovernance is much more than complyingwith legal and regulatory requirements.Good governance facilitates effectivemanagement and control of business,

109

enables the Bank to maintain a high levelof business ethics and to optimize the valuefor all its stakeholders. The objectives canbe summarized as:• To protect and enhance shareholder

value.• To protect the interest of all other

stakeholders such as customers,employees and society at large.

• To ensure transparency and integrity incommunication and to make availablefull, accurate and clear information toall concerned.

• To ensure accountability forperformance and customer service andto achieve excellence at all levels.

• To provide corporate leadership ofhighest standard for others to emulate.

The Bank is committed to

• Ensuring that the Bank’s Board ofDirectors meets regularly, provideseffective leadership and insights inbusiness and functional matters andmonitors Bank’s performance.

• Establishing a framework of strategiccontrol and continuously reviewing itsefficacy.

• Establishing clearly documented andtransparent management processes forpolicy development, implementationand review, decision-making,monitoring, control and reporting.

• Providing free access to the Board toall relevant information, advices andresources as are necessary to enable itto carry out its role effectively.

• Ensuring that the Chairman has theresponsibility for all aspects of executivemanagement and is accountable to theBoard for the ultimate performance ofthe Bank and implementation of thepolicies laid down by the Board.

• The role of the Chairman and the Boardof Directors are also guided by the SBIAct, 1955 with all relevantamendments.

• Ensuring that a senior executive is maderesponsible in respect of complianceissues with all applicable statutes,regulations and other procedures,policies as laid down by the GOI/RBIand other regulators and the Board, andreports deviations, if any.

Board of Directors/ Board Issues

The various aspects of the Board ofDirectors Viz. board structure, boardstrength and size, board diversity andnumber of board meetings and few otherrelevant particulars are examined in thefollowing paragraphs and presented inTable1.

Board Structure, Strength and Size

Central Board of SBI

State Bank of India was formed in 1955by an Act of the Parliament, i.e., The StateBank of India Act, 1955. A Central Boardof Directors was constituted according tothe Act. The Bank’s Central Board drawsits powers from and carries out its functionsin compliance with the provisions of SBIAct & Regulations 1955. Its major rolesinclude, among others:



• Overseeing the risk profile of the Bank;• Monitoring the integrity of its business

and control mechanisms;• Ensuring expert management, and• Maximising the interests of its

stakeholders.

The Central Board is headed by theChairman, appointed under section 19(a)of SBI Act; four Managing Directors arealso appointed members of the Boardunder section 19(b) of SBI Act. TheChairman and Managing Directors arewhole time Directors.

Table1: Board Structure, Strength and Size of SBI

Particulars 2015-16 2014-15 2013-14 2012-13 2011-12 Total No. of Directors 14 15 14 16 14 Non-Executive ( excluding Chairman) 5 6 7 7 6 Independent Non Executive 4 4 4 4 4 Women Non-Executive 1 0 0 0 0 Foreign Non Executive 0 0 0 0 0 Executive (excluding Chairman) 4 4 2 4 3 Women Executive 1 1 1 0 0 Foreign Executive 0 0 0 0 0 No. of Board meetings 12 12 12 13 12 Is the Chairman Executive? Yes Yes Yes Yes Yes

Composition of the Central Board

The Central Board of SBI on averageconsists of 14 to 16 members, which is inline with the Sec. 149 (1) of the CompaniesAct, 2013 which stipulates a maximum of15 directors provided that a company mayappoint more then 15 directors afterpassing a special resolution.

Distribution of the Board

The percentage of non-executivedirector ’s range from 65 % to 79% dur ing 2011-12 to 2015-16which is in accordance with theAct.

Chart 1: Number of Central Board Members of SBI

111

Chart 2: Distribution of Executive, Non-executive and Independent Board Members of SBI

Women Participation in the BoardThe Central Board of SBI is having at leastone woman director on its board since thecommencement of this Act i.e. from 2013-

14 onwards. Prior to commencement ofthis Act the SBI board was not having anywoman director for the year 2011-12 and2012-13.

Board Meetings

Chart3: Number of Central Board meetings held in SBI

The central board of SBI on average isholding its board meeting every month,which is a sign of pro active management

implying that the constant engagement ofthe board will lead to less number ofcorporate governance issues.



Committees of the Board

For the efficient discharge of dutiesentrusted to the board, the board isempowered to set up various committeesof the board members itself viz. the Audit

Committee, Nomination andRemuneration Committee, RiskManagement Committee, StakeholdersRelationship Committee and CSRCommittee.

Table 2: Audit Committee, Nomination and Remuneration Committee and RiskManagement Committee of Central Board of SBI

Particulars Audit Committee

Nomination and Remuneration Committee

Risk management Committee

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 8 8 8 8 7 4 4 4 4 4 8 8 7 7 8

No. of ID 6 6 6 6 5 4 4 4 4 4 4 4 4 4 4 No of ED 2 2 2 2 2 0 0 0 0 0 2 2 2 2 2

No. of meetings 11 11 10 10 9 1 1 1 1 1 4 4 4 6 4 Note: * includes two nominees of GOI and RBI

Audit Committee

In case of SBI, the number of auditcommittee meetings held was on anaverage ten per year.

Remuneration Committee

In case of SBI the RemunerationCommittee consists of only non executive

directors and half of them are independentdirectors for the period 2011-12 to 2015-16, thereby complying with the mandatoryrequirements.

In case of SBI, the committee has beenconstituted as per the mandatoryrequirement and on average have held fourmeetings per year.

Table 3 : Stakeholders Relationship Committee and CSR Committee of SBI

Particulars Stakeholders Relationship Committee CSR Committee

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members 5 7 6 6 5 6 7 NA NA NA No. of ID 3 4 4 4 3 4 4 NA NA NA No of ED 2 3 2 2 2 2 3 NA NA NA No. of meetings 4 4 4 4 4 4 2 NA NA NA

Stakeholder Relationship Committee

113

Risk Management Committee

SBI has complied with these requirementsfrom 2011-12 to 2015-16, which is clearlyevident from the fact that on average fourmeetings of the committee were heldannually and the composition of thecommittee for all the years is such that , itcan effectively gauge the risk inherent inoperations and external risks.CSR Committee

As per the provisions of the Sec 135 ofthe Companies Act, 2013, the CSRcommittee held three meetings on averageper year and the committee constituted fourID and two EDs, which is in line with themandatory requirements.II. UNITED BANK OF INDIA (UBI)

United Bank of India is an Indiangovernment-owned financial servicescompany headquartered in Kolkata. Thebank was set up in 1950.The Bank’s Philosophy on Code ofGovernance

In United Bank of India, the fundamentalphilosophy of Corporate Governance isguided by the Bank’s obligations to itsresponsibilities and value creation througheffective management and control. TheBank’s policies and practices are not onlyconsistent with statutory requirements, butalso all-encompassing to honour itscommitments to take the organization tothe next level.The Bank defines Corporate Governanceas a systematic process by which anorganization is directed and controlled to

maintain a set of well defined ethicalstandards and at the same time enhanceits wealth generating capacity. The Boardis collectively responsible for ensuring thatCorporate Governance process isstructured to direct Bank’s actions, assetsand resources to achieve this purpose whilecomplying with Governance Codes.

The Bank on one hand is extremely mindfulabout Shareholders’ values while on theother hand responsibly upholds the needsof the economy, national priorities andcorporate growth. It recognizes highstandards of ethical values, financialdiscipline and integrity in achievingexcellence in all fields of activities. TheBank seeks to proclaim corporateexcellence by –

Upholding Shareholders’ values withinthe established principles and legalframework of the Nation;

Clear statement of Board Processesand Board’s relationship with theexecutive Management;

Framing transparent corporatestrategies, effective policies, efficientprocedures, rigid ethical standards,strict legal responsibilities and fosteringoverall professional approach;

Extending best of facilities and servicesto the customers;

Proclaiming congenial environment foremployees, customers and the societyat large;

Ensuring pro-active management, freefrom any bias.



Bank considers itself a Trustee to theStakeholders and acknowledges thefiduciary responsibility towards them bycreating and safeguarding their wealth. Thefundamental drivers of sustainableperformance are safety, security, respect,excellence and teamwork.


The various aspects of the Board ofDirectors Viz. board structure, boardstrength and size, board diversity and numberof board meetings and few other relevantparticulars are examined in the followingparagraphs and presented in Table4.

Table4 : Board Structure, Strength and Size of UBI

Particulars 2015-16 2014-15 2013-14 2012-13 2011-12 Total No. of Directors 9 8 11 10 11 Non-Executive ( excluding Chairman) 2 2 3 2 3 Independent Non Executive 4 3 6 6 6 Women Non-Executive 1 2 2 1 1 Foreign Non Executive 0 0 0 0 0 Executive (excluding Chairman) 2 2 2 2 1 Women Executive 0 0 0 0 0 Foreign Executive 0 0 0 0 0 No. of Board meetings 10 9 14 14 11 Is the Chairman Executive? YES YES YES YES YES


The Board is constituted in accordancewith The Banking Companies (Acquisition

& Transfer of Undertakings) Act, 1970and Nationalized Banks (Management andMiscellaneous Provisions) Scheme, 1970.

Composition of the Board

The Board of UBI on average consistsof 8 to 11 members, which is in line withthe Sec. 149 (1) of the Companies Act,2013.

In the board of UBI, the percentage ofnon executive directors range from 62 %to 82 % during 2011-12 to 2015-16which is in accordance with Sec. 149 (4).

Chart4 : Number of Board Members of UBI

115

Women Participation in the Board

The Board of UBI is having at least onewoman director on its board from 2011-12 to 215-16.

The board of UBI on average is holdingits board meeting nine to fourteen everymonth, which is a sign of proactivemanagement implying that the constantengagement of the board will lead to lessnumber of corporate governance issues.

Board Meetings

Chart 6: Number of Board meetings held in UBI


For the efficient discharge of dutiesentrusted to the board, the board isempowered to set up various committeesof the board members itself viz. the AuditCommittee, Nomination andRemuneration Committee, RiskManagement Committee, StakeholdersRelationship Committee and CSRCommittee.(See Table-5)

Table 5 : Audit Committee, Nomination and Remuneration Committee and Risk ManagementCommittee of Central Board of UBI




2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 7 5 9 9 7 5 4 4 4 4 NA 4 3 5 4 No. of ID 6 4 7 7 6 5 4 4 4 4 NA 2 2 3 2 No of ED 1 1 2 2 1 0 0 0 0 0 NA 2 1 2 2 No. of meetings 9 10 12 9 11 1 1 1 1 1 NA 3 2 4 4

Note: * includes nominees of GOI and RBI



Audit Committee

In case of UBI, the number of auditcommittee meetings held was at least nineper year.


In case of UBI the RemunerationCommittee consists of non-executivedirectors only for the period 2011-12 to2015-16, thereby complying with themandatory requirements.Risk Management CommitteeUBI has complied with the requirementsw.r.t risk management committee from2011-12 to 2014-15.Stakeholder Relationship CommitteeIn case of UBI, the committee has beenconstituted as per the mandatory

III. STATE BANK OF MYSORE (SBM)

State Bank of Mysore is a nationalizedbank in India, with headquarters atBengaluru. It is one of the five associatebanks of State Bank of India. It wasestablished in the year 1913 as The Bankof Mysore Ltd.


State Bank of Mysore, as an organizationdriven by values, is committed to pursueobjectives that are in the interests of theBank, Shareholders and all stake holdersand the society at large, in consonance withbest practices. The Bank believes thatCorporate Governance facilitates effectivemanagement and better internal controls.

Table 6 : Stakeholders Relationship Committee and CSR Committee of UBI


2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members 5 3 5 4 5 NA NA NA NA NA No. of ID 3 2 3 2 2 NA NA NA NA NA No of ED 2 1 2 2 1 NA NA NA NA NA No. of meetings 4 4 4 4 4 NA NA NA NA NA

Table 7 : Board Structure, Strength and Size of SBMParticulars 2015-16 2014-15 2013-14 2012-13 2011-12 Total No. of Directors 12 12 12 12 14 Non-Executive ( excluding Chairman) 3 3 3 3 4 Independent Non Executive 6 6 6 6 6 Women Non-Executive 0 0 0 1 1 Foreign Non Executive 0 0 0 0 0 Executive (excluding Chairman) 3 3 3 3 4 Women Executive 1 1 1 0 1 Foreign Executive 0 0 0 0 0 No. of Board meetings 6 8 8 11 9 Is the Chairman Executive? YES YES YES YES YES

117


The various aspects of the Board ofDirectors Viz. board structure, boardstrength and size, board diversity and numberof board meetings and few other relevantparticulars are examined in the followingparagraphs and presented in Table.7.

The Board is constituted in accordancewith The Banking Companies(Acquisition & Transfer of Undertakings)Act, 1970 and Nationalized Banks(Management and MiscellaneousProvisions) Scheme, 1970.

Composition of the Board

Chart 7: Number of Board Members of SBM

The Central Board of SBM on averageconsists of 12to 14 members, which is inline with the Sec. 149 (1).

The percentage of non executive directorsin the board of SBM range from 67 % to69 % during 2011-12 to 2015-16 whichis in accordance with Sec. 149 (4).

Board Meetings

The board of SBM on average is holdingits board meeting on an average 6 to11every year from 2011-12 to 2015-16.

Women Participation in the BoardThe Board of SBM is having at least onewoman director on its board since2011-12 to 2015-16.

Chart 9 : Number of Board meetings held in SBM



Audit Committee

In case of SBM, the number of auditcommittee meetings held was 8 in the year2011-12.The information for the years2012-13 to 2015-16 are not available inthe Annual reports.


In case of SBM the RemunerationCommittee consists of only non executivedirectors in the year 2015-16. For the

Table 9 : Stakeholders Relationship Committee and CSR Committee of SBM

period 2011-12 to 2014-15, informationnot available in the annual reports.Risk Management Committee

SBM has complied with theserequirements from 2011-12 to 2015-16,which is clearly evident from the fact thaton average four meetings of the committeewere held annually and the compositionof the committee for all the years is suchthat , it can effectively gauge the riskinherent in operations and external risks.


2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members 3 3 3 3 NA NA NA NA NA NA No. of ID 2 2 2 2 NA NA NA NA NA NA No of ED 1 1 1 1 NA NA NA NA NA NA No. of meetings 4 4 4 4 NA NA NA NA NA NA

Table 8: Audit Committee, Nomination and Remuneration Committee and Risk ManagementCommittee of Central Board of SBM




2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 3 3 3 3 4 4 NA NA NA NA 4 4 4 4 5

No. of ID 3 3 3 3 3 2 NA NA NA NA 2 2 2 2 2 No of ED 0 0 0 0 1 0 NA NA NA NA 2 2 2 2 2 No. of meetings NA NA NA NA 8 1 NA NA NA NA 6 6 6 8 9

Note: * includes two nominees of GOI and RBI



Committee, Nomination andRemuneration Committee, RiskManagement Committee, StakeholdersRelationship Committee and CSRCommittee (Table-8).

119

Table10 : Board Structure, Strength and Size of PSB


The composition of Board ofDirectors of the Bank is governedby the provisions of the BankingRegulation Act, 1949, the Banking


In case of SBM, the committee has beenconstituted as per the mandatoryrequirement and on average have held fourmeetings per year.

CSR Committee

The board of SBM has not constitutedCSR committee till 2015-16.

IV.PUNJAB AND SINDH BANK (PSB)

PSB is a government-owned bank(79.62%), with headquarters in New Delhi.The bank was set up On 24 June 1908.The Bank’s Philosophy on Code of Governance

The Bank shall continue its endeavor toenhance its shareholder’s value byprotecting their interest by ensuringperformance at all levels, and maximizingreturns with optimal use of resources in itspursuit of excellence. The Bank shall

comply with not only the statutoryrequirements, but also voluntarily formulateand adhere to a set of strong CorporateGovernance practices. The Bank believesin setting high standards of ethical values,transparency and a disciplined approachto achieve excellence in all its sphere ofactivities. The Bank is also committed tofollow the best practices. The Bank shallstrive hard to best serve the interests of itsstakeholders comprising shareholders,customers, Government and society at large.



Companies (Acquisition andTransfer of Undertakings) Act,1980, as amended and theNationalized Banks



Management and MiscellaneousProvisions Scheme, 1980, asamended.

The Board of PSB on averageconsists of 9 to 13 members, whichis in line with the Sec. 149 (1) of theCompanies Act, 201.

Distribution of the Board

Chart 11: Distribution of Executive, Non-executive and Independent Board Members of PSB

The percentage of non-executive directorsin the board of PSB range from 70 % to82 % during 2011-12 to 2015-16 whichis in accordance with Sec. 149 (4).


The Board of PSB is having one womandirector on its board since 2013-14.

The board of PSB on average is holdingits board meeting nine to twelve every year,which is a sign of proactive managementimplying that the constant engagement ofthe board will lead to less number ofcorporate governance issues.

Table 11: Audit Committee, Nomination and Remuneration Committee and Risk ManagementCommittee of Central Board of PSB




2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 5 5 6 5 5 4 4 4 4 4 6 5 6 5 5 No. of ID 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 No of ED 1 1 2 1 1 0 0 0 0 0 2 2 3 2 2 No. of meetings 7 8 8 8 7 1 1 1 1 1 4 4 4 4 4


121

Audit Committee

In case of PSB, the number of auditcommittee meetings held was on averageof seven to eight per year.Remuneration Committee

In case of PSB the Remuneration Committeeconsists of only non executive directors andhalf of them are independent directors forthe period 2011-12 to 2015-16, therebycomplying with the mandatory requirements.


PSB has complied with theserequirements from 2011-12 to 2015-16, which is clearly evident from the factthat on average four meetings of thecommittee were held annually and thecomposition of the committee for all theyears is such that , it can effectively gaugethe risk inherent in operations andexternal risks.

Table12 : Stakeholders Relationship Committee and CSR Committee of PSB


2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12



In case of PSB, the committee has beenconstituted as per the mandatoryrequirement and on average have held fourmeetings per year.

CSR Committee

The board of PSB has not constitutedCSR committee till 2015-16.

V. PUNJAB NATIONAL BANK (PNB)

Punjab National Bank is an Indianmultinational banking and financial servicescompany. It is a state-owned corporationbased in New Delhi. The bank wasfounded in 1894.


PNB’s Corporate Governance philosophystems from the belief that corporategovernance is an integral element forimproving efficiency and growth of theorganization with overall objective ofenhancing investor and other stakeholders’confidence. As a Bank PNB is committedto good corporate practices based onconscience, openness, fairness,professionalism and accountability. PNB’sBoard of Directors, guided by the missionstatement, and formulates strategies andpolicies focusing on value optimization forall stakeholders like customers,shareholders and the society at large.




The various aspects of the Board ofDirectors Viz. board structure, boardstrength and size, board diversity and

number of board meetings and few otherrelevant particulars are examined in thefollowing paragraphs and presented inTable13.

Table 13 : Board Structure, Strength and Size of PNB



The Board of the Bank is constituted inaccordance with the provisions of theBanking Companies (Acquisition andTransfer of Undertakings) Act, 1970, theNationalized Banks (Management &Miscellaneous Provisions) Scheme, 1970,and the Banking Regulation Act, 1949.

The Board of PNB on average consistsof 10 to 15 members, which is in line withthe Sec. 149 (1).

The percentage of non executivedirectors in the board of PNB rangefrom 64 % to 73 % during 2011-12 to2015-16 which is in accordance withSec. 149 (4).

Table 14: Audit Committee, Nomination and Remuneration Committee and Risk ManagementCommittee of Central Board of PNB




2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 5 4 7 8 7 4 2 4 4 4 6 4 6 9 6

No. of ID 4 3 4 5 5 4 2 4 4 4 2 1 2 5 3 No of ED 1 1 3 3 2 0 0 0 0 0 4 3 4 4 3 No. of meetings 5 11 13 8 11 1 1 1 2 1 4 4 4 4 4


123


The Board of PNB is having one womandirector on its board from 2011-12 to2015 -16.The board of PNB on average is holding itsboard meeting eleven to thirteen every year.Committees of the Board

For the efficient discharge of dutiesentrusted to the board, the board isempowered to set up various committeesof the board members itself viz. the AuditCommittee, Nomination and RemunerationCommittee, Risk Management Committee,Stakeholders Relationship Committee andCSR Committee (Table 14).Audit Committee

In case of PNB, the number of auditcommittee meetings held was on averagefive to thirteen per year.


In case of PNB the RemunerationCommittee consists of only non executivedirectors and half of them are independentdirectors for the period 2011-12 to 2015-16, thereby complying with the mandatoryrequirements.


PNB has complied with theserequirements from 2011-12 to 2015-16,which is clearly evident from the fact thaton average four meetings of thecommittee were held annually and thecomposition of the committee for all theyears is such that , it can effectively gaugethe risk inherent in operations and externalrisks.

Table 15 : Stakeholders Relationship Committee and CSR Committee of PNB


2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12


Stakeholder Relationship CommitteeIn case of PNB, the committee has beenconstituted as per the mandatoryrequirement and on average have held sixmeetings per year.CSR CommitteeThe board of PNB has not constitutedCSR committee till 2015-16.

VI. DENA BANK (DB)

Dena Bank headquartered in Mumbai, isowned by the Government of India, Thebank was founded in 1938 and the Indiangovernment nationalized it in 1969.

The Bank’s Philosophy on Code ofGovernance - Bank’s Corporate



Governance philosophy is based onapplication of best management practiceswhich will facilitate effective management andcontrol of business. This enables the Boardand the Senior Management of the Bank totake decisions adhering to ethical standards,transparency, accountability, responsibilityand financial stability. The Bank believes thatCorporate Governance is closely linked toits core values and is associated with ethicalpractices, concern for its employees,extending quality service to its customers,striving to meet the shareholders expectationsand societal aspirations. This optimizes the

value for all its stakeholders which includesnot only the Board of Directors and theSenior Management but also theShareholders, Customers, Employees andthe society at large.



Table16: Board Structure, Strength and Size of DB

Particulars 2015-16 2014-15 2013-14 2012-13 Total No. of Directors 12 11 14 11 Non-Executive ( excluding Chairman) 3 3 6 5 Independent Non Executive 6 5 5 4 Women Non-Executive 0 1 1 0 Foreign Non Executive 0 0 0 0 Executive (excluding Chairman) 2 2 2 1 Women Executive 1 1 1 0 Foreign Executive 0 0 0 0 No. of Board meetings 10 12 12 16 Is the Chairman Executive? YES YES YES YES


The Board had constituted ManagementCommittee as per provisions ofNationalized Banks (Management andMiscellaneous Provisions) Scheme, 1970/1980.

The percentage of non executive directorsin the board of PSB range from 69 % to82 % during 2012-13 to 2015-16 whichis in accordance with Sec. 149 (4).


The Board of PSB is having one womandirector on its board from 2013-14 to2015 -16.

The board of DB on average is holding itsboard meeting ten to sixteen every year,which is a sign of pro-active managementimplying that the constant engagement ofthe board will lead to less number ofcorporate governance issues.

125



Committee, Nomination andRemuneration Committee, RiskManagement Committee, StakeholdersRelationship Committee and CSRCommittee (Table 17).

Table17: Audit Committee, Nomination and Remuneration Committee and Risk ManagementCommittee of Central Board of DB




2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 6 5 6 4 6 4 2 4 2 4 5 5 6 4 5

No. of ID 4 3 4 3 4 4 2 4 4 4 2 2 3 2 2 No of ED 2 2 2 1 2 0 0 0 0 0 3 3 3 2 3 No. of meetings 8 9 12 12 8 4 0 1 1 4 4 4 4 4 4


Audit CommitteeIn case of DB, the number of auditcommittee meetings held was on averageof eight to twelve per year.Remuneration CommitteeIn case of DB the RemunerationCommittee consists of only non executivedirectors and half of them are independentdirectors for the period 2011-12 to 2015-16, thereby complying with the mandatoryrequirements.


DB has complied with theserequirements from 2011-12 to 2015-16, which is clearly evident from the factthat on average four meetings of thecommittee were held annually and thecomposition of the committee for all theyears is such that , it can effectively gaugethe risk inherent in operations andexternal risks.

Table 18 : Stakeholders Relationship Committee and CSR Committee of DB


2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12





In case of DB, the committee has beenconstituted as per the mandatoryrequirement and on average have held fourmeetings per year.

CSR Committee

The board of DB has not constituted CSRcommittee till 2015-16.

VII.CENTRAL BANK OF INDIA (CBI)

Central Bank of India, a government-owned bank, is one of the oldest andlargest commercial banks in India. It isbased in Mumbai.


Thrust of the Corporate Governance ofthe Bank is to enhance shareholders’ value

by pursuing ethical practices in the conductof its business and maintaining highstandard of disclosure and transparency.The Bank has adopted best practices, andstandards of governance are monitored byvarious Committees of the Board. TheBoard, the Executives and otherfunctionaries have distinctly demarcatedroles in achieving the Corporate goals –improved performance and enhancedshareholders’ value.



Particulars 2015-16 2014-15 2013-14 2012-13 2011-12 Total No. of Directors 13 14 13 10 13 Non-Executive ( excluding Chairman) 3 3 3 2 3 Independent Non Executive 6 6 6 5 6 Women Non-Executive 1 1 1 0 1 Foreign Non Executive 0 0 0 0 0 Executive (excluding Chairman) 3 4 3 2 3 Women Executive 0 0 0 0 0 Foreign Executive 0 0 0 0 0 No. of Board meetings 13 15 13 13 Is the Chairman Executive? YES YES YES YES YES

Table 19 : Board Structure, Strength and Size of CBI


The Bank is constituted under the BankingCompanies (Acquisition and Transfer ofUndertakings) Act, 1970 (as amendedfrom time to time). The generalsuperintendence, direction andmanagement of the affairs and business of

the Bank is vested in the Board of Directorspresided over by the Chairman andManaging Director.

The composition of the Board of Directorsof the Bank is governed by the provisionsof the Banking Regulation Act, 1949, theBanking Companies (Acquisition and

127

Transfer of Undertakings) Act, 1970 asamended and the Nationalised Banks(Management and MiscellaneousProvisions) Scheme, 1970, as amended.

The percentage of non executive directorsin the board of CBI range from 64 % to

70 % during 2012-13 to 2015-16 whichis in accordance with Sec. 149 (4).


The Board of CBI is having one womandirector on its board from 2011-12 to2015 -16 excepting 2012-13.

Board Meetings

The board of CBI on average is holdingits board meeting thirteen to fourteen everyyear, which is a sign of pro activemanagement implying that the constantengagement of the board will lead to lessnumber of corporate governance issues.Committees of the BoardFor the efficient discharge of duties

Chart 21 : Number of Board meetings held in CBI

entrusted to the board, the board isempowered to set up various committeesof the board members itself viz. the AuditCommittee, Nomination andRemuneration Committee, RiskManagement Committee, StakeholdersRelationship Committee and CSRCommittee (Table 20).

Table 20 : Audit Committee, Nomination and Remuneration Committee and Risk ManagementCommittee of Central Board of CBI


Nomination and Remuneration Committee Risk management Committee

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 5 6 7 5 5 4 2 0 2 4 8 4 3 4 8

No. of ID 4 4 4 4 4 4 2 0 2 4 8 4 3 4 8 No of ED 1 2 3 1 1 0 0 0 0 0 0 0 0 0 0 No. of meetings 15 4 8 9 15 4 2 2 2 4 NA NA NA NA NA




Audit Committee

In case of CBI, the number of auditcommittee meetings held was on averageof four to fifteen per year.Remuneration Committee

In case of CBI the Remuneration Committeeconsists of only non executive directors and

half of them are independent directors forthe period 2011-12 to 2015-16, therebycomplying with the mandatory requirements.


CBI has not held any meeting of the riskmanagement committee during theperiod 2011-12 to 2015-16


2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12


Table 21: Stakeholders Relationship Committee and CSR Committee of CBI


In case of CBI, the committee has beenconstituted as per the mandatoryrequirement and on average have held fourmeetings per year.CSR Committee

The board of CBI has not constituted CSRcommittee till 2015-16.VIII. BANK OF BARODA (BOB)

Bank of Baroda is an Indian state-ownedbanking and financial services companyheadquartered in Vadodara (earlier knownas Baroda) in Gujarat, India. It is thesecond largest bank in India, next to StateBank of India.The Bank’s Philosophy on Code ofGovernance

The Bank shall continue its endeavor toenhance its shareholders’ value byprotecting their interest by ensuring

performance at all levels and maximizingreturns with optimal use of resources inpursuit of excellence. The Bank shallcomply with not only the statutoryrequirements but also voluntarily formulateand adhere to a set of strong CorporateGovernance practices. The Bank believesin setting high standards of ethical values,transparency and disciplined approach toachieve excellence in all its sphere ofactivities.

The Bank is also committed to follow thebest international practices. The Bank shallstrive hard to serve the interests of itsstakeholders comprising shareholders,customers, Government, employees,creditors and society at large.


The various aspects of the Board ofDirectors Viz. board structure, board

129

strength and size, board diversity andnumber of board meetings and few otherrelevant particulars are examined in the

following paragraphs and presented inTable22.

Table 22 : Board Structure, Strength and Size of BOB

Particulars 2015-16 2014-15 2013-14 2012-13 2011-12 Total No. of Directors 10 8 10 13 13 Non-Executive ( excluding Chairman) 2 2 2 4 5 Independent Non Executive 4 3 4 5 5 Women Non-Executive 1 1 0 0 1 Foreign Non Executive 0 0 0 0 0 Executive (excluding Chairman) 3 2 3 3 2 Women Executive 0 1 0 0 0 Foreign Executive 0 0 0 0 0 No. of Board meetings 13 18 20 17 17 Is the Chairman Executive? NO YES YES YES YES


The composition of Board of Directors ofthe Bank is governed by the provisions ofThe Banking Regulation Act, 1949, TheBanking Companies (Acquisition &Transfer of Undertakings) Act, 1970, asamended and The Nationalized Banks(Management & MiscellaneousProvisions) Scheme,1970, as amended.

The percentage of non-executive directorsin the board of BOB range from 60 % to

72 % during 2011-12 to 2015-16 whichis in accordance with Sec. 149 (4) of theCompanies Act, 2013.


The Board of BOB is having one womandirector on its board from 2011-12 TO2015-16 excepting years 2012-13 and2013-14 to 2015 -16.

The board of BOB on average is holdingits board meeting thirteen to sixteen everyyear, which is a sign of pro-active




2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

No. of members* 5 6 6 6 6 5 2 4 4 4 5 4 5 5 4 No. of ID 4 4 3 3 4 5 2 4 4 4 2 2 1 1 1 No of ED 1 2 3 3 2 0 0 0 0 0 3 2 4 4 3 No. of meetings 12 11 12 11 11 2 1 1 2 1 5 2 4 4 4

Table 23: Audit Committee, Nomination and Remuneration Committee and RiskManagement Committee of Central Board of BOB




management implying that the constantengagement of the board will lead to lessnumber of corporate governance issues.


For the efficient discharge of dutiesentrusted to the board, the board isempowered to set up various committeesof the board members itself viz. the AuditCommittee, Nomination andRemuneration Committee, RiskManagement Committee, StakeholdersRelationship Committee and CSRCommittee (Table 23).

Audit Committee

In case of BOB, the number of auditcommittee meetings held was on averageof eleven to twelve per year.


In case of BOB the RemunerationCommittee consists of only non-executivedirectors and half of them are independentdirectors for the period 2011-12 to 2015-16, thereby complying with the mandatoryrequirements.


BOB has complied with theserequirements from 2011-12 to 2015-16,which is clearly evident from the fact thaton average four to five meetings of thecommittee were held annually and thecomposition of the committee for all theyears is such that , it can effectively gaugethe risk inherent in operations and externalrisks.

Table 24: Stakeholders Relationship Committee and CSR Committee of BOBParticulars Stakeholders Relationship

Committee CSR Committee

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12



In case of BOB, the committee has beenconstituted as per the mandatoryrequirement and on average have heldthree to four meetings per year.

CSR Committee

The board of BOB has not constitutedCSR committee till 2015-16.

CONCLUSION

It can be inferred from the structuraldynamics of board during sample periodthat the CG practices in the public sectorbanks are improving and following thestatutory requirements. The CG practicesof the banks having large capital arerelatively stable over the period of time andnot much variation is seen. This can be

131

explained by the fact that large banks havewell established internal controlmechanisms and there prevail a regulatoryoversight from multiple agencies on thesebanks. The banks having highest marketcapitalization such as SBI, PNB, BOBand UBI consistently show better CGpractices with least variation. One of thereasons for overall improvement in CGpractice after 2012-13 has been thepromulgation of the Companies Act, 2013which had made certain parameters of thepresent CG practices as mandatory.

The CG in public sector banks is enforcedthrough board and various committees ofthe board. The selection to the board andcommittees is governed in a manner whichis semi rigid as a consequence themanagement is not able to influence thefunctioning of the board and committees.Thereby preserving the independence ofthe board and committees from theexecutive which results in better andimproved CG practices.

REFERENCES

Annual Reports of the selected (8 sample)banks.Bedi, Monica, (2010), An integratedframework for service quality, customersatisfaction and behavioral responses inIndian banking industry: A comparison ofpublic and private sector banks, Journalof Services Research. Apr-Sep2010, Vol.10 Issue 1, p157-172

Catherine Ridings & Molly Wasko(2010), Online discussion groupsustainability: Investigating the interplaybetween structural dynamics and socialdynamics over time, Volume 11, Journalof AIS, Special Issue, pp. 95-121,February 2010Edward J. Zajac and James D. Westphal(1996), Director Reputation, CEO/ boardpower, and the dynamics of boardinterlocks, Academy of ManagementProceedings Vol. 1996, No. 1, PublishedOnline:13 Dec 2017https://doi.org/10.5465/ambpp.1996.4980568Kamel Mellahi (2005), The Dynamics ofBoards of Directors in FailingOrganizations, Long Range Planning,Volume 38, Issue 3, June 2005, Pages261-279Neeraj Dwivedi & Arun Kumar Jain,(2005), Corporate Governance andPerformance of Indian Firms: The Effectof Board Size and Ownership, EmployeeResponsibilities and Rights Journal,September 2005, Volume 17, Issue 3, pp161–172www.sebi.gov.inwww.rbi.org.inAcknowledgement: This paper is anoutcome of a research project funded bythe National Foundation for CorporateGovernance (NFCG), Ministry ofCorporate Affairs, New Delhi, India.



History about Ashok Leyland (ALL):

Ashok ley land was set up in 1948 asAshok Motors in collaboration with AustinMotor Co, England to assemble Austincars, by Raghunandan Saran, whose sonwas Ashok. Production began inSeptember 1949, at the factory situatedat Ennore, north of Madras, and soon thefirst indigenously assembled A40 Austincar was rolled out, Later, in 1950 anagreement was reached with Leyland, UKgetting sole rights to import, assemble andprogressively make Leyland trucks forseven years. In 1955, the company wasrenamed Ashok Leyland with equityparticipation from Leyland Motors. Itbecame famous for its double-deckerbuses (the first to make them) with 50%indigenous components. In 1970 itdelivered1, 000 6x4 Hippo tipper trucksto the Indian Army and its design remainseven today at the centre of Army trucks.

In 1987,when the Hinduja group acquiredAshok Leyland (by acquiring the offshoreLeyland stake in the company) its journeyin technology began with Iveco, the Italiancommercial vehicle (CV) manufacturerwhich wanted to introduce its expertise in

Ashok Leyland Ltd (ALL)ALL is Well: A Case study

Pavan PatelProfessor, SSIM, Kompally, Secunderabad, Telangana, India.

[email protected]

India. Iveco later took a stake in thecompany too. But in 2007, the Hindujabrought out Iveco’s stake. In the mid-1990’s,ALL explored getting into carmanufacturing but abandoned the idea, asit was a different business from CVs. TheHinduja group is 14billion transnationalconglomerate, founded by lateP.D.Hinduja in 1914and earlier focussedon trading and finance the traditionalbusiness of Sindhi Shikarpur merchants.The group’s activities now span variousfields like trading, project development,automotive, banking and fiancé health careIT/ITEs, real estate, energy and chemical&agribusiness. It has a presence in 37countries, and employees more than70,000 people. Ashok Leyland is thegroup’s flagship company. The well-known four Hinduja brothers Srichand,Gopichand, Prakash and Ashok, controlthe group competently supported bymembers of the next generation. But thefamily is not involved in the day to dayoperations of the businesses, which havebeen entrusted to professionals. TheHinduja family has consistently been onvarious Rich Lists; and for long were therichest Indians in UK.

Case Study


133

This 70year old company, the secondlargest Indian manufacturer of commercialvehicles (CV) was perceived as almostcrippled since 2013 with market down.Annexure-I is very clear indicated the fiveyear financial performance of the company.The annual medium and heavy commercialvehicle demand plummeted from 350,000to 200,000 units during 2013 and 2014.The company finances were tender stage,with high investment of Rs6, 000 core overthe previous five years more than the totalinvestment in the company in its first60years of existence. Its debt equity ratioto 2:4. Market sentiment was negative andat Rs 11 the price was under the bookvalue. The debt equity ratio was hasreduced to a low 0.3 and the stock priceis hovering at 120-125 per share.

Leadership commitment: Mr.Vinod.K.Dasari was appointed as CEO in April2011. The company was in very badposition, in all dimensions. He struggledwith his team deftly executed hisrestructuring plans with determination. Hedisposed of the non-performing assets soldthe company’s holding of Indusind bankshares, renationalized Joint Ventureholdings and trimmed the work force by10 percent. But earlier investment intechnology, improved product quality andoperational efficiency allowed him to focuson new growth areas, to reducedependency on the core business of heavyhighway trucks. He aggressively expandedsales and services in the rest of the countrydisruptively launched new products andthrust on exports under a programme

called RFG (Restructuring for Growth)

Identifying Bull market:

The market share has improved from 24percent in 2013 to 32 percent. Theoperating working capital has come downfrom 37 days to eight days. The dealershipand touch points have been ramped upfrom 350 to 2,800. The current manpowerof the company is 10,700 an average ageof 35-38 years. The turnover hasincreased from Rs 13,300 core to 21,300all in the last five years. When the marketpartially recovered, we did not look back‘says Mr Gopal Mahadevan, CFO, AshokLeyland (ALL). All these exercise helpedas grow faster than the market.” AshokLeyland (ALL) has presence in trucks,buses, light vehicles defence vehicles andpower solutions. It is fourth largest bus and14thlargest truck maker in the world. Itproduces 145,000vehicles and is thesecond largest commercial vehiclesmanufacturer in India after Tata Motors ina market with more than 10 internationallyrecognised manufacturer. The companydesign and make its own engines. All wasan early producer of multi axel trucks,articulated buses and CNG vehicles inIndia. Some of the new products like JanBus, U 3718, Boss, Captain, and 40-iTcontributed to the company growth. All hasconsolidated its position and introducednew initiatives with2.5 percent of itsrevenue invested in R&D.

Identifying similar friends: ALL has notentirely smooth sailing. In 2011 it formedjoint venture (JV) with Nissan Motors of

Ashok Leyland Ltd (ALL) ALL is Well: A Case study


Japan to make LCVs at Hosur in India. InNovember 2017, ALL acquired the NissanMotor stake of the joint venture (JV). Allalso Nissan Motor Co Ltd’s stake in eachof the three JVs formed between twocompanies, namely Ashok Leyland Nissan–vehicles Limited, Nissan-Ashok LeylandPowertrain Limited and Nissan-AshokLeyland Technologies Limited at nominalcost after Nissan decide to venture on itsown in India.

Innovation of Products: ALL is nowmaking 32,000 LCVs (light Commercialvehicles) called Dost, MITR, and Partnerwhich are based around the Nissandesigns. ALL late entrant in LCVs vehiclemarket and it EBIDTA margin turnedpositively by 8-9 percent and ALL having15% market share in the 2- 2.5 tonesegment. The company is now ready toinvest Rs 400 core in the product and plantcapex in the LCV business and addadditional capacity of another 25,000units. Mr. Vinod K. Dasari, CEO of thecompany emphasis ALL is the firstcompany to introduce air conditionedcabins and provide power steering. Itclaims vehicles from the company are 20%more fuel efficient that it competitors. Itplans to launch new products every sixmonths.

Mr.Dheeraj Hinduja highlighted theimportance to become technology self-reliant and make the product suited for costsensitive Indian market. We bought a stakein Iveco. It revamped the Research andDevelopment centre completely five yearsback and now employs 1,100 people

there, as against 120 people in the past..The Technological up gradation includestheir own cabs, engine and whole vehicleconfigurations. ALL developed theintelligent Exhaust Gas Recirculation(IEGR) technology a simple yet innovativesolution which achieved BS IV emissionnorms. It works on single process wherea portion of an engine’s exhaust gasrecirculated back to the engine cylinders.This technology is based on theconventional Exhaust cylinder. Thistechnology is based on the conventionalExhaust Gas Recirculation (EGR)technology, which works well for vehiclesor engines up to 130HP only. ALL’s claimsno other OEM has achieved anywhereelse in the world. IEGR is proud exampleof Innovation.

Standard Operation Procedures: In theyear 2016 ALL’s Pantnagar unit hadbecome the first truck and bus plant in theworld and also only commercial vehiclemanufacturer outside of Japan to winDeming Prize-the oldest and most widelyrecognised quality prize. Which awardedto companies that have established TotalQuality Management (TQM) in theirbusiness. ALL only commercial vehicleCompany in the world to win Demingprizes in consecutive years, says proudCEO Mr.Vinod K.Dasari. ALL is the firstcompany to offer a five yearcomprehensive annual maintenancecontract to its customers. (Its model 3718is of 37tonne capacity). Under tatkalscheme the company has made a promiseto attend to break down within four hours

135

anywhere in India and put a vehicle backon the road in 48hours failing which thecompany will pay rs1, 000 per day to thetruck owner

Think Global and act Local: All hasstarted it operation in Ras Al Khaimahventure in United Arab Emirates is verysmall but very successful and profitableaddressing to local market. The successfullessons from the Ras Al Khaimah nowALL is planning to establish its operationsin East Africa, Russia, South East Asia andKenya. In the year 2016, ALL has linkeda strategic tie-up with its largest dealer,IFAD Auto Limited, Bangladesh to buildan assembly unit for ALL .The Jointventure has a capacity to rolling out 600-800 vehicles in all ranges every moth.

Future Direction: ALL is also looking atelectric vehicle (EV) to become futureready. The company has formed atechnical alliances with Sun Mobility todevelop electric mobility solutions. Sunmobility plans to revolutionise thetransportation sector by deploying a uniqueopen –architecture ecosystem. Thecompany is built around hard work, talentand innovation by professional managersalong with prudent and controlled capitalallocation from the promoters whichdefines its success. “ALL is very goodcompany with large product range” saysMr.Vinod Agarwal, MD & CEO, Volvoand Eicher Commercial Vehicles jointventure. During Last few years it has grownwell the particularly in the new segmentsunder Mr.Vinod K. Dasari leadership.

Particulars/Years 2017 2016 2015 2014 2013 Revenue 21,331.67 19992.97 14485.93 10,560.85 13,298.56 Profit before tax 1.330.09 826.54 442.20 91.22 470.71 Profit after tax 1.223.08 389.81 334.81 29.38 433.71

ALL is Well –A Case study

Annexure-I : Five year results: (In cores)

Annexure-II : Regional market share of all (In %)Zone 2011-12 2017-18 South 47.10 42.80 North 16.40 25.01 West 20.60 31.00 East 10.00 26.20 Central 22.90 35.00

Annexure III: Peer comparison in M&HCV (Units sold)

Teaching Notes: All is Well- Case Study

Name 2015-16 2016-17 Market Share % Growth (%) Remarks Ashok Leyland 109,760 113,292 3 33 Tata Motors 176493 175262 -1 51 M&M 7385 8631 17 2 VECV-Eicher 36,736 41,416 13 12 Others 7,220 7,631 6 2



Questions for Discussion:

1. What is the Restructuring? Identifysymptoms of restructuring?

2. What are the steps can berecommended Restructuring Plan?

Introduction:

Business restructuring may be defined asa conscious effort to restructure policies,programmes, products, processes andpeople to serve the redefined policies,programmes on a sustainable basis,because most of the restructuring policiesare carried out with an reaction to themarket variables or internal problems,without a serious attempt of looking atlong-term (or sustainable) results. Let uslook at the comprehensive scope availableto restructure, which defines variousinteresting dimensions of restructuring –The Purpose is Quantitative & QualitativeResults and their sustainability.

If the purpose decides the scope ofrestructuring, it should also decide thebroad sequence of restructuring. Veryoften the purpose alone may not decidethe sequence, the owner’s confidence,market variables of urgent attention etc.do decide the sequence of restructuring.The following may be alternativesequences. Symptoms to restructuringneed to address through discussion in theclass room looking at Annexure-I, studentmanagers need to discuss what are themain reasons will lead to restructuring ofthe company and student managers needunderstand and contribute to the discussion

what are the efforts were contributed aMr.Vinod.K.Dasari, CEO of the companyin understanding the problem of thecompany.

Meaning of Restructuring:Restructuring is a strategy through whicha firm changes its set of businesses or itsfinancial structure to position its businessin the competitive market. This strategy hasbecome necessary for all thoseorganisation which were having fallowingsymptoms

Symptoms of Restructuring:

Financial Symptoms

1. Increasing operating costs and cost offinance 2. Falling share prices in themarket, without a near-future scope forcorrection. 3. Declining earnings ratios fordivisions, vendors, distributors andshareholders. 4. Increasing costs at thesupply-side and demand side of the value-chain.5.Growing costs on marketingoperations and hence growing pressure onmanufacturing costs. 6. Growing costs ofcorrective efforts, revisions orreincarnation of products andservices.7.Unusual cost of wastage,inefficiencies, idle time, insurance,maintenance, deliveries, etc. 8. Increasedcosts of applied research, concept sale andtake-off efforts.

Strategic Symptoms

1. Slowed down desire for perpetualgrowth and wealth acceleration. 2.Growing mismatch between strategyformulation by owners and professional

137

managers. 3 Imbalance of value-additionsdone by value-driving divisions, individualsand other strategic inputs. 4. Imbalancebetween short-term tactics and long-termstrategies.

Market, Economy-level and GlobalSymptoms

1. Sustained recession, shrinkinginternational markets. 2. Cheaper fundsavailability from the international market.4. Growing import substitution. 5.Growing influence of networking andmultinational corporations. 6. Increasedinternational culture of branding anythingand everything. 7. Hyper rate of‘information technology advancement,resulting in the globe becoming one singlemarket. 9. Increasing replacement of skilland system employees by knowledgeemployees and entrepreneurial employees.10. Opening up of certain economies,regions and the growing scope of newbusinesses, government-private sectorparticipation, international joint ventures,etc. 11. An economy’s transition from thecore sector to service sector to informationtech-sector to advisory sector.

Operational symptoms

1. Delays in supply chain and distributionchain. 2. Weak market feedback onproducts, prices and promotional policies3. Decline in new market developmentefforts. 4. High asset maintenance andrepairs. 5. Distributed ratio between thenumber of core employees and supportemployees and the time and effort spentin core performances and support

performances. 6. Uncomfortable relationswith external stakeholders like contractors,vendors, government departments,consultants etc.Answer: 2 Restructuring Plan:

The Restructuring Plan, the purpose ofrestructuring is clearly decided, arestructuring plan could then havereasonable clarity and shape. Althougheach individual purpose would decide thedetails of the plan distinctively andleadership demonstration will play vital rolein the restructuring process. A generalstructure may be summarized as follows:Steps involved in Restructuring:

1. Define the purpose further, with themaximum details of possible sustainability.2. Decide the sequence of restructuring.3. Check out all minute details of eachoperation (related to the soft and hardaspects of restructuring) under each phaseof the sequence, with the use of Programevaluation and Review technique (PERT)Critical Path Method (CPM) charts anddetails about major hurdles and tactics toovercome these hurdles. 4. Have a parallelcost-benefit chart along with the PERT-CPM chart of operations. The costs andbenefits should be on both the scales-shortand long. 5. Decide a lead team of keyexecutives and owners to carry out thewhole process of restructuring, decide onthe action plan for each member of the teamand ‘homogenous progress parameters’ tomonitor the process. 6. Chalk out adetailed plan with soft and hard aspects,costs and crisis-management of changeand result indicators.



Significance of Corporate RestructuringCorporate restructuring is a strategicdecision leading to the maximization ofcompany growth by enhancing itsproduction and marketing operations,reduced competition, free flow of capital,globalization of business, etc. Some of themost common reasons of corporaterestructuring are discussed brieflyhereunder:(i) Economies of scale: Economies of

scale arises when increase in volumeof production leads to a reduction incost of production per unit. Forinstance, overhead costs can besubstantially reduced on account ofsharing central services such as –accounting and finance, personnel andlegal, sales promotion andadvertisement, top level managementand so on. So when two or morecompanies combine, certain economiesare realized due to the larger volume ofoperations of the combined entity. Theseeconomies arise due to increasedproduction capacity, strong distributionnetworks, effective engineering services,research development facilities, dataprocessing system and others.

(ii) Operating Economies: Variousfunctions may be consolidated andduplicate channels may be eliminatedby implementing proper planning andcontrol system.

(iii) Synergy: Synergy refers to a situationwhere the combined firm is morevaluable than the sum of the individualfirms. It refers to benefits other than

those related to economies of scale.Apart from operating economies,synergy may also arise from enhancedmanagerial capabilities, creativity,innovativeness, R&D, productivityimprovements, improved procurementand the elimination of duplication.

(iv) Managerial Effectiveness: One of thepotential benefits of joint venture is anincrease in managerial effectiveness.This may occur if the existingmanagement team, which hasperformed poorly, is replaced by amore efficient one.

(v) Other reasons of corporaterestructuring are given below: (a) Toreturn to the shareholders of the surpluscash, which is not required in the nearforeseeable future. (b) To enhance theearnings per share of the company. (c)To provide to shareholders/investorsthat the company is presentlyundervaluing the share of the companyin relation to its intrinsic value and theproposed buy back will facilitaterecognition of the true value. (d)Tomaintain shareholders’ value in asituation of poor state of secondarymarket by return of surplus cash to theshareholders. (f) Eliminate the takeoverthreats. (g) An opportunity to growfaster, with ready-made market share.(h)To eliminate the competition bybuying it out. (i) Diversification withminimum cost and immediate profit. (j)To forestall the company’s owntakeover by a third party.

139

References:

1. Ashish Nanda and Peter JWilliamson: “Use Joint Venture toEase the Pain of Restructuring”Harvard Business Review;November –December 1995; pageno 199-128.

2. Edward Bowmen, Harbir Singh,Michael USeem and Raja Bhadury:When Does Restructuring ImproveEconomic reforms, CaliforniaManagement Review; Volume 41;No: 2, Winter 1999: Page no 32-49.

3. Hitt, Ireland, Hoskisson andManikutty, Strategic Management;9th Edition, Cengage LearningEdition, Strategic Acquisitions andRestructuring; page no:169-173.

4. https://www.ashokleyland.com/hinduja-group

5. Business India, January 29- February11, 2018 page no:31-37

6. http://www.himpub.com/documents/Chapter1158.pdf

7. https://www.business-standard.com/article/companies/ashok-leyland-sees-a-21-per-cent-jump-in-m-hcv-s a l e s - i n - s e p t e m b e r -118100100254_1.html

8. https://www.business-standard.com/article/companies/ashok-leyland-bags-order-for-200-ac-intercity-c i t y - b u s e s - i n - b a n g l a d e s h -118091400692_1.html

https://www.business-standard.com/article/companies/ashok-leyland-sales-up-by-27-in-july-m-hcv-sales-rise-by-22-118080100250_1.html


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Notes to Contributors

The journal will include thematic and empirical research papers in the field of BusinessManagement and allied areas, with emphasis on pragmatic orientation.

Before submitting the paper for publication, please ensure that this paper has not beensent for publication or published elsewhere, until you receive a communication from ourside. Once a manuscript is submitted for publication, it will be screened by the editorialboard to check:1.fitness of the paper for publication in the journal, & 2.originality/ plagiarism(through software).

After the preliminary screening it will then be blind-reviewed by two independent national/international reviewers, for the scientific merit, readability and interest. Unacceptedmanuscript will not be returned; however, you will be communicated accordingly.

Accepted authors will be given one hard-copy of the journal and one soft-copy.

The manuscript should be neatly typed in double space on an A-4 sheet with 1 inch spaceon all sides in 12 Times Roman size font. The manuscript should be of maximum up to5500 words, or 20 pages.

The references, as illustrated below, should be in American Psychological Association(APA) format, 5th Edition:

Reference from Journal:Alkaike, H. (1987). Factor analysis and AIC. Psychometrica, 52, 317-332.

Reference from Edited book:Browne, M. W. & Cudeck, R. (1999). Effects of Organizational Climate and CitizenshipBehavior on Organizational Effectiveness. In K.A. Bollen & J.S. Long (Eds.) HumanResource Management (pp. 136-147). Newsbury Park, CA: Sage.

Reference from Book:Luthans, F. (2002). Organisational Behaviour. New Delhi: McGraw-Hill International.Booth, W. C., Colomb, G. G., & Williams, J. M. (1995). The craft of research. Chicago:University of Chicago Press.

Reference from online resources:Hacker, D. (1997). Research and documentation in the electronic age. Boston: BedfordBooks. Retrieved October 6, 1998, from http://www.bedfordbooks.com/index.htmlMorse, S. S. (1995). Factors in the emergence of infectious diseases. Emerging InfectiousDiseases, 1(1). Retrieved October 10, 1998, from http://www.cdc.gov/ncidod/EID/eid.htm

Smith, E. E. (2001). Internet term paper mills: The case for mandatory expulsion[Electronic version]. Journal of Crime and Punishment, 6, 123–139.

Newspaper ArticleGoleman, D. (1991, October 24). Battle of insurers vs. therapists: Cost control pittedagainst proper care. New York Times, pp. D1, D9.

Newspaper Article (Online)Markoff, J. (1996, June 5). Voluntary rules proposed to help insure privacy for Internetusers. New York Times. Retrieved April 1, 1996, from http://www.nytimes.com/library/cyber/week/yo5dat.html

Newspaper Article (No Author)Undisclosed settlement reached out of court in Michigan Biodyne civil suit. (1992, March1). Psychiatric Times, p. 16.

Conference Paper (Published):Kuroda, S. Y. (1988). Whether we agree or not: A comparative syntax of English andJapanese. In W. J. Poser (Ed.), Papers from the second international workshop onJapanese syntax (pp. 103–143). Stanford, CA: CSLI.

Dissertation:Downey, D. B. (1992). Family structure, parental resources, and educational outcomes.Ph.D. dissertation, Department of Sociology, Indiana University, Bloomington, IN.

Checklists to be adhered to:1. Cover Letter with a note on Title of paper, with contributor(s)’ complete address.2. Abstract of 100-120 words, with title of paper (in Separate Sheet/ page)3. Full-text of article (with title of paper, but not with authors name/ affiliation)4. Tables and figures/ graphs should be given in the end.

Manuscript Submission:Please email all manuscripts only in MS-word/ RTF format to: [email protected]

Inquiries for current and back issues:The queries can be addressed to:

Editor, Parikalpana (KIIT Journal of Management),School of Management,KIIT University, Bhubaneswar – 751024ODISHA, IndiaOr, email the soft copies to: [email protected]

This peer-reviewed journal is indexed with reputed directories,like: EBSCO, ProQuest, Cabell’s, UIrich’s, I-Scholar, J-Gate.

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KIIT Journal of Management