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RBAC Journal Vol. 5 No. 2 (November 2010 - April 2011) 1

RATTANA BUNDITUNIVERSITY JOURNAL

Volume 5 Number 2 November 2010 - April 2011ISSN : 1906-2192

Rattana Bundit University306 Soi Ladprao 107, Klong JanBangkapi, Bangkok 10240 Thailand

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OFFICEDepartment of ResearchRattana Bundit University306 Soi Ladprao 107, Klong JanBangkapi, Bangkok 10240 Thailand

ADVISORY BOARDAsso. Prof. Sunee SinthudechaDr. Vachit RattanapianDr. Supawadee ChuangchotWarawut SumonChalermchai BunrakSamkhan RojanathavornPrasan HokchoonSukta KerdphooPhongtheb KurachaamIssayaporn PittayapornPrathum ChobjaiSamai Pansa-adAsso. Prof. Dr. Yaowalak ApichatvullopProf. Dr. Supachai YavaprabhasAsso. Prof. Patchanee NontasakAsso. Prof. Phairuch TrakarnsirinonDr. Montien ChomdokmaiSuwatjana PengjunChatphong WongsukProf. Dr. Potchanatt SamermitProf. Dr. Thomas Yun KimProf. Dr. Christopher FawsonProf. Yoshimi InouchiProf. John DeweyDr. Jeffrey D. Brown

STEERING COMMITTEEDr. Vachit RattanapianAsso. Prof. Dr. Sugree RodpothongDr. Jamnean JoungtrakulProf. Preeya VonkhorpornDr. Krisada AtsawarungsaengkunAsst. Prof. Dr. Chatpon Mongclick

ORGANIZING COMMITTEEDr. Jamnean JoungtrakulAsso. Prof. Dr. Sugree RodpothongDr. Orachorn WattanakulTavat RuamsubUbonwan KhunthongDr. Promphak BungbuaNorrasate PittayapornChairat KimsawatThida LaemlaksakulAmporn SahasyukonKanidtha SuksawatPranee NuangmatchaPhantipa TeerarojanapongNuchanart SaebangSomrudee Hutthaphong (Secretariat)

RBAC Journal Vol. 5 No. 2 (November 2010 - April 2011)2

EDITOR-IN-CHIEF’S NOTE

This Special Issue is the first ever that we mean publishing academic papers from RBACInternational Conference. The theme of the conference: Creative Economy, CreativeBusiness, Creative People: Human Capital as a Key for Sustainable Success implies thathuman capital is one of the most critical resources for the success and sustainance ofbusiness under a creative economy. It requires creative people not restricted to artists butalso needing professionals who value creative, individually, with flexibility, openness anddiversity that are able to create new ideas, products, and styles. It requires creativeentrepreneurs. It requires talented entrepreneurial people able to transform ideas intobusiness with a sense of initiative- a business-oriented mind, producing specific marketingstrategies for domestic and export performance and global markets. Thus research anddevelopment in the areas of business, management and human capital is a vital part of thesuccess of the creative business that in turn will lead to success of the creative economy.

This conference aimed to create a forum with an atmosphere and an environment thatenables an exchange of knowledge and experience among academics and practitioners inthe field of management and business studies. It is to provide an opportunity for participantsto disseminate research in the fields of management and business studies among researchcommunities and to the general public at both the national and international levels. It alsoaimed to provide opportunities for academic journal publication for suitable papers forparticipants both at the national and international levels. This is to promote and enhancemore comprehensive studies and implementation of the results of these studies at bothmacro and micro or at enterprise levels. Thus it will promote the sustainability of businesssuccess and national development. This conference brings together the results of researchand academic reports in the areas of business, management and human capital conductedand composed by researchers and academia from more than 13 countries from manycontinents including America, Asia, Australia and Europe.

I would like to take this opportunity to express my sincerest thanks to all the people whohelped make this conference happen: all the guests of honour, the speakers and the chairsof all sessions, all the presenters and participants, all the support organisations. My deepappreciation to all the peers who worked behind the scene to review and provide valuablefeedback to the authors to enhance the quality of all the papers presented in this conference.

For overseas participants I would like to recommend that you extend your stay in Thailandfor a few more days so that you can explore the present stage of the Thai creative economyyourself. This will give you some more ideas to find ways to contribute more to thedevelopment of both academic and practical areas in this field. You will find that there ismore unseen Thailand than you might have imagined. Finally to all, I wish you good luckand in addition to all overseas participants I wish you a good and safe trip back home. Welook forward to welcoming you again at our next conference.

Dr. Jamnean Joungtrakul Chair of Organizing Committee

RBAC International Conference Chair


CONTENT

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AN EXPLORATORY STUDY OF CORPORATE SOCIAL RESPONSIBILITY 6INITIATIVES IN ASIARoshan and Ashok Khurana

PURPLE OCEAN STRATEGY: EMERGING CONCEPT USING SOCRATIC 12METHOD APPROACHSararatid Sakulkoo

THE EFFECTS OF INTERNAL ENTREPRENEURSHIP CULTURE ON 22ORGANIZATIONAL LOYALTY IN ORGANIZATIONS ON CRISIS PERIODSMuammer ZERENLER and Mete SEZGiN

THE USE OF BALANCED SCORECARD IN PERFORMANCE PLANNING 31AS A STRATEGIC MANAGEMENT TOOL: AN APPLICATION INTHE ALUMINIUM SECTORAli ERBASI

EXAMINING STUDENT SATISFACTION WITH DISTANCE EDUCATION 40PROGRAMS: SOME ISSUESPardeep Gupta

A STUDY ON E- RECRUITMENT PRACTICES OF HUMAN RESOURCE 48MANAGEMENT IN ORGANIZATIONS AT CHENNAI, INDIAS.Ganesan and Dr. P. Selvaraj

ORGANISATIONAL HEALTH IN HOTELS: A RESEARCH IN KONYA 52Safak �N�VAR and Bet�l GARDA

ROLE OF INFORMATION TECNOLOGY AS AN EMABLER IN 61SUPPLY CHAINSRakesh Singh

ANALYTICAL STUDY ON THE FINANCIAL PERFORMANCE OF INDIAN 70SOFTWARE INDUSTRYK. MARAN and Pravat Kumar Sarangi

CORPORATE FRAUD AND BUSINESS SUSTAINABILITY: A LOOK AT 79THE ASIA-PACIFIC REGIONChristopher J. Skousen and Clifford R. Skousen

DEVELOPING AN EFFECTIVE GUIDELINE FOR LABOUR CONFLICT 84RESOLUTION IN THAILANDPhong-anant, D. and Joungtrakul, J.


CONTENT

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USING GENDER INTELLIGENCE TO IMPROVE APPRECIATIVE INQUIRY'S 93PRACTICE: A CASE STUDY OF THAILAND APPREACIATIVE INQUIRYNETWORKPinyo Rattanaphan

THE REQUIREMENT OF GOOD CHARACTER OF AUDITORS FOR 101EFFECTIVE GATEKEEPER OF CORPORATE GOVERNANCELoganathan Krishnan

A COMPREHENSIVE FINANCIAL ANALYSIS OF AQUA CULTURE FEED 107INDUSTRIES IN SOUTH INDIAAslam Chinarong, K. Maran and B. Yamuna Krishnan

AWARENESS AND USAGE LEVELS OF THE FINANCIAL DERIVATIVES 112BY TURKISH COMPANIES: A RESEARCH ON THE COMPANIES INKONYA REGIONSemih B�Y�KIPEKCI, Ali ERBASI and Tugay Arat

THE RELATIONSHIP BETWEEN COST ACCOUNTING SYSTEM AND 119THE PRESENT PRODUCT COST ACCUMULATION PROCESS: ITSIMPLICATION ON PRICE DETERMINATIONNemia C. Mallari

SOCIAL CAPITAL HAS A VOICE: THEORY, METHOD AND PRACTICE, 126'CAPTURING THE VOICE'Heather Gilhespy and Alma Whiteley

AN EMPIRICAL STUDY OF PERFORMANCE OF PENSION FUNDS OF 136SELECTED PRIVATE SECTOR LIFE INSURERS OF INDIAAshok Khurana and Roshan Lal

TRIPS AND PHARMACEUTICAL FIRMS-OPPORTUNITIES AND 142CHALLENGES: A CASE STUDY OF NORTH WEST REGION OF INDIASunita Mishra and Ravi Kiran

STRESS AND ITS IMPACT AMONG I.T. PROFESSIONALS: A STUDY WITH 152REFERENCE TO SELECT I.T. COMPANY IN INDIAV. Hemanth Kumar and P. Premchand Babu

INNOVATION AND INTELLECTUAL PROPERTY RIGHTS: A POST TRIPS 159ANALYSIS OF MANUFACTURING SMESRavi Kiran and Vijay Jain


CONTENT

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GOVERNANCE AND ETHICS FOR SUCCESSFUL CREATIVE ECONOMY 169Ronald Markwardt and Alfredo Bello

CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE 178SHEET DATE - LEGAL PROVISIONS, ACCOUNTING STANDARD ANDPRACTICE IN INDIAK.S. Chakraborty

A FIELD STUDY RELATED TO THE DETERMINATION OF 188THE ENTREPRENEURSHIP TENDENCY OF THE PROSPECT MANAGERVOCATIONAL STUDENTSAli ERBASI, Osman �N�VAR and Safak �N�VAR

EXPLORING EFFECT OF LOSS AVERSION AND OVERCONFIDENCE 197ON GENDER: A STUDY ON BEHAVIOR FINANCEHanuman Prasad and Bharti Mohta

THE RELATIONSHIP BETWEEN ORGANIZATIONAL JUSTICE AND 204THE COMMUNICATION PROCESS IN JAPANESE COMPANIESIkuya KANO

AN ANALYSIS OF RESTRUCTURING METHODS APPLIED BY COMPANIES 216UNDERGOING POST BANKRUPTCY REORGANISATION IN THAILANDThanida Chitnomrath, Robert Evans and Theo Christopher


AN EXPLORATORY STUDY OF CORPORATE SOCIALRESPONSIBILITY INITIATIVES IN ASIA

Roshan LalMM Institute of Management

Maharishi Markandeshwar UniversityMullana-Ambala (HR)- India

Ashok KhuranaGuru Nanak Khalsa College

Yamuna Nagar (Haryana)-India

ABSTRACT

The theme of social responsibility is rapidly becoming a budding quintessence on the domestic as well global agenda ofthe corporate sector. The idea of corporate social responsibility (CSR) is not new. Business, through the ages, demonstratedvarying degrees of responsibility to society. The present study explores global phenomenon in CSR, and examines thecorporate social responsibi lity initiatives and trends of Indian companies on selected CSR indicators in comparison toAsia and world. The study based on secondary data observed that CSR has gone main stream for the many of the world’scompanies and is headed in the same direction in India also. India has emerged as a prominent country paying an ever-increasing attention towards corporate social responsibility (CSR) disclosure. Indian companies TCS and ITC haveemerged in top 10 ASR 2009 list. Indian companies have shown its presence in the top two positions in most of the CSRindicators i.e. Corporate Governance, Codes, and Policies; Corporate Social Responsibility Strategy and Communication;Corporate Environment Disclosure; Community Investment Initiatives; and total industry score. To conclude, it isevident that the concept of CSR has emerged as a promising benchmark for companies not only in Asia but across theworld as a whole. However, the biggest challenge faced by companies is to develop a CSR strategy to find tangible andbusiness focused metrics linked to ethical, social and environmental performance in order to meet stakeholder demandsand expectations.

Keywords: Budding Quintessence, CSR Indicators, Corporate Governance, Community Investment Initiatives,benchmark.

INTRODUCTION

Corporate Social Responsibility has turned out to be one of the most promising “management fashions” and businesskey words of the last decade. The subject of corporate social responsibility (CSR) is rapidly becoming a buddingquintessence on the domestic as well global agenda of the corporate sector. The last decade has witnessed a substantialgrowth of awareness in corporate responsibility both among major companies and across society. Demand for greatertransparency, accountability and public reporting are gradually increasing. There has been an escalating demand fromstakeholder groups for greater corporate transparency regarding financial as well as non-financial indicator. Externalpressures from stakeholders are not exclusively accountable for the emergence of metrics concerned with CSRperformance. Significant internal pressures are also a key driving force. This pressure has played a central role for theincreasing popularity of CSR in the business community, as a means of demonstrating and communicating non-financialperformance to a variety of stakeholders. The idea of corporate social responsibility is not new. Business, through theages, demonstrated varying degrees of responsibility to society. However, this concept today covers a wide spectrum oftopics, issues and methodologies. There are two dimensions to a company’s CSR performance i.e. actual/measurableperformance and perceived performance by key stakeholder groups. Effective CSR reporting provides the vehicle bywhich a company is able to consider, manage and balance actual and perceived performance. In response to this trend,Companies are also showing great willingness to incorporate ethical, social and environmental issues into their corporatereports either separately or as an indispensable part of their annual reports. The biggest challenge faced by companiesis to develop a CSR strategy to find tangible and business focused metrics linked to ethical, social and environmentalperformance in order to meet stakeholder demands and expectations.


CSR-CONCEPT AND DEFINITIONS

The slogan Corporate Social Responsibility was coined in 1953 with the publication of Bowen's 'Social Responsibility ofBusinessmen', which posed the question 'what responsibilities to society can business people are reasonably expected toassume? The nature and scope of corporate social responsibility has changed over time. Corporate Social Responsibility(CSR) is used to describe businesses’ integration of social and environmental issues into decisions, goals, and operations andin their interaction with their stakeholders on a voluntary basis. Other terms for CSR are Corporate Responsibility, Sustainability,Corporate Citizenship, Ethical Business Practices, Social/Environmental Responsibility, Triple Bottom Line, Environmentaland Social Stewardship. In simple words, corporate social responsibility is interchangeably used with corporate sustainabilityreporting. The concept of sustainability is defined as “Meeting the needs of the present generation without compromising theability of future generations to meet their own needs.” Philip Kotler stated that CSR is a commitment to improve communitywell being through discreationary business practises and contribution of corporate resource. According to world businesscouncil for sustainable development…"Corporate social responsibility is the continuing commitment by business to behaveethically and contribute to economic development while improving the quality of life of the workforce and their families aswell as of the local community and society at large". International Finance Corporation defined that corporate social responsibilityis the commitment of functional businesses to contribute to sustainable economic development by working with employees,their families, the local community and society at large to improve their lives in ways that are good for business and fordevelopment. According to CSR Asia, "CSR is a company’s commitment to operating in an economically, socially andenvironmentally sustainable manner whilst balancing the interests of diverse stakeholders.”

OBJECTIVES OF STUDY

The aim of the present study is to explore global phenomenon in CSR, and examine the corporate social responsibilityinitiatives and trends of Indian companies on selected CSR indicators in comparison to Asia and world.

FINDINGS & DISCUSSION

The findings relating to CSR initiatives in Asia are highlighted as follows:1. It is found that India has emerged as a prominent country among the top 10 Asian countries that are paying

an ever-increasing significance towards corporate social responsibility (CSR) disclosure.2. The study observed that there is rising trend in publication of corporate sustainability report in India, Asia,

and at the entire global level. It is found that the number of companies publishing CSR report in India, Asia, and Worldis 20, 254 and 1227 in 2009 respectively, whereas this number has been 1, 26 and 123 in 2001 for India, Asia, andWorld. The study observed a significant rise in the companies publishing CSR reports in the last five years as depictedin table and fig 1.

Table 1 Number of Companies Publishing CSR Reports

Year No of Companies Publishing Sustainability ReportIndia Asia World

2001 1 26 1232002 4 27 1402003 1 2 1752004 5 33 2942005 3 40 3862006 5 52 5272007 8 98 7252008 20 184 10842009 20 254 1227

Roshan and Ashok Khurana

Source: CSR Asia’s Asian Sustainability Ranking (ASR)


3. The study observed that 80 percent the top ten companies’ in 2009 ASR list was dominated by Australiancompanies, and it was followed by two Indian companies i.e. Tata Consultancy and ITC.

Table 2 Ranks & Percentage Score of Asian Companies

Rank Company Stock Exchange 2009 (%) 1 ANZ Banking Group Ltd. Australia 98.0 2 BHP Billiton Limited Australia 95.1 3 Tata Consultancy Services Ltd. India 90.2 4 Westpac Banking Corporation Australia 89.2 5 Telstra Corporation Limited Australia 89.2 6 National Australia Bank Australia 87.3 7 ITC Ltd. India 85.3 8 Rio Tinto Limited Australia 84.3 9 Woolworths Limited Australia 83.3 10 Wesfarmers Australia 82.4

4. In India, high levels of disclosure are observed predominantly from large companies with recognizedbrands such as Tata and Infosys. Leading Public Sector oil companies such as ONGC and the Indian Oil Corporationalso have reasonable levels of disclosure.

Table 3 Ranks & Percentage Score of Indian Companies

Rank in India Rank in total ASR Company 2009(%)1 3 Tata Consultancy Services Ltd. 90.22 7 ITC Ltd. 85.33 14 Infosys Technologies Ltd. 80.44 17 Larsen and Toubro Ltd. 79.45 24 Reliance Industries Ltd. 71.66 32 Oil and Natural Gas Corporation Ltd. 62.77 37 Indian Oil Corporation Ltd. 58.88 42 Bharti Airtel Ltd. 56.99 46 Steel Authority of India Ltd. 55.9

10 56 NMDC Ltd. 51.9

AN EXPLORATORY STUDY OF CORPORATE SOCIAL RESPONSIBILITY INITIATIVES IN ASIA


Roshan Lal and Ashok Khurana

5. Corporate Governance, Codes, and Policies: This indicator examined the availability and communicationof company policies and codes of conduct in relation to key CSR factors including corporate governance, risk management,anti-corruption, labour and human rights issues. The percentage score of top five countries on Governance, codes andpolicies is 83.3, 74, 67.3, 66.5, and 63.3 for Australia, India, Hong Kong, China and Thailand respectively.

Table 4 Governance, Codes and Polices Score

Countries Governance, Codes, and Policies (%)Australia 83.3

India 74.0 Japan 49.8 China 66.5

Hong Kong 67.3 Malaysia 59.6 Philippines 47.5 Thailand 63.3 Singapore 50.8 Pakistan 35.2 Average across countries 59.7

Out of 10 Asian countries, 50 percent of the countries has depicted better than the percentage average across countries.Australia and India occupied first and second position on disclosure in corporate governance, codes and policies.

6. Corporate Social Responsibility Strategy and Communication: This indicator evaluated corporate strategyon CSR and the way it is communicated to stakeholders through reporting initiatives i.e. internationally recognizedreporting guidelines, CSR training and awareness and alignment with voluntary CSR standards in company operations.

Table 5 CSR Strategy and Communication Score

Countries CSR Strategy and Communication (%)Australia 68.2 India 44.5 Japan 60.7 China 41.6

Hong Kong 37.3Malaysia 23.4

Philippines 36.6 Thailand 23.2 Singapore 14.1

Pakistan 10.2 Average across countries 36.0

It is observed that average CSR strategy and communication score across countries is 36; and Australia, India, Japan,China, Hong Kong, Philippines has outperformed the average score of the selected countries. The study observed thatAustralia, India, and Japan are top three counties for its CSR Strategy and communication.

7. Corporate Environment Disclosure: This indicator assessed the level of environmental data, targets set bythe company, and the way it is reported to stakeholders. Indicators include environmental management systems, emissionsdata, the use of renewable energy; customer and employee focused environmental Initiatives. It is clearly found thatcompanies in 4 countries i.e. Australia, Japan, India and Hong Kong have shown better disclosure percentage score onenvironmental disclosure than the average across countries.


AN EXPLORATORY STUDY OF CORPORATE SOCIAL RESPONSIBILITY INITIATIVES IN ASIA

Table 6 Corporate Environmental Disclosure Score

Countries Environment (%)Australia 70.3 India 47.8 Japan 70.6 China 34.4

Hong Kong 37.5 Malaysia 28.4 Philippines 26.9 Thailand 15.9 Singapore 20.9 Pakistan 19.1Average across countries 37.2

8. Community Investment Initiatives: Community and development investment initiatives are well knownaspects of CSR in an Asia with its rich history of philanthropy. The community and development initiative score (table7) clearly reveals that its average score is 34.5. It is observed that 6 out of 10 countries have registered score higher thanthe average score. India, Australia and China have emerged as the top three nations in his CSR initiative.

Table 7 Community and Development Score

Countries Community and Development (%)Australia 51.5 India 53.0 Japan 15.5 China 48.0


9. Total Country Score: The companies in India have the second highest rating for disclosure overall, whichwas topped by Australia. It is evident that companies in 5 out of 10 countries i.e. Australia, India, Japan, China andHong Kong have shown better performance than the average across the countries.

Table 8 Total Country Score

Countries Community and Development (%)Australia 68.3 India 53.2 Japan 50.7 China 43.5



Roshan Lal and Ashok Khurana

CONCLUSIONS

In the era of globalization, CSR has emerged as a major responsibility and challenge of our times. In a world of everchanging challenges, corporate sector across the world is shifting its approach from compulsory financial reportingtoward innovative voluntary corporate sustainability reporting. CSR is the result of vision of growing sense ofresponsibility of the business community to improve transparency and accountability to the wider community, and notjust to stakeholders. CSR has gone main stream for the many of the world’s companies and is headed in the samedirection in India also. India has emerged as a prominent country paying an ever-increasing attention towards corporatesocial responsibility (CSR) disclosure. Indian companies TCS and ITC with 3rd and 7th rank respectively have emergedin top 10 ASR 2009 list. Indian companies have shown its presence in the top two positions in most of the CSRindicators i.e. Corporate Governance, Codes, and Policies; Corporate Social Responsibility Strategy and Communication;Corporate Environment Disclosure; Community Investment Initiatives; and total industry score. To conclude, it isevident that the concept of CSR has emerged as a promising benchmark for companies not only in Asia but across theworld as a whole. However, the biggest challenge faced by companies is to develop a CSR strategy to find tangible andbusiness focused metrics linked to ethical, social and environmental performance in order to meet stakeholder demandsand expectations.

REFERENCE

Anderson, Helen L. and Landau, Ingrid, Corporate Social Responsibility in Australia: A Review (October 2006).Monash U. Department of Business Law & Taxation Research Paper. 5; U of Melbourne Legal StudiesResearch Paper No. 279. [Online]. Available at SSRN: http://ssrn.com/abstract=1027845

Becchetti, Leonardo, Ciciretti, Rocco and Hasan, Iftekhar, Corporate Social Responsibility and Shareholder's Value:An Event Study Analysis (January 22, 2009). ; Bank of Finland Research Discussion Paper No. 1/2009. [Online]. Available at SSRN: http://ssrn.com/abstract=928557

Davis, Gerald F., Whitman, Marina V.N. and Zald, Mayer Nathan, The Responsibility Paradox: Multinational Firmsand Global Corporate Social Responsibility (April 2006). Ross School of Business Paper No. 1031.[Online]. Available at SSRN: http://ssrn.com/abstract=899112

Heal, Geoffrey M., Corporate Social Responsibility - An Economic and Financial Framework (December 2004).[Online]. Available at SSRN: http://ssrn.com/abstract=642762

Heslin, Peter A. and Ochoa, Jenna D., 2008. Understanding and Developing Strategic Corporate SocialResponsibility. Organizational Dynamics, (37): 125-144. [Online]. Available at SSRN: http://ssrn.com/abstract=1149001

Morimoto, Risako, Ash, John and Hope, Christopher, Corporate Social Responsibility Audit: From Theory toPractice (2004). University of Cambridge, Judge Institute of Management Working Paper No. 14/2004. Available at SSRN: http://ssrn.com/abstract=670144 or doi:10.2139/ssrn.670144

Morrison Paul, Catherine J. J. Morrison and Siegel, Donald S., Corporate Social Responsibility and EconomicPerformance (January 2006). Available at SSRN: http://ssrn.com/abstract=900838

Overland, Juliette, Corporate Social Responsibility in Context: The Case for Compulsory Sustainability Disclosurefor Listed Public Companies in Australia? (September 2007). Macquarie Law Working Paper No.2007-7. Available at SSRN: http:/ssrn.com/abstract=1016606

Reich, Robert B., The Case Against Corporate Social Responsibility (August 1, 2008). Goldman School of PublicPolicy Working Paper No. GSPP08-003. Available at SSRN: http://ssrn.com/abstract=1213129

Riyanto, Yohanes E. and Toolsema, Linda A., Corporate Social Responsibility in a Corporate GovernanceFramework (May 10, 2007). Available at SSRN: http://ssrn.com/abstract=987962

Rubin, Amir and Barnea, Amir, Corporate Social Responsibility as a Conflict Between Shareholders (March 10,2006). EFA 2006 Zurich Meetings. Available at SSRN: http://ssrn.com/abstract=686606

Siegel, Donald S. and Vitaliano, Donald F., An Empirical Analysis of the Strategic Use of Corporate SocialResponsibility (April 2006). Available at SSRN: http://ssrn.com/abstract=900521


PURPLE OCEAN STRATEGY: EMERGING CONCEPTUSING SOCRATIC METHOD APPROACH

Sararatid SakulkooInternational Graduate Studies Human Resource Development Center

Burapha University, Thailand

ABSTRACT

Globalization is characterized by global production and exchange of goods and services as well as a global flow oftechnology, information, and capital. Global business strategies have been characterized by two types of oceans: redoceans and blue oceans. Red ocean strategy is to view markets as intense competition. On the other hand, Blue oceanstrategy is about growing demand, breaking away from the competition. This study presents a classroom action research(CAR) by using Socratic Method Approach that focuses on how graduate nursing students learned in the class ofBusiness Concept for Nursing Administration at Burapha University, Thailand. The findings of this study provide thechallenges of the new concept, “Purple Ocean Strategy” that combine from the red and blue ocean strategy.

Key words: Business concept, Purple Ocean Strategy, Nursing Administration, Socratic Method, Classroom ActionResearch, Thailand

INTRODUCTION

At the present time, there are two popular strategic approaches to the business world, red ocean strategy and blue oceanstrategy. Red ocean strategy is a response to intense competition. On the other hand, Blue ocean strategy is aboutgrowing demand, breaking away from the competition. However, this article will present the alternative strategy, “PurpleOcean Strategy”. It is a mixed strategy concept from the red and blue ocean strategy. It is one of the findings from aclassroom action research (CAR) of Business Concept in Nursing Administration at the faculty of Nursing, BuraphaUniversity, Thailand where the researcher is teaching for graduate students in nursing administration.

Historically, education has been understood in terms of pedagogy, the art and science of teaching the student. Pedagogyembodies an instructor-focused education where instructors assume responsibility for making decisions about what willbe learned, how it will be learned, and when it will be learned. Usually, when pedagogy is practiced, the relationship ofthe student to the teacher is dependent and (often) passive, and the relationship between the student and her/his peers isa competitive one (Parakaevas & Wickens, 2003).

The author in this study graduated MBA and Long Term Care Administration in the U.S., and he worked there forseveral years. He earned doctoral degree in human resource development (HRD), and is now an instructor in humanresource development (HRD) at the Faculty of Education, Burapha University. He is also one of a team teaching of aBusiness Concept for Nursing Administration class.

The course description of Business Concepts in Nursing Administration at the faculty of Nursing, Burapha Universityto present:“Business concepts relevant to professional nursing services in government and private sectors. Factors promotingbusiness mind in nursing personnel within nursing profession. Entrepreneurial roles for nurses are discussed withinthe scope of law and ethics. Strategies in development of nurse-entrepreneur in education and service system. Externaland internal environment of nursing service are explored in order to promote business mind.”

The course objectives upon completion of the course indicates that the students will be able to: (1) Explain basicconcepts in business administration (2) Conceptualize the concepts from the reading articles and apply to nursingorganization, (3) Analyze strength, weakness, opportunities and threat of each individual organization, (4) Design thebusiness project that related to nursing education, nursing service, or nursing administration.

The key point of this class is a concept. Chinn and Kramer (1999) define the term concept as a complex mental formulationof experience. By “Experience,” they mean perception of the world—objects, other people, visual images, color,movement, sounds, behavior, interaction—the totally of what is perceived.


Within this context, one of the teaching strategies involving adult learners in thinking about the concepts they are aboutto ‘learn’ is the Socratic Method. The Socratic Method in adult education involves the use of systematic questions,inductive thinking, and the formulation of general definitions (Parakaevas & Wickens, 2003). Therefore, this studyapplied a Socratic Method approach in this class.

However, Johnson (2007) point out Thai students do not often openly question to teachers. Instead, they wait until afterthe session is over will privately engage the teacher after class. He reviewed that recent research has indicated that life-long learners continue to experience brain growth and are much less likely to suffer from Alzheimer’s disease or otherforms of dementia. The brain continuous to grow dendrites (use information storage and retrieval) and create newneural networks far into old age when stimulated with new learning challenge. He also found that Thais enjoy talking,listening and watching while avoiding deep reading and writing activities for the most part.

As mentioned, it is very crucial to provide a challenge to the business concept in nursing class that the author teaches formaster degree nursing students at Burapha University in Thailand. There are seventeen graduate students in this class.All of them are experienced nurses. The years of experience range from 8-33 years. The Socratic Method was used theBusiness Concepts session over period of three weeks. Although this study is a very small in scope, there are someinteresting results. We may need to learn from this group of nursing student how they think and how they created the“Purple Ocean Strategy” in their class.

PURPOSE OF THE STUDY

1. To investigate how nursing students respond to the Socratic Method Technique in teaching Business Conceptfor Nursing Administration.

2. To describe the outcome of the class of Business Concept for Nursing Administration.

RESEARCH QUESTIONS

1. How do nursing students respond to the class of Business Concept for Nursing Administration when taughtby suing the Socratic Method Technique?

2. What are the outcomes of the class of Business Concept for Nursing Administration when taught using theSocratic Method?

LITERATURE REVIEW

What is the Socratic Method?

Many teaching strategies for adult learners have been explored, and adult teaching has to be strongly linked with activelearning. However, Bonwell and Eison (1991) state that students must do more than just listen. They need to read, write,discuss, or be engaged in solving problems. Most important, to be actively involved, students need to engage in suchhigher-order thinking tasks as analysis, synthesis, and evaluation.

Within this context, one of the teaching strategies involving adult learners in thinking about the concepts they are aboutto ‘learn’ is the Socratic Method. Supporters of this method (Tredway, 1995; Strong, 1996; Parakaevas & Wickens,2003) suggest that it is a form of structured discourse about ideas and dilemmas that certain topics present, in this wayinvolving students actively in the learning process by relating activities to their own experiences and thereby engagingthem on an emotional level. The Socratic Method in adult education involves the use of systematic questions, inductivethinking, and the formulation of general definitions.

The Socratic Method begins with the questioner asking the respondent a question. Once the respondent replies, thequestioner then asks the respondent a series of purposeful questions that lead the respondent to reply with an answer thatproves their original answer. However from the study, base on empirical research, Parakaevas and Wickens (2003)suggest that the Socratic Method seems to be very effective method for teaching adult learners, but should be used withcaution depending on the personality of the learners.

Red Ocean versus Blue Ocean

In the landmark 2007 book “The Art of War: Sunzi’s Military Methods” translated by Victor H. Mair, we find the maximthat the purpose of engaging in battle is to win. The main point is that one should only go into battle when one has the

Sararatid Sakulkoo


PURPLE OCEAN STRATEGY: EMERGING CONCEPT USING SOCRATIC METHOD APPROACH

The first book of Michael Porter, Competitive Strategy established corporate strategy as an intellectual discipline (Cote,2005). Corporate strategy is heavily influenced by its military roots. Strategy is about confronting an opponent andfighting over a given piece of land that is both limited and constant. Traditionally, strategy focused on beating thecompetition, and strategic plans are still couched in war like terminology. They exhort companies to seize competitiveadvantage, battle for market share, and fight over price. Competition is a bloody battlefield (Sheehan & Vaidyanathan, 2009).

However, Kim and Mauborgne (2005a) convincingly argue that corporations can earn greater profit by creating uniqueofferings for new markets than by competing with rivals in existing ones. In essence, they ask managers to change theirperspective from that of field generals battling competitors head-to-head for market share or repeatedly seeking to growby endless market segmentation. Instead they should see themselves as explorers, looking to discover new customerdemand.

Kim and Mauborgne argue that the trouble is that if the opposing army is doing exactly same thing, such strategies oftencancel each other out. Strategy quickly reverts to tactical opportunism. So where should companies turn for a moreinnovative approach to strategy. The answer lies with something that Kim and Mauborgne (2005a) call “blue-oceanstrategy”. Furthermore, they argue that head-to head competition results in nothing but a bloody red ocean as rivals fightover shrinking profits. Success comes not from batting competitors, but from making the competition irrelevant bycreating ‘blue oceans” of uncontested market space. They said the creators of Blue Ocean don’t use the competition astheir benchmark. Instead, they follow a different strategic logic that calls value innovation (Sheehan & Vaidyanathan,2009).

Kim and Mauborgne (2005b) offer the ‘‘Six Path Analysis,’’ which involves looking in and outside the industry forideas. Head-to head competition (Red Ocean): (1) Focuses on rivals within its industry, (2) Focuses on competitiveposition within strategic group, (3) Focuses on better serving the buyer group, (4) Focuses on maximizing the value ofproduct and service offerings within the bounds of its industry, (5) Focuses on improving price performance within thefunctional-emotional orientation of its industry, (6) Focuses on adapting to external tends as they appear. On the otherhand, Blue Ocean: (1) Looks across alternative industries, (2) Looks across strategic groups within industry, (3) Redefinesthe industry buyer group, (4) Looks across to complementary product and service offerings, (5) Rethinks the functional-emotional orientation of its industry, (6) Participates in shaping external trends over time (Sheehan & Vaidyanathan,2009).

Kim and Mauborgne (2005b) believe that customers make purchase decisions based on the offering’s attributes, such asquality, availability, and price. They advise that managers discover Blue Oceans by experimenting with and developinginnovative bundles of attributes which break the accepted cost-differentiation trade-off. Kim and Mauborgne correctlyargue that benchmarking current competitors is not likely to generate ideas for Blue Oceans. While benchmarking is anappropriate value renovation tactic, it does not lead to value innovation. However, there are other tools that managerscan use to search for new market opportunities (Kim & Mauborgne, 2005b).

ACTION RESEARCH DESIGN

An action research design was applied to this study. Mills (2003) defined action research as any systematic inquiryconducted by teachers, administrators, counselors, or others with a vested interest in the teaching and learning process,for the purpose of gathering data about how their particular schools operate, how they teach, and how students learn.Expanding on this concept, Suter (2006) effectively outlined the potential contributions of action research by teachersand asserted that classroom teachers who conduct such research are “reflective practitioners” who can make exemplarycontributions to instructional improvement.

Action research as a methodology surfaced in response to the growing need for more relevant and practical knowledgein the social sciences: It bridged the gap between academic research and day-to-day applications (de Zeeuw, 2003 citedin Nolen & Putten, 2007).

Action Research Process

Kemmis and McTaggart (2000; 2005) have developed a simple model of the cyclical nature of the typical actionresearch process. Each cycle has four steps: plan, act, observe, and reflect. I used Socratic teaching method, observation,document review and informal conversation. There are 2 cycles. The first cycle was preparing activities for the class.The second cycle is observation and use Socratic Method when the students do activities in class. Because actionresearch is cyclical in nature, the first and second cycle were linked together through teaching sessions developed by the


Sararatid Sakulkoo

researcher. The class setting is for Master degree students in Nursing Administration. This study is in the class ofBusiness Concept for Nursing. There are 17 nursing students who attended the Business Concept class at Faculty ofNursing, Burapha University in the second semester 2010. These nursing students were aged from 30 to 56. There are16 female and 1 male.

Data Presentation for Cycle One and Cycle Two

Each cycle had four steps: plan, act, observe, and reflect. I will present the detail what I did in the cycle 1 and then I willmove on to the cycle 2.

Figure 1 The Cycle One and Cycle TwoSource: Adapted from Kemmis and McTaggart (2005, p.564)

Before teaching, I prepared the course syllabus, PowerPoint, textbooks and activities for my students. Activities involvedimagining discussion by using the Socratic Method Technique. I adapted a Socratic lesson plan from Parakaevas andWickens (2003). There are nine steps of a Socratic lesson plan.

The Nine Steps of a Socratic Lesson Plan

Step 1. Decide on the concepts/ideas/practices that I want the students to go away with.Step 2. Create a ‘scenario’ that will be used a starting point for the discussion.Step 3. Be prepared for all kinds of answers especially a string of questions that will lead the students in the

desired direction needs to be developed. This is the most important part of the lesson plan.Step 4. In the classroom, describe the scenario and start the questioning string by asking, “What do you think

about this issue?”Step 5. Be cautious not to dismiss any answer; it is the students who will refute inappropriate answers. There

may be answers that were not refuted but are still not appropriate (in the eyes of the instructor). These will have to beconsidered as well in the next level of more complicated questioning and will probably be dismissed there.

Step 6. Once the basic ideas have been discussed to complicate the situation by adding new parameters to thescenario: “What would you do then?”

Step 7. The process goes on with adding further parameters and asking “What now?”Step 8. In the case that no satisfactory result is achieved, the instructor may ask: “Is this a proper thing of

action? The instructor may set up a roundtable discussion “What would YOU do differently?”Step 9. When a consensus is reached, the instructor wraps up by presenting the students’ solutions to the

‘scenario(s)’. It is important here that the instructor emphasizes that this is the result of ‘their’ knowledge and experienceachieved though the continuous questioning. The instructor thanks the students for their contributions and sets tasks forthe next session.



Action Research Process

Kemmis and McTaggart (2000; 2005) have developed a simple model of the cyclical nature of the typical actionresearch process. Each cycle has four steps: plan, act, observe, and reflect. I used Socratic teaching method, observation,document review and informal conversation. There are 2 cycles. The first cycle was preparing activities for the class.The second cycle is observation and use Socratic Method when the students do activities in class. Because actionresearch is cyclical in nature, the first and second cycle were linked together through teaching sessions developed by theresearcher. The class setting is for Master degree students in Nursing Administration. This study is in the class ofBusiness Concept for Nursing. There are 17 nursing students who attended the Business Concept class at Faculty ofNursing, Burapha University in the second semester 2010. These nursing students were aged from 30 to 56. There are16 female and 1 male.

Data Presentation for Cycle One and Cycle Two

Each cycle had four steps: plan, act, observe, and reflect. I will present the detail what I did in the cycle 1 and then I willmove on to the cycle 2.

Figure 1 The Cycle One and Cycle TwoSource: Adapted from Kemmis and McTaggart (2005, p.564)

Before teaching, I prepared the course syllabus, PowerPoint, textbooks and activities for my students. Activities involvedimagining discussion by using the Socratic Method Technique. I adapted a Socratic lesson plan from Parakaevas andWickens (2003). There are nine steps of a Socratic lesson plan.

The Nine Steps of a Socratic Lesson Plan

Step 1. Decide on the concepts/ideas/practices that I want the students to go away with.Step 2. Create a ‘scenario’ that will be used a starting point for the discussion.Step 3. Be prepared for all kinds of answers especially a string of questions that will lead the students in the

desired direction needs to be developed. This is the most important part of the lesson plan.Step 4. In the classroom, describe the scenario and start the questioning string by asking, “What do you think

about this issue?”Step 5. Be cautious not to dismiss any answer; it is the students who will refute inappropriate answers. There

may be answers that were not refuted but are still not appropriate (in the eyes of the instructor). These will have to beconsidered as well in the next level of more complicated questioning and will probably be dismissed there.

Step 6. Once the basic ideas have been discussed to complicate the situation by adding new parameters to thescenario: “What would you do then?”

Step 7. The process goes on with adding further parameters and asking “What now?”Step 8. In the case that no satisfactory result is achieved, the instructor may ask: “Is this a proper thing of

action? The instructor may set up a roundtable discussion “What would YOU do differently?”Step 9. When a consensus is reached, the instructor wraps up by presenting the students’ solutions to the

‘scenario(s)’. It is important here that the instructor emphasizes that this is the result of ‘their’ knowledge and experienceachieved though the continuous questioning. The instructor thanks the students for their contributions and sets tasks forthe next session.


RQ#1: How do nursing students respond to the class of Business Concept for Nursing Administrationwhen taught by using the Socratic Method Technique?

At the step one of a Socratic Lesson Plan, I decide on the concepts/ideas/ practices that I want the students to go awaywith. I begin with a simple question. “Do you have any experience in Business?”

The first question that I make is simple, suggested in the Socratic Method inquiry. Without a good question, the data andanswers one gets may be completely unimportant in relation to the problem being examined. Initially, we are raised inour schools to believe that the “Right Answer” is all that is important and little thought is ever given to asking the “RightQuestion” (Johnson, 2007). Over five years that I am teaching in Burapha University I have also told my students somevery crucial of Buddhist principles, such as “Kalamasutta”. Firstly, do not be led by the authority of the text books andsecondly, do not be led to the ideas, “This is our teacher” (Prayutto, 2003; 2004). This is how I motivate my studentlearning to create their thinking, especially in the business concept issue.

TRACHING INPUT

I always enjoy working with the class, arguments, negotiation and whatever. Every single move I pay more attention, myeye contact, my heart and soul, my voice and my body language. Why I have to do that? When I was a student in theU.S., I realized how hard it is, as I am a non- native speaker. My aim is to motivate my student to be interested in thesubject by sharing some of my experiences working in the U.S. for several years. After that, I provided my students witha piece of paper to describe their current job, such as position, job description and answer the question: Do you have anyexperience in Business?

At Step 2 of the Socratic Lesson Plan, a ‘scenario’ that will be used a starting point for the discussion is presented to thestudents. Students kept quiet and do not respond to the question, “What is Business? And why study Business?”

At the Step 3and 4 of Socratic Lesson Plan I have to be prepared for all kinds of answers. A string of questions that willlead the students in the desired direction needs to be developed. This is the most important part of the lesson plan. In theclassroom, I describe the scenario and start the questioning string by asking, “What do you think about this issue?” Theentire in the class remain silent.

‘No spoon feeding!’

In general, from my own experience, Thai students prefer teaching step by step, following a PowerPoint. They also wantthe instructor to make a summary at the end of each class meeting like a cook book. If not, they will be confused rightaway. This kind of teaching technique I call ‘Spoon Feeding”, just eat information rather learn to develop skill andknowledge.

At the Step 5 of Socratic Lesson Plan I realize that I should be cautious not to dismiss any answer; it is the students whowill refute inappropriate answers. There may be answers that were not refuted but are still not appropriate (in the eyesof the instructor). These will have to be considered as well in the next level of more complicated questioning and willprobably be dismissed there. Komin (1990) concluded that the Thais are first and foremost ego-oriented, characterizedby highest ego value of being “Independent-being oneself” (pen-tua-kong-tua- eng). Since the ‘ego’ of the Thai is soimportant, it naturally follows that Thais have the “avoidance mechanism” to fend off unnecessary clashes. This ‘ego’orientation is the root value underlying various key values of the Thai, such as “criticism-avoidance” and “face-saving”.From my view point, these are one of the main issues in many classes in Thailand. As Johnson (2007) points out, Thaistudents do not often openly question teachers. Instead, they wait until after the session is over to privately engage theteacher after class.In this class, I provided over a hundred slices of PowerPoint and several textbooks in advance. Most of the time, Iencourage them to describe their experience and thinking instead of study in the text books or PowerPoint. There aretwo elements essential to using the Socratic Method: (1) questions, and (2) knowing where we’re going (Patnode,2002). So I set up a roundtable discussion. First, I make sure that all students can clearly see each other by having themcreate a U-shape with their desks. Next, I present the Socratic Method of learning or a particular style of teaching. Asalways other student are encouraged to ask question or offer supportive ides to enhance the use of the learning in thisclass.

Sararatid Sakulkoo



FINDINGS

According to the answers in step 1 (self description), most of students have no experience in business, as they said theyare nurses who are working for the government sector. They know nothing about business at all. However, there weresome groups of nursing students who are working in private hospitals more actively and show confidence when discussionbegin in the class. They have more experience in training at their work place, especially in interpersonal skill, servicemind and the business issue. It should be noted here that the nursing students were all employed, so that most of theiracademic work required weekend stays in Chonburi province where the university located. Among eighteen nursingstudents, three are from the private sector, fourteen students from the government sector and one nursing student is fromBhutan.

These are some of nursing students responses to the class of Business Concept for Nursing: One of nursing studentresponded that: “…We still don’t clearly understand exactly what the main point of your (Instructor) is teaching (facelook confused)…”

Another student responded that:“…Business consists of three things such as, to be organized, satisfy and make profit. Profit has two forms that aretangible and intangible profit. Tangible profit accounted for cash, stock, building, car and saving account etc. Intangibleprofits are like gaining trust, Happiness, satisfaction, likes etc. Business can be needs four basic recourses like material,human, Financial and information and it can be categorized into three groups as manufacturing, services and marketing….”

“… In business concept, networking is the important phenomena to keep people informed and connected for the survivaland sustenance of the company or organization. Business organization needs resources, knowledge, skills and competencyin production of quality goods and services to win the race in the market. The mismatch of production with demand willlead to price fluctuation which can cause risk of gain or loss to the company and satisfaction or dissatisfaction to theconsumer as well. This in turn will have impact on the name, fame and reputation of the company which is an importantfactor for the success of a company…”

In conclusion, the findings indicated that both cycles (Cycles One and Cycle Two) showed the implication of theimportance of Business Concept teaching in this class and the usefulness of Socrates’ method to help learners to improvetheir competencies and to have more confidence to discuss and learn how to make any argument in the class.

However, I found that there are still many areas of weakness, which need to be addressed. The classroom context and agap between the instructor and the nursing students in Thai culture obstructed their participation to express themselvessuch as “criticism-avoidance” and “face-saving”. I wished to promote a climate and conditions where students couldfreely express themselves and feel confident. Results of this research demonstrate that the Socratic Method Techniquehas a significant contribution to offer. The study’s contributions to knowledge are that instructors will learn from thestudy about the importance of using Socratic Method Technique that support student’s learning especially adult learning,and change instructors view of teaching. In addition, this research study raised awareness of the crucial of the SocraticMethod Technique in improvement and confidence to discussion and makes any arguments.

RQ#2: What are the outcomes of the class of Business Concept for Nursing Administration whentaught using the Socratic Method?

This study is very small in scope, but has produced some interesting outcome. The findings of this study provide thechallenges of a new concept, “Purple Ocean Strategy” that is a combination from the red and blue.

Following Socratic Method, I move on the next step. It is a Step 6 of Socratic Lesson Plan. Once the basic ideas havebeen discussed I start to complicate the situation by adding new parameters to the scenario. The complication is toevaluate the Red Ocean versus the Blue Ocean strategy. In Step 7, the process goes on with adding further parametersand asking “What now?” There were several discussion and arguments in the class.

FINDINGS

Surprisingly, one of the senior students who never added much discussion in class responded that she prefers the WhiteOcean Strategy. It should be fit in Thai context as this strategy is based on the Buddhist principle. Some still prefer theRed Ocean. The other prefers the Blue Ocean. Finally, there is other creation from this class. It is a mixed strategybetween the red and blue.


“Purple Ocean Strategy”

It should not be surprising that China is now become the top of economic in the world. One of the statements of Chineseleader said: “it’s doesn’t matter cat is black or white, once they can catch a rat that is good enough”. This is one of theideas that combine the Red and Blue together. Some students expressed that:“…. I think it’s depends. As globalization and business today are now facing in uncertainty situation, why don’t we useboth strategies in a proper way? We should have no longer versus between the Red and the Blue. Combine both. It maybe Purple that made from Red mixed with Blue”

DISCUSSION

“No longer versus between the Red and the Blue” Today, there are versus between the Red Ocean and the blue. Aninterview with W. Chant Kim by Milenko Gudic (2008) in “Toward the Blue Ocean” Kim point out that “Red OceanStrategy practice is a typical MBA classroom discussion based on a paper case originated by Harvard Business School.Assigning a paper case to both executives and MBA students in preparation for classroom discussion is ineffective.Reading over 100 pages a night is difficult for most students, which slows down the uptake of information and the rateof learning. That is why INSEAD has created the INSEAD Blue Ocean Strategy Institute that is in the process ofproducing theory and practice movies based on Blue Ocean Strategy to make the learning experience more condensedvia a multi-media format that accelerates the learning” (p.27).

So, for business schools in emerging economies, trying to copy best practices developed at prominent western businessschools is not the only way. Business schools in emerging economies should apply the same principles to create theirown Blue Oceans. They should not try to mimic or benchmark ‘‘best practices’’ because in doing so they are placingthemselves squarely in the red ocean where boundaries are defined and competition is global.

From data emerged in this study, we found these discoveries to be very freeing. “No longer versus” was our discussion.The class replaced the “versus” with “and”. It becomes a new concept. Indeed, my nursing students and I are interestedin the variety of ways that we can view business concept or business strategy having to find definition for it especiallyfrom the western context. The concept or strategy in business differs from country to country, that different organizationsview it differently; different universities teach or define it in differently such Harvard Business school and the INSEADBlue Ocean Strategy Institute. However, Kim and Mauborgne believe that customers make purchase decisions based onthe offering’s attributes, such as quality, availability, and price. They offer the ‘‘Six Path Analysis,’’ which involveslooking in and outside the industry for ideas.

From the last class meeting of Business Concept of Nursing Administration at Faculty of Nursing, Burapha University,Thailand, we produced a tentative Six Paths framework: Mixed Strategy of the Red and Blue as shown in the table 2.

Table 2. Six Paths framework: Mixed Strategy of the Red and Blue

Mixed Strategy of the Red and Blue Industry (1) Focuses on rivals within its industry and looks across alternative industries. Strategic group (2) Focuses on competitive position within strategic group and looks across strategic

groups within industry. Buyer group (3) Focuses on better serving the buyer group and redefines the industry buyer group. Scope of product (4) Focuses on maximizing the value of product and service offerings or or service offering within the bounds of its industry and looks across to complementary within the bounds

product and service offerings. Functional-emotiona (5) Focuses on improving price performance within the functional-emotional orientation orientation of its industry and rethinks the functional-emotional orientation of its industry. Time (6) Focuses on adapting to external tends as they appear and participates in shaping

external trends over time.

Source: Generated by Saratid Sakulkoo, 2010. Adapted from Blue Ocean Strategy,Kim and Mauborgne (2005b)

Sararatid Sakulkoo


There is some additional outcome from this study as one of nursing student reported that:

“… In brief, I learn the business concepts of America related to healthcare organization through Ajarn’s (Teacher) richexperiences and knowledge. This includes the procurement of articles, management of human resources and medicalpremiums such as Medicare, Medicaid, Private pay and Insurance. Ajarn (Teacher) also shared his story of failure inrunning private hospital that confronted bankruptcy for couple of times. From this story I understood the risk associatedwith business that one must be courageous and prepare to deal tactfully…”

CONCUSION AND RECOMENDATION

This study presents a classroom action research (CAR) that focuses on how graduate nursing students learn in the classof Business Concept for Nursing Administration at Burapha University, Thailand. This study, although small in scope,has produced some interesting result which it is hoped will make a contribution toward developing future educationalstrategies to assist teachers to achieve business concept teaching and learning practices.

According to Chinn and Kramer (1999) the term concept is a complex mental formulation of experience. Some ofconcepts are not appropriate for clarification process. Some are too empirically grounded, and others are too expansiveto yield a useful outcome. Three sources of experience interact to form the meaning of an idea: (1) the word of othersymbolic label, (2) the thing itself object, property or event, and (3) feeling, value, and attitudes associated with theworld and with the perception of the thing (Chinn & Kramer, 1999).

The outcome indicated that both cycles (Cycles One and Cycle Two) showed the implication of the importance ofBusiness Concept teaching in Thai context and the usefulness of Socratic methods to help learners to improve theircompetencies and to have more confidence to discuss and learn how to make any argument in the class. For example,there are many business schools swimming in the red ocean of bloody competition by benchmarking and imitating oneanother, especially in the practices of top western business schools. On the other hand, INSEAD has created the INSEADBlue Ocean Strategy Institute that is in the process of producing theory and practice movies based on Blue OceanStrategy. They make the learning experience more condensed via a multi-media format that accelerates the learning (Kim & Mauborgne, 2005).

Today, Blue Ocean opportunities exist for business schools to reconstruct boundaries across business schools, corporateuniversities, and governmental education institutions. The findings of this study provide the challenges of the newconcept, “Purple Ocean Strategy” that combine from the red and blue. Such findings demonstrate that a Socratic MethodTechnique has a significant contribution to offer. The study’s contributions to knowledge are that instructors will learnfrom the study about the importance of using Socratic Method Technique that support student’s learning especiallyadult learning, and change instructors view of teaching. In addition, this research study raised awareness of the SocraticMethod Technique in improving both quality and confidence to discussion and making reasoned arguments. As Bonwelland Eison (1991) state students must do more than just listen; they need to read, write, discuss, or be engaged in solvingproblems. Most important, to be actively involved, students need to engage in such higher-order thinking tasks asanalysis, synthesis, and evaluation. It is hoped that the results of this small-scale enquiry will serve as a template forfurther research into teaching technique.

ACKNOWLEDGEMENTS

The author of this article wants to offer his sincere appreciation to Dr. Suwadee Sakulkoo. The author would also like toextend his thanks to M.A. Nursing students who are the participants in the class of Business Concept for NursingAdministration and Dr. Ronald Markwardt for his invaluable editorial advice and suggestion.

REFERENCE

Bonwell C. C. and Eison, J. A. 1991. Active Learning: Creating Excitement in the Classroom. ASHE-ERIC HigherEducation Report. No. 1. Washington, DC: George Washington University.

Chinn P.L. & Kramer M.K. 1999. Theory and nursing: Intergraded knowledge Development. 5th edition. Mosby,Inc. Missouri.

Cote, M. 2005. Sailing the oceans blue: CA Management. Nov 2005; 138: ABI/FORM.De Zeeuw, G. 2003. Helping others: Projects or research? Journal of Community and Applied Social Psychology. 13:

496–503.Galbraith, M. W. 1991. Adult Learning Methods. Malabar: Kreiger.



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Gonczi, A. (ed.). 1992. Developing a Competent Workforce: Adult Learning Strategies for Vocational Educators andTrainers. Adelaide: National Centre for Vocational Education and Research.

Gudic M. 2008. Toward the Blue Ocean: An interview with W. Chan Kim. Retrieved November 29, 2010 [online]available from: http://proquest.umi.com

Johnson C. 2007. Creating Learning Environment for Thais learners (in Thai): Bangkok: Chulalongkorn UniversityPublication.

Kemmis, S., and McTaggart, R. 2000. Participatory action research. In N. K. Denzin & Y. S. Lincoln (Eds.).Handbook of Qualitative Research. 2nd ed. Thousand Oaks, CA: Sage: 567-605.

Kemmis, S., and McTaggart, R. 2005. Participatory action research. In N. K. Denzin & Y. S. Lincoln (Eds.).Handbook of Qualitative Research. 3nd ed. Thousand Oaks, CA: Sage: 559-604.

Kim W.C. and Mauborgne R. 2005a. ‘Blue Ocean strategy: from theory to practice California Management Review.47 (3).

Kim W.C. and Mauborgne R. 2005b. Value innovation: a leap into the blue ocean The Journal of Business Strategy.26 (4). ABI/INFORM Global

Komin, S. 1990. The psychology of the Thai people values and behavioral patterns. Bangkok: National Institute ofDevelopment Administration.

Mair V.H. 2007. The Art of War” Sun Zi’s Military Methods. Columbia University Press: New York.


THE EFFECTS OF INTERNAL ENTREPRENEURSHIPCULTURE ON ORGANIZATIONAL LOYALTY IN

ORGANIZATIONS ON CRISIS PERIODS

Muammer ZERENLERSelcuk University, Economical and Administrative Faculty

Faculty Member, Konya-TURKEYTEL: +90 332 223 30 34 FAX: +90 332 241 00 46

[email protected]

Mete SEZGiNSelcuk University Social Sciences Vocational School of Higher Education

Faculty Member, Konya-TURKEYTEL: +90 332 223 22 99 FAX: +90 332 241 00 58

[email protected]

ABSTRACT

Gravitation of entrepreneurship thinking towards intra organization is the underlying reason of intrapreneurshipphenomenon. Intrapreneurs are connections between managers and inventors and these people handle new ideas andturn them to earnings. The difference between intrapreneurs and inventors could be explained such that inventorsintroduce a new product and intrapreneurs introduce a new way in order to market this product. The similarities betweenthem are that they both undertake risk and are both creative. Intrapreneurs are aware of the market and see opportunitiesand risk takers as well as they have the ability to analyze the organization. They handle the problems from a creative andinnovative perspective and they are able to manage these problems. The survival of organization depends on thecontinuation of workers in that organization. An organization is as strong as its employees’ loyalties. Organizationalloyalty denotes the loyalty of employees to their organization. Organizational loyalty affects the organizationalperformance positively and decreases the negative results such as absenteeism, being late and resignations. Moreoverorganizational loyalty has positive contributions to product or service quality. From this point of view every effort todevelop the entrepreneurial skills of workers will make them feel more safe and enforcement of organizational connectionsand internalization of organizational goals will be possible. The aim of this study is to determine the factors effectinginternal entrepreneurship culture, effects of internal entrepreneurship on organizational performance and organizationalloyalty. Research is carried on 17 banks in Konya, Turkey.

Keywords: Intrapreneur, Intrapreneurship, dimensions of intrapreneurship, crisis periods, bank sector.

INTRODUCTION

The rapid transformations as a result of evolution of environment, society and thought, sets forth the necessity ofupdating concepts regarding 21. century paradigms. The fact of re-defining control systems and bureaucratic procedureswith the growth of entrepreneurial organizations is one of those concepts. From a small workshop to a global companyincluding service businesses and public institutions, goal-oriented individuals and groups in all areas need constantlyrenewed quality transformations. For that reason, developing methods that encourage the individuals by creating anorganizational culture directed towards innovation, invention, creation and diversity will constitute a significantsubstitution for that need. Consequently, with the realization of innovation within the organization, internal entrepreneurialenvironment will be built.Such structures are targeted with the active participation of individuals that are driven tointernal entrepreneurship within entrepreneurial process and by using their creative skills.An organization with missionof continuos improvement and innovation can only achieve those ideals by creating a vision intended for talentdevelopment and using management skills.By creating internal entrepreneurial environment, executives,not only aim atimproving the employees’ skills and benefit from that but they also make the employees feel happy and have a motivationwith stronger organizational commitmnet.In this regard,the two major elements proposed to be issued in the study areinternal entrepreneurship and the concept of organizational commitment with gradually increasing importance.

The survival of organization depends on the continuation of workers in it. An organization is as strong as its employees’loyalties. Organizational commitment denotes the loyalty of employees to their organization. Organizational commitmentaffects the organizational performance positively and decreases the negative results such as absenteeism, being late and


resignations. Moreover organizational commitment has positive contributions to product or service quality. From thispoint of view every effort to develop the entrepreneurial skills of workers will make them feel more safe and enforcementof organizational connections and internalization of organizational goals will be possible. The aim of this study is todetermine the factors affecting internal entrepreneurship culture, effects of internal entrepreneurship on organizationalperformance and organizational loyalty. The research is carried on 38 companies operating in textile industry in Konya,Turkey.

Internal Entrepreneurship in Businesses within the Scope Innovation

At present time, the rapid and continuous changes in the global dimension deeply affects the organizational structures.Theuncertainity created by change has given importance to utilizing oppurtunities and threats and taking appropriateactions.During this period,organizations that resist to change depending on their former power and bright past,lose theirpower and perish.Adapting change and even channel change can only be made possible with innovation and an affordblerisk-taking.Moreover,developing these qualities has almost become a necessity for organizations.To develop innovativebehaviour and risk-taking tendency of employees’ many different activities can be used.Regulations,for example,fosteringinnovation and risk-taking can be implemented or such attittudes can be encouraged with performance evaluation andreward systems in the organizational structure.Developing self-sufficiency beliefs of employees’ is among the measuresthat can be taken in organizational fields.Starting from this point,in this study,how self-sufficiency beliefs affect innovationand risk-taking attitudes has been studied and its contributions to organizational performance has been disscussed.

As a result of rapid-transformation in organizational field, businesses are to be structured in a constant innovative wayin order not to lose their competitiveness (Ko�el,2005: 388-389).For, organizations that cannot keep up with the changeand thus make innovation can not sustain their lives (Drucker,1998:21).Innovation has become a part of today’s qualitymentality,as well (EFQM,2003:9).According to a study,% 88 of businesses in the USA prefer employess withentrepreneurial qualities (Johnson and Hayes, 1996:62).As employess with entrepreneurial qualities can make innovationsfar above average (Daft,2005:650-651).Also,innovation is among the leading personality features of entrepreneurs(Daft,2005:650 651; Drucker,1998:34; Geisler,1993:58; Herron,1992:12; Hisrich,Peters and Shepherd,2005:21;Hitt,Black and Porter,2005:34; K��k,2005:32-35). Innovation is defined such that ‘transforming a new idea into operatingactivities and applying to them’ and in this context different innovation types are referred as technological,process andmanagerial innovation (Arslan,2001:42).

Innovation in organizations is executed as presentation of a new product,opening new markets or discovery of a newproduction method (Diedre,Joe and Sadri,1997:45). The mentioned deeds,are the elements that enable organizations tostrengthen their competitive advantages or to differ from other organizations.Naturally, employees’ adopting innovationcontitutes the referred basis of differentiation.In this contex,defining the reasons that urge employees to make innovationwill be beneficial.

The reflections to employees of the changes within organizations are among the chief reasons referred to.Many workers,forexample, are at risk of losing their job at many corporations enforcing downsizing strategy.In this context,workersadvocate innovation primarily so as not to lose their job,compete with other workers and secure their positions inorganization (Geisler, 1993:58). Moreover, other reasons that influence this situation are obtainingmore independenceand access to organizational awards (Hisrich and others,2005:46). Except for these chronic problems in organizationsare other reasons direct workers advocate innovation and so that solve problems (Borins, 2000: 502-506).

Entrepreneurship and Internal Entrepreneurship in Organizations

It seems impossible for organizations that can not keep up with the pace to move forward in today’s fast growingeconomic environment.Many large corporations may lose their initial entrepreneurial spirit.As corporations get biggertheir flexibility and innovation skills may decrease because of that large size.To survive in dynamic industryenvironment,both gurus and management researchers recommned having institutional entrepreneurship tendencies(Muzyka,Koning and Churchill, 1995:52).

Therefore, the concept of internal entrepreneurship also expressed as institutional business venture or organizationalentrepreneurship is acknowledged to certain extent in the related literature. Especially, in recent years it has beenregarded as an important way of providing researchers organizational and economic development along with wealthand fostering the corporate organizations.In this respect,internal entrepreneurship contitutes an important part inperformance and competitiveness of firms (Antoncic & Hisrich,2004) and entrepreneurship elements in organizationsare thought to make organizations more dynamic and competitive (Goosen,Coning and Smit,2002b:21).

Muammer ZERENLER and Mete SEZGiN


THE EFFECTS OF INTERNAL ENTREPRENEURSHIP CULTURE ON ORGANIZATIONALLOYALTY IN ORGANIZATIONS ON CRISIS PERIODS

Entrepreneurship and entrepreneurial culture phenomenon are among the leading issues with utmost importance inrecent years.The growing importance of entrepreneurship is closely associated with its crucial role in terms of economicand social development.The increasing entrepreneurial activities has significant role in prompting stagnant economies(e.g. the USA) and contribute to creating new job fields and solving employment issues.Entrepreneur attractions playdominant roles in the acceleration of technological development.Entrepreneurship is also regarded as an indispensabletool for the growth of developing economies.This phenomenon is accepted on a global scale including developedeconomies today (Zoltan vd., 2001: 235-245,Jack-Anderson,1999:115).

In the majority of studies conducted upon entrepreneurship, different definitions are developed and through thesedefinitions common personality features of entrepreneurs are determined. Creativity,competitiveness,being success-oriented and risk taking are generally referred in the studies carried out upon the personality features that facilitateentrepreneurship activities and allow being an entrepreneur.In this context entrepreneurship is not only handled as anarea of economic activity,but it also handled as a personality structure based on the need for achievement (McClelland,1961). Entrepreneurs outshine as individual actors that are innovative,creative,risk taker and can utilize the arisingoppurtunities in maximum extent,set up new businesses and improve them thus provide dynamism for economic growth.

In daily life, enterprise is used to express start,attempt and taking action for an activity.Entrepreneur denotes theenterprising person takig part in such situations.Actually,these concepts are dealt within an economic framework.In thiscontext,entrepreneur is the person channelling suply and demand as well as seeking market.Entrepreurship is seen as anactivity of economically mobilizing sources and activating them.

The use of entrepreneurship concept in the current sense is closely associated with the dominance of capitalist productionstyle. In fact,it was first mentioned in 19. and 20. century in literature by the French economist Cantillon.With J.BatisteSay the concept has taken the sense we use today.According to Say,entrepreneur is the person that produces a commoditybelieved to be precious by gathering all production factors and takes risks.The entrepreneur definition of Say lies in thebasis of having risk-taking and managerial abilities both (Binks-Vale,1990:119).

Hisrich and Peters (2001:9), who have deep contributions to entrereneurship concept, define enrepreneur as an individualthat gathers labor,raw material and other assets for greater oppurtunities.They,also,perceive the entrepreneur as thecreator of inovation,change and a new order.Entrepreneurship,for them,is the process of creating a new notion throughdevoting enough effort and time,taking social,financial and physical risks and achieving independence,monetary awardsand personal satisfaction.

For Casson and Foss-Klein, entrepreneurship is the whole process of taking risk, pursuiting oppurtunity, implementationand making innovation. In this context, both setting up a company and making innovation are in the scope ofentrepreneurship (T�SIAD,2002:34).Accordingly, Bridge and others (1998:35) indicate that entrepreneurship includesmore briefly starting a job,having a job and improving the business.

The concept of internal entrepreneurship was first uttered by Pinchot (1958) within the meaning of entrepreneurialactivities of the organization. In his study, Pinchot’s defines key points and recommendations that people in theorganizations are obliged to do in order to create new ideas and develop within businesses.On the other hand,Zahra andhis friends (1999a),indicate that one of the

first studies on this issue belongs to Peterson and Berger and Peterson and Berger (1972) showed that entrepreneurshipactivities help companies in the development of new businesses creating revenue streams.Some scientists like Stevensonand Jarillo (1990), Antoncic and Hisrich (2001),put forward the notion as a counter argument that concept of ‘institutional’in ’institutional entrepreneurship’ term is generally associated with big companies whereas entrepreneurship activitiesare also indispensable for small and medium sized businesses.And starting from this point they have proposed that theterm of ‘entrepreneurship in organizations’ is required to be used like the term entrepreneurship in existing organizationsregardless of the size of companies.Sharma and Chrisman (1999:11),tried to systematise the terminology used ininstitutional field and stated that they have no generally accepted definition of institutional entrepreneurship in theirstudies.Starting from this study,some definitions existing in literature on institutional entrepreneurship are demonstratedin Chart 2.1 (Sharma and Chrisman,1999:14-159).

Vesper regards Institutional Entrepreneurship as a phenomenon including worker initiative from the begining to embarkon something new and defines it considering the 3 basic elements: (1) new strategic inclinations, (2) initiatives from thebeginning and (3) creation of autonomous business/organization. According to Vesper’s conceptualization, institutionalentrepreneurship may be one of the above mentioned elements or arise as any combination of those 3 elements orinclude the whole 3 elements.



Covin and Miles (1999:48) have specified 3 different institutional entrepreneurship:(1) entry of an organization into anew business area, (2) individual or individuals that defend developing ideas for new products and presenting them inan institutional context and (3) an environment with entrepreneurship based philosopy that penetrates the view andoperations of the entire organization.

Chart 1 Classification of Entrepreneurship at Organizational Level

Scientists Concept Name Typical Dimensions DefinitionsMiller Innovation New Products Presentation of New Products and Product (aand Friesen (a dimension Service Technologies, research for

unusual (1983) of creating original solutionsaddressed to marketing strategy) and productionproblems (Miller ve Friesen:222)

Risk Taking Proactiveness “The venture of surpassing competitors rather than

following them” (Miller ve Friesen:222)Entrepreneurial Risk Taking “Taking risks concerned with investment decisions Posture and strategic movements in case of uncertainity”

(Covin and Slevin, 1991:10) Innovation “Frequency and size of the trend regarding product

innovation and technological leadership” (Covinand Slevin, 1991:10)

Proactiveness “Pioneering nature of the firm’s tendency tocompete agressively and proactively with theopponents in the field of activity” (Covin andSlevin, 1991:10)

Guth and Institutional Internal Innovation or “The formation of new businesses within existingGinsberg Entrepreneurship Business Venture organizations” (Guth and Ginsberg, 1990:5)(1990) Strategic Innovation “The transformation of organizations through the

renewal of basic ideas forming the framework oforganizations” (Guth and Ginsberg, 1990:5)

Zahra Institutional Innovation and Business “Creating new businesses with market development(1991, Entrepreneurship Venture or product,service ,technological and administrative1993) innovation projects” (Zahra, 1993:321)

Strategic Innovation “Re-defining the concept of business,introductionof comprehensive system changes for innovationand re-organization” (Zahra, 1993:321)

Lumpkin Entrepreneurial Autonomy “ An independent action of an individual or a teamand Dess Management in creating an idea or opinon and bringing those to(1996) end ” (Lumpkin and Dess, 1996:140)

Innovativeness “The inclination of a firm towards supporting andengaging into new ideas,innovation, experiencecreating processes, that can cause new products,service and technological processes” (Lumpkin andDess, 1996:142)

Lumpkin Entrepreneurial Risk Taking “Feeling of uncertainity…possibility of losing orand Dess Management negative outcome…Huge pressure resulting from(1996) borrowing resources or the pledge of using them in

excessive amounts (Lumpkin and Dess:1996:144) Proactiveness “Taking initiatives by forecasting new oppurtunities,

seeking new oppurtunities and entering to developingmarkets” (Lumpkin and Dess, 1996:146)

Competitive “Tendency of the firm to compete with opponents Agressiveness either directly or heavily in order to enter the market

or improve position’’(Lumpkin and Dess, 1996:148)



Chart 1 Classification of Entrepreneurship at Organizational Level

Scientists Concept Name Typical Dimensions DefinitionsKnight Entrepreneurial Innovativeness “The firms’,that tries to develop or enchance(1997) Management products and services to perform organizational

functions and also overcome struggles coprisingof administrative technics and technologies,endevour, for creative and original solutions ”(Knight,1997:214)

Proactiveness “The counter stance of proactiveness and the firm’sbeing at an aggressive stance when compared to itsopponents’’ (Knight,1997:214)

Antoncic and Hisrich (2003a,15-16),(chart:1) afterwards, have developed their studies on dimensions of institutionalentrepreneurship and indicated that institutional entrepreneurship can be analyzed in those 8 dimensions as follows:

- New Ventures - New Businesses- Product/Service Innovation - Process Innovation- Self-Renewal - Risk Taking- Proactiveness - Competitive Aggresiveness

Organizational Commitment

There is no consensus in the related literature on the definition of organizational commitment that denotes degree ofcommitment one feels towards the institution he works at.The concept of organizational commitment was first studiedby Whyte in 1956 and later was developed by many researchers principally Porter, Mowday, Steers, Allen, Meyer,Schermerhorn, Newstrom, Rafaeli and Suttan (O’reilly and Chatman,1986).Generally speaking,this concept denotesthe loyalty sensation for organization and the interest for the success of organization.According to Stum,organizationalloyalty is an indicator of employees’ desire to stay within the organization in future (1999).As for Rafaeli and Suttan,organizational commitment is a strong desire to stay as a member of an organization,desire to show a high level of performanceon behalf of the organization and an absolute trust in organizational purposes and values (1987).

According to Leong and others, organizational commitment is the unity of identity that the individual shares with a particularorganization and unified power of loyalty (1996).Likewise, Schermerhorn and others, have described organizationalcommitment as ‘the degree of bond that the individual forms with organization he works in and feeling oneself as amember of the organization’ (1994).

As seen above, there is a concensus on organizational commitment’s being direct relation or bond between employee andorganization especially in disciplines like organizational attitude, psychology and social psychology. There are differingopinions regarding this relation or bond structure and formation,though.This discrepancy can be detected in the definitionof organizational commitment and can cause different definitions to arise.For example,while Rietzer and Trice advocatethe fact that‘organization is a psychological phenomenon based on meaningfulness level for the individual’ (1969); Thornhilldescribes organizational commitment as ‘a sum of personal features principally,priority,need for achievement,authorityand responsibility and sense of professionalism’ (1996).Porter and others have sorted out the features characterizingorganizational commitment as follows:

a. Acceptance of the aims and values of the organizations and strict adherenceb. A willing and volunteer diligence for the organizationc. A strong desire for the continuance of organizational membership

Loyalty to organizational aims helps reduce transfer of labor and absenteeism by raising the quality and and quantityaspects of a specicif role. It also, impels the individual to lots of voluntary action needed for organizational life andhighest level of system success (Katz and Kahn,1977).

The scope and related situations for business of organizational commitment are very broad. Topics suchas, resignation,absenteeism, withdrawall, job seeking, job satisfaction, sticking to job, improving morale and performance, autonomy,responsibility, attendance, sense of duty, business misson, organizational values, objectives and principles are within theinterest of organizational commitment (Stum,1999).Meyer and Allen handles organizational loyalty in 3 dimensions (1969).



Emotional commitment, is described as employees’ desire to stay in business on their own emotional preference. It isan attitudinal phenomenon regarding personal features and factors about business. It also,relys on the principle ofemployees’ willingness to promote organizational objectives (Mird and others, 2002).

Continuance commitment, is described as employees’ necessarily attending the business and considering negations ordamages brought about by resignation. Individuals with high levels of commitment regard staying in the business as anobligation to avoid financial and other incidental losses.They keep organizational membership because there is a lack ofperceived job alternatives and ‘as the conditions required’.They also,show minimum required performance to maintainorganizational membership.

Normative commitment, is expressed as employees’,with a moral sense of duty, feeling dependant on the organizationand feeling obliged to stay within the organization (Meyer and Allen,1991).Normative commitment emphasizes thetendency of being loyal to and dependant on the organizations and institutions because of providing socialization withina culture of devoting oneself to the institution and stimulating loyalty. Normative commitment involves beliefs internalizedby the individual that are consistent to organizational mission,objective,policy,and operating styles,too.In this way,itdemonstrates the process of ‘organizational identity’ and harmony between individual-organization values (Wiener,1982).

An individual with emotional commitment thinks that he wants to stay in the organization, the individual with continuancecommitmet think that he needs to stay in the organization and the individual with normative commitment thinks that heis supposed to stay in the organization. That is to say,this situation is respectively considered in axis of ‘desire’(emotional),’need’ (continuance), and ‘obligation’ (normative), (Meyer and Allen,1991).The formation process of organizationalcommitment is described in Chart 1.

As seen in Chart 1,the individual identifying with the organization as a result of organizational socialization policiesturns into a loyal individual with suitable commitment and duty mentality in selection process.

A Research About Determining the Effects of Internal Entrepreneurship Culture on Organizational Commitmentin Organizations

The study is carried on banks operating in Konya, Turkey.17 banks selected from 31 banks situated in Konya and threedistrict center with random sampling method contitutes the main mass of the study.This number,statically (%54,8),iscapable of exemplifying the main mass.The datum are gathered through a studied survey form.The reliability rate ofquestions about organizational commitment,described in the survey form is determined as 0.845.



Chart 2 Demographic Characteristics of Research Participants Educational Status Number Percentage Age Range Number PercentageUniversity Graduate 72 64,9 26-35 44 39,6High School 17 15,3 36-45 31 27,9Secondary Education 9 8,1 17-25 20 18,1MA 8 7,2 46 and above 16 14,4Primary School 4 3,6 Gender Number PercentageDoctorate 1 0,9 Female 63 56,8Working Time Number Percentage Male 48 43,2in the Organization6-10 years 69 62,2 Maritial Status Number Percentage1-5 years 28 25,2 Married 81 7311 years and above 14 12,6 Single 30 Total 111 100,0 Total 111 100,0

As seen in Chart 2,more than half (%56,8) of the research participants are female.When the educational status ofbanking sector workers are considered it can be seen that % 64,9 are university graduate,%15,3 are high school graduateand %8,1 are secondary education.More than half of the research participants (%62,2) work for 6-10 years.Because ofreasons such as high rate of employee turnover at banking sector and the widespread employee transfer between banks,theproportion of 11-year and above workers are relatively lower than the others.

Chart 3 The Distribution of Facing a Crisis of the Research Participants Within Working Period

Facing the Crisis Situation Number Percentage Yes,i faced. 85 76,6No,i did not face. 26 23,4 Total 111 100,0

Chart 3 demonstrates the crisis situation distribution of research participants within working period.It is inferred that agreat majority of research participants (% 76,7) state that the banks they work at suffered from crisis within theirworking periods.This high proportion may be considered normal when crises,especially 2001 and 2004 crises, affectingbanking sector are taken into account.It is remarkable that all the employees who state that they did not suffer from crisiswork at ‘public banks’.

Chart 4 The Problem Distribution of Research Participants in Crises Periods

Managerial and Organizational Negations Number PercentageFeeling depressed 94 84,7I had fear of being unemployed and panic 88 79,3I started to look for job 82 73,9We had communication distruptions within the organization 74 66,7I lost confidence in my organization and my executives 71 64,0I had psychological problems 66 59,5The level of relations between other departments reduced 54 48,6Coordination became insufficient 49 44,1Quality of my decisions deteriorated 43 38,7Chaos occoured in authority and responsibility 35 31,5I was dismissed 28 25,2The decision process deteriorated 24 21,6Self-defense increased 22 19,8Note:Since more than one option can be chosen,it exceeds % 100 in total.

Chart 4 shows the crisis problem distribution of research participants in the research who express that they had crises inworking period.As seen above, the research participants undergoing a crisis felt depressed (%84,7),had a fear of unemployment and panic(%79,3),and started looking for jobs (%73,9).In terms of organizational commitment, it is remarkable that a majority of theresearch participants started looking for jobs even if they were not laid off. This fact externalizes that the employees do notfeel loyal to the organization in crisis periods.



Chart 5 The Availability to Participate in Organizational Commitment Elements of the Research Participants in CrisesPeriods

Organizational Commitment Elements Medium S.D.Emotional CommitmentI am willing to do my best for the success of institution i work at. 3,39 0,86I tell others that i am proud of being a part of the institution i work at. 3,21 0,79The benefits of the institution are more than anything. 3,14 1,02I feel myself as a partner of the institution i work at. 2,87 0,92 I think my personal values and values of the institution i work at are similar. 2,49 0,76Continuance CommitmentI work at the best institution that i can work now. 4,17 0,88I accept tasks given to keep on working at this institution. 4,08 1,02I keep on working at this institution so long as a good oppurtunity 3,91 1,14does not arise.Normative CommitmentI attach importance to success and future of the institution i work at. 4,46 0,96I struggle to reach the objectives of the institution. 4,37 0,88I try to perform the tasks i am given perfectly. 4,08 0,79I trust on my executives. 3,89 1,07Note: (i) n=111; (ii)scale 1 never affected, 3 did not change,5 means it affected significantly; (iii) According to Friedmantwo-way Anova test(?2=642,786 and p<,001)the results are meaningful statistically.

CONCUSION AND PROPOSAL

Nowadays, the competitive advantage is the ability to use the human force effectively and efficiently. The sense of trust thatstrengthens the individual’s organizational commitment is essential for the individual to use and develop their qualificationsand creativity. As a result of organizational trust, it is assumed that an increase will occur in motivation, organizationalcommitment, performance, and productivity, and a decrease will occur in stress, conflict, and uncertainty within the organization.

Banks that give service, likewise enterprises produce goods, aims to satisfy the demands and needs of the client. Enterprisesshould know and meet the demands, expectations and needs of the employee. If they achieve this, they will be decisiveon the motivation, mood and satisfaction of their employees. And employees will develop a commitment within theframe work of organizational conditions in which they are motivated and satisfied and also by increasing their performancein this direction, they will make efforts in line with the objectives of the organization itself. Owing to this, enterprisesshould attribute the required importance to their employees on the subject of organizational commitment and of increasingthe performance as their employees are crucial for their existance and maintenance.

In post-industrial work environment organizations operating information and service based, the effective managing ofchange and uncertainty depends on employees’ internalizing organizational objectives and improving their organizationalcommitment. This research studies the organizational commitment of employees from 17 banks operating in Konya incrises periods. In periods of crises employees’ especially normative commitment elements are affected significantly whenresearch findings are interpreted. In periods of crises, the employees express that they feel depressed, they are seized withfear of unemployment and look for job even if they are not dismissed. In this context business executivess need to takesome precautions to maintain employees’ organizational commitment and even improve it in periods of crises.

-There may be some periods in which organizations restore confidence and reflect their reputation to everysegment of society effectively on condition that periods of crises are managed and utilized effectively. Executives oforganizations need to believe that they can overcome the crises successfully or with minimum damage and they alsoneed to give confidence firstly to their employees, customers, shareholders and the society in order to avoid negativeeffects of crises and overcome crises periods swiftly.

-Organizational commitment has a subjective structure being affected from a variety of factors. And perceivingthis subjective structure changes from individual to time. While ensuring the commitment requires a difficult and long-runing effort, losing this, is easy and rapid. Organizational executives, leaders should keep in mind that it takes a longtime and changes from person to time while developing programs and applications that ensure and preserve organizationalcommitment.

-Business executives should develop effective strategies to fight crises and render employees take part in thosestrategies actively. In crises periods considering the increased stress and tension of the employees some leisure activitiesshould be provided and the importance of the employees should be emphasized on post-crisis plans.



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Ali ERBASISelcuk University Seydisehir MYO. 42160

Seydisehir / KONYA / TURKEYTEL. +90 532 636 63 53FAX . +90 332 582 76 [email protected]

ABSTRACT

In recent years, the performance management has become the center of many countries that are in the search of theefficiency and productivity. This focusing leads the academicians and applicators to try various methods. One of thesemethods is the Balanced Scorecard method introduced by Kaplan and Norton in 1992. Balanced scorecard providessignificant contributions to performance planning, especially in determining the strategies of the firms. Thanks to balancedscorecard, the enterprises determine and eliminate the sub-strategies that fail to contribute to their financial targets.However, the scarcity of the applications related to balanced scorecard and deficiencies in the applications have negativeimpact on the sectoral applications and results of the method. For that reason, the applications of the study in differentsectors should be mentioned. The objective of the study is to form the balanced score of the enterprise that carry onbusiness in aluminum sector in Turkey. In conclusion, the performance planning that enables the execution of performancemeasuring and evaluating in a different way than the strategies that the enterprise formed in the classical method wasperformed. In this application, 19 strategic objectives, 36 strategic targets and 46 performance criteria/indicators in thesize of 4 scorecards were determined. The determined criteria/indicators were based and the firm was enabled to havea performance management process that focuses on result and reflects the success of its each unit, thus easily determinesthe problematic fields. Such studies that will be carried out in different sectors are expected to positively contribute toincrease the profitability of the companies through using statistical methods during the processes of measuring andevaluating the performance.

Keywords: Strategic management, performance planning, balanced scorecard

INTRODUCTION

Goal setting and keeping people responsible for the realization of the goals is a common management application.Almost every organization, from small sized to large or from private to public, designate a certain level of financial andnon-financial goals as a way of encouraging progress (Yuzbasioglu, 2004: 387). The process of goal setting is denotedas performance planning in companies.

Plans are basic information sources of performance management system. Performance planning is the stage wherestrategic goals, targets, performance goals, activities and projects, criterias and application methods that enable toassess the performance of individuals, team, department and company are determined.

A variety of methods are used by academicians and applicators in performance planning process. One of these methodsis the balanced scorecard (BSC) method introduced in 1992 by Kaplan and Norton (71-79). It greatly contributes toperformance planning process, even though it is expressed as performance measuring and evaluating method in literature.

BSC; is a strategic method that provides the top management with a broad perspective concerning the performance ofcompany and forms a framework (Kaplan and Norton, 1996: 2) for strategic performance management by transformingthe missions and strategies of companies into comprehensible performance metrics. In other words BSC is, turning thestrategies intended for goals that the company tries to realize into action in a way comprising all employees in acompany. The basic feature that makes BSC different when compared to other methods could be explained such thatnon-financial indicators put forward the effects on financial data of company.

According to Kaplan and Norton strategies of a company should focus on four basic dimensions denoting these dimensionsas financing, customers, intra-company transactions, learning and development. BSC argues that strategic management

THE USE OF BALANCED SCORECARD IN PERFORMANCEPLANNING AS A STRATEGIC MANAGEMENT TOOL:

AN APPLICATION IN THE ALUMINIUM SECTOR


process could only be valuable with the availability of customers that integrate financial point of view, intra-companytransactions, criteria/indicators of learning and development in addition to financial criteria/indicators.

The creators of the BSC method, Kaplan and Norton, indicate that BSC should not be regarded as a stereotyped methodthat is applicable to every industry or company (1993: 135) and not every company is required to implement the fourdimensions they present (1996: 34). In addition to making use of only two or three dimensions out of the four, one ormore can be regarded considering the conditions of the sector the company operates and the strategy of the company.However, Kaplan and Norton indicate that all parties of the company are not needed to be included as separate dimensionswhile forming scorecards. Instead, they underline that expansions like including strategies related to staff in learningand development dimension, and including strategies related to suppliers in intra-company transactions dimension arerequired to be fulfilled and thus scorecards are required to be made abstract as much as possible.

BSC, makes use of strategy maps in the process of placing strategies. Strategy map is a powerful tool for revitalizingstrategies like the chain of cause and effect relationship between strategic goals (Anagnostopoulos and Elmasides,2010: 12).

Strategy maps help to set the cause-effect relationship between BSC dimensions. For example, if companies trainemployees in issues needed (Learning and growth dimension), the employees will be more effective and efficient inproduction process (Intra-company transactions dimension). So that intra-company transactions are realized better andmake customers more satisfied on many aspects (Customer dimension). A satisfied customer either increases disposalamount or affects people close to him/her positively about the products of company. As a result an increase of thecompany revenues can be observed (Financing dimension). The influence of a progress intended for learning anddevelopment on intra-company transactions, customer and financing dimensions can be revealed with the help of strategymaps. All the dimensions of BSC are bond tightly to each other by means of strategy maps. The company can anticipateeffects of planned operational activities on its long-term goals by means of strategy maps.

THE STAGES OF BALANCED SCORECARD

Many different stages are described to create BSC in business literature since the application stages of BSC differs withrespect to characteristics, quality of company applied to and perspective of administrators. According to Niven (2002: 64)the stages of BSC consist of two categories which are in general planning and development. Planning stage consists ofthose six stages of: determining BSC purposes, selecting the most appropriate company unit that will observe the BSCprocess, having the support of top management, creating the application team, forming the project plan and developing thecommunication plan. Development stage consists of those stages: obtaining the information and documents needed,determining mission, vision, basic principles and strategies of the company or revising them if fulfilled before, businessmeetings with executives and getting employee feedback, formulating strategy maps, improving performance criteria/indicators and making the BSC application plan continuous.

Olve and his friends (1999: 48-49), conducting a comprehensive study on BSC stages, indicate that the process consistsof eleven stages. According to Olve and his friends, the first stage is defining the sector the company operates in,clarifying the development of sector and rank of the company in sector. The second stage is forming of vision orvalidation. The other stages are, respectively formulation of scorecard dimensions, exposing vision to sub-classificationin respect to each dimension of BSC, describing critical success factors, expressing cause and effect relationship andimproving criteria/indicators, creating a balance, forming the top-level scorecards, spreading scorecards and criteria/indicators into company departments, setting goals, developing the activity plan and start of applying scorecards.

According to creators of BSC, Kaplan and Norton (2007: 364-376; 1996: 300-3009), BSC application consists of thosefour stages: selecting appropriate organizational unit and describing relationships between business units/parent company,determining strategic objectives, selecting performance criteria/indicators and formulating application plan. At the firststage the most appropriate company unit to execute BSC applications is selected. If there are more than one firmbelonging to parent company the selection of appropriate organizational unit is carried out at this stage. Because thevery first formation of BSC application within institutional diameter will be such a difficult introduction. For that, themost appropriate organizational unit is determined among firms belonging to parent company. After the determination,the relationship of the firm between parent company and other firms belonging to parent company is denoted. At thisstage, the BSC applicator discusses with other firms and senior executives of parent company and gets informationabout financial goals (growth, profitability, cash flow) for each of companies, common themes (environment, security,human resources policies, relations with the community, quality, competitive feature of prices, innovations) and linkswith other firms (common customers, chief competitive advantages, providing

THE USE OF BALANCED SCORECARD IN PERFORMANCE PLANNING AS A STRATEGICMANAGEMENT TOOL: AN APPLICATION IN THE ALUMINIUM SECTOR


Ali ERBASI

customers with integrated service opportunities, intra-company relations of customer and supplier). This informationserves to avoid establishing goals different from parent company and other firms. In other words the objective here is toavoid setting goals which avails to the firm or field of activity but not to the benefit of other firms and fields of activity.

At the second stage strategic goals are determined. Information, preparing the ground for BSC and about the firm, andinformation and documents about mission, vision and strategy of the firm are prepared. The collected information ispresented to the senior executives of the firm. After the senior executives examine the materials presented, the BSCapplicator has interviews with each executive. During these interviews thoughts of every executive about strategic goalsand proposals concerning which measurements should be included in the four dimensions of BSC are taken intoconsideration. After the interviews come to end BSC applicator and his colleagues meet, discuss executive replies andprepare a list of firm goals and measurements. At this stage it will be useful to include observations and evaluations thatshow reactions about individuals and the firm towards the BSC application and alterations the application causes inmanagement operations. The outcomes of this stage are determining objectives getting involved in the four dimensionsof scorecard and sorting the objectives out in order of importance. Whether the list where objectives of high priority areintroduced really reflect the company strategies and the objectives in the four dimensions of scorecards linked to eachother in terms of cause and effect relationship are tried to determined.

The third stage is the selection of performance criteria/indicators. The applicator has meetings with different groups andworks out. At the end of the meetings, objectives in each dimensions of scorecards, explanations about the objectives,criteria/indicators and the relationship between criteria/indicators in each stage and criteria/objectives in other stagesare externalized.

The fourth stage is the formulation of application plan. In this stage a team consisting of each work group leadersformalize long-term goals and formulate a plan regarding how to apply scorecards. This plan should include theproclamation of scorecards throughout the whole company, how the connection of scorecard measurements to databaseand information system is provided.

THE APPLICATION OF BALANCED SCORECARD IN ALUMINIUM PROFILEMANUFACTURING PLANT

In this study the formulation of balanced scorecards of Turker Industry Trade Commitment Joint-Stock Company operatingin aluminium sector in Turkey is aimed. Turker Industry Trade Commitment Joint-Stock Company (After that it is referredas Turksan Aluminium Joint-Stock Company) is a company founded in Seydisehir district of Konya province in 1997engaging in aluminium trading. The firm operates at market with Turksan brand. The firm, started manufacturing collectorin 1998, is engaged in that two sector (aluminium trading and manufacturing) until 2008. The firm officials decide to try anew field of activity and engage in manufacturing alimunium profile that year. The firm, completing factory constructionin 2008, is situated at Seydisehir Light Industrial Zone. The factory operates in an area of 110�60 m2 total including a 3120m2 of closed area. Aluminium profile is manufactured at an area of 1560 m2 which is the half of the closed area andcollector is manufactured at the other half. At the firm 40 people work consisting of 14 collector manufacturing staff, 17aluminium profile manufacturing staff, 7 administrative staff and 2 help staff. The 2009 year endorsement of the firm isabout 2 million TLs (= almost 1.250.000 $). The production in the firm continues for 24 hours.

In the study document review, benefiting from expert opinions, discussions with top executives, literature scanning,discussions with organizations, experts and associations from the sector, trend analysises, examination of statistical dataand other statistical techniques are made use of. In the process of formulating firm’s BSC, the four stages proposed bythe introducers of BSC, Kaplan and Norton (2007: 364-376), are based on. These stages are selecting appropriateorganizational unit and describing the relationship between business units/parent company, determining the strategicobjectives, selecting the performance criteria/indicators and formulating the application plan. We used all of thesestages in our study.

The Formulation of Firm Balanced ScorecardsIn the firm where the application is conducted there are two main manufacturing activities which are production of aluminiumprofile and solar energy collectors. Firstly, before including the whole firm in the application discussions are made with thefirm management for applying it to only one unit of activity and pilot application is decided to be practiced in the alunimiumprofile production site.

Secondly, a comprehensive strategic planning study is carried out on the firm and vision, mission and basic principles ofthe firm is determined at the end of the study.


Mission of the Firm: Making no concessions to our principles and making effective use of resources, meeting customerexpectations with a sense that gives priority to customer expectations in accordance with the principles of total quality andcustomer satisfaction. So that manufacturing at international standarts with constant growth and development principlesand a consistent acceleration of development. Opening to foreign markets and in native markets standing among theforemost firms in Turkey as well.

Vision of the Firm: Being an estimable firm of wordwide reputation in aluminium profile manufacturing where all theemployees in sector want to work at and want to have. The Principles of the Firm:

- Taking action with the principle of a hundred percent native and foreign customer satisfaction.- Highest efficiency and lowest cost of high quality production.- Using modern management techniques.- Giving priority to performance development.- Being sensitive and responsive to the environment and people.- Working with a young and dynamic team.- Being human-oriented.- Having a sense of responsibility and being fair, honest, reliable and transparent.- Giving priority to business ethics.- Effective use of resources.- Continuous development.- Being a participant.- Spreading quality mentality all over the firm and having a total quality approach.- Giving priority to personal and professional training of employees.

The dimensions of BSC is determined before determining strategic goals and targets of the firm. In the distribution ofBSC dimensions four dimensions (financial, customer, intra-company transactions, learning and development) Kaplanand Norton proposed are implemented. After the dimensions are defined strategic goals are determined with the help ofstrategic maps containing cause and effect relationships. The two basic strategies of the firm are based on in the formulationof the determinations. The strategy map formulated for the firm where the application is carried out is introduced inFigure-1.

Strategic goals are the long-term strategies of the firms. But, to concretize the strategies and make them perceived betterby employees each strategic goal should be introduced in a way more concrete and applicable to short-term. Because,sometimes employees can interpret a strategic goal differently. It needs to be presented more concretely for each personto interpret the same fact from the same goal. For that reason, strategic goals relating to each strategic purpose aredetermined in the model firm in addition to common balanced scorecard applications. Consequently, transforming thestrategic goals with a long-term perspective of more than 5 years into strategies between 1-5 years is ensured. Strategicgoals are presented in the firm’s balanced scorecard under the Table-1, Table-2, Table-3 and Table-4.

After formed strategy map, performance criteria/indicators of the firm are determined for each strategic goal. They arepresented in the firm’s scorecards.

After that, leaders of the study groups gather and the determined strategic goals are signed and made official. Again atthis stage a plan regarding application of scorecards is formulated. At this stage where evaluation period and how theprocesses with respect to the application work are determined and also the scorecards presented in the next part areensured to be declared all over the firm. Supporting scorecards with information technologies and facilitate tracing arerealized at this stage, too.

Lastly, Turksan Aluminium Inc.’s balanced scorecards are formed. The scorecards created for each dimension arepresented in Table-1, Table-2, Table-3 and Table-4 in the order described in strategy map.



Ali ERBASI

Figure-1 Turksan Aluminium Inc. Strategy Map


Table-1: Turksan Aluminium Inc. Financing Dimension Scorecard

STRATEGIC STRATEGIC PERFORMANCE GOALS TARGETS CRITERIA/INDICATORS

Increasing profibility. Maximizing the available Profibility rate of the firm (%).profibility of the firm.

Increasing sales. Equalizing sales to Increase rate of the firm salesproduction in full capacity (%).each year.Avoiding capacity Amount of the firm’s monthlyfluctuations in production production (kg)monthly.

Increasing productivity. Raising the firm productivity Productivity rate of the firm (%).to %95 untill the end of year2015.

Table-2 Turksan Aluminium Inc. Customer Dimension Scorecard


Ensuring continuity Having worked with the Number of previous customersof the existing whole customers available studied during the year.customers. each year.Accessing to new Adding 5 new customers to Number of newly-added customers.customers. customer portfolio each year. Number of potential customers

Participating to at least 2 Number of national fairsnational trade fairs with attended by the firm.stands each year.Participating to at least 1 Number of international fairsinternational trade fair with attended by the firm.stands each year.Increasing the frequency of Number of annual customer visits.annual customer visits. Number of registered

Ensuring customer Ensuring the creation of customers to database.satisfaction customer database. Number of customers being

updated of database information.Minimizing the rate Carrying out surveys on Number of customers surveyed.of customer complaints. each customer regarding

their views about the firmand employees

Table-3 Turksan Aluminium Inc. Scorecard of Intra-Company Transactions Dimension


Ensuring order deliveries Reducing the average Average time of delivery toon time. delivery time to customers customers.

to 5 days.Seeking new markets. Finding a new market each Number of new markets the firm

year for the firm. operates at.Increasing the rate of Meeting customer demands Duration of answering customermeeting customer request in 1 day after sales. requests (day).on time. Fulfilling customer demands Duration of meeting customer

in 5 days after sales. requests (day).Decreasing the rising cost Ensuring the increase of cost Labor cost per direct labor hourof labor per unit. of labor per unit at around (Turkish Liras).

%10 mostly.


FINANCE(%22)

CUSTOMER(%22)

INTRA-COMPANY

TRANSACTIONS

(%34)


Ali ERBASI

Table-3 Turksan Aluminium Inc. Scorecard of Intra-Company Transactions Dimension

STRATEGIC STRATEGIC PERFORMANCE GOALS TARGETS CRITERIA/INDICATORSReducing energy costs. Keeping cost of energy per Energy cost per unit (Turkish Liras).

unit under the current rate.Reducing the operating Decreasing the ratio of marketing, Ratio of marketing, sales andexpenses and the loss sales and distribution expenses to distribution to sales (%).on exchange. gross sales under the current

rate.Keeping the ratio of general Ratio of general administrativeadministration expenses under expenses to sales.the current rate which is 12%.Ensuring the elimination of the Total foreign exchange lossesthe firm’s too high foreign (Turkish Liras).exchange losses.

Improving quality of Improving inventory tracking Number of inventory trackingtotal of process. system in the firm. system used in.

Installing the implementation TKY training hours per staff.quality management in the firm. Number of accredited document.Creating job flowcharting and Number of created job description.job descriptions. Number of created work-flow

diagram.Reducing time of process. Shortening the 5 minutes of Duration of billet furnace heating

heating operation in billet furnace. operation (minutes).Shortening the 6 minutes of Duration of press machine formingforming operation in extrusion operation (minutes).press machine.Reducing the average raw material Duration of average raw materialprocurement process to 3 days. procurement (days).

Table-4 Turksan Aluminium Inc. Scorecard of Learning and Development Dimension

STRATEGIC STRATEGIC PERFORMANCE GOALS TARGETS CRITERIA/INDICATORSIncreasing labor Raising the average rate of labor Rate of labor productivity.

productuvity to %95 in 5 years.Increasing the employee Ensuring the firm employees to Number of employee suggestionsparticipation into employees to present at least 10 related to processes.management. proposals each year regarding

production and management.Increasing the employee Organizing monthly routine Number of brainstorming meetingsparticipation into brainstorming meetings with the employees attend in one year.management. the firm employees.

Creating a board of Research Employee number of R&D board.and Development (R&D) at Number of R&D board annualthe firm. meetings.Raising the ratio of employees Number of employees with higherwith higher education to total education.employees at %30 till the endof 2015.

Increasing professional Sending each working administrative Number of administrative staffmanner and training of staff to international trade fairs attending international tradethe administrative staff at least once a year. during a year.

Sending each working administrative Number of administrative staffstaff to national trade fairs at least attending national trade fairsthree times a year. during a year.

INTRA-COMPANY

TRANSACTIONS

(%34)

LEARNINGAND

DEVELOP-MENT(%22)



Table-4 Turksan Aluminium Inc. Scorecard of Learning and Development Dimension

STRATEGIC STRATEGIC PERFORMANCE GOALS TARGETS CRITERIA/INDICATORSIncreasing professional Ensuring the training of administrative Average training hours permanner and training of staff in cost accounting and administrator in cost accounting.the administrative staff budgeting. Number of administrators taking

training in cost accounting.Average training hours peradministrator in budgeting.

Increasing employee Raising the level of employee Average poll results about employeecommitment to work contentment and satisfaction. contentment and satisfaction.and workplace. Rotation rate of labor force annually

(Ratio of employees that quit jobduring a year to the number ofemployees total).Number of dinners organized.

Establishing the relationship of Amount of premium distributed toreward and performance concerning the employees in accordance withthe employees. performance (Turkish Liras).

CONCLUSION

Balanced scorecard is an important strategic management tool used to describe relations between firms’ long-termstrategic goals. Thanks to balanced scorecard relations between strategic goals with connection to one another in differentdimensions are defined. Companies have the oppurtunity to define and eliminate the strategic goals that have nocontributions to their financial targets thanks to scorecards.

In this study the forming of balanced scorecard, of which applications we recently encounter in Turkey especially inaluminium sector, at an aluminium profile manufacturing plant is aimed. In this context, the balanced scorecard of analuminium profile manufacturing plant operating at Seydisehir district of Konya province where the only aluminiumintegrated plant of Turkey is situated is formed.

In the application, strategic target part is added to common balanced scorecard applications and thus the determinationof sub-strategies between 1-5 years of strategic goals with a viewpoint of more than 5 years long-term is realized. In thisdirection, 19 strategic goals, 36 strategic targets and 46 performance criteria/indicators are determined in 4 scorecarddimensions consisting of financing, customer, intra-company transactions, learning and development dimensions.Principles of strategic management to be applied in the firm based on these criteria/indicators will provide significantcontributions in terms of demonstrating and improving long-term performance of the firm. The scorecards formedpresent a framework for other firms operating in aluminium sector to model while forming their own scorecards.

The scorecards formed are for the performance planning process of performance management system. The success ofremaining two elements of performance management system (measuring and evaluating performance, developingperformance) depends on the effectiveness of planning process. In this direction, the scorecards formed channelperformance measuring, evaluating and improving processes of the firm. From this point of view, the balanced scorecardwe form constitutes the basic framework for the firm to have an effective performance management system.

REFERENCE

Anagnostopoulos, K. P. and Elmasides, G. 2010. Strategic Plan in a Greek Manufacturing Company: A BalancedScorecard and Strategy Map Implementation. International Journal of Business and Management. 5(2): 12-25.

Kaplan, R. S. and Norton, D. P. 2007. Balanced Scorecard: Sirket Stratejisini Eyleme D�n�st�rmek 4. Baski. �eviren:Serra Egeli. Istanbul: Sistem Yayincilik.

Kaplan, R. S. and Norton, D. P. 1996. Translating Strategy into Action: The Balanced Scorecard. Boston: HarvardBusiness School Press.

Kaplan, R. S. and Norton, D. P. 1993. Putting the Balanced Scorecard to Work. Harvard Business Review. 71 (5):134-142.

LEARNINGAND

DEVELOP-MENT(%22)


Ali ERBASI

Niven, Paul R. 2002. Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. NewYork: John Wiley and Sons Inc.

Olve, Nils G., Roy, J. and Wetter, M. 1999. Performance Drivers: A Practical Guide to Using the Balanced Scorecard.New York: John Wiley and Sons Inc.

Y�zbasioglu, N. 2004. Isletmelerde Stratejik Y�netim ve Planlama A�isindan Stratejik Maliyet Y�netimi veEnstr�manlari. Sel�uk �niversitesi Sosyal Bilimler Enstit�s� Dergisi (12): 387-410.


Pardeep GuptaHaryana School of Business, Guru Jambheshwar University of Science and Technology,

Hisar, (India)Email: [email protected]

ABSTRACT

Development of Higher education has been one of the paramount concerns of the Indian Government. Now there are519 Universities including 41 central universities, 130 deemed universities, more than 25000 colleges, 12.3 millionstudents, and 491 thousand teachers in India. When India became independent, there were just 19 universities, 516colleges, 228 thousand students and about 25 thousand teachers. Like other developed countries, experiments havebeen made with varying degree of success in India to uplift the masses with the available facilities of distance learning.The distance education has assumed universal recognition for its ability to extend educational opportunities to all andwiden the access and equity through its innovative and flexible strategies. The paradigm of distance education changesthe traditional education environment by expanding it to cover geographically dispersed learning. In turn, this meansthat students will probably respond differently to this environment than they do to the traditional classroom. Distanceeducation courses and programs are not only used for providing an alternative delivery method for students but also togenerate revenues for the offering unit/college/university. As the number of distance courses and program increases atan exponential rate, the necessity to enhance quality and revenue also take prominence. The success factors are the keyareas in which the activities must “go right” so that a program succeeds. In the present paper an attempt has been madeto study the various factors which enhance the satisfaction level of students and are crucial for the success of a distanceeducation program. The primary data has been collected in the present study. To find out various indicators a questionnairewas developed and was administered to MBA students in an established distance education program. The statisticaltechniques correlation analysis, factor analysis, Cronbach Alpha etc. have been used to analyze the data.

Keywords: Distance education, Business education, technological issues, factor analysis

INTRODUCTION

Distance education is a means of acquiring knowledge and qualification without attending the college on a regularbasis. Distance education focuses on two dimensions, i.e. the distance between learner and the teacher and the structuraldynamics of the teaching-learning program. There are many terms used interchangeably for distance program such asopen learning, open education, correspondence education, virtual education etc.

Distance education mode of imparting is basically home based education system in which teaching material is given tothe students and they study the material at their home without joining daily classroom like formal education i.e. remainaway from the study center. In modern society this mode of education is getting popularity day by day. There areseveral macro and micro issues before distance education in India. These include dependence on conventional system,lack of need based training to faculty, service guarantee in academics, lack of adequate and qualified human resources,inadequate funds, doubts about quality of instructional materials, poor incentives to hired faculty, poor interaction withstudents and quality of guidance, and high dropout rate.

Distance education is a field of education that focuses on pedagogy; technology and instructional system design thataim to deliver education to students who are not physically on site rather than attending courses in person, teachers andstudents may communicate at times of their own choosing by exchanging printed or electronic media. The number ofstudents enrolled in conventional system and open distance learning system has been shown in Table 1.

EXAMINING STUDENT SATISFACTION WITHDISTANCE EDUCATION PROGRAMS: SOME ISSUES


Pardeep Gupta

Table 1 Student Enrolment in conventional and ODL System in India.

Sr. No. Year Conventional Percent ODL Per cent Total System System Enrolment in Higher

Education in India 1. 1975-76 2426109 97.42 64210 2.58 2490319 2. 1980-81 2752437 94.30 166428 5.70 2918865 3. 1985-86 3605029 90.40 382719 9.60 3987288 4. 1990-91 4924868 88.53 638231 11.47 5563099 5. 1995-96 6425624 88.23 857317 11.77 7300941 6. 2000-01 8268717 83.26 1606736 16.27 9875453 7. 2006-07 10516639 72.00 3578444 28.00 1460644 8. 2007-08 11939246 68.00 3820128 32.00 15759374Source: University Grants Commission Annual Report and Distance Education Council Report (2007-08).

Strengths of Distance Education Programs• Large number of youth population waiting for higher education.• Low cost of the education with in reach of rural people and in service students.• Plenty of individual learning opportunities.• Expenditure on salaries is less.• Open Distance Learning has demonstrated high levels of cost efficiency, flexibility and innovative applications

of modern technology and created educational opportunities for the majority of learners left un served by the formalsystem. (Kurhade, 2009).

Limitations• Poor investment by universities.• Practical and field hand on experiences mostly lacking.• Poor use of electronic facilities.• Low Quality control in distance education.• No comprehensive policy in ODL system for social development.• High dropout rate.

Opportunities• Abundant cyber culture facilities.• Opportunities to enroll youth who are not absorbed in conventional education system.• Government support hence possibilities of getting adequate funds.

Drivers of Distance Education Industry• Growth segment in education industry: Around four million students are enrolled for distance education today.

With the rapid changes in technological and societal practices, the education process is becoming more and more of alifelong journey.

• Job market expectations: Fundamental job market expectations are changing. Today, employees are not expectedto stay in the same job for long period of time. The current modes of careers include multiple careers, combinations of parttime work in multiple jobs, telecommuting, leaving and re-entering into full time work force, switching jobs, and so forth.

• Life-long learning as an education paradigm: Today’s employees easily accept the need to maintain a level ofknowledge current with the career demands. To complement these changes in employer expectations, employees havebegun to accept the need for life-long learning.

• Profit center for educational institutions: The profit potential is one of the driver of distance educationprogram. Cost savings may be obtained and if significant enough may drive up demand and costs may be lowered. Forexample, elective classes that do not have enough students enrolled in them on-campus may pick up distance educationstudents to make teaching the course more feasible.

• Possible strategic competence: A final driver is the institution’s mission. Most educational institutions are servinga geographical region, either by character or mission, and a distance-learning program may be a practical method to helpsatisfy this strategic mission (Creahon and Hoge, 1998).

PROBLEM STATEMENT

The main objective of the paper is to focus on service factors related to satisfaction level of students with distance educationprograms. It also identifies the various factors which enhance the satisfaction level of students.


EXAMINING STUDENT SATISFACTION WITH DISTANCE EDUCATION PROGRAMS: SOME ISSUES

REVIEW OF LITERATURE

It is important to review the existing literature on distance education. Distance learners often have considerable professional,social, and family commitments, which make it difficult for them to give first priority to their education. They are forced toadapt their study to correspond with their living and working conditions. Older learners are somewhat different fromyounger learners. They tend to be continuous learners, in an informal way, as they adapt to the various role changes theyconfront. They are also motivated learners as they take specific courses to learn about a particular topic and apply whatthey have learned at work or at home (Verduin Jr, 1991). These adults need further education to help them to stay up-to-date and competitive in their fields, to assist them with switching jobs/careers, or for career advancement (Rosenquist-Buhler, 1996). Some need only one or two courses, while other pursue their undergraduate or graduate degrees throughdistance learning programs. Distance programs that “allow adults to learn at a time, place, and pace that is convenient forthem” substantially improve their access to the skills required to compete for high-wage jobs (Kalil, 1999).

Thus, the pool of possible learners is larger than ever, including those who have different schedules than faculty membersand other students, who are not within close proximity to the appropriate college or university, who have physicaldisabilities, and who possess varying preparation and learning styles (Boschmann, 1995). Students can use distanceprograms to learn at their own pace, learn at a location that is convenient to them, enroll in programs that may not beoffered within a reasonable distance from their home or office, learn new technologies, participate in the social aspectof the learning process, and take their own learning process.

A body of literature has identified the factors that influence student’s selection of preferred institution of higher learning.These studies examined this issues using a wide range of variables and suggested as follows: that good faculty (Baird,1967; Chapman, 1981), high academic standards (Baird, 1967, Discenza et al. 1981), special programs that students areafter (Baird, 1967) and cost of study (Chapman, 1981) are among the factors influencing students preferred institutionof higher learning, which in turn will increase satisfaction level of the students. Other studies found peer influence,financial assistance and location as the most important factors influencing student’s selection of preferred institution ofhigher learning (Hossler, 1985).

Winsted (2000) and Zeithmal et al. (1990) maintain that service providers should deliver service encounters that willsatisfy customers if they know what their customers want. If universities know how their students perceive the offeredservices, they might adapt their services to a certain degree, which should have a positive impact on students’ perceivedservice quality and their levels of satisfaction. Joseph et al. (2005) point out that research on service quality in highereducation has relied too strongly on the input from academic insiders while excluding the input from the students themselves.The authors, therefore, suggest that academic administrators should focus on understanding the needs of their students,who are the specific and primary target audience. Douglas and Douglas (2006) suggest that the student experience and itsimprovement “should be at the forefront of any monitoring of higher education quality.”

Williams and Cappuccini-Ansfield (2007) point out that only a very limited numbers of nationally-based surveys exist thataddress the total student experience. Voss et al. (2007) showed that vocational aspects of studies motivate students morethan academic interest. Such knowledge of student expectations should help lecturers design their teaching programs.

Gruber et al. (2010) designed an instrument measuring student’s satisfaction with the services offered by a university. Theyconsidered 15 quality dimensions such as administrative and student services, computer equipment, courses, lecturers,relevance of teaching to practice, presentation of information, support from lecturers, university building, library etc.based on an extensive literature review (e.g. Harvey, 1995; Hill, 1995; Elliott and Healy, 2001). Following Rowley (1997)who believes that researchers should identify the quality dimensions that are the most important to students as they are“most likely to have an impact on the overall satisfaction”, in the present study the potential indicators used by Martz andReddy (2005) have been used to study satisfaction with distance education program.

RESEARCH METHODOLOGY

The study attempts to identify potential indicators for satisfaction with distance education program. Martz and Reddy(2005) study gave a body of possible indicators derived from the literature surrounding traditional versus distance classroomdebate. A 21 question questionnaire was developed from the indicators and was administered to 400 students in thedistance education program pursuing/completed Post Graduate Degree of the various universities situated in the state ofHaryana in India. The respondents were selected using convenience sampling. However the data obtained from 18 studentswas rejected since it was not complete.


Pardeep Gupta

The respondents were asked to give their response by using Likert Scale : 5 = Strongly Agree, 4 = Agree, 3 = Indifferent,2 = Disagree, 1 = Strongly Disagree. The Likert Scale is a widely used rating scale that requires the respondents to indicatea degree of agreement or disagreement with each of a series of statements about the stimulus objects. Each scale item hasfive response categories, ranging from “strongly disagree” to “strongly agree”. To conduct the analysis, each assignmentis assigned a numerical score ranging from 1 to 5. The analysis is conducted on an item-by-item basis (profile analysis) ora total (summated) score and calculated for each respondent by summing across items.

Internal consistency reliability is used to assess the internal consistency of the set of items, when several items are summatedin order to form a total score for the scale. In a scale of this type, each item measures some aspect of the construct measuredby the entire scale, and the items should be consistent in what they indicate about the characteristic. The measure ofreliability focuses on the internal consistency of the set of items forming the scale. The simplest measure of internalconsistency is split-half reliability. The items on the scale are divided into two halves and the resulting half scores arecorrelated. High correlation between the halves indicates high internal consistency. The problem is that the results willdepend on how the scale items are split. A popular approach to overcome this problem is to use the coefficient alpha.

The coefficient alpha, or Cronbach’s alpha, is the average of all possible split-half coefficients resulting from differentways of splitting the scale items. This coefficient varies from 0 to 1, and a value of 0.6 or less generally indicates unsatisfactoryinternal consistency reliability. Q. No. 21 was used as the subject’s level of general satisfaction. The data was analyzedusing SPSS software.

FINDINGS OF THE STUDY

Profile of the StudentsIt was found that 61 per cent of the respondents were male and remaining 39 per cent were female. The oldest studentis 49 years old and the youngest is 23 years old. The average age of all the respondents was 34 years.

Descriptive Statistics:The following Table 2 shows the descriptive statistics of the statements. Table 3 depicts the correlation between thesatisfaction levels of students and the various indicators selected for the study.

Table 2 Descriptive Statistics of the various indicators.

Statement Mean value S.D. Sample sizeI would like to take another course with the same teacher. 3.55 2.47 382The amount of interaction with the teacher and other student 3.25 0.99 382was what I expected.Feedback from the teacher was timely. 2.99 1.23 382I received personalized feedback from the teacher. 3.10 2.56 382The tests were adequately designed and were fair assessment 3.32 0.86 382of my knowledge.The course design and workload was fair. 2.96 2.60 382Evaluation and grading was fair. 3.12 1.01 382The instructions were explicit. 3.25 1.01 382I was satisfied with the contents of the course. 3.41 0.94 382I would take another distance course. 3.90 0.79 382I would like to have had more interaction with the teacher. 3.98 2.56 382The course content was valuable to me personally. 4.12 1.35 382The course made me think critically about the issues covered. 3.51 1.10 382The course contents were valuable to me professionally. 3.85 0.82 382I felt that I could customize my learning more in the distant format. 3.62 0.66 382I missed the interaction of a live traditional classroom. 2.89 1.03 382The fee charged was quite reasonable. 4.10 0.66 382I think technology (email, web etc.) was utilized effectively 4.03 1.96 382in this class.I would have learned more if I had taken this class on-campus. 2.99 0.94 382Often I felt “lost” in the distance class. 3.45 0.94 382Overall, I was satisfied by the course. 3.89 2.29 382



Table 3 Statements showing correlation between Satisfaction levels of students and the indicators of the study.

Statement Correlation SignificanceCoefficient level

I would like to take another course with the same teacher. .616 .000The amount of interaction with the teacher and other student was what I expected. .459 .001Feedback from the teacher was timely. .421 .000I received personalized feedback from the teacher. .755 .010The tests were adequately designed and were fair assessment of my knowledge. .621 .002The course design and workload was fair. .546 .020Evaluation and grading was fair. .485 .050The instructions were explicit. .654 .000I was satisfied with the contents of the course. .541 .000I would take another distance course. .632 .000

Table 4 Statements showing correlation between Satisfaction levels of students and the indicators of the study.

Statement Correlation Significance Coefficient level

I would like to have had more interaction with the teacher. -.423 .050The course content was valuable to me personally. .524 .010The course made me think critically about the issues covered. .745 .001The course contents were valuable to me professionally. .451 .050I felt that I could customize my learning more in the distant format. .301 .020I missed the interaction of a live traditional classroom. -.355 .000The fee charged was quite reasonable. .358 .000I think technology (email, web etc.) was utilized effectively in this class. .601 .000I would have learned more if I had taken this class on-campus. -.430 .000Often I felt “lost” in the distance class. -.457 .000

The large number of significant variables leads to the need for a more detailed analysis on how to group them (Statsoft,2002). Kerlinger (1986) suggested the use of factor analysis in this case “to explore variable areas in order to identifythe factors presumably underlying the variables”.

There are four steps in a factor analysis. In the first stage, correlation matrix and KMO provide the scope for adequacyof factor analysis. In the second stage, extraction by principal component method provides the scope for identificationof factors. In the third stage, rotation by varimax provides the scope for sorting the factors and grouping for easyinterpretability. In the fourth stage, the calculation of factor score gives further scope for analysis.

Any data in general should be appropriate for factor analytical model that may vary from one situation to another. Beforeproceeding with the factor analysis of the present data, the adequacy test must be applied. The rule of thumb provided byKaiser measure of sampling adequacy can be applied to acquire a rough idea of whether the data are adequate for thetechnique or not.

The Kaiser-Mayer-Olkin measure of sampling adequacy (0.71) is meritorious for further factor analysis. Barlettis testof sphericity (Chi-square=964.23, p=0.0000) indicate the presence of some shared variance among the twenty items.

An SPSS factor analysis was performed with a Varimax Extraction on those questions that had proven significantly correlatedto satisfaction. The Reliability Coefficients Cronbach Alpha were found to be above 0.7. All Eigen values are above 1.00,indicating an acceptable level for a viable factor. The Kaiser criterion was used to retain factors with eigen values onlygreater than one. The five components explain about 69.155 per cent of the variance. A factor analysis of the questionnairedata extracted five basic construct: teacher interaction, fairness, course content, classroom interaction and technology use.Table 5 shows the correlation on the factors extracted with the indicators of the study.


Pardeep Gupta

Table 5 Rotated component Matrix (partial correlation on the factors extracted)

Statement Teacher fairness Course Classroom Technology interaction content interaction useI would like to take another course with the same teacher. 0.739 0.134 -0.126 -0.101 0.062The amount of interaction with the teacher and other 0.812 0.065 -0.012 0.198 0.008student was what I expected.Feedback from the teacher was timely. 0.741 0.285 0.142 -0.128 0.185I received personalized feedback from the teacher. 0.857 0.159 0.047 0.115 0.168The tests were adequately designed and were fair 0.165 0.782 0.322 0.041 0.117assessment of my knowledge.The course design and workload was fair. 0.039 0.814 0.141 0.018 0.221Evaluation and grading was fair. 0.285 0.703 -0.120 0.248 0.110The instructions were explicit. 0.144 .000 0.529 0.145 0.158I was satisfied with the contents of the course. 0.321 .000 0.821 0.188 0.086I would take another distance course. 0.012 .000 0.858 -0.126 0.224I would like to have had more interaction with the teacher 0.127 .050 0.239 0.522 0.008in the class.The course content was valuable to me personally. 0.112 .010 0.814 0.024 0.164The course made me think critically about the issues covered. 0.111 .001 0.746 0.221 0.119The course contents were valuable to me professionally. 0.185 .050 0.856 0.248 0.141I felt that I could customize my learning more in the -0.180 .020 0.051 0.692 0.332distant format.I missed the interaction of a live traditional classroom. 0.149 .000 0.055 0.682 -0.127The fee charged was quite reasonable. 0.144 0.760 0.224 0.298 0.009I think technology (email, web etc.) was utilized effectively 0.253 .000 0.127 0.220 0.880in this class.I would have learned more if I had taken this class -0.152 .000 0.184 0.103 0.621on-campus.Often I felt “lost” in the distance class. -0.128 .000 -0.114 0.440 0.116Total variance explained in percent 20.329 19.331 10.454 10.246 8.795Cumulative variance explained in per cent 20.329 39.66 50.114 60.360 69.155

The correlation of final constructs to satisfaction level has been shown in the following Table 6.

Table 6 Correlation of final constructs with satisfaction

Construct Correlation coefficient Significance LevelTeacher interaction .706 .000Fairness .582 .020Course contents .562 .000Classroom interaction -.537 .000Technology use .701 .000

As the number of distance courses and programs increase at an exponential rate, the necessity to enhance quality andrevenue also takes prominence. According to the suggestions obtained from the respondents of the study, the followingsuggestions can impact distance education program success.

• Regular feedback should be collected from students and faculty for continuous improvement.• The teachers should have 24-48 hours turnaround time for e-mail.• The teachers should use a one week turnaround for graded assignments.• Explicit grading policy should be there.• Provide clear expectations of workload.• The technical problems should be dealt effectively.• The faculty should be provided with instructional design support.• Detailed unambiguous instructions should be provided for coursework submission.• Provide weekly “keep in touch” communications.• Do not force student interaction without good pedagogical rationale.



The present study indicates that a timely and personalized feedback by teachers results in higher level of satisfaction bystudents. The Director/administrator of distance education program therefore has to work closely with their faculty and offerthem ways to enrich the teacher-student relationship. A faculty member needs to use technology to add a personal touch to thedistance education program. For example, a faculty should be encouraged to increase the usage of discussion forums, respondto e-mail within 24 to 48 hours, and keep students up-to-date with the latest happenings related to the course.

The data also indicates that good course content and explicit instructions increase student satisfaction in the distanceeducation program. It may well be that this basically sets and manages the expectations for the distance students. Theresults suggest that faculty should have complete web-sites with syllabi and detailed instructions. In turn, this suggests thatdistance education administrators should focus their attention on providing faculty with support such as good web sitedesign, instructional designer support, test design, user interaction techniques, and so forth appropriate for distance learning.

Since distance education student’s notion to value intertwines learning and technology, it is imperative that distance educationadministrators offer, and faculty use, the available technology in distance education program. Technology in this case not onlyrefers to the actual software and hardware features of the platform but also how well technology is adapted to the best practicesof teaching. The results imply that if technology is available but not used, it lowers satisfaction. Therefore, the technologyoptions that are not being used in a course should not appear available. For the program administrator, this would suggestadoption of distance platforms that are customized at the course level with respect to displaying technological options. Thefuture success of distance education programs depend largely on satisfying the success factors outlined above.

CONCLUSION

This study sought to identify service factors related to satisfaction level of students with distance education programs. It maybe concluded from the above study that interaction with the teacher, fairness of the program, course content, classroominteraction, and use of technology are the factors which contribute to the satisfaction to students of distance education program.The research would hopefully open up an area of research and methodology that could reap considerable further benefits forresearchers interested in this topic. Further research studies should improve the knowledge on this topic by considering theperspectives of other stakeholders e.g. the government, employers, students’ families as well.

REFERENCE

Baird, L. 1967. The educational tools of college bound youth. American College Testing Program Research Report, Iowa.Boschmann, E. 1995. The electronic Classroom: A Handbook for Education in the Electronic Environment. LearnedInformation. Medford: NJ.Chapman, D. 1981. A model of student college choice. Journal of Higher education. 52: 490-505.Creahan, T.A. and Hoge, B. 1998. Distance Learning: Paradigm shift of pedagogical drift? Presentation at fifth

EDINEB Conference. Cleveland: OH. (September)Discenza, R., ferguson, J., and Wisner, R. 1981. Marketing Higher education: Using a situation analysis to identify

prospective student needs in today’s competitive environment. NASPA. 22: 18-25.Douglas, J. and Douglas, A. 2006. Evaluating teaching quality. Quality in higher Education. 12 (1): 3-12.Elliott, K.M. and Healy, M.A. 2001. Key factors influencing student satisfaction related to recruitment and retention.

Journal of Marketing for higher Education. 24 (4): 1-11.Evans, J.R. and Hasse, I.M. 2001. Online business education in the twenty-first century: an analysis of potential

target markets. Internet Research: Electronic Networking Applications and Policy. 11(3): 246-260.Gruber, T., Fub, S.,Voss, R. and Zikuda, M.G. 2010. Examining student satisfaction with higher education services.

International Journal of Public Sector Management. 23 (2): 105-123.Harvey, L. 1995. Student Satisfaction. The new review of Academic Librarianship. 1: 161-173.Hill, F. 1995. Managing service quality in higher education: the role of the student as primary consumer. Quality

assurance in Education. 3 (3): 10-21.Hossler, D. 1985. A research overview of student college choice. Association for the study in higher education. Chicago: IL.Joseph, M., Yakhou, M. and Stone, G. 2005. An Educational institution’s quest for service quality: customers’ perspective.

Quality Assurance in Education. 13 (1): 66-82.Kalil, T. 1999. A nation of learners IBM Higher Education Viewpoint. [Online] Available: http://www.hied.ibm.com, May.Kerlinger, F.N. 1986. Foundation of Behavioral Research. 3rd edition. Holt: Rinehart and Winston.Krishna. 2009. The need for an open university in Kerala. University News. 47 (42): 10.Kurhade, M.S. 2009. Open and Distance Learning for a Bright Tomorrow. University News. 47 (20): 4-5.Malhotra, N.K. 2002. Marketing Research- An Applied Orientation, Pearson Education Asia, New Delhi.


Pardeep Gupta

Rawley, J. 1997. Student feedback: a shaky foundation for quality assurance. Innovation and Learning in Education.1(3): 14-20.

Rosenquist-Buhler, C. 1996. New Partners in Distance Education: linking up to libraries. Library Administration andManagement. Fall: 205-225.

Verduin, J.R. Jr. 1991. Distance Education: The foundation of Effective Practices. San Francisco: Josset-Bass, CA.Voss, R., Gruber, T. and Szmigin, I. 2007. Service quality in higher education: the role of student expectations.

Journal of Business Research. 60 (9): 949-959.Williams, J. and Cappuccini-Ansfield, G. 2007. Fitness for purpose? National and institutional approaches to publicizing

the student voice. Quality in higher education. 13 (2): 159-172.Winsted, K.F. 2000. Service behaviors that lead to satisfied customers. European Journal of Marketing. 34: 399-417.Zeithaml, V.A., Parasuraman, A. and Berry, L.L. 1990. Delivering Quality Service: balancing Customer Perceptions

and Expectations. New York: The Free Press.


S. GanesanM.A., M.Com., M.B.A., M.Sc (IT),

Faculty – Business Studies, College of Technology, OmanResearch Scholar – Manonmaniam Sundaranar University

Tirunelveli, Tamil Nadu, [email protected]

Contact Mobile No: + 91-9444652727

P. SelvarajM.B.A., Ph.D.

Professor – Department of Business AdministrationKalasalingam University, Krishnankoil,,

Srivilliputhur, Tamil Nadu, [email protected]

Contact Mobile No: + 91-9443460777

ABSTRACT

All the activities of an organization are initiated and completed successfully by the persons who make up the organization.Therefore, people are the most significant resource of any organization. This resource is called human resource and it isthe most important factor of production. The primary purpose of this study is to give an insight into the present E-Recruitment practices of with the application of Information and Communication Technology. The study focuses applicationof information and communication technologies to deliver E-Recruitment has become an important strategy for firmsseeking to achieve a competitive advantage. This article aims to know the opinion about E-Recruitment in E-HRM practicesamong respondents in IT and IT enabled organizations in Chennai, India. The findings of the study suggested that E-Recruitment can be effective only with Standardized format, Global access facility and Cycle time reduction.

Keywords: E-HRM, E-Recruitment/ Virtual Recruitment, standardized format, cycle time reduction

INTRODUCTION

All the activities of an organization are initiated and completed successfully by the persons who make up the organization.Therefore, people are the most significant resource of any organization. This resource is called human resource and it isthe most important factor of production. It is because the efficient use of physical resources (i.e., land, machinery,materials) ultimately depends on how the human factor is put to good use on various operations. “The Management ofMan” is a very important and challenging job. The management of men is a challenging task because of the dynamicnature of the people. People are responsive; they feel, think and act; therefore, they cannot be operated like a machineor shifted and altered like a template in a room layout.

HRM & Personnel ManagementThe names ‘human resource management’ and ‘personnel management’ are being used interchangeable by many. Whenused in a broader sense, the term human resource management refers to the task of handling people who belong to thedifferent strata of society, i.e., students, employees, employers, the self-employed, sportsmen, housewives etc. The termhuman resource management has greater relevance for a Government that has to work for the betterment of all itscitizens. On the other hand, the term personnel management, even when used in a broader sense, refers to the task ofmanaging the employees of a concern.

Need of Technology in HRM: Computer technology of the 1970s and 1980s moved things on, particularly the introductionof desktop PCs and networking technology in the 1980s. Databases specially designed to meet the needs of personnelcame on to the market and many organizations started to transfer their paper records on to computer.

A STUDY ON E- RECRUITMENT PRACTICES OFHUMAN RESOURCE MANAGEMENT INORGANIZATIONS AT CHENNAI, INDIA


S.Ganesan and Dr. P. Selvaraj

This was what is now known as Human Resource Information (or Management) Systems. These systems were based ona technology known as Client-server. Nowadays, companies seek possibilities to run HR operations more efficiently.The introduction of E-HRM is expected to facilitate a more efficient and strategic way of working for HR professionals(Gardner et al., 2003; Shrivastava and Shaw, 2003).

The Human Resource Management requires new approach due to changes in the industry, Business methods, Corporatepolicy, Technological Impact and trends in Globalisation. Information is recognized as an important source. A widevariety of information needs of a business are recognized into ‘Management Information System (MIS)’. MIS consistsof interconnected subsystems. Computers have simplified the task of HR managers in all the functions like recruitment,selection, training, performance appraisal, compensation plans, and conducting employee surveys. With computerhardware, software, and databases, organizations can keep records and information better, as well as retrieve them withgreater ease.

E-HRME-HRM is a way of implementing HR strategies, policies, and practices in organizations through a conscious anddirected support of and/or with the full use of web technology-based channels. Even though the e-HRM concept iswidely used today, there are hardly any explicit definitions. The few detectable definitions (Lengnick-Hall & Moritz,2003; Ru�l, Bondarouk, & Looise, 2004) are rather general and emphasize the Internet-supported way of performingHR policies and/or activities. E-HRM is the (planning, implementation and) application of information technology forboth networking and supporting at least two individual or collective actors in their shared performing of HR activities.

Online Recruitment or E-Recruitment: According to Schreyer & McCarter (1998) e-recruitment refers to “the recruitmentprocess, including placing job advertisements, receiving resumes, and building human resource database with candidatesand incumbents”. From the relevant literature, the words e-recruitment, online recruitment, cyber recruiting, or Internetrecruiting are synonymous. They imply the formal sourcing of job information online (Ganalaki, 2002). Hoffman (2001)defined e-recruitment as “The utilisation of the Internet for candidate sourcing, selection, communication and managementthroughout the recruitment process”

Advantages of E-Recruitment: Employers has found number of advantages in using internet recruiting. A primary one isthat many employers has realized cost savings using internet recruiting compared to other sources such as newspaperadvertising, employment agencies and search firms, and other external sources. Internet recruiting also can save someconsiderable time. Applicant can respond quickly to job posting by sending emails, rather than using ‘snail mails’. Recruiterscan respond quickly to the qualified candidates and establish time for interviews or request additional candidate’s information.

According to Rosita bt. Mohamed Othman et al., (2007) e-recruitment facilitates the organisation to reach the large targetand bring the qualified candidates. Millman (1998) cited in Rozelle & Landis (2002) suggested that online recruitmentoffers an efficient way to identify and classify a virtually unlimited number of job seekers. Similarly, e-recruitment allowsemployers to broaden the scope of their search, as a result significantly increasing the likelihood that high-quality candidateswill be found (Markevieius, 2000). Moreover, it can reach people at a worldwide level while newspaper can reach peopleonly at a local level

Need of the study: According to Rosita bt. Mohamed Othman et al., (2007) from the relevant literature, there is anargument that e-recruitment is needed to be used in conjunction with other techniques. Borck (2000) and Caggiano(1999) argue that Internet-based recruiting will not replace traditional practices, but a well-implemented e-recruitmentstrategy can help the recruitment process become more successful. Internet recruiting should be only one of many toolsused to find and recruit applicants. It allows submission and updates the application, personal details and qualificationon-line, anywhere, anytime.

Purpose of the study: The primary purpose of this study is to give an insight into the present E-Recruitment HR practiceswith the application of Information and Communication Technology. The study focuses application of information andcommunication technologies to deliver E-Recruitment has become an important strategy for firms seeking to achieve acompetitive advantage. It describes in the title of the study itself that is Electronic Recruitment practices in informationtechnology and software organization and Information Technology Enabled Service industries in Chennai, India.


A STUDY ON E- RECRUITMENT PRACTICES OF HUMAN RESOURCE MANAGEMENT IN ORGANIZATIONSAT CHENNAI, INDIA

REVIEW LITERATURE

David Yoon Kin Tong (2004) has pointed out that Changing recruitment and selection strategies require capitalising ontechnology. Cappelli (2001) states that with the presence of online hiring (e-recruitment) in the internet through powerfulsearch engines, the labor market has become a true market, uncontrolled by individual companies, and unconstrainedgeographically with thousands of resumes being posted daily by job seekers to online hiring sites. Using internet forrecruitment has the advantage of faster cycle time, cheaper, and more convenient for both the employers and the jobseekers. Dixon (2000), pointed out that generally, e-recruiters come in two varieties- corporate recruiters and third-partyrecruiters.

Thomas A. Martin et al.,(2006) reveals that enterprises wish to address and recruit potential employees varied methods,which are available on the Internet. The following two main alternatives have already established themselves quickly asmethods of e-recruitment:

• Job advertisements on corporate homepages (HRM site)• Online career networks

Anna B.Holm (2008) says that some researchers suggested that, e-recruitment generates higher application turnover,shortens by 2/3 the time taken from job being posted to it being offered to a candidate is increasingly cost-effective.Objectives of the study:

• To Study the opinion on E- Recruitment in HRM practices among respondents in IT and IT enabledorganizations

• To identify the demographic profile of the respondents on E-Recruitment in E-HRM in IT and IT enabledorganization

SCOPE OF THE STUDY

The study is conducted in one of the leading global IT (Information Technology) corridor and major metro city of India,i.e., Chennai. Ten years old IT and IT enabled services organizations were selected for the study. The study focuses one ofthe vital concepts of E-HRM that is E-Recruitment, which is contributing major role in HR practices.


Research Methodology is simple the plan of action for a research that explains in detail how data is to be collected,analyzed and interpreted. The validity and reliability of any research depends upon the systematic collection of data andanalyzing in a more scientific methods. The reliability test was carried out to test the effectiveness of the questionnaire.The reliability alpha value was 0.901 (Questionnaire for HR-executives, section-1) and alpha value was 0.883(Questionnaire for Non-HR executives, section-2). The types of researches are like Exploratory, Experimental, Descriptive,and Analytical. Here the research so adopted is Descriptive in nature.

Sampling design and Sample size: The Sampling technique for this research is Simple Random Sampling. In a simplerandom sample each member of the population has a known and equal chance of being selected. Ten years old leading52 companies were selected which includes IT and IT enables services like BPO and hardware companies in Chennai.The total sample size is 406 HR executive and Non-HR executives. This includes 116 HR executives and 290 Non-HRexecutives. The questionnaire that was constructed had been pre-tested with the pilot survey and necessary changeswere and carried out so as to make the questionnaire easy to understand and follow and to be respondent friendly. Pre-testing the questionnaire designed to assess the appropriateness of the questionnaire. A pre-test survey was carried outto see (a) whether the respondents have understood all the questions. (b) Whether any particular question is unansweredby the respondents. It is also noticed that some of the respondents were not able to understand some question becauseof technical words used. The pilot survey was conducted with 30 respondents. The results of the pilot survey wereappropriately incorporated in the final questionnaire used for the study.

Data analysis: The purpose of analysis is to build up a sort of empirical model where relations are carefully brought outso that some meaningful inferences can be drawn. Data has to be analysed with reference to the purpose / objective ofthe study and its possible bearing on scientific discovery. The data gathered through the survey are to be analysed withappropriate tools and techniques and are represented with tables and graphs as and when necessary. In order to analysedescriptive data analysis and statistical data analysis the study carried out various statistical tools such as percentagemethod, weighted average method , ANOVA, Regression analysis, Friedman Test and Kendal’s test to arrive at accuracyof results.


S.Ganesan and P. Selvaraj

The weighted average scores of ranking the factors associated with expectation level of E-Recruitment with respect toHR-Executive.

Factors Total Score W.Average Assigned RankCost saving 501 4.32 1Reduction of time 477 4.11 2Standardized format 445 3.84 5Remote candidate access any time 466 4.02 3Without any intermediaries 459 3.96 4Total number of respondents – 116

The Weighted average scores of ranking the factors for benefit of E-Recruitment with respect to Non- HR-Executive.

Factors Total Score W.Average Assigned RankSaving Expenses 1121 3.87 1Cycle time reduction 890 3.07 3Global access opportunity 1053 3.63 2Standardized format 741 2.56 4No intermediaries 549 1.89 5Total number of respondents- 290

CONCLUSION

Several traditional and latest recruitment factors were reviewed. Internet recruitment is viewed as an important additionaltool and traditional methods are continued to be used in recruiting process. E-Recruitment is considered as a very goodtool to reach the global target (Ganalaki, 2002). It appears that other than language barriers, which can be overcome, theInternet has no boundaries. An organizational economic framework suggests that electronic recruiting will make up animportant dimension of human resource management activity in the future. The technology, however, may have adisparate impact on certain groups of particularly ethnic minorities. People may lack access to computers or do not havethe skills necessary to use E-Recruitment.

REFERENCE

Barber, Linda. 2006. E-Recruitment developments. Institute for employment studies.Gupta, C.B. 2007. Human Resource Management. 8th Ed. Sultan chand &Sons.Holm, Anna B. 2008. Virtual HRM: A case of E-Recruitment.Hopkins, B. H. and Others. 1998. E-HR: using intranets to improve the effectiveness of your people. Gower publishing

limited.Kin, David Yoon. 2004. Emerald insight, Employee relations. Young Researcher E-recruitment Service Providers

Review. 27 (1).Martin, Thomas A. and Others. Research of the status quo in e-recruitment. An empirical survey focusing on online

career networks in Germany.Othman, Rosita bt. and Othman Mohamed. E- recruitment practice: pros vs. Cons. Public sector ICT management

review. 1 (1 Oct 2006-Mar 2007).Sharma, Yogesh. 2005. E-Recruitment-A New Paradigm. Srajan consultancy,Sylva, Hella and Mol Stefan T. 2009. E-Recruitment: A study into applicant perceptions of an online application

system. International Journal of Selection and Assessment. 17 (3).


Safak UNUVARSelcuk University, School of Tourism and Hotel Management

KONYA / TURKEYTEL. +90 505 673 39 40 FAX. +90 332 214 00 60

[email protected]

Betul GARDASelcuk University, Vocational School of Social Sciences

KONYA / TURKEYTEL. +90 532 486 69 33 FAX. +90 332 214 00 60

[email protected]

ABSTRACT

The rapid change in the economy and technology of the world has changed the competition condition in tourism industry.The coming economic era will require tourism businesses like hotels to think about cost, quality, resiliency, velocity andnovelty in ways that they have never consider before. Across the globe, leading edge hotels are adopting a dual focus onorganizational health. Give importance to organizational health of the hotel is about having properties and qualitiestoday that create the conditions for high performance tomorrow. Besides, organizational health has its share to contributingto the understanding of healthy behaviors within working environments and identifying parameters that can be cause ofhealth problems. Because the need to raise awareness of this health problems in organization are emphasized worldwidewith the aim of adopting direct measures to protect employees’ hygiene, safety and advance their mental health cost-effectively for organizations.

Healthy organizations typically have a culture which promotes trust, openness and engagement and enables continuouslearning and improvement. In a changing internal and external environment, the profitability of a hotel is increasinglydependent on the extent to which an organization and its members are able to transform and adapt to these changingcircumstances more effectively than their competitors. The “fittest” employee is who has the ability to adjust adequatelyto these rapid changes and can remain undistracted from external factors. Furthermore such a person manages to copewith negative effects of stress. In short, organizational health directly increases the productivity and profitability of thehotel. In this study, the concept of Organizational Health was investigated in the hotels in Konya because of the importanceand sensitivity.

The purpose of this study was to investigate features of effective hotels in Konya. The article presents findings from aninvestigation of hotel-level factors associated with improved employees’ creativity and work pleasure. This study wasdemonstrated that employees’ performance varied between employees’ and between hotels. That is, when the hotel was“healthy”, employee performance was higher. The result of our research point to the importance of both improving thehotel environment and employees morale in order to enhance the health of hotels. This is only achieved when employees’believe that their hotel is improving and has a positive environment.

Keywords: Organizational health, employee satisfaction, hotel effectiveness, employee efficacy, employee morale,employee stress

ORGANISATIONAL HEALTH IN HOTELS:A RESEARCH IN KONYA


Safak UNUVAR and Betul GARDA

CONCEPT OF HEALTHTY ORGANISATIONS

Organizational Health refers to an organization's ability to achieve its goals based on an environment that seeks to improveOrganizational Performance and support Employee Well-being. Organizational Health seeks to improve performance andproductivity through improved alignment. Organizational Health, as a concept, reflects two perspectives. The first one isorganizational performance, based on the organization performing as an interacting system and other one is employeewell-being in terms of employee satisfaction and employee health (Campbell et al., 2007; Alman, 2010). A healthyorganization has been defined as one which the individuals and groups that comprise it reach homeostasis or equilibriumin their capacity for growth (Bruhn and Chesney, 1994). A healthy organization is one in which the authority structure,value systems, norms, reward systems and sanctions operate to support the success of the organizations, its environmentand the well-being of its personnel. Health may be defined differently by members of an organization and those outside itbecause health is a value-laden term; values are reflected in how we perceive and interpret behavior (Campbell et al.,2007). The state of an organization’s health, therefore, is to some extent, perceptual. However, people act on their perceptionsand the resultant behavior can be constructive or destructive. We can learn a lot about beliefs and values in an organizationby examining its employees’ behavior (Schechter, 2002b).

The culture of an organization influences employee behavior. Organizational culture is established widely by the leaders ofan organization. When leaders change, the culture also changes. Changes in employees also modify an organization’sculture. A healthy culture is more team-oriented than territorial. This culture is competitive enough but these organizationsprovide freedom to negotiate boundaries in order to accomplish organizational as opposed to individual goals. Everyemployee in a healthy organization is an investment and helps strengthen the entire (Frankel, 1992; Nielsen, 2004). Somemeasures of organization health are productivity, morale and loyalty. Task- effective organizations tend to be healthy fortheir members. Efficient task performance is rewarding and increase confidence and self-esteem. Healthy organizationsdon’t wait for change. They initiate change, encourage change and renewal. As a result change usually can be directed andthe effects of change can be controlled. Healthy organizations provide these advantages (Bulletin of the World HealthOrganization, 2000; Campbell et al, 2007; Barker and Gower, 2010): The opportunity to confront and work throughproblems, deploy people’s capacities to the fullest, provide independence without undue supervision, demonstrate visiblerelationships between effort and rewards, avoid using repressed defenses to deal with anxiety members to exert realisticcontrol over their life in the organization.

Organizational leaders should make their values and expectations explicit. Employees in a healthy organization know whatis expected of them and know how they can contribute to the organization’s goal. The essential factor of management styleis to embody the environment of workplace. Collaborative decision making, participative management, delegation ofauthority and responsibility and the encouragement of feedback by the leadership send employees the message that theyare valued, trusted and the chance to try again. The leaders of a healthy organization plan prioritization and monitor theirprogress toward achieving goals. A healthy organization has few problems to put out because the leadership ethos has aneffective problem prevention program (Marutollo, 1990; Campbell et al., 2007).

Employees directly contribute to maintaining a healthy organization when they are valued and feel in control and effectiveat their jobs. Employees feel invested in an organization when they feel free to take risks and can contribute ideas for theorganization’s improvement. Employees in a healthy organization are encouraged to be creative, to learn new skills and toassume greater responsibilities. This is reinforced when employees are given feedback on their performance and employeerewards are made explicit. The reward system in healthy organization emplies restitution, valuing the work of employees,developing programs like child care, flex time etc. both the organization and personnel needs (Bruhn and Chesney, 1994;Jackson, 2005; Barker and Gower, 2010).

CONCEPT OF UNHEALTHY ORGANISATIONS

One way of recognizing why attention should be given to addressing Organizational Health is to consider characteristics ofunhealthy organizations. Unhealthy organizations can reflect, for example, lack of direction and accountability; misalignmentof priorities; and poor coordination in and between systems and processes causing both costly inefficiencies andineffectiveness. Unhealthy organizations can also demonstrate low employee commitment and disengagement as reflectedin the costs of dissatisfaction, damaging conflicts, suppressed resentment, unnecessary absence, turnover, and presenteeism(Fordyce and Weill, 1979; Nicholas and Katz, 1985; Rosen and Berger, 1992; Frankel, 1992). Problematic organizationshave pathological symptoms and dysfunctions. Pathology is a variety of neurotic styles. Similarities can be found betweenindividual and organizational pathology resulting in deficient functioning organizations. The organizational structure andculture can be influenced by the personality of the leader. But all neurotic organizations are not run by neurotic leaders.However, the personality of leaders can create pathological symptoms at the whole organization.


ORGANISATIONAL HEALTH IN HOTELS: A RESEARCH IN KONYA

If employees take minimal risks and do only what is necessary to do their jobs, a culture of mistrust can be in control ofa majority in an organization. This kind of atmosphere puts people on guard to protect their zone and creates a defensiveclimate. Because of the lack loyalty to others and to the organization, criticisms and grievances are increased. Employeecomments about the organization, their jobs and the leadership. This may be the best clue that the organization is sick(Frankel, 1992; Rosen and Berger, 1992; Jackson, 2005 ). When many employees take the role of a victim, then theorganization is unhealthy. If the organization serve the psychological needs of leaders who need to satisfy their ownegos and ignore the realities of an organization, this organization becomes sick. These leaders reward employees whocater to their needs and are vindictive toward employees who do not. Also they do not permit line officer in an organizationto do their job without close supervision. In unhealthy organization, leaders may continue to exert tight control whileadvocating empowerment or total quality management. Other clues to an unhealthy organization are (Rosen and Berger,1992; Frankel, 1992; Jackson, 2005; Campbell et al., 2007): Frequent turnover of managers and administrators, thereputation of the CEO like a micromanager, communication patterns that ignore the organization chart, a lack of innovationand creativity, strong resistant to change, upholding of traditional patterns of authority that are based on centralizedcontrol at the top of the organization.

One symptom of organizational sickness is appeared by leaders and managers who cannot effectively cope with difficultboundaries and therefore identify certain people in the organization as the problem. Other symptom is rewarding goodwork of line officers with more work. The message sent to employees is donot do an outstanding job for not rewardingextra work. Much overworking reduces the performance of the employees (Perry and Barny, 1981; Jackson,2005).Employee behavior is often the most obvious way to diagnose an unhealthy organization. If employees have theattitudes of anger, apathy low morale, pessimism and passive aggressiveness, this organization may be unhealthy. Alsoemployees show little loyalty toward the organization, little enthusiasm for their work in unhealthy organizations (Rosenand Berger, 1992).

THE ELEMENTS OF ORGANIZATIONAL HEALTH

According to many authority this elements of health mentioned more frequently than others:- Leadership: Healthy organizations redefine their corporate purpose and reconfigure their corporate hierarchy.

The leaders in this organization must manage the change effectively. Corporate restricting affects the employees andleadership is measured by the leaders’ ability to secure their employees’ commitment and motivation and to developtheir employees’ skills. Effective leaders think strategically and communicate organizational values in credible terms.Also they create a climate of mutual trust and respect and encourage their employees’ initiative. They show determinationwhen facing a challenge and skill in guiding their organization. All of these qualities characterize them as effectiveleaders of healthy organization (Lifson, 1984; Little et al., 2007).

- Vision: Vision must be soundly basis in the reality of the organization’s social environment, the needs of itsclients, stakeholders and its own organizational values. Corporate culture acts as both a stimulus to action by mobilizingenergies and a guide by focusing them. Because of arising spontaneously, it is not entirely controllable by any givengroup of actors. In healthy organizations, employees are strongly committed to their organization’s representation andto the delivery of their organization’s products and services (Schechter, 2002a).

- Employee commitment: It is important for managers and staff to share the same values. When the employeesunderstand the organization’ mission, representation, goals, they support its strategic orientation and leadership style,they proud to identify with the company. They feel involved in operations and work as a team towards the success of theorganization. High level of trust increase employee morale, promote innovation and taking risk. This helps the organizationmanage change effectively. Respect for the competence and Professional ethics of colleagues helps to inspire trust.Respect neither is nor tied to hierarchical status in any way. Leaders, managers and employees must earn each other’srespect (Lambert, 1995; Barker and Gower, 2010).

- Rewards and recognition: Employees at all levels want to feel appreciated. Praise or to thank makes them feelvalued and improve organizational health. Organizations are searching for innovative ways to motivate and reward staff(Morley and Heraty; 1995; Jackson, 2005).

- Communication: No organization can survive, without good communication. Communication must be transparent,timely and complete. It must be present at all levels of the organization so that information is shared from top to bottom.Employees need to feel free to discuss matters and make suggestions (Morley and Heraty, 1995; Campbell et al., 2007).

- Competence and skill development: Organizations acquire skilled workers through skill-specific recruitmentprograms and in-house training. Staff renewal must be an ongoing concern as skill requirements change continuously. Inhealthy organization takes steps to renew it by obtaining new blood from the private sector, other public service organizations.To keep up with the competition and with technological advances, managers provide opportunities for ongoing trainingand more diversified career paths for employees. Employees follow scientific and technological developments to improvetheir performance (Schechter, 2002a; Barker and Gower, 2010).



- Ability to adapt: An open management style supports the people who are affected by the changes. Theorganization needs to have all stakeholders participating in the change process, either by agreeing to change or byhelping to implement change. Managers must involve all employees in developing strategies that make it possible toachieve corporate objectives. A healthy organization provides its employees with the tools they need to adapt to complexand difficult situations. Employees want to be able to give satisfaction to clients without having seek permission to dosomething different (Schechter, 2002a; Barker and Gower, 2010).

THE DIMENSIONS AT HEALTHY ORGANISATIONS

According to Healthy Companies International (1994), the 13 dimensions of an organizational health are evident at theindividual level as well as the organizational level. They are (Guarnaccia, 1994; Frovost and Leddict, 1993; Hargie etal., 2002; Barker and Gower, 2010):

- Open Communications: the organization freely shares information at all levels about its conditions, operations,choices and plans. Employees respect the confidentiality of such information and contribute to honest, forthrightdiscussions.

- Employee involvement: employees participate in planning, designing work and solving problems. Also theycontribute ideas, take responsibility for decisions.

- Learning and renewal: The organisations give chances to employees for expanding their knowledge andskills. So they become lifelong learners.

- Valued diversity: individuals contribute their unique talents and experiences to the workplace, adapt to theprevailing culture and share responsibility for promoting tolerance.

- Institutional fairness: employees respect the policies and practices of the organization and share responsibilityfor improving the quality of work relations.

- Equitable rewards and recognition: the organization motivates employees in ways that reinforce the company’svalues. It develops employees’ potential by recognizing individual contributions, rewarding performance and sharingprofits.

- Common economic security: the organization recognizes that its economic security and that of its employeesare one and the same; it seeks a common security.

- People-centered technology: the organization seeks and applies technologies that climate bad jobs, providesafe and ergonomically sound work and enhance human capabilities and satisfaction.

- Health- enhancing work environment: the organization works to promote physical and psychological healthin the workplace, encourages employees’ pursuit of health and takes steps to protect them from illness.

- Meaningful work: the organization inspires pride and a sense of purpose, creates jobs that have variety,integrity, significance and responsibility. Also it commits to high quality, ethically sound products and services.

- Family and work-life balance: the organization encourages and supports employees’ needs to balance work,family and personnel interests.

- Community responsibility: the organization leads and invests in public interests, providing benefits to thesocial well-being of community and nation.

- Environmental protection: the organization commits itself to preserve and restore environmental health andengages in ecologically sound practices.

PRESENT RESEARCH

Tourism and Hospitality industry has gained importance recently. Hotels providing accommodation for visitors maintaintheir activity with their organizational features in increasing competition conditions through a system of relationships inand out of the organization. Productivity growth exists through good organizational health. Hotels have to give importanceto organizational health and improve the features and qualities of the organization to provide high performance in thefuture. Moreover, organizational heath helps to understand the healthy behaviors in the organization and define theparameters that cause health problems.

THE SCOPE OF THE RESEARCH

It is expected that there are an important relation between worker and business demographics characteristics and theorganizational health of hotels businesses. Thus, our research shows whether there are differences between demographicsfactors and the rating of the organizational health of hotels. Because of the importance and sensitivity of the topic, theresearch was conducted on the hotels certified by Ministry of Tourism.



METHODOLOGY

The purpose of this study was to investigate features of effective hotels in Konya, Turkey. In this research, the situationsof organizational health of hotel business certified by Ministry of Tourism were put forward. Based on an exploratorystudy, primary data collection method was used basically. To measure the organizational health, 20 items scale Rosenand Berger (1992) and Altun (2001) and G�l (2007) was used. The questionnaire consists of all closed questions. Fordeveloping the questionnaire’s questions, nominal, ordinal and interval scales were used.

The subject population of this study was 14 hotels located in Konya, Turkey. The research was conducted on 200employees. These hotels were preferred because they are upscale hotel businesses in this area. The other reason is thatthese hotels do their activities professionally. There are several limitations in this study. First, certain hotels in Konyawere selected for the research. Second, limited individual and organizational demographic data were selected (e.g.,individual: age, gender, educational level, position, Organizational: total guest rooms). Third, a narrower scale wasused in this study. A broader scale should be used for measure the organizational health.

Descriptive statistics, t-tests and ANOVA analysis were used to analyze the employee survey data from the study.Analysis of variance (ANOVA) was used to analyze differences in current position, length of time employed in currenthotel, education level, age and gender ratings to examine whether significant differences existed among the hotels. Thedata were transferred into SPSS statistical package for analysis. Statistics were computed using the SPSS for Windows16.0. Descriptive statistics including frequencies and means, standard deviations, and variances were computed for allvariables.

FINDINGS AND ASSESSMENTS

Present research states that the situations of effectiveness of the hotel businesses predict that whether the hotels havehealthy or not. Thus, the perceptions of workers were evaluated. For this evaluation, some demographic characteristicswere used. In the light of these considerations, the relationship between demographic characteristics and the organizationalhealth was tested. Test results are shown in second part: about hotels and individuals. The hotels’ operating periodranged from 1 year to over 29 years with the mean of 13 years. The information about hotels’ the number of stars isgiven in table 1. Hotels in the present research have a minimum size of employee are 4 and a maximum size of 185.Thus, hotels were classified into three categories: small sized business, medium-sized business and large-scale business(see table 2). It was determined that the hotels’ guest rooms ranged from 28 rooms to 278 rooms. Hotels are divided intothree categories according to their room numbers (small-sized, medium-sized and Large-Scaled). Data findings of thesecategories are shown in Table Y. Furthermore, it was investigated Hotels’ beds number. Results show that hotels’ bedsnumbers ranged from 60 beds to 554 beds with the mean of 240 beds (see table 3).

Table 1 The Profile of the Hotels

Frequency Percent 3* 42 21,0 4* 118 59,0 5* 28 14,0 Boutique 12 6,0 Total 200 100,0

Table 2 The Hotel Size According to the Number of Employees

Frequency Percent Small Business (1-49 persons) 122 61,0 Medium-Sized Business (50-149 persons) 50 25,0 Large-Scale Business (150 and over persons) 28 14,0 Total 200 100,0

Table 3 The Hotel Size According to the Number of Room

Frequency Percent Small Business (1-49 persons) 42 21,0 Medium-Sized Business (50-149 persons) 104 52,0 Large-Scale Business (150 and over persons) 54 27,0 Total 200 100,0



The majority of respondents participating in the study were employed in the front-office (43 %) and food and beveragedepartments (25 %). A total 152 males (76 %) and 48 females (24 %) participated in this study. The subjects’ ages rangedfrom 16 years to over 55 years. 78 respondents (39 %) Bachelor’s degree from two-year or four-year colleges. The lengthof the employment ranged from a minimum of less than a year to a maximum of seven years and over.

In this exploratory study, it is investigated that whether the organizational health of the hotels in Konya changes accordingto the demographic data or not. Perceived organizational health was hypothesized to differ based upon demographiccharacteristics of employees and hotel businesses. The research hypotheses tested in this Project provide the importanceand sensitivity of organizational health. Based upon the review of literature and the study objectives, the followinghypothesizes were tested:

H1: There will be significant differences between employees’ perception of organizational health and the profile(number of stars) of hotels

H2: There will be significant differences between employees’ perception of organizational health and the numberof employee

H3: There will be significant differences between employees’ perception of organizational health and employeeposition

H4: There will be significant differences between employees’ perception of organizational health and thelength of employment

H5: There will be significant differences between employees’ perception of organizational health and theeducational level of employee

H6: There will be significant differences between employees’ perception of organizational health and thegender of employee

The questionnaire used in this research assessed employee and supervisor perceptions of the level organizational healthof the hotels in present research. Employees and supervisors provided demographic information and completed theorganizational health scale. A demographic section was included at the top of the questionnaire. This section wasdivided into two parts: general information about hotels and employees. The first part (about hotels) consisted of thenumber of stars in the business, total number of employees, guest rooms, hotel beds and year of establishment. Thesecond part (about employees) included: position, length of employment, education level, age and gender. The qualitativedata obtained from this questionnaire was used to explore differences in organizational health among hotels. Data werecollected from fourteen hotels located in Konya, Turkey. A total 220 (62.8 %) of 350 questionnaires were completedand returned to the researchers. Twenty questionnaires were not used in the data analysis because they were completedfailed by employees. Thus, this left a total available sample of 200 (152 males, 48 females) for this study. The employeesresponding to the questionnaire included general managers, branch managers, assistant branch managers and employees(senior manager, mid-level manager, personnel). A total department is purchasing, human resources, food and beverage,front office, accounting unit, senior manager, and housekeeping. Employees and supervisors were asked to rate theiroverall organizational health (20-items scale) using a 5-point Likert scale ranging from (1) never to (5) always. Tomeasure the employees’ perception of the Hotels’ organizational health, the researchers utilized the Rosen and Berger(1992) and Altun (2001) and G�l (2007) scales and adjusted the scale to measure the OH of Hotels in Konya. The datawere transferred into SPSS statistical package for analysis. Statistics were computed using the SPSS for Windows 16.0.Data related to Cronbach Alpha and general evaluations of the OH scale are shown in Table 5.

Table 5 General Assessment and Cronbach Alpha of the OH Scale

Mean Std. Deviation Items Cronbach AlphaThe Total of Organizational Health Scale 4,14 0,68 21 0,926(i) n=200, (ii) 5-point Likert scale (1) strongly disagree (5) strongly agree (iii) The values of Cronbach Alpha indicatesthat the score of the scale can be calculated on total scores.

To test the hypothesizes H1, H2, H3, H4, ANOVA tests were applied. To test the final hypothesize, Independent SamplesTest was used.



Table 6 Organizational Health Perception According to Hotel Profile

N Organizational Health Perception Scale TotalMean Std.Deviation

3* 42 4,28 ,444* 118 4,10 ,775* 28 4,11 ,56

Boutique 12 4,12 ,66(i) n=200, (ii) Anova test shows F=0,352 and Sig=0,788.

Hypothesis primary stated that there will be significant differences between employees’ perception of organizationalhealth and the profile (number of stars) of hotels. ANOVA was used to analyze differences between organizationalhealth and the profile of hotels. Therefore, this hypothesis was not supported (F=0,352 and Sig=0,788). Higher level oforganizational health did not relate to the profile of hotels.

Hypothesis two asserted that there will be significant differences between employees’ perception of organizationalhealth and the number of employees. ANOVA was utilized to detect any significant difference between the organizationalhealth perception and employees’ number. The hypothesis was not supported by the data (F=0,113 and Sig=0,893).

Hypothesis three suggested that there will be significant differences between employees’ perception of organizationalhealth and employee position. To determine whether there are differences or not, ANOVA test was run. ANOVA testshows that there are no differences between the perception of HO and the employee position. For this reason, thishypothesis was not confirmed (F=0,515 and Sig=0,599).

The forth hypothesis proposed in this study is that there will be significant differences between employees’ perceptionof organizational health and the length of employment. The results of ANOVA test shows that there were no differencesbetween the perception of OH and the length of employment. Hypothesis four was rejected (F=0,563 ve Sig=0,641).

The fifth hypothesis proposed in this study is that there will be significant differences between employees’ perception oforganizational health and the educational level of employee. To the ANOVA test, results showed that there were nodifferences between the perception of OH and the educational level. Hypothesis five was not supported by the data(F=0,979 and Sig=0,406).

Table 7 The Perception of OH According to the Gender of Employees

Males Females Independent (n=152) (n=48) Samples Test

Mean S.D. Mean S.D. T Sig.The Total of the Perception of OH Scale 4,16 0,71 4,10 0,57 0,354 0,724

The final hypothesis proposed in this study is that there will be significant differences between employees’ perceptionof organizational health and the gender of employee. Independent Samples Test shows that there were no differencesbetween the perception of OH and the gender of employees. The final hypothesis was also not supported (,724).

CONCLUSION

In the Turkish economy, the service sector is growing. More importantly, one of the most important factors to providethis development is hospitality industry. Organizations in this industry are making efforts to improve their inside andoutside characteristics. To achieve this purpose, organizations pay attentions to some factors such as open communications,employee involvement, learning and renewal, valued diversity, family and work life balance, meaningful work,environmental protection, teamwork, leadership, etc. These factors are related to organizational health of businesses.The features of businesses have an impact on employees’ perception of the organization. One of the outcomes of thefeatures of business is employee performance. Therefore, it is important to understand what predicts employee performancein organization environment. If the organization has healthy characteristics, the outcomes of employees might be positive.In conclusion, the research presented here contributes to knowledge on organizational health.

Some previous researches drew our attention to only the managerial side of the organizational health. But, the focus ofthis issue has been on the link between demographic factors of employee and hotel business and the situations of



organizational health of the hotels. Hence, six hypothesizes were put forward. It was expected that there would be significantlydifferences between employees’ perception of OH and some demographic features (the profile of hotels (number of stars),number of employee, employee position, the length of employment, the education level and gender). H1 stated that therewere no relation between the organizational health and the profile of hotels. Results indicated that three, four or five startshotels don’t determine the rating of worker’s perceptions of OH of the hotels. H2 asserted that there is a relationshipbetween the number of employee hotels owned and the perception of OH. But analysis outcomes show that there is not aratio between the number of employee and OH perceptions. H3 stated that there would be significant differences betweenemployee position and OH perception. However, whatever the position the staff have, there weren’t found relationshipbetween senior manager, mid-level manager, personnel and the perception of OH. The authority person has doesn’t impacthis perception of OH. Employess’ working length may be short or long. It may have an impact on OH and effectiveness.But, H4 wasn’t support this argument. Person’s education level may be high or low. It can be said that his level of educationaffects his level of perception of OH. It may be considered that the person who have higher education have negativeassessments about the degree of OH of hotel businesses, or vice versa. Yet, H5 wasn’t supported. The sex of the staff mayeffects many factors. It can be said that women assess the situations more sensitive than men, which may affect their levelof perceptions of OH. But, H6 didn’t support this argument. In summer, all of them were not supported. Consequently, theresults suggested that there were no differences between the perception of organization health and demographic data abouthotels and employees. The research stated that the majority of hotels had high scores of organizational health. But thesehigh scores of OH are not determined by the demographic characteristics.

A significant limitation of this study is that this study only investigated whether the differences between organizationalhealth and some demographic information about hotels and employees. The researchers suggest that employees evaluatethe organizational health of hotels. This study contributes to the literature by emphasizing organizational health as animportant factor between employees’ morale and hotel environment in order to enhance the health of hotels. Employeeperceptions of organizational health allow them to understand what is important to the organization and lead to thedevelopment of individual perceptions of climate.

There are several research implications that can be derived from the present study. Future studies should examine othervariables which might explain differences in organizational health among hotels (e.g., level of income, training programs,organizational commitment, and organizational climate). Future research might also be conducted in a variety of industriesin Konya (e.g., manufacturing, health). Future studies of organizational health might consider the antecedents or outcomesof organizational health. For example, relationships between organizational health and role-related constructs, jobsatisfaction, employee performance, organizational commitment might be considered.

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ROLE OF INFORMATION TECNOLOGY ASAN EMABLER IN SUPPLY CHAINS

Rakesh SinghDurgadevi Saraf Institute of Management Studies

Swami Vivekananda Road, Malad(West)Mumbai-400064

ABSTRACT

The paper reports on a study which analyzes relationships between information technology and performance of SupplyChains. The two main barriers faced in Supply Chain are Management of Inventory and the timely delivery of goods tomeet the demand of customers. Hence, the performance of Supply chain is measured by the impact on the inventoryturnover and lead time of goods. The transparency of demand across the Supply Chain i.e. the product visibility acrossthe Supply Chain would lead to improvement of the performance,was the expectation set by this study. Facts on thebasis of responses from Industry propose that Product Visibility results in improvement of lead time of the SupplyChain. The study also shows that certain sectors, primarily FMCG goods Industry are in the forefront in using InformationTechnology to improve their Supply Chain. However, an important outcome of the study has been the resistance observedin the industry in implementation of technology infrastructure. Since the study is based on survey methods, the perceptionsof the respondents reflect the lack of confidence in Information Technology in improving the demand visibility andhence the inventory position of Supply Chain partners.

INTRODUCTION

THE NEED FOR IT IN CHANNEL DESIGNForrester’s (1961) was the earliest and most pioneering work in the field of integrated supply chains. Over the years,numerous studies have followed on similar lines mostly on theoretical models to confirm that poor supply chain integrationresults in the “bullwhip” effect or the sequential build up of inventories right from the downstream partners to up theSupply chain. Quite the opposite happens with an integrated Supply chain. With the advent of Information technologyin the form of Internet, seamless integration has become very common. The main need for IT results from the followingcharacteristics businesses have acquired since the 90s (Liljenberg, 1996):

1. Customer expectations are rising2. Complex businesses are relying on skills and knowledge of people increasingly3. Power of IT lies in the heart of businesses

All these consequences require the modern businesses to stay closer to the customer to be proactive in satisfying hisneeds.

As planning instability grows backwards up the supply chain, controlling errors with the downstream partners becomesvery important. The more integrated the flow of data between channel partners, the easier it is to balance the supply anddemand across the entire network. An important trend in that direction is the use of internet for Supply chain integration.Pre- internet, real time demand information and inventory visibility were impossible to achieve. This has changed in theinternet era and widely available web based technologies allow strong customer and supplier integration for inventoryplanning, demand forecasting, order scheduling and customer relationship management. The basic notion of channeldesign is that efficiency can be improved sharing information among agents and plan jointly rather than distinctly(Raghunathan, 2001). In terms of relationships between manufacturers and distributors (retailers-wholesalers-distributors),in order to implement coordinating mechanisms and this attain greater efficiency in supply chain management, thepartners must share information, for a number of reasons, including the following (Cachon & Fisher 2000):

- The mechanisms allow the manufacturers to understand each customer’s specific aspects and address them ina distinct manner, adding value (through services, for example) to the line of products

- Characteristics such as segmentation of the points-of-sales and types of customers along the supply chainshould be taken into account, especially in decisions to launch new products and in dealing with each store’s mix.

There are five innovative technologies which have had significant impact on supply chain integration seamlessly:Electronic data interchange (EDI), personal computers, artificial intelligence, communications systems, bar codes andscanners.


Greater Supply-chain visibility, as well as more accurate and timely information about supply-chain execution, allowsfor reduced safety stocks (thus optimizing cash-to-cash cycles and reducing inventory carrying cost) and increased on-time performance to customer commitments (thus driving additional revenue opportunities). Operating cost improves,as RFID (Radio Frequency Identification) significantly reduces the cost of cycle counting, receiving, picking and shipping.

Figure 1 Traditional channel design Representation

LITERATURE REVIEW

A Supply chain (SC) consists of suppliers/vendors, manufacturers, distributors and retailers interconnected bytransportation, information and financial infrastructure. The supply chain’s objective is to provide value to the endconsumer in terms of products and services and for each channel participant to garner a profit in doing so (Sahin Funda& Robinson Powell E, 2002).The two main barriers faced in Supply chain are management of Inventory and the timelydelivery of goods to meet the demand of customers. Hence, we define the success of a Supply chain using certainmetrics which measure the performance of a Supply chain.

Supply chain is a linked set of resources and processes that begins with the sourcing of raw materials and extendsthrough the delivery of end items to the final customer (Bridgefeld Group ERP/Supply Chain Glossary, 2004). Whilethe separation of supply chain activities among different companies enables specialization and economies of scale,there are many important issues and problems that need to be resolved for successful SC operation – this is the mainpurpose of Supply Chain Management (SCM).

One of the most common problems in supply chains is the bullwhip effect. Even small fluctuations in the demand orinventory levels of the final company in the chain are propagated and enlarged throughout the chain. Because each companyin the chain has incomplete information about the needs of others, it has to respond with the disproportional increase ininventory levels and consequently even larger fluctuation in its demand to others down the chain (Forrester, 1961; Forrester,1958).

Another problem is that the companies often tend to optimize their own performance, disregarding the benefits of asupply chain as a whole (local instead of global optimization).Studies show that the sharing of demand information insupply chains increases the performance of the supply chain by increasing availability and reducing inventory relatedcosts (Evans et al. 1993; Gavirneni et al. 1999; Cachon and Fisher, 2000; Lee et al., 2000).

Internet and e-business offer many possibilities for effective information sharing that enable seamless flow of transactionsin the supply chain. However it should be noted that information technology alone is not a panacea for all SC problems.Even more: the most often quoted problems of online purchasing are not related to technology but rather to logistic andsupply chain problems (Hoek, 2001). This is even truer for traditional companies that are usually even less prepared fornew e-commerce related challenges. The efficiency of supply chains can generally be improved by e.g. reducing thenumber of manufacturing stages, reducing lead-times, working interactively rather than independently between stages,and speeding up the information flow (Persson & Olhager, 2002).

The benefits of information sharing have been proposed to depend on the predictability of demand. Information sharingseems to be of greater value in situations with unknown demand, for example, early sales of new products or promotionsituations. Another interesting finding which comes our way in this regard is that the benefits of IT use are more due topositive effects of IT on transaction processing efficiency potentially leading to shorted lead times and smaller batch sizesthan to sharing of inventory and demand information.

ROLE OF INFORMATION TECNOLOGY AS AN EMABLER IN SUPPLY CHAINS


Rakesh Singh

As a result of the focus on fast response to customers in many markets, lead-time reduction has been a common focusfor performance improvement efforts (Treville, 2004). Lead time can be measured in a number of ways, includingmanufacturing lead time (Jayaram, Vickery, & Droge, 1999) and customer lead time (Duenyas & Hopp, 1995). Customerlead time is defined as "the time elapsed from receipt of an order until the finished product is either shipped or deliveredto the customer" (IndustryWeek's Census Glossary, 1999). There is positive belief that there exists a relationship betweenIT integration and Lead time (Devaraj & Kohli, 2003; Vickery et al., 2003). Studies done, in this regard conclude,investments in IT lead to improved performance (Co, Patuwo, & Hu, 1998; Small, 1999; McAfee, 2002). Because keydifferences exist between internal (within-firm) and external (between-firm) information systems integration (Bergeron& Raymond, 1992), we discuss them separately. However, integration of IT has been classified based on whether theprocess is done internally or externally.

Internal Integration is defined as the process of connecting different function in a firm such as manufacturing, purchasingand materials management (Peter ward, Honggeng Zhou (2006)). For example, ERP systems are a form of internalintegration of processes (Davenport, 1994, 1998). Furthermore, these information sharing within the firm can enhancea firm’s production capabilities (e.g., Schlie & Goldhar, 1995; Small, 1999).

External integration refers to information systems that connect a firm with its suppliers and customers (Peter ward,Honggeng Zhou (2006)). IT integration with suppliers and customer has been found to impact a firms performancepositively, Frohlich (2002) and Subramani (2004) and reduce Lead times. Lead time in a supply chain is classified asmaterial movement Lead time and information movement Lead time (Mason-Jones and Towill (1999). The supplychain thus developed is called Information enriched Supply chain. In an information-enriched supply chain, firms aremore closely connected both internally and externally because of information sharing resulting in reduced informationlead time and reduced total lead time in a supply chain. Another impact of External IT integration has been found to bethe decision making process time. Data integration serves to make the data available in a standard format which isunderstandable to all the stakeholders (Galbraith, 1973). At the same time insufficient data integration leads to delays,decreases in communication and greater distortion of meaning (Huber, 1982). External integration aids supply chainpartners in reaching joint decisions by facilitating information exchange, recollection, and standardization (Dennis,1996).

Analytical studies thus provide evidence that External IT integration reduces lead time. Cachon and Fisher (2000) findthat sharing demand and inventory data can shorten the order processing lead time. Lee, So, and Tang (2000) studyinformation sharing in a two-level supply chain and show that sharing the current demand variation information leads tosignificant inventory reduction, which is



Figure 1 Traditional channel design Representation

LITERATURE REVIEW

A Supply chain (SC) consists of suppliers/vendors, manufacturers, distributors and retailers interconnected bytransportation, information and financial infrastructure. The supply chain’s objective is to provide value to the endconsumer in terms of products and services and for each channel participant to garner a profit in doing so (Sahin Funda& Robinson Powell E, 2002).The two main barriers faced in Supply chain are management of Inventory and the timelydelivery of goods to meet the demand of customers. Hence, we define the success of a Supply chain using certainmetrics which measure the performance of a Supply chain.

Supply chain is a linked set of resources and processes that begins with the sourcing of raw materials and extendsthrough the delivery of end items to the final customer (Bridgefeld Group ERP/Supply Chain Glossary, 2004). Whilethe separation of supply chain activities among different companies enables specialization and economies of scale,there are many important issues and problems that need to be resolved for successful SC operation – this is the mainpurpose of Supply Chain Management (SCM).

One of the most common problems in supply chains is the bullwhip effect. Even small fluctuations in the demand orinventory levels of the final company in the chain are propagated and enlarged throughout the chain. Because eachcompany in the chain has incomplete information about the needs of others, it has to respond with the disproportionalincrease in inventory levels and consequently even larger fluctuation in its demand to others down the chain (Forrester,1961; Forrester, 1958).

Another problem is that the companies often tend to optimize their own performance, disregarding the benefits of asupply chain as a whole (local instead of global optimization).Studies show that the sharing of demand information insupply chains increases the performance of the supply chain by increasing availability and reducing inventory relatedcosts (Evans et al. 1993; Gavirneni et al. 1999; Cachon and Fisher, 2000; Lee et al., 2000).

Internet and e-business offer many possibilities for effective information sharing that enable seamless flow of transactionsin the supply chain. However it should be noted that information technology alone is not a panacea for all SC problems.Even more: the most often quoted problems of online purchasing are not related to technology but rather to logistic andsupply chain problems (Hoek, 2001). This is even truer for traditional companies that are usually even less prepared fornew e-commerce related challenges. The efficiency of supply chains can generally be improved by e.g. reducing thenumber of manufacturing stages, reducing lead-times, working interactively rather than independently between stages,and speeding up the information flow (Persson & Olhager, 2002).

The benefits of information sharing have been proposed to depend on the predictability of demand. Information sharingseems to be of greater value in situations with unknown demand, for example, early sales of new products or promotionsituations. Another interesting finding which comes our way in this regard is that the benefits of IT use are more due topositive effects of IT on transaction processing efficiency potentially leading to shorted lead times and smaller batchsizes than to sharing of inventory and demand information.


As a result of the focus on fast response to customers in many markets, lead-time reduction has been a common focusfor performance improvement efforts (Treville, 2004). Lead time can be measured in a number of ways, includingmanufacturing lead time (Jayaram, Vickery, & Droge, 1999) and customer lead time (Duenyas & Hopp, 1995). Customerlead time is defined as "the time elapsed from receipt of an order until the finished product is either shipped or deliveredto the customer" (IndustryWeek's Census Glossary, 1999). There is positive belief that there exists a relationship betweenIT integration and Lead time (Devaraj & Kohli, 2003; Vickery et al., 2003). Studies done, in this regard conclude,investments in IT lead to improved performance (Co, Patuwo, & Hu, 1998; Small, 1999; McAfee, 2002). Because keydifferences exist between internal (within-firm) and external (between-firm) information systems integration (Bergeron& Raymond, 1992), we discuss them separately. However, integration of IT has been classified based on whether theprocess is done internally or externally.

Internal Integration is defined as the process of connecting different function in a firm such as manufacturing, purchasingand materials management (Peter ward, Honggeng Zhou (2006)). For example, ERP systems are a form of internalintegration of processes (Davenport, 1994, 1998). Furthermore, these information sharing within the firm can enhancea firm’s production capabilities (e.g., Schlie & Goldhar, 1995; Small, 1999).

External integration refers to information systems that connect a firm with its suppliers and customers (Peter ward,Honggeng Zhou (2006)). IT integration with suppliers and customer has been found to impact a firms performancepositively, Frohlich (2002) and Subramani (2004) and reduce Lead times. Lead time in a supply chain is classified asmaterial movement Lead time and information movement Lead time (Mason-Jones and Towill (1999). The supplychain thus developed is called Information enriched Supply chain. In an information-enriched supply chain, firms aremore closely connected both internally and externally because of information sharing resulting in reduced informationlead time and reduced total lead time in a supply chain. Another impact of External IT integration has been found to bethe decision making process time. Data integration serves to make the data available in a standard format which isunderstandable to all the stakeholders (Galbraith, 1973). At the same time insufficient data integration leads to delays,decreases in communication and greater distortion of meaning (Huber, 1982). External integration aids supply chainpartners in reaching joint decisions by facilitating information exchange, recollection, and standardization (Dennis,1996).

Analytical studies thus provide evidence that External IT integration reduces lead time. Cachon and Fisher (2000) findthat sharing demand and inventory data can shorten the order processing lead time. Lee, So, and Tang (2000) studyinformation sharing in a two-level supply chain and show that sharing the current demand variation information leads tosignificant inventory reduction, which is generally associated with reduced lead times. While, the performanceenhancement through inventory reductions has been explored in most of the works, the impact on Lead time is not ofparticular interest.

Demand volatility is the key problem facing most supply chains, eroding both customer service and product revenues.Thus inventory management has to account for such variation of demand at the same time optimizing the inventorylevels to drive down costs to the organization. Angulo, Nachtman, and Waller explained various strategies viz. Automaticreplenishment programs such as continuous replenishment planning, efficient consumer response, quick response andvendor managed inventory which involve information sharing among channel partners.

According to a survey (Lebhar Friedman, 2001) nearly three quarters of the retailers surveyed choose to share informationwith their vendors to improve inventory management; 28% are not providing information and may be content to managetheir inventory alone. Among the companies that choose to share information with vendors, just over one third sharebetween three and five types of information-sales, inventory, sales forecast, margin, and by store. Also, compared to lastyear's survey, the percentage of retailers sharing margin information has increased from 25% to 33%.

Certain works have analyzed the effect of information sharing on inventory management (Cachon and Fisher, 2000).They try to develop an algorithm and model to find out the relationship among them and find that lead time has decreasedalthough the inventory management with respect to demand has not changed. There are also works which explain thedevelopment of Networked Inventory Management Information Systems (NIMIS) (Verwijmeren, Martin van der Vlist,Van Donselaar, Karel, 1996). According to the same, the driving forces of inventory management are increasing customerrequirements, the need for networked organizations and opportunity of networked inventory management. They proposecertain systems in light of the same for implementation of NIMISs. The measurement of Inventory management ismostly through mathematical models which primarily use Safety stock determination through demand variability acrossthe Supply chain partners. Researchers have used two to four echelon models for measuring this variability. However,the impact of information technology on inventory management depends on the amount of comfort/resistance the users

Rakesh Singh


(Channel partners’ employees) have in the use of the technology. This would in turn result in better usage of technology toimprove the visibility of information of channel partners across the supply chain in turn resulting in managing the inventorybetter.

Thus this study aims at focusing on the impact Information technology and consequently Supply chain visibility will haveon Lead time, the reason being the need of Supply chain to manage the demand of products. Hence, this study hypothesizesthe following two hypothesis,

HYPOTHESIS 1: Product visibility will reduce the lead time of an organization and consequently improve the supplychain performance.

HYPOTHESIS 2: Product Visibility will have a positive impact on the Inventory Turns. These hypothesis were testedin the empirical phase of this study, outlined below.

DATA AND METHODOLOGY

The methodology of testing the aforementioned hypotheses was by development of a survey tool. This survey tool is inthe form of a questionnaire which was administered to a set of respondents who are part of organizations and work withtechnologies for interaction with the channel partners. The development of the questionnaire involved evaluation of thetechnologies and methodologies used in the industry for e- integration. Considering the same, a primary focus of thestudy was to focus on the demand visibility for channel partners. An important strategy in that direction is “Collaborativeplanning, forecasting and replenishment”.

Collaborative Planning, Forecasting, and Replenishment (CPFR) is a concept that aims to enhance supply chain integrationby supporting and assisting joint practices. CPFR seeks cooperative management of inventory through joint visibilityand replenishment of products throughout the supply chain. Information shared between suppliers and retailers aids inplanning and satisfying customer demands through a supportive system of shared information. This allows for continuousupdating of inventory and upcoming requirements, making the end-to-end supply chain process more efficient. Efficiencyis created through the decrease expenditures for merchandising, inventory, logistics, and transportation across all tradingpartners. (Source: Wikipedia. Org)

As earlier researchers have focused on mathematical models for research on performance enhancement of Supply chain,the survey tool method has not been prevalent in practice. There has been a significant research by Gonzaga University inthis respect. The survey tool is based on a tool developed by the university’s academicians. With questions based on theuses, implementation of CPFR, the questionnaire reflects the importance of Information Technology in enhancing theSupply chain. This data was administered to a mix of respondents from Industry and academicians. The sample size for thestudy was thirty. GlaxoSmithKline consumer health care and Marico Industries were two of the organizations mainlyinvolved in this study from whose employees a major chunk of the industry related response was elicited.

There have been several studies as mentioned in the literature review, which have relied on mathematical modeling forthe analysis of performance enhancement effects of Information technology and Supply chain integration. However, theexact nature of value addition through Information technology is qualitative and cannot be measured only by theinvestments made on Information technology infrastructure or the types of technologies used in the organization. Therehave been cases in literature review when authors have mentioned about the widespread view that Information technologyhas made the functions difficult for the execution and there has been considerable resistance to the same. It has beenproven that resistance to implementation of Information technology infrastructure is a major deterrent in improving theperformance of Supply chains (Frohlich, 2002). Hence, instead of using the explicit values of the variables of Study, thedata was measured on a 5-point Likert scale from 1- Strongly disagree to 5- Strongly agree. The questions were mainlyused to measure the perceived benefits (in the form of inventory turns and Lead time reduction) through the employmentof Information technology infrastructure. This would aid in obtaining insight into the prospects of Information technologyusage in organizations as the complexity of the Supply chain grows.

The data obtained were fed into SPSS for analysis. The analyses included Chronbach alpha estimation to ascertain thereliability of data, the correlation calculation to find any relation between the variables, regression testing to analyze theimpact of independent variables on dependent variable and also to analyze any mediation between the variables. The finalanalysis was to find out if there was any impact on the third variable through a mediating variable. This was done primarilyto estimate the impact of “Product visibility” on “Lead time” through the impact “Product visibility” had on “Inventoryturnover. The same was carried out for the “Vice versa” case.



Rakesh Singh

FINDINGS

As mentioned earlier, the two main problems faced by Supply chains are demand uncertainty (Turban, McLean & Wetherbe,2004) and integration of Supply chain (Cooper et al. 1997; Burgess, 1998; de Leeuw et al. 1999). The end result is the Leadtime increase and inventory build-up. Product visibility was postulated as a factor to reduce the impact on Lead time andinventory turnover. The first step was to analyze the reliability of responses obtained. As the results shown in the tablesbelow(next page), show an acceptable level of internal consistency was obtained for each of the three variables, (0.7 forInventory turnover, 0.6 for Lead time, and 0.8 for Product visibility).

The correlations between the three variables in consideration. As the values show, there is a significant influence of“Product visibility” on “Lead time” (sig<0.05). On the other hand “Product visibility” does not have a similar impact onInventory turnover (sig>0.05). However, there seems to be a relation between the Lead time and Inventory turnover. Themode of impact, reduction of Lead time, would have on Inventory turnover is not very clear. While, there is no mention ofthis effect in the literature review, this may be an indirect impact of reduction of Lead time, as the number of times theinventory would be replenished may increase. To analyze the same, an analysis was carried out to investigate whether therewas a significant impact on inventory turnover due to Lead time and vice versa.

The program tried to analyze the impact of a variable on another through a mediating variable. The impact of Lead Timeon Inventory turnover and vice versa is ruled out. The results show that the significance level is about 0.17 or 83%confidence interval for the case when “Inventory turnover” is used as a mediating variable and 0.09 with 91% confidenceinterval for “Lead time” as a mediating variable. Each of these cases doesn’t fit the required confidence interval of 95%.Hence, the next step was to analyze the impact of Product visibility on Inventory turnover and Lead time (Table5. below).The results show that “Product visibility” does impact Lead time as exhibited by the significance values (sig<0.05).However, the same is not observed about the “Inventory turnover” variable (sig>0.05).

DISCUSSION

The results as shown in the previous section show that Product visibility does have a performance enhancing impact.The impact it has on “Lead time” is proven by the significance values (sig<0.05 just about 0.01). However, the otherresult shows that there is no impact of Lead time on Inventory turnover which is evident from the significance valuegreater than 0.05 and lesser than the 95% confidence interval. This result is in line with the observations of certainstudies done earlier (E.g.: Devraj and Kohli, 2003, Vickery et al., 2003). As mentioned earlier, reducing lead times hasbeen cited as an important reason for adopting IT integration programs (Attaran, 1989; Schlie & Goldhar, 1995; Co etal., 1998; McAfee, 2002).

On the other hand the impact of Product Visibility on Inventory turnover is not very clear. While, the final results showthat the significance values are much higher than 0.05 and hence don’t fit in the confidence interval. Consequently, theimprovement of demand information visibility across the Supply chain does not affect the inventory turnover of theSupply chain. The opposite has been the result of earlier studies based on mathematical models. It was shown thatelectronic data interchange (EDI) could reduce swings in inventory and safety stock levels. The simulation results of astudy (Owens & Levary, 2002) showed that (among other improvements) the standard deviation of the stock level wasreduced from 749 to 272 tons, leading to $400,000 annual savings. Also, the study on Bullwhip effect (Cachon andFisher, 2000) shows that there is a considerable decrease in inventory build-up due to the visibility of demand informationacross the supply chain. The main feature of this study has been the mathematical modeling technique with four echelonsbuilt in the Supply chain. Similar models have been used in other studies (Verwijmeren, van der Vlist and Van Donselaar,1996) to ascertain the performance enhancing effects of demand/product visibility on Inventory turnover. At the sametime the secondary impact of inventory turnover on Lead time due to improvement of “Product visibility” is also ruledout, thus eliminating any mediating variable effect (p>.05).

LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH

The sample size for this study was 30 with a mix of responses from academics and industry representatives. Increasingthe involvement from industry would help in improving the validity of results,as they would then reflect the actualground situation. At the same time the metrics chosen were analyzed qualitatively. Further research should be based ona mix of quantitative and qualitative data and the impact Supply Chain visibility has on them. At the same time, whileInventory turnover and Lead time reflect the efficiency of the Supply chain, the focus on internet and E enablement ofmost of the systems and hence the increase in Internet traffic or creation of a new distribution channel and the consequentbenefits should be the focus of further research.



CONCLUSION

The main focus of this study has been improvement of the performance of Supply chain. The variables chosen wereInventory turnover and Lead time. The transparency of Supply chain i.e. the product visibility across the supply chainwould lead to improvement of the performance was the expectation set by this study. The study proposes that Productvisibility or transparency of demand across the Supply chain results in improvement of Lead time of the supply chain.The same has been put forth by earlier works based on Supply chain performance improvement. The result confirmedthese stated facts on the basis of responses from Industry. While, there have been widespread awareness and research inthis area in US, Europe and other industrially developed nations, Asia has been growing its industries lately withreforms in the economic set up and governance. Hence, the percolation of Supply chain enhancements has taken time toset foot here. However, this study shows that certain sectors, primarily, FMCG goods industry are in the forefront inusing technologies primarily Information technology to improve the Supply chain. The use of third party logistics andMIDAS software for vendors and wholesalers and SAP for the company operations by Marico Industries is a case inpoint. Similarly, the use of PDAs by HUL salesmen to transfer point of sales data to the head office for demandestimation is another example.


Rakesh Singh

On the other hand, the other finding has been that the impact of Information technology on Inventory turnover was notconfirmed. While this is in contrast to earlier studies, the same is not evident by the study, the enhancement effects oninventory turnover through Information technology cannot be brushed aside. The usage of technology to develop accuratedemand forecasts results in improvement of inventory management (Verwijmeren, van der Vlist and Van Donselaar,1996). However, an important outcome of the study has been the resistance observed in the industry to the implementationof technology infrastructure. Since the study is based on survey methods, the perceptions of the respondents reflect thelack of confidence in Information technology in improving the demand visibility and hence the inventory position ofSupply chain partners.

REFERENCE

Angulo, A. and Nachtmann, H. 2004. Supply Chain information sharing in a vendor managed inventory partnership.Journal of Business Logistics. 25(1), Pg 101.

Attaran, M. 1989. The automated factory: Justification and implementation. Business Horizon. 32(3): 80-86.Burgess, R. 1998. Avoiding Supply chain management failure: lessons from business process re-engineering.

International Journal of Logistics management. 9 (1): 15-23.Cachon, G. and Fisher M. 2000. Supply chain inventory management and the value of shared information. Management

Science. 46 (8): 1032-1048.Co, H.Patuwo, E., and Hu, M. 1998. The human factor in advance manufacturing technology adoption: An empirical

analysis. International Journal of Operations and Production Management. 18 (1): 87-106.Cooper, M.C., Lambert, D.M. and Pagh J.D. 1997. Supply chain management: more than a new name for logistics.

International Journal of Logistics management. 8 (1): 1-13.De Leeuw, S., van Goor, A.R and van Amstel, R.P. 1999. The selection of distribution control techniques. International

Journal of Logistics management. 10 (1): 97-112.Devaraj, S. and Kohli, R. 2003. Performance impact of information technology: Is actual usage the missing link?.

Management Science. 49 (3): 273-289.Duenyas, I., & Hopp, W.J. 1995. Quoting customer lead times. Management Science. 41 (1): 43-57.Evans, C.N., Naim, M.M and Towill, D.R. 1993. Dynamic supply chain performance: Chain Strategies. Management

Science. 45 (1): 16-24.Frohlich, M. 2002. E integration in supply chain: Barriers and performance. Decision sciences. 3 (4): 537-556.Galbraith J. 1973. Designing complex organizations. Reading, MA: Addison Wesley.Gavirneni, S., Kapuscinski, R. and Tayur, S. 1999. Value of information in capacitated supply chains. Management

Science. 45 (1): 16-24.Industry Week. 2006. Census of manufacturers. [Online] available from: http://industry week.comJayaram, J.Vickery, S.K., and Droge, C. 1999. An empirical study of time based competition in North American

automotive suppliers industry. International journal of operation and production management. 19:1010-1023.

Lebhar Friedman. 2001. Overview: Inventory Management. Chain Store age.Lee H. So K. & Tang C. 2000. The value of information sharing in a two level supply chain. Management Science.

46 (5): 626-643.Lee, H. and Billington, C. 1992. Managing supply chain inventory: pitfalls and opportunities. Sloan Management

review. 33 (3): 65-73.Lee, H., So, K.C and Tang, C.S. 2000. The value of information sharing in a two-level supply chain. Management

Science. 46 (5): 626-643.Liljenberg, Peter. 1996. The value of centralized information in a two-echelon inventory system with stochastic

demand. Working paper. Lund University, Lund, Sweden.Mason-Jones, R. and Towill D. 1999. Total cycle time compression and the agile supply chain. International Journal

of Production economics. 62 (1/2): 61-73.McAfee, A. 2002. The impact of enterprise information technology adoption on operation performance: An empirical

investigation. Production and operations management. 11(1), 33-53.Schlie, T. and Goldhar, J. 1995. Advanced manufacturing and new direction for competitive strategy. Journal of

business research. 33 (2): 103-114.Subramani M. 2004. How do suppliers benefit from information technology use in supply chain relationships?. MIS

quarterly. 28 (1): 45-73.Treville, S., Shapiro, R.D and Hameri A. 2004. From supply chain to demand chain: The role of lead time reduction

in improving demand chain performance. Journal of Operation Management. 21 (6): 613-627.Ward Peter, Zhou Honggeng. 2006. Impact of information technology integration and Lead/Just-In-Time practices on

Lead time performance. Decision sciences Institute. 37 (2): 177.


ANALYTICAL STUDY ON THE FINANCIALPERFORMANCE OF INDIAN SOFTWARE INDUSTRY

K. MARANProf. & Director, Sri Sai Ram Institute of Management Studies

Sri Sairam Engg. College, Chennai – 44. India.e-Mail: maran.mba65@gmail .com

Pravat Kumar SarangiResearch Scholar MGR University, Chennai, India

ABSTRACT

The history of the Indian software industry may be reckoned from 1974, when Tata Consultancy Services (TCS) startedof its operations. TCS with its joint ventures became one of the largest software exporters in the early days. The Indiansoftware Industry has grown from a mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion in 1999-2000.No other Indian industry has performed so well against the global competition. In India the major sources of income isthrough software Industry and its exports. Almost all the software companies are facing financial crisis especially thetop 10 software companies in India. In the year 2005, TCS Net profit growth is 2959 percent but it went down to 83percent in the year 2008,Wipro net profit growth is 24.1 percent in the year 2002 and it went down to 9.24 percent in2008. The other leading companies as like Infosys, Satyam are also facing the financial crisis in the global meltdown.

Keywords: Financial Ratio, Global melt down, Financial performance, Software industry, statistical tools

INTRODUCTION

The history of the Indian software industry may be reckoned from 1974, when Tata Consultancy Services (TCS) startedof its operations. TCS with its joint ventures became one of the largest software exporters in the early days. However,exports became the core focus of companies sometime around the late 1980s and early 1990s. A major event in theindustry was when Texas Instruments proposed to start a 100 per cent export-oriented, foreign owned and operatedsubsidiary. This caught on rapidly, with large software companies like Siemens, Motorola and many more setting upshop in India as subsidiaries. Software companies became R&D partners for big multinational firms, helping them toreach market faster.The Indian software Industry has grown from a mere US $ 150 million in 1991-92 to a staggeringUS $ 5.7 billion in 1999-2000. No other Indian industry has performed so well against the global competition.

According to statistics, India’s software exports reached total revenues of Rs.46100 crores. The total share of India’sexports in the global market rose form 4.9 percent in 1997 to 20.4 percent in 2002-03.In India, the software boomstarted somewhere in the late 1990’s The Indian software Industry has grown from a mere US $ 150 million in 1991-92to a staggering US $ 5.7 billion in 1999-2000. Despite the global economic slowdown, the Indian IT software andservices industry is maintaining a steady pace of growth. Software development activity is not confined to a few citiesin Indian. Software development centers, such as Bangalore, Hyderabad, Mumbai, Pune, Chennai, Calcutta, Delhi-Noida-Gurgaon, Vadodara, Bhubaneswar, Ahmedabad, Goa, Chandigarh, and Trivandrum are all developing quickly.All of these places have state-of –the-art software facilities and the presence of a large number of overseas vendors.Government has also played a vital role in the development of the India software Industry. In 1986, the Indian governmentannounced a new software policy which was designed to serve as a catalyst for the software industry. This was followedin 1988 with the World Market Policy and the establishment of the software Technology Parks of India (STP) scheme.In addition, to attract foreign direct investment, the Indian Government permitted foreign equity of up to 100 percentand duty free import on all inputs and products.

REVIEW LITERATURE

Sushanta Mohapatra (2003), Contributions from and Challenges to India’s Software Industry”, explores this dichotomyin industry perception and government policy response in greater detail. Based on data from interviews of seniorexecutives of Indian software companies in Bangalore and the US, and also by drawing upon secondary data sources,they develop a typology of India’s competitive advantages and threats thereto in the information technology sector.


An examination of the demand and supply constraints beyond quantitative estimates reveals a set of serious challenges tothe expansion of India’s information workforce.

Hamasalakshmi and manickam (2005), in their study on “Financial Performance Analysis of Selected Software Companies”,examined liquidity, proftability and leverage position of thirty four software companies during the period 1999-1998 to2001-2002 by using ratios, correlation and multiple regression analysis. The study revealed favourable liquidity and workingcapital position. They concluded that the companies rely on the internal financing and overall profitability position of thesoftware companies showed a moderately increasing trend.

K.Maran and Pravat Kumar Sarangi (2010), study analyzed the financial performance of leading software companieslike TCS, Infosys, Wipro and Satyam. The study being an external analyst, had to depend mainly upon secondary datafor the purpose of studying the financing performance of software Industries in India from the top 10 software companiesin India which is enlisted by NASSCOM, the four selected companies for the study are Tata Consultancy Services,Wipro, Infosys Technologies Ltd., and Satyam Computer Service.The data and information required for the study havebeen collected mostly from the annual reports of the unit for the period from 2000-2001 to 2008-2009. In order toevaluate the financial performance, tools like Anova, mean, standard deviation and correlation test have been used.

PROBLEM FOCUS

The software industry has become a part of everyday life, be it providing solutions for business or entertainment. In thelast 15 years the Indian software industry has brought a tremendous growth for the emerging economy .The industry isthe main component of the Information technologies not only in India and other leading develop countries also. Becauseof world financial and economical crisis global economy went down in the last two years. In India the major sources ofincome is through software Industry and its exports. Almost all the software companies are facing financial crisisespecially the top 10 software companies in India. In the year 2005, TCS Net profit growth is 2959 percent but it wentdown to 83 percent in the year 2008,Wipro net profit growth is 24.1 percent in the year 2002 and it went down to 9.24percent in 2008. The other leading companies as like Infosys, Satyam are also facing the financial crisis in the globalmeltdown. Hence the study aim is to analyze the financial performance of software companies in India.

OBJECTIVES OF THE STUDY

• To analyze the short term and long term solvency position of software companies.• To identify the relationship between software companies and selected independent variables.

SELECTED SOFTWARE COMPANIES PROFILE1. Infosys Technologies LtdInfosys Technologies Ltd was started in 1981 by seven people with $250. Today, the company boosts of

revenues of over $4 billion and 94,379 employees. Forbes magazine named Infosys in its list of Global High Performers.Waters magazine rated Infosys as the Best Outsourcing Partner. The Banker magazine conferred two Bankers TechnologyAwards on Infosys to acclaim its work in wholesale and capital markets in two categories-payments and treasury services,and Offshoring and Outsourcing. The International Association of outsourcing professional (IAOP) ranked Infosys isNo.3 in its ‘2008 Global outsourcing 100’

2. Tata consultancy serviceFounded in 1968, TCS is one of India’s largest corporate houses. It is also India’s largest IT employer with

staff strength of 1,11,000 employees. In 2007, TCS is rated by IDC-Data quest as the ‘Best IT best employer in ITservice’, and also topped Data Quest DQT top 20 list of IT Service providers in 2007.

3. Satyam Computer Services - Established in 1987 by Ramalinga Raju, Satyam has a staff strength of 51, 000employees. In 2008, the company’s revenues crossed the $ 2-bilion mark. Satyam is among the youngest IT servicescompanies to reach $1 billion in annual revenues. It is ranked No. 1 in the ASTD (American society for Training andDevelopment) BEST Award, 2007

4. WiproWipro today is $5 billion revenue generating IT, BPO and R&D services organization with its presence over 50

countries. The company has over 72,000 employees. Wipro was the only Indian company to be ranked among the top 10global outsourcing provider in IAOP’s 2006 Global Outsourcing 00 listing. Wipro has also won the international Institutefor Software Testing’s best practice Award.

K. MARAN and Pravat Kumar Sarangi


METHODOLOGY

The researcher, being an external analyst, had to depend mainly upon secondary data for the purpose of studying thefinancing performance of software Industries in India from the top 10 software companies in India which is enlisted byNASSCOM, the four selected companies are Tata Consultancy Services, Wipro, Infosys Technologies Ltd., and SatyamComputer Services, Hence the data and information required for the study have been collected mostly from the annualreports of the unit for the period from 2000-2001 to 2008- 2009. Though there was found apathy or indifference on thepart of executives in supplying information, the researcher could overcome through moral persuasion and intensivepestering. It was made clear to them that the information so collected would be exclusively used for academic purposesand proper secrecy would be maintained. Editing, classification and tabulation of the financial data collected from theabove-mentioned source have been obtained.

The data for the years 2000-2001 to 2008-2009 has been taken in order to study the change in the financial pattern interms of overall growth, operating, profitability, capital efficiency, short terms solvency and dividend payout ratio overa period of 8 years from 2000- 2001 to 2008-2009.

Source and collection of Data: The present study is mainly based on secondary data which were collected from thecorporate database, audited annual reports, published research reports by various industries, and research organization.

Period of the Study: The present study is mainly intended to examine the financial performance of software companiesfor eight years in the period between 2000-2001 to 2008-2009.

Tools used for Analysis: The present study has analyzed the financial performance of four software companies. In orderto evaluate the financial performance, tools like Anova, mean, standard deviation and correlation test have been used.

RESULT AND DISCUSSION

Current RatioCurrent ratio is an indicator of the firms commitment to meet its short term liabilities and also is an index of theconcerns financial stability since it shows the extent of the working capital which is the amount by which the currentassets exceeds the current liabilities.

H1: There is significance difference between current ratio and selected four software companies.

Sum of Squares df Mean Square F Sig.Current Between Groups 41.304 3 13.768 .477 .701Ratio Within Groups 692.381 24 28.849

Total 733.686 27

In order to find out short terms solvency position of selected four software companies TCS, Infosys, Satyam and Wipro,the one way ANOVA test was used to measuring the significance difference between current ratio an selected fourcompanies the calculated value is (0.701) is more than the table value (0.05) hence it is not null hypothesis and there isno significance difference between current ratio and selected for software companies.

Debt/ Equity RatioDebt/Equity ratio indicates the proportion of owners state in the business. Excessive liabilities tend to cause insolvency,the ratio provides margin of safety to the creditors and also it tells the owners the extent to which they can gain thebenefits or maintain control with a limited investments.

Ho: There is no significance difference between Debt – Equity ratio and selected four software companies.

Sum of Squares df Mean Square F Sig.Debt/ Between Groups 78034634.062 1 78034634.062 5.540 .040Equity Within Groups 140858015.417 10 14085801.542Ratio Total 218892649.479 11

ANALYTICAL STUDY ON THE FINANCIAL PERFORMANCE OF INDIAN SOFTWARE INDUSTRY



In order to find out the significance difference between long term solvency position (Debt/Equity) and selected foursoftware companies TCS, Infosys, Satyam and Wipro, the one way ANOVA test was used to find out the significancedifference that calculated value is (0.040) is less than table value is (0.05) hence it is null hypothetic and there issignificance difference between debt equity ratio and selected four software companies.

DividendsDividend to share capital is uses to study the extent of actual distribution of profit or dividend rate. Dividend to marketvalue of the shares shows the yield of investment to investors.

Ho: There is no significance difference between dividend and selected four software Companies.

Sum of Squares df Mean Square F Sig.Divi- Between Groups 170347.815 2 85173.907 6.011 .011dends Within Groups 240864.637 17 14168.508

Total 411212.452 19

In order to analyse the difference between dividend performance and selected four software companies TCS, Infosys,Satyam and Wipro, the one way ANOVA test was used to find out the significance difference between two variables.The calculated value is (0.011) less than the table value (0.05) hence it is null hypothesis and that there significancedifference between dividend performance and selected four Software companies.

MEAN AND STANDARD DEVIATION OF TCS, INFOSYS, SATYAM AND WIPRO

Company Sathyam Infosys TCS WiproMean SD Mean SD Mean SD Mean SD

EPS Growth 38.35 40.05 42.47 33.15 888.65 1274.35 .86 67.68Ope & Admin Exp to Soft. Revenue 17.23 2.76 7.53 .73 68.19 7.06 7.09 7.90Net Profit to Total income 22.73 2.35 34.76 1.97 23.43 1.60 18.25 8.86Return on capital Employed 29.14 6.75 82.76 29.53 98.17 70.42 56.83 59.42Fixed Asset Turn Over Ratio 9.15 4.18 .24 .03 8.40 1.46 1.07 1.48Working Capital Turn Over Ratio 1.25 .52 .78 .58 4.08 .95 2.02 1.63Total Revenue Growth 38.10 20.13 45.41 29.51 666.49 1080.06 45.49 51.24Net Profit Growth 41.88 41.42 43.77 32.88 829.49 1419.84 .05 35.24Current Ratio 6.14 1.11 3.32 .97 3.32 .21 5.18 9.84

EPS growthEquity per share growth rate is another one factor to determine the corporate growth, the mean value of TCS (888.65),when it compared with other three selected software companies, it has got tremendous growth in EPS within a shortspan of period, the second position in EPS growth rate of Infosys (42.77) and third position has got Satyam (38.75) andthe last one is Wipro EPS growth is very low (0.86) when it is compared with other three software companies

Operating and administrating expenses to software revenueOperating and administrating expenses of TCS mean value is (68.19) which is the highest. This can be interpreted thatcompany has maintained and controlled its operating and administrating expenses. mean value of Satyam, Infosys,Wipro are (17.25), (7.53) and (7.09) respectively.

Net profit total incomeInfosys (34.26) net profit to total income was highest compared to other three software companies, TCS and Satyam netprofit mean values were found to be 23.43 and 22.73 respectively. Wipro mean value was found to be (18.25) lowestamong all the other software companies

Return on capital employedTCS has got highest return on capital employed, mean value is (98.17) when it compared with other three softwarecompanies, Infosys rate of return is (82.86) and the third mean value is (70.42) for Wipro and Satyam got the lastposition in rate of return its mean value is (29.14) from these highest rate of return on capital employed is TCS and thelowest one is Satyam.


Fixed asset turn over ratioSatyam fixed asset turn over ratio (9.15) and TCS fixed asset turn over ratio (9.15) was highest compared to other threesoftware companies. Wipro (1.07) fixed asset turn over ratio was found to be moderate. Infosys (0.24) fixed asst ratiowas found to be least compared to all other software companies.

Working capital turn over ratioIn order to find out the mean value of selected four software companies, the mean and standard deviation is applied, tofind out the working capital turnover efficiency of all selected companies are similar or not.. The mean value (1.25) ofSathyam and Wipro (2.03) is somewhat satisfactory level when it is compare with other three software companies. TCShas got (4.08) mean value so it is highly satisfaction level, compared to all other three companies, Infosys mean valueworking capital is very less (0.78), this indicates the low efficiency of working capital management among all companies.

Total Revenue GrowthTotal revenue growth is one of the milestone development of any software companies, in this study, the total revenuegrowth performance of selected four companies were measured and it is inferred the mean value of TCS is (666.49)very high growth rate of revenue when it is compared with other selected three software companies. The second growthlevel of revenue is slight difference between Infosys and Wipro (45.41 and 45.49) which is almost no difference in totalrevenue growth between Infosys and Wipro and last one is Sathyam which is only a meager mean value of (20.13),based on the above analysis, TCS has got high level performance of total revenue growth.

Current RatioThe current ratio is a tool to find out the short term short term solvency position of corporates. In this analysis mean andStandard deviations were used to find out the performance of short term solvency Position of selected four softwarecompanies. Sathyam has got high liquidity position and its mean score (6.14), the second position has got Wipro (5.18)and the least mean score value (3.32) to TCS and Infosys.

Net Profit GrowthNet profit growth is reflecting the real growth of organizations of selected four software companies, the mean Standarddeviation were use to analyze the growth role of net profit performance of four software companies. The mean value ofTCS has (829.49) which is indicating its strength of overall financial performance of TCS and the second level ofInfosys has got the mean value of (43.77), the third level mean value is Sathyam computer which is close to Infosyscorporation (41.88) and the fourth selected software company of Wipro has got the least mean value is only (21.05),based on the above analysis TCS has got highest net profit growth rate performance among the selected four softwarecompanies.

The tables showing correlation between selected four software companies, Infosys, TCS, Sathyam and Wipro and fourindependent variables.

Company Software Total Net Profit EPS Revenue Growth Revenue Growth Growth Growth

Sathyam Software PearsonRevenue Correlation 1 .996(**) .994(**) .992(**)Growth Sig. (2-tailed) . .000 .000 .000

N 8 8 8 8Total PearsonRevenue Correlation .996(**) 1 .997(**) .989(**)Growth Sig. (2-tailed) .000 . .000 .000

N 8 8 8 8Net Profit PearsonGrowth Correlation .994(**) .997(**) 1 .994(**)

Sig. (2-tailed) .000 .000 . .000N 8 8 8 8

EPS PearsonGrowth Correlation .992(**) .989(**) .994(**) 1

Sig. (2-tailed) .000 .000 .000 .N 8 8 8 8




Company Software Total Net Profit EPS Revenue Growth Revenue Growth Growth Growth

Infosys Software PearsonRevenue Correlation 1 -.670 -.497 -.529Growth Sig. (2-tailed) . .069 .210 .178

N 8 8 8 8Total PearsonRevenue Correlation -.670 1 .961(**) .969(**)Growth Sig. (2-tailed) .069 . .000 .000

N 8 8 8 8Net Profit PearsonGrowth Correlation -.497 .961(**) 1 .999(**)

Sig. (2-tailed) .210 .000 . .000N 8 8 8 8

EPS PearsonGrowth Correlation -.529 .969(**) .999(**) 1

Sig. (2-tailed) .178 .000 .000 .N 8 8 8 8

TCS Software PearsonRevenue Correlation .(a) .(a) .(a) .(a)Growth Sig. (2-tailed) . . . .

N 0 0 0 0Total PearsonRevenue Correlation .(a) 1 1.000(**) .992(**)Growth Sig. (2-tailed) . . .000 .008

N 0 4 4 4Net Profit PearsonGrowth Correlation .(a) 1.000(**) 1 .994(**)

Sig. (2-tailed) . .000 . .006N 0 4 4 4

EPS PearsonGrowth Correlation .(a) .992(**) .994(**) 1

Sig. (2-tailed) . .008 .006 .N 0 4 4 4

Wipro Software PearsonRevenue Correlation .(a) .(a) .(a) .(a)Growth Sig. (2-tailed) . . . .

N 0 0 0 0Total PearsonRevenue Correlation .(a) 1 .026 .430Growth Sig. (2-tailed) . . .956 .336

N 0 7 7 7Net Profit PearsonGrowth Correlation .(a) .026 1 .526

Sig. (2-tailed) . .956 . .225N 0 7 7 7

EPS PearsonGrowth Correlation .(a) .430 .526 1

Sig. (2-tailed) . .336 .225 .N 0 7 7 7

** Correlation is significant at the 0.01 level (2-tailed).a Cannot be computed because at least one of the variables is constant.



The above tables shows the correlation between selected four software companies Infosys, TCS, Sathyam and Wiproand four independent variables of software revenue growth, total revenue growth, net profit growth, and EPS growth,the Karl Pearson correlation test was applied to find out the significance between selected four software companies andfour independent variables. It is evident that there is a strong correlation between Sathyam software revenue growth(0.996) to software total revenue, again the same company had a strong correlation between software revenue (0.996)to software net profit growth and software revenue (0.992) to EPS growth rate, which makes it clear evidence that thereis a strong correlation between software revenue to the total revenue, net profit growth, and EPS:of Sathyam, the otherselected company Infosys that there is a strong correlation of total revenue growth (0.961) to net profit growth andsoftware total revenue growth (0.999) to EPS growth, which is clearly indicates that there is strong correlation betweenInfosys total revenue growth to net profit and EPS of Infosys company and the third selected software company TCS,that there is a strong correlation of total revenue growth (1.000) to net profit and total revenue growth to EPS growth(0.992) and again which prove that there is a strong correlation between net profit growth to EPS growth (0.994) ofTCS. The fourth software company Wipro had no correlation between selected independent variables.

TABLE 4.05 The table showing Correlation between selected four software companies, Infosys, TCS, Sathyam andWipro and four variables.

Company Dividends Book Value Market price Price Earning of Shares to Book Value Multiple

Sathyam Dividends PearsonCorrelation 1 .856(**) -.503 -.059Sig. (2-tailed) . .007 .204 .890N 8 8 8 8

Book PearsonValue of Correlation .856(**) 1 -.612 -.240Shares Sig. (2-tailed) .007 . .107 .567

N 8 8 8 8Market Pearsonprice to Correlation -.503 -.612 1 .784(*)Book Value Sig. (2-tailed) .204 .107 . .021

N 8 8 8 8Price PearsonEarning Correlation -.059 -.240 .784(*) 1Multiple Sig. (2-tailed) .890 .567 .021 .

N 8 8 8 8 Infosis Dividends Pearson

Correlation 1 .991(**) -.304 -.363Sig. (2-tailed) . .000 .464 .377N 8 8 8 8

Book PearsonValue of Correlation .991(**) 1 -.254 -.323Shares Sig. (2-tailed) .000 . .545 .436

N 8 8 8 8Market Pearsonprice to Correlation -.304 -.254 1 .941(**)Book Value Sig. (2-tailed) .464 .545 . .000

N 8 8 8 8Price PearsonEarning Correlation -.363 -.323 .941(**) 1Multiple Sig. (2-tailed) .377 .436 .000 .

N 8 8 8 8



TABLE 4.05 The table showing Correlation between selected four software companies, Infosys, TCS, Sathyam andWipro and four variables.

Company Dividends Book Value Market price Price Earning of Shares to Book Value Multiple

TCS Dividends PearsonCorrelation 1 .(a) .(a) .(a)Sig. (2-tailed) . . . .N 4 0 0 0

Book PearsonValue of Correlation .(a) .(a) .(a) .(a)

Sig. (2-tailed) . . . .N 0 0 0 0

Market Pearsonprice to Correlation .(a) .(a) .(a) .(a)Book Value Sig. (2-tailed) . . . .

N 0 0 0 0Price PearsonEarning Correlation .(a) .(a) .(a) .(a)Multiple Sig. (2-tailed) . . . .

N 0 0 0 0 Wipro Dividends Pearson

Correlation .(a) .(a) .(a) .(a)Sig. (2-tailed) . . . .N 0 0 0 0

Book PearsonValue of Correlation .(a) .(a) .(a) .(a)

Sig. (2-tailed) . . . .N 0 0 0 0

Market Pearsonprice to Correlation .(a) .(a) .(a) .(a)Book Value Sig. (2-tailed) . . . .

N 0 0 0 0Price PearsonEarning Correlation .(a) .(a) .(a) .(a)Multiple Sig. (2-tailed) . . . .

N 0 0 0 0** Correlation is significant at the 0.01 level (2-tailed).* Correlation is significant at the 0.05 level (2-tailed).a Cannot be computed because at least one of the variables is constant.

The above table shows that there is correlation between selected four software companies Infosys, TCS, Sathyam andWipro and Four independent variables of dividend, book value of share, market price to book value, and price earningmultiples, the Karl Pearson correlation test was applied to find out the correlation between the selected four companiesand independent variables. Sathyam had a strong correlation between dividends (0.856) to book value of share, and thecompany had a slight correlation market price to book value (0.784) and to price earning multiple. The second selectedsoftware company of Infosys, that there is exist a strong correlation (.991) between dividend and book value of shareand also the company had a strong correlation between market price to book value (0.941) to price earning multiple,where the other two selected Software companies TCS and Wipro that there is no correlation among the four independentVariables.



CONCLUSION

The study has analyzed the overall performance of the leading software companies, some of the important ratios wereused to measure the financial performance of these companies. Based on the above analysis the overall performance ofTCS was found to be comparatively good with the other three software companies and Infosys position was found to besomewhat satisfactory, even though they have gained a good net profit. From the above results it is proved that financialstatements of Satyam computer were recently window dressed and its financial position was constant for the past years.Hence the company will not be considered for further studies and also the company which is recently acquired by Tech.Mahendra, rest of the three companies from 2001-05 performance was good but from 2005 -08 overall financialperformances went down. Again which is clearly indicates from 2009 onwards the financial performance of selectedthree software companies’ highly satisfactory level and these companies are in a growing position in world softwaregrowth.

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International research journal of finance and economics, euro journal publication. 12-16.


CORPORATE FRAUD AND BUSINESSSUSTAINABILITY: A LOOK AT THE ASIA-PACIFIC

REGION

Christopher J. SkousenUtah State University

Clifford R. SkousenUtah State University

ABSTRACT

In order for business enterprises to succeed in the long-run they must operate efficiently and competitively. Many companiesthat have been plagued with corporate frauds have experienced devastating effects on their operations. This paper looks atthe occurrence of fraud in businesses of the Asia-Pacific region. Fraud risk factors are identified and the auditor’sresponsibilities are delineated. Frauds may be committed by company management for the perceived benefit of the companyand shareholders or against the company for the benefit of company personnel. Suggested actions to help mitigate fraudulentactivities are presented. Management with the assistance of auditors is responsible for the controls and culture to helpmitigate fraud in their organizations.

Keywords: corporate fraud, fraud triangle, fraud risk, Asia-Pacific

INTRODUCTION

A basic component of a sustained prosperous economy is respect for fundamental human values: honesty, trust, andfairness. These values need to be an integral part of business culture and practice for markets to work most efficiently andeffectively. Private business is at the strategic center of a market based economy. For these businesses to succeed in thelong-run they must operate efficiently and competitively. To do so they must have the trust of the communities in whichthey operate and beyond to attract top talent and capital to their enterprises. Billions of dollars of wealth and capital arebought, sold, and exchanged on a daily basis (Zakaria, 2008). Complex systems of checks and balances have been put inplace to prevent people from using illegal manipulations of these systems to promote their own welfare at the expense ofthe general populace. Unfortunately, people have always found ways around these safeguards in order to unethicallybenefit themselves (Prasch, 2006).

In recent years, news headlines have exposed many major corporate frauds around the world. Madoff, Stanford Financial,and Satyam are examples. What were surprising about these companies’ frauds were the huge amounts involved and thelengthy period over which their frauds were perpetrated. In a recent study published in the Global Fraud Report, while allregions of the world reported high percentages of corporate fraud, the Asia-Pacific region had the highest percentage in thelast year (Kroll, 2010). Fraud in itself is not surprising. “Corporate fraud will always occur when there is a clear opportunityand when the likelihood of detection appears remote, or where the prevailing corporate culture is insufficiently robust andwhere there is a general belief that the worst that can possibly happen is a simple dismissal (Vickers, 2009).

Global Fraud Report—Asia-Pacific Region

Kroll Consulting, the world’s leading risk consulting firm, commissioned the Economist Intelligence Unit to conductglobal fraud surveys. The results of the 2010 survey were published in the Global Fraud Report, Annual Edition 2010/11. The objective of the report was to raise awareness of emerging fraud trends in order for business leaders to growtheir business securely while minimizing both the likelihood of fraud and scale of its impact. This is an important factorin the development and sustainably of business enterprises. The Economist Intelligence Unit polled more than 800senior executives worldwide from a broad range of industries and functions in July and August 2010. Twenty-fourpercent (192 respondents) were from the Asia-Pacific region with nearly half of these from China and India. The resultswere independently analyzed by both the Economist Intelligence Unit and Kroll. Their findings are reported in theannual report. Asia-Pacific has the highest number of companies of any region (92%) reporting being struck by at leastone fraud in the last year (Table 1). In particular, the Asia-Pacific companies had the most widespread problem withintellectual property theft and money laundering with 16% and 9% of the firms respectively reporting loss to these typesof fraud (Kroll, 2010 p. 28).


CORPORATE FRAUD AND BUSINESS SUSTAINABILITY: A LOOK AT THE ASIA-PACIFIC REGION

Table 1 Prevalence of Fraud Companies affected by fraud 2010

Region Percentage of Companies (affected by fraud)Asia-Pacific (overall) 92 %China 98 %India (manufacturing and engineering sector only) 89 %Southeast Asia 90 %Latin America 90 %Africa 87 %North America 87 %Middle East 86 %Europe 83 %

Source: Kroll Global Fraud Report, Annual Edition 2010/11, pp 28-37.

Asia-Pacific’s high fraud record is causing concern among executives. In the 11 fraud types tracked in the Kroll sponsoredsurvey, nine of the 11 had reported incidence above the global average. Table 2 shows the six most prevalent types offraud incidences in the Asia-Pacific Region.

Table 2 Asia-Pacific Region 2010

Areas of Frequent Loss Percentage of firms reporting loss to this type of fraudTheft of physical assets or stock 28 %Management conflict of interest 25 %Information theft, loss or attack 22 %Vendor, supplier or procurement fraud 16 %IP theft, piracy, or counterfeiting 16 %Regulatory or compliance fraud 16 %

Source: Kroll Global Fraud Report, Annual Edition 2010/11, p. 28.

Of particular concern is the number of Asia-Pacific companies that invested less in controls in order to reduce costs:33% of the firms reported that this practice had increased fraud exposure. Nevertheless, investments are being made.Table 3 shows the percentage of firms that reported investing in selected types of fraud prevention. Ongoing investmentin fraud prevention is particularly critical for Asia-Pacific companies because of the high staff turnover rate in theregion. This was reported in the Global Fraud Report as the most widespread factor contributing to continued futurefraud exposure in the region. Overall, the study reported that 75% of the Asia-Pacific companies had increased exposureto fraud during the last 12 months (p. 28).

Table 3 Asia-Pacific Region 2010

Investment Focus Percentage of firms investing in prevention of this type of fraudStaff training 46 %IT security 43 %Management controls 42 %Risk management systems 42 %Reputation monitoring 41 %Financial controls 41 %Staff screening 40 %Due diligence 40 %

Source: Kroll Global Fraud Report, Annual Edition 2010/11, p. 28.

Indentifying fraud risk factors and investing in ways to control them, is key to reducing the occurrences of fraud. Lowrates of fraud help markets to operate efficiently, increase investor confidence, and businesses are more sustainable.

Fraud Risk Factors

Donald R. Cressey first introduced the fraud risk factor theory in his work Other People’s Money: A Study in the SocialPsychology of Embezzlement (1953). He interviewed approximately 200 individuals who had been incarcerated forembezzling funds. From these interviews he concluded that the frauds had three key common elements: opportunity,pressure and rationalization. These may be depicted in a Fraud Triangle (Figure 1).


Christopher J. Skousen and Clifford R. Skousen

Figure 1 Fraud Triangle

How each person responds to the three elements in the triangle is a function of both culture and individual commitment,nevertheless when all three exist fraud becomes highly likely. The three elements can be explained as follows:

PressureManagement or other employees may have a personal incentive or otherwise be under pressure from others within theorganization to commit fraud.

OpportunityManagement has the responsibility to put in place policies, procedures, and controls to help eliminate opportunity. Theabsence of controls, ineffective controls, or the ability of management to override controls will contribute to the opportunityfor fraud.

RationalizationPerpetrators rationalize their fraudulent acts as being consistent with their personal code of ethics. Some individualspossess an attitude, a character and/or a set of ethical values that allow them to knowingly and intentionally commit adishonest act (Ramos, 2003).

AUDITOR’S RESPONSIBILITY

The audit profession has an important responsibility to help prevent fraud. In the United States, Statement on AuditingStandards (SAS) No. 99 describes a process wherein the auditor must (1) gather information needed to identify risks ofmaterial misstatement, (2) assess these risks after taking into account an evaluation of the entity’s programs and controls,and (3) respond to the results. Under SAS No. 99, the auditor must gather and consider much more information to assessfraud risks than in the past (Ramos, 2003). Thus, the auditor must play a larger role in reducing the occurrence of fraud;thereby increasing the potential sustainability of the enterprises audited.

SAS No. 99 points out that “because fraud is usually concealed, material misstatements are difficult to detect. Nevertheless,the auditor may identify events or conditions that indicate opportunities to carry out the fraud, incentives/pressures toperpetrate fraud, or attitudes/rationalizations to justify a fraudulent action” (SAS No. 99, para. 31).

SAS No. 99 suggests that the existence of any of the risk factors found in the fraud triangle may not necessarily indicatethe existence of fraud; however, these risk factors are often present where fraud does exist. While SAS No. 99 suggeststhat only one element of the fraud triangle need be present for fraud to potentially occur, Cressey argued that eachelement of the fraud triangle will exist in any given fraud (Skousen & Wright, 2008).

FRAUD CATEGORIES

Company fraud can be split into two specific categories; fraud by the company and fraud against the company. Either ofthese could take many forms including the misrepresentation of financial statements, theft of physical assets, managementconflict of interest, theft of information, procurement fraud, IP piracy, regulatory or compliance fraud, or other forms ofembezzlement or fraud. Auditors must be alert to and try to identify fraudulent activities in all forms. For this reason,auditors along with management need to be aware of the many types of fraud that are and could be perpetrated. This willhelp in prevention policies and controls, which is the best action.


CORPORATE FRAUD AND BUSINESS SUSTAINABILITY: A LOOK AT THE ASIA-PACIFIC REGION

FRAUD BY THE COMPANY

This type of fraud typically occurs when companies are under financial stress and management or directors are temptedor pressured to fabricate financial statements often to help obtain financing or additional equity investment. Theirposition of authority or responsibility may put them in a position to have the opportunity to falsify records. They mayrationalize their action by their motive to save or help the company rather than for personal gain. Examples of fraud bythe company include misrepresentation of accruals such as receivables and inventory. These accounts have direct ties torevenue and cost of goods sold, both of which directly impact gross profit, a key performance measure. Other assets orliabilities on the balance sheet that are subject to changes in assumptions and forecasts, such as estimated useful lives ofdepreciable assets, pension accruals, and warranty provisions, allow management considerable flexibility in managingshort-term earnings. These assumptions and forecasts may be legitimate revisions of estimates, or they may be overlyconservative or aggressive assumptions that can significantly misrepresent short-term earnings. In addition to theseaccounting examples of potential income manipulation, Steven Vickers (2009), President & CEO of FTI-InternationalRisk, observed other specific examples of company fraud in the Asia-Pacific Region. These included:

• Deliberate and willful tax evasion.• Deception of customs authorities to avoid paying cross-border VAT, especially between Hong Kong and the

Chinese mainland.• Deliberate non-compliance with environmental or other regulations to save money• Deliberate manipulation and ramping of shares; this calculated to obtain short-term gains for Individual

directors, sponsors and related parties.• Payment of illegal commissions to obtain business; rampant in South East Asia and in China, but not as

prevalent in Hong Kong or Singapore because of strong anti-corruption legislation and enforcement.

FRAUD AGAINST THE COMPANY

There are many ways that individuals can perpetrate fraudulent acts that will disadvantage a company. Controls must bein place to help prevent these activities. Many controls can be circumvented through collusion with other employees orwith outside providers or vendors. Typically, according to Vickers (2009), “the more senior the manager involved incorporate fraud, the greater the amount of damage that will be caused, both financially and reputationally.” The lengthof the perpetrated fraud when high level manages are involved may be considerable. Also in many Asian cultures,especially Japan, internal audit may not question senior managers’ actions.

ACTIONS TO MITIGATE FRAUD

While most companies, regardless of the internal controls they have in place, will eventually in counter fraudulentactivities, Vickers (2009) suggests several actions that a company can take to help mitigate the impact of fraud, asfollows:

• Recognize the key factors and specific risks to any given industry or business location, these include:- Companies with transnational operations utilizing matrix management without enhanced audit

capabilities.- Insufficient due diligence into new suppliers or vendors.- Insufficient background vetting into management and key staff.- Inappropriate business controls and systems.

• Take risk mitigation measures as practicable. These include:- Hire honest employees—substantive background checking.- Strong and relevant internal controls in place.- Strong and visible deterrents—zero tolerance policy, implement the policy described in China as

“killing the chicken in front of the monkey.”- Clear reporting lines—management responsibility—whistleblower programs.

• Be prepared for and react to a major fraud incident effectively to contain the impact--once the fraud hasoccurred.

- Use fraud investigation consultants to avoid conflicts of interest amongst staff who may have workedtogether.

- Confirm full extent of fraud and those involved.- Trace the proceeds of the fraud—prevent further dispersions.- Identify relevant insurance policies and seek recover.- Take appropriate legal action.


Christopher J. Skousen and Clifford R. Skousen

CONCLUSION

Fraudulent activities in business are prevalent throughout the world. They are counterproductive for the efficient deliveryof goods and services and the long-term sustainability of a business enterprise. The Asia-Pacific region is the mostdynamic business growth region in the world, yet it is faced with the highest rate of fraud occurrences in its businessenterprises. Indentifying the fraud risk factors and putting the appropriate controls in place to help mitigate fraudulentactivities is key to reducing fraud occurrences. Both management and auditors have responsibility for identifying andassessing risk factors. Management has the responsibility for putting in place the necessary controls, establishing a notolerance culture for misconduct, and in taking immediate and decisive action on perpetrators.

REFERENCE

American Institute of Certified Public Accountants (AICPA). 2002. Consideration of Fraud in a Financial StatementAudit Statement on Auditing Standards No. 99. New York City: AICPA.

Cressey, D. R. 1953. Other People’s Money: a Study in the Social Psychology of Embezzlement. Glencoe, IL: FreePress.

Kroll. 2010. Kroll Global Fraud Report. Annual Edition 2010/11. [Online] Available: www.kroll.com.Prasch, R. 2006. The economics of fraud. Retrieved May 2, 2008. [Online] Available: http://www.uvm.edu/~econ/

keynesian_conf/docs/Prasch_Paper.pdf.Ramos, M. 2003. Auditors’ responsibility for fraud detection. Journal of Accountancy. January: 28-36.Skousen, C. and C. Wright. 2008. Contemporaneous risk factors and the prediction of financial statement fraud.

Journal of Forensic Accounting IX: 37-62.Vickers, S. 2009. Mitigating Against Corporate Fraud in Asia. South China Morning Post. [Online] Available:

www.intl-risk.com. September.Zakaria, F. 2008. The Post-American World. New York City: W.W. Norton and Company, Inc.


DEVELOPING AN EFFECTIVE GUIDELINE FORLABOUR CONFLICT RESOLUTION IN THAILAND

Phong-anant, D.and

Joungtrakul, J.Business Law Center International Co. Ltd.

ABSTRACT

The objectives for this study were (1) To study facts and evidences on the problems of labour conflicts and conflictresolution processes in Thailand from past to present. (2) To carry out a comparative study of conflict resolutionprocesses in Thailand and those in other countries. (3) To recommend how to develop effective and efficient ways ofresolving labour conflicts in private and public enterprises. (4)To provide suggestions to the Government on how toresolve labour conflicts in correspondence with the National Development Plans for Thai Industries and Thailand’scompetitiveness.

The research findings showed that grievances were mostly concerned with either issues on welfares, wages, or workingconditions. More specifically, factors that caused conflicts between employers and employees in Thailand were such as:people concerned were lacking of general knowledge of labour legislation; employers not observing employees’ legalrights; matters concerning welfares and benefits. Issues found to trigger the disputes were related to: employees’ benefits;ineffective inter-communication between employees and employers; unfair lay-offs; lockouts and strikes. Differentviewpoints were given by the employee representatives who believed that main factors inducing labour conflicts weremainly caused by the obscurity and obsolescence of the present labour and other related laws. Furthermore, employersdisregarded the labour agreements, unfair layoffs of employees and reduced job securities were other factors. For theprivate sector, the study recommended some changes in the legislations. Regarding the development of an effectivelabour relations system, many recommendations were given. To promote labour relations many key points were alsoobserved. Finally, general suggestions to help resolve the conflict were a “half-way” approach; finding a balance betweenthe employers and employees; using a compromise; and allowing workers participation in management’s decision-making.

Key words: Thailand labour conflict, conflict resolution, grievances, labour relations system.

INTRODUCTION

Labour conflicts in Thailand have often caused many problems not only to the enterprises and workers themselves butsometimes to the general public due to interruptions and interferences from protests and demonstrations (AnonIntorasuksri, 1996). Adverse consequences upon the labour forces and the enterprises also result in industrial unrests,reduction of income and undermining the ongoing National Industrial Development Plans, in general. Furthermore, theforeign investment may be deviated elsewhere due to workers’ strikes or slowdown in production. From such problems,it becomes necessary for the government to intervene in the relations between employers and employees in order toretain the Nation’s industrial peace as well as political and economic stabilities.

The Department of Welfare and Labour Protection (DWLP) has thus an intention to establish a framework for laws andregulations on labour relations. This would be used as standardization for conflict resolution and a guideline forgovernment officials in dealing with industrial disputes and labour law enforcement. This research project was carriedout by the Business Law Center International Co. Ltd. (BLCI) which was engaged by the DWLP to conduct a study on“Developing an Effective Guideline for Labour Conflict Resolution in Thailand”. It aims to develop a most efficientand effective way to deal with the labour conflict problems in Thailand. th the National Development Plans for ThaiIndustries and Thailand’s competitiveness.


OBJECTIVE

The objectives for this study are as follows:(1) To study facts and evidences on the problems of labour conflicts and conflict resolution processes in

Thailand from past to present.(2) To carry out a comparative study of conflict resolution processes in Thailand and those in other countries.(3) To recommend how to develop effective and efficient ways of resolving labour conflicts in private and

public enterprises.(4) To provide suggestions to the Government on how to resolve labour conflicts in accordance with the

National Development Plans for Thai Industries and Thailand’s competitiveness.

SCOPE OF STUDY

The scope of this study, covered many key issues such as labour conflict problems, project objectives, researchmethodology, study plan and schedules, theoretical framework, related literatures and other research results, relevantdefinitions on labour conflicts industrial and labour relations systems, history of labour relations and statistics on labourdisputes in Thailand during the period from 2531 – 2546.

Furthermore, the study has included a comparative study of various concepts and practices on causes of labour conflicts,labour relations systems and conflict resolutions in nine countries over three continents. These are, namely, Malaysia,South Korea and Japan in Asia; Sweden, UK and Germany in Europe; and USA, Canada and Chile in America.

METHODOLOGY

The methodology used in this study is of a mixed method applying theoretical framework with exploratory researchmethod (Creswell, 2004). The method combines quantitative questionnaires with qualitative in-depth interviews ofsome selected individuals from the target groups to further support the quantitative results. The target groups consist ofthe representatives from the government conciliation officers, the labour unions from the private and public enterprises,other organizations representing private employees, employers, political officers, local and international labourorganizations. The analysis of data was carried out statistically and integrated with the theoretical framework. A workshopseminar was additionally carried out to confirm the previous findings and gathering additional comments.


a) Literature StudyFrom the literature study of situations in Thailand on labour conflicts and conflict resolutions from past to present time(Intorasuksri, Anon 1996); Labour Statistic, 2533 - 2546), it was found that most grievances have been concerned withwelfare, wages and salaries, and working conditions (as shown in Figure 1).

Phong-anant, D. and Joungtrakul, J.


DEVELOPING AN EFFECTIVE GUIDELINE FOR LABOUR CONFLICT RESOLUTION IN THAILAND

The factors that have been found to cause, labour conflicts between employers and employees in Thailand, rangingfrom the highest ranking to the lowest, are the lacking of knowledge and understanding of relevant legislations and legalrights (non-conformances of the Labour Protection Act) concerning welfares; compensation and benefits (such as issueson wages and overtime payments); working conditions; management rights on compensation and benefits. Issues whichtrigger labour disputes are such as employees’ benefits; ineffective inter-communication between employees andemployers; unfair lay-offs; lockouts and strikes; etc.

The comparative study of various concepts and practices on causes of labour conflicts, labour relations systems andconflict resolutions (Frankfurter Allgemeine Zeitung, 2000) in the nine countries are shown in Figure 2 and can bebriefly summarized as follows:

• Causes of conflicts in these countries are mostly similar.• Most are factors related to welfare and benefits, wages and salaries, working conditions, or collective agreement

between unions and employers.• The number of lockouts and strikes in Thailand, Malaysia, Sweden and USA are comparatively much less

than those found in UK and other European countries.• South Korea significantly showed high levels of labour conflicts, strikes and lockouts. An apparent decline of

labour conflicts was shown during the economic crisis period. An increasing trend was observed when there was a turn-around of the economy in Korea. It may therefore be said that economic situation has a strong influence on the occurrencesof labour conflicts in this country.

Regarding conflict resolution systems in Asia, the government’s labour-relations offices mostly have a strong role inconciliation process after an unsuccessful attempt from the voluntary bipartite negotiation process. If this is not yet settled,arbitration by the tripartite committee and finally judgment by the labour court will be in order to settle the disputes.

On the other hand, in Europe and America, employers and employees settle their disputes mostly by negotiation on thebipartite basis. Common practices in resolving and preventing conflicts and promote labour relations employ a collectivebargaining provided by laws which allows many companies to participate in the collective bargaining process. Thisprocess is not limited to just the labour unions but also lets other groups of employee representatives to participate in thebargaining as well.

Moreover, employers have allowed the union or employees representatives to participate in the management of thecompanies as well as in the joint consultation, bargaining, negotiation or co-determination. In USA, when the collectivebargaining process has resulted in a dispute, it will then go through another grievance process, or, in Sweden, a voluntaryagreement. Finally, the only last legal settlement will be decided by the labour court.


b) The Survey Results

Different viewpoints were given by the employee representatives from the public enterprise sector. They saw that themost influencing factors that induce labour conflicts are reduction of job securities, unfair layoffs of employees. Employersdo not comply with the agreements, and obscurity and obsolescence of the labour and other related laws are otherfactors, respectively. Mostly, in the past when the labour conflict occurred, both parties of employers and employeeswould first have a joint consultation and negotiation.

When asked about the activities or what can be done to promote the resolution or prevention of conflicts in the workplaces, both employer and employee representatives have similar opinions.

The high- ranking factors are mostly as follows:• Developing good and generous attitudes with mutual respect towards each other.• Allowing a shared problem solving and listening to each other objectively.• Developing a more effective communication system within the organization.• Boosting up workers’ morale by jointly organizing special projects or activities.• Raising higher income levels for employees as well as improving company’s profitability to reduce conflict

of interests.• Promoting an establishment of career path/career development system for employees.

The employee groups had further opinions and suggested that:• The labour union’s roles and responsibilities should be revised to enable an assistance to employees within

the law in a more creative and constructive way.• The Labour Protection Act and other relevant laws should be conformed.

The representatives of public enterprise unions expressed the following opinions:• The general practices should be complied to the Labour Protection Act and other related legislations which

are socially accepted as regulatory guidelines to prevent and deviate labour conflicts.• Fairer development and improvement of minimum wage system, compensation benefits and welfares.• Improving the union’s roles and responsibilities and finding creative ways to assist the employees under the

laws.• Giving more education to the employees on the employer’s business, policies, working regulations, welfares,

etc. so that some potential conflicts can be avoided.• Strictly complying with the mutual agreement, corporate rules and regulations• Promoting the knowledge and understanding of the Labour laws, rights, roles and responsibilities of each

party.• Developing positive attitudes, mutual compassion, and respect.

Therefore, from this study, the issues that need to be improved are those in the areas of the Labour laws, negotiation andbargaining processes, labour-relations consultants, methods and practices in problem solving and operations by theGovernment officers, etc.

RECOMMENDATIONS

From the conclusions of research findings, a number of suggestions have been given to develop an effective conflictresolution for Thailand. These are:

1. For the Public Enterprise Sector1.1 The establishment of public enterprise labour unions should be based on the Labour Relations Act of 2518.1.2 A public enterprise labour council could be established from the consolidation of the public enterprise

labour unions.1.3 A bipartite Employee Relations Committee should be established.1.4 On the roles of management and employees of public enterprise:




Roles of Management• Improving Interpersonal Relationship The management needs to improve stronger interpersonal relationship between the management and the

unions in order to promote better cooperation and reduce conflicts within the organization.• Ensuring Administrative Control The management needs to ensure that the employees of public enterprises and the unions act strictly and

properly within the rules and regulations framework so that the general public do not suffer as the consequence.

Roles of Public Enterprise Employees• Improving Interpersonal Relationship The unions need to work more closely with the management by organizing some activities together to promote

better relationship with the management.• Improving Service Efficiency To develop good image and impression for the general public, the public enterprise employees need to cooperate

by working efficiently, providing fast and accurate responses and services to the public.

2. For the Private Sector2.1 On the Labour Legislation

(1) Work Employment Contract or AgreementThere should be a work employment contract or agreement for enterprises with at least 10

employees. This would extend the Labour Relations System to cover the small enterprises as well.(2) Duration in Submitting Grievances

In the case that a work employment agreement has been in place as a result of the submittedgrievances, a settlement, or an arbitrative decision by the Employee Relations Committee or by the Minister, and eitherparty (the employee or the employer) wishes to change or add to the previous agreement or decision, they can notify todo so within 30 days before it becomes expired after the 30-day period.

(3) Number of Employees Supporting the GrievancesIn the case that the group of employees want to submit a number of grievances to their employer, they

should have names with signatures in excess of 50 per cent of all employees in the enterprise. If the grievances aresubmitted by the employees’ union, the number of union members should also be more than 50 per cent of all employees.On the other hand, the employer can submit a notification to their employees through the union only if that union has itsmembership accounted for at least 15 per cent of all employees in the work place.

(4) Representatives for the NegotiationEither the employees or the Conciliation Officers may select and nominate the representatives

for the negotiation and all employees can then cast their votes.(5) The Consultants

It is recommended that the Act does not allow, any longer, an involvement in any role of consultantor consultants during the negotiation or collective bargaining process.

(6) The Binding of the Work Employment AgreementThe binding of Work Employment Agreement should have effects upon all employers and

employees in the same work place.(7) Authority of the Minister in the Cases of Disagreeable Disputes

• The Labour Minister should be given additional authority to settle the disputes. By adding thefollowing statement in the clause concerning the Minister’s authority to settle labour disputes including “any disputes orlockouts or strikes that cannot be agreed to settle”

• Additional method to settle the labour disputes – the Minister has an additional authority to askthe tripartite Labour Relations Committee or the labour court to settle the disputes.

(8) LayoffsAdding more protection to the employees or unions which are involved in the Grievances Process

by not allowing the employer to layoff or transfer the employees during a legitimate grievance period except the employeesor the unions have committed a very serious mishap or disciplinary wrong-doing.

(9) StrikesIt is recommended that the Labour Protection Act of 2518 should be amended that a strike is

allowed only if more than half of the employees or of the union members in concerns have given their approval.(10) Replacement Labour

It is recommended that the Labour Protection Act of 2518 should be amended that during a lock-out or strike the employers are not allowed to bring in external labour to replace the workers in dispute.


(11) Disciplinary Actions on the Employee Committee MembersThe Labour Protection Act of 2518 should be also amended to allow the employers to take

disciplinary actions against employees who are members of the Employee Committee without the labour court permissionif the employees have given consent in writing. This will make it quicker and more convenient to proceed. However,without the consent, the employers will have to obtain the court order prior to taking action.

(12) Registration of the Employer Associations or the Labour UnionsThe employers or the labour unions must bring all the necessary documents to the Registrar

every time they want to have a new election or affecting some changes on the committee members.(13) Multiple Memberships in Different Employers Associations or Labour Union

The Labour Protection Act of 2518 should be further amended on the following issues• An employer or an employee can have only one membership and belong to only one employers’

association or one labour union at a time.• Abolish the division of labour unions into two levels.

(14) Protection of Employees who are the Union FoundersThe Act should give protection to employees who founded employee union so that their employers

will not mistreat them. Mistreating the employees because they have founded a union is considered an unfair act uponwhich the employee can use as a ground to submit a notification to the Labour Relations Committee.

2.2 Suggestions for Developing a Labour Relations System• Development of Employee OrganizationsThe committee members of employee union, labour federations and labour councils should have

a responsibility to cooperate with the employers or the management in improving the productivity. They can apply theirtechnical knowledge in managing the employee organizations and promote an ideology for labour leaders to focus onthe mutual benefits for employees and employers rather for their own.

• Development of Employer OrganizationsDeveloping a management system, human resource management, labour relations, including a

counseling service on labour issues that are useful to employers.• Development of Government AgencyUpgrading status of the public labour relations offices and the officers whose work are related to

the settlement, conciliation or arbitration of labour disputes. They should be considered as experts on labour relationsand recognized by laws as professionals.

• Development of Joint Consultative SystemIn the enterprises where a labour union has been established, the union committee members

should be encouraged to represent employees in the Joint Consultation Committee (JCC) together with the management.In the case that the union committee members are not Employee Committee members or JCC members, employeerepresentatives who could work with the management or departmental representatives should be appointed to sit on theJCC with the management representatives.

In an enterprise without a labour union, there should be an effective mechanism for cooperation or a joint consultationin the enterprise. The employee representatives should be fairly and independently elected with consent and approval ofall employees concerned.

3. Additional suggestions for the promotion of good labour relations

To promote good labour relations and a balance conditions where no complications or damages to any individuals,society or the nation, both human resources and systems that are related to labour relations will have to be addressed andimproved. The following are key suggestions to solve human problems that are related to labour relations:

3.1 The EmployersEmployers should improve their roles by,• Getting educated on knowledge and understanding to all concerns on the subjects of all related labour

laws.• Providing meetings and seminars to exchange knowledge and experiences among employers,

employees, governmental officers, consultants and experts on labour and legislations, etc.• Adjusting employers’ attitudes so that they have better and proper understanding about the labour

relations.• Recognizing the rights of employees to establish employee organizations.• No discrimination on employment conditions.• Being democratic and listening to the employees’ opinions.




• Avoiding a cut-back on employees’ rights and benefits.• Trying to conform to the laws and not avoiding them.• Holding firstly on the labour - relations principles rather than the legal principles.• Organizing a unit to be directly responsible for labour relations.• Not trusting the labour consultants too much.• Having a good communication system within the enterprises.• Having good human relations between employers and employees.

3.2 The EmployeesThe employees should also improve on their more appropriate roles as follows:• Not interfering with the employers’ management• Not calling an illegal strike or group protest.• Beware of being misled or influenced by other external bodies, international Organizations, individuals or

third persons who have their own interests in minds.• Having a constructive attitude.• Do not believe outsiders or consultants too much.• Being proud of own work.

3.3 The GovernmentFor the government to contribute towards resolving of conflicts, they will have to support the bipartite Labour

Relations System and act as a focal point in solving labour problems in the tripartite system as well. The government hastried to find a number of measures and methods to enable the labour relations policy to meet its objectives. These maybe summarized as follows:

• Amending the legislation so that it is more appropriate to the current economic situations and fairer to thelabour forces.

• Promoting a bipartite Labour Relations System• Expressing that the Governmental Officers are to take a neutral and impartial role.• Clearly stating the Government’s Policies on Labour Relations.

4. Resolutions of Labour Relations Problems which are results of labour Conflicts

Labour Relations problems which are derived from various types of conflicts, namely, conflicts of interests, conflicts ofattitudes or concept of thoughts and conflicts of rights, may be resolved in a number of ways:

4.1 Conflicts of Interests By using a cooperative and half-way approach, the conflicts of interests can bediminished. The problem is resolved by sharing the interests fairly and finding a balancing point between the “taking”by the employees and the “giving” of the employers.

4.2 Conflicts of Attitudes Problems from these conflicts can be settled by a compromise to accept some ofothers’ points of views as well as some of one’s own. For example, the management may stand by their right to manageor the management prerogative and forbid the employees to interfere with this right. However, the employees or theemployee organization such as the labour union may choose the industrial democracy or workers participation in themanagement’s decision-making principles. This line of thoughts has to be aligned on both sides. The employers shouldaccept the workers’ participation in the production line, in the decision making and problem solving during their workprocedures. Both parties should look for positive pictures of each other, being emphatic and accepting each other’sreasoning.

4.3 Conflicts of Rights These types of conflicts can be resolved by:• Strictly following and observing the laws.• Being fully responsible and completing own duty according to the rules and regulations.• Reviewing and changing any unworkable and out-dated rules and regulations.• Abstaining from abusing the other’s rights.

These conflicts of rights may concern the legitimate rights, rights incurring from the agreement, employment contracts,working rules and regulations or the constitutions of the employees organizations.


CONCLUSION

• The research findings showed that grievances were mostly concerned with either issues on welfares,wages, or working conditions.

• More specifically, factors that caused conflicts between employers and employees in Thailand weresuch as:

- people concerned were lacking of general knowledge of labour legislation;- employers not observing employees’ legal rights;- matters concerning welfares and benefits.

• Issues found to trigger the disputes were related to:- employees’ benefits;- ineffective inter-communication between employees and employers;- unfair lay-offs;- lockouts and strikes.

• Different viewpoints were given by the employee representatives who believed that main factorsinducing labour conflicts were mainly caused by

- the obscurity and obsolescence of the present labour and other related laws.- employers disregarded the labour agreements,- unfair layoffs of employees and- reduced job securities.

• For the private sector, the study recommended some changes in the legislations.• Regarding the development of an effective labour relations system, many recommendations were

given.• To promote labour relations many key points were also observed.• Finally, general suggestions to help resolve the conflict were a “half-way” approach;

- finding a balance between the employers and employees;- using a compromise; and- allowing workers participation in management’s decision-making.

REFERENCE

EnglishAnderson, C. A. 1988. Management: Skills Functions and Organizational Performance. Allyn and Bacon: Boston.Bain, G. S. and Clegg, H. A. 1974. British Journal of Industrial Relations. 7.Banks, J. A. 1974. Trade unionism. London.Creswell, John. 2004. Educational Research: Planning, Conducting, and Evaluating Quantitative and Qualitative

Research. Prentice Hall. ISBN 9780131127906.Chung, K. K. and Megginson, L. C. 1981. Organizational Behavior: Developing Managerial Skills. Harper and Row:

New York.David, B. L. 1983. Managing Conflict at Organizational Interfaces. Addison-Wesley: Massachusetts.Farnham, D. and Pimlott, J. 1997. Understanding Industrial Relations. London.Filley, A. C. 1975. Interpersonal Conflict Resolution. Scott, Foresman, Glenview: Illinois.Flanders, A. 1965. Industrial Relations-What's wrong with the system. London.Frankel, S.J. and R.C. Pratt. 1954. Municipal Labour Relations in Canada. Montreal.Gilles van Wijk, C. 1984. Organization Theory. Facts on File: New York.Goldthorpe, J. H. e. a. 1968. The Affluent Worker: IndustrialAttitudes and Behaviour. London.Gordon, J. R. 1991. A Diagnostic approach to organizational behaviour. Allyn and Bacon: Mass.Hyman, R. 1975. Industrial Relations: A Marxist Introduction. London.Institute, A. H. 1983. Conflict Management: Vital Skill For the Successful Executive. Modern Business Reports:

New York.Kate, D. and Kahn, R. 1966. The Social Psychology of Organizations. New York.Katz, D. and Kahn, R. 1978. The Social Psychology of Organizations. John Wiley: New York.Litterer, J. A. 1965. The Analysis of Organizations. John Wiley, New York.Mack, R. W. and Snyder, R. C. 1972. In Conflict Resolution: Contribution of Behavioral Sciences. (Ed, Smith, C. G.).

University of Notre Dame Press, Notre Dame, pp. 8-9.March, J. G. and Simon, H. A. 1958. Organizations. John Wiley and Sons: New York.Mayer, P. and Schweisshelm, E. 2000. The modernization of industrial relations in Germany trends and perspectives.

Friedrich-Ebert-Stiftung Korea Cooperation Office. Republic of Korea. 9.




Myers, D. D. 1983. Psychology. McGraw-Hill International: Tokyo.Pneuman, R. W. and Bruehl, M. E. 1982. Managing Conflict: A complete Process-Centered Handbook. Prentice-

Hall. Englewook Cliffs: New Jersey.Ponak, A. 1982. Public Sector Collective Bargaining. In John Anderson and Morley Gunderson (eds.). Union-

Management Relations in Canada. Addison Wesley: Toronto, pp. 343-378.Raven, B. H. and Rubin, J. Z. 1976. People in Groups. John Wiley: New York.Robbins, S. P. 1983. Organizational Behavior: Concepts, Controversies, and Application. Prentice-Hall. Englewood

Cliffs: New Jersey.Shaffer, L. F. and Shoben, E. J. 1965. The Psychology of Adjustment. Houghton. Mifflin: Boston.Sheppart, H. 1954. British Journal of Sociology. 5: 324-342.Silverman, D. 1970. The Theory of Organizations. London.Turner, S. and Weed, F. 1983. Conflict in Organizations. Prentice-Hall. Englewood Cliffs: New Jersey.

ThaiJaikaew, Thamasart. 2544. A Study on Labour Conflict Problems in Thai Enterprises. (an official report, notpublished)Kosakul, Yuthakarn. 2543. Public Enterprises Labour Relations System. The Public Enterprise Labour RelationsSector, DWLP.Piriyarangsan, Sangsit. 2542. Labour Relations: Theories and Practices. A “Tulakom” Publication.Sanpanich, Ponganant. 2520. Strikes and its Impacts on Investment in Thailand. (an unknown source)Wisalaporn, Sermsak. 2533. Conflict – Creative Management. A “Takiang” Publication.


Pinyo RattanaphanThe College of Graduate Study of Management

Khon Kaen [email protected]

ABSTRACT

Emerging as a new branch of Organization Development in 2001, Appreciative Inquiry is the art and science of askingpositive questions to bring about positive changes. Appreciative Inquiry is considered a kind of Action Research. Aimingto promote Appreciative Inquiry in Thailand, Thailand Appreciative Inquiry Network (AI Thailand) has been establishedsince 2007. One of its missions is to develop Appreciative Inquiry suitable for Thai context and AI Practitioners. Since itis a new discipline, there is a room for improving it. In 2009, inspired by the knowledge on brains and hormone or GenderIntelligence, the Researcher has applied such knowledge for his practices in Appreciative Inquiry. The Researcher as thefounder of the organization had offered coaching on Gender Intelligence along with Appreciative Inquiry to threeentrepreneurs as pilot projects. Appreciative Inquiry was adopted as a research methodology. Participants include anowner of the Construction Material Store, Agricultural Machinery Store and Internet Caf�. The project started at November2009 and ended at November 2010. The Researcher has found extraordinary outcomes. One construction material enjoyedthe increase in sales by average 780% over the course of four months. Another one can achieve annual target within 8months. The last one was able to establish an internet caf� for women. Compared to his previous caf�, his new caf�attracted over 500 members within four months while the older one attracted only 200 members. The Researcher foundthat through Gender Intelligence, the Researcher can simplify his Appreciative Inquiry Practices. Possible confoundingeffects were discussed. Suggestions were provided for future researches.

Keywords: Appreciative Inquiry, Organization Development, Gender Intelligence, Innovative Strategy

INTRODUCTION

Emerging in 1980, Appreciative Inquiry becomes one of the breakthrough Organization Development Interventions. Ithas been increasingly popular among Organization Development Practitioners. In 2000, the Journal of OD Practitionershad devoted its millennium issue to Appreciative Inquiry. In this year, Appreciative Inquiry was officially considered afield of Organization Development. (Watkins and Mohr, 2001) European AI Network was established. In 2006, theResearcher discovered Appreciative Inquiry in the internet. Intrigued by its strange definition, the Researcher startedstudying it. In the same year, the Researcher inspired four entrepreneurs to experiment Appreciative Inquiry in the realorganizations. They experimented Appreciative Inquiry and reported positive changes. One of them was able to increasesales.

This phenomenon inspired the Researcher to pursue more knowledge in this field. This led the Researcher to found outAI Common, the community of practice for Appreciative Inquiry Practitioners/Researchers around the world. It wasestablished by Professor David Cooperrider, the creator of Appreciative Inquiry. This Community of Practice is an opensource where academic papers, tools and presentations are available to the public for free of change. Inspired by thegenerosity of this community, in 2007, the Researcher has established a community of practice namely ThailandAppreciative Inquiry Network. (AI Thailand)

AI Thailand is the fourth Community of Practice in Appreciative Inquiry in Asia after Nepal, Korea and the Philippines.AI Thailand’s vision includes spreading the idea of Appreciative Inquiry throughout Thailand. It would be possible bycreating as many as competent AI Practitioners, community members who create high impacts upon their organizations.The Researcher assumes that such competent AI Practitioners would be the driver for the growth of AI Thailand’scommunity of practice. However, there are only 10% competent AI Practitioners. To achieve AI Thailand’s mission, itis vital for the community to improve Appreciative Inquiry’s practice. After the Researcher learnt that Gender Intelligencemight be helpful in Appreciative Inquiry’s practice, the Researcher decided to integrate it to Appreciative InquiryResearch. In 2009, the Research recruited three entrepreneurs who are willing to experiment the Researcher’s idea inreal organizational settings. To gain familiarity with this Research, it is vital to review definition and applications ofAppreciative Inquiry.

USING GENDER INTELLIGENCE TO IMPROVEAPPRECIATIVE INQUIRY'S PRACTICE: A CASE STUDYOF THAILAND APPREACIATIVE INQUIRY NETWORK


USING GENDER INTELLIGENCE TO IMPROVE APPRECIATIVE INQUIRY'S PRACTICE: A CASE STUDY OFTHAILAND APPREACIATIVE INQUIRY NETWORK

APPRECIATIVE INQUIRY

David Cooperrider, the innovator of Appreciative Inquiry (AI) gave Appreciative Inquiry’s definition, “AppreciativeInquiry is the cooperative, coevolutionary search for the best in people, their organizations and the world around them.It involves systematic discovery of what gives life to an organization or a community when it is most effective and mostcapable in economic, ecological and human terms. In AI intervention gives way to inquiry, imagination and innovation.Instead of negation, criticism, and spiral diagnosis, there is discovery, dream and design. AI involves the art and practiceof asking unconditionally positive questions that strengthen a system’s capacity to apprehend, anticipate and heightenpositive potential. AI assumes that every organization and community has many untapped and rich accounts of thepositive-what people talk about the past, present, and future capacities, or the positive core. AI links the knowledge andenergy of this core directly to an organization or a community’s change agenda, and changes never thought possible aresuddenly and democratically mobilized.” (Cooperrider, Whitney and Stavros, 2003)

This definition offers the overall picture of Appreciative Inquiry. To date Appreciative Inquiry has been applied invarious kinds of organizations of diverse sizes. In the US., Cooperrider and Srivastva (1987) conducted AppreciativeInquiry Research and caused high impacts in three organizations, John Deere, Dex Company and Nutrimental Foods.The first company John Deere experienced worse quality. There were more complaints. Employees’ morale wasdeteriorated. After Appreciative Inquiry Research was initiated for two weeks, 200 participants were able to identifyten major strategies. Implementation led to the company rebound. Morale increased. Product Development Cycle reducedfrom 5 years to 3 years. In the second company, Dex, after implementation, Appreciative Inquiry led to the enhancedproduct quality by 51 per cent. Product Development Cycle was reduced by 400%. Employee morale increased by245%. In addition, operative cost was reduced. Customer satisfaction was higher. For the third company, NutrimentalFood, 750 employees including executives and 100 customers attended Appreciative Inquiry Research to develop newbusiness models. Within a year, profit increase by 200%. Absenteeism was reduced by 300%.

Cooperrider and Whiteny (2005) applied Appreciative Inquiry Research at Road Express Company, a US-basedtransportation company. This organization has faced challenges where cost was radically increased. The business itselfwas at downturn. To resolve the challenges, all 28,000 employees and executives attended the Appreciative InquiryResearch. This resulted in process innovation and strategic implementation. Two years later, the company’s stock priceincreased from 14 to 40 USD/share. Employees’ morale and dedication were increased.

In Thailand, there were reports of Appreciative Inquiry Projects but applied in smaller organizations. Roongrangsimakul(2009) applied Appreciative Inquiry to enhance customers’ experiences at Charity Coffee, based in Bangkok. Theauthor asked all stakeholders and customers for their peak experiences after they purchased coffee at her shop. She alsoasked customers for their peak experiences with other coffee shop. In addition, the author also used observation andfound that customers preferred chocolate-color straw than pink straw. Many customers liked the way she explainedabout the difference of coffee menu. From this finding, she started customers’ education program where all staffs spenttime explaining customers on differences of coffee menu. In addition, some customers mentioned about Starbuck’spromotion so she initiated a promotion. This promotion offered discounts if only customers used their own mugs. Afterthree months, sales increased from 220-250 cups/day to 350-450 cups/day.

Praphaiwan (2008) applied Appreciative Inquiry to improve organizational performance at one fashion house at KhonKaen Province. This fashion house is the leading store in the province. Its target group is working women. Products arepremium Chinese-import dresses and cloths. The store experienced 30 % inventory resulting from obsolete fashion.The author started using positive question to ask customers. The positive cores for this fashion houses are: the owner iswilling to let their customers to try new cloths without disturbance. The customers preferred this store because moremodels and sizes are available. Later this positive core linked to the side effect on “excess inventory.” The author alsofound one intriguing customer. She is a royal customer. This customer always asked the store to help adapt her obsoleteclothes so she can reuse them. This finding led to the initiative on which all obsolete clothes were put some laces andresold. From this initiative the store increased price on the obsolete cloths and earned from them. In addition, onepositive core was developed as a strategy. Customers reported that they like after-sale service; the owner’s willing to fixclothes without charging. This positive core led to the initiative “lifetime guarantee.” All of imitative led to the increasedsales from 2 to 2.8 million Baht. Inventory was reduced to 15%.This suggests that through Appreciative Inquiry, AIPractitioners are able to create high impact upon their organizational performances. These phenomena were reportedinternationally and locally. The Researcher and his community members of Thailand Appreciative Inquiry have tried tocreate such high impacts upon their organizational performances too. Yet, AI Thailand still has challenge.


Challenge

One of AI Thailand’s missions is to spread the idea of Appreciative Inquiry throughout Thailand. One way to make thishappen is: developing as many as competent AI Practitioners. Competent AI Practitioners are people who alreadyimplemented were able to create high impacts upon their organizations. Competent AI Practitioners should increasesales by 200% or more. This figure is based on the benchmark the Researcher developed against the seminal works ofProfessor David Copperrider and Professor Suresh Srivastra (Cooperrider and Srivastra (1987).

Till 2011, the Researcher has given consultation to 150 community members. 119 out of 150 members already completedtheir AI projects. But only 10% of community members created high impacts to their organizations based on suchbenchmark (Rattanaphan, 2010). This figure lowered than the world class’s figure of 30 per cent from the Meta-Analysisstudied by Bushe (2005). According to Bushe (2005), a major contributing factor for such poor successful rate is poorstrategic execution through unqualified change agents. Most of AI Projects are driven by bureaucratic steering committeesnot a right team. As the challenge of AI Thailand is to increase more competent AI Practitioners, the researcher needs anew strategy to enhance the researcher’s practice in Appreciative Inquiry.

Inspired the author of the Leadership and the Sexes (Gurian and Annis, 2009) who defined the terminology “GenderIntelligence,” the Researcher looked for the possible to incorporate the concept of “Gender Intelligence” into hisAppreciative Inquiry’s practice. According to (Gurian and Annis, 2009), Gender Intelligence is the ability of executiveto apply knowledge of hormone and brain which impacts man and woman in both positive and negative ways in creatingbusiness value.

Stakeholders in businesses including the owners, managers and employees should have “Gender Intelligence” so theycan gain insight and serve customers better. The Researcher believed that if he incorporated Gender Intelligence intoAppreciative Inquiry’s practice, it would help his community members in implementing more high-impact AI Projects.So far there is no Research which integrates the Gender Intelligence in Appreciative Inquiry’s Practice. The Researchercannot tell to what extent Gender Intelligence would impact his Appreciative Inquiry’s Practice. Therefore the ResearchObjective and its respective Research Questions are as follows:

The Research Objective is “To investigate impacts of Gender Intelligence upon AI Project.”The Research Question is “To what extent Gender Intelligence impacts Appreciative Inquiry Projects?”

Opportunity

In 2009, the Researcher met three young entrepreneurs, the new AI Thailand’s community members. Mr. ThammsakTaesiri, Mr. Watee Kongcha and Mr. Rachanon Ma. They are the new generation of their new family businesses. Mr.Thammasak is the son of an Agricultural Machine Store based on Yasothorn Province. Mr. Watee is the son of aConstruction Material Store based in Khon Kane. Mr. Rachanon Ma is the son of the owner of Apartment based in KhonKane. Most of them had helped family businesses since they were young. Mr. Rachanon has already developed his ownbusiness the internet caf� but wanted to startup another Internet Caf�’. These three young entrepreneurs liked the idea ofAppreciative Inquiry and Gender Intelligence. These three entrepreneurs have agreed to fully implement these twoideas in their businesses and thus to measure outcomes. Followings are background of these entrepreneurs’ organizations.Background of participants’ organizations

Organization # 1: Agricultural Machinery Store

Based in Yasothorn province, the store is an authorized distributor of the Japanese small tractors. The store’s net salesat that time was second to the another Japanese brand. There are three challenges in which Mr. Thammasak the ownerare facing. The first is the fierce competition from the number one brand. Price war is inevitable. In addition, his storeis facing pressure from the Japanese company for whom he is an agent. The store needed to maintain sales as designatedand pressured by the Japanese headquarters. If the store was not able to meet the target, the Japanese company mightdismiss his distributorship. This caused a lot of pressure for the store. In addition, since his store’s financial strengthcannot compare to that the number one store. Price war is not an option. He then needed innovative strategies help himto avoid the price war and helped him to stay on business.

Organization # 2: Construction Material Store.

Based in a Khon Kaen Province, the store supplies constructional materials and equipment to the public. The store alsois an agent for Kitchen rooms. The store is facing fierce competition both from the other stores and from the large-scaleConstruction Material Store in Khon Kaen Province. The store at that time was during transitional period. The challenge

Pinyo Rattanaphan



was though his businesses were growing but profit dwindled. He needed innovative strategies to help him stay healthyin businesses and later compete his rivals. He believed that a good strategy would help him to stay on business. Mr.Watee agreed with the Researcher to experiment Appreciative Inquiry and Gender Intelligence.

Organization # 3: Internet Cafe for Women

Based in Khon Kane Province, the Internet Caf� for Women was not the coincidence. Unlike previous two organizations,this is an organization designed to serve women from the very beginning. Based on the storytelling of the previous casestudies, the owner, Mr. Rachanon was inspired by the Gender Intelligence. He then started interviewing women usingAppreciative Inquiry’s concept. As a result, he developed the new business model aiming to attract women customers.


Appreciative Inquiry was adopted as a research methodology as an alternative to Action Research. (Coghlan and Brannick,2002). However since the Researcher aims to boost the performance of Appreciative Inquiry Research, the Researchhas integrated Gender Intelligence into the step of Appreciative Inquiry Research (Reed, 2007) especially at Reflectionprocess as follows:

1. Discussing on goals of projects.2. Setting an affirmative topic: in this research, the Affirmative topic is “Innovative Strategy.”3. Discussing on Key Performance Indicators for the project.4. Select the target groups: all of stakeholders including owners, managers, as well as clients were included in

the process.5. Crafting question for owner, manager and employees “Think about the time when you have your peak

experience on your work? What happened when your productivity sharply increased?6. Crafting question for clients, “Think about the time when you have your peak experience on your purchase?

What happened?7. Interviewing all stakeholders, with prior consent, with the above positive questions. If the interviewer was

not cleared what the interviewee said, he/she was able to probe for more detail. This process is called, “Discoveryphase.”

8. All of data was recorded in tape recorder under the consent of interviewees. If the interviewees feeluncomfortable, the Researcher is to note it later only.

9. All of data was reviewed by the Researcher and three community members to find “Positive Core” of data.10. Based on this positive core, the Researcher with community members discussed about “Dream” or

“Visioning.” Simply, this is the step where participants what they should do based on “Positive Core” they identified inlong term.

11. After vision was formed, the Researcher and community members started developing “plan forimplementation.” Highest-potential and feasible “Positive Cores” were selected and developed for implementationplan. In Appreciative Inquiry, it is called “Design” phase.

12. After the plan was formed, it was a time for “implementation and evaluation.” In Appreciative Inquiry, itwas called, “Destiny” phase.

13. During the project period, all implementations were adapted and adjusted.14. Reflection was made during every step of Appreciative Inquiry. In this stage, In this stage, knowledge

about “Gender Intelligence” is incorporated. Male and female behaviors were discussed. Marketing potential for womenand men are brought into coaching session. The knowledge about this is drawn from three books, “the Gender IntelligentRetailer: Discover the Connection Between Women Consumers and Business Growth (Yaccato and McSweeney, 2008),”“Leadership and the Sexes: Using Gender Science to Create Success in Business. (Gurian and Annis, 2009)” and “WhyShe Buys: The New Strategy for Reaching the World's Most Powerful Consumers. Brennan B. (2009)

15. Reflection made by the Researcher was used as feedbacks to improve the organizational performance ofthe same project and across three projects.

Participants: Three participants in three organizations.Research timeline: November 2009 to November 2010.Limitation of the Research: These are experimentation projects. Results from finding needed to be implemented.

This might cause conflict to the organizations. Execution of AI Projects should be done with caution. In addition,though time seems to be long, in fact, most of community members were extremely busy. This might lessens impacts ofthe projects. Furthermore, outcome of this Research cannot be applied to other organizations since findings are fromonly three organizations.


FINDING

Organization # 1: Agricultural Machinery Store

There are three positive cores indentified. The first one is: they like competition. This finding corresponds to nature ofmale. (Gurian and Annis, 2009) stated that male like competition. They challenge one another to develop relationship.Such situation balance “Dopamine” hormone. Through this finding, the participant developed an idea to run competitionagainst the rival brand in the village. The second positive core identified is about the belief in the maven or the villagemechanics. According to Gladwell (2000), the maven is the person who has in-depth knowledge. People always look foradvice from them. This person is the key for viral marketing or the spread of idea. This positive core also matches withthe same finding identified by (Gurian and Annis, 2009).

Through this positive core the Researcher and Mr. Thammasak developed a plan where the store approached the villagemechanics and gave incentives if they turned to use the store’s brand. The third positive core is about financial creditability.It was found that buying decision among three types of potential customers is varied. If the male visits the store alone,chance to sell the tractor is high. If husband and wife visit the store, the chance is lower. It was found that the husbandalways seek approval from his wife. If the male comes with his entire family such as wife, parents and cousins, thechance in selling is nearly zero.

This finding led to another promotion campaign, for those who come with wives, the store offer strange promotion, “agolden lace.” This program encourages faster decision. This finding corresponds to Underhill (2008) where femalecustomers prefer some advantage like gift set and rebate while male customers prefer technical superior. The entirecampaigns generated the extraordinary result. By only eight months, Mr. Thammasak was able to meet the target set bythe Japanese headquarters with very low additional investment.

Organization # 2: Construction Material Store

Based on the lesson learnt from the first organization, reflection from the first organization suggested that genderintelligence has direct influence over business practice. Two positive cores were identified and implemented. In thisorganization, the Researcher started the project by introducing gender intelligence and Appreciative Inquiry in the sametime to Mr. Watee. The Researcher showed the article where in the US, female customers are the real influencer ofConstruction Businesses. 94% of purchases are triggered by female. Though most of his clients are male, he and theresearcher put effort to find out way to influence women customers.

The first positive core was found in furnished kitchen sets. Mr. Watee’s store is the agent of luxury kitchen set, eachcosting 600,000 Baht. Most of customers are couples of foreign husbands and Thai wives. The store had sold out byaverage the luxury kitchen one set a month. After the owner learnt that women may influence selling, he switched hisattention from foreign husbands and to Thai wives. Based on his experience, he gained more knowledge from sellingand transferred skills to his employees. The selling-talk protocol had been developed. Selling to women is focused on“advantage" rather than “technical information.”

This positive core corresponds to what Underhill (2008) found. From Underhill (2008)’s anthropology research on “thePsychology of Shopping,” the author found that when men and women visited the store, encouraging women to buyproves more effective than encouraging man to do the same thing. If women requested to buy something, men hardlyrefused her. This practice yielded satisfied outcome. The average sales increased from 1 set a month to 6 set a month.For the second positive core, since most customers are male, the Researcher asked Mr. Watee to identify his influentialmale customers. Most of them are contractors. After interviewed, two additional positive cores were identified.Most customers preferred his store over others because of two reasons: one is responsiveness. Another one is pricing ofsome merchandise. For responsiveness, frequently customers need some construction materials urgently; the store canprovide them and transport them to the constructions as promised and on time. This is quite different from other. Inaddition, there were some goods cheaper than others. Sometimes they came to buy such items here and also decided tobuy others goods here too. For better responsiveness, it becomes the store’s strength; the owner then improved hislogistics by adding duty manager to handle customers who needed urgent transportation especially after working hours.For some cheaper merchandise, the owner explored some additional items which already give low margin. He thenmanaged to lower their prices He hoped that this strategy would attract customers to buy other more expensive items.These two strategies worked well after two months of implementation. Four months later, his store sell remarkablyincreased by 780% compared to the same period of the previous year. In addition, since he is a second generation to hisbusiness family, he gained confidence from his father. Later, his father allowed him to manage the store and allowed himto start up the new larger construction material store in the same district.

Pinyo Rattanaphan



Organization # 3: Internet Caf� for Women

Based on experience with the two previous cases, the Researcher has worked with the third participant, Mr. Rachanon.He owned an internet caf�. Most of his customers are male students. The owner though loved his business but hedisliked male customers. This is because many of them shouted with excitement and disturbed others. He also faced avery fierce competition from existing and new comers. Then the Researcher proposed him to change his target groupfrom males to females. This is because according to Peter (2003), if women satisfied she would tell other 23 peoplewhile male would tell only 1.5 people. This figure sparked his interest. Mr. Rachanon started interviewing over 100women and identified positive cores. He decided to implement all positive cores in his new internet caf�. He intendedto turn it into the first “Internet Caf� for Women.” The first positive core is a clean restroom. He implemented it as thepolicy in the new store. His store’s restroom’s cleanliness is equivalent to those of the premium shopping mall. Afterimplemented his girlfriend liked this and told him the reason why she did not like his old internet caf�. The old one’srestroom is not clean. Now since she liked the new store because of its new restroom. She then loves to oversee the storefor him. In this way later he has more available time to open another Internet Caf� for women.

The second positive core is the store’ atmosphere; women reported that they like warm living rooms. This led to the newconcept where this store offered the best warm living rooms for women with free internets. Women customers paid onlyrental fee for seat available with personal computer for internet access. All of decoration in the store is carefully selectedby the owner’s girlfriend. The third positive core he identified is; women prefer assistance. This finding corresponds tothe work of Yaccato and McSweeney (2008). The author stated that women prefer assistance while male does not. Thisled to the idea to help the customers to learn to play games, Facebook and YouTube. Later his clients reported that hisstore is unlike others. They feel more comfortable with the store.

This also led to another positive core. Women customer prefers using Facebook and watching drama in YouTube in thesame time than playing games. They are some games they playing but not as many as male customers. So the ownerdecided to select games for women only. This practice cut the cost down substantially. In his former male-dominatedinternet caf�, he struggled to compete with his rival by offering most updated games. This practice resulted in a very thinprofit margin. After the new store opened, the store really attracts women customers. Operating cost is lower thanbefore. In addition, this Internet Caf� also attracted a new group of male customers who come along with their girlfriends and peer group. Most of them are more polite. This finding corresponds to the work of Brennan B. (2009). Theauthor stated that the business process attracting female customers would also attract male customers too.

Within one month, he was able to double price. Though his price is 20 baht/hour while the rival charges 10 baht perhour, he still attracts more customers. Finally it seems he attracted only women while his rival attracts only malecustomers. During the research, his new caf� attracted over 500 members within four months while the older oneattracted only 200 members. Later he decided to open another store. He also aims to raise capital to develop it as afranchise business.

However, there are many external factors which might contribute successes of these three organizations. For the firstorganization, he reported that there were many clients buying their second small tractors. Secondly, the headquartershad already run the advertising campaign. These two factors along might be confounding effects. For the ConstructionMaterial Stores, there are two possible confounding factors. Firstly, there were increasing Thai-foreign couples in thearea. Their higher purchasing power might contribute to the success of the project. Secondly, in Khon Kaen Province,construction sector is growing. For the Internet Caf� for Women, there are also two possible factors. Firstly, it is a newlocation. Compared to the old location, his new store locates in the area where there are few internet caf�s. Secondly,this is considered the new service. It still attracts new customers. However, the in the long run, this business is easilyduplicated. This might not be sustainable.

DISCUSSION

Though there are many cofounding effects, it may be inferred that Gender Intelligence impact Appreciative InquiryProjects in three following ways. Firstly, Gender Intelligence is helpful in generating the Researcher’s and AI Practitioners’creativity in designing extremely high-impact strategies. All of these initiatives are just simply slight improvements ofexisting routine practices. Most of initiatives created from each “Positive Core” required small amount of or zeroadditional investments. For instance, in the case of the Kitchen Set at the Construction Material Store, the AI Practitionerssimply changed focus from foreign husbands to Thai wives. Sales substantially increased by six times. Thirdly throughGender Intelligence, it is possible to develop the new business model. For instance, in the case of the Internet Caf� forWomen, the Researcher and AI Practitioner focused on women. By studying women’s behavior, the Researcher and AIPractitioners gained insight which resulted in the innovative business model, “the Internet Caf� for Women.” This is the


Researcher and AI Practitioner focused on women. By studying women’s behavior, the Researcher and AI Practitionersgained insight which resulted in the innovative business model, “the Internet Caf� for Women.” This is the first of itskind in the business in Thailand. This model the AI Practitioners earned higher revenue with lower operating cost.

CONCLUSION

Thailand Appreciative Inquiry Network (AI Thailand) has been established since 2007. Its mission is spreading theknowledge of Appreciative Inquiry throughout Thailand. To achieve this mission, the Researcher needs to create changeagents who are competent AI practitioners. To date the proportion of competent AI Practitioners are approximately 10%of the total community members. To achieve the mission, this proportion should be higher. This would be possible byimproving the Researcher’s practice. By integrating the concept of Gender Intelligence to his Appreciative Inquiry’spractice, the Researcher believe that there should be improvement. Later there were opportunities. AI Thailand hasrecruited three new enthusiasts. They agreed to experiment Appreciative Inquiry integrated with Gender Intelligence.These three participants are from three diverse organizations, the Agricultural Machinery Store, Construction MaterialStore and Internet Caf� for Women. By integrating Gender Intelligence during Appreciative Inquiry’s Process, theResearcher and the three participants were able identify opportunities and respective strategies. After implementedstrategies, three participants were able to improve their organizational performance. The first participant from theAgricultural Machinery Store had identified major strategies such as completion for relationship and gender-basedselling approaches. Through these basic strategies, he was able to achieve annual sales target by eight months. For thesecond organization, the Construction Material Store, by switching attention to women customers who are foreigners’wives, he was able to increase sales on luxury kitchen set by six times. By focusing attention to male customers, he wasable to identify pricing strategy which attracted more customers. This led to the sales growth by 780%. For the thirdorganization, the participant was advised to focus on women; this led to the establishment of the Internet Caf� forwomen. The new business attracted over 500 members with double pricing compared to his competitor. However thereare many confounding factors. For instance, for the Agricultural Machinery Store, many customers were second-timecustomers. There was the advertisement campaign from the mother company in the same period. For the constructionmaterial store, there was increasing population of Thai-foreigner couples in his district. In addition, the constructionsector in his province was experiencing growth. For the Internet Caf� for women, the new location might be the majorconfounding effect since there were fewer competitors. Though they are many confounding effect since it wasexperimental, it was found that Gender Intelligence is potential in improving AI Projects’ performances in three ways.Firstly, it helps AI Practitioners in designing innovative high-impact initiatives with small amount or zero additionalinvestment. Secondly, Gender Intelligences helps AI Practitioners see more opportunities through gender behaviorsresulting in more impact initiatives. Thirdly it is possible to develop the new business model through Gender Intelligences.Though these are experimental projects in three organizations, it may be concluded that Gender Intelligence has highpotential in improving Appreciative Inquiry’s practice. Yet, it needs further refinement.

SUGGESTION FOR FUTURE RESEARCH

Firstly, since there are only three organizations, these are considered pilot projects. There should be the same kind ofResearch’s model applying in more organization to see whether Gender Intelligence produces the same results. Secondly,there should be experiments to see impacts of Gender Intelligence in case where the AI Practitioners have low influencein their organizations of studies. Thirdly, other disciplines such as Knowledge Management may be also potential inimproving Appreciative Inquiry’s practice. Researchers may experiment integrating other disciplines to AppreciativeInquiry’s practices and investigate its impacts.

ACKNOWLEDGEMENT

The Researcher would like to extend his appreciation to Mr. Thammasak Taesiri, Mr. Watee Kongcha and Mr. RachanonMa, AI Practitioners of Thailand Appreciative Inquiry Network.

REFERENCE

Brennan, B. 2009. Why She Buys: The New Strategy for Reaching the World's Most Powerful Consumers. New York:Crown Business.

Bushe, G. R. 2005. When is appreciative inquiry transformational?: A meta-case analysis. The Journal of AppliedBehavioral Science. 41 (2): 61-181.

Coghlan, D. and Brannick, T. 2002. Doing action research in your own organization. San Francisco: Sage Publication.Cooperrider, D. L. and Srivastva, S. 1987. Appreciative Inquiry in Organizational Life. Research in Organizational.

Change and Development. 1: 129-169.

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Cooperrider, D.L., Whitney, D. and Stavros, J.M. 2003. The appreciative inquiry handbook. Bedford OH: LakeshoreCommunications.

Cooperrider, D.L. and Whiteny D. 2005. A Positive Revolution in change. San Francisco: Burette-KoehlerPublisher.

Gladwell, M. 2000. The tipping point: how little things can make a difference. Brown and Company: New YorkGurian, M. and Annis B. 2009. Leadership and the Sexes: Using Gender Science to Create Success in Business. San

Francisco: Jossey-BassPeter, T. 2003. Re-imagine. London: Dorling Kindersley Limited.Praphaiwan, S. 2008. The operation strategy with Appreciative Inquiry of Your Style Shop. Unpublished

Independent Study, College of Graduate Study in Management. Khon Kaen UniversityRattanaphan, P. 2010. Impact of ODIs on human capital: a case study of Thailand Appreciative Inquiry Network.

Revista de Cercetare si Interventie Sociala. 29: 25-43Reed, J. 2007. Appreciative inquiry: Research for change. London: Sage Publication.Roongrangsimakul, A. 2009. Strategic Planning through Appreciative Inquiry: A case study of Charity Coffee Shop.

Unpublished Independent Study, College of Graduate Study in Management. Khon Kaen UniversityWatkins, J.M. and Mohr B.J. 2001. Appreciative inquiry: Change at speed of imagination. Jossey-Bass/Pfeiffer: San

Francisco.Yaccato, J.T. and McSweeney, S. 2008. The Gender Intelligent Retailer: Discover the Connection Between WomenConsumers and Business Growth. Ontario: John Wiley & Sons Canada.Underhill, P. 2008. Why we buy: the science of shopping-updated and revised for the internet, the global consumer,

and beyond. New York: Simon & Schuster Paperbacks.


Loganathan KrishnanAssistant Professor

Department of International BusinessFaculty of Accountancy and Management

University of Tunku Abdul RahmanBandar Sungai Long Campus, Lot PT 21144, Jalan Sungai Long

Bandar Sungai Long, Kajang, 43000 Selangor, MalaysiaTel: 03 90194722 Ext: 131 Fax: 03 90197062

E-mail: [email protected]

ABSTRACT

S. 8(1) of the Malaysian Companies Act 1965 provides that a person may be appointed as an auditor of a company if he isapproved by the Minister of Finance. This shows that prior approval must be obtained before taking up the position of anauditor. In granting the approval, the Minister must satisfy himself that such a person is capable of carrying out auditingfunction and is of good character. This shows that the position of an auditor is regulated by the law and the government.Therefore, the concern of this study is whether S. 8(1) of the Companies Act has been properly invoked when a person isappointed as an auditor on the issue of whether the requirement of good character has been satisfied. The study thenproceeds to examine the extent good character is a determining factor on the part of the Minister’s decision in approving aperson as an approved company auditor. The study will also examine to what extent the auditors ensure that they are ofgood character in order to be an approved company auditor. The study will also examine the extent the relevant professionalbodies and regulatory bodies play their role in supervising and monitoring the character of the auditors to ensure thatauditors act ethically for the purposes of effective corporate governance. Essentially, those persons who are involved infraud or dishonesty should not be eligible to be approved as company auditor as the requirement of good character has notbeen satisfied. In cases where fraud or dishonesty has been discovered after a person has been an approved companyauditor, the approval must be revoked. This is to restore the confidence on the role of auditors as effective gatekeepers ofcorporate governance. This will also re-instill the trust placed by stakeholders on the auditors which results to sustainabilityof businesses in all aspects in the light of recent financial scandals.

Keywords: Auditors, Eligibility

INTRODUCTION

This study examines important issues on the office of auditors concerning the requirement of good character to beeligible as auditors. Therefore the requirement of good character to be an auditor will be examined as regards to how itis being applied. This is to important because it will strengthen the role and duties of auditors so that they will beeffective gatekeepers for corporate governance. This study will also explore the necessary reforms that should be madeon the issues concerning the requirement of good character on the part of the auditors.

THE SCOPE OF GOOD CHARACTER

S. 8(1) of the Companies Act (the Companies Act) provides that a person may be appointed as an auditor of a companyif he is approved by the Minister of Finance. This shows that prior approval must be obtained before taking up theposition of an auditor. In granting the approval, the Minister must satisfy himself that such a person is capable ofcarrying out auditing function and is of good character. This shows that the position of an auditor is regulated by the lawand the government. However, in most cases, it is a firm that will be approved rather than an individual (Lewis & Cheah,1997). Therefore, in such a case the concern is whether S. 8(1) of ‘the Companies Act’ has been properly invoked.

Notably, the approval is not based on an indefinite period of time as it is renewable every two years. This also shows thatthe government regulates an auditor’s eligibility not only at the initial stage but throughout an auditor’s career. Again theconcern is whether there have been any cases where there was no renewal.

THE REQUIREMENT OF GOOD CHARACTER OFAUDITORS FOR EFFECTIVE GATEKEEPER OF

CORPORATE GOVERNANCE


THE REQUIREMENT OF GOOD CHARACTER OF AUDITORS FOR EFFECTIVE GATEKEEPER OFCORPORATE GOVERNANCE

be seen that a different treatment is practiced as regards to the banking sector. It should be noted that other sectors alsorequire consideration as it could damage the financial market to have auditors who are convicted under ‘the CompaniesAct’ or any offences relating to fraud or dishonesty.

S. 9(1)(c) of ‘the Companies Act’ provides another situation where a person cannot act as an auditor. This is where if heis an officer of the company; a partner, employer or employee of an officer of the company; a partner or employee of anemployee of an officer of the company; or a shareholder or his spouse is a shareholder of a corporation whose employeeis an officer of the company; or if he is responsible for or if he is the partner, employer or employee of a personresponsible for the keeping of the register of members or the register of holders of debentures of the company. This isaimed to ensure the independence of the auditor in auditing company accounts (Iacobucci, Pilkington & Prichard,1977). However, the provisions do not contain any statement which requires auditors to be independent unlike the legalposition in Canada and New Zealand by virtue of S. 161 of the Canada Business Corporations Act 1985 and S. 161 ofthe New Zealand Companies Act 1993 respectively. Furthermore, the provision only applies to the spouse of the auditor.It does not apply to his immediate family members.

S. 9(2) of ‘the Companies Act’ provides that for the purposes of S. 9(1), a person shall be deemed to be an officer of acompany if he has, at any time within the preceding period of twelve months, been an officer or promoter of thecompany or such a corporation. However, this provision does not address the situation where a former partner of theaudit firm is now an officer of the company or employee of the company who is in a position to influence the appointmentof the auditor. This was recommended in the Ramsay Report as regards to the Australian position.This can be a problem as the retired partner who is now an officer or an employee of the company is familiar with theaudit approach and will be able to find out what the loop-holes are. In some cases the auditors may be friendly orrespectful to the retired partner who is now an officer or employee of the company. It can also be a case where the firmhas placed their own person as an officer or employee of the company to improve the relationship between the companyand the auditors. This can lead to other complications such as the offering of non-audit services, offering high fees fornon-audit services, re-appointment of auditors for subsequent years and offering high remuneration for auditors.


In carrying out this study, a certain research methodology was used in order to find out the results of the research. Thisis important since a study should not be merely confined to library research. It should also include field research.However, firstly, once must be clear about the meaning of research methodology.

Research methodology is a systematic and orderly approach which is used for collecting data. In fact it is an algorithmthat finds an effective solution for a particular set of circumstances which consist of analysis, design and implementationstarting with the root which is represented by problem statement and ending with the goal represented by the systemacceptance. As regards to research design, it is a set of decisions that make up the main plan which specifies the methodsand procedures for collecting and analyzing the information.

In this research, the research methodology used is interviews. Interviews refer to a form of direct communicationbetween the interviewer and the respondent in a face-to-face meeting (Kahn & Canneell, 1957). This is a flexiblemethod and has a two-way method of communication whereby the interviewer can ask questions during the interview(Saunders, Lewis & Thornhill, 2007). Additionally, there is instant feedback which can give room to more questions,detail information and visual demonstration. The interviewer also has a control over the discussion and is able to caterto any unique situations if they arise. The type of interview conducted is a respondent interview type. This means thatthe interviewer directs the interview and the interviewee responds to the questions of the researcher (Easterby, Thorpe& Lowe, 2002). The interviews conducted are in-depth in order to find out what is happening (Robson, 2002).

The interviews were conducted with auditors, academics, regulators, professional bodies and interested bodies. Thebreakdown is as follows:

No Persons/Bodies interviewed Location1 Auditors Federal territory/Sabah/Sarawak/

Penang/Ked Ah2 Academics UKM/UIA3 CCM KUALA LUMPUR4 MIA KUALA LUMPUR5 MSWG KUALA LUMPUR


Loganathan Krishnan

Hence, a significant step must be taken in relation to educating auditors of what is ‘good character’. Thus, it isrecommended that a special body be formed to educate auditors of what is good character. Good character must play avital role in deciding whether a person should be an ‘approved company auditor’. This will send a strong message to theauditing profession that the matter is not taken lightly. The auditors will begin devoting quality time in improving their‘software’ strength.

Although auditing skills and good character act as twin pillars to be eligible for appointment, in some instances, personswho wish to become approved company auditors may be disqualified by ‘the Companies Act.’ The disqualification isenumerated in S. 9(1) of ‘the Companies Act’ which provides that it is an offence to act as the auditor of a company ifhe knows that he is disqualified.

This is to ensure that existing individual shareholders, Board of Directors, audit committee, prospective shareholders,employees, creditors, guarantors, companies wishing to exercise takeovers and mergers, trustees, beneficiaries,government and members of the public receive an unbiased opinion on the ‘true and fair view’ of the company’sfinancial position. Thus, independence is seen as a key factor for non-biasness as pointed by the English court in ReTransplanters (Holding Co) Ltd (1958). Most importantly, as it was rightly pointed out by the English court in ReTransplanters (Holding Co) Ltd (1958) that “once a man takes upon himself a position of a auditor…he must stand aloofand divorced from the aims, objects and activities of the company.”

The provision also acts as a proactive mechanism in eliminating auditors who may be bias since auditors must be ofgood character. It is also to ensure that auditors are not in any way influenced by the officers of the company. Otherwise,there may be a possible conflict of interest. This is different from the legal position in the United Kingdom previouslywhere it was a common practice that auditors were the shareholders of the company (Hadden, 1977). However, significantchanges were made in 1900 disallowing such matters to ensure auditors’ independence.

Notably, S. 9(1) of ‘the Companies Act’ reads “A person shall not knowingly consent to be appointed, and shall notknowingly act…” Observably, the term ‘knowingly’ has been used twice in the provision. The English court in Secretaryof State for Trade and Industry v Hart (1982) on an English provision which contains similar words pointed out that itis not a strict liability offence when interpreting a similar provision in the English Companies Act and thus, knowledgeon the part of the person charged must be proved. The Malaysian provision is in pari materia with the provision inEngland i.e. S. 389(7) Companies Act 1985. This means that if a person does not know that he is disqualified under S.9(1) of ‘the Companies Act’ and consents to be appointed as an auditor, he is not in breach of the provision. Thisprovision is ironic since the person should have knowledge of whether he is disqualified by ‘the Companies Act’.

The state of knowledge should not be on the basis of actual knowledge. It should be based on constructive knowledge.This is because it will be easy for auditors to claim that they have no knowledge as the issue is based on evidence.Furthermore, auditors should be required to make a declaration that they are not disqualified under S. 9(1) of ‘theCompanies Act’. This is similar to the declaration made by directors that they are not in breach of S. 125(1) and S. 130‘of the Companies Act’. Thus, in the event the auditors fail to declare or they make a false declaration, they should ceaseto be approved company auditors and be liable to have their license revoked. This is because they have not satisfied therequirement of being persons of good character.

Furthermore, S. 9(1)(b) of ‘the Companies Act’ provides that the auditor should not be indebted to the company or anyof the companies within the group in an amount more than RM2500. At the time ‘the Companies Act’ was enacted i.e.1965, the amount may be considered high. However, in contemporary years the amount is merely meager. Thus, theprovision should be amended whereby the auditor should not be indebted to the company at all. This will truly reflectthe independence of the auditor. There is no legal justification that an auditor who owes a company less than RM2500is independent whereas an auditor who owes a company RM2501 is not independent.

It should be noted that under S. 40(4)(d) of the BAFIA, an auditor should not be indebted at all to the banking andfinancial institution in which he is auditing. Thus, S. 9(1)(b) of ‘the Companies Act’ should be amended to be in linewith S. 40(4)(d) BAFIA to reflect the approach taken in contemporary years. As for public companies, S. 126(4) of theCMSA provides that a person who is an associate of the company cannot be appointed as an auditor. S. 3 of the CMSAprovides detail explanation as to who is an associate.

A point to be noted is S. 40(4)(i) of the BAFIA. It provides that a person convicted of any offence under BAFIA, ‘theCompanies Act’ or any other written law involving fraud or dishonesty is not eligible to be appointed as an auditor. Sucha provision is not found in ‘the Companies Act’. This means that if a person is found to be convicted of an offence under‘the Companies Act’ he may still be eligible to be an auditor as long as he will not be in the banking sector. Again it could



INTERVIEW WITH AUDITOR

There is no definition as to what good character is under the law. In fact, character is not permanent. It can change overtime. However, as long as the person is not convicted of an offence under ‘the Companies Act’, BAFIA, CMSA or thePenal Code, the person should be considered as possessing good character. Furthermore, there should not be anycriminal records. Additionally, the person should not have been subjected to any disciplinary action by MIA. Theperson who wishes to become an auditor must make a declaration and disclosure that there have not been any convictionsor disciplinary action against him. He must also be a law abiding person. This is because the role of an auditor is legalin nature. He must be an honourable, reputable person, upright person with integrity and objectivity since he will bechecking on another person. This can only be determined by reference to the person’s background. In fact, the best wayto ensure that the person is of good character is through education.

Additionally, the person must produce two testimonials. The testimonials should not be from any relatives or familymembers. Good character will also be assessed during the interview. An interview is conducted as it is based on face-to-face so that one can determine how the candidate carries himself and handles a particular situation. Representativesfrom the various bodies namely CCM, SC, BNM, MIA, MOF, Bursa and MICPA will judge whether the person is ofgood character. It is a venue to determine the character of the candidate. The interview will only test on the technicalknowledge of the person and not the ethical behaviour of the person.

However, it is insufficient as one will not be able to know whether a person is of good character just from the interview.This is because it is a limited source. Furthermore, a person may be of good character today but he may not be onetomorrow. Furthermore, the two testimonials are not sufficient as it can be from friends of the applicant. This is becausethere is no minimum criteria mentioned as to who could be a referee.

Although good character is very important, it is quite difficult to determine whether a person is of good character inorder to be an approved company auditor. This is because it is quite subjective. One must look at his personality. Thisis definitely a grey area. This is because it lies with the individual. There is no guarantee that the person is of goodcharacter. This is because it is not an over-night issue.

Thus, a better way to determine whether a person is of good character is to give the person a case-study on ethicalquestion and see how the person answers the question. Essentially the question must be designed quite well so that itwill not be a straightforward matter. Alternatively the relevant bodies should have a checklist on the matters to determinewhether a person is of good character. In that way one can establish whether he is of good character. Additionally hemust get referees from existing auditors who are of good standing for a recommendation.

INTERVIEW WITH REGULATOR

According to S. 8 of ‘the Companies Act’, any person who full-filled the criteria as required by ‘the Companies Act’may apply to the Minister of Finance to be an approved company auditor. In this case, the Minister of Finance hasdelegated his power to Accountant General’s Department (JANM) under S. 8(7) of ‘the Companies Act’ to be responsiblein approving an approved company auditor. The JANM will then forward the application to Companies Commission ofMalaysia, Bank Negara Malaysia, Malaysian Institute of Accountants and Securities Commission to make a scrutiny onthe background of the person.

Generally, the candidate will be interviewed by a panel of interviewers comprised of representatives from CompaniesCommission of Malaysia, Bank Negara Malaysia, Malaysian Institute of Accountants and Securities Commission toensure the candidate fulfilled the criteria required. Those who passed the interview will be approved company auditorof which the approval will be valid for a period of 2 years form the date of its issuance unless revoked sooner by theMinister of Finance.

Under S. 8(2) of ‘the Companies Act’, the applicant must fulfill these criteria: (i) good character; and (ii) competent toperform the duties of an auditor. This can be very subjective in the sense that each of the regulators will have their owndatabase to check on the background of the applicant. Basically, there should not be any conviction and the applicantshould not be a bankrupt. Any of the regulators can raise their objections at the interview and this is sufficient to rejectthe application to be an auditor.

A good character of an auditor is all about ethics. As a professional, an auditor should maintain his professionalism byavoiding any unethical behavior whether it is persona or professional. In a nutshell, any person who wishes to become


Loganathan Krishnan

a company auditor must ensure he comply with the relevant laws and regulations in addition to the By-Laws administeredby the MIA.

Another good example for a candidate to look into as reference is a prescribed set of principles or values developed byJosephson Institute of Ethics in the United States, a non-profit membership organization for the improvement of theethical quality of society, which had identified 6 core ethical values associated with ethical behavior as follows: (a)Trustworthiness i.e. honesty, integrity, reliability and loyalty; (b) Respect i.e. notions such as civility, courtesy, dignity,tolerance and acceptance; (c) Responsibility i.e. accountable for one’s actions and exercising restraint; (d) Fairness andjustice i.e. equality, impartiality, proportionality, openness and due process; (e) Caring i.e. being genuinely concernedfor welfare of others, acting altruistically and showing benevolence; (f) Citizenship i.e. obeying laws and performingone’s fair share to make society work.

Lack of competencies amongst the candidates were observed during the interviews session whereby some have failed toshow sound knowledge and understanding of ‘the Companies Act’ or other relevant laws such as BAFIA, Guidelines byCentral Bank, Capital Market and Services Act and MIA’s By-Laws.

Every application for renewal of approval letter will follow the same procedures and will be reviewed by the relatedregulatory bodies such as JANM, Companies Commission of Malaysia (CCM), Central Bank (CB), Securities Commission(SC) and MIA, except there will be no interview session. However, the application for renewal will again be channeledto the four regulators since the auditor has been in practice for two years. Furthermore, any issue related to competencyor good character of auditor will be discussed in a committee known as Audit Supervisory Committee (ASC). The ASCwill review the recommendation for revocation and forward the decision to the Minister of Finance for approval.

CCM has brought few cases related to misconduct of an auditor to the ASC and suggested the committee to revoke theapproval based on the following situations: (i) the auditor has prepared and signed an auditor’s report as an approvedcompany auditor although the approval has been suspended by Ministry of Finance (MOF); (ii) an officer of a companyacted as the company auditor at the same time for a period exceeding 2 years. (iii) a person acted as a company auditorwhereby his spouse is an officer of a said company at the same time for a period exceeding 2 years; and (iv) the auditoris a repetitive defaulter under ‘the Companies Act’.

The criteria for revoking an approval, is the same in both situations however the criteria will be renewed from time totime. The ASC chaired by JANM, will review the recommendation for revocation of auditor’s approval and the decisionof the committee will be forwarded to the Minister of Finance for approval.

CONCLUSION

Interviews were conducted on auditors and regulators in order to obtain a holistic picture on the issue of good characterof auditors. It can be observed that there are mixed views among the auditors on the issues raised, during the interviews.As far as the regulators are concerned, it can be observed that initiatives have been taken to address issues concerning.This is welcomed not only by the academics but also the Minority Shareholder Watchdog Group. Thus, the ultimateissue is that auditors should play a more effective role in carrying out their duties so that there will be value added on theauditors’ report. Auditors’ office should not be taken lightly. The provisions of ‘the Companies Act’, BAFIA and CMSAin relations to the office of auditors must be re-examined to ensure that the auditors perform a meaningful role in thecurrent corporate atmosphere. The auditors’ role must be strengthened so that it meets the expectations of the stakeholders.Thus, key reforms must be made to ‘the Companies Act’, BAFIA and CMSA to achieve the desired objectives.

LIST OF PERSONS INTERVIEWED

1 Assoc. Prof. Dr. Malaysian Institute of 27 July 09 1600 hours Head Kuala LumpurThillai Sundaram Accountants

(Investigative Committee)2 Mr.Ravindran Ravindra Krishna & 10 September 09 1200 hours Auditor Kuala Lumpur

Associates3 Mr.Maniam HALS & Associates 18 September 09 1000 hours Auditor Kuala Lumpur4 Mr.Sidney Chong Sidney & Co 4 October 2009 2130 hours Auditor Kuala Lumpur5 Mr.Hooi Kok Mun Grant Thornton 6 October 2009 1430 hours Auditor Penang6 Mr.Tan Boon & Associates 6 October 2009 1530 hours Auditor Penang7 Mr.Jerome Tan Jerome & Associates 6 October 2009 1700 hours Auditor Penang

Thiam Poh



8 Mr.Leong Woay Hong AljeffriDean 7 October 2009 1430 hours Auditor Penang9 Mr.Lee Boon Ghee B G Lee & Co 7 October 2009 1540 hours Auditor Penang10Mr.Lee Hong Lim Honglim & Associates 8 October 2009 1400 hours Auditor Penang11 Mr.Khor Yong Yong Ang Hooi Teik & Co 9 October 2009 1000 hours Auditor Penang12Mr.Sathiah SM Associates 13 October 2009 1430 hours Auditor Kuala Lumpur13Mr.Eric Tan Chi Siong Richard Lean, Tan & Co 9 November 2009 0900 hours Auditor Kota Kinabalu14Mr.Tay Jin Tsan J T Tay & Co 10 November 2009 1000 hours Auditor Kota Kinabalu15Mr.Lim Lim Chong & Co 10 November 2009 1405 hours Auditor Kota Kinabalu16Ms.Chaw Sui Mee Chaw & Co 10 November 2009 1520 hours Auditor Kota Kinabalu17Assoc. Prof. Dr. Universiti Islam 10 November 2009 1535 hours Academic Kuala Lumpur

Zuhairah Antarabangsa Malaysia18Ms.Alexandra Chin Alexandra F L Chin 11 November 2009 0953 hours Auditor Kota Kinabalu

Fui Lin19Mr.Dennis Wong Horwath 11 November 2009 1100 hours Auditor KotaKinabalu20Mr.William Lo Lay & Partners 11 November 2009 1400 hours Auditor Kota

Kinabalu21Mr.Francis S C Yong Yong Tan & Co 11 November 2009 1500 hours Auditor Kota Kinabalu22Mr.Ambrus Wong Tong & Wong Partners 17 November 2009 1000 hours Auditor Bintulu23Mr.Hii Hii & Partners 17 November 2009 1450 hours Auditor Bintulu24Dr.Hasani Universiti Kebangsaan 4 December 2009 1500 hours Academic Kuala Lumpur

Malaysia (UKM)25Mr.Redzuan Abdullah Companies Commission 4 January 2010 1500 hours Head Kuala Lumpur

of Malaysia (CCM)26Mr.Ooi C L Ooi & Co 8 December 2009 1400 hours Auditor Kulim27Mr.Lee Leok Soon Minority Shareholder 29 April 2010 0900 hours Chief Executive Officer

Watchdog Group (MSWG) Kuala Lumpur

REFERENCE

Easterby-Smith, M., Thorpe, R., & Lowe, A. 2002. Management research: an introduction. 2nd ed. London: Sage.Hadden, T. 1977. Company law and capitalization. 2nd ed. London: Weidenfeld and Nicolson.Hardy, I.E.R. 1978. Topham and ivamy’s company law. 16th ed. London: Butterworth.Iacobucci, F., Pilkington, M., and Prichard, J.R.S. 1977. Canadian business corporations. Aurora: Canada Law

Book Ltd.Kahn, R., and Canneell, C. 1957. The dynamics of interviewing. New York and Chichester: Wiley.Lewis, J.R., and Cheah, F.S. 1997. Student handbook of malaysian company law. Kuala Lumpur: Cedar Publications.Libby, T., and Thorne, L. 2004. The identification and categorization of auditors’ virtues. Business Ethics Quarterly.

14(3): 479-498.Mintz, S.M. 1995. Virtue ethics and accounting education. Issues in Accounting Education. 10(2): 246-67.Robson, C. 2002. Real world research. 2nd ed. Oxford: Blackwell.Saunders, M., Lewis, P., & Thornhill, A. 2007. Research methods for business students. Harlow: Prentice Hall.


Aslam ChinarongResearch scholar, Sathyabama University, Chennai, India

K. MaranDirector, Sri Sai Ram Inst.Of Management,India

B. Yamuna KrishnanResearch Supervisor, Sathyabama University, India

[email protected]

ABSTRACT

The aquaculture production in India has registered remarkable growth in recent decades. The total production fromaquaculture has increased from 7,88,310 tons in 1987 to 17,68,422 tons in 1996, with a substantial growth of 124 percent.Even after rapid growth in the industry, India has exploited only 10 percent of its aquaculture potential. Indian carp farmingevolved from a mere subsistence level in 1980 to one of the worlds’ leading producers by mid 1990’s. India contributedaround 11 percent of the world’s inland fish production in 1995. In the last 10 years the export performance of aquacultureproducts are steadily growing and the export income also highly satisfactory to Indian economy, the selected four aquacultureindustrial overall financial performance is not growing well such net profit growth, capital efficiency, liquidity and longterm solvency positions.

Key words: Financial ratio, Aqua culture feed, Export growth, EPS, Net profit growth

INTRODUCTION

Aquaculture is a fast growing industry with an average annual growth rate of about 12 percent during the past decade. Asiawas the leading region in aquaculture, with 85.8 percent of global production of the total aquaculture production, freshwater fish (carps) accounted for 49.5 percent globally. According to World Bank (1999) estimation, the cultured fishproduction was doubled during 1990-1996 and at present the growth of aqua culture has increased to six hand half foldsgrowth compared to the previous decades.8,000 kilometer of coastline are found to be more potential for marine culture.

Fresh water aquaculture resources in the country comprise 2.25 million hectares of ponds and tanks 1.3 million hectaresof bheels and derelict waters , 2.09 million hectares of lakes and reservoirs and 0.12 million kilometres of irrigationcanals and channels. However, the average yield per hectare is 2,200 kg, which is lowest in Asia. Some of the majorfactors, which influence the productivity, need to be investigated in order to enhance the productivity. There exists alarger yield variation between the regions and farms. While the Punjab farmers produce 4,170 kilograms per hectare,the same productivity is as low as 1,270 kilograms in Maharashtra.

AQUACULTURE EXPORTS

Agricultural exports comprised about 27% of the total exports from India during 1986-87 but the share dropped sharplyduring the post-reform period to 20 percent in 1996-97. However, the share of seafood exports has been 16% of the totalagricultural exports and is steadily increasing in absolute terms. The absolute value of seafood exports has increasedfrom US $ 1,122 million to 2,973 million indicating an increase of265 percent. Thus the share of agricultural sector inthe total exports is decreasing the seafood export which has been maintaining its share and it is steadily increasing. Thecontribution of cultured aquaculture products increased from 33 percent in 1988-89 to 52 percent in 1998-99. Thespectacular progress of aquaculture is worth noticing in value terms. With in a period of 10 years the value of culturedshrimp increased from 48 percent to 74 percent. Though major part of the export of cultured products is shrimp, thecontribution of carps such as rohu is increasing over the years. Aquaculture production and exports continue to be anextremely focused sector during the Ninth Five Year Plan (1997-98 to 2001-02). Until recently India has been exportingmainly freshwater prawn but from 1996-97 onwards India started exporting other freshwater aquaculture products also.India started exporting negligible quantity of freshwater aquaculture products in filleted form from 1996-97 onwards.

A COMPREHENSIVE FINANCIAL ANALYSIS OF AQUACULTURE FEED INDUSTRIES IN SOUTH INDIA


A COMPREHENSIVE FINANCIAL ANALYSIS OF AQUA CULTURE FEED INDUSTRIES IN SOUTH INDIA

It can be seen from the table 2 that India exhibit a lot of variation and India's trade partners are also changing. The majorbuyer of Indian freshwater fishes is China and Bangladesh followed by Middle East.


N.R. Parasuram (2006), has made an attempt to identify and study the movement of key financial parameters and theirrelationship with profitability of automobile industry he also made an attempt to and study whether the key identifiedparameters move in a synchronous way going up and coming down with basic profitability parameters. The two wheelerand three wheeler industries chosen and all comparably profit-making companies have been taken as the sample forstudy for the period of 2002 to 2004. The data have been taken from the figures supplied by prowess database. On thebasis of this data a trend parameter is calculated for the year 2005. The actual figures in respect of the year 2005 arecompared with the trend parameter by way of t-test. So, on the base of the analysis, the broad conclusion is that theparameters are consistent within a wide horizon and with the growth that companies have achieved, the parameters havealso responded in a synchronous manner.

Adolphusj. Toby (2008) in his study on ‘Liquidity performance Relationship in Nigerian Manufacturing Companies’has analysed the empirical relationship between liquidity and other performance measures in Nigerian manufacturingcompanies. Using data from 87 quoted manufacturing companies, ten multiple regression models were estimated withfour liquidity measures as independent variables, and ten others covering profitability, efficiency and leverage measuresas dependent variables. The results show statistically significant relationships between liquidity and profitability, efficiencyand leverage measures as the computed F values exceed the table E - ratio at the 5 per cent level of significance. Themultiple regression results show that 1 per cent increase in liquidity could bring about 21.9 per cent increase in profitability,16.1 per cent increase in efficiency and 16.6 per cent increase in leverage.

COMPANY PROFILE

1. C P Aquaculture.C P Aquaculture India Pvt Ltd, established in 1996 is a 100 percent owned subsidiary of Charoen Pokphand

Group of Thailand. Charoen Pokphand is a US 13 billion group having interest in feed, agriculture, petrochemical &telecommunications. During the year 1992 the former Prime Minister of India (Mr.P.V.Narashimha Rao) visited Thailandand seeing the strength of C P Group of Thailand, he invited them to establish their business in India . In the year 1994,the C P Group obtained the approval of the Indian Foreign Investment Promotion Board, Ministry of Industry forsetting up Aqua Feed and Shrimp Processing Plants across the country and for making a foreign investment in India.Accordingly the company C P Aquaculture (India) Pvt Ltd was floated to implement aqua feed and shrimp processingplant in India. The company was incorporated in June 1996 with the approval of the FIPB/SIA , prior to this , CP Grouphad their presence in India and has been selling its products in the country for the since early 1980s. The group hasinvested Rs 25 crores towards the equity capital of the company and obtained ECB loan of $8 Million for project outlay.C P Aquaculture India Pvt Ltd primarily focuses on Aqua Feed and Poultry Feed. The company initially established anAqua feed mill at Red Hills, Chennai with capacity of 60,000 Ton of aqua feed per annum and the plant commencedcommercial operations during the year 1995. Since then the company has been growing steadily.

2. Water BaseWaterbase Limited is the largest integrated aquaculture unit in India located in the heart of shrimp country at

Nellore, Andhra Pradesh. Their mission is to give customers the best value for money with our quality seed, feed, orprocessed produce. Operations begined in 1993 and have stood committed to following and disseminating the bestaquaculture techniques. At present there are US$18 million company (Rs. 1 billion) with facilities that comprise ashrimp hatchery, feed plant, grow-out farms, and an ultra-modern process plant. Raw or cooked, peeled or unpeeled,breaded and battered they export shrimp in different forms to the quality-conscious markets of Japan, USA, andEurope. In addition they supply value-added shrimp in different forms to many of their customers.They follow HACCPguidelines and are among the few Indian companies that have FDA approval for exports to USA.

3.Avanti FeedAvanti Feeds is the leading manufacturer of Prawn and Fish Feeds and Shrimp Processor and Exporter from

India. Avanti Feeds Limited has established joint venture with Thai Union Frozen Products PCL., the world's largestseafood processors and leading manufacturer of prawn and fish feeds in Thailand with integrated facilities from hatcheryto shrimp & fish processing and exports. Avanti has two prawn and a fish feed manufacturing units, certified ISO9001:2008, in Kovvur and Vemuluru, West Godavari District, Andhra Pradesh, India with a capacity of 70,000 MT perannum. Avanti produces nutritionally well balanced and high quality feed, consistently, catering to the Indian prawn and


Aslam Chinarong, K. Maran and B. Yamuna Krishnan

and fish farmers, at their door step. The state of art technology coupled with quality consciousness, excellent storagefacilities, logistics capabilities, timely deliveries and commitment to customer satisfaction has given Avanti a long listof loyal customers from USA, Europe, Japan, Australia & the Middle East.

4. Charoen PokphandCharoen Pokphand (India) Pvt Ltd is a 100 percent owned subsidiary of C P group of Thailand a multinational

organization incorporated in 1997 in India The Company also has Broiler Breeder activities & Hatcheries CharoenPokphand (India) Pvt Ltd which commenced its operations from 2000 and its poultry feed manufacturing facility islocated in Bangalore. The Company’s operations are across two verticals- Prawn feed manufacturing (Rs334.2 croresand 48.8 per cent of revenues in 2009-10) and Integrated poultry business (rs318.9 crores and 46.2 per cent of revenuesin 2009-10). Poultry feed is mainly used for in – house consumption. The excess feed (~30 of the poultry feed production)is sold in the open market. Going forward, the company also intends to diversify into manufacturing of other animalfeeds such as cattle and swine feed. The company has a prawn feed manufacturing facility in Vishakhapatnam, AndhraPradesh with a capacity of ~ 200,000 tons per annum. Apart from these, the company has 30 breeder farms and sixhatcheries in Vijaaywada, Chittur, Pondicherry, Bangalore, Mysore and Pune. The entire shareholding of the companyis with Charoen Pokphand Foods Public Company Limited (Thailand) along with another group company CharoenPokphand Industry Company Limited (Thailand).

Problem Focus:The aquaculture industry is one of the major important exporter and important contributor in Indian economy.

In the last 15 years there are many multinational companies operating aquaculture business in India , especially Thaibased organizations are showing more interests to mobilize funds in Indian aquaculture industry. In the last 10 years theexport performance of aquaculture products are steadily growing and the export income were also highly satisfactory toIndian economy .The selected four aquaculture industries for this study was found to be not satisfactory and theiroverall financial performance is not growing well such as net profit growth, capital efficiency, liquidity and long termsolvency positions. This study aims to analyze the financial performance of aquaculture companies in India for sustainabledevelopment in the competitive market.

OBJECTIVE OF THE STUDY

• To analyze the management of working capital and liquidity position of companies.• To identify the net profit and EPS growth rate performance of companies.

METHODOLOGY

The researcher, being an external analyst, had to depend mainly upon secondary data for the purpose of studying thefinancing performance of Aquaculture Industries in India from the top 5 companies in India which is highly performedin overall growth in terms of finance, exports and total assets value. The exploratory research techniques have been usedfor this study and also the study is restricted only to Indian based aquaculture organizations.

SOURCE OF DATA

Primary and Secondary Data:The present study is mainly based on secondary data which were collected from the corporate annual audited reports,company database, published research reports by various industries, and research organization. Primary data is notapplicable to this research anyhow the researcher consulted the concern company chief finance officer for the purposeof functioning of finance department.

Selection of company and period:The present study is mainly intended to examine the financial performance of C P Aquaculture India Pvt Ltd, Avantifeed limited, The water base ltd. Charoen pokphand (india) Pvt Ltd for five years in the period between 2005-2010.

Tools used for Analysis:The present study has analyzed the financial performance of four aquaculture e companies. In order to evaluate thefinancial performance, tools like , mean, standard deviation and correlation test have been used.


A COMPREHENSIVE FINANCIAL ANALYSIS OF AQUA CULTURE FEED INDUSTRIES IN SOUTH INDIA

RESULT & DISCUSSION

CURRENT RATIOTable No.IV.01

Company 2005 2006 2007 2008 2009 2010C P Aquaculture 4.57 4.97 4.72 5.41 5.41 4.07Waterbase 1.98 2.02 1.79 1.77 2.20 1.84Avanti Feed 3.45 5.57 5.94 6.82 5.02 3.66Charoen Pokphand ---- 0.50 0.83 0.78 0.71 0.81

The above tables shows the selected four companies (C P Aquaculture, Waterbase Limited, Avanti Feed Ltd., & CharoenPokphand (I) Pvt. Ltd.,) to analyze the short term solvency provisions for the period between 2005-2010; C P Aquacultureand Avanti Feed Ltd., has maintain high level of current ratio from 2005 to 2010 and also maintain more than theindustry standard (2 :1), hence the company will have to reduce its current assets and avoiding ideal current assets of thecompany. The second selected Waterbase has maintains a good current ratio during the above study period which showsabove 1.5 to 2.5 times. Hence it indicates the current ratio performance of Waterbase is in a good position. The Fourthselected Charoen Pokphand (I) Pvt. Ltd., current ratio performance for 2006 to 2010 is less than 1 time, which indicatespoor administrating current assets hence the company has to concentrate on improving current assets performance in theabove said period.

WORKING CAPITAL TURNOVER RATIOTable No.IV.02 Working ca

Company 2005 2006 2007 2008 2009 2010C P Aquaculture 3.38 2.88 2.00 2.32 2.14 2.72Waterbase 1.69 1.23 1.08 0.84 0.76 0.63Avanti Feed 2.69 2.69 1.96 2.03 1.45 2.47Charoen Pokphand ----- 4.20 -4.33 -4.01 -15.25 -4.66

The ratio indicates whether or not working capital has been effectively utilized in making sales, the ratio is calculated bythe formula net sales/working capital. The above tables shows the selected four companies (C P Aquaculture, WaterbaseLimited, Avanti Feed Ltd., & Charoen Pokphand (I) Pvt. Ltd.,) to analyse the administrating funds for day to dayactivity of business including manufacturing. C P Aquaculture had maintain high level of working capital turn over ratiowhich indicates a clear cut evidence of the company performance in sales. This is more than the industry standard ,hence the company needs to use more funds towards turnover activity and also utilize chances for enhancing sales andrevenue performance. The Waterbase (2008-2010) & Charoen Pokphand (2007-2010) has indicated low working capitalturnover ratio, which indicates both companies have blocking of funds in working capital which leads to the loss of thecompany. Avanti feed limited has maintained good standard ratio in 2005, 06, 08 & 10. Wherein 2007 & 09 performanceof working capital turnover ratio not satisfactory level.

NET PROFIT GROWTH RATIOTable No.IV.03

Company 2005 2006 2007 2008 2009 2010C P Aquaculture 7.62 6.48 3.41 -1.52 2.96 2.60 Waterbase 1.02 -10.10 -3.05 -9.00 1.75 -12.41Avanti Feed 5.96 4.84 1.33 0.82 -9.99 -1.16Charoen Pokphand ----- 12.46 15.86 11.24 7.87 7.36

The above table shows the net profit growth ratio of the selected four Aquaculture companies (C P Aquaculture, WaterbaseLimited, Avanti Feed Ltd., & Charoen Pokphand (I) Pvt. Ltd.,). The C P Aquaculture had the net profit growth in 2005and 06 (7.62% & 6.48%), wherein 2008 which drastically showed negative profit growth rate (-1.52%) again in 2009and 2010 which is slowly growth (2.96% & 2.60%). The waterbase has maintained very worst profit growth rate duringthe study periods and also in 2006, 07, 08 & 10 showed negative growth rate. Avanti feed ltd., had the net profit growthin 2005 and 06 (5.96% & 4.84%) wherein 2009 and 2010 shows a negative net profit growth rate. Charoen Pokhpandhad maintained a highly satisfied net profit growth rate during the study period and also the company net profit growthis consistent from 2006 to 2008 wherein 2009 and 2010 in the net profit growth rate is satisfactory level when it iscompared with other three selected companies the charoen pokphand performance is indicating good position.


Aslam Chinarong, K. Maran and B. Yamuna Krishnan

PROPRITORY FUND RATIOTable No.IV.04

Company 2005 2006 2007 2008 2009 2010C P Aquaculture 0.86 0.87 0.86 0.88 0.88 0.83Waterbase 0.36 0.35 0.31 0.34 0.34 0.45Avanti Feed 0.55 0.53 0.52 0.60 0.59 0.59Charoen Pokphand ---- 0.12 0.29 0.22 0.11 0.14

From the above analysis the proprietary fund ratio is to measures conservatism of capital structures and shows theextent of shareholders funds in the total assets employed in the business. From the selected four aquaculture companies,C P Aquaculture & Avanti Feed has maintained satisfactory level of shareholders funds to total tangible assets duringthe study periods (2005 – 2010) which indicates not less than 0.8 & 0.5 for the above said companies. The secondselected waterbase company its shareholders funds not less than 0.3 which indicates somewhat satisfactory level, wherethe fourth selected company charoen pokphand has maintain very low equity position which indicates less than thestandard during the study periods. Hence the company will have to increase the shareholders funds in future.

EARNINGS PER SHARETable No.IV.05

Company 2005 2006 2007 2008 2009 2010C P Aquaculture 10.54 8.47 3.33 -1.63 3.23 3.93Waterbase 0.02 -0.15 -0.04 -0.08 0.02 -0.08Avanti Feed 0.15 0.10 0.02 0.01 -0.01 -0.02Charoen Pokphand ---- 0.71 0.69 0.70 0.75 0.68

The above table shows equity per share growth performance of selected four Aquaculture companies (C P Aquaculture,Waterbase Limited, Avanti Feed Ltd., & Charoen Pokphand (I) Pvt. Ltd.,). Among these companies, C P Aquacultureperformance is highly satisfactory position Rs.10.54 and Rs.8.47 in 2005 and 2006, wherein 2007 and 2010 the EPSgrowth rate is somewhat satisfactory positions but in 2008 which showed negative growth rate (-1.63). The secondselected company waterbase shows very low EPS growth rate 0.02 each in 2005 & 2009 where the rest of the periods2006, 07, 08 & 2010 the company showed negative growth rate. The third selected company Avanti performance wasvery low from 2005 - 2008 wherein 2009 and 2010 the company showed negative growth rate ( -0.01 and -0.02). Thefourth selected company charoen showed somewhat satisfactory EPS growth rate during study period.

The study has analyzed the short term and profitability position of leading aquaculture companies in India, some of theimportant ratios were used to measure the financial performance of these companies. Based on the above analysis theoverall performance of C P Aquaculture was found to be comparatively good with the other three aquaculture companiesand Charoen position was found to be highly satisfactory level in net profit growth. The other two selected two companiesperformance were not satisfactory positions. Hence these companies will have to strengthen its shareholders funds andworking capital to compete and enhancing its current performances in growing aquaculture export in global businessenvironment.

REFFERENCE

Adolphusj, Toby. 2008. Liquidity performance Relationship in Nigerian Manufacturing Companies (1990-2002).Finance India. March 2008: 117-131.

Agarwal, N.K. 1978. Cash management in Indian industries. The Chartered Accountant. 27 (1): 21-27.Barthwal, R.R. 1976. Tthe Determinants of profitability in Indian textile industry. The Economica. 43: 267-274.Gupta, L.C. 1979. Financial Ratios as fore warning indicators of sickness. ICICI: Bombay.Kulshreshtha, N.K. 1980. Corporate liquidity – X rayed. The Management Accountant. 15 (8): 331-334.Parasuram, N.R. 2006. Synchronous movement of Key Parameters with Profitability-An Explanatory study on the

Two Wheeler and Three wheeler sector. GIM Journal of Management. 1 (1): 26-28.Singh, K.P. 1981. Capital Structure and Returns. The management Accountant. 16 (8): 375 - 376.Sundarsana, Reddy G. 2003. Financial Performance of paper industry in Andhra Pradesh the Quarterly. Journal of

Indian Institute of Finance. 17 (3): 1027 - 1033.Thackray, J. 1995. What’s new in Financial Strategy. Planning Review. 23 (3): 14-.l9.Vijakuamr, A. and Venkatachalarn, A. 1995. Profitability and viability: Working Capital and – profitability A

Empirical Analysis. The Management Accountant. October: 748-750.


AWARENESS AND USAGE LEVELS OF THE FINANCIALDERIVATIVES BY TURKISH COMPANIES:

A RESEARCH ON THE COMPANIES IN KONYA REGION

Semih BUYUKIPEKCISelcuk University Social Sciences Vocational School Of Higher Education KONYA / TURKEY

TEL: +90 533 612 95 95 FAX: +90 332 241 00 [email protected]

Ali ERBASISelcuk University Seydisehir Vocational School Of Higher Education, Seydisehir / KONYA / TURKEY


Tugay AratSelcuk University Social Sciences Vocational School Of Higher Education KONYA / TURKEY

TEL: +90 332 241 00 [email protected]

ABSTRACT

Many companies have been embarking on a quest for finance techniques recently. Within this scope we have observedthat the usage of the derivatives have become widespread in the companies of Turkey. The aim of our study is contributingfor the determination of the usage and awareness level of the derivatives in the companies of the I. Organized IndustrialSite of Konya province that has the biggest surface area in Turkey. 100 companies were chosen as the study groupamong the 350 companies of the Organized Industrial Site of Konya in this context. Our survey has been carried out bymeans of face to face method and the feedback of the survey is 100 %. The survey has been analyzed by the program ofSPSS 16.00 with a level of 0.05 significance. In order to classify research data frequency, percentage and averagemethods are used. Regarding to the research findings issues relating to the rate of derivatives consciousness and usage,reasons of using derivatives consciousness and usage, reasons of using derivatives or not, frequently used derivatives,importance of derivatives from the point of view of companies and the matter of employing o functional unit within thecompany are pointed out.

Keywords: Awareness, derivatives, usage

INTRODUCTION

The variability in environmental conditions bring about the concepts of uncertainty and risk-taking. Two conceptsrelating to the uncertainty are perceived as synonymous and one of them is subjective while the other one is objective.Because of the fact that the concept of uncertainty is subjective and lists of quantitative data depending on observationsin the past are out of question, any probability based on the numerical size regarding an event or transaction for futurecan not be calculated. However the concept of risk; can be denoted as probability sizes which can be characterized bynumerical values (Doherty, 1985:9).

Financial risk management is the sum of efforts to minimize or eliminate losses caused by unexpected changes inexchange rates, interest rates, price of commercial products and stocks (Parlakkaya, 2003:93).

Aim of financial risk-management is to minimize or eliminate the risks of losses caused by effects of price changes ona firm’s assets, debts or future commitments (Coopers and Lybrand, 1987:14). Companies, by using various riskmanagement techniques, try to compensate the loss induced by fluctuations of financial value prices on active andpassives.

Futures markets are the markets where any commodity or financial instrument is already traded on condition that theyare delivered and cash is settled in a future date. Definition of futures market comprises forward, swap, futures andoption all. Transactions of futures and option underlying the basis of futures market are mostly run at organized marketsand as normal consequences, transaction criteria such as maturity, size of contract, guaranties requested and rate agreements


are determined by the related stock markets. The main reason to standardize futures contracts (futures and option) tradedon organized stock markets is to ensure market liquidity. Thus, futures markets constitute an important financial andeconomic environment including tools described as derivatives and used for hedging. Because it relies on the principle ofcreating a temporary substitution position to offset a position that will arise within an asset or liability or keep the positionuntil an existing position liquidate. While hedging is generally based on off-balance sheet assets, it can be based on on-balance sheet assets, now and then. Derivatives such as, futures, forward, option and swap are used for the purpose ofhedging (Usta, 2002:224).

DERIVATIVE

There are four kinds of derivatives in finance literature. In this section of the study for types of derivatives –forwards,futures, swaps and options- which are being used frequently by the firms in Turkey are described and than the research willbe given.

Forward contracts with aims of delivery comprises trade of a certain amount and quality of money, foreign currency, gold,financial instrument, property and other derivatives at a market not organized like stock market with pre-determined pricesand at a future date (Ortan,2001:39). The main purpose of forward is to secure risks caused by price changes.

Characteristics of forward contract transactions are as follows (Ceylan, 1993:299).- Forward transactions, are transactions without any central market place.- Forward transactions are performed with various communication tools and prices vary with respect to reputation

of customer.- Forward contracts are not standard contracts. Contract parties freely determine all details about the product

subject to contract.- Forward contracts cannot be transferred to third persons. Thus, cancellation of the contracts is only possible

with the agreement of contract parties. Also, exchange of contracts is out of question. Forward transactions generally laston delivery.

- When dues of forward contracts fall, parties need to complete their liabilities.- At forward transactions, parties are not to pay each other until the realization of contract.

Futures contracts are kind of legal contracts which require delivery of a certain quality and amount of property andsecurities at the price determined at contract date and on pre-determined future date. They are transferable contracts witha complete standardization regarding items transacted at stock market for pre-determined prices in future and the guaranteeof contract by clearing house is written to the holder (Usta,2002:243).

Characteristics of futures transactions are as follows;- Aim of futures contract is future price trading of the item subject to contract.- Futures contracts are registered in private places assigned for the contract.- Futures contracts provide protection (hedging) against interest rate and currency risk.- Speculators’ being present at the market increases liquidity.- At futures contracts parties can liquidate the contract at any time they want.- For futures contracts it is not necessary for contract parties to know each other.- Futures contracts are written on the holder and are easy to transfer to third persons (Usta, 2002:244).

Swap can be defined as exchanging two cash flows having different characteristics to minimize disadvantages that mayoccur on the basis of country, company and foreign exchange and to reduce risks created by changes between interest ratesand exchange rates (Aydin, 2008:368). It is a futures within the scope of exchanging a certain amount and quality of assetslike money, foreign exchange, gold, financial tool, claims and property at a future date and at a market organized as in formof bank according to pre-determined prices and conditions (Ortan,2001:311).

In a more general meaning, swap is the exchange of debts. Interest rates, principal or both principal and interest paymentsof principal may be included in payments subject to exchange. The objective of swap is to minimize risks caused byfluctuations recorded in interest rates and exchange rates (Usta, 2002:229). The reason of using the swap technique isarbitrage, increasing rate of return on assets, risk management, reducing cost of resource and yielding benefit through trade(Canbas and Dogukanli, 1997:103).

There are two parties as buyers and sellers in option transactions like as in other transactions. Option owner or dealer isparty who has the right to use option contract he has purchased in exchange for a certain price and premium within givendate indicated in the contract or at the end of it. Option dealer may not want to use option at the end of maturity. In this

Semih BUYUKIPEKCI, Ali ERBASI and Tugay Arat


AWARENESS AND USAGE LEVELS OF THE FINANCIAL DERIVATIVES BY TURKISH COMPANIES:A RESEARCH ON THE COMPANIES IN KONYA REGION

situation the other side is not requested of a refund of premiums he has paid. In other words investor purchasing theoption starts investment with a certain amount of loss from the very beginning by paying for premium. Maximum lossthe option dealer has is as much as premiums he pays. The profit is theoretically limitless (Ceylan and Korkmaz, 2000:195).

While option is not a security in real sense, it is a futures contract trading which the buyer has rights of withdrawal(Ortan, 2001:245).

METHEDOLOGY

Derivatives not being used frequently in different fields in Turkey are important tools for companies in managingfinancial risks. Increasing usage frequency in companies at Turkish markets of these products used for hedging andfocused on minimizing financial risks are important tools to reduce financial risks. The aim of this study is to determinethe usage and awareness level of the derivatives in the companies of the Organized Industrial Site of Konya provincethat has the biggest surface area in Turkey.

Revealing effectiveness level of companies operating in Turkey about usage and awareness level of derivative productswill put forward the need to make companies conscious. From this point of view, the need to eradicate misconceptionsof company viewpoints about derivative products may arise. For that reason conducting studies about the awareness ofderivatives is of utmost importance with respect to revealing deficiencies about the subject at markets.

The study is a descriptive survey model. Survey methods are researches trying to describe an existing situation or asituation in the past with all aspects. In this study the existing situation is not tried to alter or affect but efforts to reflectoriginal situation and viewpoints are made.

In this study the usage of future, swap and option of employees, their implementation and opinions of the employeesoperating actively at Organized Industrial Site of Konya province in December 2010 are tried to be determined. 350workplaces operating at Organized Industrial Site of Konya as of the year 2009 constitute the research universe. 100joint-stock companies operating at this region constitute the research sampling.

The surveys developed by the researchers are used in the study as data collection tools. In the first part of surveyquestions data about the company is gathered and in the second part views on derivatives and usage of derivatives areobtained. While developing the survey, literature scanning is made. At this stage expert opinions are resorted, and lateron the pilot implementation is carried out on 30 businesses with 17 questions. Then with the data obtained, factor loadsand reliability coefficient of questions are calculated. According to these studies, the survey is conducted on 100 businesseswith face-to-face interview method. 8 survey questionnaires turn out to be pointless and are not taken into considerationduring evaluation process.

For coding, solving and analyzing the data obtained in the study SPSS 16.0 statistics program is used.

Significance level of the study is determined as 0.05. To classify data in the study frequency, percentage and averagestatistical analysis is conducted.

Expert opinions are resorted about validity of the research formulated and in the light of criticism some alterations aremade on questions. For reliability study of the research, Cronbach Alpha reliability analysis is used in SPSS. In thestudies when alpha coefficient is 0.80<a<1, the scale is known to be highly reliable. At the end of application conducted,reliability coefficient of computer attitude scale (alpha) is found out to be as 0.87.

Our study is only conducted on 100 businesses out of 350 operating at Organized Industrial Site of Konya province. Forthat reason, businesses except for 100 businesses situated in that site are excluded in the scope of the research. Again,all the businesses not situated in this site are constraints of the study.


FINDING

Findings obtained through the study are as follows;Chart 1 Basic Information

n %Gender of research participants

Male 78 84.8Female 14 15.2Total 92 100

Positions of research participants at their companiesChairman of the Board 15 16.3Manager 39 42.4Assistant Manager 38 41.3Total 92 100

Manager’s years of experience dealing with finance1-5 years 27 29.36-10 years 35 38.011-15 years 23 25.016-20 years 7 7.6Total 92 100

Manager’s level of training dealing with financeSecondary Education 7 7.6Associate Degree 42 45.7BA 39 42.4MA 4 4.3Total 92 100

84.8 % of research participants are male and 15.2 % are female. 16.3 % of the research participants work as chairmanof the board, 42.4 % manager and 41.3 % assistant manager. Managers’ years of experience dealing with finance aremostly between 6-10 years and about 38 %. Education level data centers at associate degrees (45.7 %) and BA (42.4 %).

Chart 2 Company Profile

n %Age of the company

6-10 18 19.611-15 40 43.516-20 30 32.621-25 4 4.3Total 92 100

Management Structure of the CompanyFamily Members 72 78.3Professional Executives 20 21.7Total 92 100

Existing Capital Structure of the Company200.001-300.000 Turkish Liras 14 15.2300.001-400.000 Turkish Liras 37 40.2400.001-500.000 Turkish Liras 33 35.9500.001 Turkish Liras and above 8 8.7Total 92 100

It is understood that the companies participated in the research operate for 11-20 years (76.1 %). Majority of thecompanies (78.3 %) are run by family members, companies meeting management needs with professionals are scarce(21.7 %). According to the study, there are not any businesses with capital of 1-100.000, Turkish Liras among companies.Current capital rates of the companies are highly between (76.1 %) 300.001 and 500.000 Turkish Liras.




Chart 3 Status Of Training On Finance

n %Yes 84 91.3No 8 8.7Total 92 100

Majority of the research participants (%91.3) have received no training on finance.

Chart 4 The Status of Usage and Awareness of Derivatives

Swap Forward Futures Option NoneI heard 86 (93.5 %) 86 (93.5 %) 86 (93.5 %) 86 (93.5 %) 6 (6.5 %)I did not hear 6 (6.5 %) 6 (6.5 %) 6 (6.5 %) 6 (6.5 %) 86 (93.5 %)Total 92 (100 %) 92 (100 %) 92 (100 %) 92 (100 %) 92(100 %)

Swap Forward Futures Option NoneI used 2 (2.2 %) 10 (10.9 %) 11 (12 %) 4 (4.3 %) 71 (77.2 %)I did not use 90 (97.8 %) 82 (89.1 %) 81 (88 %) 88 (95.7 %) 21 (22.8 %)Total 92 (100 %) 92 (100 %) 92 (100 %) 92 (100 %) 92 (100 %)

According to Chart 4, 93.5 % of research participants are informed about derivatives and 6.5 % are not informed.Approximately 90 % of the participants reported that they do not use derivatives. Futures contracts with the ratio of12 % are the most used derivatives.

Chart 5 The Reasons of Not Using Derivatives

n %I do not know how to handle it 37 40.2I do not rely on the market 1 1.1I have no staff to deal with it 33 35.9Total 71 100

Reasons of not using any of derivatives for 71 people are presented in chart 5. Among the reasons of not using derivativesthe first one is not to know how to do it and the second one is not having any staff to take care of it.

Chart 6 The Purpose of Derivatives Usage and Profit Status

n %Managing risk and avoiding risk 7 46.7Gaining speculative profit 6 40.0Testing 2 13.3Total 15 100

Yielding benefit 11 73.3Not yielding benefit 4 26.7Total 15 100

The proportion of companies using derivatives is 16.3 %. The usage purposes of companies are shown in chart 6.Majority of the companies using derivatives yielded benefits.

Chart 7 Importance Level of Derivatives Contracts

Mean Standard DeviationExchange rate 1.2667 0.45774Merchandise price 3.3333 0.48795Interest rate 4.0000 0.75593Customer risk 1.5333 0.51640Political risk 1.4667 0.51640


Importance levels of elements in the usage of derivatives contracts are presented in chart 7. Accordingly, interest rate isregarded as the most important item and later merchandise price is regarded as the second most important one. Exchangerate is given the least importance.

Chart 8 Unit Responsible for Risk Management

n %Yes 63 68.5No 29 31.5

68.5 % of the participants reported that they want to form a risk management unit operating at their company. But therest of the participants said that a risk management unit operating is unnecessary.

RECOMMENDATION

Solutions that companies seek to eliminate financial risks increase demands on derivatives every day. However,applications remain mostly across large firms; they are not reflected to small and medium-sized enterprises. In thiscontext, analyses are done to determine the usage, awareness level and inclinations of the derivate products in thecompanies of the I. Organized Industrial Site of Konya province.

While 93.5 % of managers of the companies surveyed that deal with finance are informed about the derivatives, 6.5 %of them are not informed about any of the derivatives. Almost 92 % of the sampling use the derivatives. Researchfindings indicate that the companies heard about the derivatives but they do not have detailed information about them.Businesses included in the sampling, consist of family companies generally. As a result, finance department is notattached enough importance. Staff having received adequate training in the field is very small. Futures contracts are themost frequently resorted derivatives by users of the derivatives.

71 enterprises surveyed who never used the derivatives before, base this situation on two basic reasons. The first one isnot to know how to do and the second one is the absence of staff that can deal with the issue.

About 47 % of the companies using the derivatives turn to purpose of risk management and 40 % of them turn tospeculative gaining. Also, a group of 13 % mentions that they use the derivatives for testing.

The severity levels of elements in the usage of derivatives contracts are tested. According to this, interest rates in thederivatives contracts become prominent and merchandise prices come after as the second. Exchange rates turn out to bethe most trivial one. Again 68.5 % of research participants prefer availability of a unit related to risk management attheir organizations and 31.5 % do not need this, though.

Although majority of the research participants (91.3 %) have had training on finance, the usage and awareness levels ofthe derivatives come out to be quite low in terms of different variables. Analysis results support the hypotheses thatawareness levels of small and medium-sized organizations about the derivatives are quite low and that they do not havethe tendency to use the derivatives.

Because firms’ are operated by family companies family members run all the departments themselves. At some companiesuniversity-educated family members are informed about the issue and believe that using the derivatives is unnecessary.Despite the availability of a potentially suitable market, lack of qualified staff and companies’ taking a dim view of theexisting market affect the usage of the derivatives negatively.

We predict that general profile of small and medium-sized companies in Turkey share this inclination. In this contextawareness of small and medium-sized organizations about the derivatives should be raised not only in Konya provincewhere the research sampling is carried out but all over Turkey. Especially the necessity of improving and makingwidespread of operating methods of the futures option exchange and carrying out informative and educational studiesabout the derivatives for every kind of businesses at regional basis is significant. In this context, conducting projectsencouraging and informing companies and thus making usage of the derivatives prevalent is of utmost importance tocompanies for risk management and consequently achieving competitiveness.




REFERENCE

Aydin, Erkan. 2008. Vadeli Islem ve Opsiyon Sozlesmelerinde Saglanan Gelirlerin Gelir Vergisi Kanunu Ge�iciMadde 67 Kapsaminda Vergilendirilmesi. Marmara Universitesi Iktisadi ve Idari Bilimler FakultesiDergisi, (2).

Bolak, Mehmet. 1998. Finans Muhendisligi Kavramlar ve Ara�lar. Istanbul: Beta Yayinevi.Canbas, Serpil ve Dogukanli, Hatice. 1997. Finansal Pazarlar. Istanbul: Beta Yayinevi.Ceylan, Ali ve Korkmaz, Turhan. 2000. Sermaye Piyasasi ve Menkul Deger Analizi. Bursa: Ekin Kitabevi.Coopers, and Lybrand. 1987. A Guide to Financial Instrument. London: Euromoney Publications.Doherty, Neil A. 1985. Corporate Risk Management: A Financial Exposition. New York: Mc Graw Hill.Ergincan, Yakup. 1996. Endekse Dayali Vadeli Islem S�zlesmeleri. Ankara: Pelin Matbaacilik.Orten, Remzi ve Orten, Ipek. 2001. T�rev Finansal Ara�lar ve Muhasebe Uygulamalari. Ankara: Gazi Kitabevi.Parlakkaya, Raif. 2003. Finansal Turev Urunler ile Mali Risk Yonetimi ve Muhasebe Uygulamalari. Ankara: Nobel

Yayinevi.Usta, Ocal. 2002. Isletme ve Finansal Yonetim. Izmir: Anadolu Matbaa.


Nemia C. MallariPolytechnic University of the Philippines Bataan Campus

ABSTRACT

In order to develop timely information about the cost of manufacturing specific product and performing specific functions,an effective cost accounting system must be used. The cost accounting system consists of techniques, forms and accountingrecords designed to suit the needs of the management. The system may differ from company to company but the commonalityof the desired objective must be achieved. Determining the correct cost of the products produced to set a reasonable sellingprice is very important in management’s decision-making. Incorrect costing results to either lost opportunities or it may bea direct cause of losses. Overstated selling price may reduce the number of customers and in case selling price wereunderstated, there will be no sufficient income to cover the costs and expenses. Costing products properly providesmanagement with vital information that will be useful in pricing decisions which ultimately affect profits. The study wasconducted with the 27 companies operating at the Freeport Area of Bataan, Philippines (FAB formerly Bataan EconomicZone), all manufacturing firms. Data were collected through the use of researcher-made questionnaire, meetings, observationsand informal interviews with the participants. Empirical findings indicate that there is significant relationship between thecost accounting system and the present product cost accumulation process. The study also addressed the factors whichcapture all the product costs consisting of direct materials, direct labor and factory overhead. The researcher believes thatconclusions have important implications for managers and professionals with respect to pricing decisions.

Keywords: Cost Accounting System; incorrect costing; overstated and understated selling price; cost accumulation process

INTRODUCTION

In today’s competitive, innovative environment, to stay in business, a firm must be able to compete locally and globally.Competition is a game wherein the fittest survives and the unfit are eliminated. In the process of competition, the ownermust outshine his competitors, thus creating value for the business. Keeping products available at a price acceptable tothe customers is a major competitive edge of one business over another. A big price gap between two firms manufacturingalmost identical products at an almost similar quality, all things being equal, may be an indication of a weaknesssomewhere. Where it is not due to operational process, it may be brought about by a system where cost accumulationmethod needs to be reviewed.

Without the use of a proper system, keeping track of the details on how the cost of the product accumulated will bedifficult to attain. The system must be able to relate in full details how the cost of the product came about. The what’s,the how’s, the where’s and the when’s in the product costing must be so regarded. Therefore a sound and a solid systemworking harmoniously with a valid basis is suggested.

Theories on cost accounting system were discussed and a good number of studies were noted. Cohen and Kaimenaki(2008) explored the relationship among cost accounting systems structure and information quality properties throughan integrated framework that encompasses both systems structure characteristics and cost information effectivenessfeatures. Al-Omiri and Drury (2007) reported on the findings that higher level of cost system sophistication are positivelyassociated with the importance of cost information, extent of the use of other innovative management accountingtechniques, intensity of the competitive environment, size, the use of JIT /lean production techniques but no associationbetween level of cost system sophistication and cost structure, product diversity and quality of information technology.Cooper and Kaplan (1988) wrote “measure costs right; make the right decisions”. Datar and Gupta (1994) dealt withaggregation, specification and measurement in product costing while Feltham (1977) tested cost aggregation andinformation economic analysis and Hilton (1979) analyzed the determinants of cost information value.

OBJECTIVE

The purpose of the study is to be able to capture all the factors that affect the increases and decreases in the product cost.This is to evaluate in all dimensions the cost accounting system being used by the companies, to determine the appropriate

THE RELATIONSHIP BETWEEN COST ACCOUNTING SYSTEMAND THE PRESENT PRODUCT COST ACCUMULATION

PROCESS: ITS IMPLICATION ON PRICE DETERMINATION


THE RELATIONSHIP BETWEEN COST ACCOUNTING SYSTEM AND THE PRESENT PRODUCT COSTACCUMULATION PROCESS: ITS IMPLICATION ON PRICE DETERMINATION

accounting system that fits their operational activities and to recommend possible courses of action such as to continuean ongoing working system, to install an additional techniques or forms or to discontinue one which becomes redundantor ineffective. Although cost of the product is not the sole basis in assigning selling price to manufactured goods, yet, itwill create a solid basis for pricing decisions. Every company is duty-bound to keep accounting records to prepareperiodic reports. These reports must be able to give rich information that will help the management strengthen itsdecision-making process as well as for the other users of data.

METHODOLOGY

The study tested the existing practices of the different manufacturing firms operating at the Freeport Area of Bataanconsisting of 27 companies. A survey was conducted with the manufacturing firms to set the relationship between thecurrent existing cost accounting system and the respondents’ perception as to the relative importance of various items inthe cost accumulation process. A five-point Likert scale was used to ask the cost accountants or accountants to evaluateeach of the 21 items in the system if it is currently in use with “1” being “Never” to “5” Always”. Then, they were alsoasked their perceptions whether these items fit the cost accumulation process in their respective companies with “1”being “Strongly Disagree” to “5” Strongly Agree”. In addition , profile of the companies were evaluated in terms ofManufacturing Industry Classification, Number of Years in Operation, Nationality of the Owners and the ManufacturingProcess.

27 cost accountants/ accountants of the companies were contacted and were asked to participate in the study. Thisrepresents 100% of the surveyed companies. The instrument consisted of a cover letter indicating the purpose of thestudy and a two- part questionnaire. The first part identifies the profile of the companies in terms of industry classification,the number of years in operation, the nationality of the owners and the nature of cost accumulation. The second part, all21 questions, consist of 12 questions which tend to identify the current cost accounting system on materials management,forms and cost flows, 7 questions on labor and labor related documents, 3 questions on application of overhead costsand 5 questions on finished goods related questions.

DISCUSSION

This investigation is anchored on the theory of Cost Accounting System ( Meigs and Meigs 1990) which consists of thetechniques, forms and accounting records used to develop timely information about the cost of manufacturing specificproducts and performing specific functions (Figure 1). Basically, cost accounting involves the computation of the costof goods sold section in the Income Statement and the inventories in the Balance Sheet.

However, cost accounting being part of the managerial accounting function (Carter and Usry 2002), also contributes tothe planning, controlling and decision making activities of the company such as budgeting and performing in accordancewith the planned future activities, methods of production whereby costs are reduced with accompanying improvedquality of goods, maximizing production quantity, decision between two or more alternatives, price and profitdetermination and ultimately accomplishing the company goals.

The research took off from the review of the cost accounting cycle (Mejorada 1997) which gives information about thesteps undertaken in the determination of the cost of the product. The system focuses on the accumulation of the elementsof cost (Figure 2). This entails the accompanying transactions from the time materials are purchased, ordered, received,and issued to production as well as scrap recovery. Likewise, labor cost are properly measured and identified to aspecific job order and are costed. Overhead is computed in total and is allocated among the different job orders withinthe month. However, the accumulated cost will differ depending upon the method to be used. These are the job ordercost system, process cost system, the blended methods and just in time and backflush costing. Each method recordsdirect materials, direct labor and manufacturing overhead.

Product cost consists of direct materials, direct labor and manufacturing overhead (Rante 2009). Direct materials forman integral part of the finished product and is clearly identifiable with the unit output and its consumption is material interms of volume. When materials in the warehouse have reached its reorder point, the warehouseman draws the documentPurchase Requisition on a timely basis. Purchase Requisition or Purchase Order Request is a document prepared internallyin the organization notifying the purchasing department that certain materials in stock need to be purchased. Informationas to the quantity, the time frame and authorization to proceed with the purchase are stated therein. The purchasingdepartment then prepares the Purchase Order which is issued to the supplier of materials indicating the types, quantitiesand agreed prices. Once the PO is accepted by the seller, this is considered as a contract and the seller has the obligationto deliver the items as agreed upon. Upon delivery of the goods, another document, Materials Receiving Report is


is prepared. In this report, the receiver must see to it that it that the same materials found in the Purchase Requisition andPurchase Order must tie up with the delivered goods. This is one form of check and control. Materials actually receivedare brought to the warehouse department for safekeeping and further management. The newly received materials isentered in the received column of the Stock Card thereby increasing the balance of the materials which has reached itsreorder point. For production order, Materials Requisition is issued by the production department to the warehouseman.This is a document that indicates the type and quantity of materials to be drawn from the storeroom. This also identifiesthe job to which the cost of materials are to be charged.

When the materials are issued to production, Materials Issuance Report is drawn in the warehouse department. Samematerials are to be recorded in the issued column of the stock card. Sometimes, excess materials are obtained eitherbecause of an allowance in the issued materials, an error in estimating materials consumption or materials were utilizedeffectively. The document Returned Materials Report is then prepared which must also be recorded in the negativeissued column of the stock card. For the materials utilized in the production, scrap materials may be recovered out ofmaterials leftover from the manufacturing process which may be sold and may be treated as a reduction in the cost ofdirect materials used for a particular job order or may be treated as other income.

The above mentioned flow of documents is to be carried out in order to keep track of the raw materials. This must beproperly managed in order to avoid stockout or holding of excessive inventories. In addition, there will be check andbalance among the different departments. The purchasing department cannot order over and above what has beenrequisitioned to be purchased.

Figure 1 Theoretical Framework

Nemia C. Mallari



Figure 2 Conceptual Framework

The materials issued to production must be costed appropriately. The most ideal cost flow to be used is specificidentification method. However, this method is also the most impracticable to use. In the warehouse, voluminous quantityof materials may be kept overlapping each other therefore in times of changing prices, its not possible to identifyphysically the specific cost of each material. A means to facilitate the costing process is to make use of the cost flowmethod. The physical flow of materials need not necessarily be the cost flow. First-in first out costs materials issued toproduction based on earliest purchases and the remaining stock on hand are based on latest purchases. Thus, in times ofrising prices, materials issued to production cost lower than the ending inventory. Another cost flow method is that ofmoving average. A new unit cost is computed every time materials are purchased at a different unit cost. This new unitcost then is assigned to the cost of materials issued to production.

Direct labor cost is another cost component. This is composed of the wages of employees who performed the task ofconverting the raw materials into a finished product. Labor cost related documents include the time cards, time tickets,payroll sheet and payroll distribution sheet. Time card or clock card is a document which measures how many hours agiven employee has worked. This is the card inserted in a bundy clock which records the time in and time out. At the endof the period, the timekeeper measures the length of time each employee has worked. Time tickets show how thenumber of hours worked were spent. These are applicable only on direct labor cost. It identifies to what particular job


order the labor cost was utilized. A payroll sheet shows the gross pay of the employees, the deductions from salary suchas withholding taxes, social security system premiums, philhealth premiums, pag-ibig premiums and other deductions,and the takehome pay of employees. In a payroll distribution sheet, the labor cost is classified as direct labor, indirectlabor, supervision, overtime premium,idle time and other labor cost category.

Manufacturing overhead are those costs which are neither direct materials nor direct labor but are necessary to beincurred in the production process. The management must not only be aware on how to control manufacturing overheadbut also must understand how it is assigned and allocated to the products. One such kind of allocation basis is with theuse of actual input measurement bases, normal historical and standard. In actual measurement basis, the cost componentsnamely direct materials, direct labor and manufacturing overhead are taken at actual quantity at actual cost. Normalcosting assigns actual quantity at actual cost for direct materials and direct labor but for manufacturing overhead, actualquantity is multiplied by estimated cost. Standard costing uses all estimated quantity and estimated cost for directmaterials, direct labor and manufacturing overhead. Manufacturing overhead may also be classified between fixed costand variable cost. Total fixed cost remains the same regardless of the volume of production but in per unit basis, itdecreases as the volume of production increases because there are more units to absorb fixed cost. Whereas totalvariable cost increases as the volume of production also increases. But a unit variable cost remains the same at whatevervolume of production is reached. In the application of overhead, ABC costing or the use of plantwide rate for overheadmay be used. Activity Based costing allocates overhead to multiple activity cost pools. First, activities are identifiedsuch as work performed such as number of set ups, orders, parts, number of inspection, number of labor hours, designsand others. Total factory overhead then is allocated to activity cost pools. In here, multiple overhead rates are used .Traditional costing uses single plantwide rate which is allocated to the products.

The accumulated cost for materials , labor and overhead shall make up the finished goods. The cost of the finishedgoods may be affected by factors such as spoiled goods, defective goods and joint and by-products. Spoiled goods arefinished products which have developed imperfections along the process of production which cannot be reworked andare only capable of being sold as seconds or b-grade. It will be more economical to sell these goods as is because furtherreprocessing will make the profit margin less. Defective goods also developed imperfections in the process but they arecapable of being reworked for a minimal additional cost and these products will be saleable at regular selling price. Theconcept of joint products also involve the process of allocation of cost. In a single process, cost of direct materials ,direct labor and manufacturing overhead are put together until the point where these products are identified at split offpoint and the resulting output from the joint process using process costing is called joint products. Total cost of the jointproduct shall comprise its allocated cost in the joint process plus its own separable cost. Treatment for the recovered by-products may either reduce the cost of the main product or to increase the income. Sometimes, production process tendto decrease in volume or quantity as a result of evaporation or shrinkage. Cost of finished goods will be affecteddepending on the stage of discovery.

Table 1 Company Profile: Industry Classification, Number of Years in Operation, Nationality of the owners

Profile N=27 PercentageManufacturing Industry Classification

Apparel Industry 14 52%Rubber and Miscellaneous Plastic Industry 6 22%Chemical and Allied Products 2 7%Textile Industry 2 7%Furniture and Fixtures 1 4%Electronics and Electrical Equipments 1 4%Transportation Equipments 1 4% Total 27 100%

Number of Years in OperationMore than 20 years 6 22%10 – 20 years 10 37%5 – 9 years 7 26%4 years and below 4 15% Total 27 100%

Nationality of the OwnersKoreans 12 44%Taiwanese/Chinese 10 37%Others 5 19% Total 27 100%

Nemia C. Mallari



When the survey documents were retrieved and tallied the following results were summarized. The first part of thequestionnaire focused on the company’s profile. Results of this study showed that the profile manufacturing industryclassification, 14 (52%) belong to apparel industry, 6 (22%} rubber and miscellaneous plastic industry, 2 (7%) forchemical and allied products, 2 (7%) (textile mill industry, 1 (4%) furniture and fixture industry 1 (4%) electronics andelectrical equipment and 1 (4%) transportation equipment. Qualifications of an applicant as Ecozone enterprise are anyperson, firm, association, partnership, corporation or any other form of business organization regardless of nationality,control and/or ownership of the working capital thereof may apply for registration as an Export or Free Trade Enterprisein the Ecozone in any sector of industry, international trade and commerce. Companies registered with BEZ are classifiedas belonging to light and medium industries. An Ecozone enterprise company is a company that exports at least 70% ofits production. The most number is with apparel industry probably because it is the kind of manufacturing businesswhich is the easiest to set up.

The number of years in operation presented 6 (22%) companies to be operational for more than 20 years, 10 (37%)between 10 to 20 years, 7 (19%) between 5-9 years, and 4 (22%) 4 years and below. The length of time the business isin operation counts much when it comes to tax matters. An income tax holiday is given to prioritized companies asfollows: for pioneer projects, 6 years, for non pioneer projects, 4 years and for expansion projects, 3 years. Projectslocating in less developed areas may enjoy a six year income tax holiday regardless of status, pioneer or non pioneer, ortype of project, new or expansion. After the income tax holiday, the locator is entitled to special incentive of 5% final taxon gross profit. The current corporate tax being imposed on corporations is 30% of net taxable income. The companies20 years and above in operation are considered with staying power. For 5-20 years in existence means they havegraduated to become stronger and more resilient to all the tests of either staying or getting out of business. Four yearsand below are the trying years , the babying years which tends to help the locator to be self sufficient, operate with theirfull income they enjoy and either flush it back into the operation or establish a permanent structure for added production.Nationality of owners revealed 12 (44%) Koreans, 10 (37%) Taiwanese/ Chinese, and 5 (19%) belong to Filipinos,American and others. It was found that although all the companies manufacture on a per order basis, 10 (37%) companiesuse job order cost system while 17 (63%) use blended cost system and no company uses just in time and backflushcosting. Most Asians find it more convenient to operate in an Export Economic Zone because of the convenience inoperations and special benefits. Building and facilities are ready for occupancy and the ease in environmental factorsbecause the Zone is designed for environmental compliance. Rather than setting up all the infrastructure themselves, ifthings do not turn out right, then the investor can easily pack up and relocate some other places either within or outsidethe country. Economic Zones give the locators the ease in the entry and exit in business.

On cost accounting method questions, it revealed a .999 correlation coefficient, with strong correlation at 5% level ofsignificance. The cost flow that is most in use is that of first in first out. Most materials are imported therefore theymaintain a high volume of quantity per order. It take sometime before a new order is made. Therefore, moving averageor weighted average method is impracticable to use. One company uses specific identification because the product iscustom built and parts are specifically designed. This company repairs, assembles and make yachts.

The second part of the survey questionnaire which was structured to elicit vital information needed in this investigationwas also summarized (Table 2). Questions related with direct materials forms which include stock cards, purchaserequisition, purchase order, materials receiving report, materials requisition, materials issuance, returned materialsreport and scrap materials showed a correlation coefficient of .765, strong correlation, which is significant at 5% levelof significance. All the companies are manufacturing concerns which deal with more comprehensive transactions. Sincebusiness documents are evidence of business transactions, a complete line of documents, along with traceable data isnecessary for check and control. The economic zone is administered by the government therefore compliance with thereporting regulations is a must. Two kinds of scrap materials are recoverable from the operations, some are recyclableand can command selling price while some are not which are thrown and buried at designated places as per environmentalpolicies.

On cost accounting method questions, it revealed a .999 correlation coefficient , with strong correlation at 5% level ofsignificance. The cost flow that is most in use is that of first in first out. Most materials are imported therefore theymaintain a high volume of quantity per order. It take sometime before a new order is made. Therefore, moving averageor weighted average method is impracticable to use. One company uses specific identification because the product iscustom built and parts are specifically designed. This company repairs, assembles and make yachts.

For direct labor questions on time cards, time tickets, payroll sheet and payroll distribution sheet, a correlation coefficientof .894, strong correlation and it was significant at 1% level of significance. In this computer generation, payrollpreparation is no longer a tedious work. Work are now programmed in a software. Inputs are easily transformed intoinformation to expedite preparation of payroll. Work done in hours before may now be completed only in a few seconds.


Questions on overhead application include input bases covering actual costing, normal and standard costing, the breakingdown of overhead between fixed and variable and on application of overhead rate based on activity and the use ofplantwide rate for applying overhead. This showed a .999 correlation coefficient with a strong correlation at 5% level ofsignificance. In overhead applied to production, the usual rate used is the plantwide rate based on units of production.

Table 2 Cost Accounting System and Present Cost Accumulation Process

Dependent Independent Correlation Verbal Sig. Remarks Variable Variables Coefficient Interpretation (2-Tailed)Present Cost Cost Accounting .999 Strong .032 SignificantAccumulation Methods CorrelationProcess Direct Material .765 Strong .016 Significant

Forms CorrelationLabor and Labor .894 Strong .007 Significantrelated Forms Correlationand DocumentsOverhead .999 Strong .034 SignificantApplication of Cost CorrelationFinished Goods .997 Strong .000 Significant

CorrelationCorrelation Analysis Interpretation:

1 Perfect Correlation .20 - .39 Weak Correlation .70 - .99 Strong Correlation .01 - .19 Negligible Correlation .40 - .69 Moderate Correlation .00 Perfect Correlation

For the finished goods related questions a correlation coefficient of .997 was revealed showing strong correlation at 1%level of significance. The cost of finished goods for a given order is increased by incurring defective goods because ofthe additional cost to reprocess the goods. Likewise for lost units, there will be lesser number of units which will absorbthe total cost incurred to produce the order. Joint products may either increase or decrease the cost of the productdepending on the allocated cost of the joint cost. By- products are seldom recoverable in the operations, only scrapmaterials.

CONCLUSION

Empirical analysis showed a prominent application of theories in cost accounting. The study produced results that areconsistent with theoretical expectations. Respondents are unanimous in their perception that the current cost accountingsystem in use demonstrates responsiveness to the present cost accumulation process. The process of accumulating costby job order, by process costing or by blended method complements cost determination. Although the concept of just intime and backflush accounting system is not feasible in the existing environment, someday when materials locallyproduced and easy to access became suitable for the manufactured products of the exporting companies, then thissystem may also be put to use. Pricing which is materially based on cost is supplemented by the result of this findings.

REFERENCE

Al-Omiri, M. and Drury, C. 2007. A survey of factors influencing the choice of product costing systems in UKorganizations. Management Accounting Research. 18: 399-424.

Carter, William and Usry, Milton. 2002. Cost Accounting. 13th Edition. Singapore:Thomson Learning AsiaCohen, Sandra and Kaimenaki, Efrosini. 2008. Cost accounting systems structure and information quality

properties: An empirical analysis. [Online] Available: http://www.aislab.aueb.gr/accfin/downloads/seminars/seminar_ek.pdf on March 1, 2011.

Cooper, R. and Kaplan, R. S. 1988. Measure costs right: make the right decisions. Hardvard Business Review.September-October, pp. 96-103.

Datar, S. and Gupta, M. 1994. Aggregation, specification and measurement errors in product costing. TheAccounting Review. 69: 567-591.

Feltham, G.A. 1977. Cost aggregation: An information economic analysis. Journal of Accounting Research. 15: 337-353.Hilton, R. 1979. The determinants of cost information value: An illustrative analysis. Journal of Accounting Research. 17: 411-435.Meigs, Robert and Meigs, Walter. 1990. Accounting: The Basis for Business Decisions. 8th Edition. New York: McGraw Hill.Mejorada, Nenita. 1997. Cost Accounting. Quezon City: JMC Press.Rante, Gloria. 2009. Cost Accounting. Mandaluyong: Mutual Books Inc.

Nemia C. Mallari


SOCIAL CAPITAL HAS A VOICE: THEORY, METHODAND PRACTICE, 'CAPTURING THE VOICE'

Heather GilhespyBSc. Psychology,

MSc, Organizational BehaviourMA. Applied Social Research Methods.

Doctoral candidate, University of the West of England at BristolColdharbour Lane BS16 1QY Bristol

[email protected]: +6 8 9266 7714 Mob: +61 0 403 779 770

Fax: +61 8 9266 3368

Alma WhiteleyChair of International Human Resources

Curtin Graduate School of Business Curtin University 78 Murray Street, Pert Western Australia, 6000

[email protected]: +6 8 9266 7714 Mob: +61 0 403 779 77

Fax: +61 8 9266 3368

ABSTRACT

This paper is Thai oriented and presents theories, methods and practices to capture the voice of managers and employeeswho, separately and together, make up the organizational voice, its social capital. Thailand has escalated its efforts tobecome more competitive but at the same time, blend such efforts with the National Economic and Social DevelopmentPlan (NESDP), the sufficiency economy principle and, in a foundational way, the important Buddhist values that permeatebusiness as well as social life. The paper poses, as seeks to answer the following questions.

Why should employees be given a voice? Traditionally, they have been there to be managed by managers and leaderswho reflect the vision, mission and strategy of the organization. Employees as valued social capital in the west are nowwell recognized and, increasingly, research has been conducted to investigate employees’ perceptions about motivationand commitment. However, as found, there are conflicting cultural imperatives between western and Thai culture. Thispaper will use Thai government and business initiatives to answer the question of why employees’ voices are necessaryfor success. The next question asks “Which theories inform research into engaging with the workforce to capture theemployee voice – and what do managers and leaders need to know”? The theories discussed in this section are selectedfrom the ‘family’ of theories that inform how to gather and use employees’ perceptions – Symbolic interactionism,phenomenology ethnomethodology and ethnography, highlighting symbolic interactionism and phenomenology, usingdata from our researches to illustrate the appropriate questions asked of each. Grounded theory/grounded researchdemonstrates a useful method of capturing employees’ voices.

Key words: social capital, symbolic interactionism, phenomenology, grounded theory.

INTRODUCTION

This paper discusses social capital and its relatively recent focus on the human dimension. Central to the discussion isthe notion of embeddedness of social capital in human social relations. The paper offers two sociological perspectives,symbolic interactionism (Blumer, 1969; Mead 1934/1963) and phenomenology (Moran, 2000; Schutz, 1967) asepistemological lenses, interspersed with research data, through which to view and study social capital in organizations.Following this, the paper describes grounded theory (Glaser 1998; Glaser and Strauss, 1967) and grounded research(Whiteley, 2004). An impetus for the paper is the Thai NESDP, National Economic and Social Development Plan (seeCurry and Sura, 2007 for details of National Economic and Social Development Board NESDB initiatives), in whichThailand has escalated its efforts to become more competitive but at the same time, blend such efforts with the sufficiency


economy principle (Whiteley, 2010) and, in a foundational way, the important Buddhist values that permeate businessas well as social life (Niffenegger, Kulviwat & Engchanil, 2006).

Why should employees be given a voice? Traditionally, they have been there to be managed by managers and leaderswho reflect the vision, mission and strategy of the organization. Employees as valued social capital in the west are nowwell recognized and, increasingly, research has been conducted to investigate employees’ perceptions about motivationand commitment (Napoli, Whiteley & Johansen, 2005; Stone, Stone-Romero & Lukaszewski, 2007; Whiteley, 1995;Whiteley & McCabe, 2001; Whiteley & Whiteley, 2007). However, as (Niffenegger, Kulviwat and Engchanil, 2006)found, there are conflicting cultural imperatives between western and Thai cultures. These differences it is argued here,especially the Buddhist principles of Kreng Jai (consideration towards others’ feelings and a reluctance to impose uponanother person) and Buun Kuhn (indebted goodness often used for the relationship between two people doing favoursfor each other on a continuous basis) impact on critical management processes (Niffenegger, Kulviwat & Engchanil,2006, p. 411). As these authors and Klausner (1998) remind us

For modern Thai society, Klausner (1998) sees the need for and possible development of new mechanisms for cooperative,collaborative partnerships, at all levels of society. These may be created through experimentation in areas such as legaland political reform, natural resource management and rational security, resulting in new policies and innovativeprogrammes.

We would add, these new mechanisms could include social capital development and research.

SOCIAL CAPITAL

Social capital is more than the sum of the parts of individuals and groups interacting in organizations. Social capital isa complex construct and one which has been acknowledged since the time of Marx (1818-1883), a prominent andinfluential socialist thinker see (Singer, 1980). Durkheim (1933,1938) a French social scientist, saw society in terms ofits social facts, and the structures and functions within which people should operate. He proposed that social capital wasan issue of society as a whole as it sought to maintain social order. Weber (1947) rejected this ‘positivist’ view of societyand recognized that social action, especially in institutions, should be based on interpretation of the meaning andpurpose individuals attached to their actions. However, Weber was a rationalist and he designed an ideal bureaucraticmodel of organizing. Although his was a theoretical model, it was grasped by western industrialists and governments asa rational, dispassionate, objective, impersonal and scientific (Taylor, 1911) way of organizing. The bureaucratic modelis widely practiced today and, critics say, furthers the cause of materialism and the capitalist ethic (Deckup, Jurkiewicz& Giacalone, 2010). However, the emphasis on rationalism, structural and functionalist approaches to social systems,together with the ‘efficiency’ watchword in business meant that the human face of social capital and the possibilitiesoffered by the products of social interaction were not fully appreciated or explored in any depth. Dinda (2008, p. 2020)reflects the more human side of social capital, bringing in to play the human qualities that are amplified within the Thai(Buddhist) setting (Curry & Sura 2007; Niffenegger, Kulviwat & Engchanil 2006).

Social capital is a broad term containing the social networks and norms that generate shared understandings, trust andreciprocity, which underpin cooperation and collective action for mutual benefits, and creates the base for economicprosperity.

Baum and Ziersch (2003) support Dinda’s definition of social capital, applying it to interactive relationships such associal networks. These tend to be reported as informal, with characteristics of support, trust and reciprocity. Informalnetworks may be an under-recognized generator of social capital, especially in the Thai setting which seems to bepermeated by quantitative, confirmatory studies. This paper, and the methodologies explained, complements positivistresearch into relationships, especially those that allow employees as generators of social capital to have a voice.

Until the Hawthorne Studies, (Mayo, 1930; Roethlisberger & Dickson, 1939), productivity (and with it competitiveness)was largely thought to be related to external conditions. The studies were a collection of ‘experiments’ conducted from1924 to 1932 at the Western Electric Company Hawthorne Works. They began in the scientific tradition. One study wasinitially focused on how much lighting was needed to achieve efficiency but avoid costs. Interestingly (especially inlight of our interest in the human side of social capital) results were baffling. No matter how the lighting was manipulated,productivity went up. What could be causing such a syndrome? Results were to change the landscape of motivation forboth groups and individuals. They showed that motivation was not produced by external conditions but inner aspects ofsocial interaction within organizations.

Heather Gilhespy and Alma Whiteley


SOCIAL CAPITAL HAS A VOICE: THEORY, METHOD AND PRACTICE, 'CAPTURING THE VOICE'

Two distinct schools of scholarly thought were generated from the studies. One was the School of Human Relations atthe Tavistock Institute of Human Relations, a not-for-profit organisation which applies social science to contemporaryissues and problems. The Institute ‘speaks’ through the Journal of Human Relations where studies of groups and groupdynamics, group processes and the effect individuals have on group behaviors are published. The Neo-human school ofthought was interested in individuals and their motivation. Maslow’s (1943, 1970) theory of motivation, expressed as ahierarchy of needs was considered important to be met by employers as part of the organizational rewards system. As ahumanist psychologist, Maslow operated from a belief that every individual had a strong desire to reach his or her fullpotential. However, the way was not clear until basic needs such as safety and security were met. Intrinsic to this was thebelief that humans wanted to continue to accomplish. Focusing on the job, Herzberg, Mausner and Synderman (1959)and Herzberg (1966) proposed elements of enriched jobs that, in themselves would be motivating. They discovered thatachievement, recognition for achievement, responsibility for tasks, advancement to higher level tasks and the nature ofthe work itself would motivate people. It needs to be noted that these elements are qualitative and tacit in nature,appealing to the intrinsic factors of a job. The more extrinsic factors such as status, job security wages/salary/ fringebenefits supervisory practices, or other external elements such as company policy performed the role of avoidingdissatisfaction. Reported organizational research (Whiteley, 1995; Whiteley & McCabe, 2001; Whiteley & Whiteley,2007) confirmed the idea that money and conditions were important but not, as managers assumed, as important asvalues of honesty, openness, autonomy and integrity. From the perspective of social capital, the exchange relationshipwith managers and jobs themselves mediated willingness to perform and try harder. Continuing the theme of the jobitself and aligned to both Maslow and Herzberg, was the Job Characteristics Model (JCM) of Hackman and Oldham(1976) and Hackman and Oldham (1980). The model states that there are five core job characteristics, skill variety, taskidentity, task significance, autonomy, and feedback. These say the authors, impact on three critical psychological states,experienced meaningfulness, experienced responsibility for outcomes, and knowledge of the actual results, in turninfluencing work outcomes, see Figure 1.

Figure 1 JCM, task identity, task significance and job feedback

We have highlighted three elements of the model for discussion regarding social capital. The first is task identity. Howdoes a person sitting in an office processing invoices, a factory worker assembling parts, a salesperson selling productsknow where their tasks fit in the grand scheme of the organization’s success? Do they need to know? Consider taskssuch as toilet attendant, canteen assistant, vehicle cleaner, or floor sweeper. Each of these tasks is essential to thehygiene, health and sometimes safety of the organization. Each of the people performing the tasks is a generator ofsocial capital, positive or negative. If the organization takes pains to inform each job holder of where the job andassociated tasks fit in the overall scheme of things, then this has the potential to circulate throughout the organization aspositive feedback and the reverse is the case. Task significance operates in a similar way. How important am I to thisorganization? It is taken for granted that managers are important as they hold positions of authority and are responsiblefor planning and organizing employees’ working lives. Employees however, need to know, through the organization’sculture, norms, reciprocity and trust relations, just how significant their tasks are to organizational success. This is oftenexpressed as recognition (Herzberg, 1966) but, in terms of social capital, it has much more generative potential.

The next characteristic with potential for social capital is job feedback or knowledge of the results of the work. Jobfeedback is an interesting construct as it can be viewed in a narrow (task appraisal) or in a broad (problem solving) way.This is where culture, trustworthiness and reciprocity come into play. Both James Coleman (1988) and Robert Putnam(1995) identify several themes within social capital. First, it involves social relations and the need to penetrate them tofind the richness (or not) of their contribution to the organization’s success. As such, social capital is, to organizations,a resource for action. The important thing here, is that the resource lies within social relations, not individuals butindividuals, socialising together, can be a stock of potential and communicative actions. Social capital is almost


interchangeable with Schein’s (1985, p. 52) culture construct, "as a pattern of shared assumptions, invented and sharedby a given group, as it learns to cope with its problems of external adaptation and internal integration that has workedwell enough to be valid and taught to the next group.” We would add, drawing on the work of (Baum and Ziersch,2003b; Navarro, 2002; Coleman, 1988; Farr, 2004; Koka & Prescott, 2002), that within a group’s assumptions and thenorms it adopts comes a generative force of reciprocity, coordination and communication which can both solve problemsand ‘invent’ new ways of doing things. Putnam (1995) describes the benefits of social capital.

For a variety of reasons, life is easier in a community blessed with a substantial stock of social capital. In the first place,networks of civic engagement foster sturdy norms of generalized reciprocity and encourage the emergence of socialtrust. Such networks facilitate coordination and communication, amplify reputations, and thus allow dilemmas of collectiveaction to be resolved. When economic and political negotiation is embedded in dense networks of social interaction,incentives for opportunism are reduced. At the same time, networks of civic engagement embody past success atcollaboration, which can serve as a cultural template for future collaboration. Finally, dense networks of interactionprobably broaden the participants' sense of self, developing the "I" into the "we," (p. 67). It is clear that social capital isconsidered to be a valuable resource to any community and this includes the communities within organizations (Tsai,2000). It is also clear that social capital is embedded within social relations.

THEORY AND PRACTICE

Even within formal arrangements for social relations there is an embeddedness about them that requires an interpretive,qualitative approach to their identification and use for the benefit of the organization. Here is where a salient differencebetween a positivist, scientific view of social systems, such as those adopted by Durkheim (1938) and Weber (1947),occurs. The meaning of social interaction, social trust, decisions about reciprocity between individuals and groups arenot observable. They need to be interpreted by the actors involved. As such different theoretical perspectives to scientificmethods are needed. This section integrates theory and practice, showing extracts from our research into engaging withthe workforce.

They answer the question “Which theories inform research into engaging with the workforce to capture the employeevoice – and what do managers and leaders need to know”? The theories discussed in this section begin with the ‘family’of theories that inform how to gather and use employees’ perceptions – Symbolic interactionism (Blumer, 1969, 1984;Mead, 1963 [orig. 1934]; Woods, 1992), and phenomenology (Moran, 2000; Schutz, 1967) are illustrated in this paper.Ethnomethodology (Button, 1991; Garfinkel, 1967), Ethnography (Hammersley & Atkinson, 1983; Maggs-Rapport,2000; Falk, 2010) and Hermeneutics (Gadamer, 1976; Gadamer (translators G.B. Hess., and R.E. Palmer 1970) are alsopart of the ‘family’ of interpretive perspectives.

SYMBOLIC INTERACTIONISM

This perspective is important to managers and leaders as it recognizes that meaning is a co-production of social capital.When individuals network, whether this is formally or informally within an organization, meaning is produced. Theconsequences of the meaning impact on such desirable attributes as high commitment, high productivity, high loyalty andreciprocal trust. A key question is “how can we find out the current meaning being produced within the organization”? Areported study illustrates this point (Whiteley, 2005). A safety campaign to eliminate lost time injuries (LTI) was initiatedby the CEO in person. It culminated after one month in almost every employee in this construction organization having 30stickers on the hard hat (each sticker representing a day without LTI). At the celebration laid on by the company, the CEOwho had spearheaded the campaign did not attend. His apologies were made by a site manager, that he had a meeting witha minister and so could not come. What did this behaviour symbolize in terms of the meaning made by the employees?How might the result affect future safety initiatives? Had the CEO been aware of the meaning attributed to his not attending,would he have managed to attend?

The idea that more was to be gained than studying social systems using scientific methods aimed at identifying regularitiesand irregularities has a long history. Benzies & Allen (2001) chart the journeys of some of the more influential scholars ofthe 19th Century. As these journeys evolved, G.H. Mead (1963) [orig. 1934] conceptually defined two aspects of theindividual. The intensely personal and private self was the ‘I’. The social self, the ‘Me’ depends on and reflects socialinteraction and especially through the expectations of others. These two selves are mediated by the mind’s engagementwith symbols of meaning “Simply stated, the ‘mind’ is action that directs the use of symbols toward ‘self’ (Charon, 1995 inBenzies & Allen, 2001, p. 541). George Herbert Mead is credited with aggregating and refining the work of early sociologistsand philosophers (He, himself was a professor of Philosophy), introducing concepts that are central to understanding thesocial exchanges embedded within social capital.




Mead (1963) [orig. 1934], (cycles of interactions of mind, social self and societal self provide meaning and enableadjustment to social needs) refers to the natural activity of recognising and accommodating the views of others. Theimportance of communication as social interaction is evident in what Blumer (1969, 1984), who coined the term symbolicinteractionism, calls “the simple premises that are the foundation of interactionism” (Musolf, 2003, p. 103). These are:

- Human beings act toward things on the basis of the meanings that the things have for them;- The meaning of things is derived from or arises out of the social interaction that one has with one’s fellows;- Meanings are handled in and modified through an interpretive process used by the person in dealing with the

things he encounters.

It is this interpretive process that is of interest to penetrating the embedded relationships within a social capital boundedcontext (a group, an interaction of departments, interactions with customers, suppliers and other stakeholders). Examplesymbolic interaction questions of employees (or other stakeholders) are “what does this mean to you...what do you thinkof the new arrangements...how would you and your colleagues act next time such a thing happens...what did you makeof the CEO not attending the celebration”? Such questions are meant to discover how employees (or other stakeholders)interpret events and activities (including policies and procedures) in the organization. The following data are from acomplex organization (DBCT) that integrates coal mines, railway transport, a coal terminal and transfer to ships (Napoli,Whiteley & Johansen, 2005).

The quotation below is the ‘theorizing of a supervisor on the (then) management initiative ‘Going from command andcontrol to cooperation’.

From there to there you've probably got the riskiest piece of leadership management that you'll ever experience. It's veryrisky to go from control and command to getting people to participate in the business. It's such a risky step and this iswhy a lot of organisations don't take the leap because to go from here to here you've got to be prepared to make mistakesto get it wrong. You've got to be prepared to pick them up, and help them forwards and you've got to let go of some stuff.Some things might happen and say not the way that I would have done it but another guy would say to people who workwith me, are you sure they can shift and I say yes, is what you're about to do is it going to stop that process? Mimickingthe other guy. 'NO', OK well then let's give it a go, I still help them with some things and we helped them to have ahealthy discussion yesterday about in a issue but it's in order to help them to think their way through to make a decision,I didn't take it off them but I said I've got some issues with it, I look from the dark side and I tell them what I see and theygo away and they fix it

What we see is an individual (in this case a supervisor) theorising about a particular organizational strategy – movingfrom control to cooperation. Looked at another way, we could say that he is commenting on the social capital he canmake (or break) if he adopts certain strategies and not others. The next perspective of interest to social capital isphenomenology and this concerns the individual and his/her account of experience.

PHENOMENOLOGY

To study social behaviour by interpreting its subjective meaning as found in the intentions of individuals. The aim, then,is to interpret the actions of individuals in the social world and the ways in which individuals give meaning to socialphenomena (Schutz, 1967, p. 11).

Most organizations, at some time or other, initiate deep change in vision, mission, strategy, structures, systems andprocesses. Many of these report what appears to be resistance, anxiety, non-acceptance resulting in rejection of thechange. Although such events are well reported in the literature, this does not always help managers and leaders tounderstand and interpret the actual experience of those involved. What was it about the change initiative that stuck inthe consciousness?

Husserl (1931) focused on the structures of consciousness and the appearance of events as experienced. His theory is oftencalled transcendental phenomenology because, like other social scientists of the day, he wanted to rise above individualversions of consciousness towards a collective consciousness (Durkheim, 1933, 1938). Schutz (1967a, 1967b) proposed,however, that individuals are engaged in an ongoing process of making sense of the world. Their ‘first-order’ experience(say a change policy) is translated into a ‘second-order’ construct which is the way individuals apply their consciousness toexperience it. The individual has developed a personal system of relevancies that enables him to select from both the event(say the change policy) and social interaction with others, applying the typifications built up over time that result in‘experiential awareness’. Consciousness's capacity to capture reflectively and distinguish lived experiences, is a particularhuman capability. In simple terms, it is the here and now, of an event becoming a lived experience that is important for themanager and leader to appreciate.


manager and leader to appreciate. For the researcher, the phenomenological requirement is for the ‘bracketing’ as muchas possible, of his or her own experience, subjective interpretations, ideal types. Barber (2010) proposes that Schutzcautioned social scientists that they needed to be wary of replacing the viewpoint of everyday actors with a fictional,non-existing world constructed by themselves. This caution is particularly relevant to qualitative researchers as accountsof experience from respondents pass through the researcher’s personally held perceptions.

Phenomenology happens through actual conversations held with managers and/or employees (Whiteley, 1995, p. 52).We found that managers, when asked for their perceptions of what employees valued from them most of all, typicallyreferred to what we know as Herzberg’s (1966) hygiene factors such as conditions, wages and supervision. When theemployees were asked what they actually valued most from their managers, three constructs were presented – honesty,integrity, trust (and additionally autonomy and freedom). This was Senge’s (1992) mental models in action. Managersapplied their own mindsets to what employees valued. The actual ‘lived experience’ reported by employees was verydifferent. The data that follow show extracts from quotations about how senior human resource managers experiencedtheir organizations concerning rules and policies linked to stability (each quotation extract is separated by //).

Our organisation is introducing systems, rules and procedures to enhance predictability etc i.e. moving towards autopoiesisfrom a chaos environment // rules and procedures which govern reward concessions based on years of service rather thanperformance/innovation // too many rules on one hand yet an inability of management to work without them // itinstitutionalises everything rules, regulations, etc. // functional groups implement new strategies – institutionalise practices// promotion policy stated by rules and regulations but actually shaped by unwritten rules and selected by male onlymanagement // where threatened by exposure protects itself by quoting rules and regulations yet its history is not seen as‘institutionalising’.

These particular data were gathered by pen and paper and not through personal interaction, thereby minimizing‘contamination’ of the researcher’s own lived experience as a human resource manager (Whiteley, 1999).

RESEARCH METHOD

A suitable research method for engaging with the workforce with the view of giving social capital a voice is the qualitativeresearch methodology (Denzin & Lincoln, 1994, 2000, 2005). Qualitative research is linked in a flow of assumptions toconstructivism which proposes that individuals construct a personal account of their experiences, interpretivism, whichproposes that meaning is created from events and symbols and this meaning is interpreted by individuals and qualitativemethodology aimed at capturing responses. This set of terms is expressed as a constructivist ontology, interpretiveepistemology and qualitative methodology. Encircling these are the sociological perspectives selected for the study (inthis case, symbolic interactionism and phenomenology). A typical qualitative research design is exemplified in Figure2. As this figure suggests, there are many decisions to make before choosing the best method to capture employee (andother stakeholders’) voices. Assumptions are that individuals (and in their social networks) construct their own versionsof ‘reality’. The nature of knowledge to be collected is interpretive and the researcher (manager leader or professional)interacts with individuals to collect their interpretations of organizational issues.

It is always necessary to find out what existing work has been done in the field and in the case of social capital, thefollowing references would be useful (Adam & Urquhart, 2009; Ahern & Hendryx, 2003; Baum & Ziersch, 2003a;Bouma, Bulte & van Soest, 2008; Coleman, 1988; Farr, 2004; Koka & Prescott, 2002; Lin, 2001; Purdue, 2001; Tsai,2000). Care must be taken to read the literature but not to the extent that theories seem to ‘fit’ the organization, bringwith them the temptation to make the ‘voices’ fit existing theories.

There are many qualitative research methods (see Creswell, 1994, 2002, 2003 for the theory and practice of mixedmethods) but grounded theory (Glaser & Strauss, 1978; Glaser, 1992, 1998; Glaser and Strauss, 1967) supported bylater writers (Charmaz, 2000, 2002; Charmaz & Bryant, 2010), has the benefit of a set of systematic procedures thatguide the manager, leader or researcher through the process of capturing voices. Grounded research (Whiteley, 2004)has been presented in a modified version for the business setting. What follows (Figure 3) is a brief account of theactivities of a grounded theory/grounded research activity.

The overarching value in grounded theory is emergence. This means less input from the researcher and more outputfrom employees’ (or other stakeholder’) voices. It is useful to do a familiarization study first (Whiteley & Whiteley2006), so that the manager, leader, researcher can become familiar with the aspects that make respondents comfortable(see (Joungtrakul 2009) for a Thai example of strategies to make respondents comfortable). There are several datacollection methods available such as interview, storytelling, scenarios (Whiteley 2005) and they all allow voices to be



heard. There are many software products available to help manage data which means that this sort of research becomingmore efficient. Data analysis also follows a systematic procedure so that a piece of meaning (a code) is captured,allocated to a category (or collection of codes with the same meaning). Categories build up and they can be checked andcompared in an ongoing way (constant comparison). From the data, themes and concepts emerge which offer bothinsights and the beginnings of a grounded theory.

SUMMARY

In summary, Thailand through the National Economic and Social Development Plan (NESDP), has resolved to seekbusiness success but at the same time enable people (including those in organizations) to participate in their workinglives. The concept of social capital has evolved from an objective rational/economic construct to one of socialconstructionism where people and the meaning produced by social interaction can be a valuable and valued resource inorganizations. The more scientific, quantitative methods of accessing and ‘measuring’ social capital are less useful inthe human dimension. Theories of social systems such as symbolic interactionism and phenomenology are useful indiscriminating between the sorts of question to ask of individuals. Are we asking for their personal ‘theories’ oforganizational issues or are we asking for their accounts of ‘how it is’?

Having established this, what is the knowledge needed to convert ideas into trustworthy research? Knowledge of ontology(the nature of ‘reality’), epistemology (the nature of knowledge and stance of the researcher) and methodology (tomeasure or to access tacit knowledge) are needed in order to construct a research design in stages. Within the design,methods (such as grounded theory/grounded research) can be used so that other areas in the organization can be studiedusing the same procedures.

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AN EMPIRICAL STUDY OF PERFORMANCE OFPENSION FUNDS OF SELECTED PRIVATE SECTOR

LIFE INSURERS OF INDIA

Ashok KhuranaGuru Nanak Khalsa College

Yamunanagar (HR)-India

Roshan LalMM Institute of management

Maharishi Markandeshwar UniversityMullana-Ambala (HR)- India

ABSTRACT

Retirement planning is a well-known phrase today. Indian pension market has a market opportunity with potential worthRs 12 trillion ($280 billion) by 2020 as reported by research firm IIMS Dataworks. According to a survey conducted byMetLife India Insurance Company, over 80 per cent of Indian employees have done no retirement planning independentof mandatory government plans. In India, the entry of private insurance players into the insurance business has made thebusiness very competitive. These companies are offering very innovative pension products and competing with eachother to get the maximum share out of this enormous business opportunity. The present study is an endeavor to assessthe performance of hybrid pension plans of the top three players from among the private sector life insurance companies.Hybrid pension funds are offered in India by the name balanced funds. The study evaluates the projected fund values ofthe selected funds, the actual performance of funds in comparison to their benchmark –CRISIL Balanced Fund Index.The study has used ANOVA, Tukey HSD post hoc test, and Dunnet t test for hypothesis testing. On the basis of analysisit finds that there is no significant difference in the average performance of the selected funds. Further, insignificantdifference has been found in the performance of the funds as against their benchmark index.

Keywords: Retirement, government plans, pension products, performance

INTRODUCTION

Retirement planning is a widespread term today. Retirement planning is a long drawn out course of action that desiresa lot of effort and planning for a long period of time. It is a process of determining the goals of an individual by the timeof retirement. It is concerned with saving a part of income to ensure that these funds are available to achieve the goalsalready set. The basic idea is that an individual has the adequate funds when he retires from active life to meet a certainstandard of living. The need to accumulate for the future and make sure a good life following retiring from the work isthe vital reason that gives rise to the entire concept of retirement planning. Planning and keeping aside certain sums forretirement is not a new concept in India as traditionally Indians have been a big saver. There is inevitability of retirementplanning due to numerous reasons that have been playing out in the Indian scenario in the last few decades. Theincreasing life span, impact of inflation, falling rate of fixed return, self dependence, breakdown of joint family system,unintended emergencies, increasing medical costs, coping with family health problems are the major reasons whichadds to the magnitude of retirement planning. Further, changing life style, personal values, and nature of income-regularor uncertain, risk taking ability of an individual, advice of financial planner, and seriousness to financial planning mayhave an impact on retirement planning.

PENSION FUND MARKET POTENTIAL

A. Global contextThe value of pension fund assets in the world's major markets more than doubled over the past 10 years to $23.2 trillion(11.8 trillion pounds) at end-2006, with the United States retaining its top ranking, as per survey of consulting firmWatson Wyatt The U.S. market was the largest, followed by the Japanese and then British pension markets. The consultingfirm's survey of 11 big pension markets showed that assets grew at a compound annual rate of 7.5 percent over the 10-year period from 1996. During the course of last year, pension assets rose by about 11 percent in local currency termsand just above 13 percent when measured in U.S. dollars.


B. Indian contextA study conducted by research firm IIMS Dataworks reported that the Indian pension market has a market opportunitywith potential worth Rs 12 trillion ($280 billion) by 2020. According to the survey, nearly 80 million Indian workerswith no social security are ready to contribute to a retirement savings system. That’s four times the number of those nowsaving for their retirement in life insurance and other financial products, said the report, and based on the Invest IndiaDataworks Income and Savings Survey of 2007 conducted by the firm. As per the recent survey conducted by theNational Sample Survey Organisation (NSSO) estimates suggest that by 2025, people aged above 60 will account for14.5 crore of the Indian population. Further, 94 per cent of the workforce employed in the unorganised sector, do nothave access to any formal provident fund facility. Social security will be a big challenge for the Government twodecades from now if individuals don’t plan more actively towards retirement.

Table 1 Life expectancy (in years)

Year Male Female1901 23.6 23.91951 32.4 31.61971 46.4 44.71990 58.6 58.72001-06 62.3 65.220011-16 67.0 69.22025 72.0 76.0

Source: Registrar General India and Statistical abstract

According to a survey conducted by MetLife India Insurance Company, over 80 per cent of Indian employees havedone no retirement planning independent of mandatory government plans. Developed countries have fared far better,with only 58 per cent of the employees in Australia, 46 per cent in the US and around 30 per cent in the UK not takingsteps to determine income need or resorting any sort of retirement plan. One interesting finding in the survey aboutIndia is that nearly three out of four employees say they are concerned about outliving retirement savings. Only one ofevery three has taken steps to determine their retirement needs. Thus, only 20 per cent have planned for retirement.Hence, it is very much clear on the basis of MetLife survey that a large section of many full-time workers across theworld have taken few or no independent steps to plan for retirement.

LITERATURE REVIEW

Rob Bauer and Rik Frehen (2008) analyzed the net equity performance of US defined and defined contribution schemesat plan level, using a unique and comprehensive database. The study evaluated Pension fund performance by taking intoaccount fund-specific benchmarks and multiple cost components. Pension funds perform close to their benchmarks,whereas size-matched mutual funds strongly underperform. They observed that results are consistent with the notionthat pension funds are less exposed to hidden agency costs than mutual funds. Efficient fund pooling provides pensionboards with enough negotiating power and monitoring capacity to ensure that institutional asset managers serve theinterests of participants.

M Kabir Hassan and Dr Shari Lawrance(2007) conducted a survey on, “An Analysis of Financial Preparation forRetirement’’.In this study, researcher analyze financial preparation for retirement. Specifically, probit analysis wasconducted using data from the Survey of Consumer Finances to compare and contrast variables affecting retirementpreparation between men and women aged thirty to thirty-nine. The findings indicate that good health and work historyhave significant positive effects on retirement plan eligibility whereas age and education levels have significant negativeeffects. Regarding retirement plan contributions, the findings indicate significant positive effects regarding income andwomenhood. Education is significant and positive as a predictor for the decision to contribute to a pension plan forwomen in their thirties, thus supporting our hypothesis of a significant positive relationship between education andpension plan contributions. Finally, household size was insignificant as a predictor of both pension plan eligibility andthe decision to contribute.

Peter Albrecht et al (2006) conducted a research on investment risks and returns of hybrid pension plans. This paperanalyzed pension plan costs and investment strategies in the context of alternative hybrid pension plans which areoptimal either from the perspective of the plan sponsor or the beneficiaries. The study pointed out that the portfoliochoice of the sponsor and the beneficiaries shows substantial differences depending on the exact plan design and thebeneficiaries’ risk aversion. Combining minimum return guarantees and caps on investment returns emerged as a possible

Ashok Khurana and Roshan Lal


AN EMPIRICAL STUDY OF PERFORMANCE OF PENSION FUNDS OF SELECTED PRIVATE SECTORLIFE INSURERS OF INDIA

means to reduce such differences, to share investment risks and returns more equally between sponsor and beneficiaries,and to keep pension plan costs under control.

R.R.Rajamohan (2006) conducted a research on impact of financial knowledge on household portfolio. The studyfound the existence of a significant and positive relationship between the financial knowledge and ownership of riskyassets, which calls the attention of the policy makers while proceeding further in implementing the defined contributionpension plan.

John Ameriks and Paul Yakoboski (2003) argued that the retirees face retirement problems such as longevity risk, rateof return risk, inflation risk and medical risk. They should annutise the accumulated savings to ensure guaranteed streamof income. However, they found that the annuitisation rates among the retirees are low and opined that one of the majorreasons is the lack of consumer understanding of the benefits of the products.

Ajay Shah (2000) opined that forcing the participants - the working class - to make appropriate asset managementdecisions calls for answering to the question of their financial literacy. The survey conducted by Indian Investor EconomicFoundation (IIEF-2002), surveyed 1832 Indian respondents in July 2002. It assessed the knowledge, attitudes andbehaviours towards retirement, saving, risk, investments etc. and concluded that for achieving households continuedvoluntary participation in the new pension system it is desirable to have a quantum improvement of financial knowledge.Bernheim et al (1996) analysed the effect of employer sponsored retirement education on household saving behaviourand found that employer-based retirement education in the work-place strongly influenced household financial behaviourby increased retirement saving and increased total retirement wealth.

NEED OF THE STUDY

Review of literature reveals that retirement planning has been the focus of study of research scholars, government aswell as life insurance industry. Previous studies have done a lot of research on preparation for retirement, factorsinfluencing retirement, distribution channels of the retirement products etc. However, a few studies have focused onevaluating the performance of pension funds in India. In India today there are twenty one life insurance players andalmost all of them have been in the pension business for several months. They are selling pension plans products tosecure the retirement life of individuals. This study is an attempt to evaluate the performance of unit linked pensionplans-balanced/hybrid of the top three leading private sector life insurance companies. The hybrid/balanced funds are agood investment option for an investor with moderate risk profile.

OBJECTIVE AND HYPOTHESE

The specific objectives of the study are as follow:- To study the potential of pension funds market in India as well as international level.- To analyze the projected fund values of selected pension plans.- To analyse the performance of pension funds-balanced in comparison to its benchmark i.e. CRISIL

Balanced Fund Index.- To compare the performance of pension funds and find out the best performing pension fund amongst

the selected insurance players.

The hypotheses developed for the study are as follows:- There is no significant difference in the average performance of the pension funds-balanced of the

selected insurance companies.- There is no significant difference in the average performance of the selected pension funds-balanced in

comparison to its benchmark- CRISIL Balanced Fund Index.

METHODOLOGY

The present study evaluates the performance of the pension plans of the three leading private sector insurance companies.The insurance companies selected for the study are HDFC SL, ICICI Pru, and Bajaj Allianz. There are two types ofpension plans offered by insurance companies i.e. Participating Pension Plans and Unit Linked Pension Plans. Thisstudy evaluates the performance of Unit Linked Pension Plans i.e. Pension funds- balanced. The pension fund-balancedof the selected insurance companies are: HDFC Balanced Managed Fund, ICICI Pru Balancer Pension, Bajaj AllianzBalanced Plus Pension. The study is primarily based upon the published data. The main sources of secondary/publisheddata are books, journals, brochures and benefit illustrations obtained through financial advisors, and web sites of the


selected insurance companies. The study evaluates the performance of the selected pension funds for the F.Y. 2004-05,F.Y. 2005-06, F.Y. 2006-07, F.Y. 2007-08, and since inception returns.

RESULT & DISCUSSION

This section relates to analysis of performance of the pension plans of the selected insurance companies. It comparesthe performance of balanced funds of the HDFC UNIT LINKED EQUITY PENSION, ICICI PRU LIFE TIME PENSION,BAJAJ ALLIANZ- UNIT GAIN EASY PENSION PLAN REGULAR PREMIUM.

The performance of the selected pension plans has been evaluated by classifying it into following two categories:(A) Analysis of Projected Fund Values(B) Analysis of performance of Balanced Funds

(A) Analysis of Projected Fund ValuesProjected fund values are the values based on assumed investment return of 6% p.a. and 10% p.a as per IRDA

guidelines. These returns are non-guaranteed policy values. The investment risk in the investment pension plans isborne by the policyholder and the given interest rates are only for illustration purpose. Table 2 shows the projected fundvalues based on assumed investment return of annual premium of 6 percent and 10 percent. The projected figures arebased on the benefit illustrations for a premium amount of Rs 30000 p.a., and a policy term of 20 years.

Table 2 Projected fund values based on assumed investment return of 6% p.a. and 10 % p.a. (annual premium Rs30000, term 20 years, regular premium)

Sr.No. Life Insurance Fund Value at Fund Value at Company Maturity* Maturity*

(in Rs) at 6% p.a. (in Rs)at 10% p.a.1 HDFC SL 885469 13868072 ICICI Pru 930397 14674453 Bajaj Allianz 890404 1409762

Source: Benefit illustrations of the selected pension plans *Non Guaranteed Returns

The analysis of table 2 depicts that the projected returns @ 6% p.a. are Rs. 885469, Rs. 930397 Rs. 890404 for theselected pension plans of HDFC SL, ICICI Pru, and Bajaj Allianz respectively. Further, on the basis of projected returnsof 10% p.a., the fund values for the selected pension plans of HDFC SL, ICICI Pru, and Bajaj Allianz are Rs. 1386807,Rs. 1467445, Rs. 1409762. On the basis of projected returns it can be clearly stated that projected returns are highest forthe pension plan of ICICI Pru, and lowest for the pension plan of HDFC SL. (B)Analysis of performance of selected pension funds- balancedThis part of analysis evaluates the performance of the balanced funds of the selected pension plans. Table 3 shows acomparison of performance of selected pension funds –Balanced of the selected insurance companies in comparison toits peer groups and its benchmark index. An analysis of the performance of selected pension funds-balanced is given asfollows:

Table 3 Comparison of performance of selected pension funds

Period Period From Period To HDFC SL ICICI Pru Bajaj Allianz Benchmark Balanced Balancer Balanced Plus CRISIL Balanced Managed Funds Pension Pension Fund Index

F.Y. 2004-05 01.04.04 30.03.05 12.26 6.84 n/a 6.47F.Y. 2005-06 01.04.05 30.03.06 40.49 24.28 28.09 37.04F.Y. 2006-07 01.04.06 30.03.07 6.48 7.61 9.10 9.47F.Y. 2007-08 01.04.07 30.03.08 16.89 16.15 16.30 19.52First Quarter 01.04.08 30.06.08 -7.42 -5.15 -7.60 -10.00Second Quarter 01.07.08 30.9.08 2.16 1.00 1.37 1.23Third Quarter 01.10.08 30.11.08 -14.44 -8.20 -12.52 -19.68Since Inception* 02.01.04 30.11.08 7.76 7.63 6.27 6.62* Since Inception returns are annualized returns



AN EMPIRICAL STUDY OF PERFORMANCE OF PENSION FUNDS OF SELECTED PRIVATE SECTORLIFE INSURERS OF INDIA

Analysis of table 3 reveals that the pension funds-balanced has shown a mix performance in comparison to its benchmark-CRISIL Balanced Fund Index. HDFC SL Balanced Managed Fund has registered a highest growth amongst the selectedpension plans in the F.Y. 2004-05 and F.Y. 2005-06. It has outperformed returns of the peer groups as well as benchmarkreturn during this period. Analysis clearly reveals that the entire selected pension funds balanced has underperformed incomparison to its benchmark index for the F.Y. 2006-07 and F.Y. 2007-08. Further, it is clear that ICICI Pru Balancerpension has shown strength and performed better than its peer groups as well as it‘s benchmark for the three quarters ofthe F.Y.2008-09. As a whole, HDFC Balanced managed Fund and ICICI Pru Balanced Pension has shown betterperformance than its benchmark as far as since inception return are concerned.

Fig 1 Mean plots of selected pension funds-balanced

Fig 1 shows the mean plots of performance of pension funds-balanced. It clearly reveals that on the basis of averageperformance, HDFC SL Balanced Managed Fund emerges as the best performer, followed by ICICI Pru Balancer Fundand Bajaj Allianz Balanced Plus Pension. To test the significance of difference in the performance of the selected threepension balanced funds One Way ANOVA was applied. Table 4 shows the one way ANOVA results:

Table 4 One way anova results of the pension funds-Balanced

Sum of Squares Df Mean Square F SigBetween Groups 20.359 2 1.180 .053 .949Within Groups 3877.082 20 193.854Total 3897.442 22

The ANOVA table shows: F(2,20)=0.053; p>0.05. Since the p value (Sign) is more than 0.05 it can be stated that thereis no significant difference in the performance of the three pension funds.

Tukey test was applied for multiple comparisons to test whether performance of the pension funds-growth statisticallydiffer from each other. Table 5 depicts the Tukey HSD results for pension funds-balanced:

Table 5 Tukey HSD results of multiple comparisons for pension funds-Balanced

(i) pension plan balanced funds (J) pension plan balanced funds Mean Differences (I-J) SigHDFC SL Balanced Managed ICICI Pru Balancer Pension 1.75250 .966Funds Bajaj Allianz Balanced 2.16393 .952

Plus PensionICICI Pru Balancer HDFC SL Balanced Managed -1.75250 .966Pension Funds

Bajaj Allianz Balanced .41143 .998Plus Pension

Bajaj Allianz Balanced HDFC SL Balanced Managed -2.16393 .952Plus Pension Funds

ICICI Pru Balancer Pension -.41143 .998


Table 6 Tukey HSD: Pension plan balanced funds

Pension plan Balanced funds N Subset For alpha = .05Bajaj Allianz Balanced Plus 7 5.8586ICICI Pru Balancer Pension 8 6.2700HDFC SL Balanced 8 8.0225Sig. .951

Means for groups in homogeneous subsets are displayed.a. Uses Harmonic Mean Sample Size = 7.636.b. The group sizes are unequal. The harmonic mean of the group sizes is used. Type I error levels are not guaranteed.

The result of Tukey HSD reveals that p value for each mean difference is more than 0.05. Hence, the null hypothesis ofno significant difference in performance of each pension fund-balanced in comparison to other is valid and henceaccepted. To compare the performance of the selected pension fund balanced in comparison to its Benchmark Index-CRISIL Balanced Fund Index, Dunnett’s t-test has been applied. Table 6 depicts the statistical results as follows:

Table 7 Dunnett t-test results for testing significance of difference of pension funds-balanced in comparison to benchmark-CRISIL

(i) pension balanced Funds (J) pension balanced Funds Mean Differences (I-J) SigHDFC SL Balanced Managed Benchmark-CRISIL 1.68875 .992Funds Balanced Fund IndexICICI Pru Balancer Benchmark-CRISIL -.06375 1.000Pension Balanced Fund IndexBajaj Allianz Balanced Benchmark-CRISIL -.47518 1.000Plus Pension Balanced Fund Index

The analysis of Dunnett t-test reveals that the p-values for mean difference between all the pension funds-balanced incomparison to its benchmark-CRISIL Balanced Fund Index are more than 0.05. Hence, on the basis of test results, it canbe stated that there is no significant difference between average performance of the pension funds-balanced in comparisonto its benchmark - CRISIL Balanced Fund Index.

CONCLUSION


Ameriks, John., Yakoboski, P. 2003. Reducing Retirement Income Risks: The Role of Annutization. Benefits Quarterly,Fourth Quarter.

Bernheim et al. 1996. The Determinants and Consequences of Financial Education in the Workplace: Evidence from aSurvey of Households. Working paper: 5667.

Kabir, H. M., & Lawrance, S. 2007. An Analysis of Financial Preparation for Retirement. NFI Working Paper No. 2007-WP-08.Krishnamurthy, R. 2004. Insurance Company Perspectives of the Pension Market. IIMB Management Review.Peter, Albrecht et al. 2006. Investment Risks and Returns of Hybrid Pension Plans: Sponsor and Member Perspectives.

Pension Research Council. WP 2005-11.Rajamohan, R.R. 2006. An Empirical Study on the Impact of Financial Knowledge on Household Portfolio. Management

Review. 11 (4).Ray, S., Pathak A. 2006 .Strategizing the Exposure Mix in Various Communication Channels for Enhancing Visibility in

the Indian Insurance Industry’. ICFAI Journal of Management Research. 5 (10): 7-17.Rob, B., and Rik, F. 2008. The Performance of US Pension Funds. New Insights into the Agency Costs Debate.Shutan, B. 2008. MetLife benefit trends study: More employees looking to workplace for financial assistance. [Online]

Available from: http://ebn.benefitnews.com/news/metlife-benefit-trends-study-more-employees-566201-1.htmlThomas, K. P. & Muralidhar, A. 2008. Saving Social Security: A Better Approach. Financial Analysts Journal. 64 (6).Zarab, S. 2008. Invest India Dataworks Income and Savings Survey. [Online] Available from: http://www.rediff.com/

money/2008/jan/15nano.htm

In the light of findings and analysis, it can be concluded that the the performance of HDFC SL Unit Linked Pension Plan isbetter in comparison to ICICI Pru’s Life Time Pension, and Bajaj Allianz’s Unit Gain Easy Pension Regular Premium.However, the statistical results based on ANOVA, Tukey HSD, and Dunnett t test shows that there is no significance differencebetween performances of pension funds-balanced of all selected insurance companies. Besides this, the performance of theselected pension funds not differs significantly in comparison to its benchmark –CRISIL Balanced Fund Index.

REFERENCE


TRIPS AND PHARMACEUTICAL FIRMS-OPPORTUNITIES AND CHALLENGES: A CASE STUDY

OF NORTH WEST REGION OF INDIA

Sunita MishraProfessor, Department of Humanities & Social Sciences

M.M. Engineering College, M.M. University, Mullana 133207 (Ambala), Haryana (India)Mobile: 09416113811


Ravi KiranProfessor, School of Management & Social Sciences

Thapar University, Patiala, Punjab (India)Mobile: 09876114591


ABSTRACT

The period 1970-95, generally known as the pre-TRIPS period, has been considered as a flourishing phase of the Indianpharmaceutical industry. The scenario changed after the formation of World Trade Organization (WTO) in 1995 whenIndia, being a signatory member of WTO, adopted TRIPS. Indian pharmaceutical industry, being a highly fragmentedone and dominated mostly by a large number of smaller enterprises, was also apprehensive when TRIPS was includedin WTO. In the above backdrop, this paper examines the opportunities and challenges faced by the pharmaceuticalindustry of India specially the small scale firms, as a result of signing of TRIPS with special reference to north-westregion of India. With a sample of 100 firms, the Study tries to cover the major areas in Northern India, where small scalefirms are located viz. Mohali, Dehra Bassi, Lalru in Punjab, Baddi, Kala Aamb in Himachal Pradesh, Ambala in Haryana.The questionnaire has an overall reliability score of .798. The firms have been selected both from excise free zone andnon excise free zone. From the total of 100 pharmaceutical firms surveyed, 8 were large scale firms, 24 medium scalefirms and 68 were small scale firms. 57 firms were from excise free zones, whereas the remaining 43 firms were fromnon excise free zones. The paper tries to focus on whether new opportunities have been created due to signing of TRIPSand whether there were any threats by signing of TRIPS? The results of the study highlight that the firms perceive newopportunities and have responded by adopting Schedule M, switching over to new technology and filing patents.

INTRODUCTION

The Indian Pharmaceutical Industry is about 120 years old. At that point of time, the Patents Act of 1911 was in practice,which facilitated patenting all the known and possible processes of manufacturing a drug besides patenting the drugitself. Foreign multinational corporations (MNCs) took advantage of this provision. They consistently imported bulkdrugs from their home countries and produced formulations in India, arguing that locally available bulk drugs were notof the desired quality. They also patented heavily in the country (Kamath, 2002). As a result, at the time of independence,the industry was dominated by multinational corporations and the prevailing drug prices were among the highest in theworld (Henderson, 1997).

To correct this situation, two expert committees namely the “Patent Enquiry Committee (1948-50)” and the “AyyangarCommittee (1957-59)” were established in independent India to provide suggestions on the type of patent system thatIndia should implement. These committees reported that the present Indian patent system has failed in its main purpose,namely to stimulate inventions among Indians. Foreign patentees were exploiting the system to achieve monopolisticcontrol of the market. The committees therefore suggested that a patent system which focused on access to resources atlower prices would be beneficial to India. The Patent Act of 1970 was based on the recommendations of these committees.This act replaced the earlier Patent Act of 1911. The Act found support among domestic firms and various politicalparties in India.

The Patent Act of 1970 provided protection for the processes of manufacturing the drug for seven years from the dateof filing the application or for five years from the date of the grant of the patent. It was harshly criticized by themultinational companies operating in India at that time on the grounds that it would reduce the incentives for investments


for investments in that sector. A large number of indigenous and smaller enterprises entered the market and competedwith existing firms. Over the years, it became a much more fragmented industry. The negative balance of trade in bulkdrugs and drug formulations that prevailed throughout the 1970s and 1980s was turned into a trade surplus by 1990(Fink, 2000). By 1991, Indian firms accounted for 70 percent of the bulk drugs and 80 percent of the formulationsproduced in the country. (Lanjouw,1998). In 1996, of the top ten firms in pharmaceutical sales, six were Indian firmsrather than the subsidiaries of foreign multinationals (Lanjouw,1998).The period 1970-95, generally known as the pre-TRIPS period, has been considered as a flourishing phase of the Indian pharmaceutical industry.

However the scenario again changed after the formation of world trade organization (WTO), 1995. India was a foundermember of the WTO. Being a signatory member of WTO, India had signed on to TRIPS. The period 1995-2008 (i.e.,the post-TRIPS period) is thus very important for the pharmaceutical industry of India.

In the above backdrop, this paper examines the opportunities and challenges faced by the pharmaceutical industry ofIndia specially the small scale firms, as a result of signing of TRIPS with special reference to north-west region of India.With a sample of 100 firms this paper tries to focus on whether new opportunities have been created due to signing ofTRIPS and whether there were any threats by signing of TRIPS?

RESEARCH QUESTIONS

i) Is the introduction of product patenting regime providing challenges to the Indian pharmaceutical firms?ii) Does the post-TRIPS era offer new opportunities for the firms?


Researchers have a mixed opinion about the impact of TRIPS on Indian pharmaceutical firms. Some researchers visualizewonderful opportunities for Indian pharmaceutical industry as well as firms, whereas the other few perceive it as astrong challenge for the pharmaceutical firms.

Researchers like Tancer(1999) Smith (2000) Gupta (2000) Kamath (2002) Kubo (2004) Chadha (2005) Chadha (2006)Dhar and Gopakumar (2006) Pradhan (2006) Gupta (2007) Rai (2008) are of the view that TRIPS will provide excitingopportunities for Indian pharmaceutical firms on many fronts. Their opinion is that forthcoming and continuing changesin the law required by TRIPS are in fact a blessing in disguise for an industry that is yet to receive its true creativepotential (Kamath; 2002). With stronger patent laws, contract research, joint ventures and clinical trials at a fraction ofthe cost in India as compared to developed countries, India can be the right choice for pharmaceutical FDI in the nearfuture (Chadha; 2006). This is an excellent opportunity which has come just because of stronger patent laws. Theseresearchers believe that although Indian firms are yet to make a mark in the area of new drug discovery, the firms seemto be on course for major developments on this front, as is obvious by the sharp increase in their patenting activity (Dharand Gopakumar; 2006). Moreover strengthening of the patent regime globally will provide an excellent opportunity forincreasing Indian pharmaceutical exports. (Pradhan; 2006)

However, on the other hand, Srinivasan (1999), Fink (2000), Glasgow (2001) ,Adede (2001) Walker (2001), Aggrawaland Saibaba (2001), Lall and Albaladejo (2002), Zuniga and Combe (2002), Lalitha (2002), Kumar (2002), Chaudhuri(2002), Lanaszka (2003), Pradhan’s (2003), Chaudhury, et. al. (2003), Abrol (2004) and Bhaduri (2006) are a few otherresearchers who perceive TRIPS as a challenge.

For example Glasgow (2001) expresses concern that intellectual property protection is not being used to provide anincentive for innovation. Adede (2001) expresses apprehension that patents are obviously bad for poor countries. Theyare largely the preserve of western multinational companies, allowing them to establish monopolies. Aggrawal andSaibaba (2001) express concern that the TRIPS agreement is not in the national interest and should be renegotiated. Thestudy by Zuniga and Combe (2002) focuses on the economic impact of patent protection of pharmaceuticals in theMexican industry. The researcher is of the view that reinforcing patent protection will not automatically change theaccess and the ways to finance R&D projects. Chaudhuri (2002) expresses concern that the bias in the amended Act isclearly in favour of the patentees. Bhaduri (2006) expresses concern regarding extending monopoly rights up to 20years as it can lead to a situation where it will have no incentive to search for more efficient processes of the sameproduct during the patent life. In that case the consumers may have to pay higher prices for inefficient processes of thenovel drugs under the TRIPS, which is in sharp contrast with the stated objectives of the WTO.

Sunita Mishra and Ravi Kiran


TRIPS AND PHARMACEUTICAL FIRMS-OPPORTUNITIES AND CHALLENGES: A CASE STUDY OFNORTH WEST REGION OF INDIA

RESEARCH DESIGN AND METHODOLOGY

Selection of Sample and Survey AreasA sample of one hundred firms has been chosen for analysis. The study tries to cover the major areas in northwest India,where pharmaceutical firms are located. The north west region mainly comprises excise-free zones and non-excise-freezones ever since the central government announced the excise free zones in 2003 with the objective to help the developmentof backward and hilly areas of north west India. The present research covers the excise-free zones of Badi and KalaAmb in Himachal Pradesh and non-excise-free zones of Mohali, Dehra Bassi, Lalru in Punjab and Ambala in Haryana.The overall reliability of the questionnaire has been .798. Face and content validity have been used for the questionnaire.The questionnaire had been validated by the peers and has a good validation score. The changes suggested wereincorporated in the questionnaire and responses recorded. The period of data collection was June to December 2008.Table 1 describes the number of responding units.

Table 1 Sample Pharmaceutical Firms From The North West Region

Place of Pharmaceutical firms State No. of unitsExcise free zones Baddi Himachal Pradesh 27

Kala Amb Himachal Pradesh 30Total 57

Non-Excise free Lalru Punjab 6zones Mohali Punjab 6

Dehra Bassi Punjab 6Ambala Haryana 25Total 43Grand Total 100

OPPORTUNITIES AND THREATS OF TRIPS AS ENVISAGED BY THE FIRMS IN NORTH WESTREGION

The firms were interviewed to cover many aspects of TRIPS in order to get a complete overview of the opportunitiesand threats faced by them as a result of signing TRIPS. Chi-square tests and ANOVA were used to test the hypotheses.These aspects are explained as following:

• Compliance to Schedule M• Cost of production• R&D Perspective• Shift to better technology• Therapeutics of drugs in the last three years• Impact of MRP based excise duty on the existing units• Products of the firm covered under Drug Price Control Order• Overall impact of TRIPS• New opportunities created due to TRIPS• Threats due to TRIPS

Compliance to Schedule MSchedule M represents a set of norms to be followed by pharmaceutical manufacturers to ensure quality and safety ofthe drug products. Schedule M, that came into effect from July 1, 2005, was conceived on the lines of USFDA. Itrepresents a set of regulations as per the Indian Drugs and Cosmetics Act, 1940, where high levels of quality control andquality assurance standards will be maintained in the manufacturing of the drugs.

Was Schedule M a Hasty Decision?Many experts are of the view that although schedule M was a good regulation, it was nevertheless a hasty decision onthe part of the government. It does have its benefits with quality improvements and other factors but it should have beengradually phased in. It took the FDA nearly 15 years to implement the schedule in the US. This overnight implementationof Schedule M is the biggest problem faced by small scale firms in pharmaceutical industry in India (Cygnus, 2006).The present study has tried to test through the response rate of the firms whether Schedule M was a hasty decision on thepart of the government.


Table 2 Firm Size And Schedule M: Was It A Hasty Decision?

Firm size Strongly Disagree Disagree Neutral Agree Strongly Agree TotalLarge 4 -- 4 -- -- 8

50.0% 50.0% 100.0%Medium 8 4 8 4 -- 24

33.3% 16.7% 33.3% 16.7% 100.0%Small 20 24 12 12 -- 68

29.4% 35.3% 17.6% 17.6% 100.0%Total 32 28 24 16 -- 100

32.0% 28.0% 24.0% 16.0% 100.0%Notes: Chi-square :11.269, df: 6, p = .080Not Significant

The results of the study highlight that the majority of the firms have not been against schedule M. When asked aboutwhether schedule M has been a hasty decision on the part of the government, 50 percent of the large scale firms stronglydisagree, whereas 50 percent are neutral about it. From medium sized firms, 33 percent strongly disagree, 17 percentdisagree and 33 percent are neutral. Only 17 percent of the sample firms accepted that it has been a hasty decision on thepart of the government. Even from small size firms only 18 percent firms accepted that it was a hasty decision on thepart of the government. 29 percent strongly disagreed and 35 percent disagreed .The minority firms who agreed thatSchedule M was a hasty decision might be thinking on the lines of many of the experts, who, too, were of the view thatalthough schedule M was a good regulation, it was nevertheless a hasty decision on the part of the government. It doeshave its benefits with quality improvements and other factors but it should have been gradually phased in because ittook the FDA also nearly 15 years to implement the schedule in the US. According to them this overnight implementationof Schedule M is the biggest problem faced by small scale firms in pharmaceutical industry in India. The results of Chi-square do not depict any association between firm size and opinion on the Schedule M being a hasty decision whichshows that majority of the firms, irrespective of size, had the same opinion that Schedule M was not a hasty decision.Probably the firms have realized that the key to survival in a competitive environment lies only in up gradation and theyare ready for it well in advance.

Cost of ProductionOne of the impacts of TRIPS, as has been reflected by many studies (Pradhan, 2007), has been to find out whether theTRIPS agreement has lead to increase in cost of production. The results of size-wise analysis depict that all firms, small,medium and large felt that cost of production as a result of signing of TRIPS has increased. All large firms, 33.3 percentof medium scale firms and 42.6 percent of small scale firms reported that it has increased substantially after the signingof TRIPS.

Table 3 Firm Size And Cost of Production As a Result of Signing TRIPS

Firm size Substantially Marginally Remained Marginally Substantially Total decreased decreased same increased increasedLarge -- -- -- -- 8 8

100% 100.0%Medium -- -- -- 16 8 24

66.7% 33.3% 100.0%Small -- -- 15 24 29 68

22.1% 35.3% 42.6% 100.0%Total -- -- 15 40 45 100

15% 40% 45% 100.0%Notes: Chi Sq: 49.150***, p < .001, d.f:4; F:16.093***, p < .001, d.f:2*** Significance level .1percent

For small scale firms, Cost of Production increased because of implementation of schedule M, whereas for medium andlarge firms, it increased because of the heavy pressure to increase R&D for their survival. Value of Chi-square issignificant which shows that the challenge for medium and large scale firms was more rigorous in terms of COP ascompared to small scale firms. The results of ANOVA also support the same as the value of F statistic is also significant.




R&D PerspectiveIn the context of the new TRIPS regime, technology plays an important role in the survival and growth of thepharmaceutical firms. Although the small firms reported an expansion in their in-house R&D activities, employingmore skilled labour, providing training to their technical manpower, etc., however, they considerably lagged behindtheir large counterparts as far as R&D intensity is concerned.

Table 4 Firm Size And In-House R&D

Firm size Substantially Marginally Remained Marginally Substantially Total decreased decreased same increased increasedLarge -- -- -- -- 8 8

100% 100.0%Medium -- -- -- 20 4 24

83.3% 16.7% 100.0%Small -- 8 24 36 -- 68

11.8% 35.3% 52.9% 100.0%Total -- 8 24 56 12 100

8.0% 24.0% 56.0% 12.0% 100.0%Notes: Chi-Square: 83.077***, df: 6, p < .001 *** Significance level .1 percent

All the large scale firms agreed that in-house R&D has shown a substantial increase. 83.3 percent medium scale firmsresponded that in-house R&D has shown a marginal increase and 16.7 percent accepted that it has substantially increased.24 small firms are of the view that in- house R&D has not changed, while 36 reported that it has marginally increased.The value of Chi-square is 83.077 which is significant, depicts that there is a significant relationship between firm sizeand in-house R&D and as such in an effort to increase In-house R&D, the government should not implement the samepolicy for the firms of different sizes.

Shift to Better TechnologyNext the focus of research was shifted to find out whether there is an association between firm size and shift to bettertechnology as a result of the signing of TRIPS.

Table 5 Firm Size And Shift To Better Technology

Firm size Strongly Disagree Disagree Neutral Agree Strongly Agree TotalLarge -- -- -- 4 4 8

50.0% 50.0% 100.0%Medium -- -- -- 20 4 24

83.3% 16.7% 100.0%Small -- 8 16 24 20 68

11.8% 23.5% 35.3% 29.4% 100.0%Total -- 8 16 48 28 100

8.0% 24.0% 48.0% 28.0% 100.0%Notes: Chi- Square :22.362** , df: 6, P <.01** Significance level 1 percent

100 percent of the large and the medium scale firms agreed with the view that they have shifted to better technology.Even from the smaller firms, 65 percent of small firms accept this view. Here the value of Chi- square is significantwhich shows that there is an association between firm size and shift to better technology. Here the large scale firms seemto be more satisfied as compared to small scale firms.

Therapeutics of the Drugs in the Last Three YearsThere is high concentration in therapeutic product markets and as a result competition in the Pharmaceutical Industrydoes exist and is often intense. However, competition in pharmaceuticals is based on the development of new productsand on promotion and can be described strongly oligopolistic, with the leading firms possessing considerable marketpower. Product market is oligopolistic as a few firms are producing similar products, but competition is intense.



Table 6 Firm Size And Therapeutics Of The Drugs In The Last Three Years

Firm size Substantially Marginally Remained Marginally Substantially Total decreased decreased same increased increasedLarge -- -- 4 4 -- 8

50.0% 50.0% 100.0%Medium -- -- 8 12 4 24

33.3% 50.0% 16.7% 100.0%Small -- -- 16 40 12 68

23.5% 58.8% 17.6% 100.0%Total -- -- 28 56 16 100

28.0% 56.0% 16.0% 100.0%Notes: Chi- Square :53.14*** , p <.001, F: 7.788**, p<.01*** Significance level .1percent , ** Significance level 1 percent

The results of the size wise analysis highlight that 50 percent of the large scale firms are producing the same therapeuticsof the drugs in the last three years. However, 50 percent said that the number of therapeutics has marginally increased.33.3 percent of the medium scale firms have reported that they are producing the same therapeutics of the drugs in thelast three years, 50 percent accepted that the number of therapeutics has marginally increased, whereas 16.7 percent areof the view that the number of therapeutics has substantially increased. 23.5 percent of the small scale firms havereported that they are producing the same therapeutics of the drugs in the last three years, 58.8 percent reported that thenumber of therapeutics has marginally increased, whereas 17.6 percent said that the number of therapeutics hassubstantially increased. The results of the Chi-square highlight an association between firm-size and impact on therapeuticsof the drugs in the last three years. It shows that the large firms have introduced more therapeutics of drugs in the lastthree years as compared to the small firms, which confirms the oligopolistic nature of the pharmaceutical market. Thereis a significant difference of means as the F-test is also significant. So the government can think of taking some correctivemeasures to save the small pharmaceutical firms in this oligopolistic market.

Impact of MRP Based Excise Duty on the Existing UnitsIn January 2005 the government introduced the MRP based excise duty for the pharmaceutical units in the country. Asper this policy, government levied a 40 per cent excise duty on the maximum retail price (MRP) of drugs and not on themanufacturing expenses (i.e., on ex-factory price) which had been the practice earlier. Under the new excise scheme,most small scale units were likely to cross the excise exemption limit of Rs 1 crore thus effectively defeating the basicpurpose of the small scale exemption limit (Express Pharma Pulse, 2005). Under the earlier ex-factory price basedexcise duty structure, the majority of small units had a turnover of about Rs 50 lakhs. Now based on MRP, that includesmarketing and distribution expenses, their turnover is likely to reach Rs. 1 crore. As small units were operating at lowprofit margins and were incurring additional expenses to upgrade their manufacturing facilities to be GMP compliant,this MRP based excise regime was going to affect them negatively. So the respondent firms were enquired about theimpact of MRP based excise duty on their unit.

Table 7 Firm Size And Impact Of Mrp Based Excise Duty On The Existing Units

Firm size Quite Substantial Substantial Marginal No Impact TotalLarge 8 -- -- -- 8

100.0% 100.0%Medium 16 8 -- -- 24

66.7% 33.3% 100.0%Small 46 22 -- -- 68

67.6% 32.4% 100.0%Total 70 30 -- -- 100

70.0% 30.0% 100.0%Notes: Chi Sq:1.787, p=.393 F:.912, p=.409Not significantThe results of the Chi- square do not depict any association between firm size and impact of MRP based excise duty onexisting units. It means that MRP based excise duty has affected all the firms irrespective of their size. i.e they all feltthat the impact was substantial. The results of F-test suggest that there is no significant difference across the differentlevels of firms on the basis of size and impact of MRP based excise duty on existing units. These results have theimplication that the government can go for a uniform policy in order to protect the pharmaceutical firms from theadverse impact of MRP based Excise duty.



Products of the Firm Covered Under Drug Price Control OrderThe Drugs Price Control Order (DPCO), 1995 is an order issued by the Government of India under Section 3 of theEssential Commodities Act, 1955 to regulate the prices of drugs. The Order inter alia provides the list of price controlleddrugs. Small scale units were exempted from DPCO prior to 1995 but DPCO 1995 included small units also in its ambit.Now DPCO is applicable to all units irrespective of their size and turnover. In practice the impact of DPCO is relativelygreater on the small-scale units than on the large units because of the differences in production volume between the two(Lalitha, 2001). Larger units with a wide range of production of items have the advantage to balance the productionbetween the items under price control and those which are not. Since most of the small units do not have such flexibility,they get adversely affected. Also, larger units have the capacity to argue their case with the government to justify thehigher prices based on their cost of production or other reasons and charge higher prices. Smaller units have also citedreducing profit margin due to DPCO. (Lalitha, 2002) The responding firms were enquired about the percentage of theirproducts covered under DPCO.

Table 8 Firm Size And Products Of The Firm Covered Under DPCO

Firm size 0-10% 11-30% 31-50% 51-70% 70% & above TotalLarge -- 4 4 -- -- 8

50.0% 50.0% 100.0%Medium 4 -- 8 8 4 24

16.7% 33.3% 33.3% 16.7% 100.0%Small 4 20 32 4 8 68

5.9% 29.4% 47.1% 5.9% 11.8% 100.0%Total 8 24 44 12 12 100

8.0% 24.0% 44.0% 12.0% 12.0% 100.0%Chi Square: 26.530**, df: 8, p< .01** Significance level 1 percent

The results show that 50 percent of the large firms have 11-30 percent of their products under DPCO, whereas 50percent of the firms have 31-50 percent of their products under DPCO. From medium size firms, 16.7 percent firmshave less than ten percent of their products under DPCO, 33.3 percent of the firms have 31-50 percent of their productsunder DPCO, whereas 33.3 percent of the firms have 51-70 percent of their products under DPCO and 16.7 percent ofthe firms have more than 70 percent of their products under DPCO. A majority of the small firms i.e., 32 firms had 30-50 percent products covered under DPCO. The results of the Chi-square highlight an association between firm size andproducts of the company covered under DPCO at one percent. It shows that the large scale firms were affected more byDPCO as compared to the small firms.

Overall Impact of TRIPS

Table 9 Firm Size And Opinion About The Impact Of Trips

Firm size Prices of Prices of No change More R&D Companies Total all drugs certain drugs in prices activity will will expandwill go up will go up take place their size by

merger/acquisition

Large -- -- -- -- 8 8 100.0% 100.0%

Medium 4 12 -- 8 -- 24 16.7% 50.0% 33.3% 100.0%

Small 20 32 12 4 -- 68 29.4% 47.1% 17.6% 5.9% 100.0%

Total 24 44 12 12 8 100 24.0% 44.0% 17.6% 12.0% 8.0% 100.0%

Chi- Square: 1.170***, p<.001, d.f =8*** Significance level .1 percent


Then firms have been asked to give their opinion about the impact of TRIPS on the Indian pharmaceutical industry, 100percent of the large firms responded that the firms will expand their size by merger/acquisition. From medium sizefirms, 16.7 percent firms reported that prices of all the drugs will go up, while 50 percent claimed that prices of certaindrugs will go up. However, 33.3 percent of the firms claimed that more R&D activity will flow as a result of signingTRIPS. From small size firms, 29.4 percent firms reported that prices of all the drugs will go up while 47.1 percentclaimed that prices of certain drugs will go up. 17.6 percent claimed that there will be no change in prices. Only 5.9percent of the firms claimed that more R&D activity will take place as a result of signing TRIPS. Value of Chi square issignificant for 8 df, which depicts that there is a strong association between firm size and opinion on the impact ofTRIPS. Overall analysis depicts that the majority of the firms has been of the view that prices of the drugs will increase.

New Opportunities Created due to TRIPSFirst Schedule M, then enhanced cost of production, followed by MRP based excise duty, now the research focusshifted to trying to enquire whether the TRIPS agreement offered any opportunities to the firms.

Table 10 Firm Size And New Opportunities Created Due To Trips

Firm size Strongly Disagree Disagree Neutral Agree Strongly Agree TotalLarge -- -- -- -- -- 8

100.0%Medium 4 4 -- 4 12 24

16.7% 16.7% 16.7% 50.0% 100.0%Small 32 12 12 12 8 68

47.1% 17.6% 17.6% 17.6% 11.8% 100.0%Total 36 16 12 16 20 100

36.0% 16.0% 17.6% 16.0% 20.0% 100.0%Chi- Square: 69.074***, p<.001, df: 8*** Significance level .1 percent

While responding to the question whether the new opportunities have been created by TRIPS, the majority of the firmshave not accepted the viewpoint. The firms still seem to be a little apprehensive of the TRIPS agreement, but the sameviewpoint has been accepted by large scale firms. Even from medium firms, the percentage of firms who agreed/strongly agreed to it (66.7 percent) has been more than those who disagreed/strongly disagreed to it (33.4 percent). Butthis is the not the case with the small firms. Here the percentage of firms who disagreed/strongly disagreed to it (64.7percent) was more than those who agreed/strongly agreed to it (17.7 percent). Some 17.6 percent firms are neutral aboutit. Many large and medium scale firms accepted the view that new opportunities have been created by signing of TRIPS,while the small firms were a little apprehensive about it. Value of Chi square is significant for 8 df which again depictsthat there is a strong association between firm size and opinion on new opportunities being created due to TRIPS. Herethe large firms seem to be more opportunistic as compared to the small firms. It might be due to the fact that the largescale firms are increasingly making their presence felt in the generics market of USA, whereas the small firms arevisualizing opportunities only in the form of contract manufacturing by the large firms.

Threats Due to TRIPS

Table 11 Firm Size And Threats Due To Trips

Firm size Strongly Disagree Disagree Neutral Agree Strongly Agree TotalLarge -- -- 4 -- 4 8

50.0% 50.0% 100.0%Medium -- -- -- 16 8 24

66.7% 33.3% 100.0%Small 4 8 20 16 20 68

5.9% 11.8% 29.4% 23.5% 29.4% 100.0%Total 4 8 24 32 32 100

4.0% 8.0% 24.0% 32.0% 32.0% 100.0%Chi- Square: 28.554***, P<.001, d.f =8*** Significance level .1 percent




When asked about whether there are any threats by signing TRIPS, even the large firms could not categorically say no.These firms might have visualized a threat in the form of competition from the big MNCs. 50 percent of the large firmsstrongly agreed that they would face threats due to TRIPS. From medium size firms, 66.7 percent agreed, while another33.3 percent strongly agreed. From small firms, 52.9 percent strongly agreed/agreed to it while 17.7 percent stronglydisagreed/disagreed to it and remaining 29.4 percent of the small firms are neutral about it. Overall the majority of thefirms (64 percent) have accepted that TRIPS might lead to certain threats. Value of Chi Square is significant for 8 dfwhich depicts that there is an association between firm size and opinion on threats due to TRIPS. Here again the largeIndian firms are feeling handicapped in doing huge R&D expenditure in developing new molecules as compared to thelarge multinational firms, because of their weak financial status. The small firms on the other hand are facing threat asthey know that now in the absence of reverse engineering, they will not be able to copy a patented product, the practicewhich they were following till now.

Table 12 Impact Of TRIPS - Results Of Chi-Square Test

Perspectives Value of Level of Status of Chi-Square significance significanceFirm size and Compliance to Schedule M: 11.269 p=.080 Not SignificantWas Schedule M a hasty decision?Firm size and Cost of Production as a result of 49.150* p<.001 Significantsigning TRIPSFirm size and R&D Perspective 83.077* p<.001 SignificantFirm size and Shift to better technology 22.362** p<.01 SignificantFirm size and therapeutics of drugs in the last three years 53.14* p<.001 SignificantFirm size and Impact of MRP based Excise duty on 1.787 p=.393 Not Significantthe existing unitsFirm size and Products of the firm covered under DPCO 26.530** p<.01 SignificantFirm size and Overall impact of TRIPS 1.170* p<.001 SignificantFirm size and New opportunities created due to 69.074* p<.001 Significantsigning TRIPSFirm size and Threats due to TRIPS 28.554* p<.001 Significant *significance level .1 percent **significance level 1 percent

Table 13 Impact Of TRIPS - Results Of ANOVA

Perspectives Calculated Value Level of Status of of F significance significanceFirm size and Cost of Production as a result of 16.093* p<.001 Significantsigning TRIPSFirm size and Impact of MRP based Excise duty on .912 p=.409 Not Significantthe existing unitsFirm size and therapeutics of drugs in the last three years 7.788** p<.01 Significant*significance level .1 percent **significance level 1 percent

CONCLUSION

Firm level analysis of the north-west region highlights an improvement in the perception of Indian firms. The mainchallenges faced by pharmaceutical firms have been: Schedule M, an increase in cost of production, products underDPCO and MRP based excise duty etc.

The analysis reflects that the firms in the north-west region of India are preparing themselves for the change. Even theexperts were of the view that schedule M, in spite of being a good regulation, was a hasty decision on the part of thegovernment (Cygnus, 2006; Dey, 2007; Jaisankar, 2007; Jaikumar, 2008), but surprisingly Indian pharmaceutical firmsdidn’t perceive Schedule M as a hasty decision. Value of Chi-Square is not significant which shows that the firms,irrespective of size, didn’t perceive Schedule M as a hasty decision.

Increase in the cost of production was another challenge for the pharmaceutical firms. For small scale firms, COPincreased because of implementation of schedule M, whereas for medium and large firms, it increased because of theheavy pressure to increase R&D for their survival. Value of Chi-square is significant which shows that the challenge for


medium and large scale firms was more rigorous in terms of COP as compared to small scale firms. The results ofANOVA also support the same as the value of F statistic is also significant. DPCO was another big challenge especiallyfor the small scale firms. Under DPCO, the government put a cap on the prices of some essential bulk drugs andformulations using these bulk drugs with the purpose of ensuring the availability of medicines at low prices.The mainargument against the DPCO was that it did not leave any scope for sufficient returns to be reinvested in research anddevelopment. The results show that more than fifty percent of the products of the firms were covered under DPCOwhich was no doubt a big challenge. Value of Chi-Square is significant at one percent which shows that the impact ofDPCO was probably more on large firms.


The results of the Chi-square do not depict any association between firm size and impact of MRP based excise duty onexisting units. It means that MRP based excise duty has affected all the firms irrespective of their size. The results of F-testsuggest that there is no significant difference across the different levels of firms on the basis of size and impact of MRPbased excise duty on existing units. On the opportunity side, the firms have reported a shift to better technology, an increasein in-house R&D, marginal increase in the therapeutics of the Drugs in the last three years. The respective Chi-Squarevalues are significant which shows that that there is a relationship between firm size and these variables respectively.

So probably the answer to the research question, R1, i.e., Is the introduction of product patenting regime providingchallenges to the Indian pharmaceutical firms is Yes. Results of Chi-Square also depict a relationship between firm sizeand Threats Due to TRIPS. But at the same time the answer to the second research question, R2, i.e., Does the post-TRIPS era offer new opportunities for the firms is also in the affirmative. Results of Chi-Square depict a relationshipbetween firm size and New Opportunities created due to TRIPS. It seems that no doubt the post-TRIPS regime is posingmany challenges for the Indian pharmaceutical firms, but they are treating it as an opportunity. Although the majority ofthe firms have reported a significant increase in the cost of production, they have reported a significant increase in in-house R&D as well. Thus the pharmaceutical firms of North West region of India are ready for the challenges offered bythe post-TRIPS era and are accepting the new opportunities offered by it.

REFERENCE

Abrol, D. 2004. Post-trips technological behaviour of the pharmaceutical industry in India. Science TechnologySociety. 9 (2): 243-271.

Adede, A.O. 2001. The political economy of the trips agreement: origins and history of negotiations. ICTSD, ACTS &QUNO. July.

Aggrawal, P. & Saibaba, P. 2001. TRIPS and India’s pharmaceuticals industry. Economic and Political Weekly. 36(39): 3787-3790.

Bhaduri, S. 2006. Trips in India : Reasons and rhetorics. Vidyasagar University Journal of Commerce. 11: 28-38.Chadha, A. 2005. TRIPS and patenting activity: Evidence from the Indian pharmaceutical industry. National

University of Singapore, Department of Economics, working paper no 0512. [Online] Available from:http://nt2.fas.nus.sg/ecs/pub/wp/wp0512.pdf.

Chadha, A. 2006. Destination India: The right choice for the pharmaceutical industry. Delhi Business Review. 7 (1).Cygnus. 2006. A tough time for pharmaceutical SSI units in India. May 2006. [Online] Available from: http://

www.ipapharma.org/pp/Pharma_Professional_May_2006.pdfDey, S. 2007. Excise or no excise?. Express Pharma. 16-31 August 2007. [Online] Available from: http://

www.expresspharmaonline.com/20070831/market01.shtmlDhar, B. & Gopakumar, K.M. 2006. Post-2005 TRIPS scenario in patent protection in the pharmaceutical sector: the

case of the generic pharmaceutical industry in India. The UNCTAD/ICTSD Project on IntellectualProperty Rights and Sustainable Development. November 2006.

Fink, C. 2000. How stronger patent protection in india might affect the behaviour of transnational pharmaceuticalindustries. World Bank Policy Research. Working Paper No 2352.

Glasgow, L.J. 2001. Stretching the limits of intellectual property rights: Has the pharmaceutical industry gone toofar?. IDEA- The Journal of Law and Technology. 41 (2): 227-258

Jaisankar, T.S. 2007. Schedule M was a hasty decision Express Pharma. 15 September 2007. [Online] Availablefrom: http://www.expresspharmaonline.com/20070915/management05.shtml

Jayakumar, P.B. 2008. Small-scale pharma firms struggling for survival. Business Standard. 7 February 2008.[Online] Available from: http://www.business-standard.com/india/storypage.php?autono=312882

Kiran, R. & Mishra, S. 2010. New IPR regime and challenges of the small pharma industry. Interdisciplinary journalof Contemporary Research in Business. 1 (10): 42-60.

Lanaszka, A. 2003. The global politics of intellectual property rights and pharmaceutical drug policies in developingcountries. International Political Science Review. 24 (2): 181–197.

Zuniga, Z.P. & Combe, E. 2002. Introducing product patent in pharmaceutical sector: A first evaluation of the Mexicancase. Region et Development. (16): 191-221.


STRESS AND ITS IMPACT AMONG I.T.PROFESSIONALS: A STUDY WITH REFERENCE TO

SELECT I.T. COMPANY IN INDIA

V. HEMANTH KUMARSenior Lecturer, Sri Sairam Institute of Management Studies,

Sri Sairam Engineering College, West Tambaram, Chennai – 600 044, India.Phone : 98842 49862

e-mail: [email protected]

P. PREMCHAND BABUProfessor, S.K. Institute of Management Studies,

Sri Krishnadevaraya University, Anantapur, Andra Predesh – 515 055, India.Phone: 94404 64419

ABSTRACT

Stress is something we all face as employees or employers and we all handle it differently. There is a predominant gapbetween the individual capabilities and organizational demands. Also it is a mismatch between the expectations of bothindividual and organisation. Stress not only affects the physical, psychological and financial balances of an employeebut also the employers as well. Desired results cannot be expected from employees who are burnt out, exhausted orstressed, as they lose their energy, accuracy and innovative thinking. The National Institute for Occupational Safety andHealth (NIOSH), part of the U.S. Department of Health and Human Services, states that job stress, now more than ever,poses a threat to the health of workers – and the health of organizations

IT industry in India got tremendous boost in the past decade due to factors like liberalisation and globalisation of theIndian economy coupled with favourable government policies. This sector of the sunshine industry brought a new workenvironment and sea changes in the employment trends and in the work place too. In reality, it not so, because of thestress that one faces in the working environment due to various factors, like Organisational Role, the change in Cultureand Climate, intrinsic job factors and routine hassles at work, work place relationships and environment. India shoulddevelop and develop and strive for wealth, but not at the cost of its health. The stress is that which gradually penetratesones health and destroys it very badly if left unnoticed. The Stress Vortex focuses on the World Heart Day(26th Sept.)explores Stress is the important concept that underlies cardiac disorders and appears to predict coronary crisis, resultingin younger Heart Patients in India. It is becoming evident that Indian is not only the IT(Information Technology) Hubwhich has skewed the dietary and life style habits of the youngsters who enter the field and also becoming the HP (HeartPatients) Hub as the consequential fact. Hence, We require an in-depth analysis on the phenomenon of stress – itssources, levels, process, impact and consequences with prime focus on their workplace. So that the prime stressors areidentified and action plans are suggested in order to minimize the stress levels and make the work place free from stress.The present research shall bring out the general broad outline of causes of work place stress at individual employeeslevel and at the corporate level. It shall suggest some urgent strategic planning needed to combat the alarming raise ofdisorder in the health of the employee and the organization as a whole, in the present Indian context and scenario.

INTRODUCTION

Stress, simply put, is the way you react both physically and emotionally to a change. There are as many different ideasabout stress as they are people who experience change in their life. And unlike change, stress can either be positive ornegative. It may be the sense of heightened concentration you feel when faced with a new and challenging situation orit may be continual sense of being geared up and unable to relax. Stress can refer to physical effort as well as mentaltension. All individuals feel stress, but each one feels it in different amounts and reacts indifferent ways.

The original definition of stress by Hans Selye, who coined the term as it is presently used, was, "the non-specificresponse of the body to any demand for change". For some, the definition of stress was something external, like a badboss, for others the definition of stress referred to chest or stomach pain or some other disturbing reaction you experienced,but the definition of stress could also be the end result of these responses such as a heart attack or peptic ulcer. Selyesubsequently had to create a new word, stressor, to distinguish between stimulus and response. He struggled unsuccessfully


to find a satisfactory definition of stress and in his later years suggested that the best definition of stress was "the rate ofwear and tear on the body".

Research studies exploring the interrelationship between the behaviour, immune system and the nervous system, calledPsycho Neuro Immunology (PNI), have clearly demonstrated that the immune system is affected by neural process thatin turn are influenced by mental process. If we are depressed it affects our neural processes, and this situation mayweaken the immune system or vice-versa. Stress in the 21st century is not something new, not anything unknown. Stresshas been experienced since time immemorial, but its toll is higher now than ever before. When we analyse visits todoctors, 75-90 percent are for stress related problems ( Pareek ,1999).

A NewDelhi based NGO reported that in 1996 a total of 4,100 persons contacted its help-line for people on the verge ofcommitting suicide. This figure requires some serious thinking. Stress in India can take various manifestations, forinstance, Executive stress, Police stress, Marital stress, Stress among Youth and Adults, Unemployment stress, Jobstress, Post-retirement stress, Pre-menstrural stress or menopausal stress, Financial stress, Prenatal & Post natal stress.Today, we know much more about stress than ever before. Internet search revealed 25,68,931 documents under stresson a single site (www.alltheweb.com), yet we seem to be making a little headway in solving out stress related problems.The question is: Why? We have heard of Workplace stress. Today there is talk of trauma at the workplace ( Williams,1993)! We are all aware of scores of stress busting strategies, yet their application does little to mitigate stress. Are wenot trying to find out ‘Quickies’ without understanding the problem in all its entirety? To appreciate its ramifications, werequire an in-depth analysis of the phenomenon of stress – its sources, process, impact and consequences with primefocus on their workplace. Only then can an appropriate stress management programme be tailored to suit each individualperson. It was with this in mind, that is research is taken up and planned accordingly. The research is focused on the ITProfessionals the very affected by the stress in this materialistic work life… An attempt has been made to anlayse theirwork life and the stressors and to come up the feasible outputs to reduce or to limit their stress levels and dilute itsimpact in their life.

Stress in Work life:Technically stress is the adverse reaction an individual has to excessive pressure or other types of demand placed onthem. In the workplace, the negative, damaging, effects of stress can arise at times when pressures are extreme, such aspeak busy periods, but equally can be caused by continuous exposure to stressful conditions, such as being in anunsuitable job or being treated unfairly, which are the part and parcel of IT professionals in their work life. Outsidework, negative stress can be caused by major change events, such as a death in the family, but equally by continuouspressure of having a life constrained or dominated by the work situation.

Stress is personal in that stress affects individuals in different ways. In similar situations or conditions some peoplecope, even thrive, on the pressure, whilst others find it difficult to cope and suffer negative stress as a result. It is alsopersonal in the sense that the amount of control that the individual has, over their workplace conditions, events, andwork-life balance, will influence the amount of negative stress that they suffer from. Those individuals with greatercontrol will tolerate and manage stress levels, or avoid them altogether, more successfully. But the fact is that many areprone to stress and are unable to realize that they are stress and not aware of the ways and means to overcome it.The effects of stress have been found to be fairly wide-spread, implicating changes in behaviour, moods, capacity toperform mental tasks, such as thinking, logical reasoning, problem solving and decision-making, and also neuro-physiological functioning.

Psychological stimuli operate on persons each of whom is equipped with an individualized psychobiological programmefor reacting to any type of internal or external stimulation. These programmes are propensities conditioned by a vastarray of genetic and earlier environmental influences. When the environment fails to meet personal demands or becomesovertaxing the outcome is stress. Such stress brings in its wake a host of pathogenic mechanisms which may be cognitive,emotional, behavioural, and / or physiological. While under normal circumstances of non-stress, the above mechanismsform a carefully and systematically orchestrated whole, stressors essentially cause them to go into disarray. The discussionhere focuses on the problems brought on by work.


According to Maier, Watkins and Fleshner ( American Psychologist, 1994), Stress can influence the immune system bydown regulating it, that is, by causing physiological changes. The effects of student examinations, work battles, lack ofsocial support, and sleep deprivation are well known in altering the immune system.

V. Hemanth Kumar and P. Premchand Babu


STRESS AND ITS IMPACT AMONG I.T. PROFESSIONALS: A STUDY WITH REFERENCE TO SELECTI.T. COMPANY IN INDIA

Work-related stress and mental fatigue – mainly blamed on expectations of better performance, deadlines and competition– is taking a toll on Indian employees in sectors like construction, banking, media, shipping and small-scale industries.A survey conducted by India’s industry body Assocham (May, 2007) has revealed that “the menace of stress and mentalfatigue has intensified in recent times at the middle management positions of sectors comprising construction, shipping,banks, government hospitals, trading houses, electronic and print media, courier companies, small-scale industries,retail and card franchise companies.” These sectors are becoming high- stress zones like the business process outsourcing(BPO), call centres and information technology (IT) companies because of deadlines, demand for high performance,shortage of staff and threats from competitors.

According to Michael A. Chilton (2005), Software developers face a constant barrage of innovations designed to improvethe development environment. Yet stress/strain among software developers has been steadily increasing. Using a combinationof cognitive style and person-environment fit theories as the theoretical lens, this study examines one potential source ofstress/strain and productivity impediment among software developers. Specifically, this paper examines the fit between thepreferred cognitive style of a software developer and his or her perception of the cognitive style required by the jobenvironment, and the effect of that fit on stress/strain and performance. In practice, managers can use the results to helprecognize misfit, its consequences, and the appropriate interventions (such as training or person/task matching).

Geeta S. (2006), in her research, states that, The Burn Out Stress Syndrome (BOSS) is commonly observed among youngpeople working in call centers. The symptoms of this syndrome include chronic fatigue, insomnia and complete alterationof the 24 hour biological rhythm of the body, leading to sickness absenteeism, has been highlighted in the study.

Kesavachandran C. et al., (2006), relates his research with the Workers in Information Technology (IT) - enabled serviceslike business process outsourcing and call centers working with visual display units are reported to have various health andpsycho social disorders. In addition, authors executed a questionnaire- based pilot study. The available literature and thepilot study, both suggest health disorders and psychosocial problems among workers of Business Process Outsourcing.

Sunetra Bhattacharya and Jayanti Basu (2007), States that the purpose of the research was to study Distress, Wellnessand Organizational Role Stress of professionals in the area of Information Technology (IT). The effect of sex and age onthe above variables as well as the predictability of the variables from stressful life events and coping resources takentogether were also examined. Results of the study reveal that women experienced greater wellness and older personnelexperienced more distress. Distress could not be predicted from the life events and coping resources taken together.Wellness and Organizational role stress could be predicted from these two variables.

Monideepa Tarafdar et al., (2007), Based on empirical survey data, this paper uses concepts from sociotechnical theoryand role theory to explore the effects of stress created by Information and Computer Technology (ICT)-that is,"technostress"-on role stress and on individual productivity. They have explained different ways in which ICTs cancreate stress in users and identify factors that create technostress. In the practical domain, the paper proposes a diagnostictool to evaluate the extent to which technostress is present in an organization and suggests that the adverse effects oftechnostress can be partly countered by strategies that reduce role conflict and role overload.

According to Shanu A. Latheef (2009), People in the field of information technology are prone to develop IntervertebralDisc Prolapse, Cervical Spondylosis, Carpel Tunnel Syndrome, Migraine etc. If measures are not taken to prevent it, it mayaffect the person adversely. It can be prevented by simple stress relieving measures and exercise with the help of physiotherapy.It also helps to prevent the attaining of bad posture. IT Professionals who practice physiotherapy have less discomfort,pain, stress which lead to diseases during work. Comparing the differences in discomfort or pain among those who arepracticing physiotherapy and those who are not may help in highlighting the importance of physiotherapy in the field of IT.

The stress related problems in the Indian context are more due to mis-conceived notions about how one should conductoneself in the different life situations : family, workplace, social gatherings, what to expect from others, expectationsfrom others, meanings and expectations that they draw from behaviour of significant others, not knowing how to say no,over-promising and the fear of failure to deliver, over sensitivity to peer group comparisons / expectations, lower selfesteem and sense of self worth, measuring oneself against low level , highly granular and immediate performanceparameters indoctrinated by employers to seek their own goals : customer satisfaction to be competitive, the employeeshaving no other opportunities (due to their narrow skill base and unwillingness to fore-go the more than deservingpackages they have been receiving, family pressure to maintain or enhance pay packets etc., ), other than continue in thesector.


The statistics revealed by the World Heart Federation, states that, out of various causes of death, the Stroke and CoronaryHeart Disease are caused by Stress factor. Out of 57 million death that has occurred due to various reasons, the Strokecarries 10%(5.5 million) and Coronary Heart Disease carries 13%(7.2 million) of the cause. This is an alarm given bythe World Heart federation to the corporate fraternity.

In the review of literature, the points that are focused is clear that the Information Technology professionals face stressin their work life, and the way it impact on their health is highlighted, but the levels of impact on their individual,interpersonal and organisational levels are not dealt with in depth. Unless the management feels that the loss is going tobe severe that, they may loose their valuable asset (employees), there can be a solution towards reducing the stresslevels with requisite action and arrangements, not only to the organisational purview, and also in safeguarding thegeneral health of the human, which are given a narrow perspective in this research.

The work place must be welcoming and should be an avenue to exhibit our potentials to the fullest with interest. Inreality, it not so, because of the stress that one faces in the working environment due to various factors, like OrganisationalRole, the change in Culture and Climate, intrinsic job factors and routine hassles at work, work place relationships andenvironment. India should develop and develop and strive for wealth, but not at the cost of its health. The stress is thatwhich gradually penetrates ones health and destroys it very badly if left unnoticed. The Stress Vortex focuses on theWorld Heart Day(26th Sept.) explores Stress is the important concept that underlies cardiac disorders and appears topredict coronary crisis, resulting in younger Heart Patients in India (the world heart federation revealed that 10% of thedeath happens due to stroke, and 13% of the death happens due to Coronary heart disease, for which the prime reasonis the Stress factor). It is becoming evident that Indian is not only the IT(Information Technology) Hub which hasskewed the dietary and life style habits of the youngsters who enter the field and also becoming the HP (Heart Patients)Hub as the consequential fact. Hence, We require an in-depth analysis on the phenomenon of stress – its sources, levels,process, impact and consequences with prime focus on their workplace. So that the prime stressors are identified andaction plans are suggested in order to minimize the stress levels and make the work place free from stress.

OBJECTIVE OF THE RESEARCH

- To study the Stress and its impact on Individual level, Interpersonal level and on Organisational level amongIT professionals.

- To identify the ORS( Organizational Role Stressors), Culture and Climate factors that causes stress in ITcompanies.

- To understand the variations in levels of stress and its impact based on their demographic profile.- To identify the individual stress levels at different categories of IT professionals.- To ascertain their opinion towards the existing Stress Management Programs organised in IT companies.


The type of research that is adopted in this study is Descriptive in nature. Descriptive research design is the one thatsimply describes something such as demographic characteristics of respondents. The descriptive study is typicallyconcerned with determining frequency with which something occurs or how two variables vary together. The study istypically guided by an initial hypothesis.

The Sampling technique for this research is Simple Random Sampling. Select leading IT companies in India like, TataConsultancy Services (TCS), Wipro, Infosys Technologies, Satyam, HCL Technologies, Tech Mahindra, Patni , i-flex,MPhasis, L & T Info Tech. Are selected for research. The respondents who are in the cadre of Programmers, TeamLeaaders and Project Managers are randomly selected from the organisations.

The data are collected from primary and secondary sources. The primary data is collected fresh using the structuredquestionnaire by Personally interviewing the respondents in the IT organisations. The questionnaires are distributed tovarious IT professionals as mentioned above and explained in detail and then the filled in questionnaires are collectedfrom the respondents.

Structured Questionnaire is considered as the research instrument for collection of primary data from the respondents.The questionnaire comprises of closed ended, dichotomous, multiple choice, rating and ranking questions.





Impact of Stress on the Individual level, Interpersonal level and on Organisational level among InformationTechnology professionals.

Impact of stress at individual level = .278 (Organisational Role Stressors) - .276 (Culture and climate) + .272 (Habitualchanges) + .120 (Routine hassles at work)

From the regression model, it can be inferred that largest impact of stress at individual level is from theOrganisational Role Stressors(0.278)

Impact of stress at interpersonal level = .295 (Organisational Role Stressors) - .290 (Culture and Climate) +.142 (Habitual changes) + .016(Routine hassles at work)

From the regression model, it can be inferred that largest impact of stress at interpersonal level is from theOrganisational Role Stressors(0.295)

Impact of stress at organisation level = 0.233 (Organisational Role Stressors) +0.043 (Culture and Climate) +0.237 (Habitual changes) + .042(Routine hassles at work)

From the regression model, it can be inferred that largest impact of stress at org level is from the Habitualchanges(0.237) and the next is Organisational Role Stressors (0.233).

Impact of Stress and outcome on the Individual, Interpersonal and Organistional levelIndividual level - Changes in the physical and mental health, feel like taking a leave and relax options are given

the top ranks, and the other options like double the work during stressful circumstances and unable to concentrate in thepersonal and work life are given the next ranks based on the responses given by the respondents.

Interpersonal level - Showing tension to the family members and on friends, respondents feel that theirrelationship with higher officials are not smooth options are given the top ranks, and the other options like behavingdifferently with the peer group and relationship with subordinate getting affected are given the next ranks based on theresponses given by the respondents.

Organisation level - Normal participation in decision making process, not willing to work late hours, lack oftrust on others are given the top ranks, and the other options like absenting oneself and delay in completing the task aregiven the next ranks based on the responses given by the respondents.

The ORS (Organisational Role Stressors), Culture and Climate factors that causes stress in InformationTechnology companies.

The Role Expectation has got the highest score of 1738 and has been arrived at the highest weightage score of3.583 and ranked number one. Role overload given the next highest score of 1683 and has been arrived at the nexthighest weightage score of 3.470 and ranked number two. Resource Inadequacy is given the next highest score of 1652and has been arrived with the weightage score of 3.406 and ranked number three. Which are considered as the primefactors under organisational role stressors.

The Physical safety satisfaction has got the highest score of 1977 and has been arrived at the highest weightagescore of 4.076 and ranked number one. Adequacy of Physical space is given the nest highest score of 1936 and has beenarrived at the next highest weightage score of 3.991 and ranked number two. Clarity of Mission, Goal and Objectivesare given the next highest score of 1894 and has been arrived with the weightage score of 3.905 and ranked numberthree. Work place harassment is given the next score that causes stress in the Information Technology companies.

Understand the variations in levels of stress and its impact based on their demographic profile.The normal prevalence of stress is moderate in all the levels, but more stress is in the age group of 21 – 30

years of the respondents.The normal prevalence of stress is moderate among male and female, but the high level of stress is faced by

female that is 65(48.1%) out of 135 total female respondents, whereas the male has 107 (30.6%) out of 350 malerespondents.

The high level of stress is on the Married persons which is 71 (44.1%) of the total married respondents of 161,which is closely followed by the unmarried, who has 66(24.5%) respondents out of the total unmarried respondents of269.

The high level of stress is on the respondents who gets salary of 4-5 lacs, and accounts to 59 (47.2%) respondentsout of 125 respondents who fall under this salary category.

The high level of stress is on the category of respondents who have 9-12 years of experience with 47 (52.8%)respondents out of 89 respondents who are under this category of total experience, and with this experience the respondentis likely to be in the project manager cadre as it is proved that project managers too have high level of stress.


The high level of stress is on the category of respondents who have their under graduate qualification withEngineering with 14.3% (69 respondents) out of 206 respondents who are under this category.

Hence it is clear that there are variations in the levels of stress based on age, gender, marital status, income,designation, experience and educational qualification.

As for the impact of stress is concerned, at the individual, interpersonal and the organisational levels, thedemographic variables like the Age of the respondents, Marital status of the respondents, Income earned, Designationof the respondents, and Experience of the respondents has got the direct impact on the stress. The income factor hasdirect impact on the individual and at the organisational level than the interpersonal level of the respondents.

The individual stress levels at different categories of Information Technology professionalsThe individual stress levels at different categories viz, Programmers, Team Leaders and Project Managers are

concerned, the stress levels are found to be high with 50% that is 62 respondents out of 124 Project manager surveyedhave the high stress levels when compared with the other respondents who are designated with Team leaders andProgrammers. This is because of the hectic schedule and responsibility of the post of Project Manager, who should takecare of the target for the team leaders and the programmers.

Opinion towards the existing Stress Management Programs organised in Information Technology companies.The Stress Management Programs should focus on the involving much of mental and physical exercise, and

the trainers are preferably external trainers to make the difference from the usual training crew. The program shallprovide insights on balancing work and personal life and should help the employees to identify and cope up withpotential stressors.

Some areas of improvement required in conducting the Stress management programs are like, the programshould be conducted based on clearly identified needs and by expert trainers, as the respondents feel that there is lack ofexpertise with the trainers. There is no much of difference they could feel after attending the training program. Theprograms should be properly planned well in advance and conducted as per the planned schedule so as to employees canplan to attend without any hindrance.

CONCLUSION

The change in the attitude of the management is essential and needed in the present hour. Unless the management feel,understand and realizes that the ‘Stress’ is not only affecting the employees, but also the employer and organisation aswhole in various dimensions. Simple measures could improve greatly the contentment and morale. Commonsenserecommendations include redesigning the job to increase variety, prevent excessive hours, and provide better support.Rewards should also be improved-both praise and interest from more senior staff and, more tangibly, working conditions,holidays, and opportunities for study leave. Participatory decision-making, skill building, social security, support etcare some of the other attentions management must throw upon its employees. Management has to recognize itsresponsibility for minimizing stress, thereby reducing ill health among employees, including potentially fatal coronaryheart disease.

Every aspiring individual has a working life-time period of about 35-40 years, normally between 20 or 25 to 60 years ofage. Given the Indian scenario of competitive market, over population and scarcity of good jobs, runs on the theory of“Survival of the Fittest”, no profession is exempted from stress. The degree and depth may vary from one another,whereas in Information Technology sector is quite clear with the presence of stress. Both employer and employee mustunderstand that work should be valued and not excessive. Work should not compromise on individual’s health andfamily life; rather offer happiness, peace of mind, certainty, variety and flexibility. As a general rule, actions to reducestress should be given top priority in the process of organizational change to improve working conditions and to avertthe situation of brain drain. But even the most conscientious efforts to improve conditions and situations in the workplace are unlikely to eliminate stress completely for all employees. This research is one such attempt to minimise thestress and thus the suggestions are brought out after careful analysis of the data and information. If the informationtechnology companies finds it feasible to adopt these, its for sure they shall reap positive results in creating a stress freework life.

SUGGESTION

- Most of the respondents are the young workforce and with keen focus on the Rewards and Recognition thatattracts in selection of the particular organisation to proceed their career. Taking this into consideration, the managementshall make clear statements about their Job security, and career progress in this field along with the benefits associatedto the profile in their organisation.




- The working environment shall be made friendly, especially with their immediate boss and their colleagues.As the common fact is most of the employees quit, not because they don’t the job rather they don’t like their boss, andtheir bossing attitude.

- The work place arguments to be made constructive, healthier and should fetch mutual benefit on the knowledgeaspect, but not to conflict in the workplace and affects the relationships with others.

- The employees are to be provided with the adequate cabin facilities, as the otherwise bothers the employeesand affects their performance and leads to stress.

- Counsellors shall be appointed and they should be trained psychologist and or equivalent professional, inorder to understand the intricacies of the issue and cater to the needs of the employees, counsel and mentor themaccordingly during problematic or stressful instances.

- The organisational role stressors has the notable impact on the information technology professionals, especiallythe factors like, role expectation, role overload, and resource inadequacy. The expectation from the employees shouldbe normal and shall be motivated to perform much better, once he performs better, the management overloads theparticular individual as his outputs are of good quality and error free, this phenomenon of overloading the employeesshould be avoided in the work place to relieve the employees form stress.

- The employees are to be provided with adequate resources, both technical and non-technical resources inorder to complete the job in time with maximum accuracy.

- The Stress Management Training Programs should focus on minimising or identifying effective and simplestrategies to cope-up with Organisational role stressors and routine hassles at work, which are the vital stressors. Theprogram should also touch upon the regular habits of the employees and inculcate its importance to have a healthy workand personal life which is free from stress and strain. Moreover, if the trainers are from external source, it would be adifferent experience for the employees than the regular internal trainers.

- The Stress Management Training Programs shall involve good mental and physical exercise, especiallyYogas, Asanas, Tai-Chi and Self-Massage Techniques (Northwestern Health Sciences University) as the informationtechnology professionals are much prone to RSI (Repetitive Strain Injury) strain in the eyes, arms, and head.

- The smell, taste, sights, food that leads to relaxation from the stress is one of the elusive practice that shall beadopted in the information technology companiesThese suggestions are mainly placed for the consideration of the Human Resources Managers and the Top Management,of the Information Technology organsiations, which shall fetch the employees, employers and organisation with aconducive place to work, learn and earn with a stress free working environment which is of vital importance for thecurrent and future generations.

REFERENCE

Bhattacharya, Sunetra and Basu, Jayanti. 2007. Distress, Wellness and Organizational Role Stress among ITProfessionals:Role of Life Events and Coping Resources. Journal of the Indian Academy of Applied Psychology. 33 (2):169-178.

Chilton, M. A., Hardgrave, Bill C., and Armstrong, Deborah J. 2005. Person-Job Cognitive Style Fit for SoftwareDevelopers: The Effect on Strain and Performance. Journal of Management Information Systems. 22 (2).

Critchley, H.D., Taggart, P., Sutton, P.M, andthe others. 2005. Mental stress and sudden cardiac death: asymmetricmidbrain activity as a linking mechanism. Brain. 128 (January): 75-85.

Geeta, S. 2006. Stress in the sunshine sector. 2006 May 18. [Online] Available from: http://www.boloji.com/wfs/wfs180.htm.

Kesavachandran, C., Rastogi, S.K., and Das, M, Khan AM. 2006. Working conditions and health among employeesat information technology - enabled services: A review of current evidence. Indian J Med Sci. 60: 300-7

Kivimaki, M., Virtanen, M., Elovainio, M., and Others. 2006. Work stress in the etiology of coronary heart disease--ameta-analysis. Scand J Work Environ Health. 32 (6): 431-42.

Kjeldsen, S.E., Knudsen, K., Ekrem, G., and Others. 2006. Is there an association between severe job strain, transientrise in blood pressure and increased mortality. Blood Press. 15 (2): 93-100.

Maier, Watkins and Fleshner. 1994. Psychoneuroimmunology-The Interface between Behaviour, Brain andImmunity. American Psychologist Association. 49 (12): 1004-1017.

Latheef, Shanu A. 2009. Importance of Practicing Physiotherapy Exercises among IT Professionals. PaperPresented- 2nd National Conference on Students Medical Research. January 2009.

Ranjit, N., Diez-Roux, A. V., Shea, S. and Others. 2007. Psychosocial factors and inflammation in the multi-ethnicstudy of atherosclerosis. Arch Intern Med. 167 (2): 174-81.

Strike, P.C., Steptoe, A. 2004. Psychosocial factors in the development of coronary artery disease. Prog CardiovascDis. 46 (4): 337-47.


Ravi KiranProfessor, School of Management and Social Sciences

Thapar University, Patiala, Indiaemail: [email protected]

Vijay JainTeaching Assistant and Research Scholar, School of Management and Social Sciences,

Thapar University, Patiala, IndiaEmail: [email protected]

ABSTRACT

Small and medium enterprises (SMEs) in India are facing stiff competition in the new globalized era. SMEs in developingcountries have to re-examine and modify their competitive strategies by incorporating innovation within their peopleprocesses and products. There are several challenges that these firms have to face to remain at the forefront of technologicalinnovation. The chief challenge is increasing complexity of business. The main objective of the study is to analyse thetechnology management strategies adopted by manufacturing SMEs. This study investigates the factors that influence thegrowth, performance, and development of IPR attitude of SMEs in India. The study is an attempt to highlight the extent ofIntellectual Property Rights of Indian manufacturing as a whole and a survey analysis has been undertaken for 100 SMEsof Manufacturing sector of Punjab in India to understand the level of IPRS by firms in Post TRIPS period. Punjab is aprogressive state of India with an average growth rate of 10 per cent. Punjab has been ranked as one of the growing statesof India. It has evolved into a land of boundless opportunities for investment, industry and employment. The present studyuses Growth rates for analyzing the status of IPRs at all India level. Manufacturing SMES have been categorized intoDurable, Non Durable and Essential goods. The results of the study highlight that the extent of IPRs in Indian manufacturingis still low. Durable industries have filed most of the trademarks. Most of the copyrights and patents have been filed byEssential goods. The results of the regression (Table 7) depict that factors influencing Innovation in SMEs of PunjabManufacturing are: Increased market share, Improved production flexibility, Staff employed in R&D, Status of Trademarksin last ten years and Status of copyrights in last ten years and: Improved Environmental impact or Health Safety aspects.These six variables explain 87.6 percent of the variation. So in the final section the study recommends the factors forpromoting IPR Culture for SMEs of Punjab manufacturing. Factor analysis results highlight that two factors viz. i) PolicyInitiatives and Organisational Factors explain 62.85 percent of total Variation.

Keywords: Intellectual Property Rights, Innovation, Small and Medium Enterprises (SMEs), Punjab manufacturing

INTRODUCTION

In this fast changing business world, corporations have to deal with entirely new challenges to meet customer demands.Due to global competitiveness now companies are taking more effective steps to improve overall productivity andefficiency. It can only be possible if production of goods is increased by applying same input or by reducing timewastage To attain a place in the competitive market, companies have to not only reduce the cost price of their product,but a consistent effort has to be placed on adopting new technologies and enhancing quality standards. Past experienceshows that Indian firms took decades to be able to catch up with global productivity levels. Time has come to focus onTechnology management strategies with a focus on Intellectual Property Rights. IPRS are mostly filed by large anddominant firms, but it is right time now for SMEs to focus on the IPR strategies and initiate steps to enhance IPR culturein SMEs of Punjab Manufacturing. The present study has been taken against the above backdrop to study the Innovationand Intellectual property Rights status of Manufacturing SMEs of Punjab in India in the Post-TRIPS period.

INNOVATION AND INTELLECTUAL PROPERTYRIGHTS: A POST TRIPS ANALYSIS OF

MANUFACTURING SMES


INNOVATION AND INTELLECTUAL PROPERTY RIGHTS: A POST TRIPS ANALYSIS OFMANUFACTURING SMES


Empirical studies on technology-productivity nexus undertaken for industrialized countries have shown that technologicaladvancement is a major source of productivity improvement. The studies of Sherer (1984) and Grilliches and Mairess(1984) on the nexus between productivity and technology reveal that advances in the latter result in improvement in theformer. Similar results were obtained for Japanese industry by Odagiri (1985) and French industry by Cuneo andMairess (1984). These studies clearly show that improvement in productivity achieved by a firm/industry depends onResearch and Development (R & D) efforts of the firm/industry and the flow of new advanced technology embodied inintermediate inputs and capital goods resulting from R & D efforts of input suppliers. Further studies on return from R& D expenditure carried for industrialized countries indicate that the private rates of return on R & D are fairly high(ranging between 20 to 50 %) which reflects R & D investment and efforts or a major factor influencing efficiencygrowth and productivity. Shifts in the production function are defined as Hicks Neutral if then leave marginal rates ofsubstitution untouched but simply increase or decrease the output attainable from any given output (Solow 1957).

Adoption the first stage of the Technology transfer process is simply a firm’s awareness of a certain technology’sexistence and the firm’s initial pursuit of that technology. Adoption decision refers to the processes by which a newpiece of technology is selected for the organization. While the adoption decision clearly affects implementation it iscomposed of different processes and is analytically distinct from implementation (Steensma, 1996). Nijkamp et al.(1999) discussed the adoption and diffusion of environmentally friendly technologies among firms from a micro-economicperspective. The firms, which are able to adopt a particular type of manufacturing technology, become quite comfortablein adopting the next level of innovation (Mansfield, 1993). Adaptation of technology is a phase that starts after atechnology has been adopted and put to use in production activities or facilities. Mansfield (1993), the success or failureof technology transfer solely depends on the accumulated level of technology of a Nation. The higher the technologicallevel of a nation, the better judge the nation will for the assessment and selection of proper Technologies.

Regarding Productivity studies in Indian and Punjab Manufacturing Kiran and Kaur (2008) examine the impact ofeconomic reforms initiated in 1991 on the growth and adjustment process of organised manufacturing sector of India byanalysing the trends in value added, labour and capital and also trends in partial and total factor productivity for Indianmanufacturing for 51 three-digit industries for the period from 1980–1981 to 2002–2003. The comparative picture ofpre-liberalisation and post-liberalisation period depicts a slower growth of manufacturing sector of India in the latterperiod. Results of Punjab manufacturing have also highlighted low productivity growth of Punjab Manufacturing.

"Innovation . . . is generally understood as the successful introduction of a new thing or method . . . Innovation is theembodiment, combination, or synthesis of knowledge in original, relevant, valued new products, processes, or services.”Luecke and Katz (2003). Innovation typically involves creativity, but is not identical to it: innovation involves acting onthe creative ideas to make some specific and tangible difference in the domain in which the innovation occurs. Forexample, Amabile et al. (1996) propose: "All innovation begins with creative ideas . . . We define innovation as thesuccessful implementation of creative ideas within an organization. In this view, creativity by individuals and teams isa starting point for innovation; the first is necessary but not sufficient condition for the second". For innovation to occur,something more than the generation of a creative idea or insight is required: the insight must be put into action to makea genuine difference, resulting for example in new or altered business processes within the organization, or changes inthe products and services provided. A further characterization of innovation is as an organizational or managementprocess. For example, Davila et al. (2006), writes: "Innovation, like many business functions, is a management processthat requires specific tools, rules, and discipline."

Generally, firms’ sustainable competitive advantage requires that the firms continuously differentiate their products andservices from competitors (Chen et al., 2009; Koellinger, 2008). The firms can constrain and direct an R&D department’sability to take action and differentiate itself from competitors. Several definitions of innovation were made by Garciaand Calantone (2002). They proposed that if an idea has not been developed and transformed into a product, process, orservice, or if it has not been commercialized, then it would not be classified as an innovation. Innovation comprises thespeed and magnitude and this categorization provides an effective method of investigating the link between innovationand firm performance (Gopalakrishnan, 2000).

Today manufacturing small and medium enterprises (SMEs) are playing increasingly important roles in global markets.IPRs can play an important role in Technological Development of these SMEs. According to Idris, (2002) IntellectualProperty is the term that describes the ideas, inventions, technologies, artworks, music and literature that are intangiblewhen first created, but become valuable in tangible form as products. In other words, Intellectual Property is thecommercial application of imaginative thought to solve a technical or artistic challenge. Intellectual Property is not theproduct itself, but the special idea behind it, the way the idea is expressed and the distinctive way it is named and


described. India is emerging as the hub of ‘knowledge economy’ in South Asia. India has proved her strength in InformationTechnology (Kavida et al., 2008) Innovation and IPRs can play a vital role in the knowledge economy. A study by Haakon(2004) on ‘Innovation and IPR stated the Need of IPR, benefits to the different concerns as well as Planning for implementingsuch strategy demands an engagement across the whole organization affecting projects, processes and culture of the company.It focuses R & D on uniqueness, Triggers creativity, Invention and innovation. A Study by Kiran, (2004) Protection of IPRplays a dominant role in inventions and innovation. Protection of IPR plays a dominant role in inventions and innovation.The positive Result of this study depicts the growth of patents during the post TRIPS period. A study by Kanwar et al.(2001), found evidence to support the claim that the intellectual property rights encourages the technological change, asIntellectual property protection was found to have a strong positive association with R&D investment.

Maheswary et al. (2008) opine that small-scale industries have failed to cope up with the emerging challenges to keepabreast with the latest developments especially, in the field of IPRs. In India most of these industries are lagging farbehind and facing technical obscurity, being unaware about management of their Knowledge based assets like IPRs.Narain et al., (2004) deal with the steps taken for creating IPR culture and suggests the initiatives for small-scaleindustries. In order to be competitive in today’s world of globalisation and liberalisation Indian organizations have touse of advanced technology, technical manpower, and innovative research and development.

Researchers like (Kahn et al., 2003; Danneels and Kleinschmidt, 2001; Roseno, 2005) call for a better understanding ofexactly what innovation means going beyond the typical extremes of incremental and radical classification. They arguethat little has been said about what criteria are used for innovation classification and, mainly, who applies those criteria.Thus, introducing and stressing the different perspectives of individuals involved in the innovation process is becoming anessential point. As noted by Blackman and Davison (2004), although the focus of innovation is, historically, economic(Nystro�m, 1980; Scherer, 1984) the source of innovation perception is social (Zaltman et al., 1973; Burns and Stalker,1961). Zaltman et al. (1973) state that the distinguishing characteristic of an innovation is that, instead of being an externalobject, it is the perception of a social unit that decides its radicalness. It depends on the amount of experience people in theorganization have with the innovation they are developing (Green et al., 1995; Hage, 1980; Roberts and Berry, 1985).

Among the few available indicators of technology output, patent indicators are probably the most frequently used.Patent-based statistics have several uses. They allow for measuring the inventiveness of countries, regions, firms orindividual inventors, under the assumption that patents reflect inventive output and that more patents mean more inventions.Keller and Holland (1982) concluded that the number of an inventor’s patents is significantly correlated with superiorperformance ratings and self-rating. Hagedoorn and Clood (2003) concluded that the number of patents filed by acompany is a very good reflection of its technological performance. The study covered 1 200 high-technology companies.At the country level, Rassenfosse and Pottelsberghe (2008) have found a high correlation between patent numbers andR&D performance. Patents statistics are also used to map certain aspects of the dynamics of the innovation process (e.g.co-operation in research, diffusion of technology across industries or countries, etc.), or of the competitive process (themarket strategy of businesses).


The study has been undertaken with the following broad objectives.- To study the extent of intellectual property rights of manufacturing units of Punjab.- To study the factors influencing innovation in SMEs of Punjab.- To study the factors for promoting IPR culture for manufacturing units of Punjab.


Punjab has been ranked as number one growing state of India. Data has been collected by a self-structured questionnairefrom 100 manufacturing industries of Punjab from the following districts: Patiala, Ludhiana, Gobindgarh, Jalandhar ,Bhikhi, Mansa , Mohali, Barnala and Hoshiarpur. The reason for selecting these districts that some of the prominentrange of products of Punjab viz. Engineering goods, hosiery items, pharmaceuticals, food and agro products, textiles,electronics, hand and machine tools are clustered in these areas. Ludhiana is known for the production of bicycles andcomponents, hosiery, sewing machines and parts, machine tools, auto-parts, industrial fasteners, electrical and electronicgoods. About 21 per cent of the total industrial units in Punjab are located in Ludhiana district. Famous for hand tools,pipe fittings, valves and leather products, Jalandhar is well-known for its sports-goods too. Hoshiarpur, Mohali andBarnala are famous in the country for Pressure cookers, castings and machine tools. Bhikhi, Mansa are known forcotton ginning. Mandi Gobindgarh, popularly known as the ‘Steel-Town’ of Punjab, hosts more than 600 steel re-rollingmills despite being situated far from the sources of raw materials.

Ravi Kiran and Vijay Jain



Although there are around two lakh SMEs in Punjab, but in the present study only those units which have been consideredfor analysis have at least 50 employees and a gross business income over Rs 25, 00,000/- have been approached. Thereason for taking these enterprises is that they are that most of them are export oriented units and must be innovatorspossessing knowledge about IPRs. Small sixed family units are not included in this study. The basis for selection ofthese units is that may be using some technology management strategies and hence, using some part of their earnings onInnovations in the form of increased range of goods and services. The random samples were drawn from the populationof enterprises in the Punjab state, stratified by provinces as explained above. The questionnaire designated was sent to140 enterprises and 100 duly filled questionnaires have been taken for analysis. The rate of response is 72%.

The overall reliability of the questionnaire has been 0.837. Face and content validity have been used for the questionnaire.The questionnaire had been validated by the peers and has a good validation score. The changes suggested wereincorporated in the questionnaire and responses recorded. The period of data collection was July 2009 to June 2010.Table 1 describes the Reliability status. The data so gathered analysed using SPSS ver.17. Chi-square, ANOVA, Factoranalysis, Correlation and Regression has been used for data analysis.

Table 1 Reliability Statistics

Items No of Items Cronbach AlphaTechnology Management Strategies 22 .901Extent of Intellectual Property Rights 12 .901Reasons for protecting IPR 11 .804Factors for Developing IPR Culture 07 .795Overall impact of TRIPS on performance 10 .820 Overall 62 .837

There are a lot of studies on the impact of Size of the firm on innovations (Schumpeter, 1934, Sherer, 1984), as well ason productivity technology nexus (Sherer 1982, 1983; Grilliches 1984; Odagiri ,1985; Kiran and Kaur, 2007). Since thepresent paper focuses on innovations as well as IPRS in manufacturing SMEs in the post TRIPS period, the analysis hasbeen taken from the perspective of Nature of Industry and the Innovation and IPR activities. Many earlier studies havereported that machinery and technology manufacturing industries are more innovative and file more IPRs. So thepresent study has been undertaken to cover the Nature of industries viz. Durable goods, Non Durable Goods andEssential Goods and the extent of Innovation and IPR activities undertaken. Regarding the Nature of Industry in thesample out of total 100 firms there are 52 firms are producing Durable goods, 30 are producing Non Durable Goodscategory and 18 are producing Essential Goods. Regarding the category of industries covered effort has been made tocover all areas. Categories of firms within these sectors has been depicted in Fig. 1.

Figure 1: CATEGORY OF INDUSTRY

DATA ANALYSIS AND DISCUSSION

Firm Level AnalysisThe Responses were collected from 100 firms to cover many aspects of TRIPS in order to get a complete overview ofthe how firms have responded to the new challenges that have emerged by signing TRIPS. The aspects covered havebeen:

i. Market shareii. Persons employed in R& Diii. Improvement in quality of products


Table 2 Nature of Industry and Market Share

Nature of Industry V. low Low Medium High V. high TotalDurable Goods 6 12 22 8 4 52% within Nature of Industry 11.5% 23.1% 42.3% 15.4% 7.7% 100.0%Non Durable Goods 2 4 13 9 2 30% within Nature of Industry 6.7% 13.3% 43.3% 30.0% 6.7% 100.0%Essential Goods 2 0 0 6 10 18% within Nature of Industry 11.1% .0% .0% 33.3% 55.6% 100.0%Total 10 16 35 23 16 100% of Total 10.0% 16.0% 35.0% 23.0% 16.0% 100.0%Notes: Chi Square=37.073 ***, Df:8, P <.001

H1: There is an association between Nature of Industry and increase in market share.As depicted in Table 2 regarding relation between Nature of Industry and improvement in market share, there are mixedresults. Only 39 out of 100 SMEs rank their market share as high/ very high. Market share performance wise essentialgoods response is better than that of other categories as 16 out of 18 firms report high /very high market share. ChiSquare is 37.073 for Df:8 ( p<.001). These results are indicative of the fact that there is an association between natureof Industry and increase in market share. Hence the above hypothesis has been accepted.

Table 3 Nature of Industry and Persons employed in Rand D

Nature of Industry V. low Low Medium High V. high TotalDurable Goods 29 13 5 3 2 52% within Nature of Industry 55.8% 25.0% 9.6% 5.8% 3.8% 100.0%Non Durable Goods 4 4 8 8 6 30% within Nature of Industry 13.3% 13.3% 26.7% 26.7% 20.0% 100.0%Essential Goods 2 0 2 2 12 18% within Nature of Industry 11.1% 0% 11.1% 11.1% 66.7% 100.0%Total 35 17 15 13 20 35% of Total 35.0% 17.0% 15.0% 13.0% 20.0% 35.0%Notes: Chi Square=55.367***, Df:8, P<.001

H2: There is an association between nature of industry and persons employed in R &D.As depicted above table regarding relation between nature of industry and persons employed in R &D, there are mixedresults. 4 firms out of 16 essential goods rate their performance as high / Very high. Only 5 out of 52 durable firms ranktheir persons employed in R & D as high/ very high. In case of Non durable industry the situation is totally differentwhere only 14 out of 30 firms report high/ very high. In case of Essential goods the situation is a little better as 14out of18 firms report high/ very high number of staff employed in R&D. Chi- square is significant depicting an associationbetween the two. Hence, the above hypothesis that there is an association between nature of industry and personsemployed in R &D is also accepted. The above results highlight that Persons employed in R& D in Durable and NonDurable categories is still less and the situation demands attention.

Table 4 Nature of Industry and Quality of Products

Strongly Disagree Moderately Agree Strongly Totaldisagree agree agree

Durable Goods 4 4 30 8 6 52% within Nature of Industry 7.7% 7.7% 57.7% 15.4% 11.5% 100.0%Non Durable Goods 2 2 11 11 4 30% within Nature of Industry 6.7% 6.7% 36.7% 36.7% 13.3% 100.0%Essential Goods 2 0 0 6 10 18% within Nature of Industry 11.1% 0% 0% 33.3% 55.6% 100.0%Total 8 6 41 25 20 100% of Total 8.0% 6.0% 41.0% 25.0% 20.0% 100.0%Notes: Chi Square=30.655***, Df:8,P<..001




H3: There is an association between nature of industry and improvement in the quality of Products.The above table depicts that 14 out of 52 firms in durable goods category report an improvement in the quality of theproducts. In case of non – durable goods 50 percent of firms reported an improvement in quality of their products. Inthis case also the response is better for essential goods as 16 out of 18 firms report an improvement in quality ofproducts. Chi square is significant. Thus there is a relation between nature of industry and improvement in quality ofProducts. Thus the above hypothesis has been accepted.

Table5 IPR Scenario in India

Year Patents Trade marks Filed Examined Granted Filed Examined Granted

1995-96 7036 18540 1533 42723 4357 53101996-97 8562 24036 907 43234 5560 46861997-98 10155 2706 1844 46712 7116 41201998-99 8954 3424 1800 51704 42104 53001999-00 4824 2216 1881 66378 42500 80102000-01 8503 549 1318 84275 - 142022001-02 10592 1356 1591 90236 159735 62042002-03 11466 9538 1379 94120 249003 111902003-04 12613 10709 2469 92251 89958 397622004-05 17466 14813 1911 78996 72091 450152005-06 24505 11569 4320 85699 77500 1843252006-07 28940 14149 7539 103419 85185 1093612007-08 35218 11751 15261 123514 63605 100857Growth Rates 3.73** 4.57** 4.73** 2.25** 3.95** 4.18**Notes: P< .01

As depicted in table 5 regarding the overall patenting scenario the absolute number of trade marks filed in India is muchhigher as compared to the patents filed. In terms of growth rates of patents granted, the rate is higher than that oftrademarks.

IPR status: firm level analysisTable 6 depicts the IPR status of SME Manufacturing of Punjab. Punjab Manufacturing is mostly into filing Trademarks.The patents filed are still low and hence the status needs to be improved. This data suggests that IPR Awareness and IPRstatus of Indian Manufacturing is still in the nascent stage. Durable industries have filed most of the trademarks (18 of21). But it is lagging in filing patents and copyrights. And if we see the Non Durable industry one cookware industryfiled copyright and three trademarks have been filed by cotton ginning mill and cookware industry. Most of the copyrightsand patents have been filed by Essential goods. An obvious reason for this is that this sector covers the Pharmaceuticalindustries and the food products and beverages, which are more active in patent filing. Thus the status of IPR filing inPunjab manufacturing SMEs is low. So we can say that the patent and copyright filing is at initial stage in case of smalland medium manufacturing enterprises of Punjab.

Table 6 Nature of Industry and Status of IPRS in Indian Manufacturing

Nature of Industry Category of Industry Copyrights Trademarks PatentsDurable Machinery tool parts 6

Iron industry 4Electrical Equipment 3Cycle Spare parts 2Transformer parts 2

Non Durable Metal products(Sports)Cookware 1 1 1Cotton ginning mill 2

Essential Pharmaceuticals and Food Products 5 4Total 6 21 5


Determinants of InnovationSteps have been taken to study the determinants of Innovation of SMEs of Punjab Manufacturing from the sample data.The dependent variable is: Increased range of goods and services as it has now accepted as a measure of innovation activityof the firm. A widely accepted definition of definition of innovation is that innovation occurs only when enterprisesintroduce for the very first time products or production processes which are new to the world. In Developing countries, itcovers creative imitation as well. Firms especially SMEs cannot be accepted as knocking at the frontiers of technologicalbreakthroughs. Moreover Innovation according to Luecke and Katz (2003) . . . is successful introduction of a new thing ormethod . . . Innovation is the embodiment, combination, or synthesis of knowledge in original, relevant, valued newproducts, processes, or services Increased range of goods and services in this study are the new products and servicesintroduced by these firms. As many firms chosen in the sample are firms indulging in exports, so they are producingproducts which are competitive and introducing new products in keeping with changing demands.

On the basis of literature review the following independent variables have been identified.

NATURE OF THE FIRM (IV1)

According to Robson et al. (1988) the use of intellectual protection differs significantly across industries. The inter-industry differences in the use of IPRs are determined by the technology sector, by the nature of the products, their stage inthe life cycle and competitive conditions.

Increased Market share (IV2)Increase in market share leads to enhanced sales, enhanced profits and hence more money can be spent for buildinginnovation culture. Blundell, Griffith and Reenen (1999) find a robust and positive effect of market share on observableheadcounts of innovations and patents although increased product market competition in the industry tends to stimulateinnovative activity. Furthermore, the impact of innovation on market value is larger for firms with higher market shares.

Improved production flexibility, Quality of goods and ISO Standards (IV3,IV8 and IV12)Gunasakeran et al. (1996) states that overall productivity and quality improvement strategies are lacking in SMEs. Theresearchers consider continuous improvement in these to be a fundamental step along the innovation pathway.

Patents, Trademarks and Copyrights (IV4, IV5 and IV6)According to Hanel (2006) as patent-friendly environment is now prevalent in India, patents are increasingly used forprotecting innovations from imitation. Mansfield (1986), in an empirical study of one hundred American manufacturingfirms, investigated the extent to which patents mattered, especially in case of firm’s decision to introduce and develop itsinventions. Hagedoorn, J. and Cloodt, M. 2003, concluded that the number of patents filed by a company is a very goodreflection of its technological performance.

Investment in R&D (% of exp.); Staff employed in R&D (IV7 and IV9)Generally, firms’ sustainable competitive advantage requires that the firms continuously differentiate their products andservices from competitors (Chen et al., 2009; Koellinger, 2008). The firms can constrain and direct an R&D department’sability to take action and differentiate itself from competitors. Studies by Odagiri (1985) clearly show that improvement inproductivity achieved by a firm/industry depends on Research and Development (R & D) efforts of the firm/industry andthe flow of new advanced technology embodied in intermediate inputs and capital goods resulting from R & D efforts ofinput suppliers.

Improved Environmental impact, Health Safety aspects, Reduced labor Costs, material and energy costs (IV9,IV10, and V12)Innovations could be a result of Technology that results in Improved Environmental impact and/or Health Safety aspects orCost reduction. Most efforts to drive business innovation policy treat energy efficiency as a separate and marginallyrelevant issue.




Table 7 Regression results

Variable B SE B b t P(Constant) 1.177 .342 3.443 .001Market Share .883 .069 .866 12.877 .000Production .378 .061 .353 6.168 .000Improved Environmental impact -.291 .070 -.276 -4.145 .000or Health Safety aspectsStaff Employed in R & D -.836 .274 -.118 -3.047 .003Status of Trademarks filed in -.648 .213 -.320 -3.043 .003last Ten yearsNotes: R2 = 0 .892, Adjusted R2=0. 894 ;S.E of Regression= .486; DW=2.051; F-statistics=107.07Significance (F- statistics) < .001

The results of the regression depict that predictors of the model are: IV2: Increased market shareIV3: Improved production flexibility, IV8: Staff employed in R&D, IV5: Status of Trademarks in last ten years and IV6:Status of copyrights in last ten years and IV9: Improved Environmental impact or Health Safety aspects. These sixvariables explain 87.6 percent of the variation. The results of step-wise regression highlight that trade marks and copyrightsare important predictors, while the model doesn’t choose patents as important predictor. Hence the above hypothesishas been partially accepted.

It is surprising that three factors viz. i) Improved Environmental impact or Health Safety aspectsii) Staff Employed in R & D and iii) Status of Trademarks filed in last ten years (Post TRIPS period) are depicting anegative association with increased range of Goods and services. One reason for this could be that Indian SMEs are stillnot paying due attention to environmental safety standards and Staff employed in R& D activity is still very low in thesample firms. Innovation in SMEs is not introducing new radical innovations, but small improvements or producingnew products due to new technology adoption. Regarding status of technology most SMEs reported using new updatedtechnology. R& D investment is still a low percentage of total output.

The above results also highlight that nature of firm, viz. durable, non-durable and essential category has not emerged asan important predictor of innovation activity of SMEs. At the same time it is conveyed that the nature of firm doesinfluence the IPRS (Table 6)

Factors for enhancing IPR awarenessThe following section represents the steps suggesting firms for enhancing IPR awareness. Factor analysis results highlightthat two factors viz. i) Policy Initiatives and Organisational Factors explain 62.85 percent of total Variation.The first factor, i.e., Policy Initiatives, explains 32.99 percent of total Variation. The second factor viz. OrganisationalFactors explains 29.85 percent of total Variation.

Table 8 Factors for Promoting Patenting Culture

Factor Eigen % of Cum. Items Factor Mean S.D Rank value Var. Exp. % Loading1.Policy 2.31 32.99 32.99 Govt. Assistance for 0.732 4.73 .45 2Initiatives facilitating Patent filing

Support for Entrepreneurial 0.718 4.72 .67 3and Managerial Developmentfor SMEsReduction of Taxes and Fees 0.709 4.32 .68 5Severe Penalty for IPR 0.695 4.84 .55 1violationFaster Registration Process 0.595 4.56 .70 4

Mean of Policy Initiatives 4.632.Organisational 2.09 29.85 62.85 Organizing More programs .912 4.14 .71 6Factors for IPR awareness

Pool patenting is a possible .844 3.91 .68 7solution

Mean of Organisational Factors 4.02Overall Mean 4.46


Patent filing with item loading of 0.732, ii) Support for Entrepreneurial and Managerial Development for SMEs (.718) iii)Reduction of Taxes and Fees (.709) and iv) Severe Penalty for IPR violation ( .695) and v) Faster Registration Process(.595). Organisational Factors include: i) Organizing More programs for IPR awareness (.912) and ii) Pool patenting is apossible solution (.844).


Overall mean of both the factors is 4.46. Mean of Policy Initiatives factor is 4.63 and is much higher than overall mean. Therelative importance of this factor may also be highlighted through the factor loadings. Three items viz. i.) Govt. assistancefor facilitating Patent filing, ii.) Support for Entrepreneurial and Managerial Development for SMEs and iii.) Reduction oftaxes and fees are having factor loading more than seven and the percentage of variance explained by this factor has alsobeen high (32.99). Thus, for improving the IPR culture in SMEs, the assistance by Govt. is preferred in terms patentfacilitation centers as well as well as other policy initiatives like faster registration and lower fees is also having highermeans than organisational factors. Pool patenting as a possible solution is least on priority with lowest mean score. Hencethe above results highlight that Policy Initiatives factor is considered more important than Organisational Factors in developingIPR culture.

CONCLUSION

The results of the present study highlight that IPR awareness and developments in SMEs of Punjab are still at initial stage.SMEs of Punjab are only mostly filing trademarks and copyrights. Patent filing is almost missing. The overall IPR statusalso is indicative of the facts that the absolute number of trade marks filed in India is much higher as compared to thepatents filed.

IPR Awareness and IPR status of Indian SMEs of Punjab Manufacturing is quite low. Regarding the nature of industries theDurable industries have filed most of the trademarks (18 of 21). But it is lagging in filing patents and copyrights. In case ofNon Durable industry cookware industry filed copyright and three trademarks have been filed by cotton ginning mill andcookware industry. Most of the copyrights and patents have been filed by Essential goods category. An obvious reason forthis is that this sector covers the Pharmaceutical industries and the food products and beverages, which are more active inpatent filing. Thus the status of IPR filing in Punjab manufacturing SMEs is low. So we can say that the patent andcopyright filing is low in case of small and medium manufacturing enterprises of Punjab.

The results of the regression have chosen the following independent variables as predictors of Innovation: IV2: Increasedmarket share, IV3: Improved production flexibility, IV8: Staff employed in R&D, IV5: Status of Trademarks in last tenyears and IV6: Status of copyrights in last ten years and IV9: Improved Environmental impact or Health Safety aspects.These six variables explain 87.6 percent of the variation. The results of step-wise regression highlight that trade marks andcopyrights are important predictors, while the model doesn’t choose patents as important predictor. Hence the abovehypothesis has been partially accepted. The results of Factor analysis results highlight that two factors for enhancing IPRawareness are: i) Policy Initiatives and Organisational Factors explain 62.85 percent of total Variation. Policy Initiativesfactor has three items viz. i.) Govt. assistance for facilitating Patent filing, ii.) Support for Entrepreneurial and ManagerialDevelopment for SMEs and iii.) Reduction of taxes and fees are with item loading more than seven and the percentage ofvariance explained by this factor has also been high (32.99). Thus, for improving the IPR culture in SMEs, the assistanceby Govt. is preferred in terms patent facilitation centers as well as well as other policy initiatives like faster registration andlower fees is also having higher means than organisational factors. Pool patenting as a possible solution is least on prioritywith lowest mean score. For improving the IPR culture in SMEs, the assistance by Govt. is preferred in terms patentfacilitation as well as well as other initiatives like faster registration and lower fees. The major findings are that the attitudeof SME’s of Punjab is not encouraging and the awareness level among the management about their organization’s IPR’spolicy and problems is disheartening. In this period of intense competition, falling prices and wafer-thin margins, it isessential to attract and invest in creative minds. Focusing on Intellectual property, organizations have to develop the abilityto harness the creative energies of their own available workforce. The need of the times is to focus on creating andencouraging human capital. It is this pool of creative minds that will help in generating innovative ideas. Companies nowhave to formulate IPR strategies that complement their competitive strategies.

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Ronald MarkwardtAssistant Professor of Community Health Science, Burapha UniversityFaculty of Public Health, 169 LongHadt BangSaen Road, T. SanSuk,

Amphur Muang, Chonburi, THAILAND 20131TEL: 66 (0) 87 826 5482

[email protected], [email protected]

Alfredo BelloLecturer in Ecological Economics

[email protected]

ABSTRACT

Background: Creative economy strategies are based on philosophy rather than a formulated study of economics. Theassumptions of creative economy and human capital need to be examined.

Objective: This paper examines the implications of promoting a creative economy in Thailand, including interaction withregulation and control mechanisms.

Methodology: Literature review and logical analysis are used to show the need and the rationale for changing, implementing,monitoring and enforcing laws to protect both capital and labor. The potential consequences of implementing these policiesare predicted by comparing to historical events as described by other theoretical frameworks, such as the knowledge basedeconomy.

Findings: Two approaches to implementing creative economies are presented to exemplify the effects of punitive controlpolicy versus inherent market rewards in a more diversified (uncontrolled) model. Examples of creative business modelsfrom information business, arts and publishing businesses illustrate the benefits of using the public domain for developmentof culture and information. In fact, a creative economy approach can incorporate traditional wisdoms and principles ofecological balance.

Conclusion: Sustainable development can occur without restricting access to knowledge, information or creativecontributions.

Implications: Attempts to enforce patents, copyrights and censorship may ultimately prove unproductive, especially ifexpensive controls over information transfer (e.g. TV, copy printing, internet, etc.) are not maintained. Despite trendstoward regulating all communications systems and paying for information, promoting alternative strategies, such as systemsof attribution rather than ownership may be more beneficial to creative individuals and to the goal of human resourcedevelopment, while “licensing” and “anti-licensing” can be enforced on the corporate level to maintain a market value forcreative products.

Keywords: Copyright, License, Creative Economy, Thailand, Human Resource Development

INTRODUCTION

The creative economy buzzword that is the theme of this conference seems to be based on the writing of John Howkins,whose popular book “The Creative Economy: How people make money from ideas” has caught the attention of manypeople. Actually, the term “creative economy” has been attributed to Richard Florida, (1993) and Charles Landry(1995), who suggested that urban renewal and survival of cities depended on accommodating innovation and innovators.Many projects have since been attempted with the intent of promoting the creative economy worldwide. Governmentsand policy makers have been organizing events, shows, exhibitions, funding schemes and ‘quick fix’ projects in thehope that they will inspire the people to create rather than re-look at other core problems; which could be lack of abusiness climate which supports entrepreneurship, lack of consistency in economic policy which prevents planning or

GOVERNANCE AND ETHICS FOR SUCCESSFULCREATIVE ECONOMY


GOVERNANCE AND ETHICS FOR SUCCESSFUL CREATIVE ECONOMY

investment, lack of a cultural approval for innovation, an education system which does not promote critical thinking or amyriad of other issues. (Sridhar Ryalie, 2008)

Certainly it is true that the very idea of making something as meaningful as money from something as ethereal as an ideais attractive to those who want to collect currency. In fact, Howkins and his disciples can produce many examples ofhow markets have been exploited (or distorted) by people with novel approaches.

How Can we Make Creative Economy Sustainable?Those who are interested in economics as a human endeavor, i.e. trade as a means of social interaction rather than justa system for accumulation of personal wealth, should carefully examine the situations under which creativity is rewarded,along with the distribution and flow of wealth. (for example see the essays in Cullenberg et al. 2001) In order to honestlyassess the validity and/or profitability of creative economy (CE), we need to ensure that we are assessing the essentialsof trade and that planning is based on historically valid assumptions. Moreover, we should examine the ethics andstandards that will be used to determine what to count as benefits or to whom costs should accrue.


This paper is presented with the following objectives.

1. Consider the implications of promoting a creative economy in Thailand, including the role of regulation andcontrol mechanisms in creating sustainability.

2. Highlight the potential of Thailand's human resources to incorporate itself into a model of creative economicsdestined to upgrade the population's living standards

BACKGROUND

Intellectually, a Creative Economy (CE) is “the exchange of ideas for problem solving.” The term was introduced tohelp explain a plan for revitalizing urban communities and cities where industry and traditional business were no longerviable. Although the description of CE has meaning in explaining micro-economic phenomena, what CE means becomessomewhat less clear when discussing national or global markets. Most recently the term creative economy has beenused to refer to either 1) the industries which are concerned with generating or exploiting knowledge and information,or 2) human exchanges and interactions (such as tourism) based on culture and arts. The focus of discussion about CEis usually on either 1) the business environment seeking new markets and new marketing strategies (en.wikipedia.org/wiki/Creative_economy) or 2) the jobs that traditionally require a sophisticated set of skills and knowledge, e.g. theCanadian report by Schimpf (2008).

“Creativity” in this context refers to the formulation of new ideas and to the application of these ideas to produceoriginal works of art and cultural products, functional creations, scientific inventions and technological innovations.There is thus an economic aspect to creativity, observable in the way it contributes to entrepreneur-ship, fosters innovation,enhances productivity and promotes economic growth.” (Michael Schimpf ,2008: UNCAP Creative Economy Report2008 Overview)

With either industry or arts, CE implies that a change of business strategy is needed because of an innovation inproducts or services. In order to integrate innovation into the economic environment, intellectuals have conceived of acreative ‘production chain’ with four key links.

• Creation/content origination – The multiple processes by which creative material and intellectual assets areoriginated and produced – this ‘stage’ includes all creative forms (images, ideas, compositions, designs, games, titlesand packages)

• Manufacture – The making of ‘one-offs’ or proto-types, which may be reproduced later plus specialist goodsused towards creative production (such as paint brushes, cameras and musical instruments)

• Distribution and mass production – Activities that channel content and services to markets (such as CDreplication, shipping and digital delivery systems)

• Exchange – The exhibition of creative products (for example, venue-based activities undertaken in theatres,concert halls and cinemas) and the retailing of products (such as books, CDs, games, or even products sold on the basisof brand) (http://www.torontoartscape.on.ca/about/vision2011/jargon-decoder).


Creativity, utility and constraints to the valuation of creativityPop theories as Theoretical Frameworks of Policy

In the 1990’s analysts began to look for “knowledge related” indicators of trends in economic growth, productivity, andemployment what that traditional accounting frameworks could not explain. The attempts to describe a knowledge-basedeconomy brought attention to the constructs of human capital and intellectual capital. Most of the myriad definitions of CEimply that it is a small extension of the “Innovations of a knowledge based economy”. Definitions of a knowledge basedeconomy are a radical departure from the traditional models developed since the time of the Industrial Revolution, whereineconomists have focused on developing constructs of capitalist markets and concerns for “Market Efficiency”. In theInformation Age we have to change our concerns. The markets are still seen as supporting human development, but rapidchanges in conditions have created concerns about “Sustainability”.

The authors of the economic theory of knowledge, among which we can mention Sakaiya (1985) in his book The KnowledgeValue Revolution or a history of the future, sustain that knowledge incorporated or applied to the production of goods andservices DOES NOT ADD VALUE, but rather IMPROVES CONDITIONS FOR VALUE ADDING, understanding VALUEas the quantity of productive labor incorporated into goods or the elevation of the usefulness of these goods.

The best conditions for value adding (better knowledge and information) take place when laws establish the stimulus andguarantee of greater freedom and transparency, as well as a direct flow of knowledge between creators of knowledge andits final users. The desirable role of a State (effectiveness) in its different fields or branches (Legislative, executive andjudicial), is fundamental in evading or reducing the barriers that prevent knowledge and information from being theengines that increase the value of goods (AB, 2010).

The current situation in ThailandA summary of the current situation of creation in Thailand might allow us to understand what kind of policies supportinnovation and development. Which information (e.g. on the internet and other mass media) should be prohibited orregulated? And which prohibited or regulated information should be allowed or decontrolled?

Even as a foreign observer, the changes and experiments of the Thai economy are apparent. Outstanding among thesuccessful experiments are the promotions of OTOP (One community one product), Sufficiency economics (especially asapplied to agriculture), support for SME’s (small and medium enterprises), and a laissez faire policy for individual sellers.

• Imported corporate business models dominate the industrial southeast, and many many people are moving intothis “globally competitive” sector in order to get cash and consumer goods. A reasonable number of domestic workers haveachieved some degree of success, but many are also learning about “debt based lifestyle maintenance.” (TNSO, 2007)

• The middle class is the majority and currently fairly affluent. In fact, there are significant numbers of peopleready to invest the excess cash created from business and investment (TNSO, 2007).

• Significant redistributions of wealth occur through donation to temples (Cook, 1998).• Regarding the use of resources for creative endeavors it appears to me that Thailand is already advance in each

of the 4 areas:• Creation (particularly with regard to the visual and performing arts) Examples are in the TV advertisements• Manufacture – The making of ‘one-offs’ or proto-types, which may be reproduced later is evidenced in the

OTOP programs, and the many local artisans in all parts of the country• Distribution and mass production – Activities that channel content and services to markets (such as CD

replication, shipping and digital delivery systems)

This is the difficult area to incorporate profit for innovation. Issues arise concerning control over modifications, imitationsand use. Without an infrastructure of surveillance, it is difficult to ensure that innovators are sustainably reimbursed fortheir efforts or able to collect tolls for use of their “intellectual property”.

• Exchange – The exhibition of creative products (for example, venue-based activities undertaken in theatres,cultural shows, concert and cinemas) and the retailing of products (such as books, CDs, games, or even products sold onthe basis of brand)

Thailand is currently well situated to receive income from both tourism as well as the increasingly affluent adapters whoare getting money from sales of traditional resources to foreign interests. However, exporting ideas can have some costsattached (as in promotion and travel by promoters).In reviewing the above list, it becomes apparent there are problems with managing distribution systems and with exchangevalues in international trade arenas. Some difficulties include language, cultural specificity, and predicting the nature offashion and trends (eg. Gladwell, 2000)

Ronald Markwardt and Alfredo Bello



Analysis of options; Different PathsIncorporating Creativity into a Market Model requires looking at the creative economy as a concern of industry.

Model 1 - Promoting Innovation through industry

Like any other industry, creative industries are only truly sustainable if they contribute to building the asset resource base(UNCTAD, 2010). We note here that in the UNCTAD report, the section on policy development is focused on supportingcorporate structure and global markets. Even suggestions for SME’s (Small and Medium Enterprizes) are that they couldget development assistance from larger corporate entities and integrate their output into the national policy.

Figure 1 is intended to indicate that cost can be fixed for every part of the creative process with the exception of themarket. Owners can control two potential assets. i.e. ideas and talent, by mechanisms for recruitment, reward andretention. They can control productions by the training they provide to personnel. Return on investment (ROI), ofcourse accrues to investors, who risk fixed amounts of capital but accrue any extraordinary profit.

However, this system requires regulation in order to be sustained. Current regulations are probably designed to protectthose people whose risk is most obvious. Thus, it is the people who invest their capital who will most benefit from asystem in which markets are controlled. Restriction on unauthorized profit must be in place to protect the quantifiablemarket. Control must include punitive mechanisms (such as fines or court enforced remuneration) to ensure that profitfrom creative endeavors are channeled back to the legal “owners”.Exemplary Case: Privatization of Intellectual Activities

Problems of Using Human capital and intellectual capital in a market modelBasic economic assumptions, such as balance of supply and demand, do not apply neatly to human capital nor thecreative activities. Thus, innovations, which are essentially information, cannot be modeled using traditional methodsof market.

Aside from stock market averages, employment is the most frequently cited indicator of economic health. Employmentcould thus be viewed as an indicator or proxy for Human Resource Development.

Business Barriers to Creativity and HRDIn Thailand, many major industries are international subsidiaries, so production is synchronized with global markets,with little thought of answering new demands. There are currently few policies that promote innovation. There areconcerns about Thai culture and inability to enforce regulations.

Restrictions on Freedom of Information might be considered among the regulatory barriers to enrichment by creativeactivities. Another problem is the lack of indicators of creativity which could by used to evaluate the effects of policy.Regulatory needs for privatization of profit.

Mechanisms needed to protect the interests of innovators include patents, copyrights, licensing and punitive restrictionsto ensure products are not copied or imitated in such a way as to capture part of the market to which the innovator claimsexclusive access.


Implications for the Market Model of Creative EconomyThis model implies the need for competitive strategies, and indicators of success being the first to introduce innovations orto replace products with lower prices.(OECD, 1997). The focus of development is “Return on Investment”, based onmarket value rather than value creation. It requires a means of intervention and enforcement, most likely with governmentagencies to act as mediators or arbitrators according to national law. The government would need to build or revise a legalinfrastructure to manage these issues. Review would be needed to see whether the sources of innovation are valued orwhether promoting creativity or introducing new products and services is just another strategy for businesses to expandtheir markets.

Non-market rewards for creativitySimple linear models of innovation can become tremendously complicated when constructs like knowledge and researchare connected to all of the processes they affect, e.g. In Schimpf, 2008). It may be preferable to conceptualize creativity asthe environment in which strategies fro R&D, production, and distribution are applied. Even Howkins admits that acreative economy is dependent on the environment.). Creativity depends on a mix of four ecological conditions: diversity,change, learning and adaptation; which he calls a creative ecology (Howkins, cited in UNCTAD (2010) p. 121 and Howkins(2009)) Markets, on the other hand, are the environments in which exchanges and transactions occur.

If we look at the natural development of innovation, one that is not controlled by government enforcement, we can seebenefits accrue in a different pattern.. We can use models of how knowledge is disseminated to illustrate cases of innovationswhich become part of the public domain. It has been said, for example, that it takes 5 to 10 years for scientific theories tobe adapted or known by the general public. There are books that hint you can bring a product to market in a year, butrealists generally opt of 5 to 7 year confidentiality contracts while the various necessary processes are put in place.

Model 2 - Synergies of Creativity and Culture

Figure 2 is intended to illustrate the natural development of new ideas or knowledge in a creative environment. Creativeideas cannot be owned or controlled, but rather development can be attributed to innovators. Some people may use theideas or copy them for their own purposes, while others may modify them, translate them, or even “package them andsell them”. All of this, of course requires somewhat more risk or investment on the part of the creators and developers.However, in exchange for a salary and direct sale of their ideas to a corporate entity, as assumed in the prior model, theyare rewarded returns (new ideas as well as return on investment) that directly benefit them and improve their value asresources for human development.

However natural this system may be, mechanisms for maintaining such a system are still required. Below, idea licensingand attribution are presented as alternatives to the idea ownership employed by maintaining patents and copyrights.Open licenses

Copyright is the ownership of an intellectual property (IP) within the limits prescribed by a particular nation's orinternational law. Often publishers or distributors own the copyright to material created by other people, and they havethe right do determine how it is copied, distributed, or used by others.

Computer and internet have introduced the idea of copyleft - which fits the model in figure 2. Copyleft is the idea andthe specific stipulation when distributing software that the user will be able to copy it freely, examine and modify thesource code, and redistribute the software to others (free or priced) as long as the redistributed software is also passed



along with the copyleft stipulation. The copyleft is a form of attribution, similar to citations required in academic work suchas this. The term was originated by Richard Stallman and the Free Software Foundation. (Tech Target, 2010)

Creative Commons licenses provide simple, standardized alternatives to the “all rights reserved” paradigm of traditionalcopyright. (Creative Commons, 2010) the citation in the previous paragraph was copyrighted. The citation in thisparagraph is from a page that is licensed, and moreover, which anyone can suggest changes to.

The model of promoting development created by the computer industry is an open license or free license. This licenseis the legal statement that allows free content and free software to be "free". This means "free" as in "freedom of speech"or "free to use it how you want".

License allows people use intellectual property - and traditionally specifies the condition under which it may be reproducedor used. It is usually statement attached to a work (e.g. computer program, ticket to a sport event, or included on a CDmovie). Open license allows the content to used in any way, including commercially, but requires future users to sharetheir modifications under the same license. There is also a concept of appending an anti-license, which allows free useof work, but in a sense denies all responsibility for the subsequent use or modifications of your work. The main point ofan open license is to tell people that they are free to use the content, under relatively few conditions:

The most common condition is attribution - requiring that they acknowledge your work. (This may be just attribution tothe wiki, so the individual contributor may not be credited. (For more, and to see ways to ensure more direct attribution,see CC:Attribution.)

The next most common condition is Share Alike - that you will share, as long as the final product is also shared in thesame way. This prevents someone from taking a work, adding something of their own, and then publishing it in a morerestricted way, e.g. claiming copyright on their amendments.

Another popular clause is the non-commercial clause However, content with this license is not considered "free" byFreedom Defined (the free cultural works definition), or the Open Knowledge Definition and is not able to be used in asite such as Appropedia, which uses a license allowing commercial use. This may be a wise choice for personal photos,or in some cases for creative work that you may wish to make a profit from.

Exemplary Case: Innovation by public contribution e.g. Linux,

Regulatory needs for public sector developmentAlthough this model does not imply competition, there is a need for documenting, cataloging and organizing the creativearts and services provided. This is a role which can be assumed by government, or possibly by NGO’s, by which I meanindustry supported regulatory bodies such as ISO or professional regulatory bodies. Self-regulation would require atleast some statements of ethics and standards for public perusal. There is a possibility of quasi-enforcement andmonitoring by governments by requiring registration and a fee. Registration also enhances opportunities to tax eitheractivities or transactions.

This second model also assumes money is exchanged for the “packaged product”. However, packaging or customizingis not done by a centralized entity, rather it is more likely that the “product” will be tailored to meet local demands. Thissystem would be consistent with ethical ideals of local self-determination. Localized creative markets would also encouragethe development of capital in the periphery (Wallerstein, 1976)

Business barriers to creativity and developmentBarriers to Public Creativity include: Lack of Investment. Economic risk to creators and developers, rapid diversificationand segmentation of markets, possible loopholes to avoid taxes or hide value added, and fewer jobs for legal analysts.Implications for the Public Domain Model of Creative Economics

Intellectual Property is a recent construction of the Western Economies, and it has proven difficult to implement measuresto protect dissemination of ideas in Asia. Even countries with experience protecting patents and copyrights are susceptibleto “innovative adaptors” and have problems defending against reverse engineering. An interesting twist on copyrightversus license as a response to the question "Did the license change?": "The copyright for future (computer) code willchange. But the license is still in effect (The Wiki page DocIbatis2MyBat, 2010)



Promoting open source creativity causes some people concerns about efficiency.Asian culture is not as accepting of innovation for the sake of change as are the western industurialist economies (Mahbubani,2004). While the family based business models might restricted experimenting with new artforms, the concerns ofgovernments include the difficulty of including new developments in promoting their Globalization and or figuring outhow to include innovations in their national indicators of Human Capital.

ANALYSIS

SustainabilityHuman development may or may not be viewed as exploitation of resources. In fact, the way that we define humancapital is open to debate. The corporate view tends to look at human capital as being employable by omnipotentorganizations, but until now has not recognized the contributions of the creative arts.

Past analytical literature tends to stress the importance of technical skills and forms of knowledge related to science andengineering for economic innovation and growth. . . . producing many consumer and industrial products relies on a broadspectrum of skills, knowledge and abilities. Indeed, “softer” skills, particularly those more closely associated with the creativeor fine arts, may also play a vital role. For example, the stylistic design of a particular product, such as a household appliance,can decisively affect its appeal to consumers. This suggests that design can add significant value to a consumer good independentof technology. Moreover, given the vast number of consumer products available in the current economic context, it is importantfor manufacturers to differentiate their products from competitors in order to compete effectively for sales

This perspective is not new. Jane Jacobs’ The Economy of Cities (1969), a work of seminal importance, emphasized thata wide variety of skills and knowledge are necessary for innovation. Culture occupations are explicitly creative and possesssubstantial skills and knowledge.

Moreover, they embody forms of creativity that are profoundly different from the creativity found in technical andscientific occupations. Many culture workers are obviously employed in the production of cultural goods and services,such as artistic works, concerts and literature.”

Michael Schimpf, 2008

The data for the Canadian report was gathered to determine the extent that employers in non-culture industries, such asmanufacturing or business services, rely on culture workers and their skills as inputs into productive processes

Changing paradigm: Worker Skills Training vs Labor Markets:Employment: - this concern of most analysts is in itself a reflection of the desire to concentrate control of capital in thehands of a few. By including things like “employment levels” “GDP” and “Income” in analysis of economic growth weare ignoring the people who have enough imagination to survive, and likely contribute creatively to society. This isunmeasured human capital.

Changing paradigm: valuation of skill vs valuation of productSuccess in a Creative Economy should be measured in terms of skills rather than products. This requires economic datato provide a careful documentation of jobs as opposed to the accounting of revenue from the economic sectors inquestion. On the local level, the argument of this paradigm is an extension of the branding trends in advertising; wherechoice is based on style rather than utility.

Changing paradigm: Supply : Demand vs Human WelfareSimply stated, the objective of building an infrastructure to promote open source innovation should be to improveoptions for as many people as possible without concern for the balance of trade or market efficiency.

Current thinking about the resources of creative economyIn knowledge distribution, the configuration of national innovations systems, which consist of the flows and relationshipsamong industry, government, and academia in the development of science and technology is an important economicdeterminant (OECD,1996 p 7) However, model 2 is culturally and historically consistent with Thai policies that encouragelocal trade, SME’s, and local development. It is also consistent with Thai National Economic and Social DevelopmentPlan goals which emphasize the need for human resource development in this 5 year plan.

Some people give examples of the music industry, sports industry, or theatre to exemplify contributions to a creativeeconomy. One of the problems with those examples is that ownership of the product is easily confused and expensivelyargued in court. Particularly, problems arise in the contractual agreements which simultaneously demand productivity



from the culturally skilled person (artist, programmer, sportsperson), yet restrict their ability to profit from their ownactivity. Abuse of such contracts brings into question whether these are attempts to claim ownership of the creativity or ofthe person. Should such contracts allow for control of the product, the producer, or the market? From an economic view,the market itself is often distorted by selling information and skills based products to only selected buyers. (No need tomention Thai Telecom sales to Malaysia here)

A creative economy model up until now has assumed that it is possible and desirable to have creators controlled throughemployment by larger organization (e.g. sports teams, entertainment studios, universities or hotel chains). In an alternativemodel, creators release Open Content to the public free of cost - empowering those lacking in resources. It is also free toreuse, empowering innovators, researchers, educators, entrepreneurs, or other enthusiasts to think of a use for this knowledge.These “creative developers’ can then easily share their own improved versions of the work. "Free" or "open" knowledgemakes humanity wealthier. Individuals and organizations benefit from the development of free knowledge such as onAppropedia, Wikipedia and elsewhere.

DISCUSSION

Promoting Creative Economy is an objective of the latest National Economic and Social Development Plan. The analysishas looked at the creative economy paradigm as something that can benefit either the private capital or the public development.We have analyzed two possible models of exchange in regard to the need for policy to protect or promote the CE paradigm.It would be possible to conclude that a “Creative Economy” approach is being promoted to justify attempts at controllingthe products of the “knowledge based economy”. However it would also be consistent to conclude that a creative economyneeds an environment without restrictions on use of existing knowledge. The development of internet and tele-communicationresources that led to an explosion of data and information has resulted in the major resource (information) being accessibleto almost everyone. Such an environment would encourage more activity and more diversity. Such a system would alsomean more failures and varying definitions of success. Such as system limits chances for inordinate profit by that segmentof the population who fear competition.

Classic economic theory indicates that even when resources are equally distributed; trading will result in an unequaldistribution with holders of surplus and persons with inadequate supplies. Market theory also indicates that innovation maybe more efficiently supported by large industries in concentrated markets (Nelson, 2002). However, value estimationsunder classic trade scenarios may not apply to knowledge, because the supply side is close to infinity.

Nevertheless, for the past years or so, those who want to maintain a division of classes, including those who want a marketadvantage through distribution of information. (e.g. internet subscriptions to academic journals, certain news outlets, andof course entertainment) have been experimenting and redoubling efforts to restrict access in order to maintain a powerbase. By restricting distribution they want to increase the price of information with no additional costs incurred to themselves,the perceived owners. Although traditional trade restrictions do not apply to marketing knowledge or talent, novel solutionsare being tested using private schemes to control access as well as traditional censorship applied by governments.

Ethics and character play an important role in determining a market economy and will also influence which creativeeconomy strategies are implemented. But ethics are part of economic decision making, so whatever markets can be createdwill influence ethical behavior. (background e.g. Teaching the Ethical Foundations of Economics by Jonathan B. Wight,John S. Morton (2007) National Council on Economic Education, NY)

CONCLUSION

The idea of a creative economy was intended to address issues at a local level. In the interface among creativity, culture,economics and technology, there is the ability to create and circulate intellectual capital, and the potential to generateincome, jobs and export earnings while at the same time promoting social inclusion, cultural diversity and human development(UNCAP Creative Economy Report 2008 Overview).

The promotion of creative economy in Thailand will require developing a market which will appreciate the creative sectorwith the same enthusiasm they have embraced consumerism.(RAM).

Although Thailand has policies to protect certain contributors, to register writings and art, and to protect brands, etc.,there are also restrictions or limitations in accessing knowledge. Neither protective nor restrictive control strategieshave been universally enforced. The apparent outcome of current efforts to create systems of ownership of the resource(skilled persons), the product (skillfully bundled knowledge), the distribution system (constantly changing media) willrequire imposition of restrictions on the consumer as well as the producer or service. Using the internet and knowledge



based economics as an example, we find that the making and enforcing of laws to control or regulate knowledge andinformation must take into account that more development can be achieved when information and knowledge are encouragedand promoted with an environmentally friendly, economically efficient, socially just and politically viable sense. Monitoringand cataloging of innovation can be achieved while reducing copyright costs by incorporating copyleft or other licensingand registration schemes. (AB)

The creative industries are at the crossroads of the arts, culture, business and technology. All these activities are intensivein creative skills and can generate more income through trade than through maintenance of intellectual property rights.National policies will determine whether the income is distributed equitably and the effects of creativity are broadlynoticeable.

In Thailand, service industries, which the creative industries of culture and tourism account for 37 % of the GDP.Tourists alone contribute 6.7% to the GDP. (Wikipedia contributors, 2010). As one of the most dynamic sectors in theeconomy there will be new opportunities for Thailand to maintain its uniqueness rather than assimilate the globalculture. In so doing, the country can participate in emerging high-growth areas of the world economy by encouragingthe people to find ways to participate in legitimate commerce In conclusion, promoting the philosophy of creative economy will be consistent with existing programs for economicand social development.

REFERENCE

Appropedia. 2010. Based on work by Joe Raftery, Chriswaterguy and Appropedia anonymous user. [Online]Available from: http://www.appropedia.org/Appropedia:Make_your_content_free (3 January 2010).

Cook, Nerida. 1998. Dutiful Daughters, Estranged Sisters: Women in Thailand, In Maila Stivens, Krishna Sen (eds.).Gender and Power in Affluent Asia. Routledge, London.

Cullenberg, Stephen., Cullenberg, Jack., and Ruccio, David F. 2001. Postmodernism, Economics, and Knowledge.Routledge, London and New York.

Florida, Richard. 1993. The New Age of Capitalism: Innovation-Mediated Production. Futures. The Journal ofForecasting and Planning. July-August: 637.

Gladwell, Malcolm. 2000. The Tipping Point: How little things can make a big difference. Back Bay Books, New York.Howkins, John. 2009. Creative Ecologies: Where thinking is a proper job. London.Kotarawibul, Sommit., Wonglimpiyarat, Jarunee., and Sanguansat, Nopawan. 2002. THAILAND in Entrepreneurship

and Innovation in the Knowledge-based Economy: Challenges and Strategies (Tan Wee Liang,.Ed.). AsianProductivity Organization. Tokyo.

Landry. Charles. 1995. The Creative City. Demos: London.Mahbubani, Kishore. 2004. Can Asians Think?. 3rd edition. Times Editions: NY.Nelson, Philip. 2002. Relationships Between Market Structure and Innovation. [Online] Available from: www.ftc.gov/

opp/intellect/nelson.pdf , accessed February, 2011.Reynolds, Christopher. 2001. A Conceptual Model of Global Business Growth in Southeast Asia. Journal of the Asia

Pacific Economy. 6 (1): 76–98.Ryalie, Sridhar. 2008. Creative economy: Opportunities and Challenges for Thailand 2. [Online] Available from:

http://www.creativethailand.org /en/articles/index.php?writer_id=9Schimpf, Michael. 2008. Creative Input: The Role of Culture. Occupations in the Economy During the 1990s.

Minister of Industry, 2008 Culture, Tourism and the Centre for Education Statistics: Canada.Sobol, Joshua. 2009. Left, right, left: On the sanctity of the forgotten “needs of the soul”. [Online] Available from:

http://acheret.co.il/en/%20http:/?cmd=articles.278&act=read&id=1710 (December 2010).TNSO. 2007. The 2007 Household Socio-economic Survey – Executive Summary. National Statistical Office, Bangkok.

[Online] Available from: http://web.nso.go.th/en/survey/house_seco/socio.htm (February 2011).Target, Tech. 2010. Definition: Free software foundation. [Online] Available from: http://whatis.techtarget.com/

definition/0,289893,sid9_gci212158,00.html (January 2011).UNCTAD. 2010. Creative Economy Report 2010. UNCTAD/DITC/TAB/2010/3. Geneva.Wallerstein, Immanuel. 1976. Inequalities of Core and Periphery – Chapter 1, in The Capitalist World Economy.

Essays by Immnanuel Wallerstein, Cambridge University Press.Wikipedia contributors. 2010. Toursim in Thailand. Wikipedia. [Online] Available from: http://en.wikipedia,.org/

w/inidx.php?title=Toursims_in_Thailand&oldid=398812272



K.S. ChakrabortyRegional Director, Indira Gandhi National Open University, Agartala Regional Centre

Tripura-799004, India and Guest Faculty , School of Management, Tripura University, [email protected]

ABSTRACT

Contingencies and events occurring after the balance sheet date are significant disclosure in annual corporate reportingbecause the inadequate disclosure reduce the reliability of accounting information contained in annual reports. Thisissue requires meaningful discussion in the context of convergence of Indian Accounting Standard and InternationalFinancial Reporting Standards (IFRS). The present paper discusses the matter in the light of Indian Accounting Standard,legal provisions and disclosure practices observed in the annual reports of companies in India. To examine the disclosurepractices in the annual reports of companies, Annual Reports of 500 selected Indian companies are considered for theaccounting years 2004-05 to 2008-09 consecutively for five years. Statistical tools are used to draw meaningful inferences.

Balance sheet on a particular date is in no way affected by incidents that happen after that particular date, but thedecisions that are likely to be taken on the true and fair view may be affected in view of additional information arisingfrom post balance sheet events. Despite the legal provision and relevant accounting standard there is scope of suppressingthe events occurring after the balance sheet date by the way of considering them immaterial as the concept of materialityimplies a state of relative importance. Therefore, the attention of legal experts, professionals and academics in thisregard is needed very much. It is observed that after introduction of revised accounting standard 4 and revised accountingstandard 29 in India which are now in draft form, there will be no significant difference with the international accountingstandard namely IAS 10 and IAS 37 respectively.

INTRODUCTION

The main purpose of preparation of financial statements is to present a 'True and Fair View' of the statement of affairsof the organisation it represents. In preparing financial statement, accounting is done by following accrual basis ofaccounting and prudent accounting policies to ascertain the profit or loss for the year and to recognize assets andliabilities in balance sheet. While following the prudent accounting policies, the provision is made for all known liabilitiesand losses, even for those liabilities / events, which are probable. Prudent judgment is therefore required to classify thefuture events occurring and, therefore, the question of contingencies and their accounting and/or disclosure arises.

Contingencies and events occurring after the balance sheet date is a significant disclosure in annual corporate reporting.This is because the non-disclosure of contingencies and post balance sheet events reduce the reliability of accountinginformation contained in annual reports. As the objective of corporate reporting is to provide fair, full and adequateaccounting information to the users, the aforesaid topic cannot simply be ignored but requires much discussion.

Meaning and Implication:A contingency is defined as a future event or circumstance regarded as likely to occur, or as influencing present action,something dependent on another uncertain event or occurrence. A contingency is a condition or situation, the ultimateoutcome of which, profit or loss, will be known or determined only on the occurrence or non-occurrence of one or moreuncertain future events. If it is likely that a contingency will result in a loss to the enterprise, it is prudent to provide forthe loss in the financial statements. A potential loss to an enterprise, however, may be reduced or avoided because acontingent liability is matched by a related counter claim or claim against a third party. A contingent liability in abalance sheet is a potential obligation which may in the future develop into actual liabilities. The uncertainty as towhether there will be any legal obligation differentiates a contingent liability from an actual liability. Contingent gain isnot recognised in financial statement as it is consistent with the doctrine of conservation (Chakraborty, 1997, pp.179-180).

It is quite natural that the companies do not publish annual reports on the date when annual accounts are prepared. Itindicates a time gap between the two dates, the date of preparation of financial statement and the date of issuance of the

CONTINGENCIES AND EVENTS OCCURRING AFTERTHE BALANCE SHEET DATE - LEGAL PROVISIONS,ACCOUNTING STANDARD AND PRACTICE IN INDIA


K.S. Chakraborty

the report. Or it may be stated that there exists a time gap between preparation of annual reports and its due approval bythe Board. Consequently the question arises whether the companies should take into consideration the events occurringafter the balance date but before the date of approval.

The events occurring after the balance sheet date are of two types, one, which has no direct impact on the annual accountsbut is relevant from the point of disclosure of true and fair view. Another, such event is that which has a direct bearing uponthe annual accounts. In spite of different opinions regarding the consideration of such events, most of the professionalbodies and academics are in favour of inclusion of such events even if these do not initially relate to. Their main propositionis, perhaps based on the idea of adequate importance to cause, user of the statements to place a different interpretationabout the company’s financial condition. The Institute of Chartered Accountants of India (ICAI) also shares the sameopinion by saying that “… ….. it may also happen that events occurring after the balance sheet date may affect materiallythe solvency the company or may have great importance to the share holders in disclosing the true and fair view althoughthey may have no effect on items appearing In the accounts”(www.icai.org).

Events may also be viewed as first type are those which provide evidence so that an estimation of amounts relating to thesituation that existed as at the Balance Sheet date. Second types of events are those which are indicative of conditions thatarose subsequent to the date of the Balance Sheet. They do not relate to conditions existing at the Balance Sheet date. Forexample, decline in the market value of investment made by the organisation after the Balance Sheet date. In general,events of this nature do not require adjustment of assets and liabilities in the Balance Sheet. It also does not requiredisclosure in the financial statements.

Thus, it appears that only those material changes and commitments which have bearing on financial reports includingcontingent liabilities and/or have some effect on the financial position of the company under report are required to bestated. The way of disclosure of post balance sheet events in the annual reports is also a matter of attention. The eventsthat have a bearing on the true and fair view of the state of affairs of business may be disclosed in the annual reports byway of a foot note which require adjustment, or through the director's report which do not require adjustment. Eventswhich do not affect auditor's report may be covered in the Chairman’s speech. The opinion of ICAI in this regard is,"Although a company is obliged to prepare balance sheet showing its state of affairs as a particular date, when suchevent occur, It would be desirable if information regarding such events is given by way of a note on the accounts or by,a suitable statement in the director's report."(www.icai.org)

The Present Paper:It perhaps requires no mention that contingencies and events occurring after the balance sheet date have been referred inthe literature of accounting and finance. The nature, type, valuation, accounting treatment of contingencies and eventsoccurring after the balance sheet is discussed commonly in the parlance of accounting and finance (Hendriksen, 1970,Foulke, 1974, Banerjee, 2009).It is perhaps pertinent to mentioned here that the accounting standard and the disclosurepractices for contingencies and events occurring after the balance sheet date in annual reports depends upon the regulatoryframework of the concerned countries which differs from country to country and time to time. In India the Institute ofChartered Accountant of India has the legal recognition to prescribe accounting standard through Indian Company’s Act,1956. Indian Accounting Standard (AS) 4 and 29 deal with events occurring after the balance sheet and contingencies.While International Accounting Standard (IAS) 10 with IFRIC 17 and 37 with IFRIC 5 and 6 deal with the above issue.

The theory and practice of corporate financial reporting has been extensively discussed by Lal (2005). The issues of IndianAccounting Standard were discussed by Tarun and Bodla(1997). Nangia (2005) has highlighted the disclosure practice ofcompanies. Gaps between Indian and International Accounting Standard were the focal issue of many scholars in Indiaover time. Rao (1997) has identified the major differences between Indian and International Accounting Standard. Gapsbetween standards and practices were the issues of many scholars in India (Jafar and Agrawal, 1997, Kumar, 1997).Sharma (2010) has identified the challenges for the Indian accounting educators in the perspective of convergences betweenIFRS and accounting education.

The review of literature on Indian Accounting Standard reveals that there is no study exclusively on contingencies andevents occurring after the balance sheet date. The study of Chakraborty (1997) throws some light on the issue of contingenciesand events occurring after the balance sheet date in Indian context. But after 1997 a lot of changes have taken places in theaccounting standard and disclosure practices in India specially pertaining to accounting standard for contingencies andevents occurring after the balance sheet date.

The studies on Indian Accounting Standard and its convergence with IAS have been attempted by many scholars (Ghosh,1990, Porwal, 1993, Garg and Verma, 1994, Sarada 1996). The impact of convergence on fundamental reporting practicesand regulatory framework in India are discussed in details by Khatri and Master (2010). Indian Accounting Standard inthe context of globalization has been attempted by Narayanswamy (2006), Dwivedi (2010).


In view of above the present paper examines the accounting standard and regulatory framework of contingencies andevents occurring after the balance sheet date, and the disclosure practices in annual reports of companies in the context ofIndia. The objectives of the present paper are (i) to study the legal provisions and compliance with Indian accountingstandards; (ii) to review the relevant accounting standards in India namely AS-4 and AS-29 in the context of convergenceof Indian Accounting Standard (IAS) and International Financial Reporting Standards (IFRS), and finally (iii) to examinethe disclosure practices of contingencies and events occurring after the balance sheet date in the annual reports of corporatebodies in India.

In the course of analyzing the issues, a number of text and reference books, research papers and articles, the Institute ofChartered Accountants of India (ICAI) publications, publications of Govt. of India and other published and unpublisheddocuments relating to the study are considered. To examine the disclosure practices of contingencies and events occurringafter the balance sheet date in the annual reports of corporate bodies in India, Annual Reports of selected Indian companiesare considered for the accounting years 2004-05 to 2008-09 consecutively for five years. At present (2010) in India thereare 1552 companies listed in National Stock Exchange and 4928 companies listed in Bombay Stock Exchange. Out of thecompanies listed in either Bombay Stock Exchange or National Stock Exchange or in both the Stock Exchanges, 500Indian companies were considered for the study. The year 2004-05 was selected because Accounting Standard (AS) 29,‘Provisions, Contingent Liabilities and Contingent Assets’, comes into effect in respect of accounting periods commencingon or after 1-4-2004 in India. Due to non availability of sufficient number of annual reports the year 2009-10 was notconsidered. The companies whose financial year ends other than on 31st March and companies who are not listed inBombay Stock Exchange or National Stock Exchange are kept out of the scope of the analysis. Selection of annual reportsof the companies is completely done on the basis of random selection. The samples are broadly represented by the annualreports of companies belonging to different types of companies namely textiles, paper, sugar, chemicals and engineering,cement, trading etc.

The information collected from the annual reports of the selected companies pertaining to contingencies and events occurringafter the balance sheet date are categorized as (i) reported no substantial information, (ii) reported inadequate informationand (iii) reported adequate information. The companies who have not reported any substantial information about contingenciesor events occurring after the balance sheet date during the stated period are categorized in the first group. The companieswho have reported information about contingencies or events occurring after the balance sheet date during the statedperiod but not in details are categorized in the second group. The companies who have reported information aboutcontingencies or events occurring after the balance sheet date in details and according to relevant Indian accountingstandards are categorized in the third group. Based on the above classification of the sample annual reports, Linear TrendAnalysis for all the categories of time series are carried out for both contingencies as well as events occurring after thebalance sheet date. Finally Pearson’s Product Moment Correlation between the different categories of data generated fromsample annual reports are also computed.

Legal Provisions and Compliance with Indian Accounting Standards:Corporate reporting practice in India is mainly guided by the Indian Companies Act, 1956. Accounting Standards issued bythe ICAI have legal recognition through the said act. Corporate bodies in India are required to comply with the AccountingStandards. The statutory auditors of every company are also required to report whether the Accounting Standards havebeen complied with or not. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India also requirecompliance with the Accounting Standards issued by the ICAI from time to time. The Insurance Regulatory and DevelopmentAuthority (IRDA) (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2000requires insurance companies to follow the Accounting Standards issued by the ICAI( Sharma, 2010, p. 61).

Section 211 of the Companies Act, 1956, deals with the form and contents of balance sheet and profit and loss account. TheCompanies (Amendment) Act, 1999 has inserted new sub-sections 3A, 3B and 3C to section 211, with a view to ensure thatthe financial statements are prepared in accordance with the Accounting Standards. The new sub-sections as inserted arestated below.

Section 211 (3A) states that every profit and loss account and balance sheet of the company shall comply with the accountingstandards. Section 211 (3B) states that where the profit and loss account and the balance sheet of the company do notcomply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, thefollowing, namely, a) the deviation from the accounting standards; b) the reasons for such deviation; and c) the financialeffect, if any, arising due to such deviation. Section 211 (3C) states that for the purposes of this section, the expression“accounting standards” means the standards of accounting recommended by the Institute of Chartered Accountants ofIndia, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Governmentin consultation with the National Advisory Committee on Accounting Standards established under sub- section (1) ofsection 210A.

CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE - LEGALPROVISIONS, ACCOUNTING STANDARD AND PRACTICE IN INDIA


It may also be mentioned that the National Advisory Committee on Accounting Standards (NACAS) has been constitutedin India under section 210A as referred to under section 211 (3C) to advise the Central Government on formulation andlaying down of the accounting standards for adoption by companies or class of companies. On the basis of recommendationof NACAS, the Ministry of Company Affairs has issued a Notification dated 7th December, 2006 prescribing AccountingStandards 1 to 7 and 9 to 29(ICAI, 2007, P.13). As per the Notification, the Accounting Standards shall come into effectin respect of accounting periods commencing on or after the publication of these Accounting Standards, i.e., 7th December,2006. Specific relaxations are given to particular kinds of companies, termed as Small and Medium Sized Companies,depending upon their size and nature (www.mca.gov.in).

The above legal provisions have cast a duty upon the management to prepare the financial statements in accordancewith the accounting standards. The corresponding provision to report on the compliance of accounting standards hasbeen inserted under section 227 of the Companies Act, 1956, thereby casting a duty upon the auditor of the company toreport on such compliance. A new clause (d) under sub-section 3 of section 227 of the Companies Act, 1956 is read as‘whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred toin sub-section (3C) of section 211’

As far as the reporting of compliance with the Accounting Standards by the management is concerned, clause (i) underthe new sub-section 2AA of Section 217 of the Companies Act, 1956, (inserted by the Companies Amendment Act,2000) prescribes that the Board’s report should include a Directors’ Responsibility Statement indicating therein that inthe preparation of the annual accounts, the applicable accounting standards had been followed along with properexplanation relating to material departures.

Disclosure Requirement as per Indian Accounting Standard (AS 4 and AS 29):The Indian Accounting Standard 4, ‘Contingencies and Events Occurring After the Balance Sheet Date’ was originallyissued by the Council of the Institute of Chartered Accountants of India in November 1982 and subsequently it was mademandatory. The revised standard of AS-4 came into effect in respect of accounting periods commencing on or after 1.4.1995and was mandatory in nature. In 2004 the Institute of Chartered Accountants of India (ICAI) issued Accounting Standard29, ‘Provisions, Contingent Liabilities and Contingent Assets’. Pursuant to Accounting Standard 29, becoming mandatoryin respect of accounting periods commencing on or after 1-4-2004, all paragraphs of AS-4 that deal with contingenciesstand withdrawn except to the extent they deal with impairment of assets not covered by other Indian Accounting Standards.For example, impairment of receivables (commonly referred to as the provision for bad and doubtful debts), would continueto be covered by AS 4 (The Chartered Accountant, April 2004, pp. 1151).

As per revised accounting standard-4, events occurring after the balance sheet date are those significant events, bothfavourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements areapproved by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case ofany other entity. Two types of events can be identified: (a) those which provide further evidence of conditions that existedat the balance sheet date; and (b) those which are indicative of conditions that arose subsequent to the balance sheet date.Events which occur between the balance sheet date and the date on which the financial statements are approved, mayindicate the need for adjustments to assets and liabilities as at the balance sheet date or may require disclosure.

Adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additionalinformation materially affecting the determination of the amounts relating to conditions existing at the balance sheetdate. Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if suchevents do not relate to conditions existing at the balance sheet date.

Events occurring after the balance sheet date which do not affect the figures stated in the financial statements would notnormally require disclosure in the financial statements although they may be of such significance that they may requirea disclosure in the report of the approving authority to enable users of financial statements to make proper evaluationsand decisions. When such event are disclosed in the report of the approving authority, the information given comprisesthe nature of the events and an estimate of their financial effects or a statement that such an estimate cannot be made.

There are events which, although they take place after the balance sheet date, are sometimes reflected in the financialstatements because of statutory requirements or because of their special nature. Such items include the amount ofdividend proposed or declared by the enterprise after the balance sheet date in respect of the period covered by thefinancial statements. A deterioration in operating results and financial position, or unusual changes affecting the existenceor substratum of the enterprise after the balance sheet date may indicate a need to consider whether it is proper to use thefundamental accounting assumption of a going concern in the preparation of the financial statements.

K.S. Chakraborty


Assets and liabilities should also be adjusted for events occurring after the balance sheet date that provide additionalevidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or indicate that thefundamental accounting assumption of going concern is not appropriate. Dividends, proposed or declared thus, shouldbe adjusted accordingly. Disclosure should be made in the report of the approving authority of those events occurringafter the balance sheet date that represent material changes and commitments affecting the financial position of theenterprise, and the following information should be provided: (i) the nature of the event; (ii) an estimate of the financialeffect, or a statement that such an estimate cannot be made.

Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, issued by the Council of theInstitute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after1-4-2004. This Standard is mandatory in nature. The objective of this Statement is to ensure that appropriate recognitioncriteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information isdisclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. Theobjective of this Statement is also to lay down appropriate accounting for contingent assets. In this Statement, the term‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only bythe occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.In addition, the term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.

According to AS 29 a contingent liability is: (a) a possible obligation that arises from past events and the existence ofwhich will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not whollywithin the control of the enterprise; or (b) a present obligation that arises from past events but is not recognised because:(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation;or (ii) a reliable estimate of the amount of the obligation cannot be made.

A contingent liability is disclosed unless the possibility of an outflow of resources embodying economic benefits isremote. Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is expected tobe met by other parties is treated as a contingent liability. The enterprise recognises a provision for the part of theobligation for which an outflow of resources embodying economic benefits is probable, except in the extremely rarecircumstances where no reliable estimate can be made. Contingent liabilities may develop in a way not initially expected.Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefitshas become probable. If it becomes probable that an outflow of future economic benefits will be required for an itempreviously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in whichthe change in probability occurs.

Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for each class of contingentliability at the balance sheet date a brief description of the nature of the contingent liability and, where practicable: (a) anestimate of its financial effect, (b) an indication of the uncertainties relating to any outflow; and (c) the possibility of anyreimbursement.

A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by theoccurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise.Contingent assets are not recognised in financial statements since this may result in the recognition of income that maynever be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingentasset and its recognition is appropriate. Though a contingent asset is not disclosed in the financial statements, it isusually disclosed in the report of the approving authority, where an inflow of economic benefits is probable. Contingentassets are assessed continually and if it has become virtually certain that an inflow of economic benefits will arise, theasset and the related income are recognised in the financial statements of the period in which the change occurs.

Convergences with International Accounting Standard (IAS) and IFRSConvergences of national accounting standards with the international accounting standard are considered need of thehour as a measure of transparency and facilitating multinational flow of investment in the era of economic globalization(Sharma, 2010, op.cit.).The Core Group constituted by the Ministry of Corporate Affairs, Government of India, forconvergences of Indian Accounting Standards with the International Financial Reporting Standard (IFRS) has decidedto apply the idea of convergences in phases with effect from April, 2011. The Institute of Chartered Accountants ofIndia has been made the nodal agency for the implementation of convergence with IFRS. It is reported that there aremajor differences between IAS and Indian accounting standards in many areas which needs to reconcile and wipe outthe differences (Sharma, 2010,p.65, and Pandey & Rathore, 2010, p.49-54).



Accounting Standards Board, The Institute of Chartered Accountants of India has issued exposure draft for revised AccountingStandard (AS) 4 corresponding to International Accounting Standard (IAS) 10. The requirements contained in the AS 4(Revised 20??) are the same as those contained in International Accounting Standard (IAS) 10, Events after the ReportingPeriod, issued by the International Accounting Standards Board (IASB) and IFRIC 17, Distributions of Non-cash Assets toOwners. There is no difference between the AS 4 (Revised 20??) and IAS 10 and, IFRIC 17 (www.icai.org).

However the major differences between the Exposure Draft of AS 4 (Revised 20??) and existing AS 4 are as follows:a) In the exposure draft of AS 4 (Revised 20??), the term ‘events after the reporting period’ has been defined

as those events, favourable and unfavourable, that occur between the end of the reporting period and the date when thefinancial statements are authorised for issue, and date of authorisation for issue has been adequately explained throughexamples. Whereas, the existing AS 4 does not use the term ‘authorised for issue’ and defines the events occurring afterthe balance sheet date as those significant events, both favourable and unfavourable, that occur between the balancesheet date and the date on which the financial statements are approved by the Board of Directors in case of a company,and by the corresponding approving authority in case of any other entity.

b) In the exposure draft of AS 4 (Revised 20??), material non-adjusting events are required to be disclosed inthe financial statements, whereas the existing AS 4 requires the same to be disclosed in the report of approving authority.

c) As per the exposure draft of AS 4 (Revised 20??) dividend proposed or declared after the reporting period,cannot be recognised as a liability in the financial statements because it does not meet the criteria of a present obligationas per AS 29 (Revised 20??). Such dividend is required to be disclosed in the notes in the financial statements as per AS1 (Revised 20??), whereas as per the existing AS 4 the same is required to be adjusted in financial statements becauseof the requirements prescribed in the Schedule VI to the Companies Act, 1956.

d) If after the reporting date, it is determined that the fundamental accounting assumption of going concern isno longer appropriate, the exposure draft of AS 4 (Revised 20??) requires a fundamental change in the basis of accounting.Whereas existing AS 4 requires assets and liabilities to be adjusted for events occurring after the balance sheet date thatindicate that the fundamental accounting assumption of going concern is not appropriate.

e) Exposure Draft of AS 4 (Revised 20??) requires certain additional disclosures as compared to existing AS4, such as, the date when the financial statements were authorised for issue and who gave that authorisation. If theentity’s owners or others have the power to amend the financial statements after issue that fact is also required to bedisclosed as per the Exposure Draft of AS 4(Revised 20??).

f) Exposure Draft of AS 4(Revised 20??) gives guidance on accounting for non-cash distributions to owners.But the existing AS 4 does not contain this guidance.

Accounting Standards Board, The Institute of Chartered Accountants of India has also issued exposure draft for revisedAccounting Standard (AS) 29 corresponding to International Accounting Standard (IAS) 37. There is no major differencebetween the Draft of AS 29 (Revised 20??), Provisions, Contingent Liabilities and Contingent Assets and InternationalAccounting Standard (IAS) 37, Provisions, Contingent Liabilities and Contingent Assets, except that the transitionalprovisions given in IAS 37 and IFRIC 5 and IFRIC 6 have not been given in the Exposure Draft of AS 29(Revised20??), keeping in view that IFRS 1, First-time Adoption of International Financial Reporting Standard, provides thattransitional provisions in other IFRSs do not apply to a first-time adopter’s transition to IFRSs, unless otherwise permittedin IFRS 1(www.icai.org). However the major differences between the Draft of AS 29 (Revised 20??), Provisions,contingent Liabilities and Contingent Assets, and Existing AS 29 (issued 2003) are as follows:

a) Unlike the existing AS 29, the Exposure Draft of AS 29(Revised 20??) requires creation of provisions inrespect of constructive obligations also. However, the existing standard requires creation of provision arising out ofnormal business practices, custom and a desire to maintain good business relations or to act in an equitable manner. Thishas resulted in some consequential changes also. For example, definition of provision and obligating event have beenrevised in the Exposure Draft of AS 29 (Revised 20??), while the terms ‘legal obligation’ and ‘constructive obligation’have been inserted and defined in the Exposure Draft of AS 29(Revised 20??). Similarly, the portion of existing AS 29pertaining to restructuring provisions has been revised in the Exposure Draft of AS 29 (Revised 20??). Additionalexamples have also been included in Appendices F and G of the Exposure Draft of AS 29 (Revised 20??).

b) The existing AS 29 prohibits discounting the amounts of provisions. The Exposure Draft of AS 29(Revised20??) requires discounting the amounts of provisions, if effect of the time value of money is material.

c) The existing AS 29 notes the practice of disclosure of contingent assets in the report of the approvingauthority but prohibits disclosure of the same in the financial statements. The Exposure Draft of AS 29 (Revised 20??)requires disclosure of contingent assets in the financial statements when the inflow of economic benefits is probable.The disclosure, however, should avoid misleading indications of the likelihood of income arising.

d) The Exposure Draft of AS 29 (Revised 20??) makes it clear that before a separate provision for an onerouscontract is established, an entity should recognize any impairment loss that has occurred on assets dedicated to thatcontract in accordance with AS 28 (Revised). There is no such specific provision in the existing standard.

K.S. Chakraborty


e) The existing AS 29 states that identifiable future operating losses up to the date of restructuring are notincluded in a provision. The Exposure Draft of AS 29 (Revised 20??) gives an exception to this principle viz. suchlosses related to an onerous contract.

f) The existing AS 29 states that identifiable future operating losses up to the date of restructuring are notincluded in a provision. The Exposure Draft of AS 29 (Revised 20??) gives an exception to this principle viz. suchlosses related to an onerous contract.

The Practice in India:A close look into the published annual reports of sample companies in India during the period 2004-05 to 2008-09reveal the following points in regard to disclosure practices of contingencies and events occurring after the balancesheet date under the Indian accounting standard namely revised AS 4 and AS 29 :

i) Most of the companies in the sample have reported, substantially or not substantially, directly or indirectly,the fact of events occurring after the balance sheet date and contingencies as per revised AS 4 and AS 29 during theperiod of study.

ii) It is observed in the sample annual reports that the statutory auditors have mentioned in Audit Reports thatthe accounts of the company complied with Indian accounting standard, hence, it appears the companies are compliedwith the revised AS 4 and AS 29.

iii) In case of holding company, it is found that contingencies and events occurring after the balance sheet datehave been reported in the annexed accounts of the subsidiary company in the form of notes to accounts in pursuance ofsection 212 of the Companies Act 1956.

iv) So far as events occurring after the balance sheet date are concerned, it is found from the linear trendanalysis (table-1) that there is no significant trend, upwards or downwards, between different categories of information(i.e. reported no substantial information, reported inadequate information and reported adequate information) and reportedaccounting year. From the Pearson’s product moment correlation between the different categories of information pertainingto events occurring after the balance sheet date (table-3) it is also observed that there is no significant correlationbetween the variables.

v) It may be noted here that more than 91 percent of the sample companies have not reported any informationon events occurring after the balance sheet date. While it is observed that the date of approval of the accounts by theBoard of Directors of the respective sample companies varies between 1-4 months in most cases. Therefore, there is apossibility to record the significant events, both favourable and unfavourable that occurs between the balance sheet dateand the date on which the financial statements are approved by the Board of Directors. But the number of samplecompanies reported significant events occurring after the balance sheet date in details are insignificant in the totalnumber of samples.

vi) Legal decisions, cancellation of contracts, negotiation resulting in financial implications, change in exchangerates, new legal suits and other statutory disclosure requirements are the main reported events after the balance sheetdate noticed in the annual reports during the period of study.

vii) In pursuance of disclosure requirement under AS4, an estimate of the financial effect of reported eventsoccurring after the balance sheet date or a note stating inability to estimate are observed in the annual reports of allreported cases.

viii) In the section of ‘Management Discussion and Analysis Report’ of annual reports of many companies it isfound that risks and concerns areas of the company have been focused and discussed where, in few cases, events afterthe balance sheet date were referred indirectly.

ix) So far as reporting of contingencies in sample annual reports of companies are concerned, linear trendanalysis for the period of study are carried out (table-2). It is found from the linear trend analysis that there is nosignificant trend in case of categories of reported information in first and second categories (i.e. reported no substantialinformation and reported inadequate information).However, there is significant upward trend at 10 percent level isobserved in case of category belonging to ‘reported adequate information’ of contingencies in sample annual reports ofcompanies. The Pearson’s Product Moment Correlation between the different categories of information pertaining tocontingencies (table-4) is also carried out. It is found that there is a significant negative correlation at 5 percent levelbetween categories ‘reported adequate information’ and ‘reported inadequate information’ over the time. It appears thatsample companies have improved their reporting practices by providing adequate information on contingencies.

x) Disputed matters relating to excise duty, custom duty, sales tax and income tax constitutes one of thecommon and major parts of contingent liability. Other claims against the company not acknowledged as debts, billsdiscounted, liability under guarantee etc are the other main constituents of contingent liability reported by the companiesin annual reports under study.

xi) A separate list of contingent liabilities for the year along with corresponding amount of the previous yearhave been noticed in the annual reports of many companies under the heading of 'notes to accounts'.

xii) Most of the sample companies have reported the significant accounting policies of their companies duringthe period of study where policies pertaining to provisions and contingencies are explained.



xiii) It is found in the annual reports of a few organisations like State Bank of Bikaner and Jaipur that they havereported separately for accounting standard compliance under the heading ‘Disclosures in Terms of Accounting Standard’where movement of provisions for contingent liabilities are stated in table form and the nature of liabilities are alsomentioned. It is also found that a few companies like Gujarat Hotels Limited have not reported any information oncontingencies.

xiv) It is noticed in the sample annual reports that none of the director's reports have mentioned specificallyanything about the contingent liability. However, it is found that in Director’s Responsibility Statement as per section217(2AA) of the Companies Act 1956, that in the preparation of the annual accounts, the applicable accounting standardhave been followed and that there are no material departures.

xv) So far as companies belonging to different groups are concerned, there is no noteworthy difference indisclosure practices. But the information contained in the annual reports of companies like TATA Steel, United SpiritsLtd., Reliance Industries Ltd., etc. in regard to contingencies and events after the balance sheet date are more specificand detailed in nature.

CONCLUSION

The essence of balance sheet is true and fair disclosure of the financial information at a particular date. It is a fact thatthe balance sheet on a particular date in no way is affected by incident that happens after that particular date. But thedecisions that are likely to be taken on the true and fair view may be affected in view of additional knowledge arisingfrom post balance sheet events. Therefore, provisions in the Indian Companies Act and accounting standard in thisregard have been introduced. Despite the legal provisions and relevant accounting standards which are mandatory innature, there is scope of suppressing the events occurring after the balance sheet date by the way of considering themimmaterial as the concept of materiality implies a state of relative importance, which varies from time to time, place toplace and circumstances to circumstances. There is no boundary line also to judge a particular item as being material orimmaterial. It is considered to be a matter for the exercise of reasonable skills and care on the part of the directors whomay manipulate the date of events also to keep them out of its scope. Therefore, the attention of legal experts, professionalsand academics in this regard is needed very much in this era of globalisation.

The differences between Indian Accounting Standards and International Accounting Standards (IAS) have been narrowing,especially in the case of standards issued since the late 1990s. Some of the differences are attributable to the need forconformity with the Companies Act and there is no corresponding Indian Standard on the subject (Dwivedi, 2010 pp.55-59). It is observed that after introduction of revised AS 4 and revised AS 29 which are now in draft form, there willbe no significant difference with the international accounting standard namely IAS 10 and IAS 37 respectively.

Table – 1 Events Occurring After the Balance Sheet DateLinear Trend Analysis

Dependent Variables Year RNSI RII RAI

2004-05 468 13 192005-06 450 27 232006-07 447 19 342007-08 455 16 292008-09 461 8 31

Beta -0.9 -2.1 3t -0.295 -0.918 2.143R-Square 0.028 0.219 0.605Adjusted R-Square -0.296 -0.041 0.473F 0.087 0.842 4.592P-value 0.787 0.426 0.122

K.S. Chakraborty


Table – 2 Contingent LiabilityLinear Trend Analysis

Dependent Variables Year RNSI RII RAI

2004-05 30 128 3422005-06 21 162 3172006-07 28 103 3692007-08 32 76 3922008-09 18 81 401

Beta -1.3 -18 19.3t -0.63 -2.302 3.123**R-Square 0.117 0.639 0.765Adjusted R-Square-0.178 0.518 0.686F 0.396 5.3 9.752P-value 0.574 0.105 0.052

** Denotes significant at 10 percent level

Table – 3 Events Occurring After the Balance Sheet DatePearson's Product Moment Correlation Matrix

RNSI RII RAIRNSI 1RII -0.706 1RAI -0.567 -0.183 1

Table – 4 Contingent LiabilityPearson's Product Moment Correlation Matrix


RNSI RII RAIRNSI 1RII -0.203 1RAI 0.035 -0.986** 1

** Denotes significant at 5 percent levelRNSI – Reported No Substantial Information; RII - Reported Inadequate Information; RAI – Reported AdequateInformation

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K.S. Chakraborty


Ali ERBASISelcuk University Seydisehir MYO. 42160 Seydisehir / KONYA / TURKEY


Osman �N�VARSelcuk University Seydisehir MYO. 42160 Seydisehir / KONYA / TURKEY


Safak �N�VARSelcuk University Sosyal Bilimler MYO. 42160 KONYA / TURKEY

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ABSTRACT

Vocational schools are the educational institutions that train intermediate staff for work power market. From this pointof view, the vocational schools are focused on training mid-level managers for markets of good and service. Some of thetrained prospect managers become candidates of entrepreneurs through starting some enterprises. Thus, determiningentrepreneurship tendencies of students who study at vocational schools of universities have a big place. The objectiveof the study is to determine the entrepreneurship levels of the students receive education at associate degree at universities,determine whether there is differentiation between the students of technical programs and that of economics andadministration programs related to the factors that affect the tendencies of entrepreneurship and reveal the relationsbetween some demographic characteristics and the entrepreneurship factors. With this purpose, Sel�uk University whichis the biggest university in Turkey was chosen as sample and the questionnaires were carried out in the class environmentand through face-to-face interviews during the months of May and June. The questionnaire was applied to 1690 studentswho study in the 38 different programs at 8 vocational high schools of the university through random sampling. 180 ofthe questionnaires were ignored since significant differences were determined in them and 1510 questionnaires wereevaluated. The questionnaires were evaluated through SPSS 18.00 program. In the light of the data from the analysis,significant relations were determined between some demographic characteristics of the students and their tendency ofentrepreneurship (i.e. there was difference in the tendencies of entrepreneurship between the girls and the boys, thestudents of technical programs and those of economics and administration, whether the students take the course ofentrepreneurship or not was effective on their tendency for entrepreneurship, the attempts of one or more members ofthe family affected their tendency to entrepreneurship, the tendency of the students who reside in the areas with highentrepreneurship levels, etc.) while the relationship between some demographic aspects and their tendency toentrepreneurship was not significant (whether the income levels of the families or frequency of following variousmagazines related to entrepreneurship affect the tendency of students to entrepreneurship affect the entrepreneurshipand whether there was no significant difference between the ages of the students and their tendency to entrepreneurship).

Keywords: Entrepreneurship, tendency, university students

INTRODUCTION

Purpose of the vocational schools is educating junior administrative and mid level manager candidates. In this direction,the basic expectation is that while some of the graduated candidates supply with intermediate and qualified personnelnecessity of work-power market, some others get into the market beginning their own business. The statistics in Turkeyshows that considerable amount of graduated ones from universities head towards working at state institutions andorganizations.

A FIELD STUDY RELATED TO THE DETERMINATIONOF THE ENTREPRENEURSHIP TENDENCY OF

THE PROSPECT MANAGER VOCATIONAL STUDENTS


Ali ERBASI, Osman �N�VAR and Safak �N�VAR

Negative attitude of educated people in Turkey, in direction of involvement work-power market in private sector, hasbecome an important problem. This problem should be solved via various facilities in terms of both syllabus andlegislation. With this point of view, determining the entrepreneurship tendency of vocational school students who stillreceives education is essential. Thus, determination of the relationship between entrepreneurship tendency of managercandidates and some demographical attributes might also offers an insight into determination of the factors that effectsthe problem. In this context, literature search has been conducted but these studies haven’t been given place so as not tobreak away from the main theme.

In management literature, many factors related to the attributes that an entrepreneur should have been determined.Avsar (2007: 11-19) who investigates these factors in his study thoroughly, presents 8 main factors effecting theentrepreneurship. These factors: risk-taking, internal control, creativeness, innovativeness, indefiniteness tolerance,independence demand and relationship with people.

METHODOLOGY OF STUDY

Purpose of the survey is to present how associate degree students educating at universities have the attributes of anentrepreneur needs to have and the relationship of this attributes with demographic factors. Thus, it is presented thathow the associate degree students educating at vocational schools of universities have a profile that fits the purpose ofvocational schools or how vocational schools effects entrepreneurship tendencies of vocational school students. Besides,presenting of level and direction of the relationship between various demographic factors and entrepreneurship attributesof associate degree students presents important information to the academicians who studies on entrepreneurship and tothe instructors who works at vocational schools.

Population of the survey are the students receives education at associate degree programs at universities. Sample consistsof students receives education at Aksehir VHS, Eregli Kemal Akman VHS, Kadinhani VHS, Kulu VHS, Saray�n�VHS, Seydisehir VHS, Social Sciences VHS and Technical Sciences VHS which are connected with Sel�uk Universitythat is the biggest university of Turkey. In these schools, questionnaires are conducted in lesson environment in accordancewith random sampling method to the students who are present on 15-16 May 2010 at school. In this direction, 1690students filled in questionnaires and because of some reasons questionnaires that were filled in by 1510 students wereanalyzed declaring null and void questionnaires of 180 students.

Survey questions consist of 2 chapters. In first chapter, 12 questions devoted to determine the demographic attributes ofstudents and in second chapter, 40 questions devoted to present the entrepreneurship attributes of students were asked.Second chapter questions of the questionnaire were obtained from the survey that is improved utilizing the questionsthat Summers (1998) and Brice (2002) used in their survey and is written as a postgraduate thesis by Avsar (2007).Different concept and terms were used in some questions for understanding more easily but heart of the chaptersrepresenting every entrepreneurship factors has not been changed. In the survey conducted by author, 8 entrepreneurshipfactors were represented by 5 each questions. Especially in groups in which calculated Cronbach Alpha values are low,questions were changed. A questionnaire with 52 questions in total is prepared adding questions relative to demographicattributes to the last group. Cronbach Alpha value of reprepared questionnaire is calculated as 0.873. This result isconsiderably sufficient for the validity of analysis.

Data were analyzed by taking advantage of SPSS 18.00 statistics packaged software. The correlation is analyzed byapplying annova, scheffe and independent-samples t tests.

Our study is conducted only devoted to the students of 8 vocational schools which consist in Sel�uk University. Therefore,the obtained results will only concern this area. In addition, since it would be hard to reach all students and somestudents are not disposed to fill in the questionnaire, it is limited to only 1690 students who are disposed and present inthe lesson that questionnaire is being made. Besides, the cultural dimension that is considered it will effect theentrepreneurship structure but also take the survey to wider and more different points is disregarded.

FINDING

Frequency ranges relative to demographic attributes of searched student population are determined separately. With thethought that it would take up so much place, only frequency analysis table reflected on the survey and the rest is onlygiven by commenting.


Table 1 Distribution of the searched students according to their sex.

Frequency Percent Valid PercentValid Male 968 57.3 64.1

Female 542 32.1 35.9Total 1510 89.3 100.0

Missing System 180 10.7Total 1690 100.0

57% of the students who participated to the survey consist of male students and 32% of them consist of female students.However, when the questionnaires of 180 students which are determined as underestimated in filling the questions areremoved, 64% of survey population consist of males and 36% of it consist of females.

Distribution of the students participated to the survey according to schools consist of 2% Aksehir VHS, 2% EregliKemal Akman VHS, 3% Kadinhani Faruk I�il VHS, 3% Kulu VHS, 8% Saray�n� VHS., 52% Seydisehir VHS, 19%Social Sciences VHS, 11% Technical Sciences VHS’s students.

44% of the students who participated to the survey are freshman, 50% of them are sophomore and the rest 6% of themare nongraduated students. While 54% of the students who participated to the survey are formal education students,46% of them are evening education students.

When distribution of the students participated to the survey according to age range examined, it is seen that 46% ofthem are in the age range of 17-25. 50% of them are in the 21-25, 2% of them are in the 26-30 and 2% of them are in the31 and older age range.

It is determined that 5% of the students are married, 93% of them are single and 2% of them are divorced. While 6% ofthe students are singleton, 35% of them are two brothers, 29% of them are 3 brothers, 16% of them are 4 brothers, 7%of them are 5 brothers, 2% of them are 7 brothers and 1% of them are 8 brothers and above.

While 38% of the students are the 1. kid of their family, 33% of them are the 2., 14% of them are the 3., 7% of them arethe 4., 4% of them are the 5., 2% of them are the 6., 1% of them are the 7. and 1% of them are the 8. kid of their family.

When distribution of students according to the geographical region they live before they got into the university examined,it is determined that 11% of them were living in Meditteranean Region, 5% of them were living in Blacksea Region, 1%of them were living in Aegean Region, 12% of them were living in Marmara Region, 58% of them were living in CentralAnatolia Region, 2% of them were living in Eastern Anatolia Region, 2% of them were living in Southeastern AnatoliaRegion,

In the classification of students according to the locality they live before they got into the university, it is seen that 37%of them were residing in metropolis, 5% of them were residing in city, 27% of them were residing in county, 11% ofthem were residing in town, village and small town.

According to the monthly income of student’s families, 5% of them have 299TL and below, 16% of them have 300-574TL, 28% of them have 575-820 TL, 34% of them have 821-1623 TL, 11% of them have 1694-2566 TL and 6% of themhave 2576 TL and above income (1 TL = 0.62 $ on 11th of February, 2011).

While the ratio of explainers who explain that they have one person who set up his/her own business is 18%, families of82% of them has no entrepreneurship history.

While 37% of the students speak foreign languages, 63% of them do not speak any. 10% of the students have goneabroad before, 90% of them have never gone abroad. While 18% of the students have excellent level, 52% of them havegood level, 28% of them have mid level and 2% of them have low level knowledge of computer usage, the ones whodon’t have knowledge of computer usage are only at the ratio of 0.2%.

While 18% of the students follow journals about economics and management, 67% of them follow when they takeopportunity and 15% of them indicated that they never follow.

Against “What would you do, if you had 50.000 TL?” question, while 59% of the students answered as I’d set up myown business, 3% of them answered as I’d imburse exchange market, 6% of them answered as I’d put out at interest in

A FIELD STUDY RELATED TO THE DETERMINATION OF THE ENTREPRENEURSHIP TENDENCYOF THE PROSPECT MANAGER VOCATIONAL STUDENTS


bank, 15% of them answered as I’d buy property, 6% of them answered as I’d buy foreign currency, gold vs., % of themanswered as I’d do nothing and 9% of them put a tick on the other option.

While the ratio of the students who took lessons about entrepreneurship before 29%, the ratio of the ones who didn’ttake is 71%. Against “Do you want to set up your own business?” question, while 88% of the students said yes, 12% ofthem said no.

70% of the mothers of students have elementary school, 25% of them have secondary education, 2% of them haveassociate, 2% of them have undergraduate academic and 1% of them have master degree educational levels. 45% of thefathers of students have elementary school, 38% of them have secondary education, 6% of them have associate, 8% ofthem have undergraduate academic and 3% of them have master degree educational levels.

While 18% of the mothers of students work, 82% of them do not work. While 79% of the fathers of students work, 21%of them do not work. While 17% of the fathers of students work in the public sector, 32% of them work in public sector.51% of them do not work. While 5% of the mothers of students work in the public sector and 8% of them work in publicsector, 87% of them do not work.

After the frequency ranges relative to demographic attributes of the students who participated the survey were given,averages and standard deviations relative to all questions had been calculated. The data relative to this were given inTable 2.

Table 2 Average and Standard Deviations of Answers Given Relative to Survey Questions.

Avg. S.D. 1 Even if I don’t like a rule, I obey it because I have to. 2.13 1.37 2 I orient myself to the unexpected situations quickly. 2.24 1.33 3 I don’t quail easily. 2.25 1.53 4 If it is necessary, I’d accept the factors that prevent me from doing my job well. 3.10 1.65 5 I orient myself against the uncertain situations quickly. 2.60 1.45 6 After graduation, rather than working somewhere else I’ll strive to have my 2.11 1.47

own company. 7 I want to be independent economically. 1.54 1.12 8 I’m not afraid of being different. 1.63 1.21 9 I don’t like taking orders from someone else. 2.00 1.3610 If I do believe in something, I will do that job without any need to the other’s 1.98 1.30

approval.11 I’m able to travel to the place that I’ve never known. 2.23 1.5312 I don’t refrain from risking my money for earning much more money. 2.65 1.5313 I don’t refrain from trying new food and clothes. 2.08 1.3914 Risky jobs fascinates me because produces much more benefit. 2.60 1.4915 If we want to get succeed, we have to take risks. 1.75 1.2016 I’m able to generate original ideas and opinions that can solve existing problems. 1.86 1.1917 The new and different one is always better. 1.89 1.2618 I spare time to think and research for taking opportunities. 1.85 1.1919 Against unexpected demands of customers, I’m able to create new product 2.09 1.27

instead of standard one.20 I’m able to prevent opposing ideas creating work environment in which people 2.50 1.40

can produce new product.21 Taking on the others is my life style. 2.51 1.5322 I’m not able to get over losing. 2.21 1.4123 I want to be the best at my job. 1.67 1.1624 I never give up till I get succeed. 1.75 1.1925 While I’m taking on, I think to win first. 1.74 1.2626 I like talking to people and teaming with them. 1.61 1.1227 I like helping people. 1.50 1.0728 When I enter a new circle of friends, I gain their acceptance quickly and they 1.84 1.24

encircle me immediately.





Avg. S.D.29 I make contact with people easily. 1.92 1.2730 I use body and color language in the process of communication. 2.20 1.3531 I keep up with the work I started insistently until it ends. 1.74 1.1632 I control my works myself and I 1.78 1.2033 In the works I’ll do, I don’t allow for chance factor. 2.38 1.3534 I don’t want someone to canalize me on my decisions. 2.08 1.3335 If I did promise to do something, I would definitely do it. 1.58 1.1136 For coming up new ideas, required environment should be created. 1.77 1.2137 An entrepreneur, should spend his/her most of the time following the latest 1.99 1.28

developments in the market.38 I should change the experiences I gained from life, to new ideas. 1.71 1.1539 Issues (idea, design, product vs.) in which creativeness is at the forefront 1.66 1.13

fascinates me.40 I develop alternative point of view devoted to solutions of the problems that 1.74 1.14

I run into. TOTAL 2.01 0.52

Notes: (i) n=1473 (ii) In scale, 1 means I strongly disagree and 5 means I strongly agree.

According to Friedman two-way Anova analysis (?2=4521.191 and p<0.001), results are significant statistically.

After giving the averages of answers given to the survey questions, hypothesis were developed between the questionsand these hypothesis were analyzed with independent-sample t test, anova and scheffe tests.

H1: There is significant difference between sex and entrepreneurship tendencies of students.

Table 3 Relationship Between Sex and Entrepreneurship Tendencies

Sex Independent-Sample Male Female t Test (n=968) (n=542)Avg. Std. Avg. Std. t p

Dev. Dev.Total Entrepreneurship Tendencies 2.02 0.56 2.01 0.45 0.715 0.475Notes:(i) In scale, 1 means I strongly disagree and 5 means I strongly agree.(ii) The numbers between parenthesis shows the number of people involves in the group.

As it is also understood from Table 3., the hypothesis relative to there is significant difference between sex andentrepreneurship tendencies of students is rejected.

H2: There is significant difference between the grade they receive education and the entrepreneurship tendenciesof students.

Table 4 Relationship Between Grade and Entrepreneurship Tendencies

Total Entrepreneurship Tendencies N Avg. S.D.

Freshman 666 2.01 0.48Sophomore 752 2.01 0.53Nongraduated 92 2.13 0.69

According to Anova test, F=2.287 and p=0.102. These results are not significant statistically. In this context, we can saythat there is no significant difference between the grade they receive education and the entrepreneurship tendencies ofstudents.


bank, 15% of them answered as I’d buy property, 6% of them answered as I’d buy foreign currency, gold vs., % of themanswered as I’d do nothing and 9% of them put a tick on the other option.

While the ratio of the students who took lessons about entrepreneurship before 29%, the ratio of the ones who didn’ttake is 71%. Against “Do you want to set up your own business?” question, while 88% of the students said yes, 12% ofthem said no.

70% of the mothers of students have elementary school, 25% of them have secondary education, 2% of them haveassociate, 2% of them have undergraduate academic and 1% of them have master degree educational levels. 45% of thefathers of students have elementary school, 38% of them have secondary education, 6% of them have associate, 8% ofthem have undergraduate academic and 3% of them have master degree educational levels.

While 18% of the mothers of students work, 82% of them do not work. While 79% of the fathers of students work, 21%of them do not work. While 17% of the fathers of students work in the public sector, 32% of them work in public sector.51% of them do not work. While 5% of the mothers of students work in the public sector and 8% of them work in publicsector, 87% of them do not work.

After the frequency ranges relative to demographic attributes of the students who participated the survey were given,averages and standard deviations relative to all questions had been calculated. The data relative to this were given inTable 2.


Avg. S.D. 1 Even if I don’t like a rule, I obey it because I have to. 2.13 1.37 2 I orient myself to the unexpected situations quickly. 2.24 1.33 3 I don’t quail easily. 2.25 1.53 4 If it is necessary, I’d accept the factors that prevent me from doing my job well. 3.10 1.65 5 I orient myself against the uncertain situations quickly. 2.60 1.45 6 After graduation, rather than working somewhere else I’ll strive to have my 2.11 1.47

own company. 7 I want to be independent economically. 1.54 1.12 8 I’m not afraid of being different. 1.63 1.21 9 I don’t like taking orders from someone else. 2.00 1.3610 If I do believe in something, I will do that job without any need to the other’s 1.98 1.30

approval.11 I’m able to travel to the place that I’ve never known. 2.23 1.5312 I don’t refrain from risking my money for earning much more money. 2.65 1.5313 I don’t refrain from trying new food and clothes. 2.08 1.3914 Risky jobs fascinates me because produces much more benefit. 2.60 1.4915 If we want to get succeed, we have to take risks. 1.75 1.2016 I’m able to generate original ideas and opinions that can solve existing problems. 1.86 1.1917 The new and different one is always better. 1.89 1.2618 I spare time to think and research for taking opportunities. 1.85 1.1919 Against unexpected demands of customers, I’m able to create new product 2.09 1.27

instead of standard one.20 I’m able to prevent opposing ideas creating work environment in which people 2.50 1.40

can produce new product.21 Taking on the others is my life style. 2.51 1.5322 I’m not able to get over losing. 2.21 1.4123 I want to be the best at my job. 1.67 1.1624 I never give up till I get succeed. 1.75 1.1925 While I’m taking on, I think to win first. 1.74 1.2626 I like talking to people and teaming with them. 1.61 1.1227 I like helping people. 1.50 1.0728 When I enter a new circle of friends, I gain their acceptance quickly and they 1.84 1.24

encircle me immediately.




H3: There is significant difference between age and entrepreneurship tendencies of students.

Table 5 Relationship Between Age and Entrepreneurship Tendencies

Age Groups Total Entrepreneurship Tendencies N Avg. S.D.

17-20 689.00 2.03 0.5021-25 757.00 2.01 0.5526-30 22.00 1.83 0.3831 and above 42.00 2.03 0.56

According to Anova test, F=1.339 and p=0.260 are found. These values are not sufficient for the relationship betweenvariables are significant. In this direction, there is no relationship between entrepreneurship tendencies of the vocationalstudents who are at the different age groups and the hypothesis is rejected.

H4: There is significant difference between region they live and entrepreneurship tendencies of students.

Table 6 Relationship Between Region and Entrepreneurship Tendencies

Geographical Region Total Entrepreneurship Tendencies N Avg. S.D.

Mediterranean 164.00 2.03 0.55Black sea 80.00 2.03 0.50Aegean 150.00 1.89 0.47Marmara 183.00 2.02 0.48Central Anatolia 880.00 2.02 0.52Eastern Anatolia 23.00 2.48 0.98Southeastern Anatolia 30.00 1.96 0.49

According to Anova test, F=4.629 and p <0.001 results are significant statistically. According to Scheffe test, thedifferences in groups are due to comers from Eastern Anatolia. In this direction, the hypothesis which provides therelationship between the region that students reside and entrepreneurship tendencies of students is accepted. Especially,entrepreneurship tendencies of students who come from Eastern Anatolia are found higher in proportion to the otherregions.

H5: There is significant difference between locality they live and entrepreneurship tendencies of students.

Table 7 Relationship Between Locality and Entrepreneurship Tendencies

City They Live Total Entrepreneurship Tendencies N Avg. S.D.

Metropolis 553.00 1.94 0.47City 381.00 2.00 0.52County 408.00 2.08 0.53Town, village and small town 168.00 2.16 0.63

According to Anova test, F=10.627 and p <0.001 results are significant statistically and also according to Scheffe test,the differences in groups are due to livings in town, village and small town. In this direction, contrary to expectationsentrepreneurship tendencies of students who live in countryside are higher in proportion to the students who live in citycenter.


H6: There is significant difference between level of income of their family and entrepreneurship tendencies ofstudents.

Table 8 Relationship Between Level of Income and Entrepreneurship Tendencies

Level of Income Total Entrepreneurship Tendencies N Avg. S.D.

299 TL. and below 79.00 2.06 0.58Between 300-574 TL. 243.00 2.06 0.60Between 575-820 TL. 428.00 2.03 0.51Between 821-1.693 TL. 507.00 2.01 0.50Between 1.694-2.566 TL. 163.00 1.94 0.452567 TL. and above 90.00 2.00 0.58

According to Anova test, F=1.342 and p=0.244 values are found. In this direction, the hypothesis relative to there issignificant difference between level of income of students’ families and entrepreneurship tendencies of students isrejected.

H7: There is significant difference between following incidence of students relative to journals about economicsand management and entrepreneurship tendencies of students.

Table 9 Relationship Between Journal Following Incidence and Entrepreneurship Tendencies

Journal Following Situation Total Entrepreneurship Tendencies N Avg. S.D.

Regularly 267 2.13 0.63When I take opportunity 1014 2.01 0.50Never 226 1.96 0.48

According to Anova test, F=6.884 and p <0.001. Results are significant statistically and also according to Scheffe test,the differences in groups are due to the ones that never follow journals.

H8: Whether students took a lesson about entrepreneur or not has an effect on entrepreneurship tendencies (19with entrepreneur tendencies).Table 10 Relationship Between Whether Taking A Lesson About Entrepreneur or Not and Entrepreneurship Tendencies

Entrepreneur Lesson Taking Independent Situation Sample t Test Yes No (n=438) (n=1072)Avg. Std. Avg. Std. t p Dev. Dev.

Total Entrepreneur Tendencies 2.03 0.49 1.97 0.58 -2.027 <0.05Notes:(i) In scale, 1 means I strongly disagree and 5 means I strongly agree.(ii) The numbers between parenthesis shows the number of people involves in the group.

The test relative to whether students took a lesson about entrepreneur or not has an effect on entrepreneurship tendenciesis significant. In this context, it can be said that entrepreneur tendencies of the students who took entrepreneur lesson ishigher in proportion to who didn’t take this lesson before.




H9: There is significant difference between school they receive education and entrepreneurship tendencies ofstudents.

Table 11 Relationship Between School They Receive Education and Entrepreneurship Tendencies

Total Entrepreneurship Tendencies N Avg. S.D.

Aksehir VHS 30 2.16 0.71Eregli Kemal Akman VHS 29 1.79 0.35Kadinhani Faik I�il VHS 51 1.94 0.58Kulu VHs 43 1.92 0.48Saray�n� VHS 113 1.98 0.45Seydisehir VHS 777 2.02 0.53Social Sciences VHS 292 1.94 0.44Technical Sciences VHS 175 2.21 0.61

According to Anova test, F=5.773 and p<0.001. These results are significant statistically and also according to Scheffetest, the differences in groups are due to Technical Sciences VHS group. In this context, we can say that there issignificant difference between school they receive education and entrepreneurship tendencies of students.

CONCLUSION

Analysis were conducted devoted to test the relationship between the students who receive education at variousdepartments which gives education at the grade of associate at universities and various demographic attributes. Accordingto analysis results for which 1510 valid questionnaire are examined, hypothesis that measures the relationship betweenvariables such as sex, grade they receive education, ages, level of income of their families and entrepreneurship tendenciesof students are rejected. Therefore, there is no significant difference between these variables and entrepreneurshiptendencies. But, the relationship between locality they reside, living in the countryside or city centre, journal followingincidence and whether they took a lesson about entrepreneur or not and entrepreneurship tendencies of students arefound significant.

.

REFERENCE

Avsar, Mustafa. 2007. Y�ksek �gretimde �grencilerin Girisimcilik Egilimlerinin Arastirilmasi: �ukurova. �niversitesindeBir Uygulama, �ukurova �niversitesi Sosyal Bilimler Enstit�s� Y�ksek Lisans Tezi, Adana.

Brice, Jeff. 2002. The Role of Personal Dimension and Occupational Preferences on The Formation of EntrepreneurIntention.

Mississippi State University Department of Management and Information Systems Doctorate Dissertation,Mississippi.Erbatu, G�knil. 2008. K�lt�rel Boyutlari I�erisinde Girisimcilik Egilimi. Marmara �niversitesi Sosyal Bilimler

Enstit�s� Y�ksek Lisans Tezi, Istanbul.Summers, Davids. 1998. An Emprical Investigations of Personal and Situational Factors That Relate to Formation

of Entrepreneur Intensions. Texas University Doctorate Dissertation, Texas.

It is expected that making of the analysis that we performed extending the population by various universities wouldbring important initiatives about entrepreneurship abilities of students for academicians and managers. In addition, asfor Table-2, the average values about entrepreneurship tendency are quite low. So, we must probe deep into causes ofthis values with new study.

As a result of entrepreneur tendencies of the students who took entrepreneur lesson is being higher in proportion to whodidn’t take this lesson before, we can say that the lessons about entrepreneurship contribute to increasing students’entrepreneurship tendency

Relationship between following incidence of journals about economics and management of students and entrepreneurshiptendencies of students is another hypothesis come up insignificant. Following of the journals on these fields contributesto them to get actual job ideas and also confronts as a factor that increases these students’ predisposition towardsentrepreneurship.

Entrepreneur tendencies of students who come from Eastern Anatolia is being found higher in proportion to the otherregions is an interesting and important detail. Again, tendencies of students who live town, village and small-town (incountryside) is being higher in proportion to the students who live in city center also corroborates this hypothesis.


Hanuman PrasadAssistant Professor, Faculty of Management Studies

Mohanlal Sukhadia UniversityRajasthan, India

Bharti MohtaResearch Scholar, Faculty of Management Studies

Mohanlal Sukhadia UniversityRajasthan, India

ABSTRACT

Behavioral finance is one of the emerging areas of research in the field of finance. It has revolutionalized the way wethink about investments. Behavioral finance is cross-disciplinary in nature incorporating finance with psychology. Forinvestors, managing their investments is like managing any enterprise. They apply all their skills, knowledge and expertisein managing their money to get the best from investments. Despite this, some psychological factors affect their decision.This study of systematic errors in cognitive reasoning and perception, and ultimately what these errors reveal about theindividual’s underlying thought processes, is often referred to as investor heuristics and biases. This article definesbehavioral finance and integrates two most important biases of investors – Overconfidence and Loss Aversion withGender. The objective of the study was achieved by administering a well structured questionnaire and collecting empiricalevidence on investor’s own perceptions of bias. Analysis was done on a final set of 128 investors consisting of bothmale and female investors. An Average Bias Score (ABS) was calculated and analyzed in SPSS. Results indicate thatmale and female investors have different perception for different biases. Males were found to be over-confident thanfemales and females were more loss-averse than males. These behavioral biases are present in each and every one of usin varying degrees and awareness about them is one of the best ways of coping with them.

Keywords: Behavioral finance, Behavioral Biases, Overconfidence, Loss aversion

INTRODUCTION

Behavioral Finance is an emerging discipline that represents a collection of alternative approaches to refine the classicalfinance definition of economic rationality. In particular, Behavioral Finance draws on the psychology and cognitivescience literatures to examine why individual decision-making often deviates from rational choices in systematic ways.Previous research on BF issues have focused on investor heuristics, biases, and framing effects. Specifically, this paperwill analyze: overconfidence and loss aversion, with special reference to gender.Behavioral finance is based on the alternative notion that investors, or at least a significant minority of them, are subjectto behavioral biases that mean their financial decisions can be less than fully rational. Evidence of these biases hastypically come from cognitive psychology literature and has then been applied in a financial context.Some of these biases include:

• Overconfidence and over optimism—investors overestimate their ability and the accuracy of the informationthey have.

• Representativeness—investors assess situations based on superficial characteristics rather than underlyingprobabilities.

• Conservatism—forecasters cling to prior beliefs in the face of new information.• Loss Aversion- losses are emotionally felt twice as strongly by people compared to comparable gains.

Hirshleifer offers a categorization of biases identifying four sources: cognitive resource constrains, self-deception,emotion and social interaction. While overconfidence comes under Self deception category, Loss aversion is an emotionalbias.

As defined by Hersh Shefrin, bias is nothing else but the “predisposition towards error” (Shefrin, 2007). In other words,a bias is a prejudice or a propensity to make decisions while already being influenced by an underlying belief. There aremany common biases humans exhibit.

EXPLORING EFFECT OF LOSS AVERSION ANDOVERCONFIDENCE ON GENDER:A STUDY ON BEHAVIOR FINANCE


EXPLORING EFFECT OF LOSS AVERSION AND OVERCONFIDENCE ON GENDER: A STUDY ONBEHAVIOR FINANCE

Overconfidence:Overconfidence is often regarded as the most prevalent judgment bias. Overconfidence is another bias that affects decision-making, both in the corporate world and individual investments. According to Shefrin, overconfidence “pertains to howwell people understand their own abilities and the limits of their knowledge” (Shefrin, 2007). In general, people tend tooverestimate their ability to perform well. This, in turn, leads to impulsive decisions as managers who think they knowmore than they really do are overly confident in their own abilities. Therefore, they search for less help and direction inmaking major decisions. Puri and Robinson (2005) link optimism to major economic choices and found out that optimistsare more likely to believe that future economic conditions will improve. David, Graham, and Harvey (2006) test whethermanagerial overconfidence is associated with corporate policies and find that firms with overconfident CFOs invest more,pay out fewer dividends, maintain long-term debt, exhibit higher investment-cash flow sensitivity, repurchase more equityas a response to low returns but issue less equity following high returns, and tilt executive compensation towards performance.

Barber and Odean (2001) did work on gender. They have summarized psychological studies that find a higher degree ofoverconfidence among men than among women. Consequently, they partition their data set, a sample of U.S. onlinebroker investors, on gender. They find that men trade more than women which are consistent with overconfidencemodels. In itself, overconfidence can generally be viewed as a positive trait as it leads to survival both in short and longrun. The negativity of the bias presents itself in those situations when individuals don’t recognize their limitations andtherefore, make faulty decisions based on erroneous premises.

Loss Aversion (Regret Aversion):Loss aversion (Kahneman & Tversky 1979), which is well established in choice scenarios, is commonly assumed to be due tothe anticipation that losses will have a greater effect on feelings than equivalent gains. Loss aversion or “prospect theory” isrelated to individual’s stronger desire to avoid losses than experience comparable gains (Tversky and Kahneman, 1979).

First positively demonstrated by Tversky and Kahneman, the theory of risk aversion stipulates that losses are emotionallyfelt twice as strongly by people compared to comparable gains. There have been some studies which suggest that lossescan be as much as twice as psychologically powerful as gains. The aversion to loss is so great with most investors thatthe thought of selling a stock when one is down (showing a paper loss) is truly abhorrent and too painful to face. Manyinvestors hang on to losing stocks in the hope that one day, the stock will come good. They do so even when there is noinformation to suggest this recovery will occur. In other words, their distaste for losses renders them unable to make asound investment decision when losing money and they start to gamble.

But refusing to sell a stock when it is down (unless there is a good reason to hold) is akin to a failure to acknowledgereality. Many investors continue to hold loss-making stocks in the hope they will one day recover.

Research has shown that people tend to evaluate outcomes not in terms of their impact on an individual's resulting stateof wealth, but in terms of changes from a reference state (e.g., Kahneman & Tversky, 1979). Moreover, evidence hasbeen interpreted to imply that people are loss averse: negative changes (i.e., losses) from a reference state are thought toloom larger than positive changes (i.e., gains) of equivalent magnitude (e.g Kahneman & Tversky, 1979; Tversky &Kahneman, 1991). This principle, named Loss Aversion, is commonly considered the most robust and important findingof behavioral decision theory and cited as a "seemingly ubiquitous phenomenon" (Novemsky & Kahneman, 2005).

This theory of loss aversion is present both in business and in everyday life. A study that looked at the concessions madein negotiation when the framing was alternatively posed in positive and negative frames, concluded that “a loss frameproduced fewer concessions than a gain frame”, proving again that individuals are less willing to negotiate when thereis a potential of a loss because they are not predisposed to encounter that loss (Carnevale, 2008). Previous studies haveshown that biases, heuristics, and framing effects have a negative impact on decision making and result in loss ofproductivity and value maximization; but do students display the same amount of bias in everyday life when it comes toinvestment decisions. The paper will also explore this question.

BACKGROUND OF THE STUDY

Parikh,(2009) in his book Value Investing And Behavioral Finance has identified smart and successful way of investingcalls for a thorough understanding of behavioral finance not just market sentiments, crowd behavior or companyperformance. This book studies investing and behavioral trends in Indian capital markets, and shows the follies ofcollective behavioral biases and their impact on investor decisions and returns. It makes nice reading because theexamples are from the Indian markets so familiarity is high.


Maheran and Muhammad, (2009) compared Behavioral finance and traditional finance. Chira and Thornton (2008) didwork on Behavioral Bias within the Decision Making Process. Chandra, (2008) worked on Decision Making in theStock Market: Incorporating Psychology with Finance. Pompian, (2006) did extensive research on Behavioral Finance.In his book Behavioral Finance and Wealth Management, financial expert Michael Pompian shows investors and financialadvisors how to make better investment decisions by employing behavioral finance research.

A large body of psychological literature suggests that females tend to be more risk averse than males (see Byrnes,Miller, & Schafer, 1999,). This finding has been relatively robust across a wide variety of domains and using a widevariety of definitions of risk. Wilson and Daly (1985) suggest that risk taking in males has evolved due to the adaptivemating advantage conferred on males willing to take risks to accumulate mates and resources that may attract mates.

Empirical investigation of gender differences in risk taking do point in the direction of less risk taking by women thanby men ( Eckel and Grossman, 2002 and Croson and Gneezy, 2004). Research in the domain of investing has also foundconsistent support for this basic gender difference. For example, non-professional women investors have been found toallocate less of their portfolios to volatile assets (Barber & Odean, 2000; Bernasek & Shwiff, 2001; Chow & Riley,1992; Cohn, Lewellen, Lease, & Schlarbaum; 1975; Jianakoplos & Bernasek, 1998; Sunden & Surette, 1998). This riskaversion on the part of women has also been demonstrated in professional financial analysts. Olsen and Cox (2001)found that female professional investors are more focused on the chance of loss in determining their portfolio makeupthan male investors.

Studies have found that men tend to be more risk tolerant on average than women (Byrnes, Miller, and Schafer, 1999).This gender difference carries over into personal investment decisions. Men tend to allocate more wealth to risky assetsthan do women (Jianakoplos & Bernasek, 1998) and are 45% more active in trading common stock than women (Barber& Odean, 2001).

Gender-stereotyped beliefs exist within the business realm. For example, a study conducted by Williams, Paluck, andSpencer-Rodgers (2010) revealed that both university students and working adults provided higher salary estimates formen than women to neutral job titles in both white and blue collar professions. Moreover, they also believed that menshould earn more than women. Such findings are consistent with the proposed “male-wealth stereotype” where masculinity,more than femininity, is associated with wealth. In financial investment decisions, women are typically perceived to bemore risk averse than men.

Most studies have found that men and women do respond to risk differently, with men taking more risks than women;For example, Eckel & Grossman (2002) found women are more risk averse on average than men in gamble choices:they are more than four times as likely as men to choose the risk-free gamble and only one-third as likely to choose thehighest-risk gamble, although men and women did not significantly differ in estimated loss aversion. However, notevery study has found significant gender differences in risk aversion or risk taking. In a recent study by Feng andSeaholes (2008), no gender differences were obtained in terms of portfolio return and trading activity for individualChinese investors in China.

Finally, a few papers have studied the issue of whether men and women stereotype similarly or differently. Siegrist,Cvetkovich, and Gutscher (2002) found that women tended to overestimate the risk seeking tendency of men butaccurately estimated the risk seeking tendency of women. However, Eckel and Grossman (2002) found a consistentpattern in both men and women underestimated the risk seeking tendency of both genders. They also found that mentend to underestimate women’s risk seeking tendency more than women themselves.

RATIONALE OF THE STUDY

From the above discussion, it is clear that investors are prone to behavioral biases and their role in decision makingcannot be undermined. Rather, we attempt to study the most prevalent of these biases, i.e., Overconfidence and LossAversion (Regret Aversion) in the budding Indian investors. We are studying only Overconfidence and loss aversionbecause these are the most common among the biases to which people are prone to not only in business decisions butalso in day to day activities. For this, we have taken business students who are investing in the stock market. It is ourassumption that the business students do not have much knowledge and expertise about the behavioral biases and henceare more prone to them. Further, we have not only identified these biases among the student investors, we have alsoclassified the biases on the basis of gender, i.e. intensity of Overconfidence and Loss Aversion is different in males andfemales student investors.

Hanuman Prasad and Bharti Mohta



So, the objectives of this study are:• To give an overview of the two biases of our study

- Overconfidence- Loss aversion (Regret Aversion)

• To find out the differences in male and female investors in terms of biases, .i.e. Overconfidence and Lossaversion.


For testing Over Confidence and Loss Aversion with respect to gender we designed a questionnaire where in the questionsrelating to both was mixed.

The questionnaire was prepared using Google documents and was sent to participants through e-mail. Participants comprisedof various categories of people namely – students, working professionals, professional investors and amateur investors. E-mails were sent out to more than 300 people, almost half of them women since this is a gender based study.

We received 135 responses, out of which 61 were female and 74 were male. Three responses for women were deleted dueto incomplete information, making a total of 58 responses for consideration. Out of 74 responses received for males weconsidered only 70 and four of them were rejected due to incomplete information. Thus the final set of responses was 128,of which 58 were from women and 70 were from men.

RELIABILITY OF THE INSTRUMENT

From the questionnaire, Question numbers 1,3,5,6,9 were asked to measure Over Confidence and the remaining questionsi.e. 2,4,7,8,10 were used to measure Loss Aversion. The questionnaire was designed on a 5-point Likert scale and aninternal consistency check was done by calculating Cronbach Alpha for both set of questionnaires.

The Questionnaire pertaining to Over Confidence the responses yielded a Cronbach Alpha score of 0.752 and for that ofLoss Aversion the Cronbach Alpha was 0.751.

Questionnaire Cronbach alphaOver Confidence 0.752Loss Aversion 0.751

HYPOTHESIS

Over Confidence and Loss Aversion are the two main common behavioral biases among investors and are present invarying degrees in both men and women. This study is an attempt to identify whether there is a significant difference ofthese behavioral biases in Indian men and women. We propose to analyze the following hypothesis:

H1: There is no difference between the Over-Confidence exhibited by males and females.H2: Both males and females display loss aversion to the same degree.

ANALYSIS AND INTERPRETATION

The data received from the questionnaire was further refined by separating the data from the two mixed questionnaires.Question numbers 1, 3,5,6,9 were on Over Confidence and the remaining questions i.e. 2, 4, 7,8,10 were used tomeasure Loss Aversion. Once we had data for the two different questionnaires, both sets were further refined to extractresponses for males and females. This was done using Microsoft Excel.

The Aggregate score was calculated in excel and a Graphical analysis was done using Minitab software so as to generatethe basic statistics of the Aggregate Score. Below are the 4 graphs revealing the descriptive statistics of the totalaggregate score of the four categories – Aggregate data of Over-Confidence in males and females as well as Aggregatedata of Loss-Aversion in males and females.

The final analysis on the refined data was done in SPSS.


The aggregate score for the respective questionnaires was then used to calculate the Average Bias Score (ABS) whichwas the arithmetic average of the aggregate score. This was done separately for males and females. Finally, t-tests wereperformed for identifying whether there is any significant difference between the Average Bias Score (ABS) for maleand female responses for both the questionnaires respectively.

Over Confidence and Gender:There is a general notion that males tend to be more over confident than their female counterparts. To test this wesubjected the Average Bias Score (ABS) for Over-Confidence to an independent t-test, comparing the ABS for malesand females respectively.




Hypothesis t value Sig. (2-tailed) ResultH01 12.202 .000 Rejected

The Null hypothesis is Rejected, which means that there is difference between the over confidence displayed by malesand females. The ABS for Over Confidence is higher for males suggesting that males are more over confident thanfemales.

Loss Aversion and Gender:Loss Aversion is another commonly occurring bias said to be found more in females than males. To test this, we againapplied an independent t-test on the ABS for Loss Aversion on male and female data respectively.

Hypothesis t value Sig. (2-tailed) ResultH02 -8.361 .000 Rejected

The Null hypothesis is Rejected, meaning that the means of the two populations are significantly different and femalesare more Loss averse than their male counterparts.

CONCLUSION

Behavioral biases such as overconfidence and loss aversion lead people to make mistakes and hence lose out more thanpeople who judge correctly. This paper was an attempt to link the biases with gender and see whether there is anydifference between the biases exhibited by males and females. Our study found that there is a clear difference betweenthe levels of biases displayed between males and females. While males seem to be more over confident than femalesthey are less likely to show loss averse behavior than females do.

Being aware of these facts is an advantage to both kinds of investors as these facts can act as yardsticks while investing.Also, an important implication is that mixed teams comprised of males and females can nullify these effects to a greatextent. We have only studied the two most common occurring biases. However, further studies can be done to explorethe relation of other behavioral biases with gender.

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Ikuya KANOSchool of Business Administration

University of Hyogo

ABSTRACT

VThis article investigates the role of organizational communication as an influential factor on organizational justice.Since organizational justice provides a powerful framework for understanding how the justice of decision-makingprocedures affects the relationships within organizations, the concept of organizational justice is of interest to scholars.Studies on organizational justice have mainly discussed personnel appraisal and distributing rewards to the employees.However, organizational justice in the workplace is not associated only with the process of personnel appraisal but alsowith task accomplishment.

The purpose of this paper is to elaborate the model of organizational justice in the workplace and test it. First, weattempt to clarify the impact of task characteristics on organizational justice. Second, we attempt to analyze the impactof organizational justice in different conditions. Although there are many empirical studies on specific jobs in Americancompanies, jobs in Japanese companies have not been analyzed fully. Because of this point, we should consider theimpact of organizational justice on different jobs.

In this study, we mainly examined how the characteristics of communication affect organizational justice. A sample of1479 employees in five companies in Japan was used. We used regression analysis to test various hypotheses.The results showed that organizational communication directly and positively influences organizational justice. Theseresults suggest communication inside organizations is an important factor when we consider organizational justice inthe workplace. The results also suggest that organizational justice focusing only on the process of personnel appraisal isinadequate for designing an evaluation system in Japanese companies.

THEORETICAL BACKGROUND AND FRAMEWORK

Organizational justice, a term first used by Greenberg (1987), refers to people’s perceptions and cognitions of justice orfairness in organizations. Concerns about organizational justice are reflected in several different facets of employees’daily jobs. First, workers are concerned about the justice of distributed resources, such as pay, rewards, promotions, andthe outcome of dispute resolutions. This is called “distributive justice” (Homans,1961; see also Adams,1965, Deutsch,1975, Leventhal, 1976). Second, people are also concerned with the fairness of making decisions in procedures thatlead to those outcomes, attempting to understand how and why such decisions came about. This is known as “proceduraljustice” (Thibaut and Walker, 1975; see also Leventhal, 1980). Finally, individuals are also concerned with the nature ofthe interpersonal treatment received from others, especially key organizational authorities. This is referred to as“interactional justice” (Bies and Moag, 1986). Collectively, distributive justice, procedural justice, and interactionaljustice are considered forms of organizational justice.

These organizational justice dimensions are important to people on the job for a variety of reasons. From the perspectiveof organizational psychology or organizational behavior, organizational justice affects work motivation, job satisfaction,and organizational commitment. Perceptions of justice also reinforce the perceived trustworthiness of authorities, reducingfears of exploitation. On a more personal level, organizational justice satisfies several individual needs, such as the needfor process control (Thibaut and Walker, 1975). Moreover, undoubtedly, people who behave in ways perceived to befair also satisfy their interest in fulfilling moral and ethical obligations.

Procedural justice research has focused mainly on the relationship between the evaluation process and organizationaljustice in the workplace. Previous studies on organizational justice maintained that awareness of procedural justice inevaluation has to be raised by way of accuracy of assessment, explicit evaluation criteria, feedback, and so on. Thus, thepractical implications were that the number of interview conducted by the evaluator have to be increased and that theamount of training for the evaluator should be increased.

THE RELATIONSHIP BETWEEN ORGANIZATIONALJUSTICE AND THE COMMUNICATION PROCESS IN

JAPANESE COMPANIES


Ikuya KANO

However, organizational justice in the workplace is not associated only with the process of personnel appraisal but alsowith task accomplishment; that is information and organizational communication directly impact on organizational justice.This means that employees’ cognition of the accuracy of evaluation results is affected by the system of information flowand communication throughout daily work, as well as by the design and the operation of the evaluation system. Therefore,the quality of information is important for improving the accuracy of evaluation. If employees feel that the given informationis low quality, and that the required information is not provided, then their trust in evaluation results may gradually decrease.

Chester Barnard once wrote that “the first executive function is to develop and maintain a system of communication”(1938, p.82). As we all know, organizational communication plays an important role in the workplace. We put forwarda hypothesis that communication affects organizational justice before the evaluation process, not afterwards.

It is important to recognize that the debate over distributive justice, procedural justice, and interactional justice isactually embedded in a larger debate among organizational justice researchers as to whether organizational justice isbest conceptualized as one, two, or three factors. The traditional view over the years has been that of a two-factor theory,namely, distributive justice and procedural justice (Sweeney and McFarlin, 1993).With the introduction of interactionaljustice, Bies and Moag (1986) came the emergence of a three-factor theory.

In this debate, several positions have been taken. Taking one view are those who argue that interactional justice isindependent of procedural justice, and that it represents a third dimension of organizational justice (Bies and Moag,1986). Those who take this position point to the empirical evidence demonstrating the distinctiveness and differentcorrelates of interactional justice relative to procedural justice.

However, the empirical evidence includes important issues to be considered. Bies and Moag (1986) suggested thatpeople were quite concerned with the fairness of the interpersonal treatment they received from corporate recruiters.The three-factor theory may apply to specific jobs in American companies, but it is not applicable to the ambiguity ofjob assignment that occur in Japanese companies. Therefore, we adopt the two-factor theory, that is, distributive justiceand organizational justice.

HYPOTHESIS

To achieve the above-mentioned objectives, we developed hypotheses about how the dimensions of the informationprocessing load and organizational communication influence organizational justice. In other words, the qualitativeaspect of information and the quantitative aspect of information affect organizational justice. First, we verify therelationships between these informational aspects in an organization and in organizational/personal outcomes. Thus, weoffer the following hypotheses:

Hypothesis 1a The lower the cost of collecting information, the stronger the organizational/personal outcomes.Organizational justice mediates this relationship.

Hypothesis 1b The greater the clarification of information flow and structure, the stronger the organizational/personal outcomes. Organizational justice mediates this relationship.

Hypothesis 1c The greater the accuracy of information, the stronger the organizational/personal outcomes.Organizational justice mediates this relationship.

Hypothesis 1d The more active the formal communication, the stronger the organizational/personal outcomes.Organizational justice mediates this relationship.

Hypothesis 1e The more active the informal communication, the stronger the organizational/personal outcomes.Organizational justice mediates this relationship.

The distinction between predicting personal outcomes versus organizational or authority-referenced outcomes wasinvestigated further by McFarlin and Sweeney (1992) and Sweeney and McFarlin (1993). In their research, usingstructural equation modeling, these researchers examined alternative models, with procedural justice and distributivejustice predicting personal outcomes and organizational outcomes. The former was pay satisfaction and job satisfaction;the latter was organizational commitment. The best fitting and most concise model was the one in which only distributivejustice predicted pay satisfaction and only procedural justice predicted organizational commitment. The authors calledit a ‘two factor model’. It is a term that would go on to capture both the statistical independence of procedural justiceand distributive justice, but also the person-referenced versus organization-referenced distinction in the types of attitudesthey predict.

Leventhal (1980) noted what procedural justice consists of. He identified the following six rules for fair procedures: (a)consistency, (b) bias suppression, (c) accuracy, (d) correctability, (e) representativeness, (f) ethicality. Leventhal (1980)


THE RELATIONSHIP BETWEEN ORGANIZATIONAL JUSTICE AND THE COMMUNICATION PROCESSIN JAPANESE COMPANIES

also discussed these in a second paper examining allocation rules. We should confirm what kind of factors have aneffect upon organizational justice as noted in the previous studies. For example, the number of evaluations, the accuracyof evaluation, the extent of the evaluator’s knowledge about his or her subordinates, and communication betweensuperior and subordinates as independent variables.

From this, we put forward the following hypotheses:Hypothesis 2a The lower the cost of collecting information, the greater the organizational justice. The reliability

of the evaluation process mediates this relationship.Hypothesis 2b The greater the arrangement of information flow and structure, the greater the organizational

justice. The reliability of the evaluation process mediates this relationship.Hypothesis 2c The greater the accuracy of information, the greater the organizational justice. The reliability of

the evaluation process mediates this relationship.Hypothesis 2d The more active the formal communication, the greater the organizational justice. The reliability

of the evaluation process mediates this relationship.Hypothesis 2e The more active the informal communication, the greater the organizational justice. The reliability

of the evaluation process mediates this relationship.

Furthermore, our model includes the constructs that extend our causal chain. From the perspective of social psychology,it is meaningful to analyze how information and communication affect organizational justice. On the other hand, fromthe perspective of human resources management, this is inadequate for finding practical implications. We consider thatthe information processing load and organizational communication directly affect organizational justice, becauseemployees are not only perceived as fair throughout the evaluation process but also in carrying out their jobs or duties.Accordingly, we put forward the following hypotheses:

Hypothesis 3a The lower the cost of collecting information, the stronger the organizational/personal outcomes.The reliability of the evaluation process and organizational justice mediates this relationship.

Hypothesis 3b The greater the arrangement of information flow and structure, the stronger the organizational/personal outcomes. The reliability of the evaluation process and organizational justice mediates this relationship.

Hypothesis 3c The greater the accuracy of information, the stronger the organizational/personal outcomes.The reliability of the evaluation process and organizational justice mediates this relationship.

Hypothesis 3d The more active the formal communication, the stronger the organizational/personal outcomes.The reliability of the evaluation process and organizational justice mediates this relationship.

Hypothesis 3e The more active the informal communication, the greater the organizational/personal outcomes.The reliability of the evaluation process and organizational justice mediates this relationship.

The information processing load and organizational communication while carrying out the job affects the trust in theevaluation process. These hypotheses mean that both the qualitative and quantitative aspects of information directly/indirectly impact on organizational justice. Our model is shown in Figure 1, and dimensions and variables adopted inthis study are shown Table 1.

Figure 1 Conceptual model:Information, Evaluation, Organizational Justice, and Outcomes

METHODOLOGY

Sample and ProcedureThis study was conducted in five Japanese companies, including the wholesale industry, the retail industry, and amanufacturing firm. To obtain more generalized conclusions, we dared to choose different industries and differentoccupations. The companies had a total of 1479 employees. All of the employees were invited to participate in thisstudy by completing a survey. Participants were asked to complete a questionnaire assessing perceived information,organizational communication, and organizational justice in the company for which they worked.


Ikuya KANO

MeasuresThe measures of organizational justice were developed by Misaki (2007), Sweeney and McFarlin (1993). The measuresconsisted of 18 variables, 87 items pertaining to five dimensions: Measures for the variables were obtained from theemployees’ surveys. Each scale utilized a five-point Likert scale ranging from 1 (“not at all descriptive of me”) to 5 (“verydescriptive of me”).

Table 1 Dimensions and Variables for all Study Variables

Dimensions VariablesInformation processing load 1 Cost of Information

2 Immaturity of Information Flow and Structure 3 Inaccuracy of Information

Organizational Communication 4 Communication with Supervisors 5 Informal Communication 6 Formal Communication with Colleagues 7 Formal Communication with Other Departments

Trust in Evaluation 8 Consistency of Evaluation 9 Process Control10 Accuracy of Information with Evaluation11 Ethicality12 Trust in Supervisor

Organizational Justice 13 Distributive Justice14 Procedural Justice

Organizational /Personal Outcomes 15 Affective Commitment16 Continuance Commitment17 Job Satisfaction18 Work Motivation

RESULT

Table 2 provides descriptive statistics and correlations, and the results of our regression analysis are shown in Tables 3-1 to 5. All of these models and steps include the control variables. Concerning each dimension of the informationprocessing load; ‘Cost of Information’, ‘Immaturity of information flow and structure’ and ‘Inaccuracy of information’were measured by reverse scales. Accordingly, it is preferable if the variable of the information processing load showsa minus value and our hypotheses are supported.

In Hypothesis 1, we described the relationships between informational aspects of organization and organizational/personal outcomes (Table 4-1 and 4-2). This is a model in which the qualitative aspects of information and the quantitativeaspects of information directly influence organizational justice. Hypothesis 1b clearly confirms and Hypotheses 1c, 1d,and 1e were generally supported, but Hypothesis 1a was not supported. In sum, Hypothesis 1 is largely supported fromour results, but some causal relationships are unsupported. In our prospective study, we have to examine the reasons thatthe variables of the dimensions of information processing load and organizational communication influence differentdimensions of organizational justice. Overall, we found that the quality of information and organizational communicationin daily work affected the trust in evaluation.

With regard to Hypothesis 2, we argued the relationships between informational aspects of organization and organizationaljustice (Table5). In the previous study of organizational justice, the evaluation process influenced organizational justice.Hypotheses 2a, 2b, 2c, and 2d were partially supported, but Hypothesis 2e was unsupported. From our results, Hypothesis2 was partially supported, and we note that the variables of organizational communication that mediate the evaluationprocess individually affect the different dimensions of organizational justice. Concerning Hypothesis 3, our empirical results clearly confirm that the informational aspects of organization affectorganizational/personal outcomes (Table3-1 and 3-2). Hypothesis 3b clearly confirms and Hypotheses 3a, 3c, 3d, 3ewere partially supported.

In summary, the results mainly show that information and organizational communication directly and positively influenceorganizational justice. This evidence suggests communication inside organizations is an important factor when weconsider organizational justice in the workplace. The results also suggest that organizational justice focusing only onthe process of personnel appraisal is inadequate when designing an evaluation system in Japanese companies.



Table 2 Descriptive Statistics and Correlations for Study Variables


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Table 3-1 Results of Regression Analysis


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Table 5 Results of Regression Analysis



DISCUSSION

This study shows that the quality of information and that the quantity of information, i.e. organizational communication,affect procedural justice more than distributive justice. These results differ from Sweeney and McFarlin (1993). In linewith Sweeney and McFarlin’s (1993) earlier two-factor model, we found that the results of our research show thatprocedural justice affects personal outcomes more than distributive justice.

Our study provides one of the first empirical examinations of the role of organizational justice as an intervening mechanismbetween organizational communication and organizational/personal outcomes.

Secondly, Bies and Moag (1986) certainly provided substantiated evidence that people were quite concerned with thefairness of the interpersonal treatment they received from corporate recruiters. However, the dimension of interactionaljustice may be unsuitable for the case of repetitive and persistent matters of organization, such as making decisions onevaluation, rewards, promotion, and so on.

Additionally, the three-factor theory may be applicable to specific jobs in American companies, but it may be inappropriatefor the ambiguity of jobs in Japanese companies.

In summary, the results show that organizational communication directly and positively influences organizational justice.This evidence suggests communication inside organizations is an important factor when we consider organizationaljustice in the workplace. The results also suggest that organizational justice focusing only on the process of personnelappraisal is inadequate for designing an evaluation system in Japanese companies. Because our hypotheses are concernedwith organizational justice in a general sense, and not its specific manifestations, we will have to carefully examine ourresults in detail.

CONCLUSION

This study extended organizational justice research to Japanese companies. Several important contributions come fromthis study. It provides rare evidence that helps increase understanding of how organizational communication andinformation affect organizational justice. Our measures included more items than earlier measures of this construct, andwere more reliable.

In this study, we applied the two-factor model, namely distributive justice and procedural justice as the dimensionsconstituting organizational justice. We regard organizational communication not as a component of organizationaljustice, but as the impact of it.

This study provides evidence that considering only the design and the arrangement of evaluation systems is inadequatefor enhancing employees’ cognition of organizational justice. The arrangement of information flow, the accuracy ofinformation, and organizational communication are important for enhancing this, as well as developing the evaluationsystem. Therefore, these results can help clarify the best approach to managers that need to reconstruct or revise theirevaluation system of human resource management. With regard to managerial implications, to enhance employees’cognition of organizational justice, managers have to consider the issues of job management and work flow.

REFERENCE

Adams, J.S. 1965. Inequity in Social Exchange. In Berkowitz, L. Ed. Advances in Experimental Social Psychology.Academic Press.

Alexander, S. and Ruderman, M. 1987. The Role of Procedural and Distributive Justice in Organizational Behavior.Social Justice Research. 1 (2): 177-198.

Barnard, C.I. 1938. The Functions of Executive. Harvard University Press.Bies, R.J. and Moag, J.S. 1986. Interactional Justice:Communication Criteria for Fairness. In Sheppard, B. Ed.

Research on Negotiation in Organizations. JAI Press.Colquitt, J.A. 2001. On the Dimensionality of Organizational Justice:A Construct Validation of A Measure. Journal

of Applied Psychology. 86: 386-400.Colquitt, J.A. and Greenberg, J. 2003. Organizational Justice:A Fair Assessment of the State of the Literature, In

Greenberg, J. Ed. Organizational Behavior:the state of the science. 2nd ed. Lawrence Erlbaum Associates.Colquitt, J.A., Conlon, D.E., Wesson, M.J., and Others. 2001. Justice at the Millennium:A Meta-Analytic Review of

25 Years of Organizational justice Research. Journal of Applied Psychology. 86 (3): 425-455.


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Colquitt, J.A., Greenberg, J. and Zapata-Phelan C.P. 2005. What Is Organizational Justice?A Historical Overview, InGreenberg, J. and Colquitt, J.A. Eds. Handbook of Organizational Justice. Lawrence Erlbaum Associates.

Cropanzano, R., Prehar, C.A., and Chen, P.Y. 2002. Using Social Exchange Theory to Distinguish Procedural fromInteractional Justice. Group and Organizational Management. 27: 324-351.

Deutsch, M. 1975. Equity, Equality, and Need: What Determines Which Value Will Be Used as the Basis ofDistributive Justice?. The Journal of Social Issues. 31 (3): 137-149.

Greenberg, J. 1986. Determinants of Perceived Fairness of Performance Evaluations. Journal of Applied Psychology.71: 340-342.

Greenberg, J. 1993. The Social Side of Fairness:Interpersonal and Informational Classes Organizational Justice, InCropanzano, R. Ed. Justice in the Workplace: Approaching Fairness in Human Resource Management.Hills-dale, Lawrence Erlbaum Associates.

Greenberg, J. 1987. A Taxonomy of Organizational Justice Theories. Academy of Management Review. 12 (1): 9-22.Greenberg, J. and Folger, R. 1983. Procedural justice, Participation, and the Fair Process Effect in Groups and

Organizations, In Paulus, P.B. Ed. Basic Group Processes. Springer-Verlag.Greenberg, J. 1990. Organizational Justice:Yesterday, Today, and Tomorrow. Journal of Management. 16 (2): 399-432.Leventhal, G.S. 1976. Fairness in Social Relationships, In Thibaut, J.W., Spence, J.T. and Carson, R.C. Eds.

Contemporary Topics in Social Psychology. General Learning Press.Leventhal, G.S. 1980. What Should Be Done with Equity Theory? New Approaches to the Study of Fairness in

Social Relationships, In Gergen, K.J., Greenberg, M.S., and Willis, R.H. Eds. Social Exchange:Advances in Theory and Research. Plenum Press.

Lind, E.A. and Tyler, T.R. 1988. The Social Psychology of Procedural Justice. Plenum Press.McFarlin, D.B. and Sweeney, P. D. 1992. Distributive and Procedural Justice as Predictors of Satisfaction with

Personal and Organizational Outcomes. Academy of Management Journal. 35 (3): 626-637.Misaki, H. 2002. Effects of distributive and procedural justice on performance evaluation. Shougaku –ronshu.

70 (2): 105-124.Misaki, H. 2003. A empirical study on distributive and procedural justice. Shougaku –ronshu. 72 (1): 37-49.Misaki, H. 2007. Research on organizational justice and strategy. Journal of University of Hyogo. 59 (2/3): 1-22.Sweeney, P. D. and McFarlin, D. B. 1993. Workers’ Evaluations of the “Ends” and the “Means”:An Examination of

Four Models of Distributive and Procedural Justice. Organizational Behavior and Human DecisionProcesses. 55: 23-40.

Thibaut, J.W. and Kelley, H. H. 1959. The Social Psychology of Groups. New York: Wiley.Thibaut, J. and Walker, L. 1975. Procedural justice:A psychological analysis. Hills-dale: Lawrence Erlbaum Associates.Thibaut, J. and Walker, L. 1978. A theory of procedure. California Law Review. 66: 541-566.


Thanida ChitnomrathThe Graduate School, Dhurakij Pundit University

Bangkok, Thailand

Robert EvansThe Graduate School of Business, Curtin University of Technology

Perth, Western [email protected]

Theo ChristopherThe School of Accounting, Finance and EconomicsEdith Cowan University, Perth, Western Australia

ABSTRACT

This research reports on the restructuring methods adopted by Thai firms following post-bankruptcy reorganisation.The study used a sample of 111 filing companies whose reorganisation plans have been confirmed by the Thai CentralBankruptcy Court during the period 1999-2002, with performance results to 2005. The results indicate that the medianpost-bankruptcy performance for these companies improved over the three year period and also moved closer to thatpredicted each year. The recovery rate from bankruptcy for this study was 60% of the total number of companies, 58%for privately owned and 66% for public. The result suggests a majority of insolvent firms achieve successful reorganizationand that the reformed governance mechanisms of the bankruptcy reorganization Act produce some success. The studyalso investigated details of restructuring strategy implemented by insolvent firms. Among three categories of restructuringmethods, all firms undertook financial restructuring, 60% restructured their operations and 39% restructured their assetmanagement. Cost reduction, disposal of non-core assets and debt write-off were the most widely adopted restructuremethods.

Keywords: bankruptcy reorganisation, corporate governance, post-bankruptcy performance, Thailand

INTRODUCTION

Reorganisation is an extensive alteration of a financially distressed firm’s capital, organisational and management structurefollowing a plan worked out during the reorganisation proceedings under the bankruptcy law. The objectives of reorganisationare to eliminate the cause of the failure, settle with creditors and allow the firm to remain in business (Ross, Westerfield &Jordan, 2000). It enables firms to improve and continue their operations by providing several mechanisms for ensuring thatthese firms can emerge from bankruptcy adequately (Brigham & Houston, 2001; White, 1989).

The motivation for the study is to identify the overall success of the restructure process and the restructuring methodscommonly pursued by restructuring firms. The study also serves as a useful measure of the effectiveness of the recentlyinstituted Thai bankruptcy reorganisation process.


Research into measures of success in the bankruptcy reorganisation process have been undertaken by Hotchkiss, 1995;Alderson and Betker, 1999; Daily, 1995; Platt and Platt, 2002; Kalay, Singhal and Tashjian, 2007; Jayaraman, Sabherwaland Shrikhande, 2001. These studies included the percentages of firms emerging from bankruptcy, categories of emergingfirms (successful reorganisation, partially successful reorganisation, and mergers and acquisitions), accountingperformance, cash flow performance compared with financial projections of the reorganisation, and stock performance.The evidence, particularly for those which filed for US Chapter 11 bankruptcy reorganisation, showed that a majority offirms either failed or continued to exhibit poor performance for some years following reorganisation.

AN ANALYSIS OF RESTRUCTURING METHODSAPPLIED BY COMPANIES UNDERGOING POSTBANKRUPTCY REORGANISATION IN THAILAND


Thanida Chitnomrath, Robert Evans and Theo Christopher

Critical factors influencing successful bankruptcy reorganisation have been researched by Frank & Torous, 1989; Gertner& Scharfstein, 1991; Chatterjee, Dhillon & Ramirez, 2004; Chen, 2003; Fisher & Martel, 2003; Michel, Shaked & McHugh,1998; Platt & Platt, 2002; Datta & Iskandar-Datta, 1995; Dawley, 1999; Routledge & Gadenne, 2000; White, 1994; Chen,Weston & Altman, 1995; Fayez and Meyer, 2001; Dhillon, Noe & Ramirez, 1995; John, John & Vasudevan, 2000;Triantis, 1993; Denis and Rodgers, 2007; Gilson, Hotchkiss and Ruback, 2000; Dawley, Hoffman & Lamont, 2002; Denis& Rodgers, 2002; Berkovitch and Israel, 1991. These studies included the recontracting process, debtor-in-possession(DIP) financing, management changes, a firm’s profitability, financial and operational projections in the reorganisationplan, refocusing and restructuring strategy, and the efficiency of insolvent firms. Evidence confirms that some of thesemechanisms (i.e. DIP financing, restructuring strategy) are helpful for renegotiating with creditors, increasing the efficiencyof investment decisions and enhancing bankruptcy recovery.

Researchers concerned with the critical governance factors influencing successful bankruptcy reorganisation were Daily,1995; Daily & Dalton, 1994a, 1994b; Gales & Kesner, 1994, Brockmann, 1997; Brockmann, Hoffman, Dawley & Fornaciari,2004; Hotchkiss, 1995; Daily, 1996; Charitou, Lambertides & Trigeorgis, 2007; Chen, 2003. These studies included boardsize, board composition, the structure of chief executive officer (CEO) - board chairperson positions, CEO and directorturnover, equity ownership, and audit committee. Among them, the crucial governance factors influencing successfulbankruptcy reorganisation tend to be outside directors in the board, board leadership structure and CEO power.

To date, only three research studies of formal methods of corporate workout have been conducted in Thailand. The firstbyVongvipanond, Jumpa and Wichitaksorn (2002) was based on empirical evidence of court - supervised corporaterestructuring in Thailand focused on economic and legal perspectives. The second study was undertaken by Pipatsitee,Kuldilouk and Ekukara (2003), at the Center for Applied Economics Research, Faculty of Economics, Kasetsart University,Thailand. They extended the first piece of research concerning the efficiency and effectiveness of the Thai bankruptcycourt in terms of managing and controlling debt restructuring proceedings comparing it with the Corporate RestructuringGroup, Bank of Thailand and the Thai Asset Management Corporation. The third study by Pipatsitee, Kuldilouk, Ekukaraand Kuntong (2004) extended previous research by examining ways for law development and the development of the lawenforcement to improve debt restructuring efficiency. It was found that only the first, the research of Vongvipanond et al.(2002) investigated the implementation of the reorganisation plan and a firm’s post-bankruptcy performance, finding a49% recovery rate during the period 1998-2002.

SAMPLE USED FOR ANALYSIS

The sample includes all companies which filed petitions for Chapter 3/1 bankruptcy under the Thai Bankruptcy Act andwhose plans have been confirmed by the bankruptcy court between January 1999 and December 2002. The primaryinvestigation found that 111 private sector companies had met the selection criteria of owing creditor(s) at least 10 millionBaht and having their reorganisation plans accepted by the bankruptcy court (Table 1). A quantitative analysis will beundertaken to determine the prevalence of methods adopted by both successful and unsuccessful companies.

Table 1 The number of sample firms each year 1999 - 2002

Year Total No. of firms each year (that plans were accepted by the court)

1999 1 (0.9%)2000 16 (14.4%)2001 48 (43.2%)2002 46 (41.4%)Total 111 (100.0%)

Note: The bankruptcy court opened on June 18, 1999.

PERFORMANCE MEASUREMENT

A firm’s post-bankruptcy performance is measured in terms of the first three-year actual profits before tax during thereorganization period. Mean scores of actual profits before tax (APBT) in years 1, 2, 3 were 496.96, 11.50 and 104.33million Baht, respectively, whereas mean scores of predicted profits before tax (PPBT) were -22.08, 10.56 and 43.83million Baht, respectively.

Figure 1 presents graphs of median values of the first three-year actual and predicted profits before tax for the 111sample firms. The median post-bankruptcy performance (PFOM) improved over the three year period and also moved


AN ANALYSIS OF RESTRUCTURING METHODS APPLIED BY COMPANIES UNDERGOING POSTBANKRUPTCY REORGANISATION IN THAILAND

closer to that predicted each year. These results indicate that in general the insolvent firms’ performance improved whilereorganization plans were being implemented.

Figure 1 A comparison of the three-year median actual and predicted profit before

Table 2 illustrates the number of firms reporting positive and negative percentage differences of post-bankruptcyperformance (PFOM). PFOM is measured as the three-year average value of the difference between actual profitsbefore tax and predicted profits before tax as a percentage of the absolute value of predicted profits before tax in years1-3. This is essentially a measure of the firm’s ability to meet the financial predictions which had been established in thereorganisation plan. The measure is the three-year average value of the difference between actual profits before taxcalculated as follows:

Where:n = Years 1-3 during the reorganisation timeXi = {(APBTi - PPBTi)/ |PPBTi|} x 100APBT = Actual profits before taxPPBT = Predicted profits before tax

The findings for this sample show that 67 firms (60%) have positive percentage differences and 44 firms (40%) havenegative percentage differences. The results in each company type are also similar to the results in total. Forty-fourprivate firms (58%) and 23 public firms (66%) have positive results while 32 private (42%) and 12 public (34%) havenegative results. This evidence suggests that main governance mechanisms in the reorganization proceedings enable themajority of insolvent companies to meet or exceed financial expectations.

Table 2 Positive and negative percentage differences of post-bankruptcy performance (PFOM)

Characteristic difference Total sample firms Private firms Public firms1) Positive percentage difference 67 firms, 60% 44 firms, 58% 23 firms, 66%2) Negative percentage difference 44 firms, 40% 32 firms, 42% 12 firms, 34%Number of firms 111 firms, 100% 76 firms, 100% 35 firms, 100%

Note: PFOM is measured as the three-year average value of the difference between actual profits before tax and predictedprofits before tax as a percentage of the absolute value of predicted profits before tax in years 1-3.

RESTRUCTURING METHODS AND PERFORMANCE

Table 3 presents the results of positive and negative percentage differences of performance (PFOM) and their relationshipto the features of key restructuring mechanisms including operational, asset and financial restructurings. All companiesused financial restructuring. For operational restructuring a smaller proportion of successful companies used operationalrestructuring than unsuccessful ones (58% versus 64%), and for asset restructuring, a higher proportion of successfulcompanies generally used this form of restructuring than for unsuccessful ones (43% versus 32%).



Table 3 A comparison of companies with positive and negative post-bankruptcy performance (PFOM)

Variables Positive PFOM Negative PFOM (67 companies) (44 companies)

Restructuring methods1 Operational restructuring - Yes 39 (58%) 28 (64%)

- No 28 (42%) 16 (36%)2 Asset restructuring - Yes 29 (43%) 14 (32%)

- No 38 (57%) 30 (68%)3 Financial restructuring - Yes 67 (100%) 44 (100%)

- No - -Note: PFOM is measured as the three-year average value of the difference between actual profits before tax and predictedprofits before tax as a percentage of the absolute value of predicted profits before tax in years 1-3

All firms reported to the Central Bankruptcy Court details of operational, asset, and financial restructuring methods.Panel A of Table 4 shows the methods of operational restructuring. Almost 50% of total firms attempted to reduce costsand expenses, while around 30% attempted to change management, production systems, and sales and service systems.Around 15 – 20% were involved in company size reduction, change in organization structure, improvement in financialand accounting systems, and change in internal control systems, including discontinuation of loss making operations.Less than 14% improved information systems, profitable activities, and compensation and wage systems. Interestingly,although private and public firms applied each method, public companies were noticeably higher in the use of ‘changein management’ as a strategy.

Panel B of Table 4 documents that the most common methods of asset restructuring were the disposal of non-core assets(86%), followed by the disposal of investments (21%). Some firms (12%) invested in capital assets. Four firms (9%)accepted mergers and acquisitions and only two (5%) were involved in intangible asset write-offs. It is apparent thatthere was little difference among the asset management methods which private and public firms used.

Panel C of Table 4 discloses that 107 firms (96%) accepted debt write-off of principal and/or accrued interest.Approximately 60 -70 firms (over 50%) attempted to use debt to equity swaps (common share), deferment of principaland/or accrued interest, capital reduction from existing shareholders, and capital injection from new investors. 30 –40% of firms reported debt repayment / reschedule / refinance, change in interest rate, and settlement of debts with non-equity assets. Sixteen firms (14%) were granted a grace period and 8 firms (7%) used debt injection from new investors,while 7 firms (6%) injected capital from existing shareholders. A small group chose to use debt to equity swaps intoconvertible debentures/bonds (4%) and debt to equity swaps into preference shares (2%).

In summary, the results in Table 4 show that insolvent firms utilized multiple methods of reorganization through thecourt to relieve their debt burden and inject capital for continuing their businesses. Cost reduction, disposal of non-coreassets and debt write-off were crucial methods for restructuring.

Table 4 Details of restructuring methods used by reorganized firms

Panel AMethods of operational restructuring Total firms Private firms Public firmsNo. of firms using operational restructuring 67 50 17Methods:Cost and expense reduction 32 (48%) 26 (52%) 6 (35%)Change in management 21 (31%) 13 (26%) 8 (47%)Change in production system 19 (28%) 14 (28%) 5 (29%)Change in sale and service system 19 (28%) 14 (28%) 5 (29%)Company size reduction 13 (19%) 8 (16%) 5 (29%)Change in organization structure 13 (19%) 9 (18%) 4 (24%)Improvement in financial and accounting system 12 (18%) 9 (18%) 3 (18%)Change in internal control system 11 (16%) 9 (18%) 2 (12%)Discontinuation of loss making operation 10 (15%) 9 (18%) 1 (6%)Improvement in information system 9 (13%) 8 (16%) 1 (6%)Improvement in profitable activities 7 (11%) 6 (12%) 1 (6%)Improvement in compensation and wage system 3 (5%) 3 (6%) -



Table 4 Details of restructuring methods used by reorganized firms

Panel BMethods of operational restructuring Total firms Private firms Public firmsNo. of firms using asset restructuring 43 27 16Methods:Disposal of non-core assets 37 (86%) 24 (89%) 13 (81%)Disposal of investments 9 (21%) 3 (11%) 6 (38%)Investment in capital assets 5 (12%) 3 (11%) 2 (13%)Mergers and acquisitions 4 (9%) 1 (4%) 3 (19%)Intangible asset write-off 2 (5%) 2 (7%) -Panel CNo. of firms using financial restructuring 111 76 35Methods:Debt write-off (principal and/or accrued interest) 107 (96%) 72 (95%) 35 (100%)Debt to equity swaps (common share) 69 (62%) 49 (65%) 20 (57%)Deferment of principal and/or accrued interest 63 (57%) 48 (63%) 15 (43%)Capital reduction from existing shareholders 62 (56%) 32 (42%) 30 (86%)Capital injection from new investors 61 (55%) 43 (57%) 18 (51%)Debt repayment / reschedule / refinance 43 (39%) 23 (30%) 20 (57%)Change in interest rate 40 (36%) 26 (34%) 14 (40%)Settlement of debts with non-equity assets 33 (30%) 23 (30%) 10 (29%)Granting of grace period 16 (14%) 11 (15%) 5 (14%)Debt injection from new investors 8 (7%) 5 (7%) 3 (9%)Capital injection from existing shareholders 7 (6%) 5 (7%) 2 (6%)Debt to equity swaps (convertible debenture/bond) 4 (4%) 2 (3%) 2 (6%)Debt to equity swaps (Preference share) 2 (2%) 1 (1%) 1 (3%)Note: The number in brackets is the percentage of the number of companies using the method divided by the totalnumber of firms in each column.

Rankings of prevalence of use of the three restructuring types of both positive and negative percentage difference of post-bankruptcy performance (PFOM) firms are displayed in Tables 5.1 – 5.3. As can be seen in Table 5.1, firms in the positivegroup used ‘change in management’ as the most common operational method, whereas the negative group adopted ‘costand expense reduction’. At the second rank, the positive group used ‘cost and expense reduction’ and ‘change in sale andservice system’ while the negative group gave priority to the use of ‘change in production system’. Change in productionsystem, company size reduction and change in organization structure were employed by the positive group at the third,fourth and fifth rank, respectively. Meanwhile the negative group used ‘change in management’ and ‘improvement infinancial and accounting systems’ in the third rank, change in sale and service system, organization structure, and internalcontrol systems in the fourth rank, and discontinuation of loss making operations as the fifth priority.

Table 5.1 The rank and prevalence of operational restructuring methods used by two groups of reorganized firmsreporting positive and negative percentage differences in post-bankruptcy performance (PFOM)

Positive group Negative groupMethods: Rank no. of firms Rank no. of firmsCost and expense reduction 2 13 (19%) 1 19 (43%)Change in management 1 14 (21%) 3 7 (16%)Change in production system 3 11 (16%) 2 8 (18%)Change in sale and service system 2 13 (19%) 4 6 (14%)Company size reduction 4 10 (15%) 6 3 (7%)Change in organization structure 5 7 (10%) 4 6 (14%)Improvement in financial and accounting systems 7 5 (7%) 3 7 (16%)Change in internal control systems 7 5 (7%) 4 6 (14%)Discontinuation of loss making operations 6 6 (9%) 5 4 (9%)Improvement in information system 6 6 (9%) 6 3 (7%)Improvement in profitable activities 7 5 (7%) 7 2 (5%)Improvement in compensation and wage system 8 1 (1%) 7 2 (5%)Note: PFOM is measured as the three-year average value of the difference between actual profits before tax and predictedprofits before tax as a percentage of the absolute value of predicted profits before tax in years 1-3.



Table 5.2 displays the ranks of asset restructuring methods in both groups. As can be seen, companies of the positive groupchose disposal of non-core assets, disposal of investments, and mergers and acquisitions as the top three methods forrestructuring. They also used other methods; investment in capital assets and intangible asset write-offs. The negativegroup generally followed the same primary methods that the positive group, although their prevalence of use was slightlylower.

Table 5.2 The ranks and prevalence of asset restructuring methods used by two groups of reorganized firms reportingpositive and negative percentage differences in post-bankruptcy performance (PFOM)

Positive group Negative groupMethods: Rank no. of firms Rank no. of firmsDisposal of non-core assets 1 25 (37%) 1 12 (27%)Disposal of investments 2 7 (10%) 2 2 (5%)Investment in capital assets 4 3 (4%) 2 2 (5%)Mergers and acquisitions 3 4 (6%) -Intangible asset write-offs 5 1, (2%) 3 1,( 2%)Note: PFOM is measured as the three-year average value of the difference between actual profits before tax and predictedprofits before tax as a percentage of the absolute value of predicted profits before tax in years 1-3.

Table 5.3 illustrates the ranks of financial restructuring methods of reorganized firms. It can be seen that debt write-off(principal and/or accrued interest) and debt to equity swaps (common share) are the first and second rank respectivelyfor both groups. The major differences were the use of deferment of principal and/or accrued interest by the negativegroup in the third rank, whereas the positive group considered this method at the fifth rank.

Table 5.3 The ranks and prevalence of financial restructuring methods used by two groups of reorganized firmsreporting positive and negative percentage differences in post-bankruptcy performance (PFOM)

Positive group Negative groupMethods: Rank no. of firms Rank no. of firmsIntangible asset write-offs 5 1, (2%) 3 1,( 2%)Debt write-off (principal and/or accrued interest) 1 66 (99%) 1 41 (93%)Debt to equity swaps (common share) 2 42 (63%) 2 27 (61%)Deferment of principal and/or accrued interest 5 38 (57%) 3 25 (57%)Capital reduction from existing shareholders 3 41 (61%) 5 21 (48%)Capital injection from new investors 4 39 (58%) 4 22 (50%)Debt repayment / reschedule / refinance 6 24 (36%) 6 19 (43%)Change in interest rate 6 24 (36%) 7 16 (36%)Settlement of debts with non-equity assets 7 19 (28%) 8 14 (32%)Granting of grace period 8 10 (15%) 9 6 (14%)Debt injection from new investors 9 7 (10%) 12 1 (2%)Capital injection from existing shareholders 10 4 (6%) 10 3 (7%)Debt to equity swaps (convertible debenture/bond) 11 2 (3%) 11 2 (5%)Debt to equity swaps (Preference share) 11 2 (3%) -Note: PFOM is measured as the three-year average value of the difference between actual profits before tax and predictedprofits before tax as a percentage of the absolute value of predicted profits before tax in years 1-3.

CONCLUSION

This research reports on the restructuring methods adopted by Thai firms following post-bankruptcy reorganisation.The study used a unique sample of 111 filing companies whose reorganisation plans have been confirmed by the ThaiCentral Bankruptcy Court during the period 1999-2002, with performance measures through 2005.

For this sample the median post-bankruptcy performance (PFOM) improved over the three year period and also movedcloser to that predicted by the companies each year. The recovery rate from bankruptcy in this study was 60% of thetotal number of companies, 58% for private and 66% for public. This represents an improvement on the findings ofVongvipanond et al. (2002) who reported a 49% recovery rate during the period 1998-2002. It suggests that a majorityof insolvent firms achieve successful reorganization and that the reformed governance mechanisms of the bankruptcyreorganization Act have produced some success.



The study also investigated important details of restructuring strategy implemented by insolvent firms. Among three categoriesof restructuring methods, all firms undertook financial restructuring, sixty-seven firms (60.4%) restructured their operationsand 43 (38.7%) restructured their asset management. Cost reduction, disposal of non-core assets and debt write-off werethe most widely adopted restructure methods. The data suggests that the selection of operational restructuring methodsmay differ between those companies which successfully reform and those which do not. In particular successful companieswhere found to adopt ‘change in management’ as the most common operational strategy, whereas the unsuccessful groupfocused on ‘cost and expense reduction’. This suggests the need for further empirical testing to identify whether thesedifferences are significant, and to identify those specific operational methods which are most likely to improve the financialoutcomes for restructuring companies.

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Daily, C. M. 1996. Governance patterns in bankruptcy reorganisations. Strategic Management Journal. 17 (5): 355-375.Daily, C. M. and Dalton, D. R. 1994a. Bankruptcy and corporate governance: The impact of board composition and

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PEERS

Prof. Dr. Brian Sheehan Dr. Arunee VittayasirinunProf. Dr. Clifford Skousen Dr. Chalong TubsreeProf. Dr. Ian David Smith Dr. Chokchai SuttawetProf. Dr. John D. Wilson Dr. Chulaporn KobjaiklangProf. Rob Evans Dr. dheera PonganunProf. Issara Suwanabol Dr. Katsunori KanekoProf. Rob Evans Dr. Khahan Na-NaaAsso. Prof. Dr. Cheung Wing Sum Dr. Molraudee sratanAsso. Prof. Dr. Supaporn Chengium Dr. Nopraenu TheerathitiAsso. Prof. Dr. Trirat Pokapalakorn Dr. Pak ThaldumrongAsso. Prof. Jeera Prateep Dr. Panu ChaoprichaAsst. Prof. Dr. Sirapatsorn Wongthongdee Dr. Piti SrisangnamAsst. Prof. Dr. Somboon Kulvisaechana Dr. Punnee PimapunsriAsst. Prof. Dr. sombud Kusumavalee Dr. Sadhon PukongAsst. Prof. Dr. Tangon munjaiton Dr. Saratid Tong SakulkooAsst. Prof. Dr. Suree Khemthong Dr. Sooksan KantabutraDr. Surat Pongpipatpanich Dr. Woraphot KantapipatDr. Tanin Kaveevisantagul Dr. Joseph Natawut LeeamornsiriDr. Tawan VigripatDr. Terdsak Rojsurakitti

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