Springer Proceedings in Business and Economics

Springer Proceedings in Business and Economics
S.Chatterjee
N.P.Singh
D.P.Goyal
NarainGupta Editors
Managing in
Recovering
Markets
Springer Proceedings in Business

and Economics
More information about this series at http://www.springer.com/series/11960
S. Chatterjee N.P. Singh D.P. Goyal

Narain Gupta
Editors
Managing in Recovering
Markets
Editors
S. Chatterjee
Operations Management
Management Development Institute
Gurgaon, Haryana, India
N.P. Singh
Information Management
D.P. Goyal
Information Management
Narain Gupta
Operations Management
ISSN 2198-7246
ISSN 2198-7254 (electronic)
ISBN 978-81-322-1978-1
ISBN 978-81-322-1979-8 (eBook)
DOI 10.1007/978-81-322-1979-8
Springer New Delhi Heidelberg New York Dordrecht London
Library of Congress Control Number: 2014951209
Springer India 2015
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About MDI
The Management Development Institute (MDI) a leading B-School located in the

National Capital Region of India was established in 1973 with the active support of
IFCI following an initial grant received from KFW, West Germany. Various national
media surveys have ranked MDI among the top B-Schools of the country consecutively among the last 10 years. The education programs comprise of 2-year full-time
PGPM, PGP-HR, PGP-IM, 15-month executive PGDBM, 3-year executive management program, doctoral level FPM/EFPM, postgraduate program in energy
management, and PG diploma in public policy and management. MDI maintains
high level of academic excellence in management. Various surveys have consistently ranked MDI among the top five B-Schools of the country.
MDI has a well-developed state-of-the-art infrastructure, which includes a
library with a collection of over 60,000 volumes, and online access to international
journals, a computer center with over 500 PCs, air-conditioned lecture halls, and
syndicate rooms, besides a host of other recreational facilities. Above all, MDI has
over 80 full-time faculties who have several years of experience having worked at
senior positions in the industry.
MDI is the first Indian B-School accredited by the coveted Association of MBAs
(AMBA), an international accreditation in London, in 2006. The milestone established the international quality standards of the Institute.
Additionally, MDI has the distinction of being among the few B-schools accredited by South Asian Quality Standards (SAQS) in 2005.
About Partner Institutions
The University of South Australia (UniSA)

The University of South Australia (UniSA) is a globally focused, locally engaged
institution established on the dual principles of equity and excellence. With more
than 33,000 students, the university is South Australias largest and was the youngest
Australian institution to be named in the top 50 of 2013 the Times Higher Educations
top 100 global universities aged under 50. UniSA offers more than 400 degree
programs across a wide range of subjects including business, law, education, arts
and social sciences, health sciences, information technology, engineering, and the
environment. UniSAs commitment to excellence is also reflected in the caliber of
its academics and researchers. The proportion of UniSA staff holding doctorate
qualifications (69 %) remains significantly above the national average. In addition,
the 2012 national Excellence in Research for Australia evaluation reported that
86 % of our assessed research was rated world-class or above.
The Australian Centre for Asian Business (ACAB), UniSA, is located within the
International Graduate School of Business (IGSB), Adelaide, Australia. ACAB
serves both academic and industry needs through high-quality research into Asian
business practices while encouraging the development of collaborative partnerships
between Australian and Asian scholars, businesses, and institutions.
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About Partner Institutions
Faculty of Economics and Business, the University

of Maribor, Slovenia
The University of Maribor, the second largest Slovene university, has provided
prosperous and favorable ground for thriving evolvement of the academic community
ever since the emergence of higher education horizons in 1859. The University of
Maribor offers a strong educational and research infrastructure, where students and
researchers in different points of their career can work in one of the 17 faculties. At
the University of Maribor, the care for research and researchers is of utmost
importance. The University of Maribor cooperates in European Framework
Programs since 1998, and the number of international research projects is increasing
each year. The undergraduate study in academic year 20112012 implies altogether
56 academic- and 25 professionally orientated study programs.
In 2009, the Faculty of Economics and Business (FEB), the University of
Maribor, Slovenia, celebrated its 50th anniversary. The FEB is proud of this 50-year
existence, which presents the tradition in the Slovenian academic area and a high
degree of maturity in the international one. During these 50 years, more than 26,000
students graduated from our Faculty, hence acquiring different professional and
scientific titles. The FEB offers undergraduate, masteral, and doctoral education.
The Faculty of Economics and Business acknowledges research excellence and
interconnectedness of research and pedagogical work of our academic staff and
associates.
In academic year 20112012, there are 3,544 students enrolled in the University
of Maribor postgraduate study programs.
Message from The Director
That the world has been under an economic stress for the last few years is now more
a matter of fact than fiction or speculation. The challenges emanating from this
stress affect not just the livelihoods of people or the geopolitics but goes beyond in
terms of leaving long-lasting scars on the psyche of people and moral of the
economies. But as Shakespeare had said, and it will follow as the night, the
day, the world has to recover from the economic crisis and it will recover, albeit
at different rates of recovery, through different modes of recovery and following
different trajectories of recovery.
The next big managerial challenge before the World is how to manage the
recovery itself in the phase of recovery. And there is not much available as a
research, knowledge, or even information from the past that could guide this phase.
It is therefore imperative that the worlds of practice and academia get together to
chronicle the global practices, thought, endeavor, and experiences of these
challenging times for influencing current practice as well as creating knowledge for
prospective application.
With this purpose, the Management Development Institute, Gurgaon, has set up a
series of conferences under the banner and title of Global Conferences on Managing
in Recovering Markets (GCMRM) to be held as multiple editions over the next 3 years
across different geographies attracting diverse inputs for wider dissemination and a
longitudinal validation. GCMRM is one of the leading special initiatives on Global
Research on Managing in Recovering Markets. Its high-quality research projects, seminars, and publications shall encompass almost all areas and domains of recovering
markets, and thus, it is at the forefront of discussions on the many contemporary issues
of international and regional challenges, opportunities, and strategic responses.
I am delighted to note the active participation and collaboration of the academia
and industry in this endeavor. I hope that this edition of Springer containing the
synthesis of the research papers of GCMRM curtain raiser event shall be the
reference point for future research and application.
MDI
Gurgaon, India
Mukul Gupta
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Message from The Dean Research
It is with deep satisfaction that I write this message for the proceedings of the event
Global Conference on Managing in Recovering Markets organized during 0507
March 2014, at the Management Development Institute, Gurgaon.
The Management Development Institute (MDI), Gurgaon, is the first premier
business school to start an international academic initiative like GCMRM. Since the
last three decades, we have been speaking about emerging markets. The developed
world experienced a downturn and witnessed multiple financial crises. We believed
that the emerging economies would now have management lessons which the
developed nations may like to study and adopt to recover from their crises.
In line with the above premise, we brought an initiative such as GCMRM. The
GCMRM is an initiative largely to organize a series of conferences in different
continents of the world. The structure of the GCMRM is designed in a way that
there is a revisit of one conference every year in the month of March in its home
ground, i.e., MDI Gurgaon. The revisit to MDI is planned in a view to comprehend
the learning from the conferences happening in other continents.
The curtain raiser of the series of conferences under GCMRM was organized
during 0507 March 2014. The first event of the GCMRM was a grand success with
the participation of more than 10 countries and 120 premier business schools across
the globe. The conference was inaugurated with the talks of invited speakers from
academia and industry. The ambassador of Slovenia was guest of honor at the
inaugural event. The GCMRM witnessed an overwhelming participation from
global faculty including MDI faculty and doctoral students.
The conference accepted 118 high-quality research papers, case studies, and
white papers from the industry of which 101 papers were presented in the conference.
A completely blind review process was followed while accepting the papers for the
conference, and further review was done to accept papers for a publication in the
proceedings with Springer. The conference had a very fruitful discussion and
exchange of thoughts. The conference was organized with three to four parallel
panels of presentation with a total of 20 tracks. The conference was able to help
develop an interface between multiple management universities, business schools,
and industry.
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Message from The Dean Research
I am delighted to witness a large participation, and this proceeding would leave

the mark of the event in the academia and industry. I hope that the researchers and
industry will be able to find this proceeding as an opportunity for future direction of
research and industrial applications.
I wish to thank everyone for making this event a grand success and a good start
towards the organization of the series of conference on the theme Managing in
Recovering Markets and feel convinced that GCMRM endeavor is the right platform to discuss, deliberate, and seek credible solutions and implications of the
global economic scenario.
N.P. Singh
Preface
The Management Development Institute (MDI) in association with its worldwide

partner institutions has set the agenda by initiating a series of global conferences on
the theme of Managing in Recovering Markets. The curtain raiser event was held at
MDI, Gurgaon campus, from 5 to 7 March 2014.
In the last two decades, extensive research has been undertaken on the topic of
emerging markets with a number of international conferences and articles being
reported on it. At that time the developed markets saw an opportunity in the
developing and emerging markets. However, the scenario changed as the developed
markets faced severe financial turbulence in the past decade. This in turn influenced
the overall growth of the emerging as well as the developed markets. What resulted
was an initial stagnation in certain markets followed by signs of recovery. MDI has
outlined the discourse of the current conference in view of the need for extensive
research on this topic.
The first conference of the series of global conferences on the theme Managing
in Recovering Markets in March 2014 was held at the campus of MDI in Gurgaon
(India) in association with Australian Centre for Asian Business, the University of
South Australia, Adelaide, Australia, and Faculty of Economics and Business, the
University of Maribor, (Maribor) Slovenia.
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Preface
The conference served as a platform for researchers, business practitioners, academics, policy-makers, entrepreneurs, and media persons and deliberated upon the
causes and consequences of the evolving environment as also the challenges emanating therefrom. It set the tone through strategic responses to these challenges and
identifying required areas of development and research for managing recovering
cross-country markets. Around 120 paper presentations in the conference covered a
wide range of management disciplines and set the agenda for the forthcoming global
conferences planned in year 2014, 2015, and 2016.
MDI strategizes to conduct four international conferences every year for the next
3 years with the primary objective of enhancing research in the stated area. Carrying
the agenda forward, MDI plans to conduct the following conferences in the
coming days.
2nd edition of the conference from 17to 19 September 2014 at Bangkok, Thailand
3rd edition of the conference from 8 to 9 November 2014 at Australia Business
School Adelaide, Australia
4th edition of the conference in December 2014 in African continent
The three conferences above will be followed by a conference at MDI, Gurgaon,
India, from 11 to 13 March 2015, followed by a conference in May 2015 at Maribor,
Slovenia. There will be further deliberations on the topic thereafter in the period
20152017 through subsequent conferences.
GCMRM Chair
Gurgaon, India
S. Chatterjee
Contents
A Dynamic Conditional Correlation Analysis-Based Approach

to Test Financial Contagion in Developing Markets ............................
Shegorika Rajwani and Dilip Kumar
Achieving Business Agility Through Service-Oriented

Architecture in Recovering Markets .....................................................
Sangeeta Shah Bharadwaj, Sumedha Chauhan, and Aparna Raman
15
An Analysis of Foreign Direct Investment

with Special Reference to Indian Economy ..........................................
A. Neelima, Mridul Dharwal, and K.R. Gola
27
An Empirical Analysis of Price Discovery

in Indian Commodity Markets ..............................................................
Shelly Singhal and Sunil Ashra
41
An Empirical Study on Factors Affecting Faculty

Retention in Indian Business Schools....................................................
Prabjot Kaur
63
An Empirical Study on the Relationship Between Emotional

Intelligence and Job Performance Among IT Sector Employees .......
Pranjali Madhur
75
An Empirical Study to Determine the Significant

Predictors of Trust in Government Hospitals.......................................
Amrita Sandhu
87
An Exploration into the Nature of Comments

on Facebook (Page of Large Indian Organizations) ............................ 103
Rajan Yadav
Analysis of Perception of Customers

of Bata India Limited Products ............................................................. 113
N.P. Singh, S.K. Sharma, D. Singh, and S. Kalra
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Contents
10 Applications of Mathematical Programming Models

for Product Mix Optimization in World Steel Industry:
Challenges and Directions ...................................................................... 133
Shikha Aggarwal and Narain Gupta
11
Behavioral Finance: A Study of Correlation Between

Personality Traits with the Investment Patterns
in the Stock Market ................................................................................ 143
Saima Rizvi and Amreen Fatima
12
Brand Trust and Country of Origin: Pointers

for Research in an Emerging Market.................................................... 157
Harvinder Singh
13
Capturing Indian Rural Market Through

a Proactive Tool: Reverse Innovation .................................................... 167
Rati Dhillon
14
Capturing the Brand Essence and Communication

Commonalties of a Western Brand in an Eastern Country ................ 183
Kanwal Kapil and Avinash Kapoor
15
Considerations in Medical Software Purchase:

Evidence from Dentistry in India .......................................................... 193
Jaydeep Mukherjee
16
Counterfeit Purchase Intentions Among College Students:

An Empirical Investigation .................................................................... 213
Rojalin Mishra and Asmita Shukla
17
Critical Factors Within Organizations Influencing

Effective Use of CRM Solutions............................................................. 223
ebjan Urban, Samo Bobek, and Tominc Polona
18
Customer Voices Incorporated in a Marketing Class: A Review ....... 235

Kirti Sharma, Jaydeep Mukherjee, and Mukul P. Gupta
19
Demutualisation of Stock Exchanges in India:

The Corporate Governance Chapter .................................................... 241
Sandeep Goel
20
Determining the Optimal Price Point: Using Van

Westendorps Price Sensitivity Meter ................................................... 257
Sakhhi Chhabra
21
Do Middle-Level Managers Have a Role in Strategy

Formulation and Implementation? Insights into
an Indian Public and Private Sector Organization .............................. 271
Meeta Dasgupta
Contents
xvii
22
ERP Business Solutions Acceptance in Companies ............................. 283

Simona Sternad Zabukovek and Samo Bobek
23
Exploring the Linkages Between Human Resource

Configuration and Knowledge Management Process:
A Strategic Human Resource Management Perspective ..................... 295
Bindu Singh and M.K. Rao
24
Green Work-Life Balance....................................................................... 303

Harshita Singh and Jyotsana Bhatnagar
25
Impact of CSR-Driven Internal Employee

Motivation on Cordiality of Employee Relations ................................. 315
Sharad Agarwal, Yashwant Singh Yadav, and Abhilash Acharya
26
Improving Efficiency of Emerging Market Banks: A Matter

of Ownership, Control, or Getting Ones Hands Dirty? ..................... 327
Giang Phung and Michael Trge
27
Influence of Drivers for Store Choice

on Store Selection and Loyalty .............................................................. 343
Deependra Sharma and Pankaj Madan
28
ISFTA: Lessons for Bangladesh ............................................................. 351

Kumar Gaurav, Nalin Bharti, and Priyanka Sinha
29
Japans Recovery from the Lost 20 Years ......................................... 369

Susumu Yamamoto
30
Crisis Communication in the Digital Era ............................................. 377

Gita Bajaj, Anandan Pillai, and Rajen Gupta
31
Mutual Impacts of Human Resources Management

and Knowledge Management: Issues of Functions
and Effective Factors .............................................................................. 395
Jelena Horvat and Samo Bobek
32
Preselection of Contractors Before Inviting

for Bidding Using AHP ........................................................................... 403
Satyendra Kumar Sharma
33
Role of Passion in Organizational Cynicism: A Mediating

Effect of Sustainable Leader in the Process Model.............................. 415
Niharika Gaan
34 The Role of Technological Innovation in Managing

Through Business Cycles: A Study on Indian ICT Firms ................... 427
Arindam Das and Sheeba Kapil
35
Sustainable Supplier Selection: A Case of Indian SME ...................... 441

Jitendar Bittoo Khatri and Manoj Srivastava
xviii
Contents
36 The Cyber Security Ecosystem: Post-global Financial Crisis ............. 453

Saini Das
37 The Impact of Gold Price Changes on Saudi Stock Market ............... 461
Durga Prasad Samontaray and Ahmed Awad Alanuzi
38 Waning the Challenges in the Implementation
of Supply Chain Management Information System:
A Study of the Indian Automobile Industry ......................................... 473
Manisha Seth, Ravi Kiran, and D.P. Goyal
About the Editors
S. Chatterjee is a Professor in Operations Management and Dean (Consulting and

Executive Development) at the Management Development Institute, Gurgaon, India.
Prior to this, he was teaching and consulting in the same area at the Administrative
Staff College of India, Hyderabad, since 2002. A mechanical engineer from BITS
Pilani, India, he obtained his management postgraduate diploma from IIM Bangalore,
India. He has a PhD in Materials Management from Barkatullah University, Bhopal,
India, while working with Bharat Heavy Electricals Limited (BHEL) at Bhopal. He
has executed a number of consultancy assignments, the major ones among them being
the restructuring of the Directorate General of Foreign Trade, restructuring of
Engineers India Limited, work study of banking hall activities of Reserve Bank of
India, Mumbai, and manpower assessment for Hyderabad Traffic Police. Dr. Chatterjee
has authored a book, Applied Materials Management, published by Sage Publications
India Private Ltd in 2005. His areas of interest include materials management, project
management, supply chain management, and international trade and logistics.
N.P. Singh is a Professor of Information Management and Dean (Research and
Accreditation), Management Development Institute, Gurgaon, India. Prior to this,
he was at the National Institute of Financial Management (Faridabad, India),
Institute of Rural Management (Anand, India), and Haryana Agricultural University
(Hissar, India). Dr. Singh was awarded the Young Scientist Award by the Indian
Society of Agricultural Statistics. His areas of interest are business intelligence, data
warehouse, data mining, telecom management, and optimization models. He has
worked as a consultant to the Ministry of Finance, Government of Sri Lanka (Asian
Development Bank funded Project), a reviewer to the Ministry of Tertiary Education
Government of Sri Lanka (World Bank funded Project), ATI Washington and with
Indian organizations such as Karnataka Milk Federation, National Dairy
Development Board (Mother Dairy, Delhi), North East Council, Ministry of
Consumer Affairs, Ministry of HRD, Food Corporation of India, Security Printing
and Minting Corporation of India Limited, Minister of Information Technology,
National Scheduled Tribes Finance and Development Corporation, and National
Thermal Power Corporation, among others.
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About the Editors
Dr. D.P. Goyal is a Professor of management information systems and Dean of

Executive Graduate Programs at the Management Development Institute (MDI),
Gurgaon. A Postgraduate in Business Management and a Doctor in management
information systems, Prof. Goyal has more than 27 years of corporate, teaching, and
research experience to his credit. His teaching and research interest areas include
management information systems, IS strategy, knowledge management, IS value
for business, and business process management.
Narain Gupta is an Assistant Professor in Operations Management at the
Management Development Institute, Gurgaon, India. He received his doctoral
degree FPM (Fellow Programme in Management) from the Department of
Production and Quantitative Methods of Indian Institute of Management,
Ahmedabad, India. He has a US Copyright for an optimization-based decision support system. In addition, the corporate that he worked for earlier, Global eProcure,
obtained a US Patent on his name for one algorithm developed by him for AutoClassification of Spend-Data Visibility. Dr. Gupta has traveled to multiple counties
including the USA, Denmark, China, the UAE, and Singapore for teaching, training, consulting, and conference presentations. He has published in national and
international journals and presented his research in international conferences. His
areas of research interest are strategic integrated supply chain planning, decision
support system, mathematical modeling, process optimization, procurement analytics, and strategic sourcing, with particular interest in revenue optimization, project
management, and services operations management.
Contributors
Abhilash Acharya IIM, Ranchi, India

Sharad Agarwal IIM, Ranchi, India
Shikha Aggarwal MDI, Gurgaon, India
Ahmed Awad Alanuzi STC, Riyadh, Kingdom of Saudi Arabia
Sunil Ashra MDI, Gurgaon, India
Gita Bajaj MDI, Gurgaon, India
Sangeeta Shah Bharadwaj MDI, Gurgaon, India
Nalin Bharti IIT, Patna, India
Jyotsana Bhatnagar MDI, Gurgaon, India
Samo Bobek University of Maribor, Maribor, Slovenia
Sumedha Chauhan MDI, Gurgaon, India
Sakhhi Chhabra MDI, Gurgaon, India
Arindam Das IIFT, New Delhi, India
Saini Das IIM, Indore, India
Meeta Dasgupta MDI, Gurgaon, India
Mridul Dharwal University of Rajasthan, Jaupir, India
Rati Dhillon Bharti College, University of Delhi, New Delhi, India
Amreen Fatima Lucknow University, Lucknow, Uttar Pradesh, India
Niharika Gaan MDI, Murshidabad, Kolkata, India
Kumar Gaurav IIT, Patna, India
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Contributors
Sandeep Goel MDI, Gurgaon, India

K.R. Gola Sharda University, Greater Noida, India
D.P. Goyal MDI, Gurgaon, India
Mukul P. Gupta MDI, Gurgaon, India
Narain Gupta MDI, Gurgaon, India
Rajen Gupta MDI, Gurgaon, India
Jelena Horvat University of Zagreb, Varadin, Croatia
S. Kalra MDI, Gurgaon, India
Kanwal Kapil MDI, Gurgaon, India
Sheeba Kapil IIFT, New Delhi, India
Avinash Kapoor MDI, Gurgaon, India
Prabjot Kaur Uttarakhand Technical University, Dehradun, India
Jitendar Bittoo Khatri MDI, Gurgaon, India
Ravi Kiran Thapar University, Patiala, Punjab, India
Dilip Kumar Institute for Financial Management and Research, Chennai, India
Pankaj Madan Gurukul Kangri Vishwavidyalaya, Haridwar, India
Pranjali Madhur MAEERs Maharashtra Institute of Technology, Pune,
Maharashtra, India
Rojalin Mishra IIT, Bhubaneswar, India
Jaydeep Mukherjee MDI, Gurgaon, India
A. Neelima Sharda University, Greater Noida, India
Giang Phung ESCP Europe, Paris, France
Anandan Pillai MDI, Gurgaon, India
Tominc Polona University of Maribor, Maribor, Slovenia
Shegorika Rajwani IIFT, New Delhi, India
Aparna Raman MDI, Gurgaon, India
M.K. Rao IIT, Roorkee, India
Saima Rizvi IILM, Gurgaon, India
Durga Prasad Samontaray King Saud University, Riyadh, Kingdom of Saudi
Arabia
Amrita Sandhu MDI, Gurgaon, India
Contributors
Manisha Seth Hierank Business School, Noida, India

Deependra Sharma Amity University Haryana, Gurgaon, India
Kirti Sharma MDI, Gurgaon, India
S.K. Sharma MDI, Gurgaon, India
Satyendra Kumar Sharma BITS, Pilani, India
Asmita Shukla IIT Bhubaneswar, Bhubaneswar, Odisha, India
Bindu Singh IIT, Roorkee, India
D. Singh MDI, Gurgaon, India
Harshita Singh MDI, Gurgaon, India
Harvinder Singh IMT, Ghaziabad, India
N.P. Singh MDI, Gurgaon, India
Shelly Singhal MDI, Gurgaon, India
Priyanka Sinha IIT, Patna, India
Manoj Srivastava MDI, Gurgaon, India
Michael Trge ESCP Europe, Paris, France
ebjan Urban University of Maribor, Maribor, Slovenia
Rajan Yadav Delhi Technological University, New Delhi, India
Yashwant Singh Yadav IIM, Ranchi, India
Susumu Yamamoto Ritsumeikan Asia Pacific University, Oita, Japan
Simona Sternad Zabukovek University of Maribor, Maribor, Slovenia
xxiii
Chapter 1
A Dynamic Conditional Correlation

Analysis-Based Approach toTest Financial
Contagion inDeveloping Markets
ShegorikaRajwani andDilipKumar
Abstract This paper examines the contagion from US and Britain markets to Asian
markets, namely, China, Japan, India, and Malaysia. The period of study spreads
over 6years from January 3, 2006, to December 19, 2011. We split the study period
into three sub-periods which include: (1) pre-crisis period or quiet period from
January 3, 2006, to July 31, 2007; (2) crisis period from August 1, 2007, to February
26, 2010; and (3) post-subprime crisis period from February 27, 2010, to December
19, 2011. The sub-periods have been taken based on the recommendations by Horta
etal. (Contagion effects of the subprime crisis on developed countries, CEFAGEUE working papers 2009/01, University of Evora, CEFAGE- UE, Portugal, 2009)
and Naoui etal. (Int J Econ Financ 2(3):8596, 2010a, J Bus Stud Q 2(1):1528,
2010b). The significant change (increase) in the degree of correlation has been taken
as a measure of contagion. We model the time-varying conditional correlation using
bivariate dynamic conditional correlation generalized autoregressive conditional
heteroskedasticity (DCC GARCH) model for all the three sub-periods separately
for US-Asian market and Britain-Asian market pairs. We observe significant contagion effect from US and Britain stock markets to all Asian markets during the period
of subprime crisis. However, after subprime crisis, we do not find any evidence of
contagion from the USA to Japan and China and from Britain to China.
Keywords Contagion Stock markets Financial crisis Interdependence DCC
GARCH
S. Rajwani (*)
Research Scholar, Research Division, Indian Institute of Foreign Trade,
New Delhi, India
e-mail: [email protected]
D. Kumar
Senior Faculty Associate, Department of Finance, Editorial Associate, Journal
of Emerging Market Finance (Sage Publication), Institute for Financial Management
and Research, 24, Kothari Road, Nungambakkam, Chennai 600034, India
e-mail: [email protected]; [email protected]
Springer India 2015
S. Chatterjee et al. (eds.), Managing in Recovering Markets, Springer
Proceedings in Business and Economics, DOI 10.1007/978-81-322-1979-8_1
S. Rajwani and D. Kumar
1 Introduction
Repeated occurrence of crisis and crashes in the international financial markets has
drawn interest of researchers around the globe to explore the interlinkages among
the financial markets of various economies. The Great Depression in 1929, the
Exchange Rate Mechanism (ERM) attacks of 1992, the Mexican crisis in 1994,
the East Asian crisis of 1997, the Russian collapse of 1998, the terrorist attack in
the USA in 2001, the subprime crisis in the USA, and the current European debt
crisis in European region, almost all these crises originated in one country but the
tremors were felt in different countries of different shapes, sizes, and fundamentals
(Forbes and Rigobon 2002; Gallegati 2012). Hence, a need is felt to examine the
transmission of shocks from one country to another, maybe due to integration of
financial and commodity markets.
To understand the propagation mechanism of shocks from one country to another,
one needs to differentiate between interdependence and contagion. Emerging
markets have been hit most of the times as they have underdeveloped financial markets, structures, and large public deficits (Billio and Pelizzon 2003). They have a
tendency to catch cold first if any developed market gets pneumonia. A rationale
behind this phenomenon is that the countries have similar policy framework or
macroeconomic fundamentals. They might also have trade linkages or similar investor
group and behavior. The impact of shock might be different for different countries
due to their structural framework and many other factors. On the other hand, it is
difficult to sense the impact of crisis in one country on those economies which do
not share similar trade and other macroeconomic fundamentals. Thus, a need was
felt to understand the tequila effect of the markets.
The US subprime crisis increased the interest among the researchers to examine
the impact of country-specific crisis on the other parts of the world. The researches
done till now show somewhat mixed results. Using VAR model, Majid and Kassim
(2009) have found high degree of integration between the US market and Malaysia
and Indonesia. Karim etal. (2011) did not find the impact of the US crisis on the
long-run co-movement among the stock index futures markets from Japan,
Singapore, China, and Thailand. Naoui et al. (2010b) find significant conditional
correlation between emerging markets and US markets except for the Chinese market based on the DCC GARCH model. Celik (2012) examines the contagion was
found for most of the developed and emerging countries using DCC GARCH
approach. On the other hand, Naoui et al. (2010a) find that Brazil, Mexico, and
Argentina have very high correlation with the US market, unlike China, Hong Kong,
Korea, and Tunisia. Using copula approach, Wen etal. (2012) examine the contagion between the energy market and stock market during the US subprime crisis.
Gallegati (2012) find that Brazil and Japan are the only countries (out of the countries under study) which showed contagion at all scales with the US market using
wavelet approach.
The existing literature has thrown some light on the issue of contagion on the
emerging and developed markets; hardly any study has been done to examine the
impact of the US mortgage crisis on the Asian markets, namely, China, Japan, India,
and Malaysia. Of late, new terms have emerged to define various emerging economies
1 A Dynamic Conditional Correlation Analysis-Based Approach toTest Financial
like BRIC, BRIICKS, BRICET, etc. This paper seeks to examine the existence of
contagion in the Asian economies from the US market, pre and post the subprime
crisis. The data used in this study are daily closing stock market indices of the above
markets, spanning over a period of 6years from January 3, 2006, to December 19,
2011. Policy makers seek to study the existence of contagion among markets so that
they can strategically manage risk and it further helps in assetallocation. If the markets are contagious, then the investors will be unable to reap benefits through international diversification of portfolio. In such a case, the policy makers will further
frame policies so that they can insulate themselves from inflicting heavy damage
from various crises.
The onset of subprime crisis has further given food for thought to the researchers
in exploring the effects of the financial crisis on the Asian markets. Post the Great
Depression, the subprime crisis has been labeled as the worst financial crisis (Jaffee
2008). The crisis has not only affected the financial markets of the USA but has also
affected other financial markets worldwide (Majid and Kassim 2009). Our contribution to the existing literature is to study the impact of US subprime crisis on few
Asian financial markets by using DCC GARCH model by dividing the data into
pre-crisis, during crisis, and post-crisis period. The findings of the study may be
useful for the investors who diversify their portfolio internationally and make capital budgeting decisions in these regions.
The rest of the paper is organized in the following way. In Sect.2, a brief review
of literature is conducted to identify the lacunae in the existing studies and focus on
the specific objectives of the present study. Section3 presents the econometric
methodology. Section4 describes the data used. Section5 provides the empirical
results, followed by concluding observation in Sect.6.
2 Present State oftheArt

During periods of high volatility, markets tend to be correlated which in turn has
important implications on policy formulation for international portfolio diversification, capital adequacy, and risk management strategy by managers (Billio and
Pelizzon 2003). Studies on integration have potential benefits of assetallocation and
financial stability of a country (Ibrahim 2005). Capital mobility and removal of
barriers between countries have increased the movement of capital and, thus, the
need for international portfolio diversification and risk reduction. This has increased
the need to study correlation patterns among countries, especially during turbulent
times. It is generally understood that the correlation among markets may differ
drastically during quiet period versus crisis period. This will further help investors
in hedging their positions in the market to avoid losses. Hence, a need was felt
to study whether markets are interdependent on each other. This further gives rise to
clarify the definition of interdependence and how it is different from contagion.
Lot of research has been done on contagion, but the researchers have not been
able to arrive at a professional consensus, and hence, it remains as the most debated
topic. Following Forbes and Rigobon 2002, contagion is defined as a significant
increase in the cross market correlation during the period of crisis. To infer
whether there exists contagion between any two countries, one needs to compare the
correlation between the countries, pre (before/tranquil) and during (turmoil) the
crisis. If a country is hit by a crisis; the correlation between the countries significantly increases from tranquil period to period of turmoil; then there exists contagion between the countries. However, if two countries are highly correlated and
remain highly correlated post the crisis too, then the countries are said to be interdependent on each other. This is so because crisis in one country did not lead to significant increase in correlation between the countries. Interdependence between
countries is when they are highly/strongly correlated in tranquil times.
Several economies have experienced crisis in the recent past. This has drawn
attention of various researchers, academicians, and policy makers. Further, in recent
past, various emerging economies have opened up to international investors and
companies for investment and trade. International linkages have been increasing,
especially for stocks traded in major financial markets (Goldstein and Michael
1993). Thus, integration among the financial markets has increased due to stock
market crash of October 1997 and Asian crisis of 1997 (Lee and Kim 1993;
Arshanapalli and Doukas 1993; Francis etal. 2002; Yang etal. 2003; Hwahsin and
Glascock 2006; Karim and Majid 2009). If the markets are integrated, then the
returns from international diversification will tend to diminish.
Previous studies on the integration of Asian stock markets have given mixed
results. No contagion between US and various Asian markets has been reported by
Chan etal. (1992) and Ibrahim (2005). However, evidences of cointegration among
Asian emerging markets and developed markets were found (Arshanapalli etal.
1995; Masih and Masih 1999; Majid etal. 2008; Karim and Majid 2009). In a more
recent study on the impact of the US subprime crisis on the integration and co-
movements of emerging stock markets, namely, Malaysia and Indonesia, it was
found that the stock markets tend to show greater degree of integration during the
crisis period than during tranquil period (Majid and Kassim 2009). Studies conducted previously on US markets suggest that the US market is one of the most
influential stock markets in the world. It was found that the US market is a global
factor which affects most of the Asian markets (Cheung and Mak 1992). It was
further found that the ASEAN markets show greater degree of influence toward US
stock markets than the Japanese market (Arshanapalli etal. 1995; Ibrahim 2005;
Majid etal. 2008). The Japanese stock market was found to significantly move the
Malaysian market compared to the US during the post-crisis period (Yusof and
Majid 2006; Karim and Majid 2009).
There have been different views on the impact of the US subprime crisis on the
Asian markets. These views focus on international linkages and have been categorized as coupling versus decoupling debate. The decoupling theory argues
whether the emerging Asia is decoupling itself from the global business cycle. The
theory suggests that the strong growth in the Asian region and the rising purchasing
power will increase Asias own final demand, and it may weather out the adverse
consequences of the US subprime crisis (Majid and Kassim 2009; Raj and Dhal
2008). The coupling theory is of the view that focuses more on global linkages of
Asian economies. The demand of intermediate goods has increased over a period of
time within the Asian region. This may due to increased trade among countries in
the Asian region or increase in the exports made by Asian countries to countries in
other parts of the world. It was further suggested that the rapid economic integration
within Asian region is linked to global integration. Instead of decoupling, the
emerging Asia has rather been coupling with countries like the USA, the UK, and
Japan (Kim etal. 2011).
3 Methodology
3.1 DCC GARCH Model
In the empirical analysis, DCC GARCH model of Engle (2002) is being used to test
the contagion during global financial crisis. The major advantages of using the
model are as follows:
(a) The model helps in the detection of possible of changes in conditional correlations over time, which allows us to detect dynamic investor behavior in response
to news and innovations.
(b) The DCC measure is appropriate to investigate possible markets during crisis
periods (Corsetti etal. 2005; Boyer etal. 2006; Chiang etal. 2007; Syllignakis
and Kouretas 2011).
(c) The DCC model estimates the correlation coefficients of the standardized residuals and so accounts for heteroskedasticity directly (Chiang etal. 2007).
(d) Since the volatility is adjusted by the procedure, the time-varying correlation
(DCC) does not have bias from volatility. Unlike the volatility-adjusted cross-
market correlations employed in Forbes and Rigobon (2002), DCC GARCH
continuously adjusts the correlation for time-varying volatility. Hence DCC
GARCH provides a superior measure for correlation (Cho and Parhizgari 2008).
The multivariate DCC GARCH model is defined as follows:
e i ,t = zi ,t hi ,t
(1.1)
hi ,t = w i 0 + a i j e 2j,t 1 +
j =1
j =1
ij
h j,t 1 ,
(1.2)
for i, j =1,2

where zi,t is the standardized residual and hi,t is the conditional variance.

H t = Dt Pt Dt
(1.3)
where Ht is the 22 conditional covariance matrix, Pt is the conditional correlation

matrix, and Dt is a diagonal matrix with time-varying standard deviations.

Dt = diag
h11 , h22
(1.4)
and
Pt = diag (Qt )
1/ 2
)Q diag ((Q ) )
1/ 2
(1.5)
where Qt is a (22) symmetric positive definite matrix, Qt= (qtij), and is given as
Qt = (1 q1 q 2 ) Q + q1 zt 1 zt 1 + q 2Qt 1
(1.6)
where Q is a (22) matrix of the unconditional correlation of standardized residuals.

1 and 2 are nonnegative scalars and it is assumed that 1+2<1. The estimates of
correlation are given as
r i , j ,t =

qi , j ,t
qi ,i ,t q j , j ,t
The diagonal bivariate GARCH model assumes the dynamic conditional correlation
between asset returns to be zero, i.e., i,j,t=0 for all i and j. On the other hand, the
constant conditional correlation considers Pi,j=i,j and Pt=P.
3.2 C
ontagion Effect Test withDynamic Conditional
Correlation Coefficient
To test the consistency of dynamic correlation coefficients between international
stock markets in the pre-crisis and crisis periods to judge the contagion effect, we
use t-statistics. We define null and alternative hypothesis as
H 0 = m r crisis = m r pre-crisis, H1 = m r crisis m r pre-crisis
(1.7)
where pre-crisis and crisis are conditional correlation coefficient means of population
in the pre-crisis and crisis periods. If the sample sizes are ncrisis and npre-crisis, the
population variances 2crisis and 2precrisis are different and unknown. The means of
dynamic correlation coefficients estimated by DCC are ijcrisis and ijprecrisis and the
variances are s2crisis and s2precrisis, the t-statistic is calculated as
(r
t=

2
where scrisis
=
crisis
ij
ncrisis
pre-crisis
r ij
) (m
crisis
p
2
2
spre-crisis
scrisi
is
+
n cirsis
n pre-cirsis
1
2
r- crisis
(r crisis
ij
ij )
n crisis 1 t =1
m ppre-crisis
))
(1.8)

2
pre-crisis
npre-crisis
n pre-crisis 1
t =1
v=
2
r- crisis
( r crisis
; the degree of freedom v is
ij
ij )
s 2 crisis s 2 pre-crisis
n crisis + n pre-crisis
s 2 pre-crisis
s 2 crisis
n pre-crisis
n criisis
+
n crisis 1
n pre-crisis 1
(1.9)
If t-statistics is significantly greater than the critical value, H0 is rejected supporting the existence of contagion effect.
4 Data andPreliminary Analysis

Data employed in this study are log returns of daily closing stock market indices for
the USA, the UK, India, Japan, Malaysia, and China. The various indices that have
been considered in the current study are shown in Table1.1.
The period of study spreads over a period of 6years starting from January 3,
2006, to December 19, 2011 (1,118 observations). The data have been compiled
from Bloomberg.
Determination of crisis period is a very difficult decision (Kaminsky and
Schmukler 1999). We split the study period into three sub-periods which include:
(1) pre-crisis period or quiet period from January 3, 2006, to July 31, 2007; (2)
crisis period from August 1, 2007, to February 26, 2010; and (3) post-subprime
crisis period from February 27, 2010, to December 19, 2011. The sub-periods have
been taken based on the recommendations by Horta etal. (2008) and Naoui etal.
(2010a, b). The significant change (increase) in the degree of correlation has been
taken as a measure of contagion. To avoid spurious results, we eliminated those
observations where data were unavailable, because of holidays or other reasons,
for at least one market.
Table 1.1 Detail of indices

used
Country
India
China
Japan
Malaysia
USA
UK
Index
BSE SENSEX
Shanghai Stock Exchange
Composite Index (SSECI)
Nikkei 225
FTSE Bursa Malaysia Index
S&P 500
FTSE 100
Tables1.2, 1.3, and 1.4 provide the descriptive statistics of returns of the data
under study for pre-crisis, crisis, and post-crisis periods. During the pre-crisis
period, the average returns of all the economies under study are positive. All the
returns series exhibit lower volatility (with respect to data from the crisis period).
Moreover, all returns series are negatively skewed and exhibit significant excess
kurtosis (leptokurtic behavior). During the crisis period, except for India, all other
index returns are negative, are extremely volatile, and exhibit significant excess
kurtosis. During this period, except for the UK and India, all other series are negatively skewed. During the post-crisis period, the US, the UK, and Malaysia exhibit
positive returns and China, Japan, and India exhibit negative average returns. During
this period, all returns series are negatively skewed (except for India) and exhibit
significant excess kurtosis. Overall, it can be said that the Asian markets are
Table 1.2 Descriptive statistics for the pre-crisis period (January 3, 2006, to July 31, 2007)
Minimum
Maximum
Mean
Std. dev.
Skewness
Kurtosis
USA
0.0353
0.0213
0.0005
0.007765
0.48833
2.182609
UK
0.0338
0.0245
0.0004
0.00876
0.64271
1.966056
China
Japan
0.1130
0.0511
0.0792
0.0677
0.0045
0.0002
0.021828
0.013368484
0.93979 0.15278081
5.252802
2.864585552
Malaysia
India
0.0603
0.0700
0.0272
0.0667
0.0014
0.0017
0.009036
0.018207
1.52289 0.48321
10.22024
2.386992
Table 1.3 Descriptive statistics for the crisis period (August 1, 2007, to February 26, 2010)
Minimum
Maximum
Mean
Std. dev.
Skewness
Kurtosis
USA
0.1378
0.0940
0.0006
0.022047
0.70308
5.321786
UK
0.1033
0.0982
0.0004
0.020916
0.028354
3.811992
China
0.1276
0.0933
0.0008
0.026945
0.04862
1.786665
Japan
0.1292
0.0999
0.0011
0.024281
0.90558
5.631415
Malaysia
0.0873
0.0581
0.0002
0.013293
0.60211
7.178117
India
0.1280
0.1611
0.0001
0.027252
0.181091
4.460316
Table 1.4 Descriptive statistics for the post-crisis period (February 27, 2010 to December 19,
2011)
Minimum
Maximum
Mean
Std. dev.
Skewness
Kurtosis
USA
0.0690
0.0551
0.0003
0.015345
0.28104
2.586436
UK
0.0541
0.0508
0.0000
0.013985
0.04212
2.021205
China
0.0558
0.0422
0.0009
0.014943
0.50521
1.580044
Japan
0.1115
0.0552
0.0006
0.015768
1.10377
7.780096
Malaysia
0.0423
0.0266
0.0004
0.007709
0.96221
5.394022
India
0.0446
0.0620
0.0002
0.013939
0.322559
1.567363
impacted by the US subprime crisis as well as the European debt crisis (negative
returns in the post-crisis period).
5 Empirical Results
Figure1.1 reports the time-varying conditional correlations estimated from DCC
GARCH model for US-Asian market and UK-Asian market pairs. We observe
wider fluctuations in the conditional correlations during the period of subprime
0.098983
0.45
US- China
0.0989828
0.3
0.2
20
06
20
Time
07
08
20
08
20
08
20
09
20
09
20
09
20
10
20
10
20
10
20
11
20
11
20
11
2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
20
0.0989812
07
07
0.05
20
0.1
0.0989814
20
0.0989816
06
0.15
06
0.098982
0.0989818
0.25
20
0.0989822
20
0.0989824
Correlation
Correlation
UK- China
0.4
0.35
0.0989826
Time
0.6
0.8
US- Japan
0.5
UK- Japan
0.7
0.4
Correlation
Correlation
0.6
0.3
0.2
0.5
0.4
0.3
0.2
0.1
0.1
0
2006
2007
2008
2009
2010
0
2006
2011
2007
2008
0.241834
2010
2011
2010
2011
0.5
Correlation
Correlation
2011
UK- Malaysia
0.6
0.24183
0.241828
0.241826
0.241824
0.4
0.3
0.2
0.241822
0.1
0.24182
0
2006
0.241818
2006
2010
0.7
US- Malaysia
0.241832
2009
Time
Time
2007
2008
2009
2010
2011
2007
2008
0.6
2009
Time
Time
1
US - India
UK- India
0.8
0.5
0.4
Correlation
Correlation
0.6
0.3
0.2
0.4
0.2
0
-0.2
0.1
-0.4
0
2006
-0.6
2007
2008
2009
Time
2010
2011
2006
2007
2008
2009
Time
Fig. 1.1 Time-varying conditional correlation estimated by DCC GARCH model
10
crisis (20072009) for all US-Asian market and UK-Asian market pairs under
study. We also observe volatility in the correlations of UK-Asian market pairs during the period of European debt crisis (20092011). This indicates that indeed the
crisis in developed markets impacts the developing markets.
Table 1.5 reports the unconditional correlations estimated using conventional
approach and the average of the dynamic conditional correlations for pre-crisis,
crisis, and post-crisis periods. Results indicate that except for China, all other Asian
markets exhibit increase in conditional correlation with respect to the US market
during the period of subprime crisis. Further, similar findings are observed with
unconditional correlation approach. After subprime crisis, we observe increase in
conditional correlation for US-Malaysia and US-India pairs. The US-Japan pair
does not exhibit any significant change in the average conditional correlation value;
however, the unconditional correlation for US-Japan exhibits significant decline
during the post-crisis period.
For the UK-Asian market pairs, the average values of conditional correlation and
the unconditional correlation exhibit significant increase in the crisis period with
respect to the pre-crisis period. Except for UK-China pair, all other UK-Asian market pairs exhibit decline in the correlation in the post-crisis period with respect to
the crisis period. The UK-China pair also exhibits decline in the correlation value,
but decline is very small with respect to other cases. These findings indicate that the
Asian markets are influenced by the movements in developed markets.
Table 1.6 reports the results of t-test to examine the significant change in the
conditional correlation in the US-Asian market and UK-Asian market pairs over
the pre-crisis and crisis period and crisis and post-crisis period. Results support the
significant contagion from the US and UK markets to Asian markets over the study
period with the exceptions for US-Japan and UK-China pairs after subprime crisis
for which we do not find any evidence of contagion.
6 Concluding Observations
The paper examines whether there has been financial contagion from US and UK to
few Asian markets defined above during the 2008 financial crisis by using stock
returns data during time period from January 3, 2006, until December 19, 2011.
Financial crises and their contagion have been long studied and modeled by economists, and several alternative definitions of financial contagion have been used. The
period of study was categorized into three: pre-crisis period or quiet period from
January 3, 2006, to July 31, 2007; crisis period from August 1, 2007, to February
26, 2010; and post-subprime crisis period from February 27, 2010, to December 19,
2011. We first compare the correlation coefficients between stock returns of the
USA (a crisis country) and developed state (UK) with few Asian markets like Japan,
India, China, and Malaysia during the non-crisis and crisis period. Investigation
is based on the dynamic conditional correlation approach. We find significant
Pre-crisis
With respect to the USA
China
0.181
Japan
0.165
Malaysia
0.194
India
0.203
With respect to the UK
China
0.093
Japan
0.375
Malaysia
0.365
India
0.381
Unconditional
Post-crisis
0.186
0.239
0.160
0.283
0.229
0.365
0.370
0.480
Crisis
0.065
0.305
0.281
0.392
0.221
0.554
0.468
0.517
136.306
47.858
28.109
35.860
64.032
84.521
44.850
92.964
% age diff
(pre-crisis
and crisis)
Table 1.5 Comparative analysis of unconditional correlation and DCC
3.601
34.149
20.870
7.270
186.750
21.617
43.145
27.686
% age diff
(crisis and
post-crisis)
0.093
0.373
0.329
0.381
0.181
0.165
0.191
0.203
Pre-crisis
Conditional
0.221
0.554
0.468
0.516
0.065
0.239
0.281
0.389
Crisis
0.227
0.363
0.374
0.477
0.186
0.239
0.208
0.283
Post-crisis
136.259
48.435
42.416
35.217
64.032
44.809
46.895
91.353
% age diff
(pre-crisis
and crisis)
3.047
34.506
19.984
7.545
186.750
0.102
25.885
27.126
% age diff
(crisis and
post-crisis)

11
12
Table 1.6 Dynamic conditional correlation coefficient and contagion effect test
Pre-crisis
Mean SE^2
With respect to the USA
China
0.181 0.000
Japan
0.165 0.000
Malaysia 0.191 0.000
India
0.203 0.000
With respect to the UK
China
0.093 0.000
Japan
0.373 0.000
Malaysia 0.329 0.000
India
0.381 0.000
Crisis
Post-crisis
t-stat (pre-crisis t-stat (crisis
and crisis)
and post-crisis)
Mean
SE^2
Mean
SE^2
0.065
0.239
0.281
0.389
0.000
0.000
0.000
0.000
0.186
0.239
0.208
0.283
0.000 3,648,594.955
0.000
8.899
0.000
28.944
0.000
109.640
0.221
0.554
0.468
0.516
0.000
0.000
0.000
0.000
0.227
0.363
0.374
0.477
0.000
0.000
0.000
0.000
52.873
39.479
15.960
21.803
3,851,346.459
0.029
15.837
88.038
1.442
33.707
74.197
4.257
contagion from US and UK markets to Asian markets under study with the exceptions
for US-Japan and UK-China pairs for which after subprime crisis we do not find any
evidence of contagion.
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the US and Japan. Glob Econ Rev 37(2):201225
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contagion effects? Evidence based on Asian emerging stock markets. Pac Basin Financ J
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Chapter 2
Achieving Business Agility Through ServiceOriented Architecture in Recovering Markets

Sangeeta Shah Bharadwaj, Sumedha Chauhan, and Aparna Raman
Abstract Organizations in recovering markets are struggling to sustain and grow.
These markets are characterized by turbulence in terms of market volatility and uncertainties. Over the years, there has been a greater need of alignment of IT strategies
with business strategies. However, business leaders have always been skeptical
towards IT spending because of the perceived gap between business needs and IT. The
changing landscape of IT through emerging technologies such as cloud computing
and service-oriented architecture is addressing the gap by providing flexibility, agility,
and scalability. This research paper addresses the role of service-oriented architecture
(SOA) in achieving business agility in organizations. The existing enterprise systems
such as ERP, CRM, SCM, etc. are making organizations very efficient, but end-to-end
value chain agility is not achieved through these hardwired independent enterprise
systems (Alter, Defining information systems as work systems: implications for the IS
field. Eur J Inf Syst 17(5):448469, 2008). SOA addresses this gap by identifying the
business services needs and then delivering it. SOA integrates the heterogeneous IT
applications that may exist in organizations. In recovering markets, competiveness is
achieved by using the technology efficiently and effectively. In this research paper, a
conceptual model has been designed to address the business value chain agility
through SOA.
Keywords Value chain agility Digital options Service-oriented architecture
Introduction
Agility today forms an important part of an organizations competitive strategy

(Yusuf et al. 1999). It is defined as the ability to sense and respond to unanticipated
challenges in business (Sharifi and Zhang 1999). Organizations in emerging market
are driven by regulatory changes, market volatility, and increasing customer
S.S. Bharadwaj (*) S. Chauhan A. Raman

Management Development Institute, Mehrauli Road,
Sukhrali, Gurgaon 122007, India
e-mail: [email protected]; [email protected];
[email protected]
Springer India 2015
15
16
S.S. Bharadwaj et al.
expectations. To survive in such an environment, an enterprise should have the

capability to first sense the unanticipated demand of its customers and, more importantly, to respond to it in a timely manner, keeping in mind the quality and reliability
of the services. This dynamic capability to sense unexpected threats, opportunities,
as well as environmental changes and make use of existing resources, knowledge,
and processes to quickly respond is called enterprise agility (Goldman et al. 1995;
Yang and Liu 2012). Thus, enterprise agility enables an enterprise to compete and
deal with turbulent environment and survive. However, to be agile at the enterprise
level, an enterprise should be agile from the point where it receives raw material
from its suppliers to the point where the finished products reach the consumer.
Organizational agility involves the agility in value chain which includes the
activities like designing, producing, marketing, delivering, and supporting the products. An agile organization has the abilities to design and deliver innovative products
(Swafford et al. 2006). The objective of this study is to discuss the agility at various
functions of the value chain. This will help in understanding the horizontal integration aspect of the business value chain in terms of agility, which is missing from the
existing literature. Another objective is to understand how IT can act as enabler in
making the business value chain more agile.
This paper first discusses the value chain model and how IT directly and indirectly
enables the agility at the enterprise level. Further, it discusses about the framework
of business value chain agility in which the agilities at different steps of the value
chain are discussed and how IT enables each one of them. Finally, it presents the
service-oriented architecture as a solution to enhance value chain agility and help in
tight coupling of horizontal integration.
2
2.1
Literature Review
Porters Value Chain Model
Porters value chain is regarded as one of the most comprehensive strategic framework for a companys value creation process (Sanchez and Heene 2004). It identifies the sources of sustainable competitive advantage: Competitive advantage
cannot be understood by looking at an enterprise as a whole. It stems from the many
discrete activities an enterprise performs in designing, producing, marketing, delivering and supporting its product. All of the activities included in Porters value
chain model can contribute to relative cost advantage and build a foundation for the
differentiation (Porter 1985).
The division of the value chain into parts helps the enterprise to understand which
activities add value and which of them do not (Ketchen and Hult 2007). The porters
value chain separates the activity of the enterprise into a sequential stream of core
(primary) and non-core (support) activities. The porters value chain is based on the
process view of organizations. The organization is viewed as a service, which is made
up of subsystems of inputs, transformation processes, and output processes. The pri-
2 Achieving Business Agility Through Service-Oriented Architecture in Recovering
17
mary activities consist of the inbound logistics, operations, outbound logistics,

marketing, and sales and service. The secondary activities are procurement, human
resources management, technological development, and infrastructure.
The primary activities are those which are involved in the actual and physical
creation of the product, sales of the product, its distribution, and the post-sales services. The inbound and outbound logistics which are product interrelations along
with the market interrelations, marketing, and sales and postsales are the major
components. The support facilitates the primary activities and involves the infrastructure, technology interrelation, procurement interrelation, and human resource
management (Ireland and Webb 2007; Mowen and Hansen 2007). Most of the organizations do not do all the production in-house, and therefore, external linkages of
upstream suppliers and then delivering them to downstream ones become critical in
todays scenario. Also, there is a physical and an information processing component
in each value activity. These components consist of steps to capture, manipulate,
and channel data (Porter and Millar 1985).
2.2
Role of IT in Enterprise Agility
Information technology (IT) empowers the sensing and responding capabilities of

an enterprise by enhancing the enterprises capacity to gather and process information in a dynamic environment. These capabilities can be enhanced directly and
indirectly through digital options (Huang et al. 2012; Sambamurthy et al. 2003;
Overby et al. 2006). For the direct effect of IT, an enterprise must possess an adequate level of IT capability so that it can sense the changes that are pertinent to its
business brought about by advances in IT. IT capabilities are significant for responding in the industries that are driven by IT such as telecom and financial services.
More importantly, IT indirectly enhances the performance of an enterprise by
contributing to the performance of its business processes like manufacturing and
supply chain (Overby et al. 2006). This is done through digital options which are
IT-enabled capabilities in the form of digitized work processes and knowledge systems (Sambamurthy et al. 2003). IT helps in enabling the reach and richness of
these digital options. A digitized knowledge system is the way to maintain repository of knowledge and promote sharing of knowledge by the experts in the organization. Digitized knowledge reach is the comprehensiveness and accessibility of the
available codified knowledge in the enterprise. Further, knowledge richness is
enhanced by IT as it can enable an enterprise to attain high quality in a timely and
customized manner (Sambamurthy et al. 2003; Overby et al. 2006). Digitized processes refer to the IT-enabled, common and connected processes. IT also expands
process reach which enables an enterprise to integrate with its customers, suppliers,
distributors, etc. Similarly process richness improves the quality of information
available to the partners of the enterprise by making it more timely and accurate
(Sambamurthy et al. 2003; Overby et al. 2006). Knowledge-oriented IT enhances
the sensing dimension, while process-oriented IT enhances the responding dimension of agility (Overby et al. 2006).
18
Business Value Chain Agility for the Manufacturing Sector
This section discusses the agilities at each of the core and non-core activities of
Porters value chain model, namely, inbound and outbound logistics, operations,
sales, and services. It also discusses how IT acts as enabler in making these activities agile.
3.1
Inbound and Outbound Logistics
Supply chain activities are divided into inbound logistics, like receiving, storing,
and inventory control of the raw material, and outbound logistics, like storing the
finished product, sending it to the customers, and fulfilling the order (Hult et al.
2007). Through supply chain management, an enterprise collaborates with its value
chain partners to integrate its business processes which in turn help it in meeting
unpredictable demands of its customers (Agarwal et al. 2006). In the dynamic
environment, the needs of the customers are uncertain; hence, an agile supply chain
is needed to overcome such situations. Supply chain agility is the capability of
aligning the network and its operations in order to rapidly respond to the changing
customer requirements (Ismail and Sharifi 2006; Sharp et al. 1999). Hence, supply
chain agility is required to survive in the dynamic environment as it facilitates the
synchronization of supply with demand (Gligor and Holcomb 2012).
The quality of relationship with the supplier, high level of information sharing,
and greater connectivity among the enterprises in the supply chain are the three
significant enablers of the agile supply chain (Christopher 2000). Information technology solutions like enterprise resource planning (ERP) can help in achieving each
of these conditions by providing easy and rich interaction, real-time information
sharing, and better connectivity with the suppliers and distributors. For example, if
a sales team is able to forecast the market demand effectively, then this information
can be fed to the supply chain and production department which in turn help them
in procuring the correct amount of material from the suppliers. This can only be
achieved with the use of IT because an enormous amount of information can be
obtained from diverse geographic locations and on real-time basis. This, in turn
can be disseminated to both forward and backward supply chain paths as soon as
possible to meet the changed environment effectively.
In addition to supply chain agility, agility among partners like suppliers
(inbound logistics) and distributors (outbound logistics) can be achieved by making
use of their knowledge, assets, and competencies to build a strategic and extended
network (Zaheer and Zaheer 1997).
Partnering agility can help in exploring the opportunities for innovation and can
be done by building alliances and partnership. Digital process and knowledge
reach and richness help in enhancing partnering agility as new competencies can be
integrated by the enterprise in its value network (Sambamurthy et al. 2003).
3.2
19
Operations
Activities that transform raw material into finished product fall under this step of
the value chain. The ability of business processes to attain accuracy, speed, and cost
economy in the exploitation of opportunities for innovation and competitive action
is called operational agility (Cohen and Levinthal 1990; Gupta et al. 2006; March
1991). Operational agility makes sure that an enterprise can create new processes and
redesign the existing ones. Digital process reach and richness support operational
agility as the business processes can be rapidly sequenced and coordinated along
the complete value chain (Sambamurthy et al. 2003). For example, the use of IT
can enable a culture of greater interaction among production and sales departments.
This can help in tight coupling of sensing and responding capabilities of the
enterprise as the sales department can forecast the demand and the production
department can manufacture the goods or services to fulfill it.
Manufacturing agility is the ability to survive and thrive in an unpredictable,
competitive, and continuously changing environment by responding quickly
and effectively to the dynamic market changes driven by customer demands
(Gunasekaran 1998). To achieve this, there ought to be strong sensing capabilities
(achieved through agility in sales) feeding into an IT-enabled lean manufacturing
unit. Similarly, the production function itself should be quite flexible to respond
effectively to the changed environment. IT can support the integration of various
feedback paths, material flow, and interaction among different production functions.
Real-time information sharing, tightly coupled production functions all enabled by
IT, would help in only producing exactly what is required and exactly when required.
For example, if different warehouses of an enterprise can share the information in
real time and the enterprise can estimate the geographic distribution of demand in
advance, these factories can work in tandem to fulfill the demand without straining
the resources.
3.3
Sales
Activities which facilitate buyers purchasing the product fall under sales. Today,
customers act as cocreators and contribute to product design and development
instead of being just the receiver of the products and services. To be agile at this
step, an enterprise should have the ability to co-opt with customers in exploring and
exploiting the opportunities for innovation and competitive action. This is called
customer agility (Roberts and Grover 2012a, b; Sambamurthy et al. 2003). There
should be a strong match between customer sensing and responding capabilities for
the greater customer agility effect. Digital process reach and richness enhance customer agility by making use of virtual communities and customization, while digital
knowledge reach and richness help in product configuration knowledge delivery
(Sambamurthy et al. 2003).
20
For example, the forecasting process aims to attain the exact customer demands.
Developing a salesperson portal can ease the issue because the information can
directly be exchanged between the sales department in headquarters and the local
market (Huang et al. 2012).
3.4
Service
This step of the value chain includes the activities like maintaining and enhancing
the value of the product by providing customer support services. The different elements of services strategy are competitive capabilities, portfolio of strategic choices
regarding policies, infrastructure, staffing, and structure and integration system of
coordination (Roth and Jackson 1995). Maintaining interaction with current and
future customers of the enterprise to create a profitable and long-term relationship
and as a result improving the shareholder value is called customer relationship management (CRM). This requires the integration of people, processes, and marketing
and operations capabilities through the use of information technology (Payne and
Frow 2005). Therefore, CRM agility can be defined as the ability to effectively monitor and manage the relationship with customers by rapidly sensing and responding
to their support and services demand in the volatile environment, thereby retaining
and increasing the value of customers by increased customer loyalty and market
and wallet share. CRM agility is required so that the customer-facing processes can
keep pace with the business objectives and marketplace (Pega 2013). A front office,
flexible yet tightly integrated with the back office, can improve the effectiveness of
marketing, increase sales, and result in more satisfied customers.
The operational agility in the service strategy is defined as the capabilities that
are associated with exemplar services (Kogut and Zander 1992; Chase and Hayes
1991). Menor et al. (2001) use these competitive capabilities for services to excel in
service quality, delivery, flexibility, and low cost. For example, in the 1990s,
McDonalds needed more operational agility in operations to compete. The operational agility developed by McDonalds in its services along with the flexible production process helped it in gaining sustainable competitive advantage. It provides
quality in customer service as well as invests in training and building technical
skills. The investment in information technology in the service-based processes has
helped it leverage its quality in front of its customers. Figure 2.1 presents the business value chain agility framework.
3.5
Procurement
The flexibility in the procurement benefits the value chain agility. The agility in
procurement focuses on the effective management of relationships with the external
enterprises (Swafford et al. 2006) and is tightly related to supply chain agility.
21
HUMAN RESOURCE MANAGEMENT - operational agility

TECHNOLOGICAL DEVELOPMENT- operational agility
SERVICE CRM
agility and operational
agility
MARKETING &
SALES- customer agility
LOGISTICS-Supply
chain / partnering agility
OUTBOUND
OPERATIONSoperational /
manufacturing agility
FIRMS INFRASTRUCTURE- operational agility
INBOUND
LOGISTICS-Supply
chain / partnering agility
SUPPORTING
ACTIVITIES
PROCUREMENT Supply chain agility
DELIVERED
VALUE
PRIMARY ACTIVITIES
Fig. 2.1 Business value chain agility framework (Adapted from Porters Value Chain, 1985)
The procurement typically is concerned with the management of the purchase

and delivery of material and forms a close linkage between supplier and internal
activities. It further improves the responsiveness and customer satisfaction
(Narasimhan and Das 1999). IT can impact value chain agility by reducing response
time and improving interfirm network relationships.
3.6
Human Resources, Technological Development,

and the Enterprises Infrastructure
The operational agility is a must for an organization to quickly respond to the needs.
The human resources, technological development, and the enterprises infrastructure help in providing quality in customer service. Information technology plays a
role in all the three components as it helps in the right allocation of human resources,
helps in technological development, as well as helps in the right investment of the
enterprises infrastructure as per the advanced need of technology.
Today, various enterprises have hardwired independent IT solutions like ERP,
CRM, SCM, etc. to achieve efficiencies and agilities at the individual level. Though
these systems are the best of the breed solutions, there is a need to achieve end-toend value chain agility to be more successful and competitive. The next section
presents service-oriented architecture as a solution to this problem. Figure 2.2
presents the system without SOA which is closed, monolithic, and in silos.
22
Fig. 2.2 System without SOA
Service-Oriented Architecture
Service-oriented architecture is a way to specify, identify, and organize distributed

computing services into the loosely coupled applications. It provides an architectural paradigm to help in the simplification of integration (Papazoglou and Heuvel
2007). Thus, loose coupling helps the system to retain the internal integrity of these
elements while making the entire system flexible. SOA is considered to be an effective way to achieve business agility (Brown 2008). It is a set of discrete software
modules or computation services that can link the resources on demand. Therefore,
it provides a platform to design flexible systems for an agile environment that can
adapt to the dynamic needs (Ren and Lyytinen 2008).
One of the major benefits of SOA is service reusability. It implies that services
are not employed to meet a narrow need but to address many service situations, for
example, having a piece of code that can be generalized across multiple business
cases. This situation can only be achieved if service consumption goes up which in
turn gives chance to application builds to recognize the services that can be reusable. As SOA is needed to support flexibility at the enterprise level, reusability in
the services is a logical aspect (Ren and Lyytinen 2008; Oracle 2009). Further SOA
helps in business modeling and structuring of organizations so that the individual
capabilities are leveraged and complexity is reduced. This helps in greater adaptation to change and greater ability for the businesses to monitor and react.
SOA is regarded as a core IT asset in organizational integration. In the past,
organizational integration studies have majorly focused on ERP. SOA allows the
organization to integrate various elements, taking care of the problems that could
occur in different versions of EAI. Service Oriented Architecture is a software
design pattern which specifies, identifies, and organizes distributed computing services into the loosely coupled applications (Bieberstein et al. 2006). As per Matei
and Bank (2011), SOA separates organization function according to which it could
be reused or combined to meet user needs. The framework is provided by SOA, so
that the functionality can be accessed as services on network. Joachim et al. (2013)
23
assert that SOA governance mechanism is required for agility-related benefits like
modularity, scalability, integration, and service reuse.
The SOA maturity model has been proposed by Inaganti and Aravamudan 2007
which gives an idea about the scope of SOA adoption, capabilities of architecture,
SOA expansion stages, and return on investment, and cost-effectiveness. From a
technical perspective, SOA is an approach where services provide reusable functionality, and from a business perspective, SOA is a way of exposing legacy
functionality to remote clients, implementing new business process models by utilizing
third-party assets (Bierberstein et al. 2006). Kontogiannis et al. 2008 defined a
problem, planning, and solution space for SOA. Ordanini and Pasini 2008 mention
that SOA helps in service coproduction and value cocreation.
SOA helps in meeting the needs of scalable platform for growth and seamless
integration, cross organization collaboration, and successful alignment of the IT
and the business teams. It helps services to talk to each other, which makes the
entire value chain more agile. For example, the procurement department wants to
know the total number of products that have been sold so that it can know the accurate amount of raw material that it has to order to the supplier through SCM. SOA
makes it possible for the procurement department to access CRM database where
sales and service data gets stored. Similarly, the salesperson can manage the demand
better, since the procurement department can easily access required details due to
the interconnection among the systems because of SOA. In this way, agility at one
level further stimulates the effect of agility at another level, as a result making the
entire business value chain agile. SOA contributes in three major ways: It adds to
business agility by providing an abstraction layer to simplify and accelerate change.
It also helps in process orchestration to maximize productivity. Further, it leads to
elimination of data and application silos. SOA also helps in cost-effectiveness as it
extends the lifecycle of older IT assets. It enables faster time to market with a low
opportunity cost. It is able to tackle small discrete projects than large monolithic
projects (Gabhart and Bhattacharya 2008). Figure 2.3 presents the system after the
introduction of SOA.
Fig. 2.3 System with SOA
24
Adding Value Through Service-Oriented Architecture:

A Case of an Indian Telecom Company
One of Indias largest telecom companies wanted to scale its operations to meet the
needs of 1.5 million customers per month. The firm wanted to ensure cost reduction
with the help of elimination of duplicate systems and support systems. The requirement was to integrate and share the business processes and increase customer satisfaction and retention. They leveraged SOA platform to enable efficiency and save
costs. The project involved the integration of multiple systems including CRM, billing system, and other applications which had to be integrated with new and upgraded
applications. Eleven applications had to be integrated. This integration exhibited the
integration of core processes of the service value chain. The business processes
were standardized across all telecom circles. The SOA framework was based on
the WebSphere stack of technologies. They also used the data management tool
and the business intelligence tool of one of the largest technology and consulting
organizations. The service-oriented architecture not only powered the service
organization to strengthen its value chain but also to achieve business agility.
The business agility derived through the solution could be seen in the real-time
responses. The telecom model was a largely prepaid, and therefore, if a customer
recharges the account at Rs 10, the process of transaction goes through three to five
systems for eight to ten million customers. The SOA system made them more agile by
building 150 reusable services handling seven to eight million transactions per day. The
dashboard powered by SOA gives the details of the transaction and therefore facilitates
and improves customer service and therefore aids in hyper growth. The customer
agility, partnering agility, and operational agility were achieved in the desired manner.
The SOA had enabled the telecom organization to get the picture of employee
productivity, sales force productivity, and service activation times and improve the
quality of services. SOA ensured dynamic process integration which enhanced
organizational agility. The whole process supported the growth from 5 crore to
13 crore subscribers. The customer issue severity 1 was reduced by 40 % and the
availability targets for business critical application increased from 98.2 to 99.5 %.
Conclusion
As per the literature, agility is a very important aspect for an enterprise to be

successful and competitive as it enables it to sense and respond in a dynamic environment in emerging markets. For an agile organization, there must be synergies
amongst different value chain components and their agility. Today, organizations
have best-in-breed IT solutions available to them in the form of CRM, SCM, ERP,
etc. However, these systems have failed to provide agility in the entire value chain
due to lack of coupling among them. Emerging technologies like cloud computing
and SOA have emerged as a solution to this problem as it enables loose coupling
among applications. SOA enables and facilitates automation of information
25
transfer, stronger connection with customers and suppliers, enhanced business

decision making, and greater employee productivity. It can help in value chain agility by providing a comprehensive solution that improves the business processes by
consolidation of redundant operations and dynamic ability to adapt to the needs.
Therefore, SOA allows value chain integration (Brown 2008) which further
improves customer satisfaction, enables easier integration of services, reduces
duplication of data, increases agility through governance focus, and increases integration with partners. The conceptual model presented in the paper helps us understand the role of SOA in improving business agility. Further, this model can be
tested with the help of case studies or quantitative techniques to evolve with the
exact scenario in the industry today.
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Chapter 3
An Analysis of Foreign Direct Investment

with Special Reference to Indian Economy
A. Neelima, Mridul Dharwal, and K.R. Gola
Abstract Foreign direct investment (FDI) has become the major stake for globalization of firms. It is belived that Indias generous and fast-growing native markets,
well-synchronized and mounting financial markets, large density of population who
speaks English, and its democratic government has created an eye-catching spot
for investment. However India has not succeeded in captivating the FDIs to its
potentiality. To brief, a few concerns include widespread corruption, multifaceted
and prolonged investment procedures and business sanctions processes, old-fashioned
way of land acquisitions, inflexible labor laws, and poor contract administration.
To add to this, Indias GDP growth has slowed down for the past one year, and its
large economic and current account deficits and persistent inflation increased the
concerns. In view of the growing competition and to invite foreign direct investments
(FDI), the present paper tries to evaluate the emerging trends and outlines of foreign
direct investment in response to various policy measures broadcasted by the government of India.
Keywords FDI Investment climate Government policies
Introduction
In todays modern day of globalization, the foreign direct investment plays a

dynamic and an energetic role to all the underdeveloped nations as well as the
nations which are in the phase of development. To be more precise, how this foreign direct investment has an impact to the domestic market is clearly explained in
many empirical works. The major advantage in having a foreign direct investment
is that it generates a strong foundation for the capital inflows to the economy,
which creates an opportunity to spread across the modern high technology which
in turn recommends having an infrastructure, thereby yielding a number of potential employment opportunities which will finally lead to high raise in production.
A. Neelima M. Dharwal (*) K.R. Gola

School of Business Studies (SBS), Sharda University, Greater Noida, India
Springer India 2015
27
28
A. Neelima et al.
And the other advantage is that FDI is that most powerful investment because it is
non-debt creating which gives more stability in regard to result orientation. India is
keen on encouraging foreign investors and their investments in India. There has
been a huge transformation over a decade about the insight of FDI. To add potential
to the above statement, India has been ranked the second best destination for FDIs
after China (A K ATKERNEY 201217). It has been observed and noticed that
nations which have faced severe chronic current account deficits have opted for
long-term FDIs in order to have a stable economy, while the domestic volatile
portfolio investments which have brought a huge gap and deficit in the current
account are being avoided. Hence the best suggested way for India is to have FDI
flows which will fill the gap of current account deficit which was around 4.8 % of
GDP (Planning commission, 12th five year plan 201217). Normally FII flow is
more defenseless to external shock, whereas FDIs on the other hand are more stable and effective. When it comes to Indian scenario, the variations are mainly
because of inability to act upon the inappropriate management behaviors, not
because of external factors, which will have a bad impact on long-term FDIs.
Therefore the expression of understanding the concept of FDI plays a very crucial
role. Always a good empathetic way of using FDI gives the investor a piece of
confidence and assurance. In the very recent times, the government of India has
taken well-founded measures to give comfort for FDIs. However not all the sectors
are providing the same luxury for FDIs. Certain sectors have been undergoing
policy reforms towards FDIs, but unfortunately it has been hung up in a stalemated
parliament giving rise to uncertainty.
Global Trends and Patterns in Foreign Direct Investment
Foreign direct investment movements have fell down to an estimated US $ 1.3 trillion
which is 18 % less when compared to that of US $ 1.6 trillion in the year 2011. This
downfall has created an uncertainty for an investment company and investor. The root
cause for this uncertainty has been due to the fragile macroeconomic environment
constructed by lower growth rates of GDP, trade, capital information, employment, no. of
alleged risk factors in the policy atmosphere, eurozone catastrophe, the US fiscal rock
face, and too many changes of governments in 2012. FDI flows to developing economies remained relatively robust in 2012, reaching US$ 680 billion, the second highest
ever recorded. Developing economies absorbed an extraordinary US$130 billion
more than those of the developed countries. FDI inflows to developing Asian economies
fell by 9.5 % due to the deteriorations across most subregions and major economies,
including China, Hong Kong (China), India, the Republic of Korea, Singapore, and
Turkey. However, 2012 inflows to Asia were still at the second highest level recorded,
accounting for 59 % of FDI flows to developing countries (UNCTAD 2012; Global
investment trend monitor 2013). FDI to India has declined by 14 %, though it remained
3 An Analysis of Foreign Direct Investment with Special Reference to Indian Economy
29
at the high altitudes achieved in the recent years. The countrys forecasts in attracting
FDI have been improving, appreciations to the ongoing efforts to open up key
economic sectors.
Trends and Patterns of Foreign Direct Investment in India
Due to the transformation in the definition of foreign direct investment, the movements
in foreign investment since 20002001 are not comparable to the data prior to this year.
This is an effort to bring in line with international practices (DIPP 2003). The definition
differed from that of the IMF which includes external commercial borrowings, reinvested earnings, and subordinated debt. In an attempt to bring the complete Indian characterization in sync with IMFs characterization, the coverage of FDI since 20002001
includes equity capital (i.e., RBI automatic route, SIA/FIPB route, NRI, and acquisition
shares), reinvested earning (including earnings of FDI companies), and other direct
capital (intercorporate debt transactions between related entities). In the year 1990, India
had less than $1 billion FDI, but a recent survey conducted by UNCTAD (2013a, b)
projected that India has emerged one of the best suitable places for FDI investments.
There has been a major transformation in the sectors like telecommunications, services,
hardware, software, and infrastructure, which had a huge inflow from FDIs. India has
become one among the leading sources of FDI. The government of India allowed FDI
in various sector such as aviation up to 49 %, broadcast sector up to 74 %, and multibrand retail up to 51 %. Moreover in supply chain there has been complete 100 % ownership for cold chain development, thereby allowing foreigners to invest with full
proprietorship to accommodate Indias increasing demand for effective food supply systems, thus making a way to reduce the waste in fresh food and to feed the prospective
demand of fast-growing India, which in turn creates a very effective, efficient, profitable
investment option for the FDIs (Department of Industrial Policy and Promotion 2012)
(Tables 3.1 and 3.2).
Table 3.1 Fact sheet on foreign direct investment (FDI) from April 2000 to February 2013
Cumulative FDI flows into India (20002013)
(A) Total FDI inflows (from April 2000 to February 2013)
1. Cumulative amount of FDI inflows (equity inflows +
US$ 287,127
reinvested earnings + other capital)
million
2. Cumulative amount of FDI equity inflows (excluding
Rs. 888,083
US$ 191,757
amount remitted through RBIs NRI schemes)
crore
million
(B) FDI inflows during financial year 20122013 (from April 2012 to February 2013)
1. Total FDI inflows into India (equity inflows + reinvested
US$ 33,912
earnings + other capital) (as per RBI monthly bulletin
million
dated: 10.04.2013)
2. FDI equity inflows
Rs. 113,610
US$ 20,899
crore
million
Source: Department of Industrial Policy and Promotion (DIPP), http://dipp.nic.in
A. Neelima et al.
30
Table 3.2 Sector-specific FDI policy
Sl. no. Sector activity
1.
Agricultural and animal husbandry
2.
Industry
(a) Mining
(b) Coal and lignite
(c) Petroleum and natural gas
3.
Manufacturing
Any industrial undertaking which is not a microor small-scale enterprise, but manufactures items
reserved for the MSE sector would require
government route where foreign investment is
more than 24 % in the capital. Such an undertaking
would also require an industrial license under the
Industries (Development and Regulation) Act 1951,
for such manufacture
4.
Defense
5.
Service sector
(a) Civil aviation (greenfield projects)
(b) Asset reconstruction companies
(c) Banking private sector
(d) Banking public sector
(e) Broadcasting
8.
9.
10.
11.
12.
(f) Print media

Commodity exchange
Development of township, housing, and
construction development
Credit information companies
Industrial park
Insurance
NBFC
Pharmaceuticals
13.
14.
Power exchange
Telecommunication
6.
7.
15.
% of FDI
cap equity
100 %
Entry route
Automatic
100 %
100 %
100 %
Automatic
Automatic
Automatic
26 %
100 %
49 %
74 %
20 %
74 %
26 %
49 %
100 %
49 %
100 %
26 %
100 %
100 %
49 %
74 %
Government
Automatic
Government
Government
Government
Automatic up to
49 %, beyond 49 %,
and up to 74 %
Government
Government
Government
Government
Automatic
Automatic
Automatic
Automatic up to
49 %, beyond 49 %,
and up to 74 %
Government
Automatic up to
49 %, beyond 49 %,
and up to 74 %
Retailing
(a) Cash and carry wholesale
100 %
Automatic
(b) Single brand trading
100 %
Government
(c) Multi-brand Trading
51 %
Government
Source: DIPP, Ministry of Commerce & Industry, Government of India Consolidated FDI Policy
Effective from April 5, 2013. For detail explanation of sectoral caps visit http://dipp.nic.in/English/
Policies/FDI_Circular_01_2013.pdf
31
2
1.5
(
0.5
FDI inflows into India

%age growth over previous
year (in US$ term)
0
-0.5
Fig. 3.1 Foreign direct investment in India (20002013) (Source: Department of Industrial Policy
and Promotion (DIPP)
India experienced its slowest growth in a decade in 2012 and also struggled
with risks related to high inflation. As a result, investor confidence was affected,
and FDI inflows to India declined significantly. Though India has observed a
remarkable rise in the flow of FDI over the last few years, it receives comparatively much lesser FDI compared to China. Even smaller economies in Asia such
as Hong Kong, Mauritius, and Singapore are much ahead of India in terms FDI
inflows (UNCTAD 2012). Gross foreign direct investment (FDI) inflows into
India have slowed since mid-2012, after a recovery from post crisis. While the
overall trend in FDI inflows into India has broadly been in line with global trends,
India has to deal with few issues; these include the uncertain global environment,
relatively high energy prices, slowdown in domestic demand, persistently high
inflation, and high cost of capital. The slowdown in government machinery, especially since the graft-related investigation came to the forefront, has affected
approvals for not only domestic investment projects but also FDI projects. Indias
current account deficit is likely to widen to 5 % of GDP in 20122013. While a
reduction in the current account deficit is expected, it may remain relatively high
in 20132014. Since September 2012, the government has taken policy initiatives
to correct the bad growth mix (low investment spending coupled with high fiscal
deficit). These efforts are already helping reverse the stagflation-type environment
(Fig. 3.1).
Mauritius topping the list of Indias foreign direct investment mainly because
India has a Double Taxation Avoidance Treaty with Mauritius, under which the
corporate registered there, can choose to pay taxes in the island nation. Experts said
companies prefer to route their investment through the famous Mauritius route
because of as low as three percent effective rate of corporate tax on the foreign
companies incorporated there (Table 3.3).
India emerged as one of the most favored destinations for investment in the
service sector due to low-cost wages and wide demand-supply gap in financial
services particularly in banking, insurance, and telecommunication. Gradually
India has become important center for back-office processing, call centers, technical support, medical transcriptions, knowledge process outsourcing (KPOs),
financial analysis, and business processing hub for financial services and insurance
32
A. Neelima et al.
Table 3.3 Share of top investing countries FDI equity inflows (financial years): amount rupees in
crores (US$ in million)
Rank
1
2
3
4
5
6
7
8
9
10
Cumulative
20102011 20112012
inflows (April
(April
(April
20122013 2000Feb
Country
March)
March)
(AprilFeb.) 2013)
Mauritius
31,855
46,710
48,786
338,257
(6,987)
(9,942)
(8,970)
(73,139)
Singapore
7,730
24,712
10,831
88,419
(1,705)
(5,257)
(1,984)
(19,136)
UK
12,235
36,428
5,736
80,397
(2,711)
(7,874)
(1,069)
(17,537)
Japan
7,063
14,089
11,559
69,410
(1,562)
(2,972)
(2,111)
(14,425)
USA
5,353
5,347
2,923 (537) 50,812
(1,170)
(1,115)
(11,101)
Netherlands 5,501
6,698
9,054
41,379
(1,213)
(1,409)
(1,672)
(8,781)
Cyprus
4,171
7,722
2,490 (459) 32,160
(913)
(1,587)
(6,858)
Germany
908 (200) 7,452
3,473 (637) 24,300
(1,622)
(5,258)
France
3,349
3,110
3,483 (646) 16,861
(734)
(663)
(3,572)
UAE
1,569
1,728
969 (177)
11,289
(341)
(353)
(2,419)
97,320
165,146
113,610
888,616
(21,383)
(35,121)
(20,899)
(191,878)
% age
to total
inflows
in terms
of US $
38 %
10 %
9%
8%
6%
5%
4%
3%
2%
1%
Total FDI
inflow from
all countriesa
% age worked out in US$ terms and FDI inflows received through FIPB/SIA + RBI automatic
route + acquisition of existing shares only
a
Includes inflows under NRI Schemes of RBI
claims. However, increased competition, rising wages, and other costs have caused
Indian firms to face tough times. The rise in FDI flows to India has been accompanied by strong regional concentration. The top six states, viz., Maharashtra,
New Delhi, Karnataka, Gujarat, Tamil Nadu, and Andhra Pradesh, accounted for
over 70 % of the FDI equity flows to India between 20082009 and 20112012.
Despite impressive growth rates achieved by most of the Indian states as well as
aggressive investment promotion policies pursued by various state governments,
the concentration of FDI flows across a few Indian states continues to exist
(Table 3.4).
After analyzing the trend between FDI, it is time to bring some meaningful comparison between FDI, FIIs, and GDP. To facilitate this purpose, data were selected
33
Table 3.4 Sectors attracting highest FDI equity inflows amount in Rs. crores (US$ in million)
Rank Sector
1
Services sectora
2
Construction
development:
townships, housing,
built-up infrastructure
Telecommunications
(radio paging,
cellular mobile, basic
telephone services)
Computer software
and hardware
Drugs and
pharmaceuticals
Chemicals (other than
fertilizers)
Automobile industry
Cumulative
20102011 20112012 20122013 inflows (April
(April
(April
(April
2000Feb
March)
March)
Feb.)
2013)
15,054
24,656
25,839
1,71,817
(3,296)
(5,216)
(4,747)
(37,151)
7,590
15,236
6,853
1,00,655
(1,663)
(3,141)
(1,260)
(22,008)
7,542
(1,665)
9,012
(1,997)
5,585
(107)
57,663
(12,660)
% age
to total
inflows
in terms
of US$
19 %
12 %
7%
3,551
(780)
961 (209)
3,804
2,546
52,664
6%
(796)
(466)
(11,671)
5
14,605
5,960
48,828 (8,861) 5 %
(3,232)
(1,114)
6
10,612
18,422
1,488
40,388 (8,861) 5 %
(2,354)
(4,041)
(272)
7
5,864
4,347
7,111
37,896 (8,061) 4 %
(1,299)
(923)
(1,303)
8
Power
5,796
7,678
2,887
36,101 (7,828) 4 %
(1,272)
(1,652)
(529)
9
Metallurgical
5,023
8,348
7,479
34,415 (7,434) 4 %
industries
(1,098)
(1,786)
(1,393)
10
Hotel and tourism
1,405
4,754
17,548
33,031 (6,589) 4 %
(308)
(993)
(3,217)
FDI sectoral data has been revalidated in line with that of RBI, which reflects minor changes in the
FDI figures (increase/decrease) as compared to the earlier published sectoral data
a
Services sector includes financial, banking, insurance, nonfinancial business, outsourcing, R&D,
courier, tech. testing and analysis
from RBI monthly bulletin and DIPP Annual Report (201213). It has been observed
that both FDI and FII flows are very important to bridge the gap of current account
deficit which was around 4.8 % of GDP, but FII flows (hot money) are more vulnerable to external shock, whereas FDI flows are considered to be more stable. In the
case of India, the fluctuations in FDI flows are not mainly because of external factor,
but it is due to internal mismanagement, which is going to impact long-term investment prospects. Therefore it has become very important to understand the critical
factor and try to restore the confidence of the investors (Fig. 3.2).
34
A. Neelima et al.
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
12
10
8
Total FDI Inflow
6
4
2
0
Investment by FII'S Foreign

Institutional Investors Fund
(Net)
Real GDP Growth Rates @FC
Fig. 3.2 FDI, FIIs, and GDP growth rates India (Source: RBI Bulletin September 2013 dt.
10.09.2013 (Table No. 34 FOREIGN INVESTMENT INFLOWS); Planning Commission Macro
Economic Summary 19902013, 30 September)
Literature Review: FDI and Economic Growth
Standard economic theory points to direct causal relationship between economic

growth and FDI that can run in either direction (Colen et al. 2008). On one hand,
FDI flows can be induced by host country economic growth if the host country
offers a sizeable consumer market in which case FDI serves as a substitute for commodity trade or if growth leads to greater economies of scale and cost efficiency in
the host country (Groh and Wich 2009). On the other hand, FDI itself may contribute to
host country economic growth by augmenting the countrys capital stock; introducing complementary inputs, technology transfer, and skill acquisition; or increasing
competition in the local industry. Of course FDI may also inhabit competition and
thus hamper growth, especially if the host country government affords extra protection to foreign investors in the process of attracting their capital (Hadjila and Iuliana
2010). Basu et al. (2003) study a panel of 23 developing countries from Asia, Africa,
Europe, and Latin America and find the causal relationship between GDP growth
and FDI to run both ways in more open economies and in only one direction from
GDP growth to FDI in more closed economies. Trevino and Upadhyaya (2003)
find a comparable result, based on their study of five developing countries in Asia,
that the positive impact of FDI on economic growth is greater in more open economies. Alam (2000) in his comparative study of FDI and economic growth for Indian
and Bangladesh economy stressed that though the impact of FDI on growth is more
in case of Indian economy, yet it is not satisfactory. By using a vector error correction model (VECM), Chakraborty and Basu (2002) tried to find the short-run
dynamics of FDI and growth. The study reveals that GDP in India is not Granger
caused by FDI; the causality runs more from GDP to FDI, and the trade liberalization policy of the Indian government had some positive short-run impact on the FDI
flow. The study by Sahoo and Mathiyazhagan (2003) also supports the view that
FDI in India is not able to enhance the growth of the economy.
35
Methodology of the Study
A log linear regression function has been applied to know the impact of FDI in
India in terms of GDP. The degree of significance of coefficient of regression is
verified by the application of t-test. The strength of linear relationship between
the dependent variable and independent variable is measured by the coefficient of
determination. The data analyzed in this paper has been collected from the reliable
sources, i.e., journals, articles, research papers, economic survey, Ministry of
Commerce, and Handbook of Statistics by the RBI and Department of Industrial
Policy & Promotion (DIPP).
5.1
Hypothesis Testing
Ho The null hypothesis assumes that FDI has no significant impact on growth.
Ha The alternative hypothesis accepts that FDI has significant impact on
growth.
The null hypothesis (Ho) assumes that there is no significant impact of FDI
on the growth of Indian economy. The alternative hypothesis (Ha) accepts that
there is significant impact of FDI on the growth of Indian economy. In order to
test the hypothesis, the variables have been converted into natural log where FDI
has been taken as independent variable and natural log of GDP as a dependent
variable. It is stated that the independent variable is significant at any level of
significance with t-value of 7.9 and on the other hand constant, i.e., dependent
variable is significant at any level of significance with t-value of 17.8. It shows
that there is a clear impact of FDI on GDP and some other unknown factors also
play a significant role. In Table 3.5, the B value is 0.34 % which indicates that
the elasticity between FDI and GDP is 0.34 %. It resulted that 1 % increase in
FDI leads to 0.34 % increase in GDP that helps in boosting the growth rate of
India. If FDI increases 10 %, then it may increase the GDP growth rate by 3.6 %.
Therefore, Ho is rejected and Ha is accepted as there is significant impact of FDI
on Indias GDP (Table 3.5).
Table 3.5 Coefficients summary

Coefficients
Model
1 (Constant)
Log FDI
Unstandardized coefficients
B
Std. error
8.452
.473
.344
.043
Standardized coefficients
Beta
.936
Source: Economic survey, DIPP & RBI, based on Table 3.6

Dependent variable: Ln GDP
Sig.
17.863
7.971
.000
.000
36
A. Neelima et al.
Table 3.6 Foreign direct investment (FDI) and gross domestic product (GDP)
Year
FDI (Rs. in crore)
GDP (RM)
LNFDI
LNGDP
20002001
18,406
122,410
9.820432
11.71513
20012002
29,235
134,392
10.28312
11.80852
20022003
24,376
145,055
10.10135
11.88487
20032004
19,860
162,291
9.896463
11.99715
20042005
27,188
180,908
10.21053
12.10574
20052006
39,774
191,393
10.59097
12.16208
20062007
103,367
213,444
11.54604
12.27113
20072008
140,180
274,316
11.85068
12.52204
20082009
173,741
282,003
12.06532
12.54967
20092010
179,059
299,129
12.09547
12.60863
20102011
138,462
325,228
11.83835
12.69228
Source: Economic Survey of 20102011 & CSO and FDI fact sheet of DIPP from September, 2005
to April, 2011 in iram Khan, 2012
LNFDI = natural log of FDI inflow of sector, LNGDP = natural log of GDP
5.2
Government of India Initiatives to Attract

Foreign Direct Investment
The policy pertaining to the foreign direct investment is being periodically

reviewed and liberalized. The government has raised the cap on FDI to 100 %
in telecom and more than 26 % on a case-by-case basis in defense and allowed
FDI up to 49 % under automatic route in various sectors including single brand
retailing, state-run oil refineries, commodity houses, stock exchange, and
clearing corporations. These measures have been notified vide Press Notes No. 4
to 8 2012, issued by the Department of Industrial Policy & Promotion, Ministry
of Commerce and Industry.
The government put out a tighter definition of control and ownership in an Indian
firm with foreign stakeholder. FDI policy should define control in the same way
as the companies bill. Control shall include the right to appoint a majority of
the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or
voting agreements. The change in the definition of control would impact the
determination of direct and indirect foreign shareholding in an Indian entity
owned or controlled by a resident or a nonresident.
Besides allowing FDI in new sectors, the need of multiple approvals from government and regulatory agencies that exist in certain sector has been given up.
FDI up to 100 % is allowed under automatic route in most sectors, and no
approval is required from either the government or RBI. Investors are only
required to notify within 30 days to concerned regional RBI office.
The government push to project through the cabinet committee on investment
(CCI) seems to be making a difference on the margins, most notably to the power
sector.
37
State governments are also committed to simplify rules and procedures to attract
foreign direct investment. Single Window System is now in existence in most of
the states for granting approval to set up industrial units. To attract foreign investors in their states, many of them are offering incentive packages in the form of
various tax concessions, reduced power tariff, interest subsidies and capital, land
at low cost, etc.
In order to bring it in line with international practices, foreign investment through
GDRs/ADRs and foreign currency convertible bonds (FCCBs) is treated as
FDI. Indian companies are allowed to raise equity capital in the international
market through the issue of GDR/ADRs/FCCBs. These are not subject to any
ceilings on investment.
The government is revisiting its policy on special economic zones in the hope of
rekindling interest among investors. With industry and state government citing
problems with land acquisition, the commerce department is considering relaxing the minimum area requirement for more sectors in the amendments in the
SEZ rules.
The Ministry of Overseas Indian Affairs in partnership with the Confederation of
Indian Industry (CII) has set up an Overseas Indian Facilitation Centre (OIFC) as
a not-for-profit trust, to facilitate nonresident Indians (NRIs), overseas corporate
bodies of overseas Indians, and nonresident Indians who want to invest in India.
In order to ease the process for foreign investors to invest in India, OIFC has
developed an online toolkit investment guide to India. The toolkit serves as a
simple, practical, and stagewise investment guide for the nonresident Indians
wanting to invest in India.
FDI Issues and Policy Recommendation
India is striving hard to achieve a stable growth rate which can be possible only
when we improve the level of productivity. FDI data reveals that Indias volume
of FDI has increased largely due to mergers and acquisitions (M&As) rather than
large greenfield projects. M&As do not necessarily show infusion of new capital
into a country if it is through reinvested earnings and intracompany loans.
Investment friendly environment must be created on priority to attract large
greenfield projects. Regulations should be simplified so that realization ratio is
improved. To maximize the benefits of FDI persistently, India should also focus
on developing human capital and technology.
Attracting quality foreign direct investment in manufacturing sector is one of the
greatest challenges India is facing right now. Manufacturing sector has greater
scope of low-end, labor-intensive manufacturing jobs for unskilled population
when compared with service sector. It is widely reported in large number of studies that India lags behind in terms of business environment (ranked 134 out of
189 countries by Ease of Doing Business 2014) which is not conducive for doing
business. These factors are acute labor market rigidities, dealing with construction
38
A. Neelima et al.
2007 2008 2009 2010 2011 2012 2013 2014

1
21
41
61
81
Ease of Doing Business

(Rank)
Starting a Business Rank
(Rank)
Dealing with construction
permits (rank)
Getting Electricity (rank)
Registering property
(rank)
Getting Credit (rank)
101
Protecting investors (rank)
121
Paying taxes (rank)
141
161
Trading Cross Borders

(rank)
Enforcing Contracts (rank)
181
Resolving Insolvency
(rank)
Fig. 3.3 World Bank, Ease of Doing Business Rank India (Source: World Bank, Ease of Doing
Business, 2014)
permits and getting electricity. Other problems are that of protection of investors,
registering property, lack of rationale tax structure, corruption and competition
rules, and time taken in enforcing contracts (Fig. 3.3).
The issues of regional disparities of FDI in India need to address on priority.
States play an important role in the economic reforms. Many states are making
serious efforts to simplify regulations for setting up and operating the industrial units. In order to attract foreign investors in their states, many of them are
offering packages in the form of capital, tax rebates, interest subsidies, reduced
power tariff, etc. However, efforts by many state governments are still not
encouraging.
Over 40 % of Indias foreign direct investment is routed through Mauritius and
tax havens like Cayman Island and Virgin Island through a maze of subsidies.
Such a high level of FDI contributed by a low-tax country like Mauritius indicates that all is not well. This is not good for the state exchequers and financial
stability of the country.
One of the greatest advantages India has is huge pool of working population.
However, due to poor quality of primary and higher education, there is still an
acute shortage of talent and skills. Foreign direct investment in education sector
is considered to be less than 1 %, which needs to be encouraged by proper liberalization which should not compromise the quality of education. The issues of
commercialization of education, regional gap, and structural gap have to be
addressed on priority.
Indian economy by and large depends upon agriculture. Foreign direct investment in this sector should be encouraged. There is plenty of scope in food processing, agriculture services, and agriculture machinery. The issue of food
security, interest of small farmers, and marginal farmers need cannot be ignored
for the sake of mobilization of foreign funds for development.
39
India must focus on the development of equity and debt market. Steps should be
taken to improve the depth and liquidity of debt market as many companies may
prefer leveraged investment rather than investing their own cash. Looking for
debt funds in their own country invites exchange rate risk.
In order to promote technological competitiveness of India, foreign direct investment into research and development should be encouraged. Intellectual property
rights such as copyrights and patents need to be addressed on priority. Special
package can be encouraging in mobilizing FDI in R&D.
Conclusion
Foreign direct investment can help the domestic economy to enhance competitiveness, employment generation, technology diffusion, and accessibility of financial
resource. India is attracting a low level of foreign direct investment largely due to
poor business environment prevailing in the country. Business climate in India has
become ever investment friendlier today due to its ongoing reforms. However, a lot
is to be done if we want to emerge as one of the major recipients of FDI inflows.
Investors are showing interest to invest in India; therefore it has become very important to provide good quality infrastructure, liberalized FDI policies, and attractive
regulatory policies. FDI of course might be one of the important sources of financing the economic development. It is very important to understand that FDI alone is
not a solution for unemployment, poverty eradication, and other economic problems. India needs a massive investment to achieve the millennium development
goals. Policy makers need to ensure transparency and consistency in policy making
along with comprehensive long-term development strategy.
References
Alam MS (2000) FDI and economic growth of India and Bangladesh: a comparative study. Indian
J Econ IXXX(1), No. 316: 115
Basu P, Chakraborty C, Reagle D (2003) Liberalization, FDI, and growth in developing countries:
a panel cointegration approach. Econ Inquiry 41(3):510516
Chakraborty C, Basu P (2002) Foreign direct investment and growth in India: a cointegration
approach. Appl Econ 34(1):10611073
Colen L, Maertens M, Swinnen J (2008) Foreign direct investment as an engine for economic
growth and human development: a review of the arguments and empirical evidence. Leuven
Centre for global governance studies, Working Paper no. 16
Department of Industrial Policy and Promotion (DIPP) (2012) Fact sheet on Foreign Direct
Investment. Available at http://dipp.nic.in
Department of Industrial Policy and Promotion Annual Report, Ministry of commerce and
industry, Government of India, 201213
DIPP (2003) Revised data on Foreign Direct Investment. The FDI compilation report and the first
action taken report of the TMG are available in RBI and DIPP websites http://www.rbi.org.in
and http://www.dipp.nic.in
40
A. Neelima et al.
Global investment trend monitor The rise of BRICS FDI and Africa Special edition published by
UNCTAD, 25 March 2013. This report exclusively discussed about the BRICS net FDI inflow
among member countries
Groh AP, Wich M (2009) A composite measure to determine a host countrys attractiveness for
foreign direct investment. Working paper 833. IESE, Business School, University of Navara
Hadjila KS, Iuliana M (2010) Business climate, political risk and FDI in developing countries:
evidence from Panel Data. Int J Econ Financ 2(5)
Iram K (2012) Impact of Foreign Direct Investment (FDI) on Indian economy: a sectoral analysis.
Int J Res Commer Econ Manag 2
Kearney AT (2012) Cautious Investors feed a tentative recovery. AT Kearney Foreign Direct
Investment Index. Available at www.atkearney.com
Multi-Year Expert Meeting on Investment for Productive Capacity-Building-and Sustainable
Development Regional Integration and Foreign Direct Investment, UNCTAD 2013
Planning commission, Government of India Faster, Sustainable and More Inclusive Growth An
approach to the twelfth five year plan, 201217
Sahoo D, Mathiyazhagan MK (2003) Economic growth in India: does foreign direct Investment
inflow matters? Singapore Econ Rev 48(2):151171
Trevino LJ, Upadhyaya KP (2003) Foreign aid, FDI and economic growth: Evidence from Asian
countries. Transnatl Corp 12(2):119135
UNCTAD (2012) Towards a new generation of investment Policies. World Investment report,
2012. Available at http://unctad.org
UNCTAD (2013a) World investment report Global value chains: investment and trade for development. United Nation Publication, New York, Sales No. Sales No: E.13.II.D.5
UNCTAD (2013b) Investment country profiles India. A detailed study done by UNCTAD dealing
with issues related to investment and enterprise development
World Bank (2014) Understanding regulation for small and medium size enterprise. Ease of Doing
Business Report. Available at http://www.doingbusiness.org
Chapter 4
An Empirical Analysis ofPrice Discovery

inIndian Commodity Markets
ShellySinghal andSunilAshra
Abstract In an efficient market, the prices should be reflected simultaneously in
futures and spot markets without a time lag. However, in the practical world, there
is often supposed to be some time lag between the information spillover between
spot and futures markets. In this study an attempt has been made to empirically validate the flow of information and price discovery in the context of Indian commodity
markets. Daily data from the four spot and four futures indices of MCX for a span
of 8years from June 2006 to 2013 has been analyzed for the study. EngleGranger
(EG) procedure and vector error correction model (VECM) have been employed in
the empirical analysis. The results of the study reveal that cointegration exists in all
the spot and futures indices except for MCXAGRI. After the data set was reduced
up to June 30, 2012, MCXAGRI was also found to be cointegrated. For the three
different commodities, the information flow was found to be different. In agriculture
commodities the information flow was found to be bidirectional. In MCXMETAL
the spillover effect was found from futures market to spot market, and the reverse
was found for MCXENERGY. In COMDEX, a weighted index of all three different
markets, the price discovery takes place from the spot market to the futures market.
However, the results are mixed and not unambiguous on the direction of spillover
effect for all the commodities.
Keywords Price discovery Commodity markets EngleGranger cointegration
Vector error correction model
1 Price Dynamics of Commodity Markets: An Introduction

Price discovery is a continuous process of arriving at a price from the information
prevailing in the market. Competitive price discovery is a major economic function
and, indeed, a major economic benefit of futures trading. Through this, the available
S. Singhal (*) S. Ashra

Management Development Institute, Gurgaon, India
Springer India 2015
41
42
S. Singhal and S. Ashra
information is continuously transmitted into the futures price, providing a dynamic

barometer of supply and demand status (Easwaran and Ramasundaram 2008).
Information flow between spot and futures markets facilitates price fixation of commodity through mutual understanding between the buyer and the seller for which
the price has to be paid in the predetermined time in future. This reduces the chances
of very high prices in return for protection against extremely low prices, technically
called hedging, i.e., price risk management or risk transfer function.
The essence of the price discovery function hinges on whether new information
is reflected first in changes of futures prices or changes of spot prices. In an efficient
market, all the information available in the marketplace is immediately incorporated
in the prices of assets. Since futures and spot markets represent the same commodity, their price should exhibit a mutual (similar) response to a given information
event. Therefore, price in the futures market and its corresponding spot market
should move contemporaneously in response to the arrival of information. However,
due to certain factors like ease of short sale, lower transaction cost, institutional
arrangement, and market microstructure effect, there exists a leadlag relationship
between spot and futures markets.
The leadlag characteristics of futures and spot market illustrate how rapidly one
market incorporates information relative to the other. These characteristics also indi
cate the efficiency of their functioning as well as the degree of integration between
the two markets (Karolyi and Stulz 1996). Traders act faster and at lower cost in the
futures market as compared to spot market (Grossman and Miller 1988). If information is reflected first in futures price and subsequently in spot price, futures price
should Lead spot price, indicating that the futures market performs the price discovery
function (Zapata et al. 2005). Wahab and Lashgari (1993). put forward the general
principle that spot price is affected by past spot price, current and past futures price,
and other market information. Similarly futures price is affected by past futures
price, current and past spot price, and other market information. Thus, the causality
appears to be bidirectional. They further argue that the leadlag pattern between
futures and spot price changes as new information arrives. Each may lead the other as
market participants shift information for clues that are relevant to their position
which may be spot or futures. The summary hypothesis that can be derived from the
above discussion is that there is some rationale for the hypothesis that futures price
leads spot price and also for the hypothesis that spot price leads futures price.
Against this background, the present paper examines the price discovery process
and volatility spillovers in Indian spotfutures commodity markets through Engle
Granger (EG) cointegration approach and vector error correction model (VECM).
This study considers the four futures and spot indices of Multi-Commodity
Exchange of India (MCX) representing relevant sectors, like agriculture
(MCXAGRI), energy (MCXENERGY), metal (MCXMETAL), and the composite
index of metal, energy, and agro-commodities (MCXCOMDEX).
Year
1987
1989
1990
1990
1991
1993
1995
1996
1997
Author
Kawaller etal.
Harris
Cheung and Ng
Stoll and Whaley
Chan etal.
Wahab and Lashgari
Abhyankar
Koutmos and Tucker
Booth etal.
Review of literature
S&P 500 index over 15min interval

from April 1982 to June 1987
S&P 500 and the MMI futures for the
period 19821987
Stock index and stock index futures
markets of the S&P 500
S&P 500 and FTSE 100 index for the
period 19881992
FTSE 100 stock index futures and cash
index using hourly data for the period
19861990
Intraday volatility spillover between
stock index and index futures markets
Volatility spillovers in Scandinavian
stock markets, namely, Danish,
Norwegian, Swedish, and Finnish stock
markets for the period May 2, 1988, to
June 30, 1994
Data set
S&P 500 futures and the S&P index
using minute by minute data for the
period 19841985
S&P 500 index and futures during the
October 1987 stock market crash
Volatility transmission was found to be

asymmetric
EGARCH
(continued)
Futures market leads the stock market
Index futures leads the spot index
Futures returns lead spot returns by about

5min
Spot market leads to futures markets
Futures returns lead spot returns by at least

15min
Futures market leads the spot market
Finding
Futures price movements consistently lead
the spot index movements by up to 45min
EGARCH
Cointegration and error correction

model (ECM)
AR(2) and exponential GARCH(1,
1)
Bivariate GARCH model
ARMA(p, q) process
Correlation technique and

weighted least squares (WLS)
model. Five minute data has been
used
GARCH model
Methodology
Three-stage least square regression
analysis
4 An Empirical Analysis ofPrice Discovery inIndian Commodity Markets

43
Year
1999
2001
2002
2013
2003
2004
2004
Author
Turkington and
Walsh
Park
Moosa
Badrinath and Apte
Raju and Karande
Zhong etal.
Gerard
(continued)
Mexican stock index futures markets

effectively serve the price discovery
function
Spillover effects between US S&P 500
futures and Hong Kong stock and
futures markets
Spot and 1-month futures prices of

West Texas Intermediate (WTI) crude
oil covering the period from January 2,
1985, to July 1996
Volatility spillovers among the stock
market, foreign exchange market, and
call money markets in India
Nifty index and Nifty index futures
Data set
Shares Prices Index (SPI) futures and
the All Ordinaries Index (AOI) for
Australia
Wondollar spot and offshore forward,
i.e., NDF markets
Structural systems approach
Cointegration and GARCH

techniques
VEC and EGARCH models
Multivariate EGARCH models
Garbade and Silbers (1983)

model
Methodology
ARMA (p, q), bivariate VEC and
VAR models and impulse response
functions
Augmented GARCH
Unidirectional transmission effects from

volatility of the Hang Seng index futures
(HSIF) to volatility of the HSI
Futures trading had been a source of

instability for the spot market
Asymmetric volatility spillovers across stock,

foreign exchange, and money markets
During the pre-reform period, a mean

spillover effect exists from the spot to the
NDF market. Post reform, however, the
results are reversed
Price discovery function was performed in
futures market
Finding
Bidirectional causality between the SPI
futures and spot AOI index
44
Nifty and S&P CNX Nifty futures
The NSE spot and futures market from

June 12, 2000, to September 12, 2008
Six commodities copper, gold, silver,
chickpeas,
rubber, and nickel traded on NCDEX
Six Indian commodity markets,
namely, gold, silver, crude oil, castor
seed, jeera, and sugar
2006
2007
2009
2010
2010
Fu and Qing
Thenmozhi and
Thomas
Srinivasan
Iyer and Pillai
Shihabudheen and
Padhi
Chinese spotfutures markets
2004
Raymond and Tse
Data set
DAX index and DAX index futures
markets in Germany
Price discovery among Hang Seng
index, Hang Seng index futures market,
and the tracker fund
Year
2005
Author
Theissen
VECM
TGARCH
VECM-SURE and EGARCH

models
Johansen cointegration, VECM,
and EGRACH
Threshold vector autoregression
(TVAR)
Johansen cointegration, VECM,

and bivariate EGARCH model
Multivariate GARCH techniques
Methodology
Threshold error correction
Futures price acts as an efficient price

discovery vehicle, except in the case of sugar
Finding
Futures market leads to price discovery
process
Movements of the three markets are
interrelated. The futures markets contain
most information, followed by the spot
market
Significant bidirectional information flows
between spot and futures markets in China,
with futures being dominant
Spot market dominates the futures market in
terms of return and volatility
Bidirectional relationship between the Nifty
spot and Nifty futures market prices in India
Price discovery process occurs in the futures
market in five out of six commodities

45
46
Many of the studies reviewed above had used a very high-frequency data even up
to 15min; however, due to the limitation of the availability of data for such a short
time frame in Indian commodity markets, daily data has been used in the present
study. In addition some of the studies had also used GARCH and ARCH framework, but these tools are used only when the analysis is of univariate in nature and
the variable is lagged upon its own value. However, the present study is bivariate in
nature as the researcher intends to study the relationship not only between a futures
series and its lagged value but also on the lagged value of spot series and vice versa.
Therefore, instead of the GARCH framework, EngleGranger cointegration and
VECM framework have been used in the study.
2 Methodology andEmpirical Analysis

EngleGranger (EG) cointegration method and VECM were employed to examine the leadlag relationship between spot and futures market prices of selected
oil and gas industry stocks in India. As a preliminary investigation, augmented
DickeyFuller (ADF) (David et al. 1979) was employed to verify the stationarity
of the data series. After identifying a cointegration vector between spot and futures
prices, the VECM was employed to examine the long-run relationship. The data
for the study consists of daily closing prices of four commodity futures indices
and its corresponding underlying spot indices of MCX, Mumbai. The four indices
are MCXAGRI, MCXENERGY, MCXMETAL, and MCXCOMDEX.The sample
span for the study is daily data from June 6, 2005, to October 30, 2013. All the
required data information for the study has been retrieved from the website of
MCX,1 Mumbai.
Table4.1 presents the results of summary statistics of spot and futures market
returns of different commodity classes. The table shows that although in the long
run all the series are trending upward, mean returns of spot and futures markets of
all commodities are found to be negative. The standard deviation of both spot and
futures returns series of the selected commodity indices ranges between 0.78 for
Spot MCXAGRI and 2.99 for Spot MCXENERGY. This indicates that energy
stocks are more volatile as compared to agriculture stock in spot market. Further,
the table also reveals that the skewness statistics of selected indices are significantly
different from zero for both the spot and futures series, i.e., they are skewed either
to the right or to the left. Also, the kurtosis values of spot and futures index returns
series of selected stocks show that they are fat tailed or leptokurtic compared to the
normal distribution. In addition, the JarqueBera test statistics indicate that the null
hypothesis of normality of spot and futures returns series of selected oil and gas
industry stocks had been rejected at 1% significance level. Hence, it can be concluded that both the spot and futures markets returns series of selected indices significantly depart from normality.
http://www.mcxindia.com/SitePages/indexhistory.aspx
Mean
Median
Maximum
Minimum
Std. dev.
Skewness
Kurtosis
JarqueBera
Probability
Coeff of var
Sum
Sum sq. dev.
Observations
SCOMDEX
0.0477
0
6.182551
8.10219
1.092865
0.097205
7.981664
2,338.42
0
22.9136
107.694
2,695.655
2,258
SMETAL
0.06278
0
12.67459
7.07466
1.22092
0.812392
13.18854
10,014.82
0
19.4488
141.748
3,364.39
2,258
SENERGY
0.06639
0
47.82274
92.7921
2.999173
11.3052
436.1914
17,703,289
0
45.1771
149.902
20,301.8
2,258
Table 4.1 Descriptive statistics of futures and spot returns

SAGRI
0.04839
0
16.9586
15.8525
0.788639
0.857128
172.4669
2,702,260
0
16.2992
109.252
1,403.746
2,258
FCOMDEX
0.04776
0.06709
26.52668
34.1366
1.380748
3.33188
227.6406
4,751,944
0
28.9107
107.839
4,302.895
2,258
FMETAL
0.06568
0.1067
12.86407
14.5269
1.283743
0.873394
23.27682
38,969.39
0
19.5457
148.303
3,719.526
2,258
FENERGY
0.05405
0.06241
40.51325
62.6507
2.616729
6.73614
252.2441
5,861,781
0
48.414
122.043
15,454.28
2,258
FAGRI
0.03304
0.01151
19.32902
22.7596
1.238477
0.129186
123.9731
1,376,868
0
37.4876
74.597
3,461.846
2,258

47
48
As all the data involved in the present study is time series in nature, so the visual
plot of the data sets is usually the first step in the analysis.
All the time series exhibit a phenomenon known as random walk phenomenon.
However, empirical work based on time series data assumes that the underlying
time series is stationary. Therefore, it is very crucial at the initial stage to test the
series for the stationarity. If the series under study are found to be non-stationary,
then it has to be converted to stationary series first, and then the further analysis will
be performed. There are basically three kinds of tests that can be performed to check
the stationarity of the series. These are graphical analysis, correlogram-based analysis, and augmented DickeyFuller (ADF) test which is the formal test. All the three
tests had been performed in the study and shown later in the paper.
The first impression that is emerging from the graph of data sets is that all the
series are trending upward (Fig.4.1). Another important thing to consider is that
futures and spot series of a particular class, be it agriculture, metal, or energy, are
showing similar patterns of movements in the graph. The futures and spot series of
agriculture and metal show only one trend of upward movement. However, the
graph of MCXCOMDEX and MCXENERGY shows three trends, initially moving
upward, then trending downward, and then reverting back upward. The presence of
trends in the above series gives an indication that the series might have a timevarying mean and variance and are non-stationary in nature. However, in order to
.3
40
Plot of Future MCXAGRI (Prices and Returns)
.2
35
.1
30
.15
4000
Plot of Spot MCXAGRI (Prices and Returns)
.10
3600
.05
3200
.00
2800
-.05
2400
2000
.0
25
-.1
20
-.10
-.2
15
-.15
1600
-.20
1200
-.3
10
05
06
07
08
10
11
12
05
13
06
07
08
09
SAGRI
DLOG(FAGRI)
FAGRI
.8
09
10
11
12
13
DLOG(SAGRI)
5000
Plot of MCXMETAL (Prices and Returns)
.6
4500
.4
4000
.2
3500
.0
3000
-.2
8000
.8
Plot of MCXENERGY (Prices and Returns)
.6
7000
.4
6000
.2
5000
.0
4000
2500
-.2
3000
-.4
2000
-.4
2000
-.6
1500
-.6
1000
-.8
1000
-.8
05
06
07
08
FENERGY
09
10
11
12
13
DLOG(FENERGY)
Fig. 4.1 Graph of individual data series
0
05
06
07
08
SENERGY
09
10
11
12
DLOG(SENERGY)
13
49
7000
.08
.10
6000
.04
6000
.05
5000
.00
5000
.00
4000
-.04
4000
-.05
3000
-.08
3000
-.10
2000
-.12
2000
1000
-.16
.15
Plot of Future MCXMETAL (Prices and Returns)
-.15
05
06
07
08
09
FMETAL
.3
10
11
12
Plot of Spot MCXMETAL (Prices and Returns)
1000
05
13
06
DLOG(FMETAL)
07
08
09
SMETAL
Plot of Future MCXCOMDEX (Prices and Returns)
.2
5000
4500
.1
.08
7000
10
11
12
13
DLOG(SMETAL)
Plot of Spot MCXCOMDEX (Prices and Returns)
5000
.06
4500
.04
4000
.02
3500
4000
.0
3500
-.1
3000
-.2
2500
-.3
2000
-.06
1500
-.4
1500
-.08
1000
05
06
07
08
FCOMDEX
09
10
11
12
DLOG(FCOMDEX)
13
.00
3000
-.02
2500
-.04
2000
05
06
07
08
SCOMDEX
09
10
11
12
13
DLOG(SCOMDEX)
Fig. 4.1(continued)
study the leadlag relation between the spot and futures series, it is desired that the
series must be stationary in nature. The importance of stationary series lies in the
fact that if a time series is non-stationary, it will have a time-varying mean and variance, and then we can study its behavior only for the time frame under consideration. As a consequence it is not possible to generalize it to other time periods.
3 Correlogram Analysis
The correlogram of all the series at levels has been given in the appendices. The
most striking feature of all the correlogram is that the autocorrelation coefficients
for all the index series are high even at very high lag length. Even if we consider the
lags up to 36days, the autocorrelation functions are quite high and the coefficients
are also high, which is the typical property of the correlogram of a non-stationary
series. Thus, it seems that all the index series are non-stationary in nature. In addition
another important thing to note is that partial autocorrelation function for all the
50
series except for energy declines very rapidly just after one lag. The PAC for energy
series declines after two lags. This kind of behavior gives a hint that most of the
series are integrated of order 1 (or they become stationary after first differencing).
4 Augmented DickeyFuller Test

Augmented DickeyFuller test (ADF) is a formal test for a unit root in a time series
sample. It is an augmented version of the DickeyFuller test for a larger and more
complicated set of time series models. As a random walk process may have no drift,
or it may have drift, or it may have both deterministic and stochastic trends, the
DickeyFuller test is estimated in three forms:

Random Walk Yt = Yt 1 + ut
Random Walk with Drift Yt = 1 + Yt 1 + ut

Random Walk with Drift Yt = 1 + 2 + Yt 1 +ut
around
a Stochastic trend

Augmented DickeyFuller test is conducted by augmenting the above three
equations by adding the lagged values of the dependent variable Yt. It consists of
estimating the following regression equation:

Yt = 1 + 2 + Yt 1 + Yt 1 + t
where t is a pure white noise error term and where Yt1=(Yt1Yt2),Yt2=

(Yt2Yt3), etc.
5 Result ofUnit Root Test (Table4.2)

Result of ADF: The result of augmented DickeyFuller test indicates the presence
of unit root in the series at the levels for the indices. This indicates that all the series
are non-stationary in nature. However, at the first difference level, none of the series
possess unit root and are found to be stationary in nature. The above analysis confirmed
that the series are difference stationary in nature.
ADF test statistics

Market
at levels
Log spot
1.541945
Log futures
1.83699
MCXENERGY
Log spot
2.5581
Log futures
2.452301
MCXMETAL
Log spot
2.3663
Log futures
2.340782
COMDEX
Log spot
2.066321
Log futures
2.233567
a
denotes the significance at 1% level
Name of the
index
MCXAGRI
Table 4.2 Result of augmented DickeyFuller test

ADF (t-statistics
at 1%)
3.962112
3.962112
3.962115
3.962115
3.962112
3.962114
3.962112
3.962114
Prob (ADF
t-statistic)
0.815
0.6865
0.2999
0.3522
0.3973
0.411
0.5638
0.47
ADF test statistics at

first difference (DLog)
45.37076a
46.09462a
41.27462a
40.59979a
49.70362a
53.60772a
46.4034a
59.46117a
ADF (t-statistics
at 1%)
3.96211
3.96211
3.96212
3.96212
3.96211
3.96211
3.96211
3.96211
Prob (ADF
t-statistic)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

51
52
6 Cointegration Test
Two variables (or series) are said to be integrated if they have a long-term equilibrium relationship between them. A number of methods have been proposed in literature for checking the cointegration; in this study we have used the EngleGranger
test for checking cointegration. The basic regression used for the model is
Ft = 1 + 2 St + ut

or

ut = Ft 1 2 St
where Ft stands for the futures indices and St represents the spot indices. ut is the
residual of regression result of two non-stationary series. Now ut has been subjected to unit root test analysis and checked whether it is stationary or non-stationary.
If the residuals are found to be stationary, then the two series are said to be cointegrated. This means that if the two ivndividual series are I(1) i.e., integrated of
order 1 which means they have stochastic trends their linear combination is I(0).
This signifies that the linear combination cancels out the stochastic trends in the two
series and the series are cointegrated in the long run. But before applying the formal
tests, we have plotted the pairs of futures and spot of a particular index together in
order to get an idea of the co-movement of the series with respect to each other
(Fig.4.2).
The idea behind plotting the futures and spot prices together is that it will give us
a fair idea of whether the two series are moving together. If the two series are
moving together, they are said to be cointegrated. The information in one market
gets transmitted very rapidly to another market. The futures and spot series in case
of metal moves so closely that one series is almost hidden behind the other and only
traces are visible at points. The futures and spot series in context of MCXAGRI
commodities shows the deviation from each other at a number of points. The spikes
of futures prices are visible in starting and mid of 2010. In addition from mid-2012
to 2013, the direction becomes completely reverse, and the spot series is moving
upward, while the futures series is moving downward. This will give rise to a clear
arbitrage opportunity. The speculators will start short selling today, and this practice
continues until both the markets are back in equilibrium. In addition since the series
after mid-2012 are moving apart, the researcher might have to reduce the data set of
MCXAGRI till June 2012in order to test the cointegration. In MCXENERGY also,
there are some downward spikes of futures series in the mid of 2005, but after that
the two series are moving together as one should expect.
53

4000
4500
3600
4000
3200
3500
2800
3000
2400
2500
2000
1600
2000
1200
1500
05
06
07
08
09
10
11
12
13
05
06
SAGRI
FAGRI
07
08
09
10
5000
11
12
13
SCOMDEX
FCOMDEX
6000
5000
4000
4000
3000
3000
2000
2000
1000
1000
05
06
07
08
FENERGY
09
10
11
12
13
SENERGY
05
06
07
08
09
FMETAL
10
11
12
13
SMETAL
Fig. 4.2 Graph of paired (spot and futures) data sets
7 Result ofCointegration Analysis

Table 4.3 provides results of residual-based cointegration test. Majority of the
studies done in the context of price discovery had used Johansen cointegration test
for checking cointegration. This test is usually used when the empirical analysis
involves more than two series. Therefore, in the present study, EngleGranger
cointegration test has been employed.
The result shows that except for MCXAGRI, the residuals from cointegration
regression are stationary and are also integrated of order zero, indicating that there
is a long-run relationship between spot and near futures prices. It confirms the
existence of long-run relationship between the spot and futures prices except for
MCXAGRI, and we can proceed further for the VECM for all rest indices.
From the above graph of MCXAGRI, it was indicated that the series are cointegrated up to year 2012 and something had happened in 2012 due to which the
series start moving apart from each other and a breach had been created between
the two series. If the residuals are also found to be non-stationary, then we cannot
proceed further for VECM.Therefore, in case of MCXAGRI, data had been
dropped after 2012, and residual test had been performed again on the data up to
2012. The residuals were found to be stationary for MCXAGRI also after the
54
Table 4.3 Result of EngleGranger cointegration test

Residual of
ADF t-statistic
regression
ADF t-statistic at 1% level
Log agri
2.621746
3.962114
5.502970a
Log agri
3.962660
(data up to
June 2012)
Log energy
14.42997a
3.962117
Log metal
12.98805a
3.962115
Log COMDEX 8.147247a
3.962119
a
denotes the significance at 1% level
ADF t-statistic
at 5% level
3.4118
3.412068
ADF t-statistic
at 10% level
3.127788
3.127947
Prob. (ADF
t-statistic)
0.27
0.0000
3.411802
3.411801
3.411803
3.127789
3.127789
3.12779
0.0000
0.0000
0.0000
reduction of data set. For VECM also the data of MCXAGRI was taken up to June
2012 only and up to 2013 for all the other series.
8 Vector Error Correction Model

If the two series were found to be cointegrated, it is an indication of a long-term
relationship between the two, or there exists an equilibrium relation between the
two. However, in the short run, there may be disequilibrium which is random and is
reflected in the white noise residual term, and this residual error term can be used to
tie the short-run behavior of the series with its long-run relationship. Engle and
Granger gives a theorem called Granger representation theorem based on this error
correction mechanism which states that if two variables/series are cointegrated, then
the relationship between the two can be represented as error correction model:

Ft = 0 + 1 St + 2 ut 1 +
where denotes the first difference operator, is a random error term, and
ut1= (Ft112 YSt1), that is, the one period lagged value of the error from
the cointegrating regression.
As the futures price today could depend upon the futures price or spot price prevailing in the previous week so for all the series the empirical analysis was started
with up to six days lags (Table4.4). However, for MCXENERGY, all the futures
and spot values up to six lags were found to be significant. As a result of which the
lag length was increased for MCXENERGY and further the futures and spot values
were coming out to be insignificant at tenth lag, so for energy series, the analysis
was done up to nine lags. In addition the data for MCXAGRI was taken up to June
30, 2012, for VECM analysis as the residual term beyond that was coming out non-
stationary in nature.
In case of futures MCXAGRI, the error correction term was found to be significant indicating the presence of short-run equilibrium between futures and spot
DLog (Ft2)
DLog (Ft3)
DLog (St2)
0.091839a
(2.717052)
[0.0066]
0.061630a
(2.68028)
[0.0074]
DLog (St1)
DLog (Ft1)
DLog (Ft)
DLog (St)
ECT
MCXAGRI
DLog (Ft)
0.032437a
(4.55580)
[0.0000]
0.225690a
(6.88594)
[0.0000]
0.094282a
(6.508002)
[0.0000]
0.172172a
(11.70362)
[0.0000]
DLog (St)
0.022090a
(4.717230)
[0.0000]
Table 4.4 Result of vector error correction analysis

MCXENERGY
DLog (Ft)
DLog (St)
a
0.131260
0.201922a
(5.68124)
(8.869609)
[0.0000]
[0.0000]
0.285664a
(14.70088)
[0.0000]
0.307251a
(14.60903)
[0.0000]
0.343227a
0.287446a
(11.6850)
(9.757539)
[0.0000]
[0.0000]
0.161089a
0.335517a
(5.886296)
(12.5642)
[0.0000]
[0.0000]
0.184063a
0.284581a
(6.116028)
(9.659488)
[0.0000]
[0.0000]
0.114514a
0.187914a
(4.212494)
(7.00920)
[0.0000]
[0.0000]
0.130735a
0.173379a
(4.387644)
(5.933376)
[0.0000]
[0.0000]
0.038908b
(1.886405)
[0.0594]
0.186857a
(7.570230)
[0.0000]
0.121978a
(5.094443)
[0.0000]
0.054755a
(2.403619)
[0.0167]
MCXMETAL
DLog (Ft)
0.095248a
(5.770989)
[0.0000]
0.381685a
(16.53650)
[0.0000]
0.282435a
(16.52841)
[0.0000]
0.221137a
(10.17659)
[0.0000]
0.156332a
(7.3612)
[0.0000]
0.153684a
(7.260422)
[0.0000]
0.099456a
(4.91538)
[0.0000]
0.067475a
(3.539816)
[0.0004]
DLog (St)
0.181248a
(12.83994)
[0.0000]
MCXCOMDEX
DLog (Ft)
DLog (St)
a
0.097732
0.079904a
(7.008398)
(6.981123)
[0.0000]
[0.0000]
0.458556a
(19.84447)
[0.0000]
0.323254a
(19.79419)
[0.0000]
0.400183a
0.251064a
(17.00972)
(12.91499)
[0.0000]
[0.0000]
0.361192a
0.136358a
(13.56871)
(6.06456)
[0.0000]
[0.0000]
0.211276a
0.128784a
(8.579128)
(6.899395)
[0.0000]
[0.0000]
0.206465a
0.111577a
(7.531058)
(5.07310)
[0.0000]
[0.0000]
0.105117a
0.035710b
(4.386662)
(2.184973)
[0.0000]
[0.0290]
(continued)

55
0.117502a
(5.34422)
[0.0000]
DLog (Ft4)
DLog (St4)
DLog (Ft5)
DLog (Ft6)
DLog (St6)
DLog (St5)
DLog (St3)
MCXAGRI
DLog (Ft)
0.077911a
(2.398658)
[0.0165]
Table 4.4(continued)
0.033396b
(2.287924)
[0.0222]
0.042760b
(1.993691)
[0.0463]
0.026511b
(1.829974)
[0.0674]
DLog (St)
MCXENERGY
DLog (Ft)
0.099723a
(3.729164)
[0.0002]
0.107832a
(3.689828)
[0.0002]
0.104066a
(3.961582)
[0.0001]
0.093243
(3.262431)
[0.0011]
0.098396a
(3.836465)
[0.0001]
0.095718a
(3.446851)
[0.0006]
0.084279a
(3.374041)
[0.0008]
DLog (St)
0.090461a
(3.457521)
[0.0000]
0.123195a
(4.341286)
[0.0000]
0.024915
(0.991038)
[0.3218]
0.090976a
(3.373952)
[0.0008]
0.045770b
(1.968923)
[0.0491]
0.038522c
(1.627382)
[0.1038]
0.021990
(1.039427)
[0.2987]
0.038694b
(1.946340)
[0.0517]
MCXMETAL
DLog (Ft)
0.059904a
(3.477156)
[0.0005]
0.03955b
(2.29489)
[0.0218]
DLog (St)
0.052154b
(2.312553)
[0.0208]
MCXCOMDEX
DLog (Ft)
0.113537a
(4.236355)
[0.0000]
0.058745a
(2.786952)
[0.0054]
0.081532a
(3.250194)
[0.0012]
DLog (St)
56
DLog (Ft7)
DLog (St7)
DLog (Ft8)
DLog (St8)
DLog (Ft9)
DLog (St9)
DLog (St)
D stands for first difference

( ) represents t-statistics
[ ] represents p-values
a
indicates significance at 99% confidence level
b
Indicates significance at 95% confidence level
c
Indicates significance at 90% confidence level
MCXAGRI
DLog (Ft)
MCXENERGY
DLog (Ft)
0.072964a
(2.71373)
[0.0067]
0.073778a
(3.078948)
[0.0021]
0.065265a
(2.55452)
[0.0107]
0.053507a
(2.427045)
[0.0153]
0.044522b
(1.9862)
[0.0471]
0.034633c
(1.806638)
[0.0710]
0.059912a
(3.190035)
[0.0014]
0.070291a
(3.583690)
[0.0003]
0.057781a
(2.893965)
[0.0038]
DLog (St)
MCXMETAL
DLog (Ft)
DLog (St)
MCXCOMDEX
DLog (Ft)
DLog (St)

57
58
prices. In addition the changes in futures prices were found to depend upon first and
third lag values of the spot prices. It also depends upon its own lagged values at two
and five lags.
The result for Spot MCXAGRI indicates that error correction term was significant. The change in spot depends upon the first lag value of futures prices. However,
spot and futures prices at fifth and sixth lag were also significant. This suggests
the presence of weekly effect in spot prices and futures prices in case of MCXAGRI.
The result above does not give any clear indication of whether spot price leads the
futures price or vice versa.
For MCXENERGY the error correction term was found to be significant for both
the futures and spot price changes indicating the presence of short-run equilibrium
in both spot and futures series. The changes in spot prices were found to depend
upon the changes in futures prices up to five lags. Spot prices also depend significantly upon its own lagged value up to nine lags. The change in futures price
depends upon spot prices as well as its own lagged value up to nine lags. Since the
futures price depends upon spot prices up to greater lag length, it indicates that spot
price leads the futures prices in the context of MCXENERGY.
In case of MCXMETAL, also the error correction term was found significant for
both futures and spot series suggesting the correction of short-run disequilibrium.
The change in futures prices depends upon change in spot price only up to one lag
indicating that futures price of today will depend on yesterdays spot price only.
However, it was also found to depend significantly on its own lagged value up to
five lags. The change in spot prices depends significantly upon change in futures
price up to five lags except for fourth lag. It depends on its lagged value up to two
lags. Since both the futures and spot series were found to depend more on lagged
futures values, it can be concluded that in case of MCXMETAL, futures price leads
the spot prices and price discovery takes place from futures to spot market.
COMDEX which is the weighted average of all the above three indices gives the
overall picture of the commodity markets. While individual series gives information
pertaining to that commodity class only, COMDEX represents the entire commodity market as a whole.
For COMDEX also the error correction term for spot as well as futures prices
was found to be significant, thereby indicating the presence of equilibrium in the
entire commodity market. The changes in the price of futures COMDEX series
were found to depend upon both futures and spot series up to four lags. In addition
the spot prices at six lags were also found to be significant in causing the change in
futures prices. This indicates the presence of significant cyclic effect in commodity
marketalso. The change in spot COMDEX series was found to depend on its own
lagged value only up to two lags; however, it depends significantly on the futures
COMDEX prices up to three lags. However, as the change in futures prices itself
also depends upon the change in spot price at six lags, it can be concluded that in the
commodity market as a whole, the spot prices lead the futures prices.
59
9 Conclusion
The study investigates the price discovery and information spillover between futures
and spot commodity markets by using EngleGranger cointegration test and vector
error correction model. The study discovers the existence of long-run relationship in
all the cases except for MCXAGRI. However, after the reduction of data set of
MCXAGRI up to June 2012, the long-run equilibrium was found to be significant.
In the context of price discovery, the present study provides mixed result. For
MCXAGRI, there was no clear indication of the direction of the flow of information, and bidirectional information spillover has been found. In case of
MCXENERGY and MCXMETAL, the results are quite contradictory, and the price
discovery took place from futures to spot markets in MCXMETAL and the reverse
in case of MCXENERGY. For MCXCOMDEX which represents the commodity
market as a whole, the information flow was found to be significant from spot to
futures markets. The findings of this study would definitely attract investors and
portfolio managers whose main interest is to develop trading strategies and would
also help the regulators in implementing control measures in order to ensure stability in the Indian commodity markets. The results of this study were found to be in
contradiction with the studies done in developed countries to a certain extent. These
studies found that the information is reflected first in spot prices and then it got
transferred to futures prices in commodity market as a whole. However, the consensus on spillover effect for all the commodities could not be reached in the study.
10 Limitation oftheStudy
The major limitation of the study is that daily data has been used for analysis due to
non-availability of high-frequency data. In the present scenario where the markets
are integrated on a real-time basis, daily data is of less relevance due to the fact that
closing prices represent average fluctuations in the last 30min only. In addition for
MCXAGRI, the study got restricted only up to June 2012, and what happened to the
two series has not been examined in the present study due to the changes in policy
environment. Lastly the study provides mixed results in the context of price discovery, and an unambiguous decision on whether futures leads spot or vice versa cannot
be arrived.
60
Appendices
MCXAGRI Regression Residual Test
Null hypothesis: R1 has a unit root
Exogenous: constant
Lag length: 2 (automatic based on SIC, MAXLAG=26)
Augmented DickeyFuller test statistic
Test critical values
1% level
5% level
10% level
*MacKinnon (1996) one-sided p-values
t-statistic
15.541407
3.433054
2.862620
2.567391
Prob.*
0.0125
MCXMETAL Regression Residual Test

Exogenous: constant
1% level
5% level
10% level
t-statistic
14.86098
3.433054
2.862620
2.567391
Prob.*
0.0000
MCXENERGY Regression Residual Test

Exogenous: constant
Lag length: 3 (automatic based on SIC,
MAXLAG=26)
1% level
5% level
10% level
t-statistic
13.67923
3.433055
2.862621
2.567391
Prob.*
0.0000
61
MCXCOMDEX Regression Residual Test

Exogenous: constant
1% level
5% level
10% level
t-statistic
Prob.*
6.093264
3.433056
2.862622
2.567391
0.0000
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Chapter 5
An Empirical Study on Factors Affecting

Faculty Retention in Indian Business Schools
Prabjot Kaur
Abstract Today, the biggest challenge being faced by the academic leaders is
retaining the talented and competitive faculty members. On the one hand, higher
education is facing the unwanted heat of faculty voluntary turnover, and on the other
hand, technical education institutions are dealing with the acute shortage of talented
faculty that is directly hampering the quality of the education system of an economy.
Keeping the same concern pertaining to the quality and development of management
education, the study is conducted to identify the relationship between the factors
influencing the faculty members of the business schools of India towards retention
which will help in designing faculty retention strategies. The sample size for the
exploratory research is 300 faculty members from the accredited business schools of
northern India using the questionnaire as research instrument for data collection
undergoing a non-probability technique of sampling for the study. Factor analysis is
adopted for analyzing data using SPSS. Career planning and development, FDPs
and training programs, job enrichment, cooperation from the work teams, and job
security like other factors are found to be the most possible variables influencing
faculty members towards retention. The study can help business schools in the formulation of effective HR policies that will help in retaining their employees. The
study will help in designing the faculty retention model in higher education.
Keywords Faculty retention Faculty voluntary turnover Shortage of talented
faculty Quality of education Faculty retention strategies HR policies Business
schools of India
P. Kaur (*)
Academic Associate (OB & HR), Indian Institute of Management, Kashipur, India
Research Scholar (Management), Uttarakhand Technical University, Dehradun, India
Springer India 2015
63
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P. Kaur
Introduction
The faculty plays a prominent role in shaping the future and image of an institution or
a university. It is the efforts of the faculty that makes an institution or a university
internationally recognized with all his or her teaching excellence and research
orientation. The contribution of faculty in terms of research-related activities and
higher academic achievement brings stars to the affiliated institute/university.
Academic leaders also acknowledge the valuable contribution of productive faculty
and thereby do understand the linkage between the academic achievements of a faculty and the image of an institution/university to which the talented faculty is associated with. In spite of knowing the crucial role of faculty, retaining talented and
productive faculty is the biggest challenge academic leaders are facing today in their
institutions. Higher educational institutions especially technical education private
colleges/universities are today facing the continuous heat of faculty voluntary turnover at their institutions which is directly hampering the quality education, sound
functioning of the organization, and future of the students. Supporting the statement
(Hensel 1991), the president of the University of Maine at Presque Isle also stated,
The well being and smooth functioning of the university depends upon its ability to
recruit and retain a talented professoriate. In the study, Hensel found that the institutions who fail to retain talented faculty have a difficult time in establishing quality
programs. In spite of knowing the fact, academic leaders and management are unable
to design effective retention strategies for the talented faculty members. It feels so
pitiful that management colleges imparting degrees in management education and
specializing students in effective human resources management strategies are unable
to manage the HR issues of their own teaching associates. Future business school
affluence hence depends on a principal area of attention within the HR management
function. The academic leaders are facing war for talent in the academic labor market of management education. It has become very difficult for the institutions to hold
the productive faculty for a longer duration because as the faculty develops, undergoing academic achievements, the faculty also wishes to develop his or her career and
thereby look ahead to the working institute to meet his or her expectations in return
for the quality services and achievements. Such type of cases exists in every institute,
but no efforts are taken by employer to meet the expectations of the faculty, and some
or other day, the faculty decides to leave. In such situations, institutions need to be the
brand employer employer of choice and design effective strategies to retain
and attract talents in the academic labor market.
Literature Review
Faculty retention refers to the policies and procedures organizations use to prevent
talented and competent faculties from leaving their job. It involves taking measures
and designing strategies to remain in the institution for a period of time. Retention is
a voluntary move by an organization to create an environment which engages
An Empirical Study on Factors Affecting Faculty Retention in Indian Business
65
employees for a long term (Chaminade 2007). Hiring knowledgeable people for the
job is essential for an employer. But retention is more important than hiring. In the
recent decades, the Indian industry has changed its employment scenario. Factors
like skill sets and job satisfaction drive the employment, not only the money part.
The employer is facing the unwanted heat of employee turnover. Continuous efforts
are made by the organizations to control the employee turnover rate as it directly
affects the performance and goodwill of the organization as many key people leave
the organizations for varied crucial reasons. This turnover is normally referred to as
attrition. Many researches have been conducted on this very subject. Teacher attrition has been a topic of discussion in the education literature for many years. It has
been claimed that teacher attrition is a major problem in the schools, and between
20 % and 50 % of beginning teachers decide to leave the profession in the first
35 years (Ewing 2001; Ewing and Smith 2002). There seems to be little variations
in these figures internationally (Macdonald 1999). For example, a 2003 Victorian
Department of Education and Training Report stated that in the United States, a third
of teachers leave the profession within 3 years and almost half within 5 years. In
Britain, a 2003 survey by the University of Buckingham found that around 30 % of
British teachers who left teaching that year had been in the profession for less than
5 years. The benchmark study of faculty mobility was conducted by Caplow and
McGee in 1958 as The Academic Marketplace which was replicated by Burke
(1988), producing The New Academic Marketplace. Burke in his study found that
the market for professors had become radically different over the last three decades.
In the 1950s, as higher education was expanding rapidly, there was a large and
increasing demand for faculty members and, on the other hand, a short supply of
Ph.Ds. which created a big demand supply gap in the academic labor market pertaining to higher education. This gap existed due to the incapability of the academic
leaders to retain talented and productive faculty members in their institutions. A
number of scholars had tried to identify the factors affecting faculty attrition and
retention, but still there had been no little consistency in the findings of the same. A
number of studies had reflected the relation between job satisfaction and employee
retention. And when the question turns to academia, teacher job satisfaction is very
essential for the smooth functioning of any institution. One of the studies conducted
by Eskildsen and Nussler (2000) states that the employees who are happy and satisfied with their jobs are more creative, productive, and more likely to be retained by
the organization. In the context of academics, carrying ahead the same thought, Perie
et al. (1997) in their study state that the faculty who are highly satisfied as compared
to dissatisfied tends to remain more for a longer duration in the same working institution. Employers today need to take care of their employees personal feelings
towards the job and satisfaction levels from their working conditions, peers, and
superiors, as these are the keys to ensure employee retention. Other studies also
indicated that employees will be retained in their organization if he or she has a good
relationship with the people he or she is working with; therefore, the social working
environment plays a major role in retaining the employee (Clarke 2001). The same
thought is also reflected in the study conducted by Johns et al. (2001) suggesting
organizations to provide team-building opportunities and liberty to work in their
66
P. Kaur
own way, where discussions and interactions can be carried out not only within
working hours but also outside working hours. Human capital theorists believe that
personal endowments such as ability, competence, and schooling translate into
returns in the marketplace. An individuals attributes, competence, and background
generate the educational, occupational, and economic attainment at different points
in the course of life (Becker 1964; Mincer 1971; Rees and Schultz 1970). The academicians who all are equipped with stronger credentials, such as better institutional
origins and higher research/teaching productivity, have more job opportunities
which leads to the war for talent in the academic labor market. The faculty who
leaves voluntarily tends to be characterized by a high achievement orientation
(Barnhart and Bechhofer 1995). Those who are not competing for rank or tenure
may have the greatest staying power for long because they are free from the wanderlust afflicting competitive academics as they do not have more job opportunities in
the marketplace because of their very low achievements in the course of time with
the profession. Palmer and Patton (1981) in his study reported that those who published less and rated themselves as less successful were more likely than other faculty members to have seriously considered leaving the academia permanently. To
this statement, many researchers argue by saying that career outcomes are more than
a matter of personal choices or achievements. They firmly believe that the academic
labor market is multiple and overlapping. The academic labor market is divided by
factors such as subject matter specialty, religion, sex, race, and academic rank of the
individuals and by institutional region, status, size, control, degree level, and governance (Brown 1967; Smelser and Content 1980; Youn and Zelterman 1988).
Academic workers seem to work in a segmented labor market that offers different
working conditions, different opportunities, and different institutional norms to govern incentives (Youn 1988, p. 15). This confines the mobility within the academia.
There had been some disagreement found in the literature concerning faculty loyalty
to their employing institutions. Supporting the fact, Nienhuis (1994) describes faculty as mobile, loyal to the discipline rather than the institution. Boyer (1990) puts
his argument that the faculty is more likely than in previous years to report their
school and department as important to them, thereby discouraging mobility. In either
case, the increased opportunities for nonacademic work have led to a greater ease of
mobility than in the past. One model holds that turnover is predicted on (a) the desirability of leaving the organization and (b) the ease of movement from the organization (Mowday et al. 1982). Considering the indications of an upward swing in both
components, it is safe to assume that faculty turnover is causing greater problems for
many administrators.
3
3.1
Methodology
Objectives of the Study
To explore the factors that influence the faculty retention practices in business schools
3.2
67
Hypotheses
There is a relationship among the factors that influence the faculty members
towards retention.
3.3
The Study
The study was exploratory in nature with survey being used as a method to complete
the study.
3.4
Sampling Design
Population: Faculty members of accredited business schools of northern India

Sample size: 300 faculty members
Sample element: Individual respondents of various accredited business schools
of northern India
Sampling technique: Nonprobability sampling
3.5
Tools Used for Data Collection
A self-designed questionnaire was used to solicit response from the

respondents.
3.6
Tools Used for Data Analysis
In order to identify the underlying variables or factors and their relationship with the
retention of faculty members of accredited business schools, factor analysis was
applied.
3.7
Methodology
Cronbachs alpha is a measure of internal consistency, that is, how closely related a
set of items are as a group. An investigation has been made with the reliability of
data using a reliability test to see whether the random error causing inconsistency
68
P. Kaur
Table 5.1 Reliability

statistics
Cronbachs alpha
0.831
No. of items
22
and in turn lower reliability is at the managerial level or not. The point to be noted
is that a reliability coefficient of 0.70 or higher is considered acceptable in social
science research. A high value of alpha is often considered as evidence that the
items measure an underlying (or latent) construct. As is depicted from the table,
the value of alpha coefficient for the 22 items is 0.831, suggesting that the items
have relatively high internal consistency (Table 5.1).
3.7.1
Factor Analysis
Hypotheses: There exist significant relationships among the factors that influence
the employee retention.
In the research study, efforts are done to analyze the perception of faculty
members working in the NBA (AICTE)-accredited b-schools of northern India
towards the factors affecting faculty retention in the accredited business schools of
northern India. The 22 variables representing the various dimensions of the work
style of the b-schools including the behavioral approach, policies, and concern of
the management of the business schools towards the growth and development of the
faculty members working there with the concern of faculty members to be retained
with the business schools are included. The exploratory factor analysis is applied on
the responses in order to identify the latent factors which influence the faculty members to stay and continue working in the business schools. This will not only help in
knowing the major factors affecting faculty retention but, on the other hand, will
also help in designing strategies and models for faculty retention.
Exploratory factor analysis is a method of data reduction. It does this by seeking
underlying unobservable (latent) variables (factors) that are reflected in the observed
variables (measured variables). There are various methods that can be used to
conduct exploratory factor analysis (such as principal axis factor, maximum likelihood, generalized least squares, unweighted least squares). In addition to this, there
are also different methods of rotations that can be applied after the initial extraction
of factors, including orthogonal rotations, such as varimax and equimax, which
impose the restriction that the factors cannot be correlated, and oblique rotations,
such as promax, which allow the factors to be correlated with one another. Factor
analysis is a technique that requires a large sample size. Factor analysis is based on
the correlation matrix of the variables involved, and correlations usually need a large
sample size before they stabilize. The results of exploratory factor analysis are
shown in the table below. The KaiserMeyerOlkin measure of sampling adequacy
statistic (0.775) indicates that the sample size is adequate to apply factor analysis on
the data collected in the research study. The probability (p) value of Bartletts test of
sphericity statistic (0.000) indicates that the correlation matrix of the variables
considered in the research study is not an identity matrix. This indicates that the
factor analysis can be done on the data collected from the faculty members (Table 5.2).
69
Table 5.2 KMO and Bartletts test

KMO and Bartletts test
KaiserMeyerOlkin measure of sampling adequacy
Bartletts test of sphericity
Approx. chi-square
Sig.
0.775
661.515
0.000
KMO measure of sampling adequacy is an index to examine the appropriateness

of factor analysis. High values 0.5 and 1.0 indicate factor analysis is appropriate.
Values below 0.5 imply that factor analysis may not be appropriate. From the above
table, it is seen that the KaiserMayerOlkin measure of sampling adequacy index
is 0.775, and hence, the factor analysis is appropriate for the given data set. Bartletts
test of sphericity chi-square statistics is 661.515, which shows the 22 statements are
correlated, and hence, as inferred in KMO, factor analysis is appropriate for the
given data set (Table 5.3).
Eigenvalue represents the total variance explained by each factor. The percentage
of the total variance attributed to each factor. One of the most popular methods used
in exploratory factor analysis is principal component analysis, where the total variance in the data is considered to determine the minimum number of factors that will
account for maximum variance of data. With principal factor axis method, the initial
values on the diagonal of the correlation matrix are determined by the squared multiple correlation of the variable with the other variables. The values in the Extraction
column indicate the proportion of each variables variance that can be explained by
the retained factors. Variables with high values are well represented in the common
factor space, while variables with low values are not well represented. The initial
number of factors is the same as the number of variables used in the factor analysis.
However, not all 22 factors will be retained. In the study, only the first three factors
are retained. The eigenvalues are the variances of the factors. Because factor analysis is conducted on the correlation matrix, the variables are standardized, which
means that the each variable has a variance of 1, and the total variance is equal to
the number of variables used in the analysis. The Total column contains the eigenvalues. The first factor will always account for the most variance (and hence have
the highest eigenvalue), and the next factor will account for as much of the leftover
variance as it can and so on. Hence, each successive factor will account for less and
less variance. The Percentage of Variance column contains the percent of total variance accounted for by each factor. The Cumulative % column contains the cumulative percentage of variance accounted for by the current and all preceding factors.
The results indicate that the three factors together account for 44.64 % of the total
variance. The number of rows in the Extraction Sums of Squared Loadings panel
of the table corresponds to the number of factors retained. The values in the
Rotation Sums of Squared Loadings panel of the table represent the distribution
of the variance after the varimax rotation. Varimax rotation tries to maximize the
variance of each of the factors, so the total amount of variance accounted for is
redistributed over the three extracted factors (Table 5.4).
Initial eigenvalues
% of
Component
Total
variance
Cumulative %
1
6.339
28.813
28.813
2
1.895
8.612
37.425
3
1.587
7.212
44.637
4
1.252
5.692
50.329
5
1.149
5.221
55.550
6
1.124
5.110
60.660
7
1.035
4.705
65.365
8
0.931
4.230
69.595
9
0.845
3.842
73.437
10
0.761
3.459
76.896
11
0.724
3.291
80.187
12
0.649
2.951
83.138
13
0.614
2.791
85.929
14
0.602
2.734
88.663
15
0.474
2.155
90.818
16
0.438
1.990
92.808
17
0.368
1.674
94.482
18
0.320
1.456
95.938
19
0.299
1.361
97.299
20
0.229
1.042
98.341
21
0.206
0.938
99.279
22
0.159
0.721
100.000
Extraction method: principal component analysis
Table 5.3 Total variance explained

Extraction sums of squared loadings
% of
Total
variance
Cumulative %
6.339
28.813
28.813
1.895
8.612
37.425
1.587
7.212
44.637
Rotation sums of squared loadings

% of
Total
variance
Cumulative %
4.923
22.379
22.379
3.179
14.449
36.828
1.718
7.810
44.637
70
P. Kaur
71
Table 5.4 Rotated component matrix

Rotated component matrixa
Salary and incentives

Recognition, rewards, and designations
Quality of employers leadership
Role clarity
FDPs and training programs
Employee benefits
Financial assistance to research and project work
Career planning and development
Organizational climate and culture
Work life balance
Satisfaction with the current profile
Cooperation from work teams
Job security
Job enrichment
Performance appraisal and performance management
Proximity with your own residence
Physical working facilities/infrastructure
Social environment in the organization
Opportunity to grow and develop
Flexible working schedules
Goodwill/brand of the institute
Difficulty in family relocation
Rotation method: varimax with Kaiser normalization
a
Rotation converged in five iterations
Component
1
0.404
0.545
0.577
0.106
0.740
0.592
0.223
0.765
0.570
0.559
0.546
0.719
0.715
0.736
0.544
0.213
0.626
0.700
0.531
0.485
0.539
0.152
Rotated Method: Varimax with Kaiser Normalization

The interpretation of factors is facilitated by identifying the statements that have
large loadings in the same factor. The factor can be interpreted in terms of the statement that loads high on it.
The factors of a study on faculty retention programs comprises of 22 individual
statements. Out of 22 factors, the top 10 individual factors contribute more towards
faculty retention strategies:
Career planning and development

FDPs and training programs
Job enrichment
Cooperation from the work teams
Job security
Social environment in the institution
72
P. Kaur
Physical working facilities/infrastructure

Employee benefits
Quality of employers leadership
Organization climate and culture
Scope for Future Work
The study has made a focus on developing quality higher education with special
emphasis to accredited business schools of northern India identifying the factors
affecting faculty retention. The findings of the study can help academic leaders to
formulate effective retention strategies as faculty plays a dominant role in making
up the goodwill of an institute. The programs that aim to improve satisfaction
level and retention among faculty can in turn improve the health and vitality of an
institution (Hensel 1991). Academic leaders and program administrators can use the
findings and methods employed in this study to gather data on faculty retention in
order to increase the quality of higher education especially management education,
to reduce the unwanted heat of faculty turnover, and to retain the desirable talented
faculty. The study can extend to the designing of faculty retention model.
Conclusion
The study aimed to explore the factors influencing the retention practices of faculty
members in accredited management education colleges. The hypotheses of the
study get accepted showing the significant relationship among the factors influencing
faculty towards retention. The findings of the study concludes that career planning
and development, FDPs and training programs, job enrichment, cooperation from
the work teams, job security, social environment, working facilities, quality of
employers leadership, and organizational climate and culture are found to be the
most possible factors. Thus, it becomes imperative importance for deans/directors
of business schools to develop faculty retention plans and models.
References
Barnhart BT, Bechhofer S (1995) New faculty departure at five institutions. Presented at the annual
meeting of the American Educational Research Association, San Francisco, CA, 1822 April
1995
Becker S (1964) Human capital. Columbia University Press, New York
Boyer E (1990) Scholarship reconsidered. Princeton University Press, Princeton
Brown DG (1967) The mobile professors. American Council on Education, Washington, DC
Burke DL (1988) The new academic marketplace. Greenwood Press, New York
73
Chaminade B (2007) A retention checklist: how do you rate? www.humanresourcesmagazine.

co.au. Accessed 28 Nov 2007
Clarke KF (2001) What businesses are doing to attract and retain employee becoming an
employer of choice. Empl Benefits J 26(1):3437
Eskildsen JK, Nussler ML (2000) The managerial drivers of employee satisfaction and loyalty.
Total Qual Manag 11(4 & 5):s581s588
Ewing R (2001) Keeping beginning teachers in the profession. Indep Educ 31(3):3032
Ewing R, Smith D (2002) Retaining beginning teachers in the profession. Paper presented to the
European Educational Research Association Conference, Lisbon, Portugal, 1114 Sept 2002
Hensel N (1991) Realizing gender equity in higher education: the need to integrate work/faculty
issues. Eric Clearinghouse on Higher Educations. George Washington University, Washington, DC
Johns GH, Gutmann ME, Dewald JP, Nunn ME (2001) Career retention in the dental hygiene
workforce in Texas. Int J Dent Hyg 75(2):135143
Macdonald D (1999) Teacher attrition: a review of the literature. Teach Teach Educ 15:83548
Mincer J (1971) Schooling, age, and earnings. National Bureau of Economic Research, New York
Mowday R, Porter L, Steers R (1982) Employeeorganisation linkages: the psychology of commitment, absenteeism, and turnover. Academic, New York
Nienhuis RW (1994) Satisfied faculty and involved chairpersons: key to faculty retention. Presented
at the 19th meeting of the Association for the study of higher Education, Tucson, AZ, 1013
Nov 1994
Palmer D, Patton C (1981) Mid-career change options in academic experience and possibilities.
J High Educ 52:378398
Perie M, BakerDP, Whiterner S (1997) Job satisfaction among Americas teachers: effects of workplace conditions, background characteristics, and teacher compensation. U.S. Department of
Education, Washington, DC
Rees A, Shultz G (1970) Workers and wages in an urban labor market. University of Chicago
Press, Chicago
Smelster NJ, Content R (1980) The changing academic market: general trends and a Berkeley case
study. University of California Press, Berkeley
Youn TIK (1988) Studies in academic markets and careers: an historical review. In: Brenemen DW,
Youn TIK (eds) Academic labor markets and careers. Falmer, New York, pp 827
Youn TIK, Zelterman D (1988) Institutional career mobility in academia. In: Breneman DW, Youn
TIK (eds) Academic labor markets and careers. Falmer, New York, pp 827
Chapter 6
An Empirical Study on the Relationship

Between Emotional Intelligence and Job
Performance Among IT Sector Employees
Pranjali Madhur
Abstract The concept of emotional intelligence has gained popularity in management

for the sake of enhancing the capacity of human capital in organizations. The current
paper sets out to examine the relationship between emotional intelligence and job
performance of employees of the IT sector in Pune City considering the important
aspects like attitude and behavior.
The result suggests that emotional intelligence is significantly related with
individual attitude and behavior and ultimately job performance.
All attitudes can be changed if we want to change them, so all aspects of EI can
be developed and improved. Since majority of the concerns in organization involve
people in different roles, emotional intelligence must become a determining factor
for their effective management.
It is revealed in this research paper that there is a significant relationship
between emotional intelligence and job performance of employees of the IT sector
in Pune City.
Keywords Emotional intelligence Attitude Behavior Job performance
Introduction
In the present scenario of cutthroat competitions in all sectors especially in IT sectors,

stretched goals, cultural differences among the diverse workforce and imbalanced
work life lead to increasing level of stress in employees, also increase the job dissatisfaction. This satisfaction adversely affects the performance of the employees.
Therefore, by developing our emotional intelligence, we can become more productive and successful at what we do and help others to be more productive and
successful too. The process and outcomes of emotional intelligence development
also contains many elements known to reduce stress for individuals and organizations,
P. Madhur (*)
MBA Department, MAEERs Maharashtra Institute of Technology,
Pune, Maharashtra, India
Springer India 2015
75
76
P. Madhur
by decreasing conflicts, improving relationships, and understanding and increasing

stability, continuity, and harmony which leads to job satisfaction.
In an era of shifting paradigms, one of the worlds fastest-growing emerging
economies, such as India, should be able to develop its human resources as a source
of competitive advantage.
1.1
What Is Emotional Intelligence?
Emotional intelligence can be described as having four branches: the ability to accurately perceive and express emotion, assimilate emotion into thought, understand
emotion, and regulate emotions in the self and others.
Some of the advantages of developing your emotional intelligence are:
Improved relationships
Improved communication with others
Better empathy skills
Acting with integrity
Respect from others
Improved career prospects
Managing change more confidently
Fewer power games at work
Feeling confident and positive
Reduced stress levels
Review of Literature
Emotional intelligence is the ability to acquire and apply knowledge from your
emotions and the emotions of others.
Goleman (1998) in his study on emotional intelligence compared star performers
with average performers in senior leadership position. Goleman found that nearly
90 % of the difference in their performance profiles was attributable to emotional
intelligence factors.
According to a mounting body of evidence given by Segal (2000), feeling is the
most powerful resource we have. Emotions are life-lines to self-awareness and
self-preservation that deeply connect us to ourselves and others, to nature and the
customs. Emotions inform us about things that are of utmost importance to us the
people, values, activities and needs that lend us motivation, zeal, self-control, and
persistence. Emotional awareness and know-how enable us to recover our lives and
our health, preserve our families, build loving and lasting relationships, and succeed in our work.
As per Stein (2009), Attitudes play a fundamental role in our levels of emotional
intelligence. We can improve our happiness by taking steps to change our emotions.
Now, we dont want to change all our emotions. We simply want to decrease our
An Empirical Study on the Relationship Between Emotional Intelligence and Job
77
negative emotions and maintain or augment our positive emotions. One way to
sustain positive emotions is to become more aware of what types of thoughts are
associated with those emotions. Looking at our positive emotions as a consequence
or outcome, try to figure out which thoughts give rise to these feelings. So, for
example, if we feel good each time you think about a problem youre trying to solve
or the dinner youre planning to cook, we can increase the amount of time we have
these kinds of thoughts during the day. We more likely want to change the negative
emotions. Use the starting point, the consequence, as our opportunity to identify
which of a wide range of emotions were experiencing. After we identify the emotion that we want less of, we can change the thoughts that lead up to that emotion.
Psychologists call this type of emotional change cognitive reappraisal, which means
we are developing a new way of looking at our world.
Many organizations feel that their people can provide a competitive advantage,
and therefore their people contribute to the organizations performance. Employees
play a pivotal role in organizational success (Collis and Montgomery 1995).
The principal influence on the organizations performance is the quality of the
workforce at all levels of the organization. The function that human resources can
play in gaining a competitive advantage for an organization is empirically well documented (Brewster, Carey, Dowling, Grobler, Holland and Wrnich, 2003). For
organizations to accomplish their goals, they must continually look for better ways
to organize and manage their work. There is a growing recognition that the primary
source of competitive advantage is derived from a organizations human resources.
This was not always the case, as human resources were traditionally seen as a cost.
3
3.1
Scope and Significance of the Study

Why Study Emotional Intelligence and Its Importance
in the IT Sector?
It is very essential to study the intelligence of the IT employees at working place

to interpersonal relationships for organizational growth.
In the IT sector, if emotions are properly managed, then they can and do have
successful outcomes. Carefully managed emotions can drive trust, loyalty, and
commitment as well as increase productivity, innovation, and accomplishment in
the individual, team, and organizational sphere.
Research Gap
Most of the studies have used emotional intelligence to job satisfaction and impact
on various approaches. This study examines the relationship between emotional
intelligence and employee performance among the employees of IT sectors in a
developing country like India by considering their attitude and behavior (Fig. 6.1).
P. Madhur
78
IA
SR
RFO
IP
EI
SA
AFO
IB
SR = Self Regard
RFO = Regard for Others
SA = Self Regard
AFO = Awareness for Others
EI = Emotional Intelligence
IA = Individual Attitude
IB = Individual Behaviour
IP = Individual Performance
Fig. 6.1 Emotional intelligence and employee performance model
The researcher studied the emotional intelligence of employees of IT sectors

who are already under the work pressure, completing the business targets, achieving
high positions, and working with different people at the same time across
boundaries.
Aims and Objectives of the Research Study
Aims and objectives of the present study are as under

To study the impact of emotional intelligence on ob performance of employees
in IT sectors
To study the relationship between emotional intelligence and an individuals attitude and the behavior of employees in IT sectors
To study the relationship between emotional intelligence and job performance of
employees in IT sectors
To develop the framework for emotional intelligence and job performance
Hypotheses
The main hypotheses of the present study are as under

There is no impact of emotional intelligence on Job performance of employees
in IT sectors.
79
There is no significant relationship between emotional intelligence and an

individuals attitude and the behavior of employees in IT sectors.
There is no significant relationship between Emotional Intelligence and Job
Performance of employees in IT Sectors.
7
7.1
Research Methodology
Sources of Data
Data sources are classified as being either primary sources or secondary sources.
In this study, the researchers have used primary sources to analyze the data gathered.
The instrument used is a structured questionnaire that was developed by the researchers
based on the literature review on the relevant topics.
7.2
Survey Design
The idea of a research design is to specify methods and procedures for collecting
and analyzing required information. It is thus designed in the following ways to
increase the validity of the questionnaire and gain more responses.
7.3
Choosing an Appropriate Mode of Response
Questionnaires were administered personally to the respondents at IT sectors of

Pune City. This is to enable the researcher to collect all the completed responses
within a short period of time. Any doubts that the respondents might have regarding
any questions were clarified on the spot. The respondents were permitted to ask the
researcher for further clarification if they encountered difficulties in understanding
the questions.
The questionnaire was based on the questionnaire used by Wheeless et al.
(1983) for measuring the impact of various emotional intelligence factors on
employees performance. The reason for selecting this questionnaire is that it was
used to study the impact of the same variables as in the present study and was well
tested on reliability and validity scales. The questionnaire that was administered
consisted of emotional intelligence factors which are self-regard (08 items), regard
for others (08 items), self-awareness (08 items) and awareness for others (08 items),
and individuals attitude (07 items), individuals behavior (05 items), and individual
performance (03 items).
The questionnaire was well tested by the researcher on internal consistency and
other measures. Cronbachs alpha coefficient reliability was conducted to test the
reliability of the questionnaire, and the alpha value was found to be 0.845 which is
P. Madhur
80
acceptable. Each dimension of emotional intelligence which was measured with

the help of statements and responses to each statement was obtained on a five-point
Likert scale, ranging from 1 strongly disagree to 5 strongly agree.
Sample Size
A total of 447 questionnaires were distributed; however, 335 were received back,
making the response rate 75 %, and a sufficient sample size was collected for the
analysis of results. The participants included top-level, middle-level, and lowerlevel employees from three leading IT companies in Pune City, from a population
of 1120 (30 % of 1120 = 335).
Scale and Measurement
The survey instrument consisted of two parts. In part B of the questionnaire, survey
respondents were asked to state their level of agreement to each statement of emotional
intelligence on a five-point scale (1 strongly disagree to 5 strongly agree; 3 denotes
average). According to Cooper (2000), this type of scale is considered to be an interval
scale. Therefore, the measurement of central tendency and its dispersion can be made.
Demographic and academic backgrounds of respondents will be asked in part A of the
questionnaire. Some were assigned to certain categories, and it is mutually exclusive
and collectively exhaustive. Thus, it possessed a property of a nominal scale.
9.1
Scale Reliabilities
Reliabilities for the multi-item measures of interest are given in Table 6.1. Coefficient
alpha is typically calculated to measure the internal consistency of a multi-item
measure. Internal reliability represents the degree to which each of the items of a
scale represents the same construct (Burch 2008, p. 77).
Table 6.1 Reliability
coefficients of the study
variables
Multi-item measure
Self-regard (SR)
Regard for others (RFO)
Self-awareness (SA)
Awareness for others (AFO)
Individual attitude (IA)
Individual behavior (IB)
Individual performance (IP)
Mean
29.26
32.33
29.38
26.64
25.76
14.93
9.07
Cronbachs
alpha
0.801
0.777
0.801
0.809
0.798
0.874
0.865
9.2
81
Statistical Methods
Demographics Frequency Table

Demographics are shown in a demographics frequency table (see Table 6.2).
The demographics are not used in the present study to find out their relationship
with employee performance. The objective of Table 6.1 is to show the composition
of respondents to have a better understanding about their response and results for
the present study. Majority of the respondents are male, i.e., 65.4 %. Majority of the
respondents are in the age group of 3142 years and more than 43 years, i.e., 33.4
and 39.4 %. Most of the employees are working in the middle- and lower-level
management, i.e., 31.6 % and 40.3 %, respectively. Majority of the employees are
having the length of service in the range of 610 years, i.e., 44.2 %. All the parameters of demographics in the present study are important in this paper to consider
their attitude and behavior.
9.3
Correlations
A correlation matrix was used to verify the existence of relationship between the
independent variables, i.e., self-regard (SR), regard for others (RFO), self-awareness,
awareness for others (emotional intelligence), and individuals performance considering their attitude and behavior.
Table 6.2 Demographics frequency table

Demographic
factor
Age
Gender
Employees
designation
Length of
service
Education
Description
2530 years
3142 years
>43 years
Male
Female
Top level
Middle level
Lower level
<1 year
12 years
35 years
610 years
11 years
Graduate
Postgraduate
Frequency
Company A
47
43
95
115
70
64
56
65
1
29
39
90
26
0
185
Company B
20
54
1
57
18
15
25
35
0
18
17
32
8
11
64
Company C
24
15
36
47
28
15
25
35
1
27
19
26
2
35
40
Percentage
(%)
27.2
33.4
39.4
65.4
34.6
28.1
31.6
40.3
0.6
22.1
22.4
44.2
10.2
13.7
86.3
P. Madhur
82
9.4
Correlation Matrix
SR
SR
1
RFO
.825**
SA
.643**
Pearson
Correlation
Sig. (2-tailed)
.000
.000
N
335
335
335
RFO
Pearson
.825** 1
.775**
Correlation
Sig. (2-tailed) .000
.000
N
335
335
335
SA
Pearson
.643** .775** 1
Correlation
.000
N
335
335
335
AFO Pearson
.588** .670** .650**
Correlation
.000
.000
N
335
335
335
IA
Pearson
.633** .765** .622**
Correlation
.000
.000
N
335
335
335
IB
Pearson
.004
.058
.047
Correlation
.288
.394
N
335
335
335
IP
Pearson
.063
.070
.030
Correlation
.204
.589
N
335
335
335
**.Correlation is significant at the 0.01 level (2-tailed).
AFO
.588**
IA
.633**
IB
.004
IP
.063
.000
335
.670**
.000
335
.765**
.935
335
.058
.250
335
.070
.000
335
.650**
.000
335
.622**
.288
335
.047
.204
335
.030
.000
335
1
.000
335
.683**
.394
335
.019
.589
335
.002
335
.683**
.000
335
1
.732
335
.095
.971
335
.080
.000
335
.019
335
.095
.083
335
1
.142
335
.917**
.732
335
.002
.083
335
.080
335
.917**
.000
335
1
.971
335
.142
335
.000
335
335
10 Discussion
In this correlation matrix, it signifies self-regard (SR) is strongly related with
regard for others (RFO) {(0.825**), **p < 0.01)}, self-awareness (SA) is also
significantly correlated with {(0.650**), **p < 0.01)}. It is revealed from the
analysis that individual attitude (IA) is also more consistently related with selfregard (SR), regard for others (RFO), self-awareness (SA), and awareness for others
(AFO) {(0.630**), **p < 0.01)}, {(0.765**), **p < 0.01)},{(0.622**), **p < 0.01)},
{(0.683**), **p < 0.01)}, respectively. Individual behavior depends on individual
attitude, and if the attitude develops positively, the behavior also gets improved and
it ultimately affects individual performance positively. Individual behavior (IB) is
strongly correlated with individual performance (IP) {(0.917**), **p < 0.01)}.
83
Looking at all the study variables, the null hypothesis formulated was rejected.
It is quite clear from the above table that all the study variables have been strongly,
positively, and significantly correlated with one another. With regard to Employee
Performance indicators (EP), it is observed that it has yielded a positive and significant correlation with all the variables of emotional intelligence (EI) reported by the
participants of the study. Thus, it indicates that as emotional intelligence improves
positively, the individual performance also increases significantly.
10.1
Regression
Variables entered/removed
Model
Variables entered
1
IP, IA, IBa
a
All requested variables entered
Variables removed
.
Method
Enter
Model summarya
Model
R
R Square
.596
1
.772b
a
Dependent variable: EI
b
Predictors: (Constant), IP, IA, IB
Adjusted R square
.592
Std. error of the estimate

14.73197
ANOVAa
Model
1
Sum of squares
105,933.899
71,837.193
177,771.093
Regression
Residual
Total
a
b
Predictors: (Constant), IP, IA, IB
df
3
331
334
Mean square
35,311.300
217.031
F
162.702
Sig.
.000b
t
10.389
22.049
1.538
1.238
Sig.
.000
.000
.125
.217
Coefficients
Model
1
(Constant)
IA
IB
IP
Unstandardized
coefficients
B
44.889
2.927
.735
.915
Std. error
4.321
.133
.478
.740
Standardized
coefficients
Beta
.774
.135
.109
84
P. Madhur
Residuals Statisticsa
Minimum
Predicted value
62.5860
Residual
27.75958
Std. predicted value
3.090
Std. residual
1.884
a
Maximum
146.3970
47.24706
1.616
3.207
Mean
117.6179
.00000
.000
.000
Std. deviation
17.80919
14.66565
1.000
.995
N
335
335
335
335
A simultaneous solution was performed in which all independent variables were

entered at the same time into the regression equation. This allowed a determination
of the relative predictive power of each independent variable among the set of
independent variables. In this analysis, the overall multiple regression was significant for the prediction of the individual performance (F = 162.702, P = 0.0000).
As the table indicates, the emotional intelligence factors are significant predictors
of the individual performance of the employees of IT sectors in the study. It is found
that 59.6 % of change in individual performance could be predicted by emotional
intelligence factors.
Thus, the hypothesis there is no significant correlation between emotional
intelligence factors and individual performance indicators of the IT employees
has been rejected since emotional intelligence factors were found to be a significant
predictor of individual performance of the IT employees.
The following figure shows the histogram of the dependent variable emotional
intelligence (Fig. 6.2).
Fig. 6.2 Dependent variable: individual performance indicators (EI)
85
From the results, it was found that the emotional intelligence factors are
significantly correlated with the employee performance indicators. It indicates that
self-regard, regard for others, self-awareness, and awareness for others improve
emotional intelligence.
11
Conclusions
It is evident from the regression analysis that the emotional intelligence factors are
consistently significant predictors of the individual performance among the IT
employees in the study. It is found that 59.6 % of change in individual performance
could be predicted by the emotional intelligence of IT employees. Therefore, it is
suggested that regard for self and for others and awareness for self and others have to
be improved by conducting many trainings, counseling sessions, and development
programs. It is also recommended that developing EI will take time but will lead to
sustainable behavior changes that will improve the way one manages oneself and the
way they work with others. To succeed, one requires effective awareness, control and
management of self-emotions, and awareness and understanding of other people.
It is also recommended in this study that it would be beneficial for different
kinds of personality types to develop their personal power. So the focus here is on
changing attitudes and behaviors, not on changing personality.
In this study, it is clearly shown that there is a significant relationship between
emotional intelligence and an individuals performance by developing their attitude
and behavior.
To conclude, we can state that people high in EI will build real social fabric
within an organization and between an organization and those it serves, whereas
people low in EI may tend to create problems for the organization through their
individual behaviors.
References
Brewster C, Carey L, Dowling P, Grobler P, Holland P, Wrnich S (2003) Contemporary issues in
human resource management. Clyson Printers, Cape Town
Collis DJ, Montgomery CA (1995) Competing on resources. Harv Bus Rev 73(4):118128
Goleman D (1998) Working with emotional intelligence. Ben tarn, New York
Goleman D (2000) Working with emotional intelligence
Robbins SP. Organizational behaviour, 10th edn.
Segal J (2000) Raising your emotional intelligence, a practical guide, a hands-on program for
harnessing the power of your instincts and emotions. Magna Publishing Co. Ltd, Mumbai, p 3
Stein SJ (2009) Emotional intelligence for dummies. Wiley, Mississauga, p 58
Chapter 7
An Empirical Study to Determine

the Significant Predictors of Trust
in Government Hospitals
Amrita Sandhu
Abstract Out-of-pocket expenditure (OOP) on healthcare forms a major barrier to

health seeking in India. The per capita public health spending is low in India, being
among the five lowest in the world. Yet, India ranks among the top 20 of the worlds
countries in its private spending. A large part of our population continues to depend
on private sector for their healthcare needs even when many of them cannot afford
it. Private spending on healthcare pushes millions of vulnerable households into
poverty every year. The affected households find it impossible to get out of this
vicious cycle of poor health and poverty. This results in huge losses to the country
in terms of human resource as it affects the productivity of the population and
consequently affects the GDP of the country. Patients trust in their healthcare providers is necessary for them to accept therapy, to reveal information, and to describe
feelings, all prerequisites for effective medical care. Trust in government hospitals
in India is an area which is under-researched. The efforts to improve service quality
of public hospitals can only produce tangible results in reducing the burden of people of India if it causes a significant change in the intangible construct of trust in
public hospitals. Measuring service quality of government hospitals and linking it
to trust in government hospitals is an important step to understand where the
hospitals are faltering and what aspects of service quality are significant predictors
of trust in government hospitals. The purpose of this paper is to find significant
predictors of trust in government hospitals from measures of perceived service
quality by using multiple regression analyses. It was found that social responsibility,
medical service and discharge process in government hospitals are significant predictors of trust in government hospitals.
Keywords Trust Perceived service quality Multiple regression Government
hospitals Healthcare India
A. Sandhu (*)
Public Policy and Governance Area, Management Development Institute, Gurgaon, India
Springer India 2015
87
88
A. Sandhu
Introduction
Taking cognisance of the important role of public health expenditure, the Eleventh
Five-Year Plan (20072012) document suggests the necessity of building a responsive public health system with the need for increasing the public spending on health
from 0.9 % of GDP to 23 % of GDP and stepping up investment on primary care,
communicable diseases and HIV/AIDS prevention (Planning Commission 2007).
The public health expenditure in the country over the years has been comparatively
low, and as a percentage of GDP, it has declined from 1.3 % in 1990 to 0.9 % in 1999,
increased marginally to 1.1 % by 2009 (Ministry of Health and Family Welfare
2010). As per the NHA (20042005), the total health expenditure in India, from all
the sources, constituted 4.25 % of the GDP. Of the total health expenditure, the share
of private sector was the highest at 78.05 %, public sector at 19.67 % and external
flows contributed 2.28 % (MOHFW 2009). The idea of the state of public health
infrastructure can be had from the National Health Policy (2002), which states:
The existing public health infrastructure is far from satisfactory. For the outdoor medical
facilities in existence, funding is generally insufficient, presence of medical and paramedical personnel is often less than that required by prescribed norms, the availability of consumables is frequently negligible, equipment in many public hospitals is often obsolescent
and unusable and the buildings are in a dilapidated state. For indoor treatment facilities, the
equipment is often obsolescent; the availability of essentials drugs is minimal; the capacity
facilities is grossly inadequate, which leads to overcrowding, and consequently to a steep
deterioration in the quality of services. As a result of such inadequate public health facilities,
it has been estimated that less than 20 percent of the patients who seek out patient department services, and less than 45 percent of that who seek indoor treatment, avail of such
services in public hospitals. This is despite the fact that most of the patients do not have the
means to make out of pocket payments for private health services except at the cost of other
essential expenditures for items such as basic nutrition.
Thus, it is abundantly clear that there is a need for serious efforts to improve
service quality in public hospitals.
The per capita public health spending is low in India, being among the five lowest
in the world. Yet, India ranks among the top 20 of the worlds countries in its private
spending. Employers pay for 9 % of spending on private care, health insurance
510 % and 82 % is from personal funds. As a result, more than 40 % of all patients
admitted to hospital have to borrow money or sell assets, including inherited property and farmland, to cover expenses, and 25 % of farmers are driven below the
poverty line by the costs of their medical care (World Bank 2001). An out-of-pocket
payment for healthcare is considered to be the most inefficient and inequitable
means of financing a health system and one of the most regressive forms of healthcare financing (World Health Organisation 2000; World Bank 2005). There is growing evidence globally that healthcare costs can plunge households into poverty
(WHO 2005). When people have to pay fees or copayments for healthcare, the
amount can be so high in relation to income that it results in financial catastrophe
for the individual or the household (Xu et al. 2003). Direct out-of-pocket payments
could push 2.2 % of all healthcare users and one-fourth of all hospitalized patients
into poverty in a year. Although these percentages may seem small, they translate
Significant Predictors of Trust in Government Hospitals
89
into substantial numbers considering our huge population (Peters et al. 2002).
Out-of-pocket expenditure (OOP) on healthcare forms a major barrier to health
seeking in India. According to the National Sample Survey Organization, the year
2004 saw 28 % of ailments in rural areas go untreated due to financial reasonsup
from 15 % in 19951996. Similarly, in urban areas, 20 % of ailments were untreated
due to financial reasonsup from 10 % in 19951996 (MOHFW 2010).
These figures make it clear that majority of our population should rely on public
hospitals managed by government which provides relatively cheaper services. Yet,
the reality is that a large part of our population continues to depend on private sector
for their healthcare needs even when many of them cannot afford it. This is especially
true in case of serious ailments. According to the findings of a white paper on state
of health in Mumbai, published by Praja, a nongovernment organization (NGO),
dependency on nongovernment healthcare facilities is the highest for ailments like
cancer and diabetes with 78 % cancer and 71 % diabetes patients choosing private
or charitable hospitals (Indian Express 2013).
One of the major reasons people choose private hospitals over public hospitals is
trusting the former to offer superior healthcare. Trust is most important where there
is risk and uncertainty. Thus, medical care is an area where trust plays an important
role. Patients trust in their healthcare providers is necessary for them to accept
therapy, to reveal information, and to describe feelings; all prerequisites for effective
medical care (Zhang 2005).
This lack of trust in government hospitals needs to be studied. The efforts to
improve service quality of public hospitals can only produce tangible results in
reducing burden of people of India if it causes a significant change in the intangible
construct of trust in public hospitals. Measuring service quality of government
hospitals and linking it to trust in government hospitals is an important step to
understand where the hospitals are faltering and what aspects of service quality are
significant predictors of trust in government hospitals.
The present study was planned to find significant predictors of trust in government hospitals.
2
2.1
Literature Review
Trust in Hospitals
Research on public trust in health care is relatively scarce. However, measurement of

public trust in health care might be important for governments. It could provide them
with information on the performance of the health care system from a users perspective (Goudge and Gilson 2005). In the field of health care trust is commonly understood as the optimistic acceptance of a vulnerable situation in which the truster
believes the trustee will care for the trusters interests (Hall et al. 2001). Public trust
is trust placed by a group or a person in a societal institution or system. It can also be
described as being confident that you will be adequately treated when you are in
90
A. Sandhu
need of health care (Straten et al. 2002). Public trust is in part influenced by peoples
experiences in contacts with representatives of institutions or systems and in part
influenced by media images (Mechanic and Schlesinger 1996). Public trust in its turn
influences how people enter contacts with health care providers and institutions.
2.2
Perceived Service Quality
Ensuring quality in health care services ought to be a priority for any health care
system. The notion of quality in health services has emerged more strongly because
of the rising costs of treatments, constrained resources and evidence of variations in
clinical practice (Campbell et al. 2000). Assessment of quality usually focuses on
technical concerns as well as the process through which care is delivered. This assessment becomes more authentic and legitimate if based on the application of professional standards integrating the patients views, experiences and perceptions (Haddad
et al. 2001; Aharony and Strasser 1993). Patient assessment of the health services
together with the views of staff in improving the level of quality is in fact respecting
the consumer sovereignty (Grol 2001). The World Health Organization (Wilkinson
et al. 2004) defined quality of health care through benchmarks of efficiency, cost
effectiveness and social acceptability. It is seldom seen that researchers have looked
for evaluation of health care services from a consumer perspective. Parasuraman
et al. (1988) defined service quality as the gap between customers expectations of
service and their perception of the service experience. They proposed SERVQUAL
framework to assess perceived service quality for a variety of sectors. There is growing evidence to suggest that this perceived quality is the single most important variable influencing consumers perceptions of value and that this, in turn, affects their
intention to purchase products or services (Bolton and Drew 1988; Zeithaml et al.
1996). Majority of the studies have been done in the developed country context,
which cannot be generalized to the Indian context. It has been contended that constructs of service quality that are developed in one culture might not be applicable in
another culture (Kettinger et al. 1995; Karatepe et al. 2005; Ladhari 2008). The
majority section of population will rely on public hospitals managed by government
which provides relatively cheaper services. Hence, the need to focus on management
aspects of hospitals has become more relevant than before. Measuring service quality
as perceived by patients is one step to improve management of public hospitals.
Problem Statement
The problem we are trying to address in this study is to find significant predictors of
trust in government hospitals. This research aims to answer the following main
question:
What are the significant predictors of trust in government hospitals among factors measuring
perceived service quality in government hospitals?
91
Research Model and Hypotheses
The main aim of this research is to find factors having a significant impact on trust
in government hospitals. The research model is shown in Fig. 7.1. To achieve this
aim, the following hypotheses were proposed:
H1: The admission process in government hospitals has a significant positive impact
on trust in government hospitals.
H2: The medical care in government hospitals has a significant positive impact on
trust in government hospitals.
H3: The overall service in government hospitals has a significant positive impact on
trust in government hospitals.
H4: The discharge process in government hospitals has a significant positive impact
on trust in government hospitals.
H5: The social responsibility of government hospitals has a significant positive
impact on trust in government hospitals.
Research Design and Methodology
To measure the perceived service quality of government hospitals which is made up

of five dimensions: admission, medical care, overall service, discharge and social
responsibility, 24-item scale was used (Table 7.1). These items were taken from a
scale developed specifically to measure perceived service quality for public hospitals
from the users perspective and dubbed PubHosQual by its authors (Aagja and Garg
2010). The scale was selected for the present study as its validity and reliability was
established by its authors. All items were measured on a five-point Likert scale
Admission
Medical
service
Overall
service
Discharge
Social
responsibility
Fig. 7.1 Research model
Trust in
hospitals
92
A. Sandhu
Table 7.1 Scale description

Construct
Admission
Medical service
Overall service
Discharge
Social responsibility
Items
Adm1
Adm2
Adm3
Adm4
Med1
Med2
Med3
Med4
Over1
Over2
Over3
Over4
Over5
Over6
Over7
Over8
Over9
Disc1
Disc2
Disc3
Disc4
Socres1
Socres2
Socres3
Description
Prompt admission
Polite employees
Handles emergency well
Good ambulance services
Knowledgeable doctors
Knowledgeable nurses
Knowledgeable staff
Prevent hospital acquired disease
Visually appealing pamphlets
Visually attractive and comfortable facilities
Clean rooms without foul smell
Sincere interest
Dependable
Prompt service
Willing to help patients
Respond to patients request
Patients best interest at heart
Prompt discharge
Explain the discharge process
Know needs of patient
Explain precautions after discharge
Equal treatment to all
Good service at reasonable cost
Sense of responsibility
having extreme anchors, strongly disagree and strongly agree (where 1 = strongly
disagree, 2 = disagree, 3 = neutral (neither agree nor disagree), 4 = agree, 5 = strongly
agree). The 24 items measured five constructs of perceived service quality which are
admission (four questions), medical care (four questions), overall service (nine
questions), discharge (four questions) and social responsibility (three questions).
Trust in government hospitals was measured with a 12-item scale adapted from
a questionnaire measuring public trust in healthcare (Schee et al. 2006).
5.1
Sampling
An online survey was floated based on the convenience sampling method, and
responses were recorded on the 36 items which are a part of the scales measuring
service quality and trust along with demographic data. A total of 105 individuals
participated in the study. The procedure employed was convenience sampling as it
is considered the best way of getting some basic information quickly and efficiently
(Sekaran 2006). Data was then analyzed using SPSS version 18.0 for windows.
93
Results
The sample consisted of 105 respondents of which 81 were male and 24 were
female. The age range of the sample was 2250 years with the mean age being
28.8 years with a standard deviation of 6.96 years. The descriptive statistics for all
the individual constructs are given in Table 7.2.
Reliability analysis was done on the perceived service quality scale and
the Cronbachs alpha value was 0.90 for the scale. The Cronbachs alpha value
for the scale measuring trust was also found to be 0.90. The Cronbachs alpha value
for the scales measuring the constructs of admission, medical service, overall
service, discharge and social responsibility is 0.71, 0.75, 0.82, 0.70 and 0.70, respectively, which is greater than or equal to Cronbachs alpha value 0.7 (Nunnally 1978).
Hence, reliability of the scales was established.
To analyze multicollinearity, three types of measurements are used: Durbin
Watson, Variance Inflation Factor (VIF) and tolerance. The VIF measures the extent
to which the variance of the estimated regression coefficients is inflated as a result
of being related to other independent variables and tolerance is the amount of variability of the selected independent variables not explained by other independent
variables. Results showed that VIF for all independent variables ranged from 1.64
to 2.66 which is less than 5 and hence acceptable. Tolerance ranged from 0.37 to
0.60 which is greater than 0.2, and hence, it can be said that there was no high
correlation among the independent variables. Durbin Watson value was 1.798 which
again falls in the acceptable limits. Hence, based on these three measurements, it
can be said that multicollinearity is not present among the independent variables.
Multiple regression is an extension of bivariate correlation. The result of regression
is an equation that represents the best prediction of a dependent variable from several
independent variables. Stepwise multiple regression was done to find the cause effect
relationship between the five independent variables (admission, medical service, overall service, discharge and social responsibility) and trust in government hospitals.
From Table 7.3, it can be seen that only three independent variables , i.e. social
responsibility, medical service and discharge, have entered the regression equation.
These three variables together explain 63.4 % of the variability in trust in government hospitals. Social responsibility on its own contributes to 47.7 % of the
Table 7.2 Descriptive statistics

Adm
Med
Over
Disc
Socres
Trust
Valid N (listwise)
N
105
105
105
105
105
105
105
Minimum
1.00
1.25
1.00
1.00
1.00
1.17
Maximum
3.75
4.50
4.00
4.25
4.67
4.00
Mean
2.1595
3.0143
2.0646
2.8048
2.4540
2.8302
Std. deviation
0.64406
0.77042
0.57689
0.70454
0.84873
0.68367
94
A. Sandhu
Table 7.3 Variables entered/removeda

Model
Dimension0
Variables
entered
Socres
Med
Disc
Variables
removed
Method
Stepwise (criteria: probability-of-F-to-enter
0.050, probability-of-F-to-remove 0.100)
Dependent variable: trust
variance in trust in government hospitals (Table 7.4). These three variables are
significant predictors of trust in government hospitals, as indicated by the F value
and level of significance associated with it in Table 7.5. An examination of the
t-values in Table 7.6 indicates that social responsibility, medical service and
discharge in government hospitals contribute significantly to the prediction of
trust in government hospitals. It can be seen in Table 7.7 that two independent
variablesoverall service and admissionfailed to meet the selection criteria of
stepwise regression, as indicated by nonsignificant t-values (p > 0.05). From the
scatterplot of residuals against predicted values (Fig. 7.2), it can be seen that
there is no clear relationship between the residuals and the predicted values,
consistent with the assumption of linearity. The normal plot of regression
standardized residuals for the dependent variable (Fig. 7.3) and also indicates a
relatively normal distribution.
Discussion
The research findings indicate that trust in government hospitals can be significantly
predicted by social responsibility, medical service and discharge in government
hospitals. In light of the research objectives and the hypothesis testing, the researcher
has revealed the following overall conclusions.
7.1
Admission
Admission process was not a significant predictor of trust; hence, H1 is rejected.

Admission process is an important dimension of service quality of hospitals
(Carman 1990; Rust and Oliver 1994); hence, it was included as a variable to predict
trust, but in this study, it was not found to have a significant effect on trust.
R
0.691b
0.786c
0.796d
1
2
3
a
b
Predictors: (constant), Socres
c
Predictors: (constant), Socres, med
d
Predictors: (constant), Socres, med, disc
Model
Dimension0
Table 7.4 Model summarya
R square
0.477
0.617
0.634
Adjusted
R square
0.472
0.610
0.623
Std. error of
the estimate
0.49681
0.42720
0.41978
Change statistics
R square
change
F change
0.477
93.947
0.140
37.299
0.017
4.641
df1
1
1
1
df2
103
102
101
Sig. F
change
0.000
0.000
0.034
7
95
A. Sandhu
96
Table 7.5 ANOVAa
Model
Sum of squares
1
Regression
23.188
Residual
25.422
Total
48.610
2
Regression
29.995
Residual
18.615
Total
48.610
3
Regression
30.813
Residual
17.797
Total
48.610
a
b
Predictors: (constant), Socres
c
Predictors: (constant), Socres, med
d
Predictors: (constant), Socres, med, disc
df
1
103
104
2
102
104
3
101
104
Mean square
23.188
0.247
F
93.947
Sig.
0.000b
14.997
0.183
82.177
0.000c
10.271
0.176
58.287
0.000d
t
9.834
9.693
4.010
7.438
6.107
2.677
6.823
4.965
2.154
Sig.
0.000
0.000
0.000
0.000
0.000
0.009
0.000
0.000
0.034
Table 7.6 Coefficientsa
Model
1
(Constant)
Socres
2
(Constant)
Socres
Med
3
(Constant)
Socres
Med
Disc
a
7.2
Unstandardized
coefficients
B
Std. error
1.465
0.149
0.556
0.057
0.713
0.178
0.409
0.055
0.370
0.061
0.523
0.195
0.380
0.056
0.318
0.064
0.148
0.069
Standardized
coefficients
Beta
0.691
0.507
0.417
0.471
0.359
0.153
Medical Service
Medical service was found to be a significant predictor of trust; hence, H2 is

accepted. The literature on trust supports this hypothesis too. One definition of
interpersonal physician trust that has been proposed is a patients optimistic acceptance of their vulnerable situation, based on the belief or expectation that the physician will act in the patients best interests (Hall et al. 2001). The primary reason
people go to the hospitals is to avail of its medical services.
97
Table 7.7 Excluded variables

Model
Beta in
t
Sig.
1
Adm
0.263a
3.398
0.001
Med
0.417a
6.107
0.000
3.542
0.001
Over
0.303a
3.888
0.000
Disc
0.284a
2
Adm
0.101b
1.316
0.191
1.698
0.093
Over
0.141b
Disc
0.153b
2.154
0.034
0.967
0.336
3
Adm
0.075c
Over
0.084c
0.930
0.355
a
Predictors in the model: (constant), Socres
b
Predictors in the model: (constant), Socres, med
c
Predictors in the model: (constant), Socres, med, disc
Partial
correlation
0.319
0.517
0.331
0.359
0.130
0.167
0.210
0.096
0.093
Collinearity statistics
Tolerance
0.766
0.807
0.624
0.838
0.630
0.531
0.721
0.610
0.447
Fig. 7.2 Scatterplot
7.3
Overall Service
Overall service did not have a significant impact on trust; hence, H3 is rejected. The
construct overall service is composed of items like visual appeal, cleanliness,
prompt service and comfort. We are conditioned not to expect government hospitals
A. Sandhu
98
Fig. 7.3 Normal P-plot of standardized residual dependent variable: trust
to be visually appealing and comfortable, given the shortage of healthcare facilities

for our vast population. As of January, 2013, there was one government hospital bed
for every 879 people (Indian Express 2013). This might explain the cause of overall
service not having a causal relation with trust in government hospitals.
7.4
Discharge
Discharge was found to be a significant predictor of trust in government hospitals in

this study. Hence, the hypothesis, H4, is accepted. When discharges are expedited
without adequate, synchronized planning, vulnerable people may suffer adverse
consequences (Glasby 2003). Discharge from hospitals can seriously affect the
postdischarge care of the patients and subsequent rehospitalisation. For example,
problematic discharges can result in prolonged hospital stays (Naylor et al. 1994;
Shepperd et al. 2003).
7.5
Social Responsibility
Social responsibility on its own contributes to 47.7 % of the variance in trust in

government hospitals and is the single largest predictor of trust in government hospitals in our study. Social responsibility was found to be a significant predictor of
99
trust in government hospitals, and hence, H5 is accepted. The dimension of social

responsibility is relevant as a part of the GDP (during the last 5 years, the average
spending in health was 0.86 % of the GDP) and is allocated by the government on
public healthcare; informal payments are a part and parcel of the delivery system;
the government health subsidy does not reach the actual beneficiaries; there is lack
of accountability; and 70 % of the urban households and 63 % of the rural households
resort to the private sector as the chief source of healthcare (National Family Health
Surveys 20052006).
Conclusions
The aim of this study was to find significant predictors of trust in government
hospitals. Social responsibility of hospitals, medical service of hospitals and discharge process of hospitals were found to be having a significant impact on government hospitals. Admission process and overall service of hospitals were not found
to be significant predictors of trust in government hospitals. Social responsibility
which was comprised of three items measuring equal treatment to all, good quality
service at reasonable cost and sense of responsibility in government hospitals
emerged to have the most significant impact on trust; therefore, efforts to increase
trust in government hospitals by improving service quality should focus on this
aspect of quality of hospitals which is generally not studied or assessed when service
quality of hospitals is being measured.
8.1
Research Limitations
The present study was done with a sample size of 105 respondents. The proportion
of females in the sample was a mere 23 %. This study needs to be undertaken with
a larger sample size to improve its generalizability. The method of sampling was
convenience sampling; in future research, sampling should be done with probability
sampling techniques. The perceived service quality of hospitals was measured using
a scale called PubHosQual (Aagja and Garg 2010). Confirmatory factor analysis
using AMOS software should have been done in the present study.
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Chapter 8
An Exploration into the Nature

of Comments on Facebook
(Page of Large Indian Organizations)
Rajan Yadav
Conventional marketing wisdom long held that a dissatisfied

customer tells ten people. Butin the new age of social media,
he or she has the tools to tell ten million.
(Paul Gillin)
Abstract Computer-mediated communication (CMC) has redefined the art of

communicating with a customer. The Internet, especially social networking sites
(SNSs), has disrupted the traditional mass media business model of approaching to
the customer and provides an opportunity to strike a dialogue between customer and
marketer on real-time basis. Over the years, SNSs have emerged as a platform to
share positive and unsatisfactory product or service experience in the form of
writing posts or wall-based conversation among a large number of community
members. Marketers worldwide are using SNSs as a means of managing their
recovery from a crisis. The aim of this study is to analyze the extent of participation
by Indian customers and organizations on such conversation on virtual communities. The information was collected from the official Facebook page of 25 different
companies selected across five major sectors of the Indian economy from the
ET-500 ranking for 2012. The study observed that large Indian organizations do not
consider such comment as a feedback and an opportunity to improve their image
and public relation. The study is the first of its kind that provides some empirical
evidences to marketers, researchers, customers, and others on such an emerging
paradigm of consumer phenomenon in India.
Keywords Social networking sites Customer expression Communication
technology Facebook
R. Yadav (*)
Delhi School of Management, Delhi Technological University, New Delhi 110042, India
Springer India 2015
103
104
R. Yadav
Introduction
In the last couple of years, the Internet has emerged as one of the most powerful technological advancements which has deep influence on the consumer behavior of the people.
There is hardly any business domain which has not integrated information and communication technology in improving the value chain system of the organization. It has redefined the art of communicating with customer, engaging them in persistent and
meaningful dialogue and tap customer information and knowledge in strategy formulation (Van Bruggen et al. 2010). Social networking sites like Facebook, Orkut, Twitter,
and Myspace are increasingly used by marketing organizations to make an interactive
dialogue with the customers. It provides the ability to marketers to share the latest information about their brands, sales promotion, new launches, and consumer contests with
a very large number of fans/members who join such network of communities online.
Information exchanged through online discussion forums, electronic bulletin
boards, blogs, newsgroup, and product-service review sites, including SNSs, put
more interactive, trustworthy, and credible impact on consumer buying behavior
(Bickart and Schindler 2001; Goldsmith and Horowitz 2006; Liao and Cheung
2006; Blackshaw 2008; Chang and Zhu 2011). Unlike traditional mass media like
television and radio, SNSs are considered as a highly interactive media where people can transmit content, pictures, and music in their social communities without
any cost (Boyd and Ellison 2007). The ability to develop social capital and the
interactive nature of SNSs acts as a magnet to attract and retain visitors. Although,
SNSs are unable to develop a distinct and solid business model, but the impact that
they create in spreading information in a democratic manner, offering creative
learning engagement, and making behavioral changes is deeply traversed. It can be
observed from growing profile creation by corporates and individuals, time-spending
patterns on these profiles, and nature of information exchange which benefits both
consumers and marketers extensively.
In an effort to reach a large number of existing and potential customers, improve the
visibility and brand equity, and find a cost-effective solution to highly expensive traditional mass media, marketers are now unlocking the value through such structured set
of social relationships (Sawhney and Verona 2005; Muniz and OGuinn 2006; Ulusu
2010; Carola 2011). Social networking sites offer a business that no other form of public
interface does: the ability to monitor public perception of their brand and services in
real time (Merril et al. 2011). In recent years, SNSs are also used by marketers to create
a mediating effect between the customers and the society. SNSs like Facebook are now
looking beyond the like only business to more meaningful associations that include
trying to light up villages, reduce corruption, quit smoking, and generally make the
world a better place to live in (Bapna 2013). Some of the these campaigns have created
a strong synergy between the digital world, the company, and the stakeholders in order
to educate the customer against social evils and creating a brands presence felt among
a large number of virtual community members worldwide.
However, such social platforms also pose the risk of sharing negative comments
by an upset customer among the community members instantly. On one hand, it
An Exploration into the Nature of Comments on Facebook (Page of Large Indian
105
provides a democratic opportunity to the customer to share her dissatisfied

experience with the corporate leadership, product, or service. At the same time, such
negative word of mouth also provides an opportunity to the marketers to tackle them
by offering solutions to such negative comments on their community pages. The
digital platforms open gates to people to criticize any undesirable experience with a
product or service delivered to them. It has also been observed that such platforms
have become so strong in recent years that a brand which does not have any official
presence on Facebook or Twitter may also get such perceived threat of talking in the
form of advocates or haters through writing on walls or liking on the individual
persons Facebook page. The growing adoption of SNSs has given rise to the
concept of Citizen Journalist through which even the opinion of the common
citizen can be published easily using SNSs (James 2011; Ansari 2013).
So far, no major studies have been conducted to analyze and monitor the extent
of the involvement of the customer and organizations on SNSs as a medium to
exchange meaningful and valuable information especially in India where a significant percent of marketers still believe in transactional marketing only. The insight
from this study can serve as a roadmap for marketers, SNSs, policy makers, and
others who can develop a mechanism to provide a real sense of consumer democracy in which consumer mandate and voice can be used effectively for collaborative
learning and mutual benefits.
Objectives of the Study
To analyze the integration of large Indian organizations over Facebook

To monitor and understand the extent to which consumers are using such
networks to express their feeling about that organization
Literature Review
Social networks have achieved phenomenal success in terms of profile creation in

developed markets during the last couple of years. As a result, they have attracted the
attention of academia, practitioners, and marketers to convert this proposition into
specific business opportunities. Most of the investigation which have been carried
out in this direction so far attempted to explain the historical development of social
networks (Donath and Boyd 2004; Boyd and Ellison 2007), identity and privacy
issues, enhancement of social capital (Ellison et al. 2006; Mudambi and Schuff
2006; Hanna et al. 2011), and customer engagement (Ulusu 2010; Gummerus
et al. 2012). In addition to that, the majority of such studies conducted so far are
more relevant to developed and mature markets which are characterized with a high
degree of computer literacy and broadband penetration. There is a dearth of literature
106
R. Yadav
that investigates the level of customer involvement to share their offline experiences
online and marketers intent to take such feedback as an opportunity to listen to customer voice.
Among various SNSs, Facebook has emerged as one of the fastest growing
virtual network communities in terms of profile creation among individuals as well
as marketers. No modern marketing plan targeting users online is complete without
a social network marketing component (Ulusu 2010). The term Facebook is derived
from publications, issued by many American colleges, that display the names and
photographs of students attending the institution for the purpose of promoting social
interaction among the student community (Dekay 2012). Initially, the founder Mark
Zuckerberg restricted this community to college students by requiring users to
register with a valid e-mail address associated with their institution (Ulusu 2010).
The community enjoyed high patronage and adoption among college students at par
with iPods and text message in America. The restriction to college students only
was relaxed in 2006 and high school students over 13 years of age with a valid
e-mail address were also invited to join the Facebook community. The decision
helped Facebook to penetrate among American youngsters deeply. Eventually,
corporate and other segments were also invited to join the Facebook community.
Since 2004, Facebook developers took a series of measures to enhance the interactive ability of the site by promoting photographs and videos and creating and
writing on the wall, live chat, and numerous other avenues for user engagements.
In the first phase, Facebook permitted the so-called elite club of ten companies
including Amazon.com, Apple, and Electronic Arts to open their profiles on Facebook.
Virtually, over the years, it permitted the marketers worldwide to connect to a large
number of people, customer, and prospect by making a Facebook profile of their
respective organizations.
In todays competitive environment where connecting with customers has
become a necessity, organizations worldwide are using Facebook extensively to
understand customers perception about their brands by using Facebook analytics.
Marketers also use this platform by using newsfeed or paid advertising on
Facebook (Gather 2011). A corporate presence on such virtual networking
communities allows to spread increased positive word of mouth communication
which enjoys high degree of credibility and co-creation in comparison to other
means of communicating with the customer (Shankar and Smith 2003; Prahalad
and Ramaswamy 2004).
There is no doubt that a positive WoM on community brings immense dividend
in terms of improving brand equity and amplifies it within the consumer and larger
communities on a real-time basis (Lester et al. 2012). However, the opposite is also
true. Any undesirable corporate act, unsatisfactory service experience, or public
gaffes that originate offline migrate into the social media sphere like Facebook
within minutes in the form of angry posts, wall-based conversation, and activistorchestrated attacks (Champoux et al. 2012). There is an inherent tension for marketers as SNSs offer more power to the consumers, and such freedom may sometimes
prove very precarious when consumers use such platform to vent their anger
(Thomas et al. 2012).
107
There is virtually an absence of empirical investigation which examines how

Indian customers and marketers are connecting through social networking platforms
to make a bidirectional communication for the benefit of each other. Thus, the
contribution of this paper lies in understanding and analyzing the extent to which
Indian consumers and marketers are using these platforms as a medium of communication exchange and unpacking certain possible solutions to deal with such
user-generated content on their profile page.
Methodology
The study used multistage sampling. In the first stage, five major sectors were
selected. These sectors were consumer nondurables (FMCG), banking, and telecommunication, automobile, and real estate. In the second stage, five top organizations from each sector were identified and selected as sample of the study on the
basis of their ranking in Economic Times (ET) 500 survey carried out for 2012. In
totality, data from 25 corporations are collected.
The data was collected between November 25, 2013 and December 10, 2013
from the official Facebook page of the respective organization. The study considered only those Facebook pages which have been officially sponsored by corporations, and mere use of the logo or brand name of a corporation did not qualify them
as a unit of study. In cases where a firm has a different Facebook profile for individual brands, the Facebook profile of one of the biggest brands has been taken as
sample unit for analysis.
The Facebook page of individual marketers was observed during the data collection period, and the nature of the comments posted on each profile was observed.
The comments were analyzed and subsequently divided into two categories: negative
and positive. Negative comments were defined as those comments that were
precarious, sarcastic, and unfavorable; evince criticism; or have certain input of
disagreement, negativity, or unfavorable feedback about products, practices, communication, and societal orientation of the firm. Positive comments were defined
as those remarks having certain content of favorable input and not necessarily
appreciative or praising in nature. Each comment or posting on the Facebook page
of the sampled organization was monitored and tabulated accordingly.
Findings
The study observed that 96 % of the sampled organizations have a Facebook profile
of either of their individual brands or corporate brand. Mahanagar Telephone Nigam
Ltd. was the only organization in the sample not communicating with their customers and other stakeholders on social media like Facebook. A summary of the survey
result is given in Table 8.1 below. The study analyzed around 2,500 comments of the
ET 500
companies
list 2012
FMCG
1
2
3
4
5
Banking
1
2
3
4
5
Telecom
1
2
Official
Facebook
page (Y/N)
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Company name
ITC Ltd.
Hindustan Unilever Ltd.
Nestle India Ltd.
Godrej Industries Ltd.
Britannia Industries Ltd.
State Bank of India

ICICI Bank Ltd.
Punjab National Bank
Bank of Baroda
Canara Bank
Bharti Airtel Ltd.

Reliance Communications
Ltd.
9
17
30
115
3
2
5
160
2,262
60
40
30
Total no. of
comments
Table 8.1 Facebook comments monitoring data of large Indian organizations
8
2
15
110
3
2
5
150
2,242
55
35
27
No. of
positive
comments
1
15
15
5
0
0
0
10
20
5
87.5
3
No. of
negative
comments
88.88
11.76
50
95.65
100
100
100
93.75
99.11
91.66
12.5
90
% positive
comments
11.11
88.23
50
4.3
0
0
0
6.25
0.88
8.33
50
10
% negative
comments
100
0
1
2
3
4
5
50
10
20
0
0
% negative
comments
with responses
108
R. Yadav
Automobile
1
2
3
4
5
Real Estate
1
2
3
4
3
4
5
Y
Y
Y
Y
Jaiprakash Associates Ltd.

Punj Lloyd Ltd.
DLF Ltd.
Hindustan Construction
Company Ltd.
NCC Ltd.
Y
Y
Y
Y
Y
y
Y
N
Maruti Suzuki India Ltd.

Hero MotoCorp Ltd.
Bajaj Auto Ltd.
Ashok Leyland Ltd.
Escorts Ltd.
Idea Cellular Ltd.

Tata Communications Ltd.
Mahanagar Telephone
Nigam Ltd.
1
0
0
0
247
30
114
3
0
126
4
0
1
0
0
0
217
29
114
3
0
76
0
0
0
0
0
0
30
1
0
0
0
50
4
0
100
0
0
0
87.85
96.66
100
100
0
60.31
0
0
0
0
0
0
13.82
3.33
0
0
0
39.68
100
0
0
0
0
0
0
0
0
0
0
20
25
0
8
109
110
R. Yadav
sampled companies. The inter-sectoral monitoring of the data reveals that the
FMCG sector got the maximum Facebook participation in terms of both negative
and positive comments. However, intra-sectoral analysis of the FMCG sector
displays high degree of variation among the companies. Due to a very strong consumer base and product portfolio, HUL has got the maximum Facebook traffic
among the sampled organizations. The real estate sector displays the least Facebook
comments during this period. The FMCG sector is followed by automobile, telecom,
and banking sector in terms of total comments. The reason for the low comments in
the real estate sector for low participation on Facebook page may be attributed in
terms of the real estate sectors high level of reported dissatisfaction and the nature
of segment it serves.
The data analysis reveals that it is again the FMCG sector which attributes the
maximum percent of the positive comments on its Facebook page. It may be due to
the large number of customer base that these organizations are serving. Similarly, the
nature of positive comments also related with the integration of various communication tools in digital platforms that sampled FMCG organizations are using to connect
with the customers through various engagements practices on social media. Such
online engagement practices are also very high among automobile companies selected
in the sample. HUL and Nestle observed more than 90 % comments as positive on
their respective Facebook page. Interindustry comparison revealed that Reliance
Communication got the lowest percentage of positive comments on its Facebook wall
during the survey period. The low percentage of positive comment may be considered
as an indicator of low level of customer satisfaction in such organizations.
The percentage of comment with negative input painted a different picture of
customer complaint behavior on the Facebook page among selected organizations.
The FMCG sector has performed better than other sectors. However, on this parameter, telecom and banking sectors have failed miserably in comparison to other
sectors. Reliance Communications and State Bank of India got 88.23 and 50 %
negative comments on their respective Facebook page during the survey period.
In the automobile sector, Maruti Suzuki Ltd. also got around 14 % negative comments
during this period. The microanalysis of the negative comments ranges from sector
to sector. In case of banking sector, negative comments range from nondelivery of
credit cards to misbehavior of dealing frontline staff at the time of availing the
service.
A competitive and competent organization is expected to take such negative wall
as an opportunity to listen and understand the customers perception about the organization. The advocates of the social media theory of communication also profess to
respond and communicate to an angry or otherwise upset customer. In communication platforms where an organization has the least control over the content of the
message, ignoring to respond to dissatisfied customers who have used such platform
may prove fatal. However, such proposition did not seem to be followed by firms in
almost all the sampled organizations. Two outliers have also been observed in this
case. Bharti Airtel and State Bank of India responded with 100 % of the negative
comments which have been posted on the wall during the survey period. Even
FMCG firms like Hindustan Unilever Ltd. which performed better in other two
111
parameters responded to approximately 10 % of the negative comments. The

problem was observed quite seriously with ITC Ltd. which responded only half of
the negative comments posted on the wall during survey period. Reliance
Communication was observed with almost zero percent response to 12 % negative
comments posted on its wall. The poor rate of response to various negative comments displayed the unresponsive and unwilling nature of a significant percent of
sampled organizations to listen to customer anxiety on the virtual platform. When
businesses are unresponsive and slow to respond to customer communication, they
are perceived as aloof, uncaring, or guilty of the complaints for which they are
accused (Howell et al. 2012). Not responding or ignoring such an opportunity makes
an organization vulnerable and offers a more risky proposition for a firm looking for
sustainable competitive advantages in modern times.
Implications for Future Research
Customer participation in terms of writing positive and negative comments on

virtual community sites like Facebook provides a rich resource for marketing analytics to understand and listen to the customers voice. Such writings basically
provide broad dimensions of opinion and attitude that customers may have about a
particular product and service. These responses may vary from appreciation to
profane and sarcastic remarks to pronouncements. An analysis of such walls requires
a careful and identifiable analysis of their tone, nature, and pattern used in such
postings. The present study divided wall postings into two categories only. There is
a scope to have more than two categories for analyzing wall postings in other such
research. Future research on this subject is also required to understand and analyze
the impact of these postings on the larger communitys attitude and buying behavior. In addition, the tendency of the majority of the firms to ignore and nonresponse
to consumer complaints on Facebook requires further investigation.
The findings of this research can also be tested by conducting such studies with
different population and unit of analysis. For example, a study on small- and
medium-size enterprises can be conducted to compare the findings with large organizations as used in this study. The currency of this research can further be tested
by improving the sample size and analyzing empirically what discourages these
organizations from responding to communicate with their customers for all kinds of
comments that customers write on their social community pages.
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Chapter 9
Analysis of Perception of Customers

of Bata India Limited Products
N.P. Singh, S.K. Sharma, D. Singh, and S. Kalra
Abstract India is the second largest global producer of footwear after China,
accounting for 13 % of global footwear production of 16 billion pairs during
20122013 but mainly to meet domestic needs. Bata India is not only one of the
leading manufacturers of footwear in India but a household name. This paper presents
the analysis of perception of consumers about Bata products, relationship of perception with expenditure per year on Bata products, frequency of buying Bata products,
repeat purchases, and recommendation of Bata products to others. In addition research
paper presents the analysis of differences in perceptions with respect to various
categories of demographics. Perception data was subjected to reliability analysis,
exploratory data analysis, factor analysis, dependency analysis, and regression analysis.
It is concluded that Bata products are accepted by all segments of the responds with
almost same perception and Bata needs to improve collection for ladies.
Keywords Bata India Perception Footwear Factor analysis Reliability
coefficient KMO
Introduction
According to PRNewswire (2012), the global footwear market was worth USD 185.2
billion in 2011. It is expected to reach US$ 195 billion by 2015 BusinessVibes
(2013). It is expected to reach USD 211.5 billion in 2018. It will grow at a compound
annual growth rate (CAGR) of 1.9 % from 2011 to 2018. Asia Pacific is expected to
maintain its lead position in terms of revenue till 2018. Asia Pacific is expected to
enjoy 30.1 % of the global footwear market revenue share in 2018 followed by
Europe PRNewswire (2012). The major contribution will come from China and
India. As per RNCOS (2013), India is the second largest global producer of footwear
after China, accounting for 13 % of global footwear production. As per Assocham
N.P. Singh (*) S.K. Sharma D. Singh S. Kalra
Information Management, Management Development Institute,
Mehrauli Road, Sukhrali, Gurgaon 12207, Haryana, India
e-mail: [email protected]; [email protected]; [email protected];
[email protected]
Springer India 2015
113
114
N.P. Singh et al.
report, February 2012, the Indian footwear industry is growing at a compound annual
growth rate (CAGR) of about 15 % and is likely to reach approximately INR 38,700
crore by 2015 from the current level of around INR 23,600 crore (Amarnath 2012).
During 20122013, India produces 2,065 million pairs of different categories of
footwear (leather footwear, 909 million pairs; leather shoe uppers, 100 million
pairs; and non-leather footwear, 1,056 million pairs). India exports were about 115
million pairs. Thus, nearly 95 % of its production goes to meet its own domestic
demand (http://www.leatherindia.org/products/footwear-23-4-13.asp).
The major production centers in India are Chennai, Ranipet, Ambur in Tamil
Nadu, Mumbai in Maharashtra, Kanpur in UP, Jalandhar in Punjab, Agra, Delhi,
Karnal, Ludhiana, Sonepat, Faridabad, Pune, Kolkata, Calicut, and Ernakulam. About
1.10 million are engaged in the footwear manufacturing industry as per the data of
export leather council. The Indian footwear market is segmented between organized
and unorganized segments. The organized market of footwear in India is dominated
by key brands like Bata, Liberty, Clarks, Woodland, Khadims, Metro, Red Tape,
The Loft, M&B Footwear, Da Milano, Timberland, Puma, Nike, Adidas, Reebok,
Rockport, Provogue, Lee Cooper, Converse, Nine West, Aldo, Relaxo, etc., whereas
the organized footwear market is fetched by small unorganized players. Market size
of Indian footwear industry was US$ 2,684.6 million during 2012 in comparison to
US$ 2,442.8 million during 2011 (Source: http://advantage.marketline.com/
Product?pid=MLIP0948-0015). It is reported by the experts that contribution of
organized market is 2040 % (Mahesh 2012; Garg 2011). However, most of the
reports are suggesting that it is about 20 %.
New policy change by the Government of India has now de-licensed and dereserved the footwear sector, paving the way for expansion of capacities on modern
lines with state-of-the-art machinery. It will give a big boost to the industry. Another
policy change done by the government is permission of 100 % Foreign Direct
Investment through the automatic route for the footwear sector.
Footwear Imports Global Trend The major importers of footwear (leather and
non-leather) are the USA, Germany, France, UK, Italy, Hong Kong, Japan, the
Netherlands, Spain, Belgium, and Canada. It is reported that imports by these countries are increasing year after year but Germany had witnessed a sharp increase in
comparison to other European importers from 2007 to 2011. During 2011, Germany
recorded imports of 8,527.62 million US$ in comparison to US$ 5,966.99 during
2007. On the other hand, Russian Federation imports have almost doubled during
2007 (US$ 2,067.82 million)2011 (US$ 3,935.95 million). However, the USA
remains the biggest importer of footwear during the same period with a substantial
growth. Indian manufacturers may target these markets for export of footwear
(Source: http://www.leatherindia.org/products/footwear-23-4-13.asp).
Footwear Exports Global Trends The major exporting countries of footwear are
China, Italy, Hong Kong, Germany, Belgium, Indonesia, the Netherlands, Spain,
France, Portugal, UK, and Romania. China is the number one exporter of footwear
in the global market. China exported footwear of US$ 39,374.18 million in comparison to US$ 1,421 million from India during 2011. Though India is the second
largest producer and supplies footwear to a large number of countries across the
Analysis of Perception of Customers of Bata India Limited Products
115
globe, its share in export share is at par with Romania (US$ 1,393.71 million)
(Source: http://www.leatherindia.org/products/footwear-23-4-13.asp).
Trend in Share of Exports of India in the Global Market The global import of
footwear (both leather footwear and non-leather footwear) has increased from US$
81.47 billion in 2007 to US$ 103.38 billion in 2011, growing at a CAGR of 6.13 %.
During 2011, the Indias share in the global import was 2.01 %. However, it has
grown from 1.82 % in 2007 (Source: ITC, Geneva & DGCI &S, Kolkata).
Research Objectives Keeping in view the importance of the footwear industry for
Indian economy and Bata Company being very important manufacturer of footwear,
the present study is taken up with following research objectives:
(a) To study the perception of consumers with respect comfort, price, appearance,
and availability of Bata products
(b) To study variations in the perception with respect to demographics of the customers
(c) To study the relations of perception with expenditure, frequency of buying,
repeat purchase, and recommendations of Bata products to others
The research paper is organized into four sections. The paper starts with introduction of footwear industry followed by a brief discussion about Bata India Limited
in Sect. 2. Section 3 presents the research methodology. Analysis and results are
presented in Sect. 4 followed by a section of conclusions and limitations.
1.1
Bata India Limited
Bata India Limited (Bata) is the largest retailer and leading manufacturer of footwear in India. Bata has presence in 70 countries across five continents. Bata India
Limited (Bata) is a 52 % subsidiary of the Netherlands-based Bata BV. It sells a
wide range of canvas, rubber, leather, and plastic footwear. The company has a
licensed capacity of 628 lakh pairs per annum spread across its five manufacturing
units at Batanagar (Kolkata), Faridabad (Haryana), Bataganj (Bihar), Peenya (near
Bangalore), and Hosur (Tamil Nadu). The company has one tannery at Mokama
Ghat (Bihar). It serves more than 150,000 customers daily through 1,250 retail
stores. The company has employed more than 7,000 people. Its competitors in India
are Reebok, Nike, and Adidas but they target higher income group of population.
During the year 2012 Bata has achieved 19,017 million indian rupee (INR) revenue
from sales and other sources as compared to 16,960 million INR in 2011, reflecting a
growth of approximately 12 % on year-on-year. The company has been growing at the
rate of 13 % CAGR from 2004 to 2012 year-on-year. Bata has negative net profit in
2004 but after that it is consistently growing till 2011. Net profit has been dip by 24 %
in 2012. Batas return on equity has been more than 20 % since 2007. The company
has also given good return to shareholders. The EPS has been positive since 2005 and
growing at an annual CAGR of 24 %. This reflects the strong financial stability of Bata
in the market. Share of Bata in Indian market is 7.23 % during 2012. However, during
the same year, its share was 10.08 % in the organized footwear market in India.
116
1.2
N.P. Singh et al.
SWOT Analysis of Bata
SWOT is a tool that identifies the strengths, weaknesses, opportunities, and

threats of an organization. Specifically, SWOT is a basic, straightforward model
that assesses what an organization can and cannot do as well as its potential
opportunities and threats. The method of SWOT analysis is to take the information from an environmental analysis and separate it into internal (strengths and
weaknesses) and external (opportunities and threats) issues. Once this is completed, SWOT analysis determines what may assist the firm in accomplishing its
objectives and what obstacles must be overcome or minimized to achieve the
desired results.
SWOT matrix for Bata
Strength
(a) Presence of Bata in tier
2/3/4 cities through its
large distribution network
(b) Conceived as value for
money product for its
quality and durability
(c) Establish brand in India
(d) Largest market share in
organized footwear
market
(e) Diverse footwear
collection for the entire
family
Opportunities
(a) Price gap between
Bata product and
global brand
(b) E-commerce business
is growing
(c) There is demand for
fashionable apparels
(d) Per capita footwear
consumption in India
is growing
(e) Increasing middleclass income
Weakness
(a) Lack of fashion/trendy
collection
(b) No product differentiation
(c) Not focus on innovative

products
(d) Conceived as low-rated
brand in metropolitan city
(e) Not much focused on

promotion of brand
(f) No major footprint in
international market
(g) Less number of companyowned stores
SO strategies
WO strategies
(a) Expand rural reach
(a) International expansion in
value for money
categories with focus on
product quality, reliability,
(b) Special product suitable to
and durability
villagers need in harsh
usage
(c) Focus on value for money
product
(d) Strengthen brand image in
rural and tier 2/3 cities
(e) Fashion product for tier 1
cities
(continued)
Threat
(a) Share of unorganized
footwear market is
80 %
(b) Intense competition
(c) Entry of big brand in
affordable segment
(d) High inflation rate
pushing up the cost of
raw materials
ST strategies
(a) Promotional scheme for
rural area
(b) Special incentive for
distributor located in tier
2/3 cities
117
WT strategies
(a) Lowest price for rural
area
(b) Highly durable product to
meet need of villagers
(c) Extended sole warranty
for product sold to
villagers
1. Methodology: The research methodology adopted in the present research paper

is exploratory and descriptive in nature. It is exploratory in two ways. First, the
sample size is not very large. Second, only few dimensions are considered while
collecting data. It is descriptive because we have used its methodology and with
these empirical evidences, authors have tested a large number of hypotheses.
2. Sampling Framework: Sampling framework includes two approaches of data
collection. These approaches are collecting data directly from the respondents in
person and collecting data from the respondents online. In both cases same structured questionnaire as given in annexure was used. As a part of the first approach,
data was collected from retail stores located in Gurgaon and Delhi which attracts
maximum footwear customers with different demographics. The objective was
to get a good mix of customer perception on various variables.
For data collection from retail stores, questionnaires were handed over to customers while they were in Bata retail store with a request for filling at the spot.
Due care was taken to reduce biases by providing clarification to customers to
their queries. In addition to this, a thorough analysis was done for each filled-in
questionnaire to see the consistency of data provided by customers. In such cases
many incomplete questionnaires were found by the authors. Such questionnaires
were not considered worthy for analysis and were rejected.
On the other hand, online collection of data was done from a more
homogeneous group. The group consists of part-time PGPM students of
Management Development Institute, Gurgaon. These respondents are in the age
group of 2435 years. This segment of population was selected due to their adoption of online buying pattern of various needs and they are more Internet savvy.
For the purpose of data collection in the second approach, questionnaire was
circulated to the group using group email ID of part-time PGPM students. All the
118
3.
4.
5.
6.
7.
N.P. Singh et al.
respondents were requested to provide their responses during class break to

insure the increase in response. In this case also responses were taken from the
students who are customers of Bata products.
Design of Questionnaire: The questionnaire was design with four dimensions.
These dimensions are (i) demographics of the respondent such as gender, marital
status, age, qualification, and personal income, (ii) perception of respondents
towards Bata product related to footwear collections only, and (iii) target
variables such as buying frequency, repeat buying, footwear recommendation to
others, and customer expenditure pattern.
Sample Size: A sample of 150 respondents with Z as 95 %, error as 8 %.
Proportion (response distribution) as 50 % was taken for the purpose of primary
data collection by designing a structured questionnaire. The target population
was Bata customer of national capital region (NCR).
Selection of Bata Retail Outlets: Two retail outlets of Bata have been selected for
data collection. One of the outlets is located in Connaught Place, Delhi, and the
other one is located in Sukhrali, Gurgaon. Apart from this, data has also been
collected online from part-time PGPM students.
Methods of Data Analysis: Data were subject to statistical analysis such as
descriptive, statistical analysis, frequency distribution, and factor analysis. For
scaled data, reliability analysis is applied before subjecting the data for testing
mean difference using t-test and carrying out factor analysis. The reliability test
was done with a view to identify inconsistencies in the data set.
Null Hypotheses (Ho): Null hypotheses tested as part of this research work are
listed in the following:
(a) Ho = Gender has no relation with parameters such as (i) buying Bata products, (ii) recommendation of the Bata products to others, and (iii) repeat
buying of Bata products.
(b) Ho = Age has no relation with parameters such as (i) buying Bata products,
(ii) recommendation of the Bata products to others, and (iii) repeat buying of
Bata products.
(c) Ho = Marital status has no relation with parameters such as (i) buying Bata
products, (ii) recommendation of the Bata products to others, and (iii) repeat
(d) Ho = Qualification has no relation with parameters such as (i) buying Bata
products, (ii) recommendation of the Bata products to others, and (iii) repeat
(e) Ho = Income has no relation with parameters such as (i) buying Bata products,
(ii) recommendation of the Bata products to others, and (iii) repeat buying of
Bata products.
(f) Perception of Bata product is independent of (i) expenditure on buying Bata
products, (ii) frequency of buying Bata products, (iii) repeat purchase, and
(iv) recommendations of Bata products to others.
119
Result and Discussion
This section presents the analysis of data with respect to frequency distribution of
demographics of the respondents and frequency analysis of data with respect to
expenditure and frequency of buying during the year. It is followed by frequency
analysis of buying Bata products (first time or regular basis), recommendation of
Bata products to others, and repeat buying by the same consumer/respondent including the dependency with demographics.
3.1
Demographic Data of the Respondents
As mentioned in the section of research methodology, data was collected with

respect to five demographics of the respondents. These demographics are (i) gender,
(ii) marital status, (iii) age, (iv) educational qualifications, and (v) income. It can be
seen from the data given in Tables 9.1 and 9.2 that the majority of the respondents
are male (64 %), single (60 %), between 18 and 30 years of age (61 %), graduate
(45 %), and having income between 5 and 10 lakhs (34 %).
3.2
Data with Respect to Expenditure, Buying Frequency,

Usage of Footwear
This section presents the analysis of data of consumers expenditure on footwear

and buying frequency of footwear in general. The section also presents usage of
Bata products by its buyers/consumers and companion at the time of buying. It is
worth to mention here that all the respondents were selected from the buyers of Bata
products. The data was collected from them while they were making purchases. The
answers with respect to the usage are multiusage type. This is the reason why the
total of the frequency is more than 150 and percentages are not calculated. The data
Table 9.1 Frequency distribution of the sampled buyers of Bata products based on gender, marital
status, and age
Frequency
%age
Gender
Male Female
96
54
64 % 36 %
Marital status
Married Single
59
91
40 %
60 %
Age (in years)

Below 18 1830
10
95
7%
61 %
3140
45
30 %
Above 40
4
2%
Frequency
%age
<Graduate
17
11 %
Qualification
Graduate
67
45 %
Postgraduate
35
23 %
Professional
degrees
31
21 %
05 lakhs
43
29 %
Income
510 lakhs
51
34 %
Table 9.2 Frequency distribution of the sampled buyers of Bata products based on qualification and income
1015 lakhs
29
19 %
1520 lakhs
22
15 %
20+ lakhs
5
3%
120
N.P. Singh et al.
121
Table 9.3 Frequency distribution of expenditure, buying frequency of footwear, and usage of Bata
footwear
Expenditure of footwear
Annual
Frequency
expenditure (%age)
Buying frequencies
Numbers/ Frequency
month
(%age)
Usage of Bata
footwear
Companion
Frequency
Frequency
Category (%age)
Category (%age)
<1,000
1,0012,500
2,5014,000
7 (4.6)
9 (6.0)
30 (20.0)
01
23
35
56 (37.3)
53 (35.3)
36 (24.0)
Casual
Office
In-house
88
84
67
4,0015,000
5,000+
39 (26.0)
65 (56.7)
5+
5 (3.33)
School
Party
Sports
37
22
19
150 (100)
150 (100)
Friends
Family
Only
wife
Alone
21 (14.0)
85 (56.7)
29 (19.3)
15 (10.0)
150 (100)
on these four parameters is complied in Table 9.3. It can be seen from Table 9.3 that
more than 56.7 % respondents buy footwear of more than Rs. 5,000 per year. More
than 62 % respondents buy footwear more than once in a year. The maximum usage
of Bata footwear as reported by the respondents is for office and casuals. The least
responses were for sports followed by party.
3.3
Data with Respect to Repeat Buy and Recommendations
This section presents the analysis of data with respect to three parameters in relation
to Bata products. These parameters are (i) buying Bata products, (ii) recommending
Bata products to others, and (iii) repeat buying of Bata products. Each parameter
answer has two options as mentioned in the questionnaire. The data so analyzed is
presented in Tables 9.4, 9.5, and 9.6. It can be inferred from Table 9.4 that the
majority of respondents were regular buyers of the Bata products, are willing to
recommend Bata products to others (77.3 %), and are repeat buyers (78.0 %).
Having analyzed the data for percentage, an attempt is made to test the hypotheses
that these three parameters are dependent on demographics. Analysis was done with
the help of chi-square test and complied in Table 9.5. It can be seen from Table 9.5
that none of the three parameters is dependent on gender as evident from the p-values of the corresponding chi-squares. It means Bata products have acceptability
among male and female.
Similar analysis is conducted with respect to the other four demographics. Only
p-values of the chi-square are given in Table 9.6. Contingency tables are not given
for these parameters due to paucity of the space. It can be inferred from the p-values
given in Table 9.6 that there is dependency between recommendations of the Bata
products and buying Bata products on regular basis or first-time buy at 10 % level
of significance. Similarly, dependency is seen between age and first-time/regular
buy at 10 % level of significance. In the rest of cases, four demographics under
N.P. Singh et al.
122
Table 9.4 Frequency distribution of buying, repeat buying, and recommendation of Bata products
Buying Bata products
Frequency
First time
31
Regular
119
150
%age
20.7
79.3
100 %
Recommending Bata
products
Frequency %age
Yes
116
77.3
No
34
22.7
150
100 %
Repeat buying
Frequency
Yes
117
No
33
150
%age
78.0
22.0
100 %
Table 9.5 Dependency analysis of type of buyers, recommendation, and repeat buying with
gender
Demographics
Male
Female
Total
Chi-square test
p-values

First
time
Regular
Total
22
74
96
09
45
54
31
119
150
0.364
Recommending Bata
products
Repeat buying
Yes
74
42
116
0.922
Yes
72
45
117
0.364
No
22
12
34
Total
96
54
150
No
24
09
33
Total
96
54
150
Table 9.6 Chi-square p-values with demographics of the respondents
Demographic
Marital status
Age
Qualification
Income

p-value
0.105
0.076
0.141
0.243
Recommending Bata
products
Repeat buying
0.052
0.645
0.476
0.073
0.052
0.2667
0.785
0.962
reference have no dependency with repeat buying, recommendation of the Bata

products to others, and buying Bata products on first-time or regular basis.
The results in three tables (Tables 9.4, 9.5, and 9.6) indicate that Bata products
have acceptability across demographics barring few specific cases.
3.4
Analysis of Perception Data
This section presents data with respect to eight statements which were used to
collect data on five-point Likert-type scale. This data is analyzed using following
statistical methods: (i) descriptive statistics analysis, (ii) hypothesis testing in relation to demographics, (iii) reliability testing, (iv) factor analysis for data reduction,
and (v) linkage of new factors with target variables.
123
Table 9.7 Descriptive statistics of perception data

SN
1
2
3
4
5
6
7
8
3.4.1
Statements/questions/variables/items
How much value you associate with
comfort while buying to Bata
products
price while buying to Bata products
appearance while buying to Bata
products
Do you think Bata has adequate kids
collection
Do you think Bata has adequate ladies
collection
Do you think Bata has adequate
casual collection
formal collection
Do you think Bata has adequate latest
collection
Mean SE
3.99 0.085
Median
4.00
Mode
5.00
Skewness
0.964
3.94 0.074
4.00
4.00
0.921
3.68 0.084
4.00
4.00
0.513
3.41 0.093
4.00
4.00
0.323
3.32 0.085
3.50
4.00
0.346
3.36 0.090
4.00
4.00
0.332
3.79 0.085
4.00
4.00
0.998
3.41 0.090
4.00
4.00
0.365
Results of Descriptive Statistics
Results with respect to descriptive statistics are given in Table 9.7. It is evident
from the results given in Table 9.3 that respondents have given maximum scores
to comfort followed by price and formal collection. Minimum score is given to
ladies collection followed by casual collection and kids and latest collection. The
values of median are 4.00 for all variables except 3.5 for ladies collection. Mode
values are 4.00 except 5.00 for comfort dimension. Distribution of all questions/
variables is skewed to the left as indicated by negative values of skewness
coefficient.
3.4.2
Hypotheses and p-Values
The list of hypotheses tested and corresponding p-values are given in Table 9.8. The
following can be inferred from the p-values given in Table 9.8.
1. There is no evidence against all Hos with respect to gender. It means the perception of men and women respondents is not statistically different with respect to
eight items starting with comfort to latest collection as listed in Table 9.4.
2. There is no evidence against seven Hos with respect to marital status, gender, and
perception on seven dimensions except one, i.e., formal collection at 5 % level of
significance. If we decrease the level of significance to 10 %, then null hypotheses are rejected in four cases (comfort, appearances, kids collection, and formal
N.P. Singh et al.
124
Table 9.8 Hypotheses and corresponding p-values
SN
(A)
Ho 1
Hypotheses
Hypotheses with respect to gender
Men and women associate same value to comfort
while buying Bata products
Ho 2
Men and women associate same value to price while
buying Bata products
Ho 3
Men and women associate same value to appearance
Ho 4
Both men and women think at same level that Bata
has adequate kids collection
Ho 5
Ho 6
Ho 7
Ho 8
(B) Hypotheses with respect to marital status
Married and single associate same value to comfort
Ho 1
Ho 2
Married and single associate same value to price
Ho 3
Married and single associate same value to
appearance while buying Bata products
Ho 4
Both married and single think at same level that
Bata has adequate kids collection
Ho 5
Bata has adequate ladies collection
Ho 6
Bata has adequate casual collection
Ho 7
Bata has adequate formal collection
Ho 8
Bata has adequate latest collection
(C) Hypotheses with respect to age
Respondents of all age groups associate same value
Ho 1
to comfort while buying Bata products
Ho 2
to price while buying Bata products
Ho 3
to appearance while buying Bata products
Ho 4
Respondents of all age groups think at same level
that Bata has adequate kids collection
Ho 5
that Bata has adequate ladies collection
Test statistics
p-values
t-test
0.543
t-test
0.817
t-test
0.482
t-test
0.374
t-test
0.254
t-test
0.485
t-test
0.643
t-test
0.239
t-test
0.070
t-test
0.235
t-test
0.072
t-test
0.077
t-test
0.551
t-test
0.791
t-test
0.026
t-test
0.835
F-test/ANOVA
0.142
F-test/ANOVA
0.335
F-test/ANOVA
0.274
F-test/ANOVA
0.358
F-test/ANOVA
0.778
(continued)
125
Table 9.8 (continued)

SN
Ho 6
Hypotheses
that Bata has adequate casual collection
Ho 7
that Bata has adequate formal collection
Ho 8
that Bata has adequate latest collection
(D) Hypotheses with respect to qualification
Respondents with all qualifications associate same
Ho 1
value to comfort while buying Bata products
Ho 2
value to price while buying Bata products
Ho 3
value to appearance while buying Bata products
Ho 4
Respondents with all qualifications think at same
level that Bata has adequate kids collection
Ho 5
level that Bata has adequate ladies collection
Ho 6
level that Bata has adequate casual collection
Ho 7
Respondents with all qualification think at same
level that Bata has adequate formal collection
Ho 8
Respondents with all qualification think at same
level that Bata has adequate latest collection
(E) Hypotheses with respect to income
Ho 1
Respondents of all income groups associate same
value to comfort while buying Bata products
Ho 2
value to price while buying Bata products
Ho 3
value to appearance while buying Bata products
Ho 4
Respondents of all income groups think at same
level that Bata has adequate kids collection
Ho 5
level that Bata has adequate ladies collection
Ho 6
level that Bata has adequate casual collection
Ho 7
level that Bata has adequate formal collection
Ho 8
level that Bata has adequate latest collection
Test statistics
F-test/ANOVA
p-values
0.615
F-test/ANOVA
0.180
F-test/ANOVA
0.407
F-test/ANOVA
0.173
F-test/ANOVA
0.786
F-test/ANOVA
0.104
F-test/ANOVA
0.002
F-test/ANOVA
0.193
F-test/ANOVA
0.001
F-test/ANOVA
0.298
F-test/ANOVA
0.015
F-test/ANOVA
0.846
F-test/ANOVA
0.782
F-test/ANOVA
0.609
F-test/ANOVA
0.236
F-test/ANOVA
0.415
F-test/ANOVA
0.082
F-test/ANOVA
0.833
F-test/ANOVA
0.383
collection). It is worth to mention here that perception scores assigned by singles

about Bata are less in comparison to score given by married except in the case of
casual collection. It means single and married perception is varying about Bata
on certain dimensions.
126
N.P. Singh et al.
3. There is no evidence against all Hos with respect to age groups. It means the
perception of respondents of different age groups is not statistically different
with respect to eight items/variables/dimensions starting with comfort to latest
collection as listed in Table 9.4. It means the perception of respondents is at par
with respect to eight dimensions taken into in this study.
4. There is no evidence against five null hypotheses with respect to qualifications of
respondents. These dimensions are comfort, price, appearance, ladies collections, and formal collections at 5 % level of significance. However, null hypotheses are rejected on three dimensions in relation to qualifications of the
respondents. These items/dimensions/variables are kids collections and casual
collections. It means respondents with different qualifications perceive these
three dimensions differently.
5. There is no evidence against all Hos with respect to income. It means the perception of all income group respondents is not statistically different with respect to
eight items starting with comfort to latest collection as listed in Table 9.8. It means
consumers of all income groups have almost same perception of Bata products.
3.4.3
Reliability Test, KMO, and Bartlett Test
The value of Cronbachs alpha (reliability coefficient), Kaiser-Meyer-Olkin value

(KMO), the measure of sampling adequacy, and chi-square value of Bartletts test
of sphericity are given in Table 9.9. The value of Cronbachs alpha is greater than
0.70. The value of KMO (0.815) suggests that the degree of common variance is
middling and the values of Bartletts test (p-value = 0.000) are indicative that sample
intercorrelation matrix did not come from a population in which intercorrelation
matrix is an identity matrix in both cases.
3.4.4
Factor Analysis
Based on the factor analysis, two factors/components emerged to explain variation

in the respondents perception scores. The details of factor loading and variation
explained by different factors are presented in Table 9.10. The variation explained
by factor 1 (comfort, price, and appearance) is 52.549 % and by factor 2 (collection
for kids, collection for ladies, casual collection, formal collection, and latest collection) is 14.731 %. Cumulative variation explained by these two factors is 67.280 %
Table 9.9 Reliability coefficient (Cronbachs alpha), KMO, and Bartlett test
Reliability
coefficient
0.869
KMO measure of
sampling adequacy
0.815
Bartlett test of sphericity

Chi-square = 578.83
DF = 28, p-value = 0.000
Remarks
Calculate for 8
items and 150 cases
127
Table 9.10 Eigenvalues and percent of variance explained by extracted factors

Total variance explained
Statement/questions/variables
How much value you associate
with comfort while buying to
Bata products
with price while buying to Bata
products
with appearance while buying to
Bata products
kids collection
ladies collection
casual collection
formal collection
latest collection
Initial eigenvalues
% of
Cumulative
Total variance %
Extraction sums of squared

loadings
% of
Cumulative
Total variance %
4.204
52.549
52.549
4.204
52.549
52.549
1.179
14.731
67.280
1.179
14.731
67.280
0.645
8.061
75.341
0.592
7.399
82.740
0.535
6.692
89.432
0.386
4.820
94.252
0.300
3.750
98.002
0.160
1.998
100.000

Table 9.11 Factor analysis-rotational component matrix and communality
Component matrix
Component
Factor 1
Factor 2
Commonality
Comfort
0.260
0.909
0.893
Value for money
0.104
0.907
0.834
Looks
0.469
0.635
0.623
Kids collection
0.694
0.118
0.496
Ladies collection
0.807
0.157
0.675
Casual collection
0.732
0.266
0.607
Formal collection
0.645
0.450
0.618
Latest collection
0.768
0.215
0.637
Extraction method: principal component analysis. Rotation method: varimax with Kaiser normalization. Note: rotation converged in 3 iterations
that is not a very high value but still can be considered sufficient for the purpose of
data reduction in this case. The loading of the original variables/items on the two
factors is given in Table 9.11 along with values of the communalities. It can be seen
from the data given in Table 9.11 that all the values of factor loading are positive.
128
N.P. Singh et al.
Table 9.12 Extracted factors and their constituents

Core strength
Comfort
Value for money
Looks
Core Strength =
(Comfort + Value for Money + Looks)/3
Variety
Kids collection
Ladies collection
Casual collection
Formal collection
Latest collection
Variety =
(Kids Collection + Ladies Collection + Casual Collection
+ Formal Collection + Latest Collection)/5
The values of the commonality are high to very high except in the case of kids
collection perception.
The suggested names of extracted factors and their constituent are given in
Table 9.12.
3.4.5
Linkages/Relations of New Factors with Variables of Interest
The major linkages or relations of interest to Bata could be between to two new
factors, i.e., core strength and variety of perception data with (a) expenditure on
footwear, (b) frequency of purchase in a year, (c) recommendations of Bata products
to others by consumers/respondents, and (d) repeat buying by the consumers/
respondents. Data on expenditure is collected in the form of categories. To establish
its relation, chi-square test of independence is applied. For this purpose, new variables
are also converted into categorical variables. Similar analysis was carried out for
analyzing dependency of recommendations of Bata products and repeat buying with
perception data (two new factors). For frequency of buying Bata products, regression
analysis is carried out to study its relation with perception of two new factors. Based
on the results, it is concluded that expenditure, recommendations, and repeat purchase
are having dependency with perception variables (core strength and variety), but it
could not be proved statistically significant based on chi-square test. Similarly, regression analysis between perception as independent variables and frequency as dependent variables showed a significant regression coefficient for core strength, but
R-squared value was very low. Graph of new factors and frequency indicates the relation between frequency of buying and core strength and variety. It can be summarized that perception impacts these variables but could not established statistically
significant.
Conclusions
Based on the data and its analysis presented in various sections, the following inferences/conclusions are drawn:
129
1. Footwear industry in India mainly consists of unorganized sector as evident from

the data presented in the section of introduction. For the domestic market
demand, it may not be a concern, but for export market it is worrisome. There is
an urgent need to increase the growth of organized market.
2. The main usage of Bata products is for casual and office.
3. The consumers often with family members to Bata show room for buying.
4. Analysis for independence between demographics and buying Bata products, recommendation of Bata products to others, and repeat buying of Bata products indicates that respondents of all segments of demographics rate Bata products similar.
5. Descriptive analysis of perception data given in the table reveals that mean perception comfort is highest followed by price and formal collection. The mean
perception score is lowest in the case of ladies collection followed by kids collection and latest collection.
6. The results of dependency of core strength and variety dimension indicate
that there is a dependency with (i) expenditure of Bata footwear, (ii) repeat buying,
(iii) recommending Bata products to others, and (iv) frequency of buying during
the year. However, these relations could not be proved statistically significant.
Limitations of the Study
There are mainly two limitations of the study. First one is the sample size. Second
one is inclusion of few dimensions with few subdimensions that are included in the
study. It needs to be converted into a detailed study such as conducted by
Laiwechpittaya and Udomkit (2013).
Annexure: Questionnaires
Demography
Sl
no
Parameters
Scale
Gender
Male
Female
Marital
status
Single
Married
Age
Below 18
1830
3040
4050
Accompanied
by
Friends
Family
Only wife
Alone
Qualification
Below
graduate
Graduate
Above
graduation
Professional
Graduate
Income group
05 lakhs
510 lakhs
10
15 lakhs
1520 lakhs
Above
20 lakhs
Above
60
130
Sl
no
7
N.P. Singh et al.
Parameters
Scale
Please select
the usage of
Bata product
Sports
Office
Casual
Party
In-house
School
Variable of Interest
Sl no
1
2
3
Parameters
Would you recommend Bata
products to others
Would you buy from Bata again
Scale
First time
Yes
Regular
No
Yes
No
Perception
Sl no
1
2
3
4
5
6
7
8
Parameters
How much value you associate with price while
Do you think Bata has adequate formal collection
How much value you associate with appearance
Do you think Bata has adequate kids collection
Do you think Bata has adequate ladies collection
How much value you associate with comfort while
Do you think Bata has adequate casual collection
Do you think Bata has adequate latest collection
Scale
Variables of Interest (Expenditure and Frequency of Buying)

Sl
no
1
Parameters
How much you
normally spend (in
rupees) on
footwear in a year
How often you buy
footwear in a year
Scale
01,000
1,0002,500
2,5005,000
(02)
(35)
(above 5)
Above 5,000
131
References
Amarnath N (2012) Rise of luxury shoe brands like Jimmy Choo, Roger Vivier & others in Indian
fashion. Retrieved on 11 Feb 2014 from http://articles.economictimes.indiatimes.com/201207-29/news/32907684_1_jimmy-choo-shoes-manolos
Business Vibes (2013) Global Footwear Industry overview, Oct 9. Retrieved on 5 Feb 2014 from
http://www.businessvibes.com/blog/global-footwear-industry-overview
Garg S (2011). Footwear industry expands, steps into non-metro mkts, business standard, 20 Dec.
Retrieved on 11 Feb 2014 from http://www.business-standard.com/article/companies/footwearindustry-expands-steps-into-non-metro-mkts-111122000042_1.html
Laiwechpittaya T, Udomkit N (2013) A matter of shoes: the analysis of desired attributes of shoes
and its retail shops from Bangkok consumers perspectives. Int J Mark Stud 5(2):3340
Mahesh BG (2012) Market size of shoes in India, some sole searching, 29 July. Retrieved on 10
Feb2014fromhttp://www.mahesh.com/entrepreneurship/marketsize-of-shoes-in-india-some-solesearching
PRNewswire (2012) Global Footwear Market is expected to reach USD 211.5 Billion in 2018:
transparency market research, 18 Sept. Retrieved on 12 Feb 2014 from http://www.prnewswire.
com/news-releases/global-footwear-market-is-expected-to-reach-usd-2115-billion-in-2018transparency-market-research-170231636.html
RNCOS (2013) RNCOS white paper: booming footwear market in India, 09 Dec. Retrieved on
Feb 2014 from http://beforeitsnews.com/business/2013/12/rncos-white-paper-boomingfootwear-market-in-india-2567820.html
Chapter 10
Applications ofMathematical Programming

Models forProduct Mix Optimization
inWorld Steel Industry: Challenges
andDirections
ShikhaAggarwal andNarainGupta
Abstract The world steel demand by construction industry, mechanical engineering
industry, and metal goods industry is more than 78%. More than 46% steel is
supplied by China, while Indias steel supply share is approximately 5%. The production of world crude steel increased from 851megatons (Mt) in 2001 to 1,548Mt
in the year 2012. Also, world average steel use per capita has increased from 150kg
in 2001 to 215kg in 2011.
Mathematical programming models for product mix optimization have been
applied to various industrial sectors to achieve improved performance. Process
industry, especially the steel sector, has been home to extensive mathematical programming applications. In this paper we present a survey of more than 20 reported
publications in the field of mathematical modeling to determine optimum product
mix in an integrated steel plant. It suggests a classification of models based on the
functional areas they are applied in. The study is an attempt to review the mathematical
programming application in product mix optimization in integrated steel plants. The
study summarizes the various applications of genetic algorithm, revenue management, energy modeling, and modeling uncertainty in the model parameters.
The study concludes that there is a growing need of modeling uncertainty in
demand and prices of finished goods of steel. The future researchers should also focus
on modeling multiple objective mathematical models, genetic algorithm, and revenue
management application. The alternative interesting extensions are to explore if the
similar applications exist in other metal processing industries, viz., aluminum, copper,
etc. The mathematical applications in one industry have significant scope to replicate
in other similar process industries. The study states that the current paper has reviewed
reported literature from product mix optimization real-world applications. This is an
interesting extension of this research to review the reported literature from multiple
areas including cutting stock, financial planning, blending, implementation of
decision support systems, production and capacity planning, etc.
S. Aggarwal (*) N. Gupta

Operations Management, Management Development Institute, Gurgaon, Haryana, India
Springer India 2015
133
134
S. Aggarwal and N. Gupta
Keywords Mathematical programming Optimal product mix optimization Steel

industry Process industry
1 An Overview ofSteel Production Process

In a steelmaking plant, the first stage is iron-making stage in which iron ore is
converted into molten iron in a blast furnace. This molten iron is then converted into
molten steel by any of the methods such as basic oxygen furnace or open-hearth
furnace:
Fe 2 O3 + 3CO 2 Fe + 3CO2 H = 22 kJmol 1
Fe 3 O4 + 4CO 3Fe + 4CO2 H = 10 kJ mol 1

The molten steel is then cast in a continuous caster into ingots and rolled into
blooms and slabs, which are then rolled into strip bars, sheet bars, or billets. These
are converted into ordinary strips by strip mill and shipped to market or a tube making
plant.
2 World Steel Industry
Million TOnnes
The production of world crude steel increased from 851megatons (Mt) in 2001 to
1,548Mt in the year 2012 (refer to Fig.10.1). Also, world average steel use per
capita has increased from 150kg in 2001 to 215kg in 2011 (World Crude Steel
Production 2012).
China is the leading producer of steel in the world (refer to Fig.10.2). India,
Brazil, Turkey, and South Korea have all entered the top ten steel producers list in
the past 40years.
1600
1400
1200
1000
800
600
400
200
0
1970
1980
1990
2000
2010
Year
Fig. 10.1 World crude steel production 2012 (Source of Data: World Steel Association)
10 Applications ofMathematical Programming Models forProduct Mix Optimization 135

Fig. 10.2 Major steel
producing countries 2012
(Source of Data: World Steel
Association)
Brazil
2.2%
Turkey
2%
Others
19%
Ukraine
Germany
2%
Russia
3%
South India
4.6%
Korea 5%
United States
4.5%
5.7%
China
46.3%
Japan
6.9%
The use of steel can be seen in almost every aspect of our lives. It has a unique
combination of strength, formability, and versatility. Almost 200 billion steel cans
for food storage are produced each year, which means cutting down on energy usage
refrigeration is not needed anymore then.
Steel used for double-hulled cape size vessels which are used to deliver raw
materials, finished goods, and energy must have the highest impact toughness, corrosion resistance, and weldability. Skyscrapers have been made possible only by
steel. The housing and construction sector is the largest consumer of steel today, it
uses around 50% of world steel production. Approximately 25% of an average
computer is made of steel. In 2010, more than 320 million PCs were sold. Also,
steel surfaces are hygienic and easy to clean; therefore, all surgical and safety equipment and commercial kitchens are made with steel.
3 Product Mix Optimization

In an integrated steel plant, it is very important to determine the optimum production
level at various stages of steel production. Profit does not depend solely on the volume of the production but also on product mix produced. Suboptimal solutions are
obtained by practitioners by experience. However, the profits generated by implementing these solutions are way less than the potential profit that could have been
made using the optimum product mix. The optimum product mix depends on the
availability of mill or furnace and demands for the product, and it keeps changing
from 1month to another.
4 Mathematical Programming Applications inSteel Industry

Steel is produced through a continuous production process where it is impossible to
decompose the product into its constituents. Also, once the production starts, it is not
economical to shut down production. The continuous production process, and therefore, steel production, is highly capital intensive and the production process is very
complex. Most steel plants are integrated as a variety of products move through
136
different series of production units. Finished products are produced in different shapes
and sizes. The production process also takes place under high-temperature and highweight material flow and incorporates complicated technology. The various equipment are designed for a specific capacity. The demands for various types of finished
products are different and have to be produced using the same set of equipment. Under
such situations, characterized by technological, material, capital, environmental, and
energy constraints, it becomes imperative for production managers to utilize the various resources optimally so as to achieve the desired production targets. If wrong decisions are taken, it will result in losses. Therefore, it presents the right situation to use
mathematical tools to achieve optimum levels of production while making effective
and efficient utilization of various kinds of resources.
5 Linear Optimization
Fabian (1958) presents a cost-minimization linear programming model. It has four
sub-models, one for each stage of iron making, steelmaking, and shop loading for
the rolling operations and finishing operations. An integrated steel plant generally
has a choice to select among different materials and production processes. There are
variables on which the economical usage rate of different materials depends, for
example, the market price of various grades of the steel scrap. The price keeps fluctuating, and therefore a periodic determination of the economical usage rate is
important. In the paper, the models of different stages of production are then connected to form a master model in an integrated steel plant. The author has also
discussed the detailed formulation of the model at each stage and then the principles
of integration. Most of the technical and economic constraints like the material balance, capacity balance, thermal energy balance, and product-dependent yield have
been considered.
Fabian (1967) explores an application of linear programming with multiple
objectives in blast furnace production planning. The blast furnace production process is described in detail, and in the linear programming problem, the thermochemical metallurgical process is stated as a set of constraints.
Bandyopadhyay (1969) proposes a cost-minimization linear programming model
for capacity allocation in production planning. In an integrated steel plant where
both basic oxygen and open-hearth furnaces are available, it is a general problem of
optimal allocation of steel production between the two of them. The model incorporates all the technological and cost constraints.
Tsao and Day (1971) present a process analysis model of steel production in the
United States. A technology matrix, which represents recent technology structure in
terms of input and output, is estimated by using engineering and metallurgical information. Then this matrix along with the detailed data on cost, sales, revenue figures,
and resource capacity is used in a linear programming model to make short-run
allocations in the whole of the steel industry. Once the models solution is obtained,
it is compared with actual industry statistics for each year from 1955 to 1968. The
authors claim to have fairly good results; however, Nelson (1971) commented that
there was an error in the treatment of the coking coal production. He attempted to
correct this problem and developed a correlated matrix for this particular stage of
production.
Sharma and Sinha (1991) present an optimization model with the objective of
determining the optimal product mix during production planning for the integrated
steel plants of Steel Authority of India Limited. In the paper, various issues related
to the choice of an optimum product mix in the context of a steelmaking operation
are discussed.
Sasidhar and Achary (1991) develop a model in the form of a maximum flow
problem during production in a multiple-activity network. The objective is to maximize capacity utilization. The production at a steel plant is generally planned
according to the customer orders, so different customers are therefore assigned different priorities. The model deals with these priorities assigned to the customers and
the balance of orders. The authors present an algorithm to solve the multiple-activity
network formulation with the customer priorities in a steel plant.
The linear programming models developed in the context of steel production are
useful for allocation of steel production in different processes, allocation of the key
input materials for production, analyzing industry problems such as resource utilization and economies and diseconomies related with selection of input mixes, and
optimum utilization of sequence capacities.
6 Advanced Linear Programming Applications

Lawrence and Flowerdew (1963) present a single-cost model for steel production
that contained a number of input-output variables, technical relationships between
them, their cost and operations, and flow restrictions on them. Then a simplex-type
representation is made, and thereafter optimal solution is calculated.
Mohanty etal. (2003) describe a genetic algorithm (GA)-based method of assortment in steel industry to determine the optimum width of the parent stock so that the
trim loss is minimized. The study evaluated six selection techniques for the selections
of parents and concluded that elitism selection technique gives the best results. The
authors suggest that for future research advanced GA operators or other techniques
such as dynamic programming can be used for solving the assortment problem.
A column generation algorithm is proposed by Song (2009) to solve the problem
of allocation of orders to stock materials in surplus inventory in steel mills. It is called
multistage multiple knapsack problem; in the first stage of the problem, slabs are
designed using orders with similar properties and in this stage these designed slabs are
allocated into the existing meta slabs in the inventory yard. The proposed algorithm
solved the real instances in reasonable time, when it was tested in an integrated
steel company and has been successfully deployed to other integrated steel mills.
It has released human planners from the cumbersome tasks of daily allocation which
contains at least a few hundred materials in the stockyard. It is also mentioned that
138
complex multi-objective function and the design of two-dimensional mother plates

explained in the paper are good avenues for future research.
Asad and Demirli (2011) develop a bilinear programming model and a branchand-bound-algorithm-based method for production planning in steel rolling mills
with a substitutable demand. They address the dynamic capacitated multi-item lot-
sizing problem, abbreviated as CMILSP, which is encountered typically in the steel
rolling mills. The various end items lot sizes are determined at the master production schedule level to minimize the total cost. Then the production-inventory problem is formulated as a mixed-integer bilinear program (MIBLP) under various
technological constraints. The authors have also used an alternative branch-and-
bound algorithm for solving the problem that is benchmarked against the linear
optimization techniques.
Kwak etal. (2010) proposed a procedure called Patient Rule Induction Method
for optimization of a multistage manufacturing process. It is important to take into
consideration the relationship between the stages of a multistage manufacturing
process, in order to optimize it. The PRIM can extend the scope of process optimization from single-stage process to multistage process and also use the information
captured in relationship between the stages, while maximizing the performance of a
stage. It is mentioned that PRIM can be used when a sufficiently large set of operational data is available. It may be interesting to explore that the use of PRIM to
optimize the multistage manufacturing process when small data is available is the
key issue of future research. Apart from steelmaking, its scope also extends to automotive industry, LCD, semiconductor, etc.
A number of problems such as assortment problems, optimizing multistage manufacturing process, and solving the given test instances within reasonable time have
been addressed by advanced linear programming. Such problems are difficult to
model as linear systems. Solutions are generated by genetic algorithms, mathematical
programming coupled with linear programming, column generation algorithms, etc.
7 Financial Planning Applications

Kendrick etal. (1984) propose three models in all two static ones for production
planning and one dynamic one for investment analysis. The two static models,
expressed as linear programming models, are transportation and mixed production
problems. The inputs in the model are prices of raw materials, facility capacities,
operations and shipments, demands, and input and output coefficients for each productive unit. The outputs are optimal product distributions. On the other hand, the
dynamic model is a mixed-integer program that incorporates time factors and also
deals with the issues of investment in five time periods each of 3years. In both
models, the inputs are similar; however, the output in the dynamic model also
includes investment decisions.
Bielfield etal. (1986) at a steel company Hoesch Siegerlandwerke AG (HSW) in
Germany developed a set of accounting matrices for the purpose of budget planning.
The company main products were hot-dip galvanized, cold-rolled, electrogalvanized,

and organic coated sheet steel, and it had a revenue of about one billion Deutsche
Marks. The issue of complexity of the companys structure, its operations, and the
rapid environmental changes pushed the management at HSW to replace the manual
system with a computer-based system for strategic planning with the objective to
improve efficiency and perform mass calculations and cost accounting with better
efficiency. The authors presented a linear programming model with 3,000 structural
variables and 2,500 constraints. It has multiple objectives of maximizing revenue
and minimizing total cost.
Another paper by Sashidhar and Achray (1991) discusses the problem of
allocation of the major components of the process costs to different quantities of
products that are produced in the melting shop of an alloy and in a steel manufacturing unit. The authors have used quadratic programming techniques to estimate the
pattern of consumption of important operational materials. However, these patterns
cannot be directly assigned to each quality of steel. Here, the quadratic programming helps to arrive at more accurate and costing both route wise and quality wise.
Hintches et al. (2010) presented an application of revenue management (RM)
technique to maximize profit in a made-to-order (MTO) scenario by selecting the
best orders. In an MTO scenario, it is not the product that perishes but the capacity.
Application of RM involves assessment of opportunity cost of an order to determine
whether the order needs to be accepted or not. The authors had demonstrated by
using a case study of capacity control at ThyssenKrupp VDM using RM techniques,
and it was found that there was a substantial difference in profit margin.
Chauhan etal. (2012) aim to find an optimum product mix in cold rolling steel
industry (JSW) which is a leading cold rolling and galvanizing house in India. The
monthly production of the company is 45,000mt, and it aims for maximum EBIDTA
and for maximum utilization of the whole main line. Thirteen products have been
selected for optimization, and the company aims to decide the monthly production
in tonnage for each selected product. For this a product-portfolio matrix is formed
that shows which products are more convenient to produce considering market
attractiveness. A multiobjective linear programming model is applied for getting
optimal product mix solution. The results so obtained are then compared with the
actual figures of the company, and then the final production figures of all the 13
products are frozen for maximum EBIDTA and for maximum utilization of plant.
The investment decisions in steel plants have to be taken in uncertain environment. The volatility of steel prices and demand variability can alter the economic
performance of the projects. In integrated steel plants, the blast furnace has to
remain working continuously; therefore, production cannot be lessened or interrupted in between. In this scenario, simulations and modeling of uncertainties are
of great value.
A number of attempts have been made by using mathematical modeling
techniques to optimize the product mix and generate maximum revenue or EBIDTA
or maximum utilization of an integrated steel plant. Future research can be conducted to find methods of updating forecast and resulting re-optimization. The area
of dynamic bid prices can be explored.
140
8 Energy Modeling
Dutta etal. (1994) develop a mathematical model for optimal allocation of electrical
energy in a Tata Steel plant in India. There is persistent problem of adequate power
supply in India, due to which at times of power shortage, it is important that power be
allocated to such nonessential loads that yield higher profitability. The steel plant was
modeled with the objective of profit maximization and taking energy as a limiting
constraint. Sinha etal. (1995) also developed a mixed-integer linear programming
model for Tata Steel to optimize their operations amidst scarce resources. Earlier
study by Hunneault and Galiana (1991) that looked into optimal use of power
addressed this issue with cost-minimization modeling approach. Some authors have
addressed the problem as a profit-maximization linear programming model. The
model developed in India is also useful for making short-term operating decisions. It
considers all economical, technical, and environmental constraints such as materials,
energy, balance of capacity, etc. It is an optimization model with multiple objectives
of minimizing cost, maximizing profit, and maximizing production and has about a
thousand variables and a thousand constraints. The output obtained is a list of facilities
that should be switched off during the energy shortage.
The problem of power shortage is taken care of by energy models that provide
solutions to prioritize in case of power crisis, to plan the production target, and to
devise a marketing strategy situations that arise due to failure of blast furnaces, oxygen plant, shortage of scrap, etc. These models can be used in other similar industries
too because the problem of power shortage runs throughout countries like India.
9 Modeling Uncertainty
Dutta and Fourer (2004) describe a generic multi-period optimization-based
decision support system (DSS) that can be used for strategic and operational planning in process industries. The DSS built on the five fundamental elements materials, activities, time periods, facilities, and storage areas requires little knowledge
of optimization techniques to be used effectively. The results are based on real data
from an American integrated steel company and they demonstrate significant potential for improvement in revenues and margins.
Denton and Gupta (2004) had proposed a two-stage stochastic integer
programming model for planned inventory deployment that can be used to choose
the semifinished products that should be made to stock and their target inventory
levels. Thus, strategically placing the semifinished inventory into finished products would help integrated steel manufactures, characterized by high capital
expenditures and long cycle time, to reduce the time between receipt of order and
dispatch of the order and its variability. Also, they mention that the model is applicable to problems involving the configuration of transportation networks in a
scenario of demandsupply uncertainty. In the future, modifications in the model
can be made to account for more factors which were not considered in this study,
other factors such as capacity constraints on total production or randomness in

second-stage cost coefficients.
Ozorio etal. (2013) used Monte Carlo simulation to calculate the value of a
product exchange option in a steel mill that has a blast furnace with a hot roller.
Since the demand is uncertain, in steel mills, it is a common practice to invest in
steel rolling assets, so that production can be diversified and product exchange
options can be generated. In the study it was found that this option can yield a significant increase on the net present value (NPV) of a blast furnace steelmaking
projects (exact value of NPV difference can be looked up) and also that it makes a
difference as to which type of stochastic process is used to determine the options
value. The authors used two different types of stochastic processes, the regressionto-the-mean reversion movement (MRM) and the geometric Brownian motion
(GBM) in their study. The interested readers are encouraged to refer to Ozorio
etal. (2013) for the mentioned stochastic processes in detail.
10 Conclusion andExtensions
This paper presents a guide to the optimum product mix in an integrated steel plant
and dispatching literature from the late 1950s to present. The mathematical models
are classified according to different techniques used, and the functional and chronological order and relationships are shown. We conclude that there is marked progression in the mathematical modeling of product mix optimization that can be seen
in the steel industry across the world.
From the survey of different applications in the modeling of the steel plants, we
believe that the following can be some potential areas for future work:
1. Developing models in a rolling horizon context to account for uncertainties associated with production capacity and demand
2. Complex multiple objective function to address a number of problems

simultaneously
3. A systematic framework to update and re-optimize in a made-to-order network
setting
4. Dynamic programming to solve assortment problem
5. Application of advanced genetic algorithm operators solving problems in integrated steel plants
References
Asad R, Demirli K (2011) A bilinear programming model and a modified branch-and-bound
algorithm for production planning in steel rolling mills with substitutable demand. Int J Prod
Res 49(12):37313749
Bandyopadhyay R (1969) Open-hearth and basic-oxygen furnaces: an allocation model for production planning. IEEE Trans Syst Sci Cybern 12:115124
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Bielfield FW, Walter K, Wartmann R (1986) A computer based strategic planning system for steel
production. Interfaces 16(4):4146
Chauhan Y, Gupta M, Zanwar D (2012) Optimization of product mix in cold rolling steel industry
using product portfolio matrix and multi objective goal programming model. Ind Eng Lett
2(6):110
Denton B, Gupta D (2004) Strategic inventory deployment in the steel industry. IIE Trans
36(11):10831097
Dutta G, Fourer R (2004) An optimization-based decision support system for strategic and operational planning in process industries. Optim Eng 5(3):295314
Dutta G, Sinha GP, Roy PN, Mitter N (1994) A linear programming model for distribution of
electrical energy in a steel plant. Int Trans Oper Res 1(1):119130
Fabian T (1958) A linear programming model of integrated iron and steel production. Manag Sci
4(4):415449
Fabian T (1967) Blast furnace production planninga linear programming example. Manag Sci
14(2):B-1
Hintches T, Spengler TS, Volling T, Wittek K, Priegnitz G (2010) Manufacturing: case study of
capacity control at ThyssenKrupp VDM.Bus Res 3(2):173190
Hunneault M, Galiana FD (1991) A survey of optimal power flow literature. IEEE Trans Power
Syst 6:762767
Kendrick DA, Meeraus A, Alatorre J (1984) The planning of investment programs in the steel
industry. John Hopkins University Press, Baltimore
Kwak DS, Kim KJ, Lee MS (2010) Multistage PRIM: patient rule induction method for optimization of a multistage manufacturing process. Int J Prod Res 48(12):34613473
Lawrence JR, Flowerdew ADJ (1963) Economic models for production planning. Oper Res Q
14(1):1129
Major Steel Producing Countries (2012) Retrieved on 1 March 2014 from http://www.worldsteel.
org/dms/internetDocumentList/bookshop/WSIF_2012/document/World%20Steel%20in%20
Figures%202012.pdf
Mohanty S, Mahanty B, Mohapatra PKJ (2003) Optimization of hot rolled coil widths using a
genetic algorithm. Mater Manuf Process 18(3):447462
Nelson JP (1971) A note on economics of metallurgical coke production. Manag Sci 18:B237B239
Ozorio L, Bastian-pinto C, Baidya T, Brandlo L (2013) Evaluating product exchange options in
integrated steel mills. Braz Bus Rev 10(1):102126
Sasidhar B, Achary KK (1991) A multiple arc network model of production planning in a steel
mill. Int J Prod Econ 22(3):195202
Sharma A, Sinha SK (1991) Product mix optimization: a case study of integrated steel plants of
SAIL.Opsearch 28:188201
Sinha GP, Chandrasekaran BS, Mitter N, Dutta G, Singh SB, Choudhury AR, Roy PN (1995)
Strategic and operational management with optimization at Tata Steel. Interfaces 25(1):619
Song SH (2009) A nested column generation algorithm to the meta slab allocation problem in the
steel making industry. Int J Prod Res 47(13):36253638
Tsao CS, Day RH (1971) A process analysis model for the U.S. steel industry. Manag Sci
17:B588B608
World Crude Steel Production (2012) Retrieved 1 March 2014 from http://www.worldsteel.org/
dms/internetDocumentList/bookshop/WSIF_2012/document/World%20Steel%20in%20
Figures%202012.pdf
Chapter 11
Behavioral Finance: A Study

of Correlation Between Personality Traits
with the Investment Patterns
in the Stock Market
Saima Rizvi and Amreen Fatima
Abstract Conventional theories are based on the assumption that investors are
rational beings. All their decisions are logical and judgments fair and rational. Based
on this assumption, they have derived all their financial models. The capital asset
pricing model assumes that investors are rational beings and they have the same
expectations. This assumption contradicts behavioral theories, which assume that
investors under uncertainty behave in a not-so-rational or irrational manner. The
phenomenon of behavioral finance was noticed post-2000, when IT bubble was
built up and finally busted. During this time period, investors showed herd mentality, and they preferably invested in companies having .com attached to them. The
market prices of IT companies rose much above their intrinsic value or fair value. It
also happened in the subprime crisis when real estate prices in the USA started rising much above their fair value. After a certain time period, the bubble collapsed
leading to the fall of stock prices, wiping off the hard-earned money of investors.
The history of irrational behavior can be traced to the sixteenth century in Holland.
The tulip bulbs were imported to Holland from Constantinople. These bulbs became
very popular with Dutch elite class. Trading of these bulbs started on major stock
exchanges in Europe. The prices rose to great heights and people started trading in
bulbs in a big way. After a certain time period, people started selling these bulbs and
the prices began falling. People started defaulting on their tulip contracts. This bubble finally collapsed leading to huge losses. Therefore, it was realized that there was
something which these conventional models were unable to explain. These softer
issues were never addressed and recognized by traditional theorist before. It was
Kahnman and Smith who for the first time brought insights from behavioral sciences into the field of finance and economics. They stated that under uncertainty
S. Rizvi (*)
IILM Institute for Business and Management, Gurgaon, Haryana, India
A. Fatima
Psychology Department, Lucknow University, Lucknow, Uttar Pradesh, India
Springer India 2015
143
144
S. Rizvi and A. Fatima
investors do not behave ideally but rather behave normally. The present paper
describes the relationship between personality traits and investment pattern of
investors. A survey of about 100 investors, who have invested in the stock market,
has been conducted. The investors have been classified into various demographic
profiles such as gender, age group, income level, number of dependents, profession,
and marital status. The data for the study has been collected from both primary and
secondary sources. Convenience sampling method is used to select the sample of
100 investors. The Big Five personality test has been incorporated to assess the
personality of investors, and its correlation with their investment behavior is being
evaluated in the study using various statistical tools. The paper attempts to rate the
personality of investors on parameters such as extraversion, agreeableness, conscientiousness, neuroticism, and openness. The study relates the personality of investors with stock market investment, type, objective, factors influencing the
investments, and so on. The findings can be useful for portfolio managers, fund
managers, and wealth managers to understand the mindset and behavior of their
clients. This will facilitate them to construct a portfolio which may be less than
optimal and which can be adhered to by the advisor and the client amicably. This is
especially significant in the context of managing portfolios in these recovering markets post-recession which the global economies have witnessed in recent times. The
concept of behavioral finance is one such emerging area which if incorporated well
in the hard-core finance, based on fundamentals, can yield dividends for portfolio
managers and equity analyst and also on the wealth generation of the overall economies emerging in the aftermath of the recession.
Keywords Behavioral finance Heuristics Behavioral biases Big Five personality test Prospect theory
Traditional finance theorists believe that investors are rational beings and they base
their investment decision on various models and information database. The real-life
situation, on the contrary, suggests that investors rely on heuristics or rule of thumb
when faced with uncertain investment decisions Jay Ritter (2003). People in standard finance are rational, whereas people in behavioral finance are normal
(Meir Statman, Ph.D., Santa Clara University) (Victor et al. 2000; Statman 2008).
Behavioral finance is one such field which brought insights from psychology into
the area of economics and finance. Kahneman and Taversky (1979) in their paper
titled Prospect Theory: Decision Making Under Risk used various cognitive psychological techniques to explain a number of anomalies from rational decision-making
(Mills 1999). History of behavioral finance can be traced back to 150 years with
Mackays book titled Delusions and Madness of Crowds, which presents a chronological description of various panics and schemes throughout history. Following
this, the subject got mentioned in a book by Selden in the year 1912 titled Psychology
of the Stock Market Selden (1912). This was the first book which applied behavioral
concepts in the stock market investments. In a seminal article published in 1951 by
11
Behavioral Finance: A Study of Correlation Between Personality Traits
145
Journal of Finance, Professor Burrell proposed scientific study of impact of psychological factors on investment behavior patterns of investors. During this time period,
the finance theory was based on market efficiency and the new capital asset pricing
model. With the rise in the anomalies in the late 1980s, the behaviorally oriented
financial research gained momentum. Prior to this finance theories were considered
to be normative, and these softer issues were never accepted and addressed by conventional theorists.
Professor Shefrin in his book, Beyond Greed and Fear: Understanding
Behavioral Finance and Psychology of Investing (Harvard Business School Press,
2000), analyzed the factors that led to the IT bubble in the year 2000. He observed
that excessive optimism and overconfidence led to the collapse of technology bubble. A sixteenth-century example of irrational behavior can be traced back to the
trading of tulip bulbs on the Amsterdam exchange, Holland. Investors sold everything to acquire these bulbs. Later on, the bubble busted, prices crashed, and the
bulbs lost almost 90 % of their value.
Behavioral finance is based on two building blocks, namely, cognitive psychology and limits to arbitrage. Cognitive psychology studies the thought process of
individuals, that is, how they think. It also studies internal mental processes such as
problem solving, language, and memory. Limits to arbitrage to predicting in what
circumstances arbitrage forces will be effective and when not. Graham (1973)
remarks that price is the amount which investors actually pay and intrinsic value is
what they actually get. If there are a limited number of arbitrageurs in the market,
then the difference between price and intrinsic value will remain.
Keynes explained that
Human decision affecting the future, whether personal or political or economic, cannot
depend on strict mathematical expectations, since the basis for making such calculations
does not exist; and it is our innate urge to activity which makes the wheel go round, our
rational selves choosing between the alternatives as best as are able, calculating where we
can, but often falling back for our motive on whim or sentiment or chance.
According to Statman (Fabozzi 2008), standard finance has four founding blocks:
Investors are rational being.
Markets are efficient.
Investors should construct the portfolios according to the rules of mean variance
portfolio.
Expected return depends on risk only.
Behavioral finance concept is based on different sets of assumptions such as:
Investors are normal.
Markets are not efficient.
Investors design portfolios according to their rules of behavioral portfolio theory
rather than the mean variance theory.
Expected returns follow behavioral asset pricing theory in which risk is not measured by beta and expected returns are determined by more than risk.
146
Chart 11.1 Branches of
behavioral finance
BEHAVIORAL FINANCE:-
BEHAVIORAL FINANCE
MICRO
BEHAVIORAL FINANCE
MACRO
Behavioral finance is further divided into (Chart 11.1):

Behavioral finance micro discusses the biases of individual investors that
distinguish them from rational investors. Behavioral finance macro identifies the
anomalies in the efficient market hypothesis.
The theory given by Kahneman and Taversky (1979), called the prospect theory,
is considered to be the foundation theory in the field of behavioral finance. The
theory says that when making decisions people may become irrational. Prospect
theory appreciates the asymmetry that investors demonstrate in dealing with gains
and losses. The dissatisfaction with losses is greater than the satisfaction with gains.
This also leads to disposition effect whereby investors sell their winning investments very early and losing investments are held too long (Shefrin and Statman
1985; Shefrin 2002). Inman and Zeelenberg (2002), Zeelenberg et al. (1996),
Zeelenberg and Beattie (1997), and Zeelenberg (1999) found evidences that investors tend to become risk averse and risk lover in the decision-making process.
Zuckerman (1979), Miller and Ross (1975), Fiske and Taylor (1991), Duval and
Silvia (2002), Stephen Ross (1987), and Ross et al. (2004) found that people tend to
attribute success to their own skills and failures to bad luck (Chart 11.2).
According to Ross (1987), the finance field uses framework and models derived
mainly from the field of economics, although with a different methodological viewpoint. All social sciences aim to understand the human behavior, which involve the
quantitative analysis of behavior data records and also devise ways and means of
experimenting upon the behavior (Mills 1999). Behavioral finance attempts to
describe and understand the thought process, reasoning patterns, emotional processes, and their impact on the decision-making process. It analyzes psychological
and sociological factors that influence the financial decision-making by investors. A
number of behavioral biases exist which are responsible for deviating the behavior
of investors from the so-called rational behavior and which eventually affect the
asset prices. Festinger (1957) stated that people feel internal tension and anxiety
when subjected to conflicting beliefs. The phenomenon is known as Theory of
Cognitive Dissonance. Individuals either try to change their values or beliefs or tend
to rationalize or justify their options (Ricciardi and Simon 2000). For investors, this
11
147
Chart 11.2 Prospect theory
Reference
Point
GAINS
LOSSES
CHANGE BELIEF/VALUE
ACTION
INCONSISTENCY
DISSONANCE
BELIEFS
CHANGE ACTION
DISSONANCE
CHANGE PERCEPTION
Chart 11.3 The cognitive dissonance theory
situation becomes hazardous as they make cling to a loss making security, which
may result in low overall return of the portfolio (Chart 11.3).
Taversky and Kahneman (1974) mentioned that heuristic or rule of thumb is used
by people when they are faced with uncertain situations. Heuristic is quite reliable,
but it also leads to judgmental errors at times. Individuals use shortcuts or heuristic
to take decisions under a complex situation (Fabozzi 2008). Often individuals
assume that small samples are representative of the population. Based on that, they
make their final decision under uncertainty. This is known as representative bias and
more specifically sample size neglect/law of small numbers. It is further classified
into base rate neglect. People often have this notion that a sequence will run into the
future, but actually the sequence turns out to be of short duration. People often have
the notion that initial public offer is a good long-term investment, which may not be
always true. A lot of hype surrounds the issue and after the initial bullish run, the
148
stocks may remain priced at a lower level than the original price. Gamblers fallacy
is another such phenomenon where the individual thinks that the luck runs in streaks
(Taversky and Kahneman 1974).
Human beings have a tendency to overestimate their skills and potential (Ricciardi
and Simon 2000). Overconfidence manifests in a number of ways. One example is
too little diversification and investing in familiar stocks in greater proportion. Also
men tend to be more overconfident than women (Ritter 2003). Mahajan (1992)
describes overconfidence as overestimation of probabilities for various sets of
events. There can be prediction overconfidence and certainty overconfidence.
Investors may have problems in predicting future course of action. For instance,
investors may expect a 10 % gain and decline of a particular stock. But actually the
deviation may turn out to be much greater. The investors may underestimate the
downside risk in their portfolio. Certainty overconfidence refers to a state where
investors become too certain or sure of their judgment. A classic example of certainty overconfidence is the tech boom of the 1990s where investors loaded their
portfolio with IT stocks and they suffered huge losses during the meltdown. Barber
and Odean (1999, 2001) and in their study highlighted the impact of gender overconfidence on common stock investments. Overconfident investors trade excessively, which often results in poor returns over time. Individuals often keep their
portfolio into separate mental accounts. One account may be for downside protection (containing cash and bonds) and another may be for the upside potential (containing stocks, options). Investors often become risk averse with money in their
downside protection account and risk seeking in their upside protection account.
Friedman and Savage observed that people regularly buy both insurance policies
and lottery tickets (Statman 1999).
Big Five Factor Theory of Personality
The research conducted during the last few decades have converged on the conclusion that in fact there may be only five core or central dimensions of personality instead of many personality dimensions. Evidence of this theory has been
growing over the past 50 years, beginning with the research of Fiske (1949), and
later expanded upon by other researchers, Goldberg et al. (1981), McCrae and
Costa (1987), Costa et al. (2001, 2001a), and Fiske (1948). There are many theories of personality that suggest number of factors playing influential role in personality. The five traits are also referred to as the Five Factor Model or FFM
given by Costa and McCrae (1985, 19851987, 19851992, 1988, 1992, 1994),
McCrae and Costa (2003), McCrae (1987, 1989), McCrae et al. (1999, 2000,
2001, 2008) and Big Five Factor Model by Ewen (1998).
Throughout the past decade, there have been growing consequences that individual
differences in personality may be described by a hierarchical system composed of
three or seven major traits; among these implications, the Big Five model has gained
distinct prominence. The Big Five model is considered one of the most comprehensive, empirical, data-driven research findings in the history of personality psychology.
11
149
Over four decades of research, these five broad factors were gradually discovered and
defined by several independent sets of researchers (Digman 1990). These researchers
began by studying all-known personality traits and then factor-analyzing hundreds of
measures of these traits (in self-report and questionnaire data, peer ratings, and objective measures from experimental settings) in order to find the basic underlying factors
of personality.
Big Five factors of personality are five broad domains or dimensions of personality, which have been scientifically discovered to define human personality at the
highest level of organization (Goldberg 1993). Big Five is the most popular and
commonly used term in personality. This describes five fundamental factors.
Each of these five factors consists of broad range of traits. Within these traits, there
will be latent attributes such as emotions, thought and behavior (McCrae and
Costa 1990).
Characteristics of Big Five Factor Model
Following are the significant characteristics of Big Five Factor Model:
The Big Five traits are universal (McCrae and Costa 1997).
Factors of Big Five are dimensions.
Factors remain stable until 45 years of age (Soldz and Vailliant 1999).
These factors have adaptive value in a prehistoric environment (Buss 1996).
Five Factor traits represent the most significant qualities of our social
landscape.
Knowing ones placement on the factors is useful for insight and improvement
through therapy (Costa and McCrae 1992).
Historically, the Big Five arise from the attempts to identify the basic factors in
personality. Study of language was one of the sources that had led to the descriptive
model of personality traits, whereas the other source was the factor analysis of questionnaires, which led to an explanatory hypothesis. The Big Five factors are extraversion, agreeableness, conscientiousness, neuroticism, and openness to experience,
OCEAN or CANOE if rearranged John (1990) and Loehlin (1992) (Chart 11.4).
Extraversion This dimension captures ones comfort level with relationships.
Individuals scoring high on this dimension are sociable, active, talkative, gregarious, and assertive, and they like to enjoy being with others. On the contrary, persons
low on this dimension are described as introverts. Introverts lack the energy and
activity levels of extraverts. They tend to be quiet, low key, deliberate, and less
involved in the social world. Their lack of social involvement should not be interpreted as shyness or depression. Introverts need less stimulation than extraverts and
more time alone (Shukla and Pradhan 2011).
Agreeableness This dimension refers to an individuals propensity to defer with
others. Highly agreeable people are cooperative, warm, compassionate, and trusting.
The trait reflects individual differences in general concern for social harmony.
150
Chart 11.4 Big Five theory
Agreeable individuals value getting along with others. They are generally considerate,
friendly, generous, helpful, and willing to compromise their interests with others.
Those who score low on this dimension are easily distracted, disorganized, and
uncooperative.
Conscientiousness This dimension measures the reliability. A highly conscientious person is responsible, organized, dependable, and persistent. Conscientiousness
suggests a preference for planned rather than spontaneous behavior. It influences the
way in which we control, regulate, and direct our impulses. Conscientious individuals tend to avoid trouble and achieve high levels of success through purposeful planning. Those who score low on this dimension are easily distracted, disorganized,
and unreliable.
Neuroticism This is marked by the tendency to experience negative emotions,
such as anger, anxiety, or depression. People high in neuroticism are emotionally
reactive and vulnerable to stress. They are more likely to interpret ordinary situations as threatening and minor frustrations as hopelessly difficult. Their negative
emotional reactions tend to persist for unusually long periods of time, which means
they are often in a bad mood. These problems in emotional regulation can diminish
a neurotics ability to think clearly, make decisions, and cope effectively with stress.
At the other side, individuals who score low on neuroticism are less easily upset and
are less emotionally reactive.
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151
Openness to Experience This dimension involves appreciation for art, emotion,

adventure, imagination, curiosity, and variety of experience (Costa and McCrae
1992). It addresses ones range of interests and fantasies with novelty. Extremely
open people are curious, creative, and unconventional. People who are open to
experience are appreciative of art and sensitive to beauty. They are more creative
and more aware of their feelings. Those at the end of the openness category are
conventional, down to earth, narrow hearted, limited, non-curious, and not interested to explore (Pervin and John 1997).
The present research is exploratory in nature. It aims to establish relationship

between personality traits and investment pattern of investors. An online survey
with the help of questionnaire had been circulated to about 100 investors who had
or had not invested in the stock market.
The investors had been classified according to various demographic characteristics such as gender, age group, income level, number of dependents, profession, and
marital status. The data has been collected from both primary and secondary
sources. Convenience sampling method had been used to collect data from 100
respondents.
The Big Five personality test has been incorporated to assess the personality of
investors on parameters such as extraversion, agreeableness, conscientiousness,
neuroticism, and openness. The study correlates personality traits with stock market
investments, type and objective of investments, factors influencing investment, and
so on.
The various statistical tools applied to test the degree of correlation between various variables are ANOVA, regression analysis, and frequency analysis to analyze
the data collected through questionnaire.
Hypothesis
H01: There is no significant relationship between personality traits and investment
pattern of investors in the stock market.
H02: There is no significant relationship between investors who have not invested in
the stock market and their personality traits.
Findings and Discussion
A sample of 105 investors had been selected for the study. Out the total 105 respondents, 63 % were females and the remaining 37 % were males. The overall profile
of the sample population is given in Appendix.
152
Impact of Age Group on Stock Market Investment The findings suggest that age
group has a significant relationship with the stock market investment (r = 0.221,
p < 0.05). The descriptive analysis also revealed that the age group of 1828 years
has 45 % investment, followed by respondents in the age group of 2939 years having 44 % investment in the stock market.
Impact of Gender on Stock Market Investment The findings suggest that gender
has a significant relationship with stock market investment (r = 0.197, p < 0.0.05).
Male respondents have invested 63 % as against the female respondents who have
invested 37 %.
Impact of Marital Status and Stock Market Investment The findings suggest that
there exists no significant relationship between marital status and stock market
investment (r = 0.154, p = 0.117).
Impact of Profession and Stock Market Investment The findings suggest that there
exists no significant relationship between profession of respondents and stock market investment (r = 0.047, p = 0.631).
Impact of Number of Dependents on Stock Market Investment The findings suggest
that there exists a significant relationship between number of dependents and stock
market investment (r = 0.276, p < 0.01).
Impact of Income Level on Stock Market Investment There exists a significant relationship between income level and stock market investment (r = 0.235, p < 0.05).
The descriptive analysis also suggests that the highest income category of investors
have invested in greater frequency in the stock market (see Appendix).
Impact of Extraversion Personality Dimension and Stock Market Investment There
exists a significant relationship between extraversion personality dimension and
stock market investment (r = 0.281, p < 0.01).
Impact of Agreeableness Personality Dimension and Stock Market Investment There
exists a significant relationship between agreeableness personality dimension and
Impact of Conscientiousness Personality Dimension and Stock Market
Investment There exists a significant relationship between conscientiousness personality dimension and stock market investment (r = 0.295, p < 0.01).
Impact of Neuroticism Personality Dimension and Stock Market Investment There
exists a significant relationship between neuroticism personality dimension and
Impact of Neuroticism Personality Dimension and Stock Market Investment There
exists a significant relationship between neuroticism personality dimension and
The study found a significant relationship between demographic profile of the
investors and their investment in the stock market. Male investors invest more in the
stock market as compared to female investors who are more risk averse. Odean and
11
153
Barbers (2001) landmark study, boys will be boys, states that men are more susceptible to overconfidence, and hence they trade and invest more in the stock market. Researchers found that a single man has traded 67 % more than a single woman.
Overconfident males have burned their wealth more as compared to women.
Also, it has been found that apart from the model-based analysis (fundamental
analysis), a number of behavioral factors also influence the investors decision to
invest in the stock market. Behavioral finance is an area which brings to light a
number of behavioral factors impacting the investment decision of investors.
Personality dimensions such as extraversion, agreeableness, conscientiousness,
neuroticism, and openness, Big Five Model of personality traits, have been found to
be significant in the stock market investment. These personality traits do impact the
investment in the stock market.
Therefore, it is often said that markets are driven by sentiments. Pompian (2006)
in his book, Behavioral Finance and Wealth Management, had said that academicians and practitioners from the standard finance camp are not convinced that
personality traits and human emotion affect the investment behavior of investors.
Behavioral finance adherents, on the contrary, believe that psychological factors
play a role in the investment decision of individuals. The present study concludes
that both demographic and psychological factors influence an investors decision to
put money in the stock market.
Future Research
Many other Behavioral Models such as Bailard, Biehl, and Kaiser Five-Way Model
can be used for future research. The model can be used by the researcher to interpret
how confident an investor approaches life in generalincluding money matters
and when negotiating with a wide array of choices, whether he is self-assured or
suffers from anxiety. It also tells us about the other characteristics of an investor
such as if he is careful, methodical, emotional, intuitive, and impetuous.
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Chapter 12
Brand Trust and Country of Origin: Pointers

for Research in an Emerging Market
Harvinder Singh
Abstract Brand trust and country of origin have been explored deeply in academic
research, but there are few researches linking both. The present study is an
empirical investigation of the same based on brand trust rankings of Indias 100
most trusted brands for four consecutive years. The rankings were done by
Indias leading market research agency in collaboration with Indias leading
business newspaper, covering over 8,000 respondents each year from different
socioeconomic segments of India. Four data sets corresponding to 4 years were
subjected to Mann-Whitney U test and t-test to investigate the relationship. This
study indicates that there is no difference in brand trust rankings of Indian and
foreign brands, indicating the neutral attitude of Indian consumer towards country of origin in terms of trust in a brand. These results are a good starting point
for a series of researches which explores this hypothesis more conclusively in
the Indian context.
Keywords Branding Brand trust Country of origin Ethnocentrism Indian
consumer Mann-Whitney U test
Introduction
Global brands have made their mark in emerging markets though the converse
rarely happens. Still the world of marketing is yet to arrive at a definite conclusion as to whether global brands perform better or local. Advocates of global
branding posit it as a natural consequence of increasingly integrated and globalized markets that tend to get more homogenized or standardized in their
preferences (Levitt 1993). Operationalizing a global branding strategy is easier
since the distance has died due to advent of technology and the barriers between
the developed and the developing economies have reduced in a flat world
(Friedman 2005). A rival stream of thought argues that despite globalization,
H. Singh (*)
Marketing Area, Institute of Management Technology (IMT), Ghaziabad, India
Springer India 2015
157
158
H. Singh
technology and convergence markets still retain their individuality making a

strong case for local branding. It has been declared that It is time to rethink
global branding (Holt et al. 2004).
The information or perception regarding country of origin of a brand (whether
global or local) is a vital input that goes into defining the personality of a brand. It
is important for marketers because it helps in differentiating similar products
(Biel 1993; Wang and Yang 2008). Brands get a competitive advantage due to their
personality (Aaker 1996). Brand personality evokes trust for the brand among consumers (Hess et al. 2007; Louis and Lombart 2010). Since brand trust leads to
attachment towards commitment and loyalty (Louis and Lombart 2010), it becomes
important for marketers to understand what determines or affects brand trust. The
present study examines the data already available in the public domain to test relationship between brand trust and country of origin of a brand. Findings of this
research would be a pointer to a series of studies to be conducted in the future that
establish possible relationship between these two constructs.
Research Objective
Feeling of trust among consumers of brands offers a host of advantages to the

brand. Brand loyalty is one of these advantages (Lau and Lee 1999). Brand
trust also leads to a higher share of the market and better returns of advertising
expenditure (Chatterjee and Chaudhuri 2005). It is also an important indicator
of brand equity (Ambler 1997). Due to obvious advantages offered by it, firms
handle the development of brand trust as a key activity. However, it is imperative to have an insight into what goes into developing trust. Apart from other
attributes, personality of the brand also plays a significant role. Consumers
tend to seek brands that compliment their personality. Personality of a brand
is, in turn, shaped by a number of factors including brand demographics.
Country of origin of a brand is a key variable in brand demographics (Thakor
and Kohli 1996). Thus, country of origin theoretically contributes to the development of brand trust through a hierarchy of relationships. Objective of this
study is to find empirical evidence of this relationship using set of data available in public domain.
The research aims at examining the relationship between the country of origin of
a brand and the trust that consumers exhibit in that brand. The null hypothesis for
this research is:
H0 = There is no significant difference between the trust rankings of Indian brands
and the foreign brands.
H1 = There is significant difference between the trust rankings of Indian brands and
the foreign brands.
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Brand Trust and Country of Origin: Pointers for Research in an Emerging Market
159
Branding has emerged as a priority for business organizations since it is a valuable

intangible asset of the organization. During the past few decades, academic researchers have explored a number of different subthemes in branding (Keller and Lehmann
2006). Country of origin (COO) of a product of brand is a specific subtheme of
branding and international marketing. It is also a very well-researched topic with
studies relating to COO running into hundreds (Rosenbloom and Haefner 2009).
The present study aims to examine the relationship between brand trust and country
of origin. The relationship between the two is not well researched in academic literature. Hence, this study fills a significant gap.
3.1
Brand Trust
Successful marketing depends on development of a strong bond between a brand

and its consumers. Trust in the brand is a prerequisite for this to happen. A number
of studies have been carried out globally exploring different aspects of trust. Being
of general nature, most of these are from diverse disciplines like sociology, psychology, organizational behavior, ethics, etc. Studies relating to trust in the area of marketing and specifically brand trust are very few.
Trust is a diverse concept and can be studied as an attribute of the individual, an
attribute relevant for interpersonal interactions, and also an attribute that is institutional in nature (Lewicki and Bunker 1995). Therefore, trust may be defined in more
than one way. Trust is defined as a generalized expectancy held by an individual or
group that a word, promise, verbal or written statement of another individual or
group can be relied on (Rotter 1971). Specifying the expectancy clearly, in terms
of security against hurt and harm, trust is defined as the mutual confidence that no
party to an exchange will exploit anothers vulnerabilities (Barney and Hansen
1994). Highlighting the positive aspects of trust, Bhattacharrya et al. (1998) define
trust as an expectancy of positive (or nonnegative) outcomes that one can receive
based on the expected action of another party in an interaction characterized by
uncertainty.
It is important to study trust in the context of brands as development of brand
would carry no meaning if these do not evoke trust among the customers. This trust
makes a customer believe that the company representing the brand would meet the
expectations that he/she (the customer) had set on the basis of his/her past experiences
with the brand. This belief is set in the context of a purchase situation characterized
by uncertainty, vulnerability, and lack of control and independent-mindedness of
the transaction partner (Sichtmann 2007).
Trust has also been studied in the context of relationship marketing. The
commitment-trust theory of relationship marketing emphasizes that networks that
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H. Singh
are high on commitment and trust produce cooperation resulting in improvement of

overall network performance (Morgan and Hunt 1994). Doney and Cannon (1997)
discussed trust in a more specific context of buyer-seller relationship. Relationship
between brand trust and brand loyalty has been explored by Lau and Lee (1999).
Chaudhuri and Holbrook (2001) examined the interaction between brand trust,
brand effect, and brand performance as a chain effect. Impact of brand trust on consumer price sensitivity has been explored by Erdem et al. (2002). Studying differences across consumer segments, Garbarino and Johnson (1999) examined the roles
of trust (along with satisfaction and commitment) for relational and transactional
consumers, whereas a somewhat restricted study about relation exchanges by
Sirdeshmukh et al. (2002) studied the relationship between (consumer) trust, value,
and loyalty. Concept of trust embodies a situation involving two exchange partners:
the organization (sponsoring the brand) and the consumer (Sichtmann 2007).
Touching the measurement part of brand trust, a number of studies have been carried out on brand trust scales. These include work on a multidimensional brand trust
scale (Gurviez and Korchia 2003) and its application across product categories
(Delgado-Ballester and Munuera-Aleman 2001, 2002). Other works on measurement
scales for trust include those of Hess (1995) and Johnson-George and Swap (1982).
3.2
Country of Origin
There are three sets of definitions for country of origin, depending on the perspective
in which the products are observed. First perspective relates to the overall image of
country in general; second perspective is the aggregate product-country image as
reflected in a typical made in xyz country impression cutting across product categories; third perspective is the specific product-country image in which the customer
associates a unique product with a unique country (Hsieh 2004). The definitions vary
in terms of the object which is to be evaluated in terms of COO. Another research talks
about macro and micro country image (Pappu et al. 2006).
Starting from Dichter (1962) who suggested a relationship between country of
origin of a product and its success, academic research has explored different perspectives of this concept. From an information theoretic perspective, products carry
two types of information cues that customer use for evaluation purpose: intrinsic
(taste, design, fit) and extrinsic (price, brand name, warranties) (Bilkey and Ness
1982). Country of origin is an extrinsic cue that influences quality perception of
customers Olson and Jacob (1972). A number of studies have established that country of origin does affect product evaluation by the customer (Schooler 1965;
Bannister and Saunders 1978; Bilkey and Ness 1982; Hong and Robert 1989; Peterson
and Jolibert 1995; Balabanis and Diamantopoulos 2004).
Consumer evaluation depends on the interaction of cognitive, affective, and
normative aspects of the country of origin (Verlegh and Steenkamp 1999). A relationship is observed between level of economic development of a country and evaluation of product originating from that country (Schooler 1971). However, products
12
161
from all developed countries are not considered at the same level when evaluated
by consumers (Nagashima 1970; Bannister and Saunders 1978). Customers attitude towards a country may change with time resulting in change in evaluation
(Nagashima 1977; Dornoff et al. 1974). Consumers tend to place their own countrys products at a relatively higher level while making such evaluations (Bannister
and Saunders 1978; Botschen and Hemetsberger 1998). This tendency has been
researched under the themes ethnocentrism and domestic country bias (Shimp
and Sharma 1987; Balabanis and Diamantopoulos 2004). Consumers coming from
different countries may evaluate product coming from a single country in a different
manner. Impact of country of origin also depends on the nature of products. It is
more pronounced in the case of consumer goods as compared to industrial goods
(Verlegh and Steenkamp 1999). Since manufacturing activities of most multinationals are spread across multiple countries, products may be classified either non-hybrid
or hybrid in terms of their country of origin. Consumers give different response to
hybrid and non-hybrid products (Chao 1993).
However, much of the research on country of origin loses its sheen when we
realize that customers either fail to recognize the country of origin of a brand or
infer an incorrect one from the brand name (Samiee et al. 2005). Hence, ability of
the consumer to recognize the country of origin of the product/brand becomes an
important factor.
The present study is a cross-sectional descriptive research based on data available in

public domain. The study is based on brand trust rankings for 100 most trusted
brands of India as released by The Economic Times, one of the Indias leading business newspapers. The survey is conducted by The Nielsen Company, Indias leading
Market Research Company.
The original survey is based on responses of more than 8,000 consumers from all
socioeconomic classifications, age, income, and geographies and is conducted every
year. Starting from a list of hundreds of brands, including both consumer products
and services, the brands were evaluated on a predefined set of parameters.
The outcome of this survey was a list of 100 brands with their trust ranking ranging
from 1 to 100, brands ranked 1 being the most trusted brand and the one ranked 100
meant the least trusted brand in the bunch of 100 brands (ET Bureau 2009, 2010,
2011, 2012).
Information on country of origin for these brands was collected from the company
websites and other secondary sources. For the purpose of this, an Indian (local)
brand is defined as the one that exists/sold only in India even if it belongs to a multinational firm (Wolfe 1991; Schuiling and Kapferer 2004). In this research a brand
is considered Indian even if it was later on sold in other countries. Alternatively a
foreign brand is the one that was originally launched in a market other than India
though it might have come to India later on.
H. Singh
162
For the present research, brand trust survey list for four consecutive years (2009,
2010, 2011, and 2012) was taken. Analysis was done at two levels. At the first level,
independent analysis of brand trust rankings for the 4 years was done on each of the
four samples using a two-independent-sample Mann-Whitney U test. Subsequently
average ranking of the Indian and foreign brands for the four samples was tested
using a two-independent-sample t-test.
Analysis and Results
The analysis results are based on four samples of 100 brands, each relating to the
years 2009, 2010, 2011, and 2012. All the brands were classified either as Indian or
foreign. Details of brands are as follows (Table 12.1).
A cursory look at the data indicates that there are more foreign brands in the list
of 100 most trusted brands, prompting one to believe that foreign brands are trusted
more than the Indian brands. Similarly Indian brands have a higher average ranking
as compared to the foreign brands leading people to believe that Indian brands are
ranked lower by the Indian consumers. However, it needs to be checked whether the
difference in numbers is statistically significant. Another issue to factor is the magnitude of ranking as brands, despite being less in number, could be equally or more
trusted if they win higher rankings. To answer this one must know whether the
medians of the two categories of brands (Indian and foreign brands) are significantly
different (Israel 2008). This is done by applying the Mann-Whitney U test.
Results of the test for four consecutive years gave following results (Table 12.2).
Since all the calculated values of Z lie within the tabulated range of +1.96 at 5 %
level of significance, H0 is rejected. The alternative hypothesis which says that there
is no difference in brand trust ranking of Indian and foreign brands is therefore
accepted.
Table 12.1 Statistical highlights of brand trust rankings
Indian brands
Foreign brands
Av. ranking of Indian brands
Av. ranking of foreign brands
2009
49
51
54.67
46.49
2010
45
55
55.84
46.13
2011
45
55
54.68
47.08
2012
42
58
54.62
47.52
Table 12.2 Results of Mann-Whitney U test

Mann-Whitney U
Wilcox on W
Z value
Significance
2009
1,045
2,371
1.410
0.159
2010
997
2,537
1.666
0.096
2011
1,049
2,589
1.303
0.193
2012
1,045
2,756
1.208
0.227
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163
Table 12.3 Results of t-test

t-statistic with 98 d.f. at 5 % level of significance
Significance
F-statistic
Significance
2009
1.417
0.160
0.151
0.698
2010
1.686
0.095
1.218
0.272
2011
1.311
0.193
1.951
0.166
2012
1.211
0.229
1.881
0.173
To test statistical significance of average rank of the Indian and the foreign
brands, t-test was applied. Data for the 4 years were subjected to the test and the
following results were received (Table 12.3).
A look at the series of F- and t-statistic and their significance level indicates that
H0 is accepted which states that average brand trust ranking of Indian and foreign
brands is the same.
Discussion on Results
Though more number of foreign brands find a place in Indias 100 most trusted
brand rankings and their average ranking is also less as compared to the Indian
brands, results of the study indicate that the differences are statistically insignificant. These results seem to be in contradiction with the vast body of research on the
topic that considers country of origin to be significant. However, a deeper investigation might yield meaningful implications. These results can also be seen in the
perspective of an increasingly networked global economy and social systems. As a
result of greater interaction between people, the extreme feelings of ethnocentrism and preference for brands from developed world are expected to converge
into a more homogenized and standard response towards the brands.
Pointers for Future Research
The aggregate results obtained from this research indicate that India and foreign
brands across a range of products and services are trusted equally by the Indian
consumers. It is a good piece of information for the global brands who wish to enter
Indian market as the Indian consumer is not ethnocentric in her approach. It is good
news for the Indian brands as well since it gives them a level-playing field in terms
of country of origin perception of consumers. The study indicates that Indian consumers are not overawed by the international brands and equally trust Indian brands.
In the future the market shall get more homogenized and consumers would prefer
standard products and brands. In a way, results of this study build a case for investing in development of global brands. However, these results come with a caution
that future studies need to address to.
164
H. Singh
Country of origin is an absolute fact but consumer response to it is a function of

consumers awareness of the fact. Since the survey was a general survey on brand
trust, it is safe to presume that students were not specifically informed about the
actual country of origin. There could be global brands whom some of the respondents perceive to be local and vice versa. Hence, this study actually explored the
perceived country of origin and not the real country of origin. Interesting patterns
can emerge if a set of respondents is also asked to identify the country of origin of
the brands (in addition to giving the trust rating). Analyzing the responses from the
two sets of respondents (the ones who identified COO correctly and otherwise) can
provide interesting insights.
Trust for a brand is shaped by a number of factors operating simultaneously and
is the net outcome of interaction between them; outcome of this study could be a
result of the influence of the other factors that neutralized the impact of country of
origin. But as a stand-alone parameter, country of origin does seem to be a neutral
parameter. Future studies on can extend the theme by covering a wider range of
factors simultaneously and find out the relative significance of each, including the
country of origin.
Sample of brands for the present study comprised of brands representing different product categories, all of which have different levels of involvement of consumers. Consumers do not involve themselves with equal intensity while evaluating
brands in different product/service categories. Decomposing the available ranking
data into rankings for different product/service categories could provide useful
insights. It may so happen that country of origin turns out to be a proper determinant
of brand trust in the case of some product/service categories. It is another pointer for
future research.
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Chapter 13
Capturing Indian Rural Market Through

a Proactive Tool: Reverse Innovation
Rati Dhillon
Abstract Reverse innovation defines to the case where an innovation is acquired
first in emerging economies before tricking up to rich nations. The reverse innovation concept that is spreading from developing to developed economies has been
introduced by Immelt et al. (Harv Bus Rev 87:5665, 2009) presently. Given its
originality the reverse innovation concept still required to be combined with literature on features, diffusion, and the locus of innovation. Although example of reverse
innovation are rare as it is still developing theoretical questions such as what types
of innovations are probably spawn by the developing economies, why such innovations might spread to rich nations, what are the competitive benefits obtained by
foreign and local companies to have fun in this process and how it influences the
worldwide strategy and organization of multinational enterprises. Reverse innovation highlights in rich nations and sells their products in poor nations. Reverse innovation is performing the opposite. Reverse innovation also highlights the importance
for reduced price point innovations emerging in developing globe to produce new
market request back in richer economies. Reverse innovations also have global
influence. Mainly, they have the importance to migrate from poor nations to rich
ones. Reverse innovation needs a varied mindset flow of work and altogether paces
for economically and socially consistent outcomes to develop. Reverse innovation
fights to provide a powerful message because the data it provides is proper but not
varied or new. Reverse innovation has two fundamental objectives: first is to support
the organizations to grasp the theory underlying the process of reverse innovation
and second is to offer them with practical guidance on how to perform the initiatives
of reverse innovation. This study discusses in detail about the concept of reverse
innovation, investigates its application in various industries in real time (Godrej,
Tata Motors, and Philips), and explores how it can extend and enrich the mainstream theories of innovation. If understood and applied in a right way, reverse innovation strategy can play a significant role in todays recovering markets. This is one
area which is still unexplored. When world over is recovering, it is important to
know that there lies a vast opportunity in exploring this new area in rural India.
R. Dhillon (*)
Bharati College, University of Delhi, New Delhi, India
Springer India 2015
167
168
R. Dhillon
Reverse innovation can help us understand and tap rural market in India in a better
way. This paper is an attempt to highlight some of the major benefits of adopting
this marketing strategy and what should be future approach for this type of marketing strategy.
Keywords Reverse innovation Diffusion Developing nations Price point
Tapping markets
1
1.1
Introduction
Overview of Reverse Innovation
According to I2B (2011), reverse innovation is an innovation strategy used mainly in

developing areas and then using these marketing/distributing innovations in developed areas. Several firms are emerging products in developing countries like India and
China and then spreading them worldwide. The major part of reverse innovation is the
gap in income that occurs between the developed nations and developing markets.
There is no path to configure a product for the mass market of America and then
merely modify it for the mass market of India or China. In poorer nations, buyers
request solutions on a wholly varied curve of cost performance. They request high
technology new solutions that provide ultra low prices and good enough quality.
Reverse innovation is not good to have an increase in the growth rates of revenue.
Govindarajan (2012a) mentioned that an MNC learns to produce successful
innovations in developing markets and then exports that knowledge and innovations
to developed nation with new possibilities of business instantly. The restrictions
inflicted by its traditional actions become surmountable and the firm can reimagine all
its products and attack new areas in search of the development. But few organizations
experience this type of reconnaissance because reverse innovation where emerging
nations in a developing market persuade them to move upward to Western areas possesses massive challenges. It needs a firm to overcome its superior logic. Typically,
reverse innovation includes major alterations to move out the old structures of organization to make new ones from scratch, manufacturing processes, reorienting sales
force, and revamping the development of the product. Reverse innovation will enhance
the future not just in poor nations but also everywhere. Several immense rich world
opportunities of business will develop in poor nations also. To compete, worldwide
corporations must be as lithe in innovating abroad as they are at home.
1.2
Evolution of Reverse Innovation
The journey of globalization of multinationals in America followed the process of

evolution since it can be viewed in varied phases. The below figure shows the evolution
of reverse innovation.
13 Capturing Indian Rural Market Through a Proactive Tool: Reverse Innovation
169
Fig. 13.1 Evolution of reverse innovation (Source: tuck.dartmouth.edu)
From the Fig. 13.1, each phase is described briefly below:
1.2.1
First Phase: Globalization
MNCs enhance the unparalleled scale economies by selling both the services and
products all around the globe. Innovation first appeared at the house and then, new
offerings were spread all over the world (Govindarajan and Tremble 2012).
1.2.2
Second Phase: Glocalization
According to Sarkar (2009), in this second phase, MNCs identified that while first
phases reduced the prices, they were not as rival in local areas as they required to be.
Therefore, they concentrated on winning the share market by modifying the worldwide offerings to attain local requirements. Still innovation emerged with requirements of home country, but the services and products were changed later to win in
every market. To attain customers budgets in poor nations, they sometimes
de- characterized the occurring products.
1.2.3
Third Phase: Local Innovation
According to Govindarajan (2010), in this phase, MNCs are concentrating on

developing products for country, in country in the first half of the reverse innovation process. They are adopting a market back view. That is, they are initiating with
an assessment based on the zero customers requirements rather than considering
that they will make changes only to products which they have already. As teams
grow local market products, the organizations enhance them to exist linked to and
to advantage from a worldwide base of the resource.
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R. Dhillon
1.2.4
Fourth Phase: Reverse Innovation
If third phase is for the country, in a country, the fourth phase is about for the
world, in country. MNCs finish the process of reverse innovation by taking the
innovations chartered for poor countries originally, by adapting them and scaling
them up for global use (Govindarajan 2009).
2
2.1
Why Reverse Innovation?
According to Govindarajan (2011), reverse innovation is an essential strategic priority.

The stakes are extensive and nowadays, poor and rich nations report for roughly
similar shares of worldwide economy. But for years, development has been far
much robust in poor nations. Mostly, rich nations are in a gradual development
recovery following an awful recession truly; the development gaps look much like
a development chasm. Developing economies are anticipated to report for as much
as two thirds of future development in global gross domestic product. Developing
market rivalries offer the strongest drive for reverse innovation. If set up worldwide
corporations do not innovate in poor nations, new rivalries will capture the chance
Kishen et al. (2010) has mentioned that reverse innovation is applied to numerous
industries and products. There are some sectors where they could likely rival with
worldwide products. But in several consumer product companies and in other industrial goods, the concept of reverse innovation would be very essential. In India, local
firms have enormous chance to advantage from reverse innovation. By the process
of reverse innovation, innovations that were chartered originally from rural markets
will be scaled up and adapted for urban areas. For several companies, reverse innovation is the need of hour to concentrate on rural areas and be their solution providers. In current era, the success of companies will thrive the volumes not only in rural
areas but also in urban areas. Low-cost products made for rural areas can produce in
urban areas as well, and hence, on account of scale economies, companies can gain
huge profits. In addition to this, classes and masses will also become reverse innovation benefiters.
2.2
Why Conventional Innovation Theories Are Not Applicable

in Case of Reverse Innovation?
According to Trimble (2012), innovators generally agree societys cultural goals but
avoid the conventional methods of meeting those targets. These people generally
have an obvious disregard for conventional theories. Nowadays, several established
worldwide firms need to innovate when competing in developing markets since
171
innovation is risky and costly. The logic for innovations flowing downhill from rich
world to emerging world is intuitive and natural. Nowadays, reverse innovation is
working very well than conventional innovation and several worldwide companies
are innovating to gain huge amount of profits.
2.3
Benefits of Reverse Innovation
According to Cramer (2010), the major benefit of reverse innovation is its simplicity.
It asserted the approach that provides an antidote to develop the located and featured
heavy products which are developed in the West.
According to Govindarajan (2012b), for western multinational corporations,
reverse innovation is about making far from home and winning everywhere, and
acquiring this process can have worldwide implications to complete the business of
multinational corporations. The decision to innovate in emerging economies not
only open up new development sources, but it is also viewed as a defense strategy
for securing competitive benefit at home.
Khanna and Palepu (2006) mentioned that emerging multinational enterprises
have the home field benefit over Western multinational corporations due to their
local context knowledge and the requirements of local customers which permits
them to perform something which multinational corporations resist to perform, i.e.,
to acquire their strategies to the local market.
Sharma and Iyer (2012) discuss that generating a lower possible cost product
besides the intended advantages like reduced costs has unintended advantages such
as frugal resource use and thereby preservation of inadequate resources. Frugal
innovation can be described as the first stage of the method and an essential precondition for providing a reverse innovation.
According to Khanvelkar (2011), reverse innovation would lead to further development in industrialization. As several MNCs opt and adapt to invent and/or generate new products in India for Western as well as local markets, the economy of India
would witness a development in foreign direct investment and also indigenous
MNCs would spontaneously develop their investments to develop advanced facilities of research and development that would motivate to reduce the edge of both the
engineering and innovation. It also means that the engineers would experience
greater opportunities of employment and the market of consumer would succeed
from developed good products to provide their requirements at cheap cost.
2.4
Challenges of Reverse Innovation
By adopting a trickle-up process to new notions, innovators are forced to challenge

their views as well as complexity of numerous services and products. In other words,
they are compelled to initiate with an empty canvas instead of merely (AIM 2010).
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R. Dhillon
Adriaens et al. (2013) point out another major challenge of reverse innovation
and the opportunity of spillover for vast economic growth in developing areas is the
availability of professional people to assist the industrial development and motivate
a market-driven innovation culture.
Aschmoneit and Janevska (2013) described some of the challenges which MNCs
face when the reverse innovation pursues cannibalization risk and dilution of brand
name when the organization establishes less costly products in their line of products. Other than essentially greater prices than advantages of such effort, those
products can be viewed by firms as a threat to their overall margins and to the effectiveness of their production. The different needs and preferences of customers in
varied geographic places can be viewed as an extra challenge when the implementation of frugal resources is done in the developed areas.
According to Jullens (2013), the actual challenge of reverse innovation is how to
reverse innovate systematically on an ongoing foundation alternative on every once
or one off in a while foundation. Otherwise, this will just exist a captivating intellectual practice but not of much practical worth. For foreign companies, this refers
emerging essential local research and development capabilities on ground.
Another challenge mentioned by Gautam (2013) is leapfrog in techniques.
Developing economies experience in lack of infrastructure is carried out for
granted in emerging economies for any launch of the product. As an outcome, the
similar product based on the proven technique from mature economies cannot
move forward. Sometimes, a technological leapfrog is needed to overcome the
constraints of the infrastructure. However, the success is yet to be licensed as
reverse innovation as these products have not yet predicted their back way into the
emerging economies.
2.5
Popular Global Practices of Reverse Innovation
The study of Syed and Gihle (2013) describes the reverse innovation phenomenon
in healthcare and quickly developing systems in less income nations, are capable of
producing solutions for contemporary challenges of the health system in high and
middle income nations. Depasse and Lee (2013) suggested a new model to enhance
the health solution flow within the pipeline of reverse innovation. The reverse
innovation series in worldwide health systems is couched within and interlinked
intimately to a wider global movement targeted at identifying the actual importance
of middle- and low-income nations in contributing to the challenges of health
systems worldwide.
Govindarajan et al. (2009) examined how reverse innovation is used to new
mobility industry advantages and combined the emerging and developed economies
including innovation sharing that travel from the regions of south to north rather
than in other direction. Rather than trying to spread costly new innovations to poorer
places, frugal innovations are spread to healthier well-emerged markets after some
173
adaptation of those innovations. Aside from raising and transforming the living
standard in developing economies through the development of new company
employment and supply chain opportunities, they expect that reverse innovation
will outcome in innovations of mobility that can be scaled rapidly to mass areas
through new segments of market which was not mentioned previously.
Talukdar et al. (2010) stated that the reverse innovation process as presently
practiced in business starts by concentrating on requirements and needs for low-cost
products in lesser emerging nations. Christensen discusses in their paper that compared to healthy countries where gasoline and electricity consumptions are ubiquitous, emerging countries are an ideal region to commercialize the technologies of
green energy.
Roetter (2011) in his study mentioned that reverse innovation, which is capable
of providing effective and reliable performance in surroundings with underdeveloped or poor infrastructure in terms of transportation, electric power, clean water,
service and repair facilities, and unfavorable conditions with regard to humidity,
cleanliness, and temperature, must be affordable and useful for users and buyers
with restricted financial resources. These features of reverse innovations can then
become the competitive benefit sources and/or opportunities for mentioned new
consumers in rich markets whose requirements are being stated poorly by locally
emerged services and products.
Ruan et al. (2012) refer that reverse innovation is an expanded disruption model
state that it could be handled as a kind of disruptive innovation. Corsi and Di Minin
(2011) point out that reverse innovation is a kind of disruptive innovation that
emerges not from similar geographical areas that incumbent firms dominate but
rather from the areas of developing economies where a product/technology has been
commercialized to fit the features of those markets specifically providing the best
BoP. Reverse innovation does not distribute in lower market areas because the products were not better enough for much sophisticated market areas but it is from the
initiation stage intended to fulfill the requirements and needs of lower market areas.
Later, those products can find its place in the emerged markets also.
According to Immelt et al. (2009), reverse innovation focuses on emerging
services and products particularly aimed at the business of pyramid customers
which are upgraded to sell in the emerged markets. It is predicted that companies
are capable of creating customized products with cost benefit and functionality for
poor without compromising comfort and safety (Van den Waeyenberg and Hens
2008). Growing a product particularly in rural areas can be sold for reduced costs
because of considerable demand importance (Craig and Douglas 2008). London
and Hart (2004) stated that successful ventures in business of pyramid areas possessed an extra capability that was based on facilitating and valuing the bottom-up
co-invention by different partners of local proper solutions. In turn, these solutions
gathered increased the capacity beyond the secured organizational boundaries. This
process can be viewed as a bottom-up making of new solutions in less emerged
globe to match the surroundings of these areas.
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R. Dhillon
The following chapter discusses briefly about the research paradigm, research
design, sampling design, data analysis, collection, and interpretation techniques
adapted in this study.
3.1
Research Paradigm
This study adopts interpretivism as the research paradigm. Interpretivism defines

the methods which are used to emphasize the meaningful nature of peoples participation in both social and cultural life. Interpretivism research processes include
focus groups, interviews, and research diaries (Chalmers 2004). This study adopts
interpretivism approach since this study adopts case study research design and this
suits best for this study when compared to positivism (Cousin 2005).
3.2
Research Approach
This study adopts qualitative research. Warren and Karner (2005) mentioned that
qualitative research usually takes place in naturally occurring situations as contrasted with the quantitative research in which behaviors and settings are
controlled and manipulated. Qualitative research emphasizes a holistic interpretation. A qualitative research always builds a theory through an inductive approach
to describe about the rapport among the data categories. This study adapts qualitative research since the researchers purpose is to predict responses to proposed
questions of research by gathering data in textual analysis rather than numerical
analysis (Anfara et al. 2002).
3.2.1
Research Design
This study adopts case study research design. According to William (2009), case
study research design can be quantitative, but because of the wide nature of case
study itself, it is always used as a qualitative research method. Case study is also
used for hypothesis testing and theory generation. This study adopts the case study
approach since it examines briefly about the technical and ethical problems related
to the reverse innovation in companies of rural India (Yin 2003). This study considers Tata Motors, Philips, and Godrej for reverse innovation in rural India. Tata
Motors is considered in this study since it is the most renowned automobile industry
in India since 1945 and still it has affordability at its core.
175
Godrej is considered for this study since it is a leading manufacturer of chemicals

even before independence and products are delivered at its best based on reverse
innovation.
Similarly, Philips is considered for this study since the technologies in this company are often promising and they are moving rapidly to innovate in developing
economies.
3.3
Sampling
This study adapts convenience sampling. Convenience sampling is the study of

subjects taken from a group that is accessible to the researchers convenience. This
study adopts convenience sampling since it conducts the analysis of companies
based on the qualitative research. Researchers prefer this type of sampling to acquire
information without having to migrate comprehensively or construct a component
of vast ranging subjects. This saves both money and time which can make a huge
variation while carrying out the research (Wise Greek 2013).
3.4
Data Collection
This study makes use of only the secondary data and no primary data. According to
Patton (2002), secondary data is the information which already occurs in some form
or other but which was not gathered primarily for the need of data at hand. Secondary
data is adopted in this study since it is time consuming and the responses are gathered from the respondents in textual format (Cooper and Schindler 2006). Secondary
data collected in this study would be with specific reference to reverse innovation
strategies adapted by three different companies, by names, Tata Motors, Philips, and
Godrej, belonging to India.
4
4.1
Company Analysis Using Reverse Innovation

in Rural India
Tata Motors
According to Yin (2009), Tata group of India is one of the companies which has
been innovating the new approach. The Tata Nano automobile is an innovation
which pushed the envelope in the world of the Indian automotive industry. Tata
Motors set their target price at $2,500 before they designed the car. They made plans
by keeping suppliers in mind and their target customers are scooter and motorcycle
176
R. Dhillon
drivers who wanted a safer vehicle. Tata Motors provides functional goals for most
of the parts rather than technical specs in the early stage of the design process. This
helped to manage the reorientation and the basic tenets of practicality and efficiency
to meet the cost target.
Efficient design of Tata Nano comes from the items that are essential for basic
transportation and removes the nonrelevant ones, i.e., having one component or part
which can perform a task like good as two components or parts can do, thus resulted
in cost savings. For example, the Nano has only one side mirror and one windscreen
wiper and it uses minimal foam padding which contains urethane for the seats and
these seats have integrated headrests. It also refrains from emphasizing items which
are not feasible because of the monetary reasons. Air conditioner, radio, air bags,
antilock brakes, and power steering are not included, whereas the instrumental
panel comprises of only an odometer, fuel gauge, and analogue speedometer similar
to that of the two-wheelers (Wells 2010).
Tata has come up with many practical ways in order to reduce the car weight as
well as to trim down the overall cost. It uses comparatively light and small engine
that is strategically placed at the back side of the car. This design enables the car to
uniquely combine maneuverability and space and formulate a new benchmark
among the small cars. For example, the car will be smaller in overall dimensions
when compared to the classic Suzukis Maruti 800, since it offers about 20 % more
seating capacity as an outcome of design choices like putting the wheels at the
extreme edges of the car. Other factors which contribute to the reduction of weight
are the usage of plastic body panels, hollow steering wheel shafts, and smaller tubeless tires. As an outcome of these measures, Tata Nano weighs only 590 kg. The
strategy of lean design has helped to minimize the weight as well as maximize the
performance of the energy consumed per unit and delivers high fuel efficiency
(Tiwari and Herstatt 2012)
Tata Nano illustrates the Gandhian engineering design or is frugal, i.e., economical, basic, and functional. It showcases the potential for future disruption, as it is
selected to compromise on a few key features for lower-cost performance which
will be appreciated by the middle-class family clients or customers in India. It is
frugal but the effective design of cars fills the gap left by the most mainstream cars
performance. The wheel design mark and rear engine created a new standard for
small cars in the market that protected the innovation from being too easily exploited
or imitated by others (Zhou and Li 2008).
4.2
Philips
According to Matheson (2013) in 1930, Philips in India started its operations.

Philips India is a leader in semiconductors, lighting, medical systems, consumer
electronics, personal care, and domestic appliances with a range of internationally
current products which is backed by both the superior technology and design.
Philips has brought superior technology to Indian customers at affordable prices. It
has been instrumental in bringing latest technologies such as digital widescreen
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TVs, high-definition rear projection TVs with DVD, and integrated wireless FM,
among several others, to Indian customers. To increase its penetration in semi-urban
and rural markets, Philips has particularly designed products and targeted at the
rural and semi-urban customer in India. For example, Philips has created a specific
brand Vardaan in its range of color TV, targeted at the semi-urban and rural markets.
To counter the problem of power supply in rural India, Philips has customized its
television to perform on a voltage range of about 90270 V, thus eliminating the
requirement for a voltage stabilizer. Philips launched the first free-power radio in
the world which has become very popular in the semi-urban and rural market
(Li and Kozhikode 2008).
Prahalad and Mashelkar (2010), Li and Kozhikode (2008)), and Quintane et al.
(2011) refer that Philips has developed specifically for the Asian market based on
the customer needs. Instead of bringing the products of European to Asian customers, Philips succeeded by identifying different lifestyle and cultural needs and customizing technologies and products for the people who buy them. Philips launched
innovative promotion campaigns particularly in rural areas. The Philips consumer
electronics and lighting divisions have launched integrated programs of rural marketing which has been spread across the semi-urban and rural areas where population is below 50,000. Philips also structured the product pricing to make them
affordable for the target customers in small towns and rural areas. For example,
Philips introduced a portable compact drive system at an affordable price of about
US$ 83 for the rural and semi-urban customers. It is one of the largest distribution
networks with higher penetration levels in the semi-urban and rural areas. To
enhance its logistics and distribution network and to raise the geographical reach of
its products, it carried out the extensive productwise exercise of mapping over 540
districts across India. Major retailers were identified and an approach of key account
management was adopted in order to strengthen the channel of distribution (Li and
Kozhikode 2008 and Yin 2009).
Yin (2009) points out that the local Indian management runs the Philips India
operations. This enables the Philips to understand the local consumer insights and
fine-tune its strategy in order to analyze the dynamics of the local market. Philips is
leveraging various advantages provided by India such as software development
capability, intellectual capability, processing capability, and cost effectiveness of
resources. Philips has product offerings across affordable price and performance
points for a wide range of Indian market. Philips product portfolio encompasses
global products which caters to anywhere in the world customers and styling and
high-reliability products for the mass customer base (Quintane et al. 2011).
4.3
Godrej
According to Inkpen and Ramaswami (2006), Indian conglomerate Godrej & Boyce
launched the cheapest super economical refrigerator in the world, namely,
Chotukool, at the price of $69 in 2010. The fridge is a portable unit of top-opening
weights with only 7.8 kg; it uses the high-end insulation in order to stay cool for
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R. Dhillon
hours without power and also consumes only half of the energy used by the regular
refrigerators. To reach its efficiency, Chotukool does not have any compressor, but
it runs on a fan and cooling chip akin to those used in the computers. Similar to
computer, it will run on batteries. Chotukool engineering credentials are boosted by
the fact that it has 20 parts, as opposed to more than 200 parts in a normal refrigerator. Unlike the general refrigerators, it opens from the top in order to prevent cold
from escaping (Li and Kozhikode 2009).
Mahmood and Zheng (2009) point out that Chotukool is another example for
local enterprises innovation model which was successful in diffusing and designing
an appropriate technology for mass markets of India. Chotukool overcomes social
and technological barriers and addresses one of the most pressing problems in India
that hosts the largest population deprived of electricity in the world, that is, 92 % of
the Indian population lives in the rural places, equaling about 71.7 million households or 380 million people. The quantity and quality of power of these people have
access to very poor and prolong these areas development. The power situation in
rural areas of India cannot be fixed overnight; products such as Chotukool are
required to make peoples lives a little better. Effective refrigeration in rural areas
will help the customers extend their access not only to food as well as to essential
drugs (Kapoulas and Mitic 2012; Inkpen and Ramaswami 2006).
According to Mahmood and Zheng (2009) and Li and Kozhikode (2009), the
Chotukool was codesigned with a village woman in order to ensure its acceptability
and it is distributed by the micro-finance group members. Initially, Godrejs team
built and designed a unit of prototype cooling from the ground up and tested the
Chotukool in the field with the customers. In 2008, more than 600 women in
Osmanabad, a city in Indias Marathwada region, were selected to participate in a
co-creation event. It worked with the original prototypes and was collaborated with
every products design aspect. They helped for the interior arrangements and also
made suggestions for the lid and offered insights on color that is eventually setting
on candy red. The outcome was the Chotukool or little cool top-opening unit with a
capacity of 43 L at 1.5 ft 2 ft and it has enough room for the certain items where
customers can keep fresh for even 2 days. The Chotukool also showcases the distinctive features of the reverse innovation and it started with the features of inferior
performance but its portability and affordability are appreciated by the niche market
that happens to be the mass market areas in the developing countries, namely, India.
Conclusion
This study examined the reverse innovation as a marketing strategy in rural India.
The reverse innovation is a practice that can be carried out by both emerging multinational enterprises and Western multinational corporations. The benefits of reverse
innovation are simplicity, defense strategy securing competitive benefit at home,
and home field benefit over Western MNCs, generating a lower possible cost product and further development in industrialization. The challenges associated with
179
reverse innovation are trickle-up process to new ideas, availability of professional

people, cannibalization risk and dilution of brand name, essential local R&D capabilities, and leapfrog in techniques. Reverse innovation can be redesigned or
reworded for context-specific applicability; however, as it is the request of present
time and destiny of future, it can neither be stopped nor be retarded. Avoiding
reverse innovation can cost several firms, particularly nowadays world class MNCs,
huge loss than a missed chance abroad. It can cause severe damage or even pain in
their own well-set-up home market. Reverse innovation shows a bold invention with
far-reaching implications. The flows uphill of innovation and its future depend in
developing markets. Nowadays, emerging countries are being tapped for breakthrough innovations that can undo new areas in the rich globe and help solve worldwide societal issues such as poor access and high cost to companies.
Reverse innovation is critical to review because it acquires huge outright of innovation but does so with relatively evident observations that are useful anywhere.
Several Western companies have myopia about product needs and requirements in
emerging nations and can study by describing customer requirements and perceiving the channels, support requirements, and infrastructure in these nations to innovate products that are much common. Reverse innovation could outcome in making
products that can appeal to both global and local customers, and hence, there will
not be a requirement for local adaptation in future. Thus, it can be concluded that
reverse innovation has the importance not only to change the company but also to
transform the globe.
Recommendations
The practical direction on how to operate reverse innovation appears a bit overdone
as well. To mention the Western thinking challenges and opportunities of local
innovation, a solution is recommended such as local growth teams which is usually a Skunk Works to make new products based on local requirements. The local
growth team is supposed to be completely autonomous and perform as a complete
unit of business with a whole value chain involving supply chain, product growth,
servicing, marketing, sales, and manufacturing. This recommendation is similar
to construct a completely parallel and new unit of business to occurring capabilities. The local growth teams will likely need new competencies. Always, these
will be professional sets which the organization has never before required. If the
occurring people and teams are not capable of innovation, perhaps the existing
structures and teams required to be rethought wholly. Local growth teams must
have the responsibility of profit and loss. Local growth teams must have the
authority of decision-making to select which products to grow and how to make,
service, and sell them. Local growth teams must have the assistance and right to
draw from global resources of companies.
It is recommended that MNCs must enhance a core understanding of local
consumer issues. Local firms must construct capabilities of worldwide distribution
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R. Dhillon
and worldwide brands. The largest barrier for reverse innovation is not budgetary or
technology constraints. It is based on mind-set and organization. In reverse innovation, the success does not rely much on financial resources or technology as it relies
on pursuing proper company and maintaining appropriate mind-set.
It is recommended that the product development and local ethnographic companies
in every developing nation partnering with entrepreneurial and mid-sized companies
in the West to provide insights, market requirements, delivery channels, and capabilities of local product development would provide low cost and rapid access to developing markets. This recommendations would permit Western companies to increase
their intellectual property and enter developing and new markets while local companies with a good understanding of local requirements, channels, and customs could
change designs and enhance solutions to provide to local consumers.
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Chapter 14
Capturing the Brand Essence

and Communication Commonalties
of a Western Brand in an Eastern Country
Kanwal Kapil and Avinash Kapoor
Abstract Post liberalization in Indian economy, a lot of multinational giants have

entered the Indian market. As now the brands have been viewed as post-valued
strategic assets in the present era, the concept of brand essence has gained prominence for the research community. The brand managers of these companies have a
tough task of globally harmonizing the image and essence of their brands. In spite
of sending the same signals via communication and integrated marketing programs,
there are still many possibilities that brand may be viewed differently by different
consumers of different countries. The same product may be at different life cycle
stage and may be perceived to be of different usage in different countries. This study
is aimed to identify commonalities in brand essence and brand communication so
that they can tailor their marketing communications to make them perceive the
intended essence of their brands. This study focuses on capturing the commonalties
in the brand essence and brand communication of a Western brand (Nike) in India
to draw out implications for brand managers.
Keywords Brand essence Brand personality Brand communications Brand
identity
Introduction
Twenty-three years after the onset of liberalization, almost all major Western brands
are rapidly entering the Indian markets. Multinational giants such as Nike, Adidas,
P&G, Vodafone, and Apple have strong presence in the Indian market. Brands are
the very reasons for any companys existence. Brand managers have a tough task of
globally harmonizing the image of their brands. It is possible that the country of
origin effect may affect the image of the brand. In order to achieve the consistency,
K. Kapil (*) A. Kapoor

Marketing area, Management Development Institute (MDI), Gurgaon, India
Springer India 2015
183
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K. Kapil and A. Kapoor
companies have to have a very clear and unambiguous strategy to strengthen their
brand capital. Companies standardize cues like logos, brand names, and advertising
globally, so that they are able to portray a global image across countries. In spite of
sending the same signals via communication and integrated marketing programs,
there are still many possibilities that brand may be viewed differently by different
consumers of different countries. The same product may be at different life cycle
stage and may be perceived to be of different usage in different countries. For
instance, consumers in different countries have different kinds of food habits as it is
largely cultural and social phenomenon. In essence, the image of any brand is not
just controlled by the marketing manager or brand manager, but many more extraneous factors such as level of competitiveness in that country, cultural contexts, category penetration, and so forth are responsible for that image. Brand image is not
merely dependent on communication strategy but is influenced by the consumer
experiences and publicity (Schultz and Chernatony 2002).
Because of varied sources of information available to a consumer, it becomes
imperative that brand managers should critically analyze as to how their brand is
being perceived by the customers. Companies would like to have a strong base of
brand loyalists who may or may not be similar across geographies in terms of demographic and psychographic behavior (Melewar et al. 2005).
Consumers are bombarded with innumerable messages through different media.
Past experiences of the customers will have a strong impact on marketing information processing (Berry et al. 2002). Brand managers have to have consistency,
coherence, and permanence in their communication and other marketing stimuli.
For global brands, it becomes a big challenge as different countries have different
national stereotypes, expressions of the culture, and ethnocentrism. Further Asia
and West differ in dimensions of individualism vs. collectivism. Yet certain brands
have defied local boundaries and have universal and global appeal and image.
Consumers in a country like India have a high liking and good image of products
originating out of Western countries as very Western is perceived to be synonymous with modern. So generally, just Western associations qualify as a favorable
brand attribute.
Global brands such as Coke and Levis have personified the Western affluent
lifestyle and freedom, thereby commanding global demand and respect (Batra et al.
1996). In a developing economy like India, the consumers have started reaping the
benefits of globalization, thereby having access to the world-class products. Before
globalization, foreign goods used to have a tag of high status. Now in spite of high
cost, even then they are still in high demand as purchasers of foreign goods associate status and affluence with them (Ger et al. 1993).
Things are changing very fast, so the perception that the very Western is blindly
favored is no longer an asset but is turning out to be a liability these days. There is
heterogeneity of brand signals that consumers receive frequently. Therefore, consumers now have a better accessibility and approachability to brand preferences and
choices along with new products. This also in a way reflects their response to new
cultural order and changing desires and expectations This poses a considerable challenge for the brand manager to identify a coherent brand essence which should
14
Capturing the Brand Essence and Communication Commonalties
185
resonate with consumers desires and preferences (Coulter et al. 2005). Therefore,
it becomes important that the very attribute called Western which had been impacting the corporate brand perception needs to be investigated in the Indian context.
There are many factors which affect the brand information and brand perception;
these also establish the extent of relationship that consumer develops with the brand
in the long run (Aaker et al. 2004; Fournier 1998). Brand image tends to be symbolically retained and understood by the consumers in their own perspectives (Solomon
1983). Therefore, the symbolic meaning of brand attributes has become a hot subject of investigation for many marketing scholars (Aaker 1997; Bettman 1993;
Hogg et al. 2000).
A consumer identifies himself or herself with the personality of the brand as
brands tend to have unique associations and personality characteristics (Ligas 2000;
Fournier 1991). Postmodern scholars in the marketing field have been propounding
that brands are not just existing because of functional attributes but they signify
symbolic and emotional meaning. Traditional researchers have ignored this very
important aspect of brands which largely display strong symbolism.
Several researchers in the postmodern era have been criticizing the traditional
experimental researchers who viewed products as mere functional things, thus
ignoring the symbolic meaning of the products (Belk 1988; Hirschman and
Holbrook 1982; Levy 1959; McCracken 1986, 1987, 1988; Solomon 1983).
Brand researchers have for a long time tried in various ways to define and understand
a brand with various interpretations including associations, identities, personalities,
etc. One of the most intensely studied aspects is the brand personality or persona
approach. This is very obvious because this approach treats the brand as a person and
tries to define its traits and characteristics. This approach instinctively attracts researchers
as people do generally tend to humanize many of their possessions, and hence this
approach would take support of this proved tendency of people.
Many scales, techniques, and theories have been developed by the researches in
the field of marketing and psychology to investigate and unearth brand personality
attributes. Further these scales have been used to describe various facets of a brand.
A brand can be described in the following aspects: firstly, each brand has physical
and functional attributes which can be identified by looking at those aspects tangibly. Secondly, each brand signifies and evokes cultural associations. Thirdly, brand
is a relationship, fourthly brand also reflects the imagery and self-concept of the
user, and finally brand acquires or is provided with some personality associations by
the marketers (Kapferer 1996). To convey all these facets of the brand to the target
audience, communications become the key and vital aspect for the brand managers
as these facilitate consumers to feel about his or her brand lively over a time.
Few researchers argue that the measurement of brand personality is difficult as it
is adding more conceptual confusion. Most of the brand personality scales covering
different constructs are inadequate to capture the complete brand personality
(Azoulay and Kapferer 2003). Furthermore most of the scales use and superimpose
all the human characteristics on brands to convey or measure personality, thereby
ignoring the distinct faces of brand identity, where personality is just one of the
constructs only.
186
Looking into these challenges, we try to address the issue of brand essence by
presenting a theoretical framework. In this paper, we take brand essence which is
part of the brand identity to look at the brand from consumer perspectives. We
choose the brand Nike which is one of the most popular brands in India. We then
try to identify the brand image of Nike and essence associations of the same, and
then we try to see what associations consumers have when it comes to communication of Nike. Then we try to map whether the brand essence as perceived by consumers is matching with the communication strategy of Nike.
Brand Essence
Brand essence is the central nature of what the brand represents to all those who
come into contact with it. A brand sometimes has a soul which he defines as a
spiritual centre, the core value(s) that defines the brand and permeates all other
aspects of the brand (Upshaw 1995). Consumers form a mental picture of these
associations to organize and interpret the brand in their own words (Murphy and
Medin 1985).
In trying to define brand essence in terms of brand persona, we think of brand
essence or brand core as a set of characteristics or traits which moderates or
influences the presence or absence of some other characteristics while also
determining, in some cases, the strength of other characteristics. So, we can say
that the essence would consist of those characteristics that would be those that
satisfy two conditions: one, they would be the strongest traits of the brand, and
two, they would be the cause of the most number and strengths of the other
characteristics of the brand.
The brand essence more specifically is a single thought that captures the soul of
a brand (Van Auken 2000). It resembles the elements of brand identity as it creates
the brand association in the minds of consumers (Aaker 1996; De Chernatony 2001;
Aaker and Joachimsthaler 2000). However, the challenge is to maintain and retain
the essence of a brand in the minds and hearts of consumers (Keller 2003; Kelly
1998). As such, consumers cocreate the meaning of brand essence beyond the marketplace (Brown et al. 2003). However, it is very difficult to identify and establish
as to how the consumers perceive the real meaning of essence. Also the existing
literature offers very little to brand managers for renewing their brands and brand
representations. Therefore, it is indeed a requirement that the lucid model is conceived that conveys the associations among perceived brand representation and
information (Johar et al. 2005).
Further, in order to communicate the brand positioning, personality traits are
used for effective communication (De Chernatony 2001). Following the same, we
investigate as to how the personality of Nike is perceived in India and what consumers
in India feel about the characteristics of the brand campaign.
14
Investigating the Commonalities in Brand Essence

and Communications: The Case of Nike in India
3.1
187
Methodology
The objective of this study was to capture the brand essence and communication
commonalities for the brand Nike. For achieving this research objective, we chose
to follow an exploratory design. The setting for this research was the National
Capital Region (NCR), Delhi, India. After several discussions with the brand manager, the sales manager, and other industry and academic experts, we choose to
conduct the study in two phases. In first phase of the study, 50 graduates of five
business schools were interviewed. They were asked a question that if Nike was a
human being, what associations come to your mind about Nike? This question was
unaided recall. They were asked to write at least five associations for the same. The
results of the group were collated and tabulated. Then we selected those associations which had been conveyed by five or more respondents. The results showed
that 11 characteristics emerged which satisfied this condition which were spirited,
full of energy, sporty, athletic, real, cool, hardworking, winner, confident, Western,
and fit (Table 14.1). Then these characteristics were shared with the brand manager
and sales manager to get their perspective. They agreed with most associations but
strongly suggested to add one more characteristic, which was champion, as the
company strongly believes that Nike is a champion brand. In all 12 associations
became an input for the next phase of the study.
A questionnaire was prepared based upon these attributes.
The second phase of research was then carried out where we administered the
developed questionnaire on 160 students enrolled in finance and HR courses.
Table 14.1 Brand attributes
and campaign characteristics
of Nike
Qualitative results
Nike
brand
Spirited
10
Full of energy
6
Sporty
9
Athletic
7
Real
6
Cool
7
Hardworking
8
Winner
10
Western
9
Confident
7
Fit
6
Champion
0
Nike
campaign
7
7
8
9
5
5
3
6
10
7
5
0
188
The respondents were asked to rate the Nike brand on the identified attributes on a
scale of 15 (where 1 represents not at all like this and 5 represents surely like this).
After obtaining the ratings of Nike brand, the students were shown the Nike
advertisements in print and electronic media, and then in the second question, the
respondents were asked to rate the communication of the brand Nike (where 1 represents not at all like this and 5 represents surely like this). This question was asked
to capture the communication and brand commonalities for the Nike brand. The
exploratory factor analysis of the data was carried out to arrive at the factors which
represent the brand essence and the reflection of the brand communication of Nike.
Results and Discussion
Before conducting the exploratory analysis, we checked the Kaiser-Meyer-Olkin

(KMO) measure of sampling adequacy and the Bartlett test of sphericity. Accordingly
we found that the sample size was adequate. Also, before carrying out the factor
analysis, it is important to test whether the data can be subjected to factor analysis.
Hence, to check the relation between the data, we have used the KMO measure of
sampling adequacy and Bartlett test. The Kaiser-Meyer-Olkin measure of sampling
adequacy is a statistic which indicates the adequacy of sample size. The KMO measure of sampling adequacy is 0.87, which is greater than 0.6, which shows that
variables are fitting with the structure of the other variables. To check the hypothesis
of the model, we used correlation and regression analyses as they were able to give
the nature and strength of the relationship between the various constructs.
Also the significance level is 0.00, which is less than 0.05, which verifies that the
data is suitable for factor analysis and there are significant relationships among the
variables.
Table 14.2 captures the results for the brand essence of Nike. The exploratory
factor analysis enabled the extraction of four factors for brand essence, explaining
the cumulative variance of 68.66 %. The first factor contained characteristics such as
spirited, sporty, full of energy, athletic, and fit. This factor can be clubbed and called
as acrobatic. The second factor contained two attributes, namely, winner and champion, which can be termed as conqueror. The extraction led to the third factor which
contained variables such as cool and Western. These two factors can be termed as
progressive. This name is chosen as the Western brands in countries like India are
considered to be forward-looking. Finally the results showed the fourth factor containing variables such as determined and real. These factors can be termed as assiduous. With the help of these factors, we can say that the brand essence of the brand
Nike has four elements, namely, acrobatic, conqueror, progressive, and undaunted.
Table 14.3 shows the results of brand communication effects of Nike, where
three factors were extracted by exploratory factor analysis to capture the brand communication characteristics of Nike explaining for the cumulative variance of
67.99 %. The first factor contained characteristics such as spirited, sporty, full of
energy, athletic, and fit, which were earlier captured for brand essence and were
termed as acrobatic. The second factor contained characteristics such as cool,
14
189
Table 14.2 Results for brand essence

Component
1
Q5 Spirited
0.525
Q5_Sporty
0.805
Q5 Full of energy
0.843
Q5 Athletic
0.774
Q5_Fit
0.750
Q5 Determined
0.366
Q5_Winner
0.226
Q5 Champion
0.334
Q5_Cool
0.115
Q5 Real
0.118
Q5 Confident
0.400
Q5 Western
0.232
a
Rotation converged in six iterations
0.433
0.605
0.634
0.566
0.144
0.390
0.851
0.881
0.298
0.135
0.268
0.101
0.179
0.358
0.163
0.275
0.645
0.178
0.576
0.222
0.750
0.156
0.368
0.791
0.110
0.170
0.174
0.289
0.199
0.696
0.654
0.551
0.681
0.802
0.419
0.142
Table 14.3 Results for brand communication

Component
1
Q6_Spirited
0.811
Q6_Sporty
0.881
Q6_Full of energy
0.864
Q6_Athletic
0.875
Q6_Fit
0.700
Q6_Determined
0.581
Q6_Winner
0.396
Q6_Champion
0.398
Q6_Cool
0.167
Q6_Hardworking
0.364
Q6_Confident
0.295
Q6_Western
0.192
a
Rotation converged in seven iterations
2
0.125
0.229
0.213
0.285
0.329
0.348
0.362
0.329
0.641
0.215
0.810
0.632
3
0.199
0.111
0.370
0.260
0.138
0.604
0.296
0.211
0.312
0.696
0.161
0.376
confident, and Western. The second factor in brand essence contained two characteristics such as cool and Western, but the brand communication results show that
confident is also part of this factor; we can term this factor as nonchalant. The third
factor contained characteristics such as determined and hardworking; we can term
it as assiduous.
190
Discussion and Conclusion
This study tries to capture the brand essence of Nike. Further the consumers were
asked to review the brand communications of Nike. Ideally the essence of the brand
should be reflected in the brand communication. The results corroborate the fact
that the brand essence is not created just by the communications but also other elements like the experience which the brand provides, the marketing mix elements,
and a lot of other environmental variables (Schultz and De Chernatony 2002). We
can see from the results of the study that three factors were common in the brand
essence and brand communication but one factor, namely, conqueror, was not captured in the brand communications at all.
Historically, Nike has been named after the Greek goddess of victory. The brand
has been using many top-class athletes as brand endorsers. Companies are increasingly using brand archetype paradigm so that they are able to build symbolic meanings, which can bring strong identities across different subcultures (Tsai 2006). For
example, the brand Nike Air Jordan is related to the hero archetype the world over.
The total consumer experience of the hero archetype is because of the experiential
potential of the brands and their marketing communication and communication
among the consumer groups (Tsai 2006).
On indicative verbatim was:
When I watch Nike commercials, I am unable to relate to Michael Jordan and feel disconnect
with the message, however I would be happy to see my sports icons like Sachin, Yuvraj,
Dravid and Dhoni sporting Nike shoes. Nike is a brand for winners with insatiable spirit to
conquer all odds
This shows that the global brand like Nike has very strong associations with
the conqueror component of brand essence which is confirmed by this study also.
But the brand communications fail to capture the same in a country like India. So
this reinforces the argument that the global brand managers should be careful in
selecting messages for global brands in countries like India, so that the exact
essence of brand is also captured in the communications. Basketball is not as
popular as cricket in India, so consumers may not relate to players of basketball.
So it will be fruitful if the company chooses the corresponding iconic class player
from a game which is a craze in the country and comes out with the subbrand or
collection like Nike Yuvi collection.
Our findings also corroborate the view that apart from one central element which
is brand story, the brands in total four central elements which are brand essence,
idealized community, and brand paradox (Brown et al. 2003). The congruence
between the representation of brand symbolism through communication and brand
essence can have a positive influence on consumers. For achieving the holistic goals
of effective brand communication, practitioners should have permanence, coherence, and durability in their messages to communicate their brand essence. Brand
managers should clearly focus on Total customer experience. Brand managers can
achieve this by not only highlighting the utilitarian attributes such as quality and
performance, but also emotional connect with the brand.
14
191
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Chapter 15
Considerations in Medical Software Purchase:

Evidence from Dentistry in India
Jaydeep Mukherjee
Abstract With the proliferation of software in medical industry, marketers are
trying to gain insights into the factors that medical professions consider important
while making their software purchase decisions. New product adoption by a service
provider has not been the focus of academic research in emerging markets like
India. Since India is culturally and socially very different from western countries
(where most of the academic research has taken place), this study becomes important. Since medical software is still a niche area, there is a need to investigate adoption and diffusion of these new innovations in the market. This research explores the
key considerations in medical software purchase so as to improve the probability of
marketing success of these products.
The conceptual framework was developed based on extensive literature review.
The scales were adapted and the framework was empirically tested. Data was collected from 160 respondents from the dentistry business and could be considered
representative of the target market of such medical software in India.
The results suggest that the adoption decision is facilitated by operational novelty, trialability, perceived risk, and relative advantage at an overall level. However,
operational novelty and relative advantage were the significant factors which
improved the probability of adoption. This finding could be used for designing marketing initiatives and budget allocation.
This framework could be a base model from where to start the process. This
could help them have framework for deciding their marketing strategies. However,
prudent marketers of medical software need to understand the behavior of their
specific target market.
Keywords Adoption of medical software in India Framework for software
adoption Technology adoption in medical devices
J. Mukherjee (*)
Springer India 2015
193
194
J. Mukherjee
Introduction
The drive toward evidence-based practice in health care requires changes in work
practices and supporting technology. Evidence-based practice can be defined as
the conscientious, explicit and judicious use of current best evidence in making
decisions about the care of individual patients. This is contributing to the increase
in use of software content in medical devises. Medical software industry has been
adapting their product portfolio to cater to these emerging requirements. Medical
software is becoming more complex and can be categorized into various subcategories like integrated medical software, surgery management programs, portability
systems, knowledge-based systems, telemedicine software, etc. With the proliferation of software in medical industry, marketers are trying to gain insights into the
factors that medical professions consider important while making their software
purchase decisions. Since medical software is still a niche area, there is a need to
investigate adoption and diffusion of these new innovations in the market. This
research explores the key considerations in medical software purchase so as to
improve the probability of marketing success of these products.
Due to the rapid evolution in the medical sciences, uses of innovative software
products have become a necessity. The purchase decision processes for such products are often quite complex as they are business purchases with large buying centers. Buying center dynamics could be quite complex because of interplay of
professional, social, and personal orientation of the decision-making unit. Research
concerning innovations in the services context has primarily focused on new service
development (Edgett 1994; Kelly and Storey 2000) or consumers adoption of new
types of services (Vrechopoulos et al. 2001). There are some researches about purchasing agents opinion of a collective organizational decision (Chwelos et al.
2001). New product adoption by a service provider has not been the focus of academic research in emerging markets like India. Since India is culturally and socially
very different from western countries (where most of the academic research has
taken place), this study becomes important.
Any medical software sale in India is regulated by various agencies like FDA and
is governed through standards like IEC 62304:2006,1 ISO 134852, etc. Yet, there are
resistances in adoption of new medical software by medical practitioners. In many
cases, the features of software are inconsistent with the users expectations or
requirements. Sometimes, even after purchase, the software is used in unexpected
ways which leads to post-purchase dissatisfaction. There are also cases where software is used in inappropriate but foreseeable ways, for which adequate design and
operational controls were not applied by the developer. Similarly, user interface
(UI) complexity caused user confusion, delay in use, or inability to use the software.
1
IEC 62304:2006 is a standard which specifies life cycle requirements for the development of
medical software within medical devices.
2
ISO 13485 is a standard of Indian Standards Organization, published in 2003, that represents the
requirements for a comprehensive management system for the design and manufacture of medical
devices.
15
Considerations in Medical Software Purchase: Evidence from Dentistry in India
195
UI sometimes makes it difficult for user to correct data entry errors or modify device
settings in a timely fashion. Software can falsely cause the user to believe a critical
situation exists when it does not, or vice versa.
Some research has been done on the effect of culture on user acceptance of information technology, predicting behavioral intentions of consumers. Social influence
represents societal pressure on users to engage in a certain behavior. This social
pressure for an individual to perform a behavior varies by culture. The social influence based on culture will provide additional explanatory power concerning consumers intention to use a technology (Bandyopadhyay and Fraccastoro 2007). This
research explores how medical practitioners operating in Indian social and cultural
context make purchase decisions of medical software.
The rest of the paper has a review of relevant literature on the area of innovation
characteristics and their influence on adoption. Based on that, a conceptual framework was developed which was tested empirically. The research methodology and
sample characteristics are presented. This is followed by the results of the data
analysis and a discussion regarding the influence of contextual factors on medical
practitioners perceptions of innovation characteristics. The final section of the article presents conclusions, their implications, and suggestions for future research.
Literature Review
Adoption of medical software by medical institutions is the main focus in this

research. Prior research demonstrates the importance of certain perceived innovation characteristics to be strong predictors of adoption rate (Black et al. 2001).
Relative advantage, compatibility, trialability, observability, and complexity are
commonly recognized as variables which are used for evaluating an innovation
(Rogers 1995). Similarly, Technology Adoption Model (TAM) given by Venkatesh
et al. (2003) is widely accepted and referred to framework for analyzing technology
adoption. TAM proposed that behavioral intention has two key determinants perceived ease of use (PEOU) and perceived usefulness (PU). The following section
provides detailed understanding of each of the constructs and their interlinkages.
Relative advantage and operational novelty independently influence the adoption
of a new technology (Weiss and Dale 1998). Relative advantage is the degree to
which an innovation is perceived superior to ideas that it supersedes. It relates to
comparing an innovation with products/services currently available. Three aspects
of relative advantage have been identified; they are economic advantage, effectiveness, and reliability (Rogers 1995). Effectiveness is the degree to which an innovation is communicated as being relatively more capable in achieving an ideal end
state. Reliability is the degree to which an innovation is communicated as being
consistent in its results. The characteristics of effectiveness and reliability seem to
be particularly applicable to an industrial market setting (Dearing et al. 1994).
Compatibility refers to an innovations consistency with the existing values and
past experiences of the adopters. Idea that is not compatible with the cultural norms
196
J. Mukherjee
of a social system is likely to have slow adoption (Dearing et al. 1994). Complexity
is the degree to which an innovation is relatively difficult to understand and use
(Rogers 1995). Especially in the case of high-technology products, the complexity
of an innovation is one of the main reasons for slow adoption or a total lack of adoption of the innovation in the mainstream markets (Chiasson and Lovato 2001).
Weiss and Dale (1998) use the term operational novelty as a contraction of
Rogers complexity and compatibility, or rather as its inverse, i.e., incompatibility.
In clinical practice context, perceived usefulness appeared to be a more important factor than perceived ease of use. Thus, improvements in ease of use of the
system will lead to increased perceived usefulness. Also, improvements in functionality will lead to an increased intention to use the system. Finally, both perceived
ease of use and perceived usefulness will be prerequisites for acceptance in clinical
practice (Schaik et al. 2002).
Innovations relative advantage, complexity, compatibility, and perceived risk
are significant characteristics that influence its acceptability (Jaakola and Renko
2007). Risk is defined as the amount that would be lost if the consequences of an
act were not favorable and individuals subjective feeling of certainty that the consequences will not be favorable. Risk is also defined in simplified form as variation in distribution of possible outcomes, their likelihoods, and their subjective
values. Risk is measured from three different perspectives (a) derived from perception of product attributes level, (b) overall perception of the product class-/
category-related risk, and (c) individuals personality trait on risk aspect. Antecedents
to risk perception vary from situation to situation; however, the factors that stand out
common across situations are (a) product level attributes; (b) likelihood of failure
that leads to negative consequences; (c) individuals purchase goals, e.g., for selfuse or as gift; and (d) other conditions associated with the specific purchase situation, e.g., product being sold via catalog, online, at the mall, etc. (Dowling and
Staelin 1994).
Research Framework Development
The purpose of this research was to investigate the product-related characteristics

that medical practitioners considered important while assessing their purchase of a
new software product. Since there were too many constructs, and their interrelationships were not clear, depth interviews were conducted with a total of five decision
makers of medical software users located in a major city in India. Their decisionmaking process was specifically probed on the following constructs: relative advantage, compatibility, trialability, observability, complexity, perceived ease of use,
perceived usefulness, operational novelty, economic advantage, effectiveness, and
reliability.
The mapping of the responses reflected that the software buying process was a
high involvement, multistep, and multiconsideration process. Variables like operational novelty, trialability, perceived risk, and relative advantage were the key
15
197
Exhibit 15.1 Framework for software adoption
drivers. Relative advantage was evaluated based on reliability, effectiveness, and

economic advantage. Thus, a framework was developed to the model of adoption of
the innovative software (refer to Exhibit 15.1).
Purchase behavior is quite difficult to measure in the context of a research study.
However, the theory of reasoned analysis posits that a behavioral intention measure will predict the performance of any voluntary act. Fishbein and Ajzens model
appears to hold quite well within the constraint of choice not available to the
respondent. Thus, it would seem that the Fishbein and Ajzen model has strong
predictive utility (Sheppard et al. 1988).
Thus, the modified model, which was empirically tested, is given in Exhibit 15.2.
4
4.1
Operationalization of the Variables

Perceived Risk
The concept of perceived risk was first introduced by Bauer (1960). A substantial
number of studies have also employed the concept of perceived risk (Tabak and Barr
1998). A negative association between perceived risk and new product purchase
(innovative behavior) has been supported, e.g., Shimp and Bearden (1982) and
Black et al. (2001). Grewal et al. (1994) distinguished between performance and
financial risk; performance risk was the possibility that the product will fail to
deliver the desired benefits, whereas financial risk included the risks associated with
the initial purchase price as well as the subsequent maintenance costs. Productspecific risk has been tested by three questions:
198
J. Mukherjee
Exhibit 15.2 Software adoption framework to be empirically validated
1. Sometimes the proposed benefits of a new software may not materialize in actual
use.
2. There is always a risk of upsetting patients if adopting a new software delays the
process.
3. I am willing to use a new software if I find it easier to get the software to do what
I want it to do relative to an existing software.
On the other hand, product category risk has been tested by:
1. I am willing to use a software product that has never been used in my industry.
2. I am willing to use a new software if learning to use it is easier than an existing
software.
3. I am willing to use a new software if it gives faster return on investment than an
existing software in the market.
4.2
Trialability
Trialability was the degree to which an innovation may be tried on a limited basis.
Some innovations are more difficult than others to divide for trial (Rogers 1995).
Trialability has been tested by asking the following questions:
1. I am willing to use a new software in my practice once I see it in actual use.
2. I am willing to use a new software in my practice after I try it myself.
15
4.3
199
Operational Novelty
Complexity is related to the skills and efforts needed and ease of use in clinical
practice. The new product format was described to differ from existing products in
the sense that it required new skills and routines from doctors who wished to include
it in their routine work.
1. I am willing to use a new software if it is easier to use in clinical practice than an
existing software.
2. Interacting with a new software should be clear and easily understood by me.
Compatibility of a new product with current medical practices and the prescribers
or his/her colleagues experiences are crucial for the products acceptance.
Compatibility with patients experiences and norms was also relevant.
1. I am willing to use a new software even if its workflow is not compatible with my
clinics existing workflow.
2. My organization/clinic can adjust to new technology quickly.
4.4
Relative Advantage
Relative advantage is measured on two dimensions reliability and effectiveness.

Reliability is the degree to which an innovation is communicated as being
consistent in its results (Dearing et al. 1994). Reliability has been tested by asking
the following questions:
1. Interacting with a new software should be clear and easily understood by me.
2. I am willing to use a new software if it is proven to be more reliable than an existing
software in the market.
3. I am willing to use a new software if it improves my performance.
Effectiveness, i.e., the degree to which a new product is more capable of achieving
an ideal end state, refers to the medical advantages of the product. The perceived
effectiveness of a medical software is dependent upon the efficacy of available alternative software, tools like manual examination, data entry, etc. Effectiveness has
been tested by asking the following questions:
1. I am willing to use a new software if it is easier to use in clinical practice than an
existing software.
2. I am willing to use a new software if it promises consistent results over time than
a current software in the market.
3. I am willing to use a new software only when the benefits of using it are clear to me.
200
J. Mukherjee
The economic advantage of the product is related to its cost and savings and/or
the earnings it would produce. Economic advantage can be equated to profitability,
and it has been further divided into capital cost of the innovation and perceived
savings (Vllink et al. 2002). A new product was considered to have an advantage
if it enabled cost savings or could function as a source of income. It has been tested
by asking the following questions:
1. I intend to use a new software rather than a conventional software if/when I can
afford it.
2. I am willing to use a new software if it gives predictable and controllable administration costs than an existing software in the market.
3. I am willing to use a new software if it has lower maintenance costs than an existing
software in the market.
4.5
Behavioral Intention
Behavioral intention is defined as a cognitive decision-making process to perform a

behavior or action (Das and Pal 2011). Thus, behavioral intention could be used as
a predictor for adoption decision in this research. It was measured by:
1. I would use a new software rather than a conventional software when it becomes
available to me.
2. I intend to use a new software rather than a conventional software if/when I can
afford it.
3. Given that I had access to a new software, I predict that I would use it rather than
a conventional software.
4. I am willing to use a new software.
Methodology
Survey research was conducted. A 5-point Likert scale (strongly agree, agree,
neither agree nor disagree, disagree, and strongly disagree) was developed to measure each of the constructs. The construct validity was provided by the literaturebased development of the constructs (refer to Exhibit 15.3 for the references). The
reliability was checked by conducting a pilot survey among 60 respondents. Based
on the findings, a few of the questions were either modified or dropped (refer to
Exhibit 15.4 for the final questionnaire).
The sampling was purposive. Three hundred copies of the questionnaire were
sent to the branch offices of a software firm in India, which developed software for
application in dentistry. Companys sales force decided to make most potential software customers as their target. The respondents were drawn from a targeted group
of key decision-making individuals associated with medical practitioners. Before
Trialability/
divisibility
Observability/
communicability
Construct
Perceived risk
Visibility
Result demonstrability
Word of mouth
Publicity
Product-specific risk
(performance risk, financial
risk, relational risk)
Sub-construct
Product category risk
Exhibit 15.3 Scale development references

Questions, generic
I am willing to use a software product that has never been
used in my industry
I am willing to use a product that my peers have not tried
Software changes regularly; still I am willing to use a new
software
Sometimes the proposed benefits of a new software may not
materialize in actual use
The cost involved in switching to a new software is really
unknown
There is always a risk of upsetting patients if adopting a new
software delays the process
I would use a new software if my competitors talk about it
I am willing to use a new software if I read about it in media
I am willing to use a new software demonstrated in
conferences
I am willing to use a new software which I feel are popularly
talked about
I am willing to use a new software only when the benefits
of using it are clear to me
I am willing to use a new software only if I can see the
results of its usage
I am willing to use a new software in my practice once I see
it in actual use
I am willing to use a new software in my practice after I try
it myself
I am willing to use a new software in my practice only
if it is tested in the marketplace
None
None
None
(continued)
Predicting behavioral intentions of

consumers: a framework
Critical innovation characteristics

influencing the acceptability of a new
pharmaceutical product format
Innovation diffusion and relationship

marketing: an empirical study of factors
influencing the intention to adopt the
innovation of modular facility technology
None
None
Reference paper title

None
15
201
Relative
advantage
Construct
Operational
novelty
Economic advantage
Effectiveness
Reliability
Compatibility (with current

practice and norms, with
patients experiences, with
doctors or colleagues
experiences)
Sub-construct
Complexity (skills and efforts
needed, ease of use in clinical
practice)
Exhibit 15.3 (continued)

Questions, generic
Learning to use a new software is easy for me
I am willing to use a new software if it is easier to use
in clinical practice than an existing software
Interacting with a new software should be clear and easily
understood by me
My organization/clinic can adjust to new technology quickly
I am willing to use a new software even if its workflow is not
compatible with my clinics existing workflow
I am willing to use a new software even if its different from
the standards used in the industry
I am willing to use a new software if it is proven to be more
reliable than an existing software in the market
I am willing to use a new software if it promises consistent
results over time than a current software in the market
I am willing to use a new software if it improves
my performance
I am willing to use a new software if it enhances
my effectiveness on the job
I am willing to use a new software if I find the system useful
in my job
I am willing to use a new software if using it in my job
enables me to provide better services to patients
I am willing to use a new software if it gives faster return on
investment than an existing software in the market
I am willing to use a new software if it gives predictable
and controllable administration costs than an existing
software in the market
I am willing to use a new software if it has lower
maintenance costs than existing PMS in the market
Innovation diffusion and relationship
marketing: An empirical study of factors
influencing the intention to adopt the
innovation of modular facility technology
Clinical acceptance of a low-cost portable

system for postural assessment
Critical innovation characteristics

influencing the acceptability of a new
pharmaceutical product format

202
J. Mukherjee
Behavioral
intention
Construct
None
Effort advantage
Sub-construct
Social advantage
Questions, generic
I am willing to use a new software if those people who are
important to me would support my use of this software
I am willing to use a new software if those who are
important to me would want me to use this software
I am willing to use a new software if those people whose
opinions I value would prefer me to use this software
I am willing to use a new software if learning to use it is
easier than an existing software
I am willing to use a new software if I find it easier to get
the software to do what I want it to do relative to an existing
software
I am willing to use a new software if I find it easier to
interact with it than an existing software
I would use a new software rather than a conventional
software when it becomes available to me
I intend to use a new software rather than a conventional
software if/when I can afford it
Given that I had access to a new software, I predict that
I would use it rather than a conventional software
I am willing to use a new software
The effect of culture on user acceptance of
information technology


The effect of culture on user acceptance of
15
203
204
J. Mukherjee
Exhibit 15.4 Questionnaire

This is a survey for exploring technology adoption in dentistry. It is an academic research conducted
by MDI, Gurgaon. Please complete the following questionnaire with specific regard to the above
inquiry, by ticking R the appropriate cell
Questions
I am willing to use a software
product that has never been used
in my industry
I would use a new software if my
competitors talk about it
I am willing to use a new
software in my practice once I see
it in actual use
My organization/clinic can adjust
to new technology quickly
software if it enhances my
effectiveness on the job
software if those people who are
important to me would support
my use of this software
I would use a new software rather
than a conventional software
when it becomes available to me
I am willing to use a product that
my peers have not tried
software if I read about it in
media
software in my practice after |
I try it myself
software even if its workflow is
not compatible with my clinics
existing workflow
software if I find the system
useful in my job
software if those who are
important to me would want me
to use this software
I intend to use a new software
rather than a conventional
software if/when I can afford it
Software changes regularly; still
I am willing to use a new software
Strongly
agree
Agree
Neither
agree/nor
disagree
Disagree
Strongly
disagree
(continued)
15
205
Questions
software demonstrated in
conferences
software in my practice only
if it is tested in the marketplace
software even if its different from
the standards used in the industry
software if using it in my job
enables me to provide better
services to patients
software if those people whose
opinions I value would prefer me
to use this software
Given that I had access to a new
software, I predict that I would
use it rather than a conventional
software
Sometimes the proposed benefits
of a new software may not
materialize in actual use
software which I feel is popularly
talked about
Learning to use a new software
is easy for me
software if it is proven to be more
reliable than an existing software
in the market
software if it gives faster return
on investment than an existing
software if learning to use it is
easier than an existing software
software
The cost involved in switching to
a new software is really unknown
software only when the benefits
of using it are clear to me
Strongly
agree
Agree
Neither
agree/nor
disagree
Disagree
Strongly
disagree
(continued)
J. Mukherjee
206
Questions
software if it is easier to use
in clinical practice than an
existing software
software if it promises consistent
results over time than a current
software if it gives predictable
and controllable administration
costs than an existing software
in the market
software if I find it easier to get
the software to do what I want it
to do relative to an existing
software
There is always a risk of upsetting
patients if adopting new software
delays the process
software only if I can see the
results of its usage
Interacting with a new software
should be clear and easily
understood by me
software if it improves my
performance
software if it has lower
maintenance costs than existing
PMS in the market
software if I find it easier to
interact with it than an existing
software
Strongly
agree
Agree
Neither
agree/nor
disagree
Disagree
Strongly
disagree
Demographic data
Practice type
City of practice
Number of years in
practice
Average daily
patient count
Single
Multiple
Student
clinic
clinics
05
610
1115
<10
1020
2030
Radiology
center
Dental
hospital
More than 15
3050
More than 50
15
207
administering the self-reported questionnaire, a sales representative gave a brief

overview of the survey purpose and then asked the medical practitioner/administrative
team to fill up the survey.
The survey was conducted in the first 2 weeks of December 2012. This short
period provided a window that avoided late response effects discussed in some traditional surveys (Cooper and Schindler 1998). Respondents were offered two
incentives. The first was the opportunity to receive the survey results as part of their
participation. The second was that their participation would result in a collective
contribution to academic literature. Completed responses from 160 medical practitioners were received and analyzed.
The sample included 135 (84 %) single clinics, 23 (15 %) multiple clinics, and 2
(1 %) hospitals. There were 45 (28 %) clinics which had less than 10 patients daily,
82 (51 %) clinics which had 1020 patients daily, 18 (11 %) clinics which had
2030 patients daily, while the remaining 15 (10 %) had 3040 patients daily. There
were 70 (44 %) clinics which had less than 5 years of practice, 42 (26 %) clinics
which had 510 years of practice, 26 (16 %) clinics which had 1015 years, while
the remaining 22 (14 %) had more than 15 years of practice. The sample was representative of the target market of such medical software in India.
Data Analysis
Reliability was checked using SPSS 10.0 software. Cronbachs alpha figures
(given in Exhibit 15.5) were more than the minimum acceptance range of 0.6 for
exploratory research (Malhotra 2004).
After assessing the eligibility of scale for measuring different variables in the
study, the next step was to test the hypothesized relationships in a structural model.
As the chi-square (2) test is susceptible to sample size, an overall model fit was also
examined using the Tucker-Lewis index (TLI), the comparative fit index (CFI), and
the root-mean-square error of approximation (RMSEA). According to literature
(Arbuckle and Wothke 1999), the recommended fit values for all the fit indices are
0.90 and that of RMSEA is 0.08. The results obtained from AMOS software are
given in Exhibit 15.6. All fit indices were within the recommended range, indicating
an acceptable model fit.
Exhibit 15.5 Reliability

figures of the constructs
from SPSS software
Sr. no.
1
2
3
5
6
Construct
Behavioral intention
Relative advantage
Operational novelty
Perceived risk
Trialability
Cronbachs alpha
0.6897
0.6886
0.6676
0.7000
0.7245
208
J. Mukherjee
Exhibit 15.6 Relevant

results from AMOS
software
Statistic
(2)/df
GFI
CFI
RMSEA
TLI
Recommended value
<3.00
>0.90
>0.90
<0.08
>0.90
Obtained value
1.450
0.907
0.922
0.052
0.900
Exhibit 15.7 Regression results

Coefficientsa
Model
B
Std. error
1 (Constant)
7.753E-02
.457
RADV
.568
.112
OPR_NOV
.304
.061
TRIAL
4.68E-03
.072
RISK
.114
.077
a
Dependent variable: BI
Beta
.375
.327
.005
.108
t
.170
5.081
5.012
.065
1.487
Sig.
.865
.000
.000
.948
.139
However, the regression data (given in Exhibit 15.7) suggests that relative advantage
and operational novelty had positive impact on behavioral intention and were
significant also. However, trialability and perceived risk did not have significant
impact on behavioral intention.
Discussion
The buying decision of medical software is typically a business buying decision in

India, which suggests the presence of a buying center. It is very easy to comprehend
the presence of multiple stakeholders in a multi-doctor hospital chain or a clinic
which has multiple doctors. Even if it were a single doctor clinic, multiple stakeholders are involved. There would be users of the software, like the operators who
would have a perspective which is likely to be different from the doctor as far as
adoption of software was concerned. Similarly, there could be influencers like the
medical associations and associates of the doctor or those who manage the finances
of the organization; each of whom could have perspectives which are diverse as well
as divergent. The process of an organizational buying was expected to be stepwise,
with different stakeholders being concerned about different aspects of the framework at different stages of the buying process. Thus, the results are to be interpreted,
keeping in view the contextual realities of this research.
This research tries to provide only a macro understanding of the medical
software purchase process. As respondents in this research were people who played
15
209
different roles in the buying center, the findings would not be specific to any particular
role. However, the framework has validated the major drivers of the purchase intention, which could be used as a checklist for instantiating and evaluating any marketing
or sales initiative.
The marketing initiative should enhance the perception of relative advantage and
trialability and at the same time reduce the perceived risks associated as well as
operational novelty of adoption.
The results were quite interesting. The overall structural model was acceptable
which showed that operational novelty, trialability, perceived risk, and relative
advantage were the drivers of the purchase intention. However, in the regression
analysis, operational novelty and trialability were found to be not significant.
These seemingly contradictory results needed a deeper analysis. If one were to
choose a particular result over the other, then the structural model which was validated by AMOS software was possibly more robust, as it considered interdependence of the variables as well as considered latent constructs, while regression
method assumed interdependence of variables. One possible way to explain the
apparent difference between the analyses by two different methods is that the two
insignificant variables were possibly not adequately used by the marketers, which
resulted in their becoming insignificant as independent variables. However, they
potentially had significant impact on the adoption decision, as is evident from the
analysis which considers interdependence among variables. Thus, the objective
would be to explore how these two variables could be used better by the marketers.
Trialability could be enhanced by creating demonstration centers or training
facilities where any doubts regarding the software could be addressed. The other
way to increase trialability would be to make the software modular, where the buyer
could buy specific modules (core product) and keep adding new functionalities or
augmentations. Pricing mechanisms like selling software as a service could also be
used to alleviate this problem.
Relative advantage had three components, reliability, effectiveness, and
economic advantage. Reliability is normally established based on past track record,
which gets manifest in the brand. However, for innovative new-to-the-market products, where such possibility does not exist, testimonials and endorsements could be
quite helpful.
Effectiveness of software is relatively difficult to demonstrate in the short run.
However, specific functionalities which are not present in competitive offers can be
highlighted as point of difference. This can also be possibly supported by more
subtle use of word-of-mouth recommendations and testimonials from users who are
known to the customer.
Economic advantage is best addressed by showing the life cycle cost. However,
care has to be exercised in making this presentation as it can be perceived differently
by different members of the buying center. Life cycle cost is normally the concern
of the top management, and they may see cost savings in operations (part of which
could be reduction on manpower) as a major advantage. However, if the same presentation is made to end users, this could be quite disconcerting. In such cases, one
may highlight only the ease of operation.
210
J. Mukherjee
Risk perceptions could have many dimensions and be difficult to assess. One of
the ways to address this aspect is to keep listing the concerns of the customer and
not to counter the concerns as and when they appear. After the marketer has a reasonably comprehensive list of concerns, all of them can be bunched together into a
set of main concerns and addressed comprehensively. This is very critical as the risk
perceptions keep lingering and the customer starts imagining problems, especially
in case of new products. In a group decision making, the process can become more
complicated. Comprehensive handling has the ability to provide closure, which is
essential in progressing the decision-making process.
Operational novelty has different impacts on the different members of buying
center. Hence, it requires careful handling by the sales and marketing team. The
specific use of operational novelty as a marketing tool is context specific and needs
to be handled carefully. It is normally a serious concern for the operations team and
not the top management. Since any change, howsoever small, requires adjustments
to be made in operations and require people to come out of their comfort zone, there
is likely to be resistance. On the other hand, the top management is likely to look
forward to the benefits that the operational novelty can provide. This aspect is to be
well assessed by the sales team by addressing the different elements of the buying
centers, sensitively and possibly differently.
Limitations
Out of the 300 questionnaires that were sent, only 160 usable responses were
received. Also, the selections of the respondents were convenience based. Thus, the
sample might not be representative of the population.
This research was primarily focused on the product aspects. There could be more
product-related factors like pricing (as Indian consumers are very price sensitive),
which need to be explored. Similarly, there could be considerable impact of the
intangible aspects like the brand name, collaboration with international partners,
etc., which could improve the predictive power of the model.
Perceived risk construct which was used in this model could be further differentiated between product category risk and product-specific risk. For our study, it was
combined. This area needs further research as the consumers may have entirely
different ways to mitigate the different risks.
Area of Future Research
Several studies have developed and used quantitative instruments to measure adopters
perceptions of predetermined innovation attribute taxonomies. This model builds on
previous research done by developing a comprehensive model for Indian conditions
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211
and empirically validating the model. However, the two broad areas of further
improving the models are as given below:
The software purchase is mostly a business buying; consequently it is a multiplemember decision-making process. There is need to understand which specific
constituent of a buying center was interested in which aspect of the software.
Thus, future research could be conducted on specific target consumers in the
organization, representing different elements of the buying center.
This research was from the product-centric point of view; however, specifically
controlling for or studying intangible aspects like brand associations, previous
relationship with the buying firms, etc., would improve the model.
References
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technology. Commun Assoc Inf Syst 19:522543
Bauer RA (1960) Consumer behavior as risk taking. In: Hancock RS (ed) Dynamic marketing in a
changing world. American Marketing Association, Chicago, pp 389398
Black NJ, Lockett A, Winklhofer H, Ennew C (2001) The adoption of internet financial services:
a qualitative study. Int J Retail Distrib Manag 29(8):390398
Chiasson MW, Lovato CY (2001) Factors influencing the formation of a users perceptions and use
of a DSS software innovation. Database Adv Inf Syst 32(3):1635
Chwelos P, Benbasat I, Albert S, Dexter AS (2001) Research report: empirical test of an EDI
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Cooper DR, Schindler PS (1998) Business research methods, 6th edn. McGraw-Hill Book Co,
Singapore
Das R, Pal S (2011) Exploring the factors affective the adoption of mobile financial services
among the rural under-banked, Retrieved on 27th November 2012 from https://www.iimahd.
ernet.in/assets/snippets/workingpaperpdf/2011-02-022011-02-02Rajanish.pdf
Dearing JW, Meyer G, Kazmierczak J (1994) Portraying the new: communication between university innovators and potential users. Sci Commun 16(1):1142
Dowling GR, Staelin R (1994) A model of perceived risk and intended risk-handling activity.
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source credibility on the price-perceived risk relationship. J Consum Res 21:145153
Jaakkola E, Renko M (2007) Critical innovation characteristics influencing the acceptability of a
new pharmaceutical product format. J Market Manag 23(34):327346
Kelly D, Storey C (2000) New service development: initiation strategies. Int J Serv Ind Manag
11(1):4563
Malhotra NK (2004) Marketing research: an applied orientation. Pearson Education Inc., Upper
Saddle River
Rogers EM (1995) Diffusion of innovations. The Free Press, New York
Schaik PV, Bettany-Saltikov JA, Warren JG (2002) Clinical acceptance of a low-cost portable
system for postural assessment. Behav Inform Technol 21(1):4757
Sheppard BH, Hartwick J et al (1988) The theory of reasoned action: a meta-analysis of past
research with recommendations for modifications and future research. J Consum Res
15:325343
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Shimp TA, Bearden WO (1982) Warranty and other extrinsic cue effects on consumers risk
perceptions. J Consum Res 9:3846
Tabak F, Barr SH (1998) Innovation attributes and category membership: explaining intention to
adopt technologic innovations in strategic decision making contexts. J High Technol Manag
Res 9(1):1733
Venkatesh V, Morris MG, Davis G, Davis F (2003) User acceptance of information technology:
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Vllink T, Meertens R, Midden CJH (2002) Innovating diffusion of innovation theory: innovation
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Vrechopoulos AP, George SJ, Doukidis GI (2001) Internet shopping adoption by Greek
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Manag 27(4):293304
Chapter 16
Counterfeit Purchase Intentions Among

College Students: An Empirical Investigation
Rojalin Mishra and Asmita Shukla
Abstract Nowadays, counterfeiting has become a severe threat to the world economy. These counterfeit goods are deteriorating the value of genuine brands.
Therefore, with consideration to this reality that counterfeiting is increasing, it is
necessary to study the psychological factors behind counterfeit purchase intention.
This study was designed to get a better understanding of the general phenomenon of
counterfeiting as well as the specific reasons why people purchase counterfeit
goods. The main objective of the present study was to examine the mediating role
of impulsive buying tendency (IBT) on the relationship between hedonic shopping
motivation (HSM), fashion consciousness (FCS) and willingness to buy counterfeit
goods (WBC). The results were obtained from a structural equation analysis by testing a sample of 355 college students from different cities of Odisha, India. The
findings confirmed the proposed mediation model, that is, IBT acts as a mediator
between HSM and WBC as well as between FCS and WBC. Finally, the results are
discussed and suggestions for future research are given.
Keywords Hedonic shopping motivation Fashion consciousness Impulsive
buying tendency and willingness to buy counterfeit goods
Introduction
Counterfeit goods refer to any unauthorised product that infringes upon intellectual
property rights like the brand names, patents, trademarks or copyrights (Chaudbry
and Walsh 1996; Kapferer 1995). Counterfeiting goods closely imitate the appearance of the original goods. Counterfeits are those products bearing a trademark that
is identical to, or indistinguishable from, a trademark, registered to another party,
thus infringing the rights of the holder of the trademark (Bian and Veloutsou 2007;
Chaudbry and Walsh 1996). The consumer is the end user in the counterfeit transaction
process and consumer involvement may be attributed to sheer ignorance or in some
R. Mishra (*) A. Shukla
School of Humanities, Social Sciences and Management,
IIT Bhubaneswar, Bhubaneswar, Odisha, India
Springer India 2015
213
214
R. Mishra and A. Shukla
cases as a willing participant (Cordell et al. 1996). Consumers cognitive willingness to purchase the counterfeit goods has become a matter of concern today. The
topic of the research was to examine the psychological factors behind the buying
behaviour, when the products are known to be counterfeits.
Nowadays, counterfeiting has emerged as a severe threat to the economy, which
hampers the original brand value Harvey and Romaine (1985). Previous research
studies revealed that the cases where people prefer counterfeit goods than the genuine ones, being fully aware of the fact that what they were buying were far from
the originals, were mainly due to two reasons: their easy access and amazingly low
prices (Gentry et al. 2001). It remains a fact that there are many people who purchase counterfeit goods and this has become a serious economic problem. Genuine
brand owners invest a huge sum to build a brand name and goodwill for their products, while counterfeit producers use dubious methods to copy the same with minor
and insignificant changes to dupe the owner of the brand, their hard-earned money
by easily using the brand names without having to spare their cost for it. The most
important factor is to understand the reason behind a persons willingness or
unwillingness to seek out and purchase counterfeit goods. As per the evidence
from the past research, about one-third of consumers would knowingly purchase
counterfeit goods (Phau et al. 2001; Tom et al. 1998). Previous research has also
revealed that consumers may be willing to purchase counterfeit luxury products in
order to obtain the benefits with a perceived value relating to the price-quality
trade-off (Cheek and Easterling 2008; Eisend and Pakize 2006; Furnham and
Valgeirsson 2007; Phau and Teah 2009; Phau et al. 2009; Wilcox et al. 2009).
Major researches had been focused on different factors like the marketing skills of
the retailer, shopping environment, product category, brand price, brand image and
country of origin of counterfeit goods (Chakraborty et al. 1997;Yoo and Lee 2012),
with considerable less research on consumers who buy the counterfeit products.
Several studies have examined the various psychological factors regarding consumers buying behaviour in the context of counterfeit purchases. Research has
been done to examine the impact of big five personality, attitude, and materialism
on willingness to buy counterfeit goods (Furnham and Valgeirsson 2007). Previous
studies also suggested that the variables like fashion, lifestyle, perceived social/
emotional value, perceived utilitarian value and perceived economic value significantly influence the buying behaviour of consumers to pay for luxury fashion
brands (Li et al. 2012). Previous studies have hardly examined the role of hedonic
motivation, fashion consciousness and impulsive buying tendency in the context of
willingness to buy counterfeit goods. All the abovementioned variables are related
to other psychological factors like personality and materialism and also have significant relationship with impulsive buying tendency (Lpez and Villardefrancos
2013). So it calls for further investigation to find out whether impulsive buying
tendency has any impact on willingness to buy counterfeit goods or not. The objective of this study is to examine the impact of impulsive buying tendency as a mediator on the relationship between hedonic shopping motivation and fashion
consciousness on willingness to buy counterfeit products.
16
Counterfeit Purchase Intentions Among College Students: An Empirical Investigation 215
Method
2.1
Participants
The sample included in this research comprises of 355 students from Odisha (India).
Fifty-four percent of the total samples were male and 46 % were female. Age range
was between 17 and 26 years. As for education level, 47 % of the samples were
undergraduates, 22 % were graduates and 31 % had a postgraduation degree.
2.2
Measures
2.2.1
Hedonic Shopping Motivation
Hedonic shopping motivation was measured by a 12-item scale developed by Arnold

and Reynolds (2003). This instrument evaluates the motivation to engage in excessive
buying patterns. It includes 12 statements (e.g. To me, shopping is an adventure)
and ratings are made on a five-point scale from 1 (strongly disagree) to 5 (strongly
agree). The Cronbachs alpha for hedonic shopping motivation scale was 0.94.
2.2.2
Fashion Consciousness
This study adopted five items from the Fashion Conscious Scale (FCS) developed
by Gould and Stern (1989) to measure respondents level of fashion consciousness.
Examples of the items from the scale are I am very conscious of the fashion related
to my own gender and I pay attention to the way people dressed. Respondents
indicated their agreement on a scale of 1 (strongly disagree) to 5 (strongly agree).
The Cronbachs alpha coefficient was 0.86.
2.2.3
Impulsive Buying Tendency
The impulsive buying tendency was assessed by the scale developed by Lin and Chen
(2013). It includes nine items each rated on a five-point Likert scale from 1 (strongly
disagree) to 5 (strongly agree) assessing the buying tendency (e.g. I often buy things
spontaneously). Cronbachs alpha for impulsive buying tendency scale was 0.90.
2.2.4
Willingness to Buy Counterfeit Products
Willingness to buy counterfeit products was measured by the scale developed by

Furnham and Valgeirsson (2007). Response was measured by the statement: given
good quality and good price, I would have no problem in buying counterfeit
216
products like clothing, CDs and DVDs, software, watches and shoes on a five-point
scale. In the current study, Cronbachs alpha was 0.80.
2.3
Procedure
Data collection was conducted in different cities in Odisha, India. A structured

questionnaire was prepared which included all the relevant factors. Five hundred
questionnaires were distributed out of which 300 and 50 valid responses were
obtained. The response rate was 71 %.
2.4
Statistical Analysis
Structural equation models (SEMs) were used in this research to test the conceptual
framework and to investigate relationships among variables using Amos 18. The
goodness of fit of the model was estimated, using the chi-squared test, the 2/df
ratio, the Comparative Fit Index (CFI), the Goodness-of-Fit Index (GFI), the
Adjusted Goodness-of-Fit Index (AGFI) and the Root Mean Square Error of
Approximation (RMSEA). Correlation and reliability analysis were also used to
validate the scales using SPSS18.
Results
The main objective of this study was to determine whether impulsive buying
tendency acts as a mediator between hedonic shopping motivation, fashion consciousness and willingness to buy counterfeit goods. In order to test the role of
impulsive buying tendency as a mediator, we followed the procedure given by
Baron and Kenny (1986). Regression analysis was used to test the mediating effect.
For a mediation model, regression coefficients of all the equations must be significant and R2 of third equation must be greater than the R2 of first equation.
To test the mediating effect of impulsive buying tendency on the relationship
between hedonic shopping motivation and willingness to buy counterfeit goods, we
ran the following regression equations:
WBC = 0 + 1 HSM
(16.1)
IBT 0 2 HSM
(16.2)
WBC 0 3 HSM 4 IBT
(16.3)
where = regression coefficient, WBC = willingness to buy counterfeit goods,

HSM = hedonic shopping motivation and IBT = impulsive buying tendency.
16
Table 16.1 Summary

of regression analysis of
hedonic shopping motivation
and impulsive buying
tendency on willingness
to buy counterfeit goods
Equations
R2
WBC = 0 + 1HSM (16.1)

0.77 0.88*
0.83 0.91*
IBT = 0 + 2HSM (16.2)
WBC = 0 + 3HSM + 4IBT (16.3)
HSM
0.80 0.45*
IBT
0.47*
WBC willingness to buy counterfeit goods, HSM
hedonic shopping motivation, IBT impulsive buying
tendency
N = 355, *p < 0.01
Table 16.2 Summary

of regression analysis of
fashion consciousness and
impulsive buying tendency
on willingness to buy
counterfeit goods
Equations
R2
WBC = 0 + 1FCS (16.4)

0.66
0.81*
0.71
0.84*
IBT = 0 + 2FCS (16.5)
WBC = 0 + 3FCS + 4IBT (16.6)
FCS
0.79
0.25*
IBT
0.67*
WBC willingness to buy counterfeit goods, FCS
fashion consciousness, IBT impulsive buying
tendency
N = 355, *p < 0.01
The results obtained are shown in Table 16.1. As the results of the first regression
equation, hedonic shopping motivation significantly predicted willingness to buy
counterfeit goods. On the basis of the second regression equation, hedonic shopping
motivation significantly predicted impulsive buying tendency. Hedonic shopping
motivation and impulsive buying tendency significantly predicted willingness to
buy counterfeit goods in the third equation in Table 16.1.
Similarly to test the mediating effect of impulsive buying tendency on the relationship between fashion consciousness and willingness to buy counterfeit goods,
we ran the following regression equations:
WBC 0 1 FCS
(16.4)
IBT 0 2 FCS
(16.5)
WBC 0 3 FCS 4 IBT
(16.6)
where = regression coefficient, WBC = willingness to buy counterfeit goods,

FCS = fashion consciousness and IBT = impulsive buying tendency.
Similarly the regression results in Table 16.2 indicate the mediating role of
impulsive buying tendency between fashion consciousness and willingness to buy
counterfeit goods.
Table 16.3 shows the correlations, mean values and standard deviations for the
variables included in the analysis. For exploratory research, a Cronbachs greater
than 0.70 is generally considered reliable (Nunnally 1978). Cronbachs statistics
218
Table 16.3 Correlations, means and standard deviations of all the variables
1
2
3
4
1. HSM
1
2. FCS
0.895**
1
3. IBT
0.910**
0.842**
1
4. WBC
0.876**
0.810**
0.877**
1
Mean
35.02
13.67
26.21
14.28
S.D.
11.47
4.82
8.37
4.76
HSM hedonic shopping motivation, FCS fashion consciousness, IBT impulsive buying tendency,
WBC willingness to buy counterfeit goods
**p < 0.01
for the study variables are 0.88 (HSM), 0.89 (FCS), 0.86 (IBT) and 0.87 (WBC) for
each of the four factors, respectively.
Results seem to suggest that impulsive buying tendency act as a mediator
between hedonic shopping motivation, fashion consciousness and willingness to
buy counterfeit goods. Finally, in order to obtain an overall fit of the relationships
between the variables used in the regression, they were subjected to structural equation analysis using the AMOS v. 18.0. Initially, the model tested (Model 1) was
constructed from the regression results and suggests for both the direct effects (of
hedonic shopping motivation and fashion consciousness on willingness to buy
counterfeit goods) and the indirect effects (via impulsive buying tendency).
The results of the structural analysis indicated the value of chi-square and degrees
of freedom as 0 and the probability level cannot be computed. The regression
weights indicated that the direct effect of fashion consciousness on willingness to
buy counterfeit goods was not significant ( = 0.066, p = 0.211). Subsequently, we
tested an alternative model (Model 2).
16
Fig. 16.1 Final model showing the relationship between hedonic shopping motivation, fashion
consciousness, impulsive buying tendency and willingness to buy counterfeit goods
This model restricts the direct path between fashion consciousness and willingness
to buy counterfeit goods. The goodness-of-fit measures revealed that the overall
model exhibits a good fit. The goodness-of-fit indices show, in general, a good
adjustment of the model to the data [2 (df) = 1.16(1), 2/df = 1.16; CFI = 1.00;
GFI = 0.99; AGFI = 0.98; RMSEA = 0.040]. The results of the path analysis are
shown in Fig. 16.1.
All structural paths used in the model between hedonic shopping motivation,
fashion consciousness and impulsive buying tendency were proved to be significant
as p < 0.001. The model demonstrates the mediating role of impulsive buying tendency between hedonic shopping motivation, fashion consciousness and willingness to buy counterfeit goods. The model also revealed the direct relationship
between hedonic shopping motivation and willingness to buy counterfeit goods.
Discussion and Conclusion
The traditional assumption is that consumers purchase counterfeit brand purchases

predominantly because of their low prices (Gentry et al. 2006; Phau et al. 2001). The
present study first demonstrates psychological factors like hedonic shopping motivation, fashion consciousness and impulsive buying tendency are also the reason of
counterfeit brand consideration. The result showed that hedonic shopping motivation
significantly predicted willingness to buy counterfeit goods. The present study also
showed the indirect effect of hedonic shopping motivation (HSM) through the mediator impulsive buying tendency. Fashion consciousness has an indirect and positive
impact on willingness to buy counterfeit goods (WBC). The result shows the covariance between hedonic shopping motivation and fashion consciousness. Nowadays,
everyone wants to buy fashion/luxury goods to maintain the lifestyle of current
generation. The consumers with medium and even low levels of income desire to
consume luxury products as the rich consumers (Hanzaee and Jalalian 2012) which
leads to purchase of counterfeit brands. Consumers with medium and low incomes,
who have not enough money to buy fashion/luxury products, are purchasing these
counterfeit goods. This study found that consumers who have fashion consciousness
220
and impulsive buying tendency had shown more willingness to buy counterfeit
goods. But in case of consumers having hedonic motivation, they have positive
attitude towards counterfeit goods. Hedonic shopping motivation has a positive
impact on willingness to buy counterfeiting and this relationship is mediated by
impulsive buying tendency. Consumers shopping with hedonic motive are more
attentive towards enjoyment perspectives. They consider shopping as a way of
relieving stress and an escape mechanism from daily life. Consumers with hedonic
shopping motive feel shopping as adventure and a pass time. So, they can buy
counterfeit goods without thinking of consequences. Consumers having impulsive
buying tendency normally shop goods for satisfaction of their inner urge. Impulsive
buyers normally take an immediate decision of purchase.
Implication and Future Research
Some practical implications could be proposed from the findings in the current study.
For instance, marketers need to understand the psychological factors of consumer to
minimize the counterfeit trade. Previous researches in consumer behaviour revealed
that the main reason behind the purchase of counterfeit goods was low prices and easy
access. The present study demonstrates that the reason can be the consumers psychological factors like motivation, perception and habit. This study also has certain limitations that we hope will be sort out in the near future. Firstly, the role of demographic
factors like age, gender, income class and educational background had been excluded
from our investigation. Secondly, we did not segregate the effect of willingness to buy
counterfeit goods for different product categories. Future researchers can take different product categories to compare the counterfeiting. Finally, the variables under this
study are only some psychological factors; there are other variables (perception, affect
and learning) which need to be studied. Besides the psychological factors, other factors like economic and legal factors can be taken into consideration. Despite the various limitations of the study, we hope this research will contribute a lot to the
understanding of the growing counterfeit market.
References
Arnold MJ, Reynolds KE (2003) Hedonic shopping motivation. J Retail 79:7795
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Cordell V, Wongtada N, Kieschnick L (1996) Counterfeit purchase intentions: role of lawfulness

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brand and product in a counterfeit culture. Adv Consum Res 28:258265
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moderating effects of time pressure and impulse buying tendency. Tour Manag 36:426434
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Nunnally JC (1978) Psychometric theory, 2nd edn. McGraw-Hill, New York
Phau I, Teah M (2009) Devil wears (counterfeit) Prada: a study of antecedents and outcomes of
attitudes towards counterfeits of luxury brands. J Consum Mark 26(1):1527
Phau I, Prendergast G, Chuen LH (2001) Profiling brand-piracy-prone consumers: an exploratory
study in Hong Kongs clothing industry. J Fash Mark Manag 5(1):4555
Phau I, Teah M, Lee A (2009) Targeting buyers of counterfeits of luxury brands: a study on
attitudes of Singaporean consumers. J Target Meas Anal Mark 17(17):315
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Mark 15(5):405421
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46(2):247293
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and their counterfeits on purchase intention of each. J Bus Res 65(10):15071515
Chapter 17
Critical Factors Within Organizations

Influencing Effective Use of CRM Solutions
ebjan Urban, Samo Bobek, and Tominc Polona
Abstract Better management of customer relations is one of key issues in recovering
economies and is therefore one of key problems of managing in recovering markets.
In this paper, issues of effective use of customer relations management (CRM) solutions are discussed. Developed conceptual model is based on the technology acceptance model (TAM). In the literature, researchers analyze several important
organizational factors and connect them to the performance, effectiveness, implementation, and use of CRM solutions. Researchers often connect the usefulness of
CRM solutions with the individual level of customers, and less with the level of
organization and its orientations. In the model, these issues are contained in set of
organizational factors (process, technological, and innovation orientation of organizations) influencing the effective use of CRM solutions. Organizational factors are
reflected in the three types of orientations in process, technological, and innovation orientation of companies. In this paper, the model is presented and organizational factors are discussed more deeply.
Keywords Customer relationship management (CRM) Process-oriented organization Technological-oriented organization Innovation-oriented organization
CRM solutions Technology acceptance model (TAM)
Introduction
Customer relationship management (CRM) solutions have been developed as an

approach based on maintaining positive relationships with customers, increasing
customer loyalty, and expanding customer lifetime value (Brassington and Pettit
2000; Ahn et al. 2003). There are two main reasons for the increased interest in the
field of CRM solutions: the development of information technologies and the increased
importance of orientation to the customers as the basic business philosophy.
. Urban (*) S. Bobek T. Polona

School of Economics and Business, University of Maribor, Slovenia,
Razlagova 14, 2000 Maribor, Slovenia
e-mail: [email protected]; [email protected]; [email protected]
Springer India 2015
223
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. Urban et al.
Effective CRM solution is about acquiring, analyzing, and sharing knowledge

about and with your customers for the quick and timely service to the customer.
CRM solution provides an integrated view of customer interactions starting
with software applications that capture these interactions and with the effective analyses of the data to reveal the hidden and important information
required for improving the relationship of firms with the customers (Davood
Karimzadgan et al. 2013).
After implementing CRM solutions, the improvement of its effectiveness is
the constant endeavor of organizations. CRM solution held out a lot of promise
in the mid-1990s, but a considerable number of failures caused concern about
its usefulness (Kaushik and Kundan 2009). An important factor for this could be
that the management in the organization still often treats the technological
aspects as the most important and not enough attention to processes and employees (Vella and Caruana 2012). Research results show that the technology is
important, but is not the only and sufficient factor for the success of the implementation of the CRM system (Mary Lou et al. 2005). The majority of problems
in implementation of CRM are not of the technological nature but organizational and include organizational changes and disorders, different views regarding customers data, and changes in business processes (Finnegan and Currie
2010). That is why the comprehensive research of organizations orientation
toward organizational factors that have the impact on effective use of CRM
solutions is needed.
Researchers are analyzing the effectiveness of implementation of CRM
solutions (McGill and Bax 2007) from the different points of view. Researchers
often base their work on TAM (technology acceptance model) model and
extend it with factors associated with level of individuals at the different
working positions (Avlonitis et al. 2005; don Lee et al. 2010 ), as well as at the
level of the whole organization; some are also oriented toward research of factors influencing the usefulness of IT solutions and technologies at clients on
the market (Giovanis et al. 2012).
Our preliminary research of published findings by other authors shows that
issues of organizational factors, especially regarding the orientation of organizations and perceived usefulness of IT solutions at the level of organization, were not
researched. Goldenberg (2000) discussed the CRM solutions as the technologyintegrated business process management strategy that maximizes relationships and
encompasses the entire organization.
In this paper, the model which incorporates impacts of organizational factors on
effective use of CRM will be presented and process orientation, technology orientation, and innovation orientation will be further explained as prerequisites for effective implementation of CRM solutions.
17
Organizational Factors Influencing Effective Use of CRM Solutions
Theoretical Background
225
For the effective use of modern IT solutions, several internal and external factors
have to be taken into account. Researchers analyzing the effective use of CRM solutions, technology and other IT solutions, are including different critical organizational factors. Moreno and Melendez (2011) have developed model and found the
fundamental role of the organizational factors (aspects to do with the leadership of
the top management, human resource management, functional integration, and
organizational structure) in the implementation of CRM. Considering that implementing CRM requires changes both in the way a firm is organized and in its business processes (Sin et al. 2005), any model needs to include a variable measuring
the importance and effect of these organizational factors on CRM success. Thus, the
strategy, the organizational structure, and the business processes all need to be transformed to implement CRM, since success in the initiative will depend on creating
the right synergy between technological systems, processes, and people (Xu and
Walton 2005).
Almotairi (2008) has reviewed critical factors of successful CRM although we
found no organizational factor regarding the organizations orientation, the factors
included may represent the starting point for studying process and technological
orientation of organization, since they include process and technological aspects of
these factors. Hung and others (2010) suggested the integrated model with organizational factors (size of organization, employees capabilities in the field of informatics systems, innovativeness of management, and capacity for knowledge
management) that are the most important for CRM solutions implementation.
Davood Karimzadgan et al. (2013) were comparing CRM solutions based on
organizational factors, where management, structures, and employees were
included. They found that organizational factors (management, structures, and
employees) have a major impact on performance of CRM solutions.
Tan et al. (2002) are focusing on five factors needed for effective implementation
of CRM solution: customer-centric strategy, commitments from people, improved
or redesigned process, software technology, and infrastructure. The field-focused
research of Sarmaniotis et al. (2013) deals with factors of effective implementation
of CRM solutions in luxury hotels. The following factors of effective implementation of CRM solutions were identified: effective customer communication strategy,
profitable marketing strategy and IT infrastructure, suitable organizational strategy,
and administrative support.
Avlonitis et al. (2005) were analyzing the relationship among three factors (social
factors, organizational factors, and factors of an employee) and perceived usefulness of CRM solutions, used by an employee in the organization, by using the TAM
model. They found out that there is a positive relationship between each of these
factors and perceived usefulness of the CRM solution. don Lee et al. (2010) identified formal and informal influential factors that have an impact on usefulness of
226
. Urban et al.
ERP system. Among formal factors, the trainings and educations and working environment were included, and communication at the informal factors side. Significant
association was found between trainings and educations on one side and usefulness
of ERP system on the other.
Conceptual Model
According to our preliminary research conducted within several case research studies
and based on published research by other authors mentioned above, we developed
conceptual model presented by Fig. 17.1. The conceptual model incorporates the
relationships among influencing organizational factors, determined by (1) process
orientation, (2) technology orientation, and (3) innovation orientation of organization, which have an impact on the effective use of CRM as well as on the intensity
of implementation and use of CRM solutions. Within this process, the TAM model,
which includes the perceived usefulness of IT solutions and technologies, was taken
into account and its parts have been adapted.
CRM solution focuses on automatization and improvement of processes in organization (Xin et al. 2002). Chen and Popovich (2003) define the CRM solution as
the integrated approach, including the process; therefore, the organization has to be
process oriented for the effective use of CRM solution.
Technology should be considered as the incentive for implementing the CRM
solution (Bose 2002; Ryals and Knox 2001), since it enables the adequate and indepth information that are available in the entire organization, for employees about
all subjects in the market (Payne and Frow 2004; Yu 2001). Research results show
that CRM is a very complex and comprehensive concept of integration of IT (Bull
2003), while Chen and Ching (2004) stress that IT investments on general ensure
higher performance of CRM solution. CRM solution requires the IT to capture,
store, organize, and distribute customer information (Piccoli et al. 2003). Also,
Fig. 17.1 Conceptual research model
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227
Chen and Popovich (2003) found the technology to be a very important factor of
CRM solution. Several studies found the positive relationship between the perceived usefulness of new IT solutions and the attitude toward technology
(Vijayasarathy 2004; Plewa et al. 2012). Recent studies focused on the identification
of organizational factors, leading to the successful use of CRM solutions (Yu 2001);
therefore, the usefulness of CRM solution may differ among organizations also due
to organizational factors (Chen and Ching 2004).
Increased use of digital technologies by customers, especially the use of Internet,
changes also the abilities and expectations about customer relations management
(Tamminga and OHalloran 2000). Progress in the field of data technologies, like
data warehousing in data mining, is crucial for working and effectiveness of CRM
solutions (Bull 2003). The CRM itself is not a technology, but is a system focused
to customers, the strategy, and/or the set of business processes and methodology
(Greenberg 2001), but is dependent from the technology. For example, Pan and Lee
(2003) discuss that e-CRM contributed to the expansion of traditional technology of
CRM and became the new channel with the integration of Internet technology.
Communication focused on potential customers can use individual approach by
e-mails and social media (Facebook, YouTube, Twitter, blogs) (Quinton and
Harridge-March 2010).
There are also several researches found in the literature that connect the use of
CRM solution with innovation capacity and ability. Ramani and Kumar (2008) suggested the CRM to be the cocreator of design, maintenance, and promotion of relationships with stakeholders in the market, and as such, the CRM represents the
strategic element for innovative capacity development. Organizations that have
important information about their customers are capable to increase their innovative
capacity to meet the needs of the target market (Ottum and Moore 1997; Souder
et al. 1997). Several studies confirm that triggers of innovations in the firm are
important information about market demands and competition (Lagrosen 2005).
Lin et al. (2010) also stress the important effects of CRM solution on the innovativeness, but it was also found that different levels of CRM solution may have the effect
on different kinds of innovativeness. But no research deals with the perceived usefulness (and its intensity) in regard to the organizations orientation toward
innovations.
In the rest of this paper, three types of orientations process, technology, and
innovation within three frameworks of organizational factors regarding our conceptual model are further explained.
Process Orientation
Process orientation of organization may be defined as the organizational effort

that requires the creation of the platform of business processes for organizational
structure and planning (Reijers 2006; Sabherwal et al. 2001). krinjar et al. (2010,
2011) defined elements of process orientation: strategic view, process definition
228
. Urban et al.
and documentation, process measurement and management, process organizational structure, people management, market orientation, supplier view, process
organizational culture, and IT/IS support. In the literature, we can find several
other concepts that define the process orientation of organizations: process-based
organization (OConnell et al. 2006), process enterprise (Hammer and Stanton
1999), process-oriented organization (Kumar et al. 2008), process-focused organization (Neubauer 2009), etc.
The process orientation approach focuses on processes instead on hierarchy
(McCormack and Johnson 2001) and on business processes instead on functional
structures (Reijers 2006). The philosophy of process management is heuristic comprehensive problem-solving, process oriented, focused on customers and based on
facts, incorporated in entire organization (Kohlbacher and Gruenwald 2011).
Management of business processes includes the discovery, design, operations, optimization, and simulation of business processes (Smith and Fingar 2003). Several
researchers also suggested the constructs for measurement of process orientation of
organization (Kohlbacher and Gruenwald 2011; McCormack and Johnson 2001;
Reijers 2006; Vera and Kuntz 2007) with nine different dimensions: process design
and documentation, management commitment, process owner, process performance
measurement, corporate culture in line with the process approach, organizational
structure in line with the process approach, people and expertise, process-oriented
HR systems, and coordination and integration of process projects.
Brocke and Rosemann (2010) defined six important elements of business process management: strategic coordination, governance, methods, IT, people, and culture. Smart et al. (2008) defined the following factors: process strategy, process
architecture, process ownership, measurement of processes, and process improvement, while Lockamy and McCormack (2004) identified the process management
and measurements and process jobs in process view.
Technological Orientation
Innovation orientation is strongly R&D-oriented, is proactive in acquiring new technologies, and uses sophisticated and new technologies in the development of new
products (Cooper 1985; Burgelman and Sayles 1986). Because of their strong commitment to R&D, technology-oriented firms can build new technical solutions and
offer new and advanced products to meet customer needs (Gao et al. 2007). Gatignon
and Xuereb (1997) propose that technologically oriented firms can use their technical
knowledge to build new technical solutions to address the needs of their customers.
A technology-oriented firm tolerates and often encourages employees with
crazy ideas or an instinctive interest in inventing something drastically new. In
such a firm, introducing breakthroughs becomes a strategic and cultural priority
(Hurley and Hult 1998). Yang et al. (2012) indicted that a technology-oriented firm
has the ability to simultaneously focus on internal technological resources (i.e., scientific expertise, design processes, and internal communication) and external
17
229
technological opportunities (i.e., intelligence gathering, technology scanning,

dissemination, and networking). Reflecting the philosophy of a technological
push, technology-oriented firms believe that consumers prefer products and services that offer technological superiority (Li 2005) that gives the firm potential for
a greater competitive advantage one that cannot be easily imitated by the
competition (Gatignon and Xuereb 1997; Song and Parry 1997).
The value of a technology orientation, however, likely depends on technological
turbulence, which refers to the rate of technological changes within an industry.
When the level of technological changes is relatively low, firms can benefit from
relying on and making full use of their current technologies. However, because of
their commitment to technological superiority, technology-oriented firms devote
their resources to R&D activities, which incurs substantial costs and expenses that
may not be worthwhile when the pace of technological change is low. Hence, a
higher level of technology orientation is needed to cope with high levels of technological turbulence (Gao et al. 2007).
Innovation Orientation
The earliest papers in the field of innovative stance date back to 1992, when the
researchers started to explain innovative stance as an all-encompassing whole of
innovative programs in organizations, which are strategic in nature (Worren et al.
2002). Kundu and Katz (2003) think that being innovative is an element of the
innovative orientation. Homburg et al. (2002) also understand innovative stance as
a function which is reflected in the number of innovations offered by the company,
insofar as these innovations are available to customer and to the point of how
much these innovations are highlighted. According to Amabile (1997), the key
elements of innovative orientation are as follows: value based on creativity and
innovation in general, risk-taking approach, a sense of pride in the organizational
team, the excitement of being able to do something, and the offensive strategy
with the future prospects.
Innovative approach can lead to competencies in the technological field and
innovative production methods. It also increases employee satisfaction, helps exposing unique talent, and increases the productivity in organization. Apart from that, it
can have positive effects on the brand itself. Innovative orientation can foster the
development of innovative capacities (Branzei and Vertinsky 2006), it positively
affects the firms long-term success, and it enhances organizational flexibility, willingness to change, and the introduction of new products while decreasing organizational inertia (Hult et al. 2004). Innovative orientation implies the openness of the
organization to new ideas and its responsiveness to changes following the adoption
of new technologies, resources, skills, and administrative systems. Innovative attitude is a key factor in overcoming barriers and improving the ability of organizations to successfully adopting or implementing new systems, processes, or products
(Zheng Zhou et al. 2005).
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. Urban et al.
Conclusion
In this paper, we discuss the critical organizational factors (procedural, technological,

and innovative orientation of organization) and their impact on the usability of
CRM information solutions. In order to effectively and efficiently implement and
use CRM solutions in companies, they need to understand the role of key organizational factors. Compared to the other researchers dealing with IT solutions and technologies, we were not restricted to specific jobs and the characteristics of users
within the organization (Avlonitis et al. 2005; Son et al. 2012) or users on market
(Schierz et al. 2010), which means that we have discussed the use of CRM information solutions at the level of an entire organization.
There are a lot of successful expansions and additions to the TAM model
(e.g., Sternad et al. 2011). A construct of usefulness of the CRM information solutions which derives from the TAM model has been included in the conceptual
model. We have filled a gap in the research attempts in the field of IT solutions,
which is a result of the lack of empirical evidence on the direct and indirect impact
of critical organizational factors, which are reflected in the approach of an organization and its inclination to use CRM information solutions efficiently and effectively.
In this paper, we have attempted to additionally clarify the effective use of CRM
solutions. The conceptual model includes other constructs with which we want to
verify the benefits of the intensity of use and perceived usefulness of CRM information solutions, which are reflected in the quality of information and, consequently,
in the satisfaction reflected in its support. Preliminary research conducted as
research studies has already partly confirm some of our assumptions and undergoing field research conducted on sample of companies will provide deeper understanding of relationships between variables in our conceptual model.
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Chapter 18
Customer Voices Incorporated in a Marketing

Class: A Review
Kirti Sharma, Jaydeep Mukherjee, and Mukul P. Gupta
Abstract The focus of this paper is to revisit the manner in which marketing
pedagogy could assume the task of incorporating the consumers voice in the classroom.
Consumers voice is well established as a central theme in marketing literature,
curriculum, and business practices. Educators teaching marketing as a subject are
continuously in pursuit of understanding the consumer behavior and, thereby, play
an important role in influencing how a new crop of managers perceive, receive, and
respond to this aspect of conducting business. The business world also constantly
keeps demanding tools and strategies to help them better understand their consumer,
as also to widen their consumer base in a constantly changing scenario.
Keywords Role of academics in the field of marketing Marketing education
Customer voice Listening to a consumers voice Market failures Teaching
customer centricity Marketing class
Introduction
A general impression seems to be growing: that there is a sort of disconnect between

conceptual knowledge, i.e., academia and operational skills, i.e., the business world.
Several studies have pointed out this gap between business education and actual
practice. This gap, on one hand, leaves the academia to grapple with questions
regarding its relevance and, on the other, causes concern that without an academic
backbone to the industry, workplace skills may not be adequately standardized, and
they may even miss out on being systematically incorporated into business practices. B-schools are trying to bridge this gap by improving their industry-academia
interface by inviting people from the world of business to teach, as well as by forming joint research agenda with the members of the industry.
K. Sharma (*) J. Mukherjee M.P. Gupta

e-mail: [email protected]; [email protected]; [email protected]
Springer India 2015
235
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K. Sharma et al.
Marketing: Practice and Education
The authors feel that this gap is a manifestation of the difference between how the
prevailing marketing pedagogy perceives the consumer, the consumers voice, how
it incorporates this into the curriculum, and how the industry formats the marketing
function. Essentially, this means that the academia and the industry differ on issues
of indentifying their consumer and capturing the consumers voice.
The question, therefore, emerges: What is the role of academics in the field of
marketing? Is it to provide basic skills to students who are preparing to join the
industry? Or, is it to conduct research, focus on understanding the problems and find
solutions to the same, and evolve framework and theories that the industry can apply
to improve its functioning? Often, there is a lack of clarity on who is expected to
lead, as that defines the agenda of various stakeholders.
Therefore, the principal endeavor here is to identify the critical assumptions and
differences in perspective. Some of the concerns explored here are as follows.
When we say voice of the consumer, whose voice are we talking about? Who
exactly is this consumer? Businesses across the board usually only focus on the
customers who have the ability to pay for their products of services, typically missing out the obligates who voice their rejection and the beneficiaries who are entitled
to certain types of gains (Bolton et al. 2004; J Mark Manag 2012). This creates a
gap, for while the academia would cover all conceptual possibilities, the industry
chooses to focus on what is practical and economically viable.
Both marketing education and businesses seem to be doing well as regards
capturing voices of advocacy and complaints, but do they truly manage to capture
rejection on any level? From a practical point of view, this poses a big problem
because trying to capture such voices could be extremely expensive, notwithstanding questions about the utility. From a practitioners point of view, this problem may
go even deeper. Capturing the voice of rejection could potentially bring up issues of
inefficiency on the practitioners end, and hence, the latter is unlikely to be interested in the subject. The question arises, should academics insist on pursuing such
areas or should they leave it to the discretion of the industry?
However, for some business organizations, it could be important to capture the
consumers voice of rejection and understand the reasons behind it in order to
improve performance. It is a voice of rejection again when a consumer switches to
competition or chooses substitute products/services are we doing enough to capture the message therein? Who is responsible for capturing the voices of consumers
from these various categories, to what end can these be studied, and whether the
system followed in the industry encourages such an endeavor or not?
For example, in case of a hospital, who may be considered the consumer? Is it
the patient who avails himself/herself of its products/services or the insurance company that pays the bills, or is it the doctors who provide their skills, or is it the government that is responsible for conducting checks and inspections and issuing
necessary licenses, etc.? In this way, all businesses, large and small, find their consumer on various levels, and they all have a varying set of demands they expect to
18
Customer Voices Incorporated in a Marketing Class: A Review
237
be met. Thus, we have a continuum of consumer voices ranging from advocacy to

complaint to rejection (Madichie 2009; Warren 1992).
While pondering the role of marketing education from the point of view of
conceptual knowledge vis--vis operational skills, we may want to find out how
strongly are the two aspects linked are they independent of each other or are they
only contextually relevant? In case they are found to be strongly linked, educators
would likely be required to play a more active role as executors and advisors than
remain dissociated from practice, as is the norm in academia the two worlds split
into thinkers and doers. It is largely to deal with this limitation that executives are
increasingly finding their way into the academic world as executive professors
(ODriscoll and Murray 1998; Mentzer and Schumann 2006).
In order to find answers to the questions detailed above, understanding what the
industry values and how it operates is of paramount importance. Our endeavor
should be to figure out where lies the locus of the problem: Is it the education system that falls short of delineating clearly the importance of listening to a consumers
voice, or is it the organizational structure of businesses that dilutes the need to focus
on the voice of the consumer by using a disconnected matrix of performance measures and reward systems?
This is a conflict of perspectives and driving it is the matter of focus on process/
results. While the academia focuses on the overall development of the society
through the development of a healthy organization and efficient market systems, the
industry focuses on its own interests, on maximizing profits rather than maximizing
the utility and service to its consumers. It may be admitted that this induces the possibility of market failures and inappropriate use of means in many situations.
For example:
A. The Triomune controversy about providing affordable anti-AIDS drugs to
sub-Saharan Africa
B. Portrayals of women in advertisements wherein there is no conceivable connection
with the product or the target audience
C. Provocation of target audience with the deceitful communications for the benefit
of easy attention, reach, and recall
Regulatory interventions are the mechanisms devised by the society to deal with
such situations, but are these robust solutions? Who is responsible for bringing in
socially responsible consumption behavior? Can the academia or the industry
absolve itself of its responsibilities to the society at large by citing market forces
such as inadequate regulatory frameworks?
Practice in the marketplace is operationally driven and values workplace skills,
while results achieved thus become the key parameters of assessment. This creates
an inherent bias towards short-term results, which it is easy to conclude may be
better managed by focusing on consumers who do not voice a critical point of view.
It is seen that industry practices systematically discourage the listening of critical
consumers voice and the thinking process of managers reflects psychological processes such as selective retention and the like (Hershey and Walker 2006; Rohit and
Biswatosh 2009; Roy 2012).
238
K. Sharma et al.
It may even be suggested that the reward systems ingrained in corporate practices
pose a threat to the intention to capture and understand the consumers voice.
Consumers do not directly reward managers they reward the organization which
in turn rewards its managers, and thus, managers are in a constant dilemma over
whom to esteem more as the consumer: their organization or the user of the products/
services of their organization. And these two are often found to be very different and
distant in nature. This causes a major gap in terms of developing effective marketing
strategies.
This, in turn, has large-scale implications on how marketing is perceived,
practiced, and taught. The role of marketing has undergone a sea change from being
perceived and practiced as a function to occupying a more integral role in the
marketplace as an activity. Today, it has long-term implications and a wider application that integrates finance and operations by taking into account customer satisfaction as well as the consumption of organizational resources.
Essentially, this calls upon the discipline of marketing education to widen its
scope, acquire a more holistic approach that goes beyond short-term market considerations, and positions itself at the center of the cross-functional process of a
service-centered business model (Vargo and Lusch 2004). It requires that marketing
education equip students with a problem-solving approach and the ability to understand its consumers, attract new ones, and retain its existing lot, rather than focus on
providing specific techniques that may prove useful in solving particular problems.
Looking to the future of marketing as an educational discipline in the dynamic
world of business, growth would have to mean a consumer-driven activity, whose
individual components all work in tandem with understanding and innovation.
Conclusion
Finally, the pursuit of clarity in this regard is affected by a potential conflict of interest:
the source of funding for academic research. In many cases, industry is the source
of this funding, giving rise to several questions: The industry, with its particular set
of priorities, directing research is this the ideal situation? Can academia work with
full freedom, critically evaluate the existing paradigm, and achieve its objective of
doing what is good for society within this set up?
References
Bolton RN et al (2004) Invited commentaries on evolving to a new dominant logic for marketing.
J Mark 68:1827
Editorial (2012) Paradigmatic and geographic diversity in marketing theory and practice. J Mark
Manag 28(12):17
Hershey L, Walker S (2006) Using the CPPD method of analysis for teaching case studies in the
marketing management class. Mark Educ Rev 16(2):45
18
Customer Voices Incorporated in a Marketing Class: A Review
239
Madichie NO (2009) Mind the gaps between the marketing theory train and the marketing practice
platform: the case of egg card. Mark Rev 9(1):3962
Mentzer JT, Schumann DW (2006) The theoretical and practical implications of marketing
scholarship. J Mark Theory Pract 14(3):179190
ODriscoll A, Murray JA (1998) The changing nature of theory and practice in marketing: on the
value of synchrony. J Mark Manag 14:391416
Rohit V, Biswatosh S (2009) Disciplining the discipline: understanding postcolonial epistemic
ideology in marketing. J Mark Manag 25(78):811824
Roy DP (2012) Promoting active learning of ethical issues in marketing communications using
debates. Mark Educ Rev 22(1):7376
Vargo SL, Lusch RF (2004) Evolving to a new dominant logic for marketing. J Mark 68:117
Warren HB (1992) Implementing holistic education in marketing courses. Mark Educ Rev
2:2122
Chapter 19
Demutualisation ofStock Exchanges inIndia:

TheCorporate Governance Chapter
SandeepGoel
Abstract The Indian stock exchanges were mostly broker dominated, and the
concept of governance was not given the due importance it deserves. This resulted
in erosion of investors wealth and ultimately their confidence in the stock market.
Since investors are the backbone of any stock exchange, it got necessary to infuse
a sense of confidence among the investors. That is how the corporatisation of
stock exchanges took place for streamlining the process of corporate governance.
Corporate governance is one of the most pivotal issues associated with demutualisation of stock exchanges. On account of recovering markets due to subprime crisis
in 20072008 and the global recession, for better corporate management, the corporate governance of the stock market becomes all the more relevant. This paper
highlights the fundamental issues in the demutualisation of these stock exchanges
and their facelift for better governance structure in the said context. The primary
contribution this study seeks to make is in the sphere of corporate governance
related to the process of demutualisation of Indian stock exchanges in this phase
of markets rebuilding. It is hoped that it will improve the investors perception
about the reliability of stock exchanges and promote better spirit of trust and
governance.
Keywords Demutualisation Stock exchange Investors Regulators Corporate
governance
1 Introduction
Prior to the 1990s, stock exchanges worldwide were operating as mutual organisations.
In the early 1990s, stock exchanges started going for major organisational and
operational changes. One of the most noted changes was demutualisation. The
inadequacy of proper governance system and transparency in many exchanges
had eroded the investors confidence. This was the major driving force behind
demutualisation of stock exchanges. Also, increasing conflicts in the stock exchanges
S. Goel (*)
Faculty- Finance, MDI, Gurgaon, India
Springer India 2015
241
242
S. Goel
members interests and tough competition led to a reduction in the stock exchanges
wealth which led to a change in the stock exchange governance structure for demutualisation (Serifsoy 2006). The increasing competition among the stock exchanges,
global business horizons and the advent of new information technology necessitated
the move of demutualisation.
The management structure of most of the Indian stock exchanges was dominated
by the brokers; therefore, for better governance, it was imperative that these
exchanges were corporatised. Thus, corporate governance emerged out as the most
essential factor in this process of demutualisation. The objective of a stock exchange
and of the brokers trading on them are different; therefore, brokers being the part
of management also can often lead to a conflict of interests, and, in most cases,
the brokers have prioritised their interest than larger stakeholders. The evidence is
in the form of Harshad Mehta and Ketan Parekh in the past.
So, demutualisation was introduced as a measure to check this as it results in the
separation of the ownership and brokerage activity. Through demutualisation, a stock
exchange becomes a corporate entity with its own objectives, and it transforms from
a non-profit organisation to profit-making company. Demutualisation is the process
through which any member-owned organisation becomes a shareholder-owned
company. This company could either be listed on a stock exchange or closely held
by its shareholders (ET).1 Several researches and discussion papers have defined
the concept of demutualisation as given below.
2 Definitions ofDemutualisation
The demutualization of an exchange is a process by which a non-profit
member-
owned organization is transformed into a for-profit shareholder
corporation. Ownership is somewhat open (The World Federation of Exchanges,
WFE 2005, Cost and Revenue Survey 2005, annex 1, p.37).
The transformation of an exchange into a for-profit shareholder-owned company
is referred to as demutualization. In most cases, the demutualised exchange
becomes a for-profit enterprise (IOSCO, IOSCO Discussion paper, 2000, p.1).
The transformation of exchanges from mutual to demutualised structure involves
two key features:
(a) Change in the ownership structure
(b) Change in legal as well as organisational form
Both need to be accompanied by adequate safeguards to ensure appropriate
governance.
http://articles.economictimes.indiatimes.com/2002-01-21/news/27334241_1_demutualisationtrading-rights-brokers. Accessed on August 7, 2013.
19 Demutualisation ofStock Exchanges inIndia: TheCorporate Governance Chapter
243
3 Motives forDemutualisation
The most obvious motive and benefit of demutualisation is that it leads to the
separation of the ownership and control of stock exchanges from the trading activity
as discussed above, which eliminates the conflict of interest between exchange and
broker-members. This reduces the chances of manipulation of peoples money by
the brokers. Thus, the most important benefit is better governance.
3.1 Improved Governance

The demutualisation makes a corporation to act more decisively and rapidly to
various business challenges and issues. There is a management that takes actions
that are in the best interests of the stock exchange and ultimately its shareholders.
Therefore, the shareholders interests are not overlooked as a part of corporate
governance. Further, the demutualised organisational structure allows greater
transparency in the form of financial reporting to various stakeholders. Further, the
demutualised organisational structure will allow for greater transparency because
stock exchanges will be obliged to report to their shareholders not only regarding
the bottom line but also on issues regarding corporate governance (Hughes and
Zargar 2006, p.1011).
3.2 More Capital fortheExchanges

For the stock exchanges, demutualisation means access to more resources,
which is very important in this competitive trading world. Further, demutualised
stock exchanges go public to raise new finance similar to the evidence for firms
(e.g. Boehmer and Ljungqvist 2002; Kim and Weisbach 2005). Also, it leads to
globalisation in the form of a strategic alliance with other exchanges or acquisition.
A corporatised structure facilitates easy access to finance. Replacement of floor
trading with screen trading is a clear example that shows the importance of demutualisation in raising capital.
3.3 Investor Participation

A demutualised stock exchange invites higher participations from investors.
Separation of membership and ownership provides a sense of confidence among
the investors. For example, contrary to NSE structure that is mainly composed
of broker-dealers as members, a demutualised structure allows both institutional
investors and retail investors to become shareholders.
244
S. Goel
3.4 Organisational Strength

For any organisation to sustain and grow, stakeholders support is must.
Demutualisation enables stock exchanges to get legitimacy from society, from
market or from financial institutions (Hawley 1968).
4 The Global Trend toDemutualisation

A number of stock exchanges have demutualised and become corporate entities.
Leading among these are the NASDAQ, the Australian Stock Exchange (ASX),
the Hong Kong Stock Exchange, the Singapore Stock Exchange and the NewYork
Mercantile Exchange.
The demutualisation trend started in 1993 with the Stockholm Stock Exchange,
which was the first stock exchange to demutualise. This was followed by several
other major stock exchanges such as ASX, TSX, the Singapore Stock Exchange and
the Hong Kong Exchanges and Clearing Limited (HKEx). ASX was one of the
first exchanges to come out with an initial public offering (IPO). In Asia-Pacific,
Singapore Exchange Limited (SGX) was the first stock exchange to demutualise
in December 1999. In 2000, Tokyo Stock Exchange, one of the largest exchanges in
the world, completed its demutualisation (Hughes and Zargar 2006, p.7).
In Europe, major stock exchanges such as London Stock Exchange, Deutsche
Borse and Euronext become public companies. In 2000, LSE became a public
limited company (London Stock Exchange plc) in the mid-2001 (Ibid. p.78).
The first demutualised stock exchange in the United States was Chicago
Mercantile Stock Exchange (CME), in 2000. In 2003, the CME came out with its
IPO and listed its shares on the NYSE (Ibid., p.8). In 2000, the NASDAQ Stock
Market, Inc. which used to be known as the National Association of Securities
Dealers, a wholly owned unit of NASD, separated from it and went public. The US
Securities and Stock Exchange Commission (SEC) on January 13, 2006, approved
application of the NASDAQ to become a registered securities exchange (Ibid. p.89).
Table19.1 lists international stock exchanges which got demutualised.
5 Demutualisation inIndia
5.1 History
Rameshan (2002) cited that Demutualisation has been experimented in India even
before the concept came to be propounded internationally. The Over The Counter
Stock Exchange of India, promoted and incorporated in 1990 by financial institutions as a non-profit company under Section 25 of the companies Act, was a
245
Table 19.1 Global stock exchanges demutualised

Demutualised exchange
Year
Stockholm Stock Exchange
1993
Helsinki Stock Exchange
1995
Copenhagen Stock Exchange
1996
Amsterdam Stock Exchange
1997
Australian Stock Exchange
1998
Iceland Stock Exchange
1999
Athens Stock Exchange
1999
Stock Exchange of Singapore
1999
Hong Kong Stock Exchange
2000
London Stock Exchange
2000
Deutsche Borse
2000
Note: Compiled from stock exchanges database
Demutualised exchange
Euronext
The NASDAQ
NYMEX
Tokyo Stock Exchange
Osaka Stock Exchange
Chicago Mercantile Exchange
Toronto Stock Exchange
Kuala Lumpur Stock Exchange
Chicago Board of Trade
NYSE
BSE
Year
2000
2000
2000
2001
2001
2002
2002
2004
2005
2005
2005
pioneering attempt in separating ownership and membership of the exchange.2 The

subsequent setting up of the National Stock Exchange of India Limited in
November 1992 as a tax-paying company with a different organisational setup
unlike other stock exchanges in the country was another significant effort in this
direction.
The government vide the Securities Laws (Amendment) Act of 2004 amended
the Securities and Contract (Regulations) Act of 1956 to make corporatisation and
demutualisation of stock exchanges mandatory.3 It not only requires separation of
ownership and trading rights but also requires that the majority ownership rests with
the public and those without any trading rights. Earlier, stock exchanges were supposed to be self-regulating agencies of their members, but after the above ordinance,
they were externally regulated.
The process of demutualising stock exchanges in India actually started with the
Bombay Stock Exchange which was demutualised in August 2005. The National
Stock Exchange has had a demutualised structure since its inception. NSE is one of
the first demutualised stock exchanges in the country, where the ownership and
management of the exchange is completely divorced from the right to trade on it.
Though the impetus for its establishment came from policymakers in the country,
it has been set up as a public limited company, owned by the leading institutional
investors in the country.
In the United Kingdom, in March 2000, the London Stock Exchange got demutualised. In the case of both these exchanges, the legal process was broadly the
same: conversion from a not-for-profit mutual entity, i.e. an association of stockRamaseshan, R., Issues in Demutualisation of Exchanges http://nseindia.com/content/press/
jun2002b.pdf. Accessed on December 10, 2013
3
http://www.legalcrystal.com/acts/description/51506, http://www.prsindia.org/uploads/media/
vikas_doc/docs/acts_new/1167484504_THE__SECURITIES__LAWS.pdf. Accessed on December
10, 2013
2
246
S. Goel
brokers, into a for-profit public limited company. However, the underlying purpose
of demutualisation in India is absolutely different from that in the United Kingdom.
In India, demutualisation was mandated by the government as a regulatory measure
for ending the brokers control over the exchanges. But the London Stock Exchanges
demutualisation was entirely its own voluntary decision, aimed at developing its
business in the fast-changing and globalising world. This step was expected to
improve its international competitiveness, provide greater flexibility, facilitate
speedier decision-making and enable it to form international alliances, as and when
necessary. In fact, the voluntary route is the international norm.4
5.1.1 Focus
1. The representation of stockbrokers on the governing board of each exchange is
restricted to a maximum of one fourth of the boards strength, the remaining
three fourths of the directors being appointed in the manner specified by SEBI
from time to time.
2. The aggregate shareholding of broker-shareholders (i.e. shareholders having
trading rights as brokers) is limited to a maximum of 49% of the exchanges
equity capital.
3. A minimum of 51 % of the equity capital is to be held at all times by public other
than broker-shareholders.
4. No broker-shareholder is allowed to have more than 5% voting rights.
5. The demutualisation scheme is individual exchange-based scheme, prescribing
a mandatory model. The exchanges, which are unable to comply, will have to
close down. Thus, demutualisation is bound to affect the overall structure of
Indias exchanges.
5.2 Present Status Quo

In terms of legal structure, the stock exchanges in India could be segregated into
two broad groups stock exchanges which were set up as association of persons
and later converted into companies, viz. BSE, ASE and Madhya Pradesh Stock
Exchange, and the remaining stock exchanges which were set up as companies,
either limited by guarantees or by shares. Apart from NSE, all stock exchanges
whether established as corporate bodies or Association of Persons were earlier
non-profit-making organisations.
4
Gupta L.C., (2013) Demutualisation of Indian stock exchanges: A critical evaluation and
some suggestions, http://www.scmrd.org/Demutualisation%20of%20Stock%20Exchanges.pdf.
Accessed on August 7, 2013
247
As per SEBI (2002), presently, out of 25 stock exchanges in India, there are
nine recognised operational stock exchanges in India.5
1 . Ahmedabad Stock Exchange Ltd.
2. Bangalore Stock Exchange Ltd.
3. Bombay Stock Exchange Ltd.
4. Calcutta Stock Exchange Ltd.
5. Delhi Stock Exchange Ltd.
6. Madhya Pradesh Stock Exchange Ltd.
7. Madras Stock Exchange Ltd.
8. National Stock Exchange of India Ltd.
9. Bangalore Stock Exchange Ltd.
Few of them have lost their recognition status, for example, Bhubaneswar Stock
Exchange Ltd.s recognition was valid up to June 4, 2013. The rest have some or the
other litigation cases going against them in the Court. For example, due to pending
litigation before the Honble Madras High Court, Coimbatore Stock Exchange Ltd.
(CSX) has not filed application for renewal of recognition which expired on
September 17, 2006. The Hyderabad Stock Exchange Ltd. (HSE) failed to dilute at
least 51% of its equity share capital to public other than shareholders having trading rights on or before the stipulated date, i.e. August 28, 2007. Consequently, in
terms of section 5(2) of the Securities Contracts (Regulation) Act of 1956, the recognition granted to HSE got withdrawn with effect from August 29, 2007. This
explains the increasing regulation of SEBI on stock exchanges for corporate
governance.
6 Demutualisation Process
Demutualisation takes place in stages and can take different forms.
Initially, the members rights are exchanged for shares in the entity and become
legal owners of the organisation.
Entities which plan to raise capital for growth raise it from outside.
Pursuant to privatisation, demutualised exchanges have two options:
Remain private
List and remove all restrictions on trading
For many exchanges, the private placement is an interim activity.
The Step-by-Step process is described in Chart19.1.
5
http://www.sebi.gov.in/sebiweb/userview/detail/2/388/No%20of%20Stock%20Exchange.
Accessed on December 10, 2013
248
S. Goel
Mutual Exchange
Member Controlled
For-Profit Private Company
Member Owned
Private Company
Private Placement to Members,

listed Companies and Institutional
Investors
Listed Company
(with restrictions)
Restricted shares owned

by members and nonmembers
Listed Company
(no restrictions)
Widely held
shares
No restrictions
Chart 19.1 Demutualisation procedure
7 Demutualisation toGovernance
Exchanges, when run as mutual associations of traders and brokers, allow members
exclusive rights of access to trading systems and platforms. They become a monopoly
of the brokers who enjoy the entire profits from the intermediation of a common man.
As the owners of these mutualised exchanges, they imposed rights to trading and
disallowed direct access to the trading floor to any outsiders. They were also not
open to any change. This was leading to close-ended market operations with poor
governance structure.
With the growing awareness of a common investor about his/her rights and
manipulations by brokers, governance of these exchanges became a major issue.
As a result, it has generated pressures on these exchanges to adopt demutualisation.
Under demutualisation, there is separation of ownership from membership that
automatically provides trading rights. This segregation helps in effective corporate
governance if there are accompanying improvements in the incentive structure
(Steill 2002).
The 1992 Cadbury Report (Cadbury 1992) described corporate governance as
the system by which companies are directed and controlled.6 OECD in order to
have efficient corporate governance system across the globe focused on five areas:
http://www.ecgi.org/codes/documents/cadbury.pdf. Accessed on August 11, 2012
249
(1) the rights of shareholders, (2) the equitable treatment of shareholders, (3) the role
of stakeholders, (4) disclosure and transparency and (5) the responsibilities of the
board (OECD 1999).
Elliot (2002a, b) highlighted that exchanges with public accountability are
required to have special focus on corporate governance on account of investors
demand. Investors need sound corporate governance system for better performance
of their businesses. It comprises of the composition of the board of directors and key
committees, financial reporting requirements for the exchange.
So, the concept and scope of corporate governance, as discussed above, can
easily be well extended to the process of demutualisation of stock exchanges.
The demutualisation is the result of the need for a transparent and well-regulated
stock exchange. It is a step towards ensuring better governance in stock exchanges.
Domowitz and Steil (1999), who examined interrelationships between stock
exchange automation, governance and quality of markets, have identified several
benefits of the demutualised stock exchanges and are of the opinion that the primary
driver for such benefits is the favourable governance structure of demutualised
exchanges. The genesis of the National Stock Exchange goes to the misgovernance
of BSE.It was plagued with a variety of problems, particularly, outdated trading and
settlement procedures and lack of investor protection. Therefore, the issue of a
well-regulated governance system in the Indian stock exchanges has become all the
more relevant in the light of the risk management and surveillance function.
7.1 Corporate Governance inIndia

Corporate governance in India came out as a post-deco effect to whatever country
witnessed in the form of scams in the 1990s. It was introduced by the Confederation
of Indian Industry (CII), as a voluntary measure to be adopted by the Indian companies which soon acquired a mandatory status in the early 2000s through Clause 49
of the Listing Agreement of SEBI Act of 1992.7 To stop cases like Satyam, the
Ministry of Corporate Affairs released a set of voluntary guidelines for corporate
governance in 2009 to address a myriad of corporate governance issues. Companies
Act of 2013 is another step in this direction.
7.1.1 Clause 49 oftheListing Agreement
Clause 49 of the Listing Agreement got implemented in 2000 by SEBI on the
recommendations of the Birla Committee which got revised on the recommendations
of the N. R. Narayana Murthy Committee on Corporate Governance and public
comments, vide circular dated August 26, 2003.8
http://www.sebi.gov.in/circulars/2003/cir2803.html. Accessed on October 24, 2013
http://www.sebi.gov.in/commreport/clause49.html. Accessed on November 10, 2013
7
8
250
S. Goel
Clause 49 is considered as a milestone in the evolution of corporate governance

practices in India. It is similar in spirit and in scope to the Sarbanes-Oxley Act in
the United States. Clause 49 of the Listing Agreement to the Indian stock exchange
came into effect on December 31, 2005.
The key mandatory features of Clause 49 are the following: (1) composition of
the board of directors, (2) the composition and functioning of the audit committee,
(3) subsidiary companies, (4) disclosures by the company, (5) CEO/CFO certification of financial results (6) reporting on corporate governance as part of the annual
report and (vii) certification of compliance of a company with the provisions of
Clause 49.
Board independence: Boards of listed companies must have a minimum number
of independent directors. Where the chairman is an executive or a promoter, then
at least one-half of the board should comprise of independent directors. In other
cases, independent directors should constitute at least one-third of the board size.
Audit committees: Listed companies must have audit committees of the board
with a minimum of three directors, two-thirds of whom must be independent.
In addition, the roles and responsibilities of the audit committee are to be specified
in detail.
Subsidiary companies: There should be detailed information about all the
subsidiary companies in the parent companys annual report.
Disclosure: Listed companies must disclose periodically the financial and other
matters to ensure transparency.
CEO/CFO certification: The CEO and CFO of listed companies must (a) certify
that the financial statements are fair and (b) accept responsibility for internal
controls.
Corporate governance report: There should be complete disclosure of corporate
governance followed by the company under a separate head in its annual report.
Compliance reports: Annual reports of listed companies must carry status reports
about compliance with corporate governance norms.
7.2 I mprovements inCorporate Governance ofStock

Exchanges Post Demutualisation
Exchanges running as mutual associations of traders and brokers allow members
exclusive rights of access to trading systems and platforms. It results in a form of
monopolistic trading wherein, they disallowed direct access to the trading floor
to any outsiders. With corporatisation, these evils seemed to be perished, and it
allowed everyone to have an equal participation in the market.
Under demutualisation, there is a separation of ownership from membership that
automatically provides trading rights and helps in effective corporate governance.
Decision-making is based on this new ownership structure, and there is an
effective governing board and a company structure.
251
In order to decrease broker influence on the board, the exchanges have appointed
independent directors or directors that are non-trading owners.
To ensure that the management of the exchange acts not only in the best
interests of the shareholders but also conducts the business in a prudent manner,
there is a system of board performance evaluation. The management should
be accountable to the board, which would decide the managements appointment
and remuneration, supervise the strategic direction, audit the financial and
operational results, including risk management and, if needed, execute the
removal of management.
7.3 Demutualisation andPerformance ofStock Exchanges

It has been established empirically that since demutualisation improves corporate
governance of the stock exchange, it impacts the performance of stock exchanges.
Hart and Moore (1996) emphasised competition as major factor for the stock
exchange to change its organisational structure from mutual to demutual, showing
that a for-profit exchange increases social welfare. When there is high competition,
a demutualised structure is more socially preferable than a mutual structure.
Galper (1999) pointed out that technological advancement enabled the exchanges
to go international and reduced the intermediary role of exchange members. This
resulted in low trading costs and facilitated investors to trade on more than one
stock exchange.
Mendiola and OHara (2004) empirically tested the effects of the change in
exchange governance on the exchanges performance. They analysed the accounting
data for ten stock exchanges and found out that stock exchange performance,
measured by stock exchange returns, improved after the change in governance.
Hazarika (2005) examined the impact of demutualisation on trading volumes and
costs, taking London Stock Exchange (LSE) and Borsa Italiana (BI) as the sample.
Whereas, LSE was demutualised due to competition, BI was demutualised by the
government. It was evident that the governance structure of stock exchanges is
definitely better for the exchanges, and the investors get a better deal.
8 Case: Indian Stock Exchange Demutualisation

8.1 BSE
BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.) is Indias one of the
leading exchanges. It was set up in 1875 and is Asias first stock exchange. BSE is
a corporatised and demutualised entity, with a broad shareholder base which
includes two leading global exchanges, Deutsche Borse and Singapore Exchange as
252
S. Goel
strategic partners. Before demutualisation, 790 broker-members held 100% in the

131-year-old exchange.9
BSE provides an efficient and transparent market for trading in equity, debt
instruments, derivatives and mutual funds. There are more than 5,000 companies
which are listed on BSE, making it the worlds No. 1 exchange in terms of listed
members. The companies listed on BSE Ltd. command a total market capitalisation
of USD 1.32 trillion as of January 2013.10
The corporatisation structure and post benefits of BSE are discussed below.
Features
Formation of A for-profit
company limited by shares
under Section 12 of the
Companies Act, 1956, as
Bombay Stock Exchange
Limited (BSE Ltd.) to succeed
BSE.
Segregation of the ownership
and management of BSE Ltd.
from the trading rights of the
members.
Only one class of trading
members with similar rights
and privileges and uniform
standards for all.
Trading members in the
Governing Board of BSE Ltd.
not to exceed one-fourth of the
total strength of the Governing
Board.
Atleast 51% of its equity
shares to be continuously held
by public other than
shareholders having trading
rights.
The BSE (Corporatisation and
Demutualisation) Scheme, 2005, May
20.(http://www.sebi.gov.in/press/2005/200
579.html)
Demutualisation stages
20th May 2005
The BSE (Corporatisation and
Demutualisation) Scheme, 2005
8th August 2005
Incorporation of Bombay Stock
Exchange Limited
12th August 2005
Certificate of Commencement of
Business
19th August 2005
BSE becomes a Corportae Entity
(http://www.sebi.gov.in/press/2005/200579
.html)
Board structure
Non-Executive Chairman 1
MD &CEO 1
Public Interest Directors 3
Shareholder Directors 3
Management Team 4
excld. MD &CEO
9
http://www.livemint.com/Home-Page/qQ7KFGKPGzjPToswQkp0XN/BSE-demutualised-May
18 2007. Accessed on August 8, 2013
10
http://www.bseindia.com/static/about/introduction. Accessed on August 8, 2013
253
8.2 NSE
The National Stock Exchange (NSE) is Indias leading stock exchange and got
incorporated in November 1992 as a tax-paying company. It was promoted by the
leading financial institutions essentially led by IDBI at the behest of the Government
of India to provide a modern, fully automated screen-based trading system with
national reach.
NSE has played a catalytic role in reforming the Indian securities market in
terms of microstructure, market practices and trading volumes. It has demutualised
structure, screen-based trading, dematerialisation and electronic transfer of securities
and professionalisation of trading members.
The corporatisation structure of NSE (2001, 2002) is discussed below.
Features
From day one of incorporation on November 1992, NSE has adopted the
form of a demutualised exchange the ownership, management and trading are in the hands of three different sets of people.
NSE is owned by a set of leading financial institutions, banks, insurance
companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the exchange.
Its board comprises of senior executives from promoter institutions; eminent professionals in the fields of law, economics, accountancy, finance,
taxation, etc.; public representatives; nominees of SEBI; and one full-time
executive of the exchange.
While the board deals with broad policy issues, decisions relating to m
arket
operations are delegated by the board to various committees constituted by
it. Such committees include representatives from trading members, professionals, the public and the management. The day-to-day management of
the exchange is delegated to the managing director who is supported by a
team of professional staff.
Demutualisation
November 1992, incorporation
April 1993, recognition as a stock exchange
254
S. Goel
Board
Chairman 1
Vice-chairman (shareholder director)-1
MD and CEO 1
Public interest director 5
Shareholder director 3
http://www.nseindia.com/global/content/about_us/facts_figures.htm
Accessed on August 8, 2013
8.3 Key Results ofDemutualisation

The common outcomes as a part of corporatisation of BSE and NSE are summarised
below.
Increased flexibility in decision-making

Increased customer focus
Expansion of activities
Management service companies
Most important, corporate governance
9 Conclusion
Corporate governance is the need of the hour, and it is equally applicable to stock
exchanges. With the changing structure of stock exchanges globally towards corporatisation, for competition and governance, it is hoped that with demutualisation,
Indian stock exchanges would also achieve that soon. The cases of BSE and NSE
indicate the trend towards successful corporatisation for infusing transparency
and fairness in the mind of investors, in particular retail investors, about their
trade practices. That is the reason why demutualisation of Indian stock exchanges
was regulated after 2004, and therefore, all the new stock exchanges post 2004
automatically fall into this umbrella.
The demutualisation of stock exchanges offers them an ample range of benefits,
abolishment of the members monopoly, better investors response and higher level
of investments. But, the inherent problems and issue related to demutualisation, as
discussed above, have to be kept in mind for proper implementation and getting
results. Stock exchange organisational structure will only deliver the results if the
governance is practised not just preached.
Undoubtedly, demutualisation improves corporate governance of stock exchanges,
but it also raises several concerns. These are discussed below.
255
9.1 Emerging Issues ofDemutualisation

1. Ineffective regulation: Since demutualisation makes stock exchanges profit-
oriented, so it is argued that after demutualisation, stock exchanges might give
up effective regulation. The main objective of profit-driven demutualised stock
exchanges will be earning maximum profits instead of allocating resources for
effective market regulation.
2. Conflict of interests: There may be a conflict of interest among the self-regulatory
organisations (SROs) and between self-regulatory organisations and the government.
In addition, it may arise between public interest directors and shareholder directors.
Any such conflict of interest is not good for the growth and development of the
stock exchanges, particularly from the investors point of view.
3. Misallocation of costs: Demutualisation may result in costs misallocation due to
multiple regulatory authorities. They are not governed by a single regulator but
also have to abide by all concerned regulatory organisations.
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wp/2002/wp02119.pdf
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Chapter 20
Determining the Optimal Price Point: Using

Van Westendorps Price Sensitivity Meter
Sakhhi Chhabra
Abstract Marketers have long acknowledged that the pricing decision is a
significant component of the marketing mix; the theoretical attention paid to pricing
is certainly not reflected by the wealth of techniques in the field of marketing
research. Many authors have identified the importance of pricing as it increases
sales, has a major influence on customer loyalty, and also serves as a proxy for quality. Despite the aforementioned significance of pricing, several authors have indicated that pricing is the most deserted element of the marketing mix. The question
of pricing new products acts as a key challenge for management. One important
reason for the difficulty faced in pricing decisions is the lack of knowledge concerning customer reactions to pricing strategies. The market researcher, who is
confronted with new product pricing decisions, could be asked about consumers
perceptions of and reactions to prices.
In this paper an attempt has been made to describe four different methods for
obtaining data used to determine prices for new products and then explicitly work
on van Westendorps model to determine the optimum price point of Vivel Cell
Renew body lotion (ITC product) for SKUs of 250 ml. With the help of the PSM
model, we would attempt to gauge the price point at which the consumers intend to
purchase this body lotion.
The methodology has been explained with an example from real life and respondents were recruited purposively with quota sampling. The target segment for the
study was females within the age group of 2035 years, SEC A (based on the SEC
classification). A sample of 240 respondents could be collected. The research
revealed that the range of low rejection extends from Rs. 170 (what the consumers
want) up to Rs. 190 (what the manufacturer can go up to). The optimal price point
figured out was Rs. 190 for 250 ml Vivel Cell Renew. There are a multitude of
approaches one can take and the exact method depends on the particular circumstances of the request, but with this whole exercise, an attempt was made to model
the actual pricing which takes place in the real world and highlight the pricing
research as one of the core methodologies in custom research.
Keywords Optimal pricing model Van Westendorps price sensitivity meter
S. Chhabra (*)
Management Development Institute, Mehrauli Road, Sukhrali, Gurgaon 122 007, India
Springer India 2015
257
258
S. Chhabra
Introduction
From the viewpoint of the classical economist, price allocates goods and services in
the marketplace. For the consumer it represents the cost of a purchase in monetary
terms. For the seller it motivates a level of supply and acts to allocate economic
resources on the production side. Marketers have long acknowledged that the
pricing decision is one of the most important components of the marketing mix; the
theoretical attention paid to pricing is certainly not reflected by the wealth of techniques in the field of marketing research.
Zeithaml et al. (2006) proposed that price serves as a proxy for quality for
customers; therefore, it must be determined very vigilantly. Many authors have
identified the importance of pricing for every companys profitability, mainly
because it is the only element of the marketing mix that generates revenues for a
firm, whereas all other elements of the mix are associated with costs (Kotler et al.
2006). In addition, Shoemaker et al. (2006) suggested that pricing is an overriding
force in attracting attention and increasing sales and that it can also have major
influence on customer loyalty. Despite the aforementioned significance of pricing,
several authors have indicated that pricing is the most deserted element of the marketing mix (Avlonities and Indounas 2006; Hoffman et al. 2002).
The question of pricing new products acts as a key challenge for management
(Dean 1969). Research has focused on normative pricing strategies for new products (e.g., Noble and Gruca 1999), essentially skimming and penetration, which are
commonly used in practice (Lowe and Alpert 2010). The usage of these pricing
strategies for new product success has been investigated rather descriptively on a
diffusion level as part of a bundle of other strategic and tactical decisions (e.g.,
Hultink et al. 1998, 2000). However, in practice, the decision for either strategy is
often difficult (Lowe and Alpert 2010) and remains to be a matter of sophisticated
judgment (Dean 1969, p. 170). One important reason for the difficulty faced in
pricing decisions is the lack of knowledge concerning customer reactions to pricing
strategies. The market researcher, who is confronted with one or many valid questions, could be asked about consumers perceptions of and reactions to prices.
Market researchers have developed a number of attitude scales on price
consciousness. As noted by Gabor & Granger (1977), the price setter must know the
extent of price consciousness to determine the importance of pricing in the marketing mix variable, while price consciousness itself is not measurable, price recall has
been used in the past as a reasonable substitute. However, this substitution leads to
problems, because price recall is an indicator of price awareness, while price consciousness represents a deliberate effort on the part of buyers to search for lower
process (Lilien and Kotler 1983). The difference between actual price and recall
price (or price image) is of concern to the seller because it provides insight into the
buyers perception of value, as well as the potential response to actual price
adjustments.
Marketing research has long recognized the importance of price optimization.
Survey research can help explore those pricing questions. Survey pricing evaluation
20 Determining Optimal Price Point Using Westendorps PSM
259
can be thought of as a continuum that moves from quick and easy but less precise to
complicated but more accurate methods. There are four commonly used research
methods for obtaining data used to determine prices for new products:
The direct approach, where you simply ask a representative sample of their
willingness to pay (WTP)
Indirect methods such as the Gabor-Granger model (GG-model) based on data
elicited from respondents on their willingness to pay for a product innovation, a
service, or concept at various price points
Traditional van Westendorps model (VW model) where you ask a series of
questions that target the upper and lower price boundaries
Product/price mix methods, such as discrete choice, where you ask the sample of
respondents to choose between numerous product scenarios varied by feature set,
price, and brand
In this work we shall describe these methods briefly and then explicitly work on
van Westendorps model to determine the optimum price point of Vivel Cell Renew
body lotion (ITC product) for SKUs of 250 ml.
2
2.1
Literature Review
Direct Price Techniques
Direct methods are based on willingness to pay (WTP) estimation. In this approach
a simple open-ended question regarding WTP is asked for a specific product. The
respondents answer to the question: What is the highest price you would be willing
to pay for product X? This approach only works in special circumstances. Since real
money is on the line, respondents have an incentive to give realistic stated
WTP. There are advantages associated with this technique such as the data is easy
to collect and suitable for new products and little prior knowledge is required from
respondents. But this method suffers serious drawbacks. Particularly, it was observed
that respondents often overstate their price sensitivity. Also, though a little prior
knowledge is typically required, if the new product concept is very unusual, respondents may not have any notion what price range is appropriate.
2.2
Gabor-Granger Indirect Price Models
Indirect methods are generally more precise than direct methods as respondents are
confronted with more realistic scenarios. Gabor-Granger technique is a practical
and convenient pricing method to determine the maximum price a respondent is
willing to pay for a given product (Gabor and Granger 1965). GG-model is suitable
for a new product development. It aims to establish the maximum price each respondent is willing to pay for a given product using a series of predetermined price
260
S. Chhabra
points (Gabor and Granger 1965). For this method various price levels are set and
the product is described to a sample of respondents with a randomly chosen price
from the predetermined list attached.
The respondent is asked her willingness to purchase the product at that given
price. If the respondent is willing to purchase the product at that price, the product
is shown again but this time with a randomly chosen higher price from the predetermined price list and her willingness to purchase asked. If the respondent is not
willing to purchase the product at the first price shown, the product is again shown
to her but with a randomly chosen lower price from the predetermined list and her
willingness to purchase elicited. This pattern is repeated several times with lower
and higher prices taken from the predetermined price point list until the highest
price point a respondent is willing to pay is determined (Gabor and Granger 1965).
The approach is somewhat limited as price is not always a conscious variable,
competitive price awareness is not always high, and pricing often varies across
distributors (Gabor and Granger 1977). It is best suited for pricing situations that are
later in the product development cycle and the company has a clear idea of range of
prices they want to use.
2.3
Product/Price Mix Models
General conjoint method and discrete choice method (DCM) classically embrace
additional variables like covariates of brands, size, demographics, etc. DCM is best
in situations when simulating immediate response to competitive offerings, especially brand and price studies. Decisions are made on the basis of relatively few,
well-known, concrete attributes. Consumers make these decisions on the basis of
competitive differences among attributes given and the possible interactions between
the levels of different attributes of what the company wants to account for. This is a
realistic approach imitating actual choices people are faced with in the store.
As described by Akiva and Lerman (1985), DCM studies for pricing are
performed by asking a person to choose among competing products at different
prices. Alter the prices and/or product attributes and ask the respondent to choose
again. After which we can build a model from that data to predict the likelihood that
a person will choose a specific product given the relative prices of the products in
the test. Through experimental design, balanced (orthogonal) sets of choice tasks
are produced (Wedel and Kamakura 1999). The advantages of this approach is that
it is reflective of real-world marketplaces with competing products, it can put up
conditional variables, brands can be customized to match market reality, it avoids
impossible combinations and is easy to administer, and it can capture interactions
more efficiently than a full-profile design (Train 2003). The disadvantage of this
approach is that it is difficult to handle many attributes and also knotty to truly predict preference share (not market share), this approach assumes some awareness
and distribution, and the results are based on calibration which uses several assumptions that may not be realistic (Train 2003).
2.4
261
Van Westendorps Price Sensitivity Models
An extension of the Gabor-Granger technique is van Westendorps (VW) technique

created by Dutch economist Peter H. van Westendorp (VW model) in 1976 called
the price sensitivity meter. It is focused on finding an acceptable price which is a
quality indicator. Pricing and quality have a close association. In the work of Gabor
and Granger (1966) and Sowter et al. 1971, the relationship between price and
quality is specified via a limit concept (this relationship is known in the economic
literature as a reservation price). A consumers intention on purchasing a product in
a particular class has two price limits in mind: an upper limit above in which purchase will not be made because the good or service is too expensive and a lower
limit below in which purchase will not be made because the quality of the item is
suspect. Within the range created by these limits, price does not act as an absolute
barrier to purchase, as it does outside the range (Lilien and Kotler 1983). The VW
approach takes into account concerns about low prices possibly indicating low quality as well as too high pricing (Lipovetsky 2006).
According to van Westendorp (1976), the PSM is much connected with earlier
work and theories, such that it can be compared to psychophysical approaches and
techniques, techniques to study absolute thresholds in price, or the theory of reasonable prices. The VW approach is suitable for new product development, and it aims
to establish the limits of price thresholds. It is based on the assumption that reasonable prices exist for consumers in every category and for each perceived level of
quality within a category (Lipovetsky 2006). Consumer price decisions are made by
balancing value against price; and there is an upper and lower bound to the price a
consumer will pay for a product or service.
Data elicited in the VW process consists of the answers to four indirect questions to
calibrate price from different perspectives: Too Cheap at what price does this product
become too cheap that you would question its quality and not buy it? Cheap at what
price does this product start to seem cheap to you, that is, when does it start to seem like
a bargain? Expensive at what price do you perceive that the product is beginning to
get expensive, so that it is not out of the question, but you would have to give some
thought to buying it? Too Expensive at what price does this product become too
expensive that you would not consider buying it?
The PSM technique is most relevant when the product marketer needs the
flexibility of evaluating how the product will perform along a range of prices. If the
acceptable range of prices, according to the marketplace, fits with the expectation of
the marketer, it is interpreted as a sign to move forward with product development
(Lipovetsky 2006). Another key advantage of the PSM approach is cost, as fewer
respondents are required for further analysis.
Also, it permits to avoid imposing price points on respondents, it is best suited
for pricing situations that are very early in the product development cycle, and the
company doesnt really have a clear idea of the price range to play in (Lipovetsky
2006). It is simple for both the respondent and the researcher. From a survey administration perspective, only asking four questions to generate pricing information is a
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S. Chhabra
low burden for researcher. On the other hand, there are certain disadvantages as
well like respondents often overstate their price sensitivity, results can be unstable
as even small changes in the sample can result in large changes in the price curves,
and the range of acceptable price can be quite large. Since there is an inherent
assumption that price is a reflection of quality, the technique is not useful for a true
luxury good. The prices given by respondents are believed to represent the actual
out-of-pocket expenses. This permits the product marketer to gain some understanding of the effects of promotional activities (on-shelf price discounts or coupons). The PSM has already been applied by a lot of companies especially with
fast-moving consumer goods (coffee, margarine, beer, detergents, toilet tissue,
etc.), with services (newspaper subscription, hairdressers tariffs, etc.), and with
durables (electrical razors, sewing machines, mens suits, etc.).
3
3.1
Methodology
Assumptions
The assumption underlying PSM is that respondents are competent of envisaging a

pricing landscape and that price is an intrinsic measure of value or utility. Participants
in a PSM exercise are asked to identify price points at which they can infer a
particular value to the product or service under study. The PSM claims to capture
the extent to which a product has an inherent value denoted by price.
3.2
Approach
For each of the four price questions, the cumulative frequencies are plotted against
the current price on the same graph. Note that the standard method requires that two
of the four cumulative frequencies must be inverted in order to have the possibility
of four intersecting points. Conventional practice inverts the cumulative frequencies
for too cheap and cheap (see Fig. 20.1).
The general explanation of intersecting cumulative frequencies varies. A common description of the intersections is that the crossing of too cheap and expensive can be the lower bound of an acceptable price range (Wildner and Conklin
2003). Some describe this as the point of marginal cheapness or PMC. Similarly,
the intersection of the too expensive and cheap lines can be viewed as the upper
bound of an acceptable price range. An alternative description is the point of marginal expensiveness or PME. The range between these two points shows the area
of the price acceptable for most consumers (Westendorp 1976).
An intersection where there is generally more agreement is the point at which the
expensive line crosses the cheap line. This is described as the indifference
263
Fig. 20.1 Price sensitivity

model
price point or IPP. The IPP refers to the price at which an equal number of
respondents rate the price point as either cheap or expensive (Westendorp 1976).
Finally, the intersection of the too cheap and too expensive lines represents
an optimal price point or OPP. This is the point at which an equal number of
respondents describe the price as exceeding either their upper or lower limits.
Optimal in this sense refers to the fact that there is an equal trade-off in extreme
sensitivities to the price at both ends of the price spectrum (Westendorp 1976).
For the purpose of this study and to meet the research objective for this project,
we take a product from ITCs personal care brand Vivel which recently launched
Cell Renew a skin care regimen comprising a Face Moisturizer, Hand Crme, and
Body Lotion, targeted towards the mid-premium segment (based on SEC classification) of the market. Currently competing body lotions like Dove, Garnier, Lakme,
Lotus, Nivea, and Vaseline are available in the market at between Rs. 130 and
Rs. 270 for 250 ml. With the help of the PSM model, we would attempt to gauge the
price point at which the consumers intend to purchase the 250 ml bottle of Vivel
Cell Renew body lotion.
A two-step quantitative approach was undertaken to understand the pricing of
Vivel Cell Renew body lotion 250 ml (see Appendix A1 for questionnaire). Step
1 is an exercise on price sensitivity meter (PSM) for understanding the optimal
range of price, respondents were exposed to the Vivel Cell Renew pack and then the
PSM was conducted. Each respondent evaluated the price for the 250 ml SKU
through the PSM. Step 2 is finding out the purchase intention and price perception
at various price points. Post-PSM for each SKU, a few price points of VCR (Vivel
Cell Renew) were exposed to the respondent and their purchase intention and price
perception were gauged using a five-point Likert scale.
Respondents were recruited purposively with quota sampling in and around the
areas of Delhi. According to Malhotra (2004), quota sampling is a two-stage
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S. Chhabra
restricted judgmental sampling technique. The first stage consists of developing

control categories or quotas of population elements. In the second stage, sample
elements are selected based on convenience or judgments. This technique obtains
representative samples at a relatively low cost and gives greater convenience to the
interviewers in selecting elements for each quota (Malhotra 2004). A sample of 240
respondents could be collected in 2 weeks time. The target segment for the study
was females within the age group of 2035 years, SEC A (based on the SEC
classification).
Analysis
In this study, the PSM model indicates that consumers want the price of the 250 ml
SKU at Rs. 165 which marks the intersection of the too cheap and too expensive lines representing an optimal price point or OPP. This is the point at which
an equal number of respondents describe the price as exceeding either their upper or
lower limits (see Fig. 20.2).
But from the marketers point of view, the best price is the point at which the
expensive line crosses the cheap line which is between Rs. 175 and Rs. 180.
This is described as the indifference price point where respondents rate the price
point as either cheap or expensive. The upper threshold is between Rs. 190 and
Rs. 200, i.e., the point of marginal expensiveness. The lower threshold is between
Rs. 150 and Rs. 160, which is the point of marginal cheapness (see Fig. 20.2).
Now, to get to know the exact price for the marketer, we calculate the percentage
risk of rejection which is calculated as the percentage difference between price
points considered too cheap and price points considered too expensive. A price point
Fig. 20.2 PSM for Vivel Cell Renew body lotion
265

Table 20.1 Percentage rejection
Price points
Rs. 170
Rs. 180
Rs. 190
% rejection*
5.0
6.7
7.1
* % Rejection at price points considered too cheap OR too expensive
Rs. 200
17.5
Rs. 210
25.0
Table 20.2 Intention to purchase

Intention to purchase
Will definitely buy
Will absolutely buy
Rs. 170
94
91
Rs. 190
69
112
Rs. 225
22
47
Table 20.3 Price perception

Price perception
Priced just right
Priced just right/can be higher
Rs. 170
80
93
Rs. 190
64
63
Rs. 225
17
20
of around Rs. 190 is viable for 250 ml VCR. However, price at/above Rs. 200
increases the risk of rejection (see Table 20.1). From Table 20.1, we can see that with
a difference for price points between Rs. 190 and Rs. 170, the percentage rejection
is just 2.1 %. But with the change in price points between Rs. 200 and Rs. 190, the
percentage rejection is 10.4 %, and between price points Rs. 210 and RS. 200, it is
7.5 %. Up to Rs. 190 the incremental rejection is ~2 %. Beyond that it increases
significantly.
The intention to purchase data further supports that Rs. 190 as the most viable
price point (see Appendix A3). From Table 20.2, it is clear that there is a difference
for only 25 respondents for the option of will definitely buy between the price
points Rs. 190 and Rs. 170, but for the price points between Rs. 225 and Rs. 190,
the difference for the same option goes up to 47%. For the option will definitely/
probably buy, the gap increases to 65 respondents for Rs. 225Rs. 190 (see
Table 20.2).
For the price perception (see Appendix A3), Table 20.3 shows two options of
priced just right and priced just right/can be higher. The gap between the price
points clearly shows that Rs. 190 is the appropriate price as the gap for the option
price just right decreases from 24 to 47 respondents when the price rises from
Rs. 190 to Rs. 225.
Among the profile of rejecters, 156 people rejected at price Rs. 190 who belonged
to younger age group of 2029. Also, the rejecters were mainly Vaseline users
followed by Nivea at Rs. 190 (Table 20.4).
Therefore, from the above discussion, we can conclude that the range of low
rejection extends from Rs. 170 (what the consumers want) up to Rs. 190 (what the
manufacturer can go up to). The proportion of rejection is low and rejecters are
predominantly younger and Vaseline users. However, pricing VCR at/over Rs. 200
266
S. Chhabra
Table 20.4 Profile for

rejecters
Price points
Rs. 170
Age group
2029 years
78
3035 years
162
Most often used brand
Dove
19
Garnier
58
Lakme
62
Lotus
19
Nivea
39
Vaseline
43
Rs. 190
156
84
43
45
12
17
55
68
increases the risk of rejection significantly, that is, by 10.4 %. Thus, the 250 ml
Vivel Cell Renew SKU can be priced around Rs. 190, but price should be below Rs.
200 (Table 20.5).
Conclusion, Limitations, and Future Study
Pricing research is one of the core methodologies in custom research. There are a
multitude of approaches one can take and the exact method depends on the particular circumstances of the request. We described different direct and indirect
techniques and explained van Westendorps model with application in practical
marketing research for evaluation of optimal prices for products like Vivel Cell
Renew body lotion. The optimal price point figured out was Rs. 190 for 250 ml
Vivel Cell Renew (Table 20.6).
The classic PSM analysis can provide first indications towards optimal prices.
Nonetheless, this traditional analysis method based on intersections needs to be
modified and complemented to deduce concrete recommendations for applied price
management. While the PSM approach has the nice property of forcing the consumer
to think about rational price ranges, it may artificially make them overly price
sensitive by forcing internally rational responses. That is, consumers might think
that a laptop for Rs. 50,000 is too much, when in reality they might defer payment
by using a credit card. The intersections are not linked to the target system of a
company. A company intends to optimize either profit or turnover, but none of the
intersections have a link with the companys turnover or profit goals (Hoffman et al.
2002; Wildner and Conklin 2003).
Further, this technique works well when testing experience-related products like
skin cream or razor, but modifications to the technique may be useful when the
product is a new to the world idea and consumers do not have a precedent for
determining what price would be reasonable.
267
Appendices
Appendix A1: Questionnaire
From the given price Range please choose a single appropriate answer for the
questions given below:
At what price does this product become too cheap, that you would question its quality
and not buy it?
At what price does this product start to seem cheap to you, that is, when does it start
to seem like a bargain?
At what price do you perceive that the product is beginning to get expensive, so that
it is not out of the question, but you would have to give some thought to
buying it?
At what price does this product become too expensive, that you would not consider
buying it?
At the given prices points please indicate your intention to buy Vivel Cell Renew
Will not buy it (1) May Or May Not Buy It (2) Will Probably Buy It (3) Will
Definitely Buy It (4) Will Absolutely Buy It (5)
Rs 150
Rs 170
Rs 190
Rs 225
268
S. Chhabra
At the given prices points please indicate your price perception to buy Vivel Cell
Renew
It Should Be Priced Much Lower (1) It Should Be Priced Slightly Lower (2)
It Is Priced Just Right (3) It Can Be Priced Higher (4) Priced just right/Can be
higher (5)
Rs 150
Rs 170
Rs 190
Rs 225
AGE
MOST OFTEN USED BRAND
Appendix A2: Cumulative Percentage

at Different Price Levels
Table 20.5 Cumulative percentage at different price levels
Column 1
Rs 130
Rs 140
Rs 150
Rs 160
Rs 170
Rs 180
Rs 190
Rs 200
Rs 210
Rs 225
Rs 240
Rs 250
Rs 260
Rs 270
Too cheap
100 %
20 %
10 %
3%
3%
2%
0%
0%
0%
0%
0%
0%
0%
0%
Cheap
100 %
99 %
85 %
50 %
33 %
21 %
12 %
7%
1%
1%
0%
0%
0%
0%
Expensive
0%
0%
3%
8%
19 %
33 %
46 %
63 %
73 %
83 %
89 %
97 %
100 %
100 %
Too expensive
0%
0%
0%
1%
2%
5%
7%
17 %
25 %
36 %
45 %
58 %
66 %
100 %
269
Appendix A3: Intention to Purchase

and Price Perception at Different Price Levels
Table 20.6 Intention to purchase and price perception at different price levels
Price points
Sample size
Intention to purchase
Will not buy it
May or may not buy it
Will probably buy it
Will definitely buy it
Will absolutely buy it
Price perception
It should be priced much lower
It should be priced slightly lower
It is priced just right
It can be priced higher
Priced just right/can be higher
Rs. 150
240
Rs. 170
240
Rs. 190
240
Rs. 225
240
6
15
30
89
100
5
10
40
94
91
14
12
34
68
112
65
34
72
22
47
5
20
65
27
123
9
48
80
10
93
31
65
64
17
63
67
110
17
26
20
References
Akiva MB, Lerman SR (1985) Discrete choice analysis. MIT Press, Cambridge
Avlonities G, Indounas K (2006) Pricing practices of service organizations. J Serv Mark
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Dean J (1969) Pricing pioneering products. J Ind Econ 17(3):165179
Gabor A, Granger C (1965) The pricing of new products. Sci Bus 3:312
Gabor A, Granger CW (1966) Price as an indicator of quality: report on an enquiry. Economics
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Gabor A, Granger CWJ (1977) Pricing, principles and practices. Heinemann Educational, London
Hoffman KD, Turley LW, Kelley SW (2002) Pricing retail services. J Bus Res 55(12):10151023
Hultink EJ, Griffin A, Robben HSJ, Hart S (1998) In search of generic launch strategies for new
products. Int J Res Mark 15(3):269285
Hultink EJ, Hart S, Robben HSJ, Griffin A (2000) Launch decisions and new product success: an
empirical comparison of consumer and industrial products. J Prod Innov Manag 17(1):523
Kotler P, Bowen J, Makens J (2006) Marketing for hospitality and tourism, 4th edn. Prentice Hall,
Upper Saddle River
Lilien GL, Kotler P (1983) Marketing decision making: a model-building approach. Harper &
Row, New York
Lipovetsky S (2006) Van Westendorp price sensitivity in statistical modelling. Int J Oper Quant
Manag 12(2):141156
Lowe B, Alpert F (2010) Pricing strategy and the formation and evolution of reference price perceptions in new product categories. Psychol Mark 27(9):846873
Malhotra NK (2004) Marketing research: an applied orientation. Prentice Hall, Upper Saddle
River
Noble PM, Gruca TS (1999) Industrial pricing-theory and managerial practice. Mark Sci
18(3):435454
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Shoemaker S, Lewis R, Yesawich P (2006) Marketing leadership in hospitality and tourism, 4th
edn. Prentice Hall, Upper Saddle River
Sowter AP, Gabor A, Granger CW (1971) The effect of price on choice: a theoretical and empirical
investigation. Appl Econ 3(3):167181
Train KE (2003) Discrete choice methods with simulation. Cambridge University Press, New York,
595
Van Westendorp PH (1976) NSS-price sensitivity meter (PSM)-a new approach to study consumer
perception of price. In: Proceedings of the 29th ESOMAR congress (pp. 139167)
Wedel M, Kamakura WA (1999) Market segmentation: conceptual and methodological foundations. Kluwer Academic Press, New York
Wildner R, Conklin M (2003) Price thresholds and prospect theory. In: The 12th annual advanced
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Zeithaml V, Bitner M, Gremler D (2006) Services marketing integrating customer focus across the
firm, 4th edn. McGraw-Hill, New York
Chapter 21
Do Middle-Level Managers Have a Role

in Strategy Formulation and Implementation?
Insights into an Indian Public and Private
Sector Organization
Meeta Dasgupta
Abstract Purpose: As the Indian economy struggles to recover, the corporate balance
sheets have become vulnerable. The challenge before every Indian organization,
facing threat from competition, global economic slump, and demand-supply mismatch,
is to sustain and take strategic decisions that stop further downward revision of
growth forecasts. The key to managing in recovering markets is to get more actors
involved in the formulation and implementation of strategic decisions. The structural
position of middle-level managers in organizations helps them to be effective in
various strategic roles. The purpose of this paper is to explore how middle-level
managers contribute to the formulation and implementation of strategic decisions
that impact organizational performance. Quest is to find out if the roles differ or are
similar in a private and a public sector organization.
Design/Methodology/Approach: Discussions with around 12 middle-level
managers in an Indian Power Solution Company (private sector organization) and
around 15 middle-level managers in an Indian Power Transmission Company (public
sector organization) helped to present a narration of various roles of middle-level
managers and draw a comparison.
Findings: Although most of the middle-level managers do not take corporate
strategy decisions, in their various roles, they are in a position to influence many
decisions. The study brings out the relative importance of the various roles.
Research Limitations/Implications: It being a qualitative study is based on two
case studies, one of an Indian private sector organization and the other of an Indian
public sector organization. It can be extended to quantitatively test the relationship
between different roles and organizational performance.
Practical Implications: The findings support the contribution of middle-level
managers in formulation and implementation of strategic decisions. It provides cue
to practitioners to leverage the entrepreneurial spirit and mindset of middle-level
managers, a spirit that enables organizations to wade through difficult times.
M. Dasgupta (*)
Strategic Management, Management Development Institute, Gurgaon, India
Springer India 2015
271
M. Dasgupta
272
Originality/Value: The study fills a gap in literature by exploring the role of

middle-level managers in an Indian public sector organization and by doing a
comparative analysis of the roles in an Indian public and private sector organization.
Keywords Middle-level managers Strategy formulation Strategy implementation
Strategic decisions Public sector organization Organizational performance
Case study Recovering markets Recovering economies Middle management role
Introduction
Although global growth is projected to be slightly higher in 2014, at around 3.7 %,

rising to 3.9 % in 2015, the revisions to growth forecasts in some of the economies
highlight the impending risk of negative growth. The growth in emerging markets
and developing economies is dependent on a strong external demand from the
developed economies. The need of the hour is also to push ahead with various
structural reforms that uplift the performance of corporate in these economies
(World Economic Outlook 2014).1
Turbulent environments being dynamically heterogeneous, it is critical to conceptualize strategies that can help the firm to sustain its competitive advantage.
Strategic decisions in a globalized era that affects lives beyond business and
commerce need to be taken that encompass the breadth and depth of an organizations dynamic competency. Not only the tacit knowledge of individuals becomes
important but top-down hierarchical structures have become redundant for creating
and harnessing the organizational brain (Subbanarasimha 2001; Mishra and Kar 2013).
The key to managing in recovering markets is to get more actors involved in the
formulation and implementation of strategic decisions. This helps to gain acceptance
from other members of the organization and also makes them understand how a
change would benefit the organizational goals (Westley 1990; Moore et al. 2010;
Dandira 2011). The structural position of middle-level managers in organizations helps
them to be effective in various strategic roles, as implementers of top-managementdefined strategic changes and as relationship managers (Shi et al. 2009; Kuyvenhoven
and Buss 2011).
The Indian economy in 2013 had shown a growth rate slightly faster than
expected, but the corporates are concerned about the high rate of inflation and the
high cost of credit that is making their balance sheets vulnerable.2 Although literature
1
World Economic Outlook Update, Is the Tide Rising? Retrieved from http://www.imf.org/external/
pubs/ft/weo/2014/update/01/on February, 14, 2014
2
Indian Economy Struggles to Recover, Nov 29, 2013. Retrieved from http://www.ft.com/intl/
cms/s/0/bb880a94-5902-11e3-a7cb-00144feabdc0.html on February, 14, 2014
21
Middle Level Managers and Strategy
273
brings out the myriad roles played by middle-level managers in an organizations

strategy (Embertson 2006; Huy 2011), research exploring the role of Indian
middle-level managers is scarce. The article endeavors to fill this gap.
Middle-Level Managers and Strategic Decisions:

Theoretical Model
Although the term middle-level management is understood rather broadly, it extends

to managers located below top managers and above first-level supervision in the
hierarchy (as cited in Wooldridge et al. 2008). According to Floyd and Wooldridge
(1992, 1997), middle-level managers are not just simply implementers of strategy
but synthesizers, champions, and information processors. As a networker the role of
the middle-level manager is to gather, synthesize, and communicate information
from/to the top and operational level. In case of emergent strategic models, the contribution of middle-level managers is vital as they are the first to recognize strategic
problems and opportunities (Wooldridge and Floyd 1990; Floyd and Lane 2000).
As a negotiator the role is to sell top managements initiatives to the operational
level and debate and discuss the intended business plans of the top management
(Currie 1999). As an entrepreneur the role of middle manager is to search for new
opportunities, identify different problems, and champion new ideas (Lassen et al.
2009; Kuratko et al. 2005). As an implementer the role of the middle-level manager
is to coordinate different strategic programs, motivate lower-level employees, and
monitor activities to support the top management (Mair and Thurner 2008; McCarthy
et al. 2010; Savanevicience and Stankeviciute 2011).
A balance of the different roles helps a middle-level manager to contribute to
efficient strategy formulation and implementation. This in turn has an impact on
organizational performance. Figure 21.1 gives a pictorial presentation of the linkage
between the different roles and organizational performance.
3
3.1
Research Design
Case Background
The objective has been to explore and understand the role of middle-level managers
in the formulation and implementation of strategic decisions. The endeavor has
been to provide a rich description of their role in an Indian private and a public sector
organization and not to measure the phenomenon. Therefore, qualitative paradigm
of research has been adopted. Because focus is on processes (how something
M. Dasgupta
274
Role of Middle Level Manager
Networker
Negotiator
Entrepreneur
Efficient Formulation and

Implementation of Strategic
Decisions
Organizational
Performance
Implementer
Fig. 21.1 Theoretical model
happens) rather than on the outcomes or results obtained (Patton 1990), positivist
case study research strategy has been adopted for the study where the aim is to
investigate a contemporary phenomenon within its real life context (Yin 2003;
Eisenhardt and Graebner 2007).
Keeping the research objective in mind, a private sector company and a public
sector company were chosen as the unit of analysis. Su-Kam Power Systems
Limited, Indias most admired power solution provider, was selected as the private
sector organization, whereas Power Grid Corporation of India Limited, the Central
Transmission Utility (CTU) of the country under the Ministry of Power, was chosen
as the public sector organization. Apart from power being one of the key pillars in a
countrys infrastructure, the Indian power industry is also on a growth trajectory.
Additionally, it was felt that the organizations were accessible and offered the
possibility of analyzing and studying the topic that was the focus of the study
(Lavarda et al. 2010).
3.2
Data Collection and Analysis
To increase the reliability of the study, a case study protocol was used to collect
information. Purposeful and chain sampling (Patton 1990) was done in order to
conduct in-depth interviews, based on semi-structured open-ended questionnaire, with
chief managers and deputy general managers in the organization, that is, employees
who occupy middle-level management position in the organization. Observations
and various reports available on the web also provided precious information which
was used to triangulate with the responses of the interviews.
The coding procedure suggested by Miles and Huberman (1994) guided in
the process of creating conceptual labels for the phenomenon observed.
21
275
Conceptually clustered matrices (Miles and Huberman 1994), with defined rows
and columns, based on the constructs/dimensions appearing in the case were used
to display and analyze data. These matrices were analyzed to understand the
phenomenon and draw explanations from the empirical evidence. The matrices
were also used to identify the relative importance of the distinct roles.
4
4.1
Findings
Case Analysis
The middle-level managers in the private sector organization understood that the
strategic priority of the organization was to expand and be known as a complete
solution provider rather than as a power backup company. They were unanimous
that decisions involving expansion of the company were reserved for the top-level
management. This might be due to the fact that decisions involving growth and
expansion are considered to be risky decisions which have a major impact on
organizational effectiveness, have a relatively high cost, and are difficult to reverse
(Bryant and Stensaker 2011). But they also shared that they had played a critical
role in the growth story of the organization. The company had its own R&D team
which had got more than 70 patents.3 The company had in the years 20112012 and
20122013 recorded 700 crores and 1,200 crores of revenues, respectively.4
All the middle-level managers interviewed in the public sector organization were
unanimous with respect to their understanding of change in the competitive scenario
in the power transmission industry and how operational efficiency/costs had become
important to win transmission projects. According to them, they help to optimize
costs on various projects and help Power Grid to be competitive in the current
scenario. Over the years, the financials of the company improved from 20082009
to 20122013. Profit after depreciation but before tax increased from Rs.2,228.57
crores to Rs.5,644.86 crores, dividends payout increased from Rs. 505.08 crores to
Rs.1,273.18 crores, earnings per share increased from Rs.4.02 to Rs.9.15, and net
profit to capital employed increased from Rs. 5.95 to Rs. 8.00.5
Appendix gives a brief narration, based on interview transcripts, of the role of
middle-level managers both in the private and public sector organizations.
3
Su-Kam Power Systems. As retrieved from http://en.wikipedia.org/wiki/Su-kam_Power_Systems
on August 6, 2013
4
Inverter maker Su-Kam plans green energy foray. As retrieved from http://www.businessstandard.com/article/companies/inverter-maker-su-kam-plans-green-energy-foray113011400108_1.html (Retrieved August 12, 2013)
5
Annual Report 201213. As retrieved on November 21, 2013, from http://www.powergridindia.
com/layouts/PowerGrid/WriteReadData/file/Investors/Annual_Report/AR%202012_13.pdf
276
M. Dasgupta
Discussion
5.1
Understanding the Roles
The role the middle-level managers play as a networker, both in the public and
private sector organizations, is evident from the comments appearing in Appendix.
They believe that as middle-level managers, they play an important role with
respect to gathering information from different sources, interpreting/analyzing the
information, and communicating it to the top-level management. The middle-level
managers believe that they play a very important role, both as a link between the top
management and the lower-level management and as a link of top management with
the market scenario (Raman 2009; Lavarda et al. 2010). This they believe helps
them to keep the top management apprised with respect to the latest in technology,
financing options, competition, regulations, etc.
Middle-level managers both in the public and private sector company feel that as
a negotiator, their role is restricted to convincing top management to change benchmarks, only if time and resources permit. The freedom given to them with respect to
questioning top managements intended business plans was minuscule. An overemphasis on the role as a negotiator might lead to conflict of interest between the top
management teams and the middle-level managers (as cited in Raes et al. 2011).
As the Appendix exhibits, middle-level managers play an important role of an
entrepreneur. Identifying new opportunities/alternative approaches is a critical area
of responsibility for them. According to them, they initiate new ideas, identify gaps,
and propose new possibilities for approval to the top management. They also evaluate
ideas suggested by the operational-level employees. This helps them to come up with
various optimum solutions (Kanter 2004; Ren and Guo 2011).
As an implementer, the middle-level managers play the most important role of
monitoring implementation activities and tracking performance. They serve as nodal
officers who help in coordinating various tasks. Setting internal benchmarks and
translating them into action plans, maintaining quality, again forms an important
part of their role as an implementer. Arranging for resources for smooth implementation of various activities and coaching employees as and when required are other
important activities done by them (Lavarda et al. 2010; Salih and Doll 2013).
5.2
Comparative Analysis of Public and Private Company
5.2.1
Relative Importance of Different Roles
Interestingly, the findings show that middle-level managers both in the private and
public sector organizations agree with respect to the relative importance of their
roles in the formulation and implementation of strategic decisions.
Table 21.1 gives a synopsis of the relative importance of the roles in the public
and private sector organizations.
As the table exhibits, the two most important roles of the middle-level managers
with respect to the formulation and implementation of strategic decisions are that of
21
277
Table 21.1 Cross company role comparison

Private
Public
Networker
Very important
Very important
Negotiator
Less important
Less important
Entrepreneur
Important
Important
Implementer
Very important
Very important
Table 21.2 Networker activities

Activities
Private
Public
Link/interface between top and operational levels
*
*
Gathering information about market, customers, competitors, etc.
*
*
Communicating top management perspective/strategic direction
*
*
to operational-level managers
Synthesizing and communicating information across organization
*
*
Link with external stakeholders
*
*
* signifies that the managers exhibit the role (based on analysis and interpretation of data collected).
Table 21.3 Entrepreneur activities

Activities
Search for new opportunities
Identify different problems
Propose programs or projects to higher-level managers
Evaluate the merits of new proposals
Champion innovative ideas
* signifies that the managers exhibit the role (based on analysis
collected).
Absence of * signifies that the managers do not exhibit the role.
Private
*
*
*
Public
*
*
*
and interpretation of data
a networker and that of an implementer. They also give importance to their roles as
entrepreneurs.
5.2.2
Exploring Activities Under Different Roles
As the role of middle-level managers as negotiators in the organization is minuscule,

Tables 21.2, 21.3, and 21.4 have been used to further detail the different activities
performed by middle-level managers in the role of networker, entrepreneur, and
implementer. The narration given by middle-level managers of their role in Appendix
and literature has been used to derive the respective set of activities.
As is evident from Table 21.2, managers of both public and private sector
organizations exhibit similarity with respect to the activities performed by them as
a networker.
As is evident from Table 21.3, both sets of managers as entrepreneurs are primarily
involved with identifying new opportunities and proposing to the top management.
Evaluation of innovative projects and ultimate championing of the ideas is the
domain of the top-level management.
278
M. Dasgupta
Table 21.4 Implementer activities

Activities
Private
Team formation
*
Motivating/encouraging employees for performance
*
Delegating roles and responsibilities
*
Monitoring/tracking performance
*
Coaching/training employees
* signifies that the managers exhibit the role (based on analysis and interpretation
collected).
Absence of * signifies that the managers do not exhibit the role.
Public
*
*
*
*
*
of data
Table 21.5 Linking roles to organizational performance

Roles
Networker
Entrepreneur
Implementer
Organizational performance
Helps the middle-level managers keep the top management, when
taking strategic decisions, informed of the latest. This improves
organizational performance
Helps the middle-level managers identify and propose new
opportunities to top management. These proposals when approved help
to improve organizational performance
Leads to efficient and timely implementation of strategic decisions.
Helps to cut cost overheads and improve organizational performance
As is evident from Table 21.4, managers of both public and private sector
organizations exhibit similarity with respect to the activities performed by them as
an implementer.
5.2.3
Linking Roles to Organizational Performance
The findings from the cases suggest that middle-level managers play a crucial role
in the formulation and implementation of strategic decisions. Their involvement has
led the company to improve performance with respect to sales targets and cost
optimization (Wooldridge and Floyd 1990).
Table 21.5 links the different roles of the middle managers to organizational
performance.
Based on the above, the following propositions can be made:
Proposition 1: As networkers in the formulation and implementation of strategic
decisions, middle-level managers positively influence organizational performance.
Proposition 2: As entrepreneurs in the formulation and implementation of strategic
Proposition 3: As implementers in the formulation and implementation of strategic
21
Conclusion and Directions for Future Research
279
It can be said that although most of the middle-level managers do not take corporate
strategy decisions, in their roles as networker, entrepreneur, and implementer, they
are in a position to influence many decisions. In the current scenario where the
balance sheets of corporate are under risk because of competition, economic slump,
and demand-supply mismatch, middle-level managers can be instrumental in
bringing about a change. Due to increased training and operational responsibility,
the cases exhibit an increased confidence of the middle-level managers to have
myriad roles. In interaction with the top management, they have a dual role of
implementer/co-designer. In interaction with the subordinates, they have one or
more roles as coordinator, motivator, coach, or team developer (as cited in Buss and
Kuyvenhofen 2011).
The study has both managerial and theoretical implications. Firstly for the top
management, this study serves as an indicator that efforts need to be made to
involve middle-level managers at various stages of the strategy process. The
middle-level managers confidence of their role in championing new ideas could
be leveraged by top-level management. According to Kanter (2004), middle
managers are crucial to bringing in innovation, and successful implementation of
changes in an organization is made possible through the use of efficient middle
managers. The need to design work practices wherein middle-level managers are
given the ownership to design and implement new initiatives is an important
practitioner implication of this study. The top-level management in Indian private
and public sector organizations needs to work on this. On the other hand, this
study can serve as a motivator for middle-level management that their role in the
organization is substantial and not nominal. Their active involvement in the strategy
process can lead companies to improve performance. The research contributes to
literature by exploring the role of middle-level managers in the formulation and
implementation of strategic decisions in Indian organizations, public and private
sector organizations.
The research, however, suffers from the limitation of being based on two case
studies and results; therefore, it cannot be generalized. It can be extended to multiple case studies from different industries and geographies. A longitudinal study can
also be conducted to understand if the role of middle-level managers evolves with
time. The research can be extended to quantitatively test the relationship between
different roles and organization performance.
Note
This study is part of a larger study being conducted by the researcher at Management Development
Institute, Gurgaon.
280
M. Dasgupta
Appendix
Networker
Private sector organization

Attending frequent meetings with
top management
Communicating sales target to be
achieved to lower levels
Preparing minutes of meeting
to be circulated to the top- and
operational-level managers
Maintaining a comparative analysis
of sales across regions
Taking directions from top
management compiling data taken
from subordinates
Maintaining transparency between
top management and lower levels
Checking credibility of suppliers and
giving feedback to R&D/production
department
Keeping track of changes in market
Negotiator
Entrepreneur
Floating message to the top

management with respect to
limitations of a decision
Giving views whether or not a
particular objective can be achieved
and also specifying areas where
systems might fail
Ensuring proper pipeline of products
is maintained
Taking feedback from customers
and proposing changes to
top management
Introducing attractive offers in cases
where market reacts unfavorably
to our strategy
Suggesting new products to the
top management
Proposing new ideas or suggesting
changes in policies
Identifying and suggesting new
supply sources
Public sector organization

Taking inputs from site and
providing inputs to site
Intimating top-level management
after analyzing information
Making funds available at
competitive rates after evaluating
commercial financing options
Interacting with external
stakeholders for the preparation
of legal documents
Brainstorming with top
management giving competitive
tariffs after collecting information
from various sources
Bringing about awareness in
personnel about competition
Serving as a nodal point between
various departments
Preparing detailed project report
after consulting with leading
manufacturers and regulators
Listening to ideas suggested by
operational-level employees
Bringing in awareness on world
standards
Convincing top management
to change benchmarks or relax
deadlines in case time and resources
permit, usually not entertained
Getting involved in analysis,

identifying gaps, and suggesting
options
Suggesting new options to the boss
who might take it to the top-level
management
Initiating ideas for new contracts,
suggesting system improvement
procedures
Putting up cases to the top
management for approval
(continued)
21
Implementer
Private sector organization

Making teams, assigning roles, and
switching responsibilities as required
Ensuring proper person is appointed
for support in critical areas
Training all employees on the team
and telling people who to contact
when required to clear doubts
Visiting frequently different regions
to keep track of performance
Monitoring to ensure that strategies
are implemented in the correct way
Keeping a check of the information
being given by operational-level
managers to lower-level employees
Taking decisions to increase output
of people
281
Public sector organization
Serving as the nodal officer and
giving delegation of power
Monitoring KPIs based on set
targets, trying to get clear outcomes
Ensuring adequate delegation
of power
Monitoring project implementation
so as to reduce costs of projects
Fixing internal benchmarks/
standards, deciding framework/
scope of work
Informing management
and exploring alternative route
in case of fallout
Maintaining quality and
expediting work
Handling problems raised by site,
different departments
Taking approval from top
management with respect to
resources
Constantly providing guidance
Reviewing and configuring the
system; preparing agenda for
implementation
Coordinating with top management
for meetings that need to be held
with the regulatory body
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Chapter 22
ERP Business Solutions Acceptance

in Companies
Simona Sternad Zabukovek and Samo Bobek
Abstract Managing in recovering markets is focused on the improvement of
business performance. Enterprise resource planning (ERP) business solutions are
key enablers for transforming business processes which lead to better business performance. Companies are facing the challenge of how to improve the use of ERP
business solutions by its employees, and therefore, understanding of factors that
impact ERP acceptance by employees is very important. Technology acceptance
model (TAM) is one of the most widely used models for explaining the behavioural
intention and actual usage and can improve understanding of how influence on
actual usage could help increase efficiency and effectiveness of business solutions
and other solutions use. This paper analyses existing extensions of TAM regarding
ERP business solutions acceptance in organisations and proposes further factors
which are needed for more comprehensive explanations of ERP business solutions
acceptance. The cognitive construct of work compatibility is included in the model
and the construct of extended use which replaces the construct of actual use is introduced. Furthermore, the impact of cognitive construct of work compatibility,
solutions usefulness and solution ease of use on attitude towards using the solution
are explained and the construct of extended use of business solution is discussed.
Survey data has been collected from ERP business solutions users in companies
where the ERP system has been in use for more than 1 year, and therefore, the solutions use can be defined as a mature one. The research model was analysed by using
the PLS approach and some key findings are presented.
Keywords Business information solutions Enterprise resource planning (ERP)
Technology acceptance model (TAM) ERP acceptance ERP use Partial least
squares (PLS) ERP business solutions acceptance in companies
S.S. Zabukovek (*) S. Bobek

Springer India 2015
283
284
S.S. Zabukovek and S. Bobek
Introduction
Modern business information solutions such as enterprise resource planning (ERP),

customer relationship management (CRM), supply chain management (SCM) and
others are in most cases bought from business information solutions vendors by
companies. In most cases they are transforming business processes and how organisations operate. Although the most important contributions of business information
solutions are that they significantly reduce the time to complete business processes
and help organisations share information (Lee et al. 2010), they also usually offer a
better work environment for their organisational workers as they are given more
efficient system to work with. It is widely recognised that business information
solutions only provide organisations real benefits if users accept and use them
extensively during daily tasks. Even more, the users perceptions play a critical role
in determining whether a business solution is implemented effectively and used to
its maximum capacity, even that those business solutions are mandated for use.
To improve the efficiency and effectiveness of business solutions use, organisations need to be aware of factors that impact user satisfaction. Technology acceptance model (TAM) is one of the most widely used models for explaining the
behavioural intention and actual usage and can improve our understanding of how
influence on actual usage could help increase efficiency and effectiveness of business solutions and other solutions use (Shih and Huang 2009).
The purpose of this paper is to discuss TAM in the context of business solutions
acceptance with a focus on ERP business solutions. Some extensions to the TAM are
presented and explained. Survey data has been collected from ERP business solutions users in companies where the ERP system has been in use for more than 1 year,
and therefore, the solutions use can be defined as a mature one. The research model
was analysed by using the PLS approach and some key findings will be presented.
Technology Acceptance Models (TAMs)

and Business Information Solutions
Several theoretical models have been used to investigate the viewpoints of acceptance
and use of new information technology (IT) (Venkatesh et al. 2003). The theory of
reasoned action (TRA) (Fishbein and Ajzen 1975) is a fundamental theory used to
explain human behaviour (Venkatesh et al. 2003). The TRA has been applied into
the theory of planned behaviour (TPB) (Ajzen 1991) and into the theory of technology acceptance model (TAM) (Devis et al. 1989). Numerous empirical studies have
found that TAM consistently explains a substantial proportion of the variance (typically about 40 %) in usage intentions and behaviour, and the TAM compares favourably with alterative models such as the theory of reasoned action (TRA) and the
theory of planned behaviour (TPB) (Davis et al. 1989; Venkatesh and Davis 2000;
Legris et al. 2003). TAM has become well established as a robust, powerful and
22
ERP Business Solutions Acceptance in Companies
285
parsimonious model for predicting user acceptance (Venkatesh and Davis 2000;
Lu et al. 2003; Liu and Ma 2006) and so among the theoretical models is most
widely used by IS/IT researchers (Davis 1989; Davis et al. 1989; Amoako-Gyampah
and Salam 2004; Lee et al. 2010). The key purpose of TAM is to provide a basis for
tracing the impact of external factors on internal beliefs, attitudes and intentions
(Davis et al. 1989). The two central hypotheses in TAM state that perceived usefulness (PU) and perceived ease of use (PEOU) positively influence an individuals
attitude towards using a new technology (AT), which in turn influences his or her
behavioural intention (BI) to use it. Finally, intention is positively related to actual
use (AU). TAM also predicts that perceived ease of use (PEOU) influences on perceived usefulness (PU), as Davis et al. (1989, p. 987) put it, effort saved due to
improved perceived ease of use may be redeployed, enabling a person to accomplish more work for the same effort.
Business solutions especially ERP business solutions have many characteristics
that require extensions of the basic TAM. By definition ERP business solutions are
integrated, all-encompassing, complex software designed to support the key functional areas of an organisation (Adam and Sammon 2004). They are high-tech and
very complex and they involve large numbers of users nearly all employees of the
company. ERP business solutions implementations almost always require business
process reengineering, because of the need to adopt the organisational processes to
match the capabilities of the ERP system (Amoako-Gyampah and Salam 2004). The
impact of ERP systems on their users and their acceptance and/or refusal have been
recognised as two of the key factors of ERP implementation success and later ERP
business solutions use.
A literature review of past ERP studies regarding TAM indicates that few studies
have investigated ERP user acceptance and usage. Research shows that a small
number of researches have been published and all of them expose small numbers of
determinants (external factors) or cognitive factors which could have an influence
on ERP acceptance and usage in different phases of an ERP system life cycle (see
Table 22.1).
But to assess if TAM is suitable for explaining end users acceptance in the ERP
context, we need to expose relationships defined by TAM in the ERP context. TAM
has been tested primarily on technologies that are relatively simple to use (e.g.
e-mail, word processors) and is not mandatory to use by users. ERP usage is characterised as mandatory (Nah et al. 2004). All researchers who examined ERP acceptance and usage through TAM, except Nah et al. (2004), had focus on external
factors which have influence on cognitive constructs (see Table 22.1). Because of
that they exclude relations between basic constructs of TAM in the context of ERP
which can be seen in Table 22.2.
Regardless of ERP complexity and ERP implementation failure, very few studies
have been conducted regarding technology acceptance especially those dealing with
autonomous ERP users and including more cognitive constructs. Our study clarifies
the importance of factors leading users to extended usage of ERP systems.
286
Table 22.1 ERP literature review regarding TAM

Reference
Nah et al. (2004)
AmoakoGyampah and
Salam (2004)
ShiversBlackwell and
Charles (2006)
Bradley and Lee
(2007)
Hsieh and Wang

(2007)
Kwahk and Lee
(2008)
Bueno and
Salmeron (2008)
Uzoka et al.
(2008)
Sun et al. (2009)
Shih and Huang

(2009)
Focus
They tested the impact of four cognitive constructs
(perceived usefulness, perceived ease of use,
perceived compatibility and perceived fit) on
attitude towards using ERP system and symbolic
adoption
Their study evaluated the impact of one belief
construct (shared beliefs in the benefits of a
technology) and two technology success factors
(training and communications) on perceived
usefulness and perceived ease of use in one global
organisation
They research student readiness for change
(through gender, computer self-efficacy and
perceived benefits of ERP) on behavioural
intention regarding the ERP implementation
They investigate through case study the
relationship between training satisfaction and the
perceived ease of use, perceived usefulness,
effectiveness and efficiency in implementing an
ERP system at a midsized university
They research the impact of perceived usefulness
and perceived ease of use on extended use
They examined the formation of readiness for
change (enhanced by two factors: organisational
commitment and perceived personal competence)
and its effect on the perceived technological value
of an ERP system leading to its use
They develop a research model based on TAM for
testing the influence of the critical success factors
(top management support, communication,
cooperation, training and technological
complexity) on ERP implementation
They extended TAM to research the selection of
ERP by organisations using factors such as the
impact of system quality, information quality,
service quality and support quality as key
determinants of cognitive response, which ERP
system to purchase/use
They extended IT usage models to include the role
of ERPs perceived work compatibility in users
ERP usage intention, usage and performance in
work settings
Their study attempts to explain behavioural
intention and actual use through incorporated
additional behavioural constructs: top management
support, computer self-efficacy and computer
anxiety
Phase: ERP system

life cycle
Post-implementation
(stabilisation phase)
Implementation
Implementation
Implementation
Post-implementation
(routine stage)
Post-implementation
(stabilisation stage)
Implementation
Selection
Post-implementation
(routine stage)
Post-implementation
(routine stage)
(continued)
22
287

Reference
Calisir et al.
(2009)
Youngberg et al.
(2009)
Lee et al. (2010)
Focus
They examine factors (subjective norms,
compatibility, gender, experience and education
level) that affect users behavioural intention to use
the ERP system based on potential ERP users at
one manufacturing organisation
They researched the impact of perceived ease of
use (PEOU), result demonstrability and subjective
norm on perceived usefulness (PU) and impact of
it on usage behaviour
They examined factor organisational support
(formal and informal) on original TAM factors
Phase: ERP system

life cycle
Implementation
Post-implementation
(stabilisation stage)
Post-implementation
Research Model
To examine organisational users use of ERP systems, we have combined findings

accumulated over the years from TAM and ERP research in the research model
represented in Fig. 22.1 where the grey area within the dotted line denotes the
basic TAM.
Because our research is focused on the current usage of ERP system in routine
stage, measured by the degree of extended use, there is no need to examine the
behavioural intention (BI) on extended use. Behavioural intention (BI) originally
included in basic TAM was dropped, the same as what Simon and Paper (2007) and
Pijpers and Montfort (2006) did.
The role of users attitude in a mandated environment is important and should not
be overlooked (Nah et al. 2004). As noted by Brown and co-authors (2002), excluding the attitude construct would not provide accurate representation of users acceptance of IT in the mandated contexts so it remains in the model.
According to Davis (1989) and Davis et al. (1989), the perceived ease of use
influences perceived usefulness and attitude towards using the system. Research
studies on TAM indicate strong empirical support in the direction from perceived
ease of use towards perceived usefulness (Heijden 2001; Davis 1989). But in the
context of ERP business solutions, empirical researches in some cases support this
relationship (e.g. Amoako-Gyampah and Salam 2004; Hsieh and Wang 2007; Bueno
and Salmeron 2008; Calisir et al. 2009; Lee et al. 2010), and some researches do not
support this relationship (Hwang 2005; Shivers-Blackwell and Charles 2006; Shih
and Huang 2009).
TAM was originally conceptualised in the context of personal use and ignored
the role of organisational work on IT usage or its predictors (Sun et al. 2009). ERP
users generally do not have a choice not to use the ERP system, regardless of their
attitude. On the other hand, organisations that implement ERP systems want to use
their systems to the fullest potential and realise the promised benefits. Because of all
Nah et al. 2004
Hwang (2005)
ShiversBlackwell and
Charles 2006
Authors
AmoakoGyampah and
Salam 2004
Survey
Large global
organisation that
implemented ERP
system (SAP, 571
respondents)
SAP users of one
public institution
where ERP was
implemented 1999
(229 respondents)
Online survey where
70 % of users use
ERP business
solutions for more
than 1 year
238 students
intention to use ERP
system on bases on
online newsletter of
ERP systems
n.s.
PEOU
PU
***
PU
A
**
n.s.
**
PEOU
A
n.s.
Table 22.2 Relationship significance through cognitive constructs regarding researches
***
PU
BI
n.s.
***
PEOU
BI
AT
BI
*
BI
Use
***a
AT
use
PU
use
***a
EOU
use
288
Bueno and
Salmeron (2008)
Kwahk and
Lee (2008)
Sun et al. 2009
Youngberg
et al. 2009
Calisir et al.
2009
10
Authors
Hsieh and
Wang 2007
Survey
ERP users in large
manufacturing
company. They use
ERP system for more
than 2 years (79
respondents)
Potential users
during
implementation
process (91
responses)
Recently finished
ERP implementation
and had implemented
at least two ERP
modules (283 usable
responses)
Field survey where
the ERP system has
been implemented for
more than 3 years
Potential participants
from 4 Utah 2-year
college
Group of potential
users at a
manufacturing
organisation (75
respondents)
***
***
*c
***
PU
BI
***
n.s.
PEOU
A
**
***
***
PU
A
**
**
PEOU
PU
**
*c
PEOU
BI
n.s.
**
AT
BI
n.s.
**
BI
Use
AT
use
EOU
use
**b
(continued)
PU
use
*b
22
289
Lee et al. 2010
11
12
Survey
Implement or use
ERP system. 99 % of
users have
experienced using
ERP system at least
12 months (165
respondents)
63.2 % of users had
experience using ERP
system in the past
n.s. not supported

*p < 0.05; **p < 0.01; ***p < 0.001
a
Symbolic adoption
b
Extended use
c
Usage intention
Authors
Shih and Huang
2009
***
PEOU
PU
n.s.
PU
A
PEOU
A
PU
BI
**
PEOU
BI
**
AT
BI
BI
Use
**
AT
use
PU
use
n.s.
EOU
use
290
22
291
Fig. 22.1 Conceptual

research model
ERPWork
Compatibility
ERP Usefulness
Attitude to
ERP system
Extended Use
ERP Ease of Use

TAM
that, for organisations, it is important that ERP users not just use basic functionality
of ERP systems but use extended functionality. Hsieh and Wang (2007) have defined
extended use as the use of behaviour that goes beyond typical usage and can lead to
better results and returns. Extended use captures the breath and frequency of using
different ERP features and functions.
In the case of ERP implementations, other cognitive considerations besides
usefulness (U) and ease of use (EOU) may become relevant (Nah et al. 2004). In the
ERP context, organisations have to adopt business processes of an implemented
ERP system. Organisations deploy ERP systems to facilitate organisational work
rather than to match users personal preferences or habits. At this presumed perspective, we view work compatibility (WC) strictly as the fit of ERP to organisational
work and not to personal preferences or work habits. ERP work compatibility (WC)
refers to the degree to which an ERP user can do most of their tasks in ERP
system. Work compatibility (WC) influences ERP usefulness (U), and so it demonstrates the importance of incorporating work compatibility in models of IT usage as
exposed, i.e. by Sun et al. (2009) and Scott and Walczak (2009). In the context of
ERP usage, it is expected that in the relationship between work compatibility (WC)
and ERP usefulness (U), the more the work is compatible with the ERP system, the
more useful it is for ERP users.
We also presume that work compatibility (WC) has a strong direct effect on
attitude towards using ERP system (AT) and on extended use (EU), not just indirect
effect through ERP usefulness as if ERP users believe that the ERP system is more
work compatible with their daily tasks, and they will have more positive attitude
towards using that system and also towards extended use of that system.
Research Study
Our research model has been tested empirically using a filed survey of ERP users
using ERP systems in routine stage. Organisations have been selected using two
criteria: (1) the organisations must have implemented one of the two global ERP
292
Work Compatibility
0.30***
(t=3.85)
0.57***
(t=9.79)
Usefulness
R2=0.59
0.28***
t=4.87
0.44***
(t=5.81)
0.32***
(t=3.91)
Attitude
R2=0.62
0.18*
(t=2.32)
Extended use
R2=0.22
0.14*
(t=2.43)
Ease of use
Fig. 22.2 Results of structural model analysis. PLS test (statistically significant: *p < 0.05;
**p < 0.01; ***p < 0.001. Based on t(499); t(0.05; 499) = 1.967; t(0.01, 499) = 2.591; t(0.001,
499) = 3.320)
business solutions SAP or Microsoft Dynamics and (2) the organisations must have
used the ERP system for more the 1 year at the time of the study. Forty-four
organisations agreed to participate in the survey and they were asked to distribute
the survey questionnaire to their ERP users. All respondents were required to have
used ERP system in their daily work. Two hundred ninety-three questionnaires were
properly filled by the respondents and used for the purpose of analysis.
All of our hypothesised relationships have been tested significantly for p < 0.05,
p < 0.01, p < 0.001 (based on t(499); t(0.05; 499) = 1,967; t(0.01; 499) = 2.591;
t(0.001; 499) = 3.320), and the findings support the causal relationships proposed in
the research model. All relationships except two are significant at p < 0.001 significant level; meanwhile, these two relationships are significant at p < 0.05 (Fig. 22.2).
Conclusion
A primary outcome expectation from the ERP system is improvement in efficiency.

Much of the success of ERP systems implementation lies in operational phase of
ERP life cycle, which consists of stabilisation stage and routine stage (Motiwalla
and Thompson 2009; Bradford 2008). Stabilisation stage is the time from go-live to
about 3090 days after or until the number of issues and problems has been reduced
to a small, manageable number. In the majority of cases, in that stage, operational
efficiency drops in productivity. Benefits start to occur as an organisation gains
more experience in using the ERP system (Markus and Tanis 2000; Ross and Vitale
22
293
2000; Hong and Kim 2002; Gattiker and Goodhure 2005; Saeed et al. 2010). Finally,
having mastered the system, the users begin to get creative. This shows that the ERP
users have accepted the system and are putting it to extended use.
To improve the efficiency and effectiveness of ERP system use, organisations
need to understand the factors that impact user satisfaction. The majority of published research examines few contextual factors that have influence on intention to
use ERP system or ERP use in stabilisation stage or earlier stages of ERP life cycle.
Only very few studies have been conducted regarding technology acceptance of
ERP systems, especially those dealing with autonomous ERP users (i.e. Sun et al.
2009). As reported researchers have recognised that the generality of TAM and
researching of small numbers of additional factors that have impact on TAM fail to
supply more meaningful information on users opinions about a specific system
especially of ERP system which is considered as a strategic IS in organisations. It is
necessary to incorporate additional factors or integrate it with other IT acceptance
models for improvement of its specificity and explanatorily utility.
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Ajzen I (1991) The theory of planned behavior. Organ Behav Hum Decis Process 50:179211
Amoako-Gyampah K, Salam AF (2004) An extension of the technology acceptance model in an
ERP implementation environment. Inf Manag 41:731745
Bradford M (2008) Modern ERP select, implement & use todays advanced business systems.
College of management, North Carolina State University, Raleigh
Bradley J, Lee CC (2007) ERP training and user satisfaction: a case study. Int J Enterp Inf Syst
3(4):3355
Brown SA, Massey AP, Montoya-Weiss MM, Burkman JR (2002) Do I really have to? User acceptance of mandated technology. Eur J Inf Syst 11(4):283295
Bueno S, Salmeron JL (2008) TAM-based success modelling in ERP. Interact Comput
20(6):515523
Calisir F, Gumussoy CA, Bayram A (2009) Predicting the behavioural intention to use enterprise
resource planning systems an exploratory extension of the technology acceptance model.
Manag Res Newsl 32(7):597613
Davis FD (1989) Perceived usefulness, perceived ease of use, and user acceptance of information
technology. MIS Q 13(3):319340
Davis FD, Bagozzi RP, Warshaw PR (1989) User acceptance of computer technology: a comparison of two theoretical models. Manag Sci 35(8):9821003
Fishbein M, Ajzen I (1975) Belief, attitude, intention, and behavior: an introduction to theory and
research. Addison-Wesley, Reading
Gattiker TF, Goodhue DL (2005) What happens after ERP implementation: understanding the
impact of interdependence and differentiation on plant-level outcomes. MIS Q 29(3):559585
Heijden H (2001) Factors influencing the usage of websites: the case of a generic portal in the
Netherlands. e-Everything: e-Commerce, e-Government, e-Household, e-Democracy in 14th
Bled electronic commerce conference. Bled Slovenia
Hong KK, Kim YG (2002) The critical success factors for ERP implementation: an organizational
fit perspective. Inf Manag 40(1):2540
Hsieh JJPA, Wang W (2007) Explaining employees extended use of complex information systems. Eur J Inf Syst 16(3):216227
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Hwang YJ (2005) Investigating enterprise systems adoption: uncertainty avoidance, intrinsic motivation and the technology acceptance model. Eur J Inf Syst 14(2):150161
Kwahk KY, Lee JN (2008) The role of readiness for change in ERP implementation: theoretical
bases and empirical validation. Inf Manag 45(7):474481
Lee DH, Lee SM, Olson DL, Chung SH (2010) The effect of organizational support on ERP implementation. Ind Manag Data Syst 110(12):269283
Legris P, Ingham J, Collerette P (2003) Why do people use information technology? A critical
review of the technology acceptance model. Inf Manag 40:191204
Liu L, Ma Q (2006) Perceived system performance: a test of an extended technology acceptance
model. J Organ End User Comput 18(3):124
Lu J, Chun-Sheng Y, Liu C, Yao JE (2003) Technology acceptance model for wireless internet,
internet research. Electron Netw Appl Policy 13(3):206222
Markus LM, Tanis C (2000) The enterprise system experience: from adoption to success. Framing
the domains of IT management: projecting the future through the past. Pinnafex Educational
Resources Inc., Cincinnati
Motiwalla LF, Thompson J (2009) Enterprise systems for management. Pearson Prentice Hall,
Upper Saddle River
Nah FF, Tan X, Teh SH (2004) An empirical investigation on end-users acceptance of enterprise
systems. Inf Resour Manag J 17(3):3253
Pijpers GGM, Montfort K (2006) An investigation of factors that influence senior executives to
accept innovations in information technology. Int J Manag 23(1):1123
Ross JW, Vitale MR (2000) The ERP revolution: surviving vs. Thriving. Inf Syst Front
2(2):233241
Saeed K, Abdinnour S, Lengnick-Hall ML, Lengnick-Hall CA (2010) Examining the impact of
pre-implementation expectations on post-implementation use of enterprise systems: a longitudinal study. Decis Sci 41(4):659688
Scott JE, Walczak S (2009) Cognitive engagement with a multimedia ERP training tool: assessing
computer self-efficacy and technology acceptance. Inf Manage 46(4):221232
Shih YY, Huang SS (2009) The actual usage of ERP systems: an extended technology acceptance
perspective. J Res Pract Inf Technol 41(3):263276
Shivers-Blackwell SL, Charles AC (2006) Ready, set, go: examining student readiness to use ERP
technology. J Manag Dev 25(8):795805
Simon SJ, Paper D (2007) User acceptance of voice recognition technology: an empirical extension
of the technology acceptance model. J Organ End User Comput 19(1):2450
Sun Y, Bhattacherjee A, Ma Q (2009) Extending technology usage to work settings: the role of
perceived work compatibility in ERP implementation. Inf Manag 46:351356
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Venkatesh V, Davis FD (2000) A theoretical extension of the technology acceptance model: four
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29:138144
Chapter 23
Exploring the Linkages Between Human

Resource Configuration and Knowledge
Management Process: A Strategic Human
Resource Management Perspective
Bindu Singh and M.K. Rao
Abstract The last decade experienced severe financial turbulence in developed

markets and its impact on developing and emerging markets. This turmoil creates
market stagnation and dramatic shift from developed and emerging market to
recovering markets. In this turbulent environment, scholars and practitioners
viewed inward for the sources of value creation and advocated that knowledge is
the primary source of value creation. Theories of knowledge-based competition
consider knowledge management vital for bringing significant strategic outcomes
for the success of the organization improving competitive position, achieving
higher corporate valuation, accelerating business growth, and so on. A systematic
review of the literature reveals a significant body of evidence, supporting the role
of human resource management in knowledge management to create and sustain
competitive advantage. Yet, in previous studies, strategic human resource management perspective towards knowledge management process and their linkages
were not fully addressed. To address this gap, this study proposes a theoretical
framework and explores the linkages between human resource configuration and
knowledge management process drawing on theoretical insights of strategic
human resource management. This study presents an apparent understanding of
the effect of human resource configuration on knowledge management process,
one that is theoretically supported and posits that human resource configuration is
the eventual foundation of KM. This study makes a significant contribution to
emerging strategic human resource management and knowledge management
literature. Further, the managerial implications are also discussed.
Keywords Strategic human resource management Human resource configuration
Knowledge management process
B. Singh (*) M.K. Rao

Department of Management Studies, Indian Institute of Technology, Roorkee, India
Springer India 2015
295
296
B. Singh and M.K. Rao
Introduction
Over recent decades, the significant role of intangible assets, to obtain and sustain
competitive advantage for the organization, has been widely recognized (Barney
1991; Amit and Schoemaker 1993; Grant 1996). One such intangible asset is
organizational knowledge. Intellectuals (Grant 1996; Cabrera and Cabrera 2005;
Mundra et al. 2011) have general consensus that managing knowledge is vital for
the success of organizations, which can be assessed through the growth of publications in knowledge management (KM) field (Minbaeva et al. 2009), one of the
youngest disciplines in the management field which is growing continuously
(Serenko and Bontis 2012). This reveals the significance of the KM to the organization and supports further line of inquiry to enhance KM process.
Researchers (Currie and Kerrin 2003; Oltra 2005; Afiouni 2007; Edvardsson 2008;
Minbaeva et al. 2009; Jimenez-Jimenez and Sanz-Valle 2013; Minbaeva 2013) cited
human resource (HR) as one of the antecedent of KM and highlighted its importance. The basic idea is that human resource management (HRM) is considered instrumental in acquisition, creation, and development of knowledge as they influence
knowledge, skills, and behaviors of employees (Currie and Kerrin 2003; Edvardsson
2008; Minbaeva et al. 2009; Kehoe and Wright 2010). Researchers (Oltra 2005;
Chen et al. 2011) maintain that in spite of the significant relation between two dominant arenas in management field, early literature neglects HR-related issues; due to
this, it is still in its infancy (Oltra 2005; Minbaeva et al. 2009; Minbaeva 2013).
Review of literature on HRM practices reveals that researchers adopted a partial
approach while studying HRM and KM and emphasizes on one or some specific
HRM practices (Theriou and Chatzoglou 2008; Minbaeva et al. 2009). Oltra (2005)
maintains that there is a limited number of researches which initiate to link strategic
human resource management (SHRM) perspective and KM process and investigate
how strategic perspective towards HRM practices enhances the KM process. Hence,
addressing this issue is an important line of inquiry.
The prime purpose of this study is to link strategic HRM perspective especially
human resource configuration (HRC) and KM process and study the effect of SHRM
practices on KM process. The study draws from and incorporates two streams of literature: SHRM and KM. Based on the review, to support the above cited linkage, the
SHRM practices, namely, HR configuration proposed by Youndt and Snell (2004),
have been studied which is likely to enhance KM process. The fundamental idea
behind HRC is that it has potential to improve the KM. The attempt has been made to
propose a conceptual framework which explores the relationship between HRC and
KM process. The methodology and theoretical support to the linkage are discussed.
Finally, this paper also discusses the implications of the study for practitioners.
SHRM Perspective
SHRM has been considered as the planned pattern of HR deployment, and various
HR activities envisioned to facilitate attainment of organizational objectives (Wright
and McMahan 1992) and enhanced organizational performance through managing
23
Exploring the Linkages Between Human Resource Configuration and Knowledge
297
people. Extant of literature has advocated that SHRM links HR practices to business
strategy (Ulrich and Lake 1991) and contributes to KM process. Over the last
decade, different authors have given various names to these practices that further
lead to KM. These practices are HR configuration (Yamao et al. 2009; Soraya and
Chew 2010), best HRM practices (Jimenez-Jimenez and Sanz-Valle 2013), and
strategic HR practices (Chen and Huang 2009). Further, knowledge is based on
people, and due to this, HRM issues are critical for managing knowledge (Robertson
and Hammersley 2000; Currie and Kerrin 2003; Edvardsson 2008). Extant of literature confirms the positive linkage of SHRM with KM (Scarbrough and Carter 2000;
Robertson and Hammersley 2000; Theriou and Chatzoglou 2008; Soraya and
Chew 2010; Jimenez-Jimenez and Sanz-Valle 2013) and advises to integrate the two
(Oltra 2005; Svetlik and Costea 2007).
Researchers maintain that HR configuration, also referred to as HRM system,
supports management of knowledge in the organization (Yamao et al. 2009; Soraya
and Chew 2010). Further, drawing on theories of SHRM, HRC enhances KM and
adds value to the organization through the planned pattern of activities like training
and development, and compensation and communication practices encourage
individuals to participate and contribute (Wright and McMahan 1992; Yamao et al.
2009; Soraya and Chew 2010).
Methodology
To explore the linkages between HRC and KM, a systematic information search was
made to cover the majority of literature in management of databases (EBSCO,
Proquest, and Scholar Google). According to the objective, theoretical and empirical studies have been reviewed that address SHRM perspective as well as the role
and effect of HRC on KM. The keywords used to search in the literature were
SHRM, KM, and HRC. There were 43 studies referring to SHRM, HRC, and KM
in the period 19912013 especially in The International Journal of Human Resource
Management, Strategic Management Journal, Human Resource Management, and
Journal of Knowledge Management.
Proposed Framework
With the objective of studying the linkage between the HRC and KM, the relevant
literature has been reviewed, and conceptual framework shown in Fig. 23.1, encompassing SHRM practices such as HR configuration and KM process, has been
proposed. In this conceptual framework, KM process is considered as a product of
SHRM practices (Scarbrough and Carter 2000; Robertson and Hammersley 2000;
Chen and Huang 2009; Soraya and Chew 2010; Jimenez-Jimenez and Sanz-Valle
2013), by stimulating attributes in human resources that are rare, inimitable, and valuable (Barney 1991; Pfeffer 1998; Kehoe and Wright 2010). Researchers maintain that
acquisition and creation of new knowledge depends on employees capabilities to
298
Fig. 23.1 Proposed framework
learn and in their motives and behaviors to use, share, and transfer their knowledge
(Kehoe and Wright 2010). The proposed framework will provide answers to the question as how HR managers can manage knowledge effectively by practicing HRC.
Theoretical Support
Extant of literature has advocated that SHRM links HR practices to business strategy (Ulrich and Lake 1991) and enhances KM process through specific HRM practices. Researchers maintain that HR configuration, a set of HR management
practices (Chien and Lin 2013) also referred to as HRM system (combination of
HRM practices and HRM strategy), supports management of knowledge in the
organization (Yamao et al. 2009; Soraya and Chew 2010).
Researchers maintain that knowledge management has been associated with the
development and utilization of the knowledge assets with the purpose of achieving
the organizational objectives (Davenpor and Prusak 1998) and enhanced performance. Numerous authors (Huber 1991; Gold et al. 2001) have proposed different
models that explained the process of KM. Following Gold et al. (2001) KM process
comprises four phases: acquisition, the accumulation of new knowledge; conversion,
using existing knowledge; application, actual usage of knowledge to create value;
and protection, processes deal with protection of knowledge (Gold et al. 2001).
The researchers highlight the significance of HR in implementing KM (Thite
2004; Oltra 2005; Edvardsson 2008; Theriou and Chatzoglou 2008; JimenezJimenez and Sanz-Valle 2013; Minbaeva 2013) as HRM practices are primary
mechanisms to influence individual KSAs (Chen and Huang 2009).
Literature suggest how HR configuration comprised of six dimensions, acquisition, developmental, collaborative, egalitarian, documentation, and information
23
299
technology, enhances KM process through staffing, compensation, and reward

mechanism and performance appraisal and feedback (Jimenez-Jimenez and SanzValle 2013; Minbaeva 2013), training practices (Chen and Huang 2009; Liu and Liu
2011; Jimenez-Jimenez and Sanz-Valle 2013; Rahman et al. 2013), teamwork
(Currie and Kerrin 2003; Cabrera and Cabrera 2005; Chen et al. 2011), flat pay
structure (Svetlik and Costea 2007; Yamao et al. 2009), and use of information
technology (Cabrera and Cabrera 2005; Svetlik and Costea 2007). Based on the
review, the following paragraphs discuss how each one of the configuration has an
impact on KM that further leads to enhanced organizational performance.
Acquisition HRC comprising staffing, compensation, and reward mechanisms
(also known as ability and motivation enhancing practices) (Kehoes and Wright
2010) recruits competent and outstanding people (Youndt and Snell 2004), enhances
their abilities, and motivates them through stimulating remuneration to foster
knowledge acquisition, application, and transfer (Yahya and Goh 2002; Kang et al.
2007; Svetlik and Costea 2007; Chen and Huang 2009; Yamao et al. 2009; Soraya
and Chew 2010; Jimenez-Jimenez and Sanz-Valle 2013; Minbaeva 2013).
Developmental HRC enhances KM process (Yamao et al. 2009; Soraya and
Chew 2010), by developing individual capabilities, enhancing motivation, and
fostering learning-oriented culture through training and performance appraisal
practices (Yahya and Goh 2002; Chen and Huang 2009; Liu and Liu 2011; Donate
and Guadamillas 2011; Jimenez-Jimenez and Sanz-Valle 2013; Minbaeva 2013;
Rahman et al. 2013), skill-based pay (Kang et al. 2007), and promotion (Minbaeva
2013).
Egalitarian HRC comprising flat pay structure, division of tasks and responsibilities, employee empowerment, and autonomy (Youndt and Snell 2004) motivates employees to acquire, apply (Yahya and Goh 2002; Cabrera and Cabrera
2005; Theriou and Chatzoglou 2008; Foss et al. 2009; Soraya and Chew 2010), and
transfer knowledge (Chen and Huang 2009; Yamao et al. 2009; Jimenez-Jimenez
and Sanz-Valle 2013).
Collaborative HRC supports collaborative environment and develops teamwork, trust, and cooperation that enhances employees motivation and encourages
them for cross functional interaction and permeable network structure (Youndt et al.
2004; Kang et al. 2007) to provide opportunity and create willingness among
employees to acquire, apply, document, and share knowledge (Yahya and Goh
2002; Theriou and Chatzoglou 2008; Chen and Huang 2009; Foss et al. 2009;
Yamao et al. 2009; Soraya and Chew 2010; Donate and Guadamillas 2011; Mundra
et al. 2011; Jimenez-Jimenez and Sanz-Valle 2013; Minbaeva 2013).
Documentation HRC supports acquisition, application, and protection of new
knowledge by encouraging employees through work redesign, employee suggestion
practices (Foss et al. 2009; Lopez-Cabrales et al. 2009; Jimenez-Jimenez and SanzValle 2013; Minbaeva 2013), and documentation of required information as client
preferences and feedback and thereby fosters KM (Cabrera and Cabrera 2005).
Information technology HRC comprises of IT practices (Youndt and Snell
2004), facilitates communication medium, and provides an opportunity to the
employees for managing, sharing, applying, and transferring knowledge within the
300
firms (Lopez-Cabrales et al. 2009; Reinholt et al. 2011). Researchers considered IT

as an indispensable element (Sher and Lee 2004).
Hence, HRC significantly enhances KM process.
Discussion and Managerial Implication
Despite the unquestionable fact that KM and SHRM have made certain advancements, SHRM practices are not fully explored in relation with KM, although
researchers accepted the role of HRM practices in the advancement and management of core competencies and strategic resources of the organizations. This study
aims to examine the relationship between HRC and KM process from SHRM
perspective, emphasizing on each configuration in isolation and exploring the
linkages between them.
Based on review of SHRM and KM literature, some important points while
proposing conceptual framework are given below:
The already existed theoretical knowledge about the concepts
That throw light on the linkages between HRC and KM
With the aim of contributing towards the SHRM practices that enhance KM
Results provide evidence of the linkages and show that HRC enhances the ability
of employees through staffing, compensation, and training and motivates them by
providing rewards, incentives, and promotion coupled with opportunities such as
performance appraisal, teamwork, work resign, employee suggestion system
empowerment, and autonomy, and ultimately fosters KM processes that are consistent with previous literature (Theriou and Chatzoglou 2008; Yamao et al. 2009;
Soraya and Chew 2010; Jimenez-Jimenez and Sanz-Valle 2013; Minbaeva 2013). In
sum, findings show that HRC enhances KM processes.
The managerial implications for the practitioners are clear. An organization anticipating to enhance KM should concentrate on HRC, as with strategic perspective
HRC affects employees motives and behaviors that have further bearing on
KM. Findings suggest that KM requires that organization offers stimulating remuneration, encouragements, communication practices, training, performance appraisal,
teamwork, cross functional interaction, flat pay structure, division of tasks and
responsibilities, minimizing job levels, documentation of required information, and
use of IT. Additionally, the study demonstrates how HR managers can enhance KM
through practicing HRC that further leads to enhanced organizational performance.
Conclusions
To conclude, this paper contributes to the literature by advocating that linkages

between HRC and KM do exist and that HRC enhances KM. Further discussion is
required to advance our understanding on the linkages and thereby contributing to
the literature. Finally, empirical and longitudinal studies with reference to the Indian
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301
context should be conducted to test and validate the linkages between HRC and KM
proposed in this framework to gain greater validity and support in theory building.
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Chapter 24
Green Work-Life Balance

Harshita Singh and Jyotsana Bhatnagar
Abstract For the past few years, business world has seen a great deal of emphasis paid
on the adoption of environmental management systems by the organizations. However,
thinking of such system does not always mean an effective implementation of the same.
Researchers argue that employees must be inspired, empowered, and environmentally
aware of greening in order to carry out green management initiatives. This article
proposes that green management initiatives by companies can meet its full potential
if organizations can manage the interface between work and family effectively.
Keywords Work-life balance Green HRM Environmental management system
Green work-life balance
1
1.1
Introduction
Environmental Management System (EMS)
and Green Strategy
There is a great deal of increase in the level of environmental pollution and waste
emerging from industries, which has resulted in increase in implementation of policies by governmental and private sector with the aim of reducing the rapid destruction
to the nonrenewable resources and the ultimate negative impact it would have on
societal consequences (Martinez-Fernandez et al. 2010). There is enhanced adoption
of environmental management systems by the corporate sector (Boiral 2006; scar
Gonzlez 2006). This resulted in the emergence of a new strategic maneuver called
green management (as cited in Cherian and Jacob 2012). Green management is the
organization-wide process of applying practices to achieve sustainability, waste reduction, social responsibility, and a competitive advantage via continuous learning and
development and by embracing environmental goals and strategies that are fully integrated with the goals and strategies of the organization (Pane Haden et al. 2009).
H. Singh (*) J. Bhatnagar

Human Resource Management, Management Development Institute,
Sukhrali, Gurgaon, India
Springer India 2015
303
304
H. Singh and J. Bhatnagar
Need for Green Management Strategies
Earlier success of a firm was strongly dependent on promotion of economic value.

However today, organizations have to consider for the reduction of ecological
footprints and give importance to social and environmental factors along with
economical and financial factors in order to enable the organization to be successful
in the corporate sector. There is a great deal of increase in the level of environmental
pollution and waste emerging from industries which has resulted in increase in
implementation of policies by government.
The benefits of going green is huge ranging from strengthening of brand image, or
social responsibility, or to reduce their footprint on the planet and earn carbon credits
and thereby improves firms financial and operational performance (McMahon 2009;
DSouza et al. 2006; Claver et al. 2007; Cooper et al. 2012; Claver-Corts et al.
2007; Wagner 2011; Molina-Azorn et al. 2009). The necessity of the green path is
stronger in third world countries than in the developed world given the rapid growth
that many of these economies are experiencing in the last decade (Khandwalla 2008:
137). Indian companies need proper environmental management systems and green
strategy implementation. Business and sustainability linkage supported by intense
people processes leading to green engagement at the individual, team, and organizational level is needed in India (Bhatnagar and Srinivasan 2013).
HR and Green Management
Today, there is debate and uncertainty associated with how green management
principles can be implemented effectively in organizations thereby arriving at
improved sustainability for the organization. Employees who are actively involved
in environmental management principles may play a vital role in arriving at better
environmental strategies to be implemented. Employees may feel empowered to
adopt specific environmental management principles as a result of promoted human
resource policies which present better opportunities for improvements related to
reduction of waste and promotion of lean manufacturing (Cherian and Jacob 2012).
The HR of the organization plays a major role in making environmental responsibility
a part of an organizations mission statement (Prathima and Mishra 2013). Managers
need to align the investments in greening with the generic strategy of the company
(Bhatnagar and Srinivasan 2013).
Green HRM
Human capital and its management are instrumental to the fulfillment of EM objectives. For the purpose of this paper, we define Green HRM as the use of HRM policies,
philosophies, and practices to promote sustainable use of resources and prevent harm
arising from environmental concerns within business organizations (Zoogah 2011).
24
Role of Green HRM
305
It is identified that the greater the strength of green human resource policies, the
greater the intensity of adoption of environmental management systems (EMS) and
policies by the different companies (Bohdanowicz et al. 2011, as cited in Cherian
and Jacob 2012). In general terms, it is seen that the personal values that employees
demonstrate to EM have not been exploited fully towards achieving corporate environmental initiatives, even though they look to have positive effects for managers
and, as such, the personnel function appears underrated and has been seen to need
to interact with EM matters (Wehrmeyer 1996: 1112, as cited in Reinwick 2013).
Green HRM Strategies
In order to implement an effective corporate green management system, it is important to promote a great deal of technical and management skills among all employees
of the organization (Daily et al. 2000). Organizations look at the development of
innovative tools and initiatives of environmental management which will significantly impact sustainability of the firm and promote a competitive advantage (Hart
1997; Lin et al. 2001 as cited in Jackson 2011). Therefore to develop such a framework, it becomes ideal to have effective human resource management practices
including presentation of strict recruitment strategies (Grolleau et al. 2009), appraisal
and reward systems which include environmental awareness and implementation in
their evaluation process (Jabbour et al. 2012), and training and empowerment programs (Unnikrishnan and Hedge 2007) which will enable the development of new
set of skills and competencies among the employees of pro-green firms (as cited in
Cherian and Jacob 2012). HR as a profession requires a deeper exploration and
understanding of its own roles and competencies in engaging with Green HRM. In a
highly competitive context for talent, where several young people have a heightened
appreciation of environment and sustainability, HR professionals in organizations
may need to find ways to reconcile the professional and personal value systems of
employees to retain them (Bhatnagar and Srinivasan 2013).
Limitations to Application of Green HRM: The Argument

of Green Work-Life Balance
A complex interplay of individual, interactional, situational, cultural, and structural

factors influences employees environmental behavior in the company. Despite the
benefits, HR professionals admit that it is not easy for their companies to become
and remain environmentally friendly. The most common barrier to creating an environmental program is implementation cost (85 %) followed by maintenance cost
(74 %). Other barriers include lack of management support (43 %), lack of employee
support (25 %), and concern for workplace inefficiency. HR professionals rank the
306
top environmentally responsible practices to be encouraging employees to work

more environmentally friendly (83 %). Both human resource professionals and
employees state that their primary, or number one, motivation for participating in
environmentally responsible programs is to make a contribution to society (anonymous, SHRM Green Workplace Survey 2008).
It can be said that companies with environmental management systems are
particularly dependent on elaborated green HR policies (Antoni and Bauer 2005;
Daily and Huang 2001; Wee and Quazi 2005). They are not immune to gaps between
rhetoric and reality (Crane 1995). If they have high expectations concerning their
environmental performance, it is especially important for them to transform aspirations and good intentions into actual everyday behavior. This is where our argument
of green work-life balance comes into play.
Up to now, both environmental management and Green HRM have focused exclusively on employees working role. Employees also learn environmental attitudes
and behavior in private life. Employees private environmental performance is closely
attached to their individual ways of living and their everyday behavior. Consequently,
it can be argued that the impact of Green HRM on greening employees will always
be influenced by employees personal environmental experiences (Muster 2011).
As a result, Green HRM might fail in realizing its full potential if they focus merely
on employees in their working role. The ability to develop an organizational capability within the firm and offer that capability to the market requires people agility
and change agility (Bhatnagar and Srinivasan 2013). For this to happen, it is very
important that employees work and family life be coordinated.
Managing the interface between work and home can lead to better implementation of green management. This is where the role of green work-life balance comes
into play. Let us see in the next section how.
The use of systemic search methodology is done in writing this article by identifying
articles related to green HR practices in EBSCO databases from March 2005 to
March 2012 (by using the following keywords: green management, environmental
management system, human resource management, training, development, recruitment, work-life balance, green work-life balance). Following this, 19 articles related
to the keyword search were identified.
Work-Life Balance
Several researches in the past have addressed the ways in which work and nonwork
roles might influence one another, building on psychological constructs such as
affect, cognition, and values (Rothbard et al. 2005; Baral 2011; Powell and
Greenhaus 2010; Greenhaus and Beuttell 1985).
24
307
Established approaches that draw on these reciprocal influences include the

conflict model, the enrichment model, the spillover model, the border theory, and
the compensation model. For the purpose of our study, we have focused mainly on
the assumptions of spill over model and enrichment model.
The enrichment model says that it is not resource distributions that are the focus,
but rather resource accumulation through different roles (Rothbard et al. 2001). It is
assumed that different requirements of domains have a positive effect on each other
and, in general, that multiple roles enrich peoples lives (e.g., Barnett and Hyde
2001). Resources and experiences that are generated in one role are supposed to
improve or facilitate the role performance in the other life domain (Greenhaus and
Powell 2006).
The spillover model can be understood as a component of both the conflict and
the enrichment model. It can be distinguished between positive and negative spillovers, meaning that transferred effects either enrich or constrain the other domain.
The total amount of available resources and their accumulation and distribution are
not considered here. Instead, specific transfers between the domains are considered
(Edwards and Rothbard 2000). On the one hand, spillovers can change the object of
reference (e.g., work satisfaction evolves as satisfaction in relationships), and on
the other hand complete spillovers (e.g., strengthened self-confidence at work
evolves at strengthened self-confidence at home) can occur. Moreover, spillovers
are differentiated between spillovers of emotions (moods), attitudes (or values),
skills, and behavior (Lambert 1990; Edwards and Rothbard 2000).
9.1
The enrichment model and the positive spillover model show that possible interactions between working life and private life can bring about positive effects. It can be
assumed that learning and practicing environmentally friendly behavior in one
domain can stimulate or strengthen similar activities in the other domain. Rashid
et al. (2006) have documented that employees participation in environmental
management systems can spill over and influence environmentally responsible
attitudes and behavior in employees private life.
Research on positive life-to-work effects with regard to environmental behavior
is still scarce. In this study, we have tried to focus mainly on this life-to-work aspect
of Green HRM. Green HRM should focus on how life-to-work enrichment and
spillovers can be helpful in the effective implementation of green initiatives by the
organizations. Green HRM should deal with these interaction effects and employees chances to manage their life domains. On the one hand, positive interaction
effects need to be facilitated. On the other hand, negative interaction effects need to
be prevented.
In the following section, we have tried to show how the green work-life balance
concept can be designed to meet the challenges of green strategy implementation.
We have assumed green work-life balance to be interactions between working life
308
Work
Effective
implementation
of green
initiatives
Green
products to
customers
Minimizing
carbon
footprints
Family/self
Green WLB strategies
Work to life
Interventions
Life to work
in interventions
Environment
friendly
living
Taking green
initiatives in
routinelife
Social forestry
Work to life and life to work spill overs
Fig. 24.1 The spillover model of green work-life balance
and family life, with spillover and enrichment effects on each other aimed at mutual
enforcement and harmonization of environmentally friendly orientations in private
life and working life. Green work-life balance policies focus on employees twofold
role as consumers and producers, because employees learn and practice environmentally relevant behavior in these two roles in particular (Muster 2011) (Fig. 24.1).
Companies should aim at decreasing imbalances in environmentally friendly
behavior by promoting positive influences both from work to life and from life to
work. On the one hand, a company can promote environmentally friendly consumer
behavior in employees private life, and on the other hand, companies can encourage employees to use environmentally relevant ideas and experiences they have
developed in their private life within their working life.
Companies can do this through a number of work-to-life and life-to-work interventions which we will discuss in the next section.
Life-to-work interventions encourage employees to bring in and develop their
environmental values, ideas, and private experiences to the workplace. It can be
assumed that employees with an interest in environmental issues in their personal
life have particular inside knowledge and experiences with, for instance, environmentally friendly practices and products, which can help a company effectively
implement its environmental efforts. Employees involvement and participation in
designing, implementing, and evaluating environmental activities in the company
are considered particularly crucial to integrate their private experiences (Bro et al.
2007; Fernandez et al. 2003; Ramus 2001, 2002; Renwick 2008).
24
309
Work-to-life interventions focus on employees environmental behavior in private

life and support them in consuming in an environmentally friendly fashion.
Providing employees with useful information on environmental management at
workplace can reinforce such green behaviors in personal life.
For example, if an employee is involved in green management, planting, rainwater
harvesting, and other such environment friendly practices in his/her personal life
(being a member of a particular resident welfare association RWA, it is a common
practice these days), then such an employee will have greater chances of adopting
and implementing companys green management initiatives (due to positive spillovers).
Not only this, he will also bring his/her personal experiences and ideas on green
management to his/her workplace.
Conversely, if an employee practices green management at his workplace as a
part of job routine, he/she is likely to reproduce such behavior in personal life also.
Life-to-work interventions
Invite ideas on green products to consumers, waste
management, and water harvesting from employees
personal life
Establishment of unified green technology learning
platforms, blogs, and employee forums where they
can share their personal life experiences on green
management
Rewards and recognition to those employees involved
in environmental management in their personal life
Employee meetings to share thoughts on how they
reduce paper consumption, water management,
and other green initiatives in their day-to-day life
Praising employee with low household power
consumption
Engaging employee in green discovery in personal
and professional life
E-waste collection centers
10
Work-to-life interventions
Company-wide intranets and
newsletters to display information
on environmental issues
Centralized shopping for organic
and fair trade products, e.g.,
vegetable boxes, eggs, coffee
Car pool and sharing, green canteen,
environment concierge services
Green computing, green
infrastructure, and data centers
Green buildings, solar systems at
workplace, social forestry
Multiple strands of engagement:
Place-based learning
Ecological footprint measurement
Biodiversity and conservation
Theater in education
Employee assistance programs
and counseling
Green Work-Life Balance Outcomes: Developing

a Testable Relationship
The green work-life balance concept is perceived as an innovative approach for

Green HRM. The green work-life balance concept is supposed to bring about positive effects for the environment, employees, and the company (Muster 2011). One
outcome of implementing green work-life balance could be green behaviors.
310
Green behavior is the integration, cooperation, compliance, focus, risk-taking,

and creativity role behaviors as important for Green HRM.
These are role behaviors that are concerned with EM advancement and growth.
They include integration, creativity, and risk-taking behaviors. Integration behaviors,
higher-level actions that enable organizations to function effectively (Lawrence and
Lorsch 1967), facilitate the integration of EM to other organizational systems. HR
managers interconnect HRM and EM practices and systems in a way that enhances
organizational functioning (Zoogah 2011).
Earlier studies have shown a positive effect of green management on firms
performance. Studies where a significant positive relationship between environment
and firm performance is obtained are predominant. In fact, 21 studies have obtained
a positive impact of environmental management and/or environmental performance
on financial performance. Whether they are doing it to improve your bottom line, to
strengthen your brand, or out of a sense of social responsibility, there are many good
reasons for companies to go green. But one advantage that often goes overlooked
could be the most importantat least it involves the most vital part of your institutionyour employees (Mc Mahon 2009).
The importance of Green HRM practices is vital to promote employee morale,
and this may help in arriving at a great deal of benefit for both the company and the
employee.
For example, some of the benefits that an organization can attain as a result of
introducing Green HRM principles in EMS include:
1.
2.
3.
4.
5.
6.
Improvement in retention rate of employee

Improvement public image
Improvement in attracting better employees
Improvement in productivity and sustainability
Reduction in environmental impact of the company
Improved competitiveness and increased overall performance
Apart from this, it is to be identified that employees who are actively involved in
environmental management principles may play a vital role in arriving at better
environmental strategies to be implemented. Employees may feel empowered to
adopt specific environmental management principles as a result of promoted human
resource policies which present better opportunities for improvements related to
reduction of waste (Cherian and Jacob 2012).
However, no such research emerges from present literature that focuses on green
work-life balance and its effect on firm performance. Thus, we can develop a model
of green work-life balance. Future research can focus on empirically testing this
model to establish the importance of green work-life balance as a HRM practice to
effective environmental management (Fig. 24.2).
Based on this model and earlier researches, we give the following propositions:
Proposition 1. Green work-life balance interventions lead to green behaviors in
employees.
Proposition 2. Green work-life balance leads to effective implementation of environmental management systems and green strategy.
24
311
Firm financial
and operational
performance
Green work to life

interventions
Green behavior
Effective
implementation
of EMS
Improved
employee
job
satisfaction
Green Life to work

interventions
Brand image
Fig. 24.2 Theoretical research model underlying hypothesis development
Proposition 3: Green work-life interventions lead to effective implementation of

environmental management system which in turn leads to increased firm financial and operational performance.
11
Conclusion and Future Directions
The aim of this paper is to provide a theoretical model of how green work-life
balance can help in effective implementation of EMS. The green work-life balance
concept is proposed as a new perspective for Green HRM. It is assumed that effective implementation of green policies is only possible if employees are encouraged
and motivated to do so in their personal life as well as professional life. Our ideas
are only conceptual. Future research needs to provide empirical evidence if a green
work-life balance strategy is to deliver on the positive outcomes we have proposed
and check for the relevant success factors of such a strategy.
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Membersh Dir 8:A1A6
Rothbard N, Phillips K, Dumas T (2005) Managing multiple roles: work-family policies and
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Unnikrishnan S, Hedge DS (2007) Environmental training and cleaner production in Indian
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Chapter 25
Impact of CSR-Driven Internal Employee

Motivation on Cordiality of Employee
Relations
Sharad Agarwal, Yashwant Singh Yadav, and Abhilash Acharya
Abstract This paper is aimed at finding out the impact of socially responsible behaviour on industrial/employee relations. The research uses employee internal motivation
as a proxy for industrial harmony. A survey was administered to 206 working professionals whose organizations were engaged in CSR activities. The research hypothesis
was tested using regression and correlation analysis. The findings indicate a positive
relationship between CSR and employee internal motivation. The results have
immense potential to be utilized by HR practitioners and tailor their social initiatives,
particularly local community relations to ensure cordial employee relations.
Keywords Corporate Social Responsibility (CSR) Internal employee motivation
Employee relations
Introduction
Although industrial relations and its upgraded, modern version, employee relations,
may seem as a subject best relegated to history to the younger breed of Indian managers, it is a discipline which has resurfaced on the plane of contemporary research
as illustrated by the recent incidents of industrial strife in the countrys automobile
sector. Industrial harmony and cordial employee relations are to a great extent
underpinned by high internal motivation amongst the employees who collectively
translate it into much coveted organizational citizenship behaviour.
S. Agarwal (*)
Marketing Area, Indian Institute of Management Ranchi, Ranchi, India
Y.S. Yadav
PGDHRM Student, Indian Institute of Management Ranchi, Ranchi, India
A. Acharya
OB & HR Area, Indian Institute of Management Ranchi, Ranchi, India
Springer India 2015
315
316
S. Agarwal et al.
Contemporary research on the theme of motivation suggests the possible use of

Corporate Social Responsibility (CSR) as a means of attracting and retaining top
talent by organizations. Active deployment of CSR by organizations, both internally
and externally, has been found to have a favourable impact on employee commitment,
loyalty, retention, performance, turnover and satisfaction (Heslin and Ochoa 2008;
Aguilera et al. 2007). Therefore, proactive organizations can suitably use their CSR
initiative portfolio as a mechanism for enhancing internal employee motivation and in
turn bolstering their employee relations.
This paper aims at harnessing the potential of CSR to foster harmonious employee
relations by tapping into employee internal motivation.
2
2.1
Theoretical Framework and Hypotheses

Employee Relations
Industrial relations which has been rechristened as employee relations in the twentyfirst century is a multidisciplinary lens that examines the relationship between employers and employees (Ackers 2002). Venkata Ratnam (1995) defines employment
relations to be an overarching term for relations between employers and employees in
all aspects of work. With the changing character and composition of the workforce,
employee relations are being viewed as a further broadening of the HRM itself
(Banfield and Kay 2008). The industrial/employee relations policy of organizations is
influenced by a variety of factors including the external and internal environment, organizational culture, technology and legislations and together determines the presence of
industrial peace. Organizations have to devise and execute their employee relations
strategy by taking into account their contextual specificities. Harmonious employee
relations assume a critical stature in organizational priorities in a milieu where workplace indiscipline and incivility may range from rudeness to even physical altercations
(Bradford 2001). That inadvertently would affect the employees presence within the
internal business environment of the organization and ideally must be avoided in order
to maintain the decorum. An employee can be looked upon as a major stakeholder in
the co-creation and implementation of innovative business systems and may thus drive
him/her to become more involved and establish increased coordination amongst all
organizational members. As CSR has developed more into a dynamic and evolutionary
process, it currently relies on enhanced employee participation.
2.2
Corporate Social Responsibility
According to the World Business Council for Sustainable Development, 2001, CSR
is the commitment of business to contribute to sustainable economic development,
working with employees, their families, and the local communities. The Commission
25
Impact of CSR-Driven Internal Employee Motivation on Cordiality of Employee
317
of the European Communities 2001 cites in their green paper one of the most popular
definitions of CSR as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. It is commonly believed that in the developing world,
the difference between voluntary and mandatory would almost be difficult to
achieve. The Indian government has also legislated a new Companies Bill in the
Indian Parliament clause 135(5) of the same bill that prescribes that every company
with a net worth of at least Rs. 5,000 million, or turnover of at least Rs. 10,000 million,
or a net profit of at least Rs. 50 million will have to spend 2 % of its 3 years average
profit on CSR activities. However, in India, there has been a gradual realization by
firms that expanding their scope and ambit of social responsibility is the pertinent
need of the hour. Scholars over time have been able to identify the significant roles
that tradition, spirituality and respect have played in the evolution of CSR
(Balasubramanian et al. 2005; Jose et al. 2003; Sagar and Singla 2004). History of
CSR in India suggests that the very concept has previously been dominated by a
philanthropic approach, which is supposed to be in tune with the age-old tradition
of business-related involvement trying to accommodate social development needs.
In recent times, CSR as a noble practice has received an impetus from the emergence
of non-family business enterprises, corporate will and government and public
expectations (Mohan 2001). Researchers are of the opinion that CSR has moved
away from being a revenue-focused activity for competitive gains through helping
other direct and indirect members/stakeholders of the organization towards a more
inclusive model of strategic, sustainable business development.
In the Indian context, Singh and Agarwal (2014) found that most of the CSR
activities of the Indian corporations are focused towards external stakeholders (such
as community welfare, education, health, environment etc.). The level of employee
involvement in CSR activities of the companies is also low, only 10 companies out
of top 200 companies in India were found to be involving employees directly in
their CSR activities (Singh and Agarwal 2014). In the context of Indian banking
industry, Singh and Agarwal (2013), found that the CSR orientation of Indian banks
differ based on ownership, number of employees, and date of its incorporation in the
areas of Environment & Rural development (for ownership), Community Welfare,
Environment, and Rural development (for number of employees), and Environment,
and market place (for date of its incorporation). This gives us evidence that corporations in emerging markets are knowingly or unknowingly gearing towards their
internal and external stakeholders.
2.3
Internal and External (Community Relations) CSR
CSR and its impact have been considered to be multidimensional and therefore we
look at CSR both from an internal and external perspective (Augilera et al 2007).
Internal CSR activities and initiatives typically represent the organizations actions
such as ensuring quality of work, Safety, Health and Environment (SHE) and pay
318
S. Agarwal et al.
parity within the organization (Brammer et al 2007). External CSR on the other
hand is concerned with organizational initiatives with respect to its external stakeholders such as customers, local communities and business partners.
Social engagement and CSR initiatives with respect to local communities are the
most common and important influence on harmonious industrial relations. A lot of
HR managers, particularly in extractive industries, tend to lead charity and
philanthropic initiatives such as supporting local art, culture and sporting events as
well as making critical infrastructure investments to win the trust and goodwill of
local community members (Augilera et al 2007). Indian companies which employ
local community members use it as an integral part of their employee relations strategy. Wartick and Cochrans (1985) opined that constantly trying to link business
with society necessarily can advance the idea of corporate social performance,
which calls for (intrinsically) motivated employees responsiveness.
2.4
Employee Internal Motivation
Employees are considered to be internally motivated when they seek interest,

self-expression, enjoyment and personal challenge (Amabile 1993). In his seminal
paper, Deci (1973) argues that it is the employees need for feeling self-determined
and competent that forms the edifice of internally motivated behaviours.
Intrinsically motivated employees are an asset every organization strives to acquire
and develop. Internally motivated employees are more committed and contribute to
cordial workplace relations. Exhibition of socially responsible behaviour by the
organizations has a positive impact on employee attitude, commitment, loyalty,
retention, turnover and employer image (Aguilera et al. 2007; Heslin and Ochoa
2008). This paper seeks to understand the impact of internal employee motivation
developed as a result of socially responsible behaviour of organizations on
employee relations. Therefore, it is hypothesized that:
H1: There is a positive correlation between CSR and internal employee motivation.
H2a: External CSR (customers-related) positively correlates with internal employee
motivation.
H2b: External CSR (local communities-related) positively correlates with internal
employee motivation.
H2c: External CSR (business partners-related) positively correlates with internal
employee motivation.
Methodology
To test the proposed hypothesis, an online survey was conducted using the Qualtrics
online platform. The link was distributed to the targeted segment through social
media platforms. We received 206 survey responses out of which 186 were
25
319
complete and were subsequently used for analysis. The demographic characteristic
of the sample is presented in Table 25.2. The scales used in the study were borrowed from Skudiene and Auruskeviciene (2012); details of the scale along with
various measures are depicted in Table 25.1. We performed factor analysis and
multiple regressions to test our hypothesis, the results of which are presented in the
following sections. A 5-point Likert scale is used (1 being strongly disagree and
5 being strongly agree) to measure agreement with each item.
The complete list of items of each scale is presented in Table 25.1, along with the
loadings on each item, which were revealed through factor analysis with principal
component analysis with varimax rotation. We checked for the item total correlation
(ITC) for each item and retained only those items which were found to be greater
than 0.35; all these items are reported in Table 25.1. Reliability measure, Cronbachs
, was found to be within the acceptable limit, i.e. greater than 0.7 for each of the
construct. The factor loadings for each item, along with the results of KMO measure
of sampling adequacy and Bartletts test of sphericity, are within the acceptable
limits and are also mentioned in Table 25.1.
Results
The data was analysed using SPSS 19.0. The factors retained after factor analysis,
along with factor loadings are presented in Table 25.1. Factor analysis revealed only
one factor for all the constructs other than internal employee motivation, for which
two factors were revealed in our study. The results of regression analysis and correlation analysis are reported in Fig. 25.2 and Fig. 25.3, respectively.
The regression results of the model shown in Fig. 25.1 revealed a statistically
significant relationship between internal CSR, various dimensions of external CSR
Fig. 25.1 Conceptual framework for factors influencing harmonious employee relations
Regression Results
Model Summary
Model
1
R
0.766
Adjusted R
Square
0.578
R Square
0.587
Std. Error
of the
estimate
7.21595
Predictors: (Constant) CSR_Employees, External_CSR_Community,

CSR_Suppliers, CSR_Customers
Model
regression
Residual
Total
Sum of Squares
13112.253
9216.39
22328.643
ANOVA
df
4
177
181
Mean Square
3278.063
52.07
F
62.955
Sig
0
Dependent Variable: Internal Employee Motivation

Predictors: (Constant), CSR_employees, external_CSR_Community, CSR_suppliers,
CSR_Community
Fig. 25.2 The regression results for our study
Correlation Analysis
Internal_emp_ Esternal_csr_
CSr_Custo- Csr_employe
Csr_Suppliers
motivation
community
mers
es
Internal_e
Pearson
mp_motiva
Correlation
tion
Sig (2 tailed)
N
Esternal_cs
Pearson
r_communi
Correlation
ty
Sig (2 tailed)
N
Csr_Supplie
Pearson
rs
Correlation
Sig (2 tailed)
N
CSr_Custo
Pearson
mers
Correlation
Sig (2 tailed)
N
Csr_employ
Pearson
ees
Correlation
Sig (2 tailed)
N
Fig. 25.3 Correlation results
0.660
0.646
0.689
0.759
182
0.000
182
0.000
182
0.000
182
0.000
182
0.660
0.765
0.725
0.773
0.000
182
195
0.000
195
0.000
195
0.000
195
0.646
0.765
0.838
0.864
0.000
182
0.000
195
195
0.000
195
0.000
195
0.689
0.725
0.838
0.909
0.000
182
0.000
195
0.000
195
195
0.000
195
0.759
0.773
0.864
0.909
0.000
182
0.000
195
0.000
195
0.000
195
195
25
321
and internal employee motivation with R square value of 0.587. Performance of

correlation analysis revealed important findings:
Internal CSR (related to employees) is found to be related positively to internal
employee motivation with Pearsons r = 0.759.
External (customers-related) CSR is also found to be related positively to internal employee motivation with Pearsons r = 0.689.
External (local communities-related) CSR is also correlated positively with
internal employee motivation employee motivation with Pearsons r = 0.660.
External (business partners-related) CSR is correlated with internal employee
motivation with Pearsons r = 0.646.
Conclusion/Managerial Implications
The results of this paper indicate a positive correlation between the demonstration
of socially responsible behaviour by the organization and the employees internal
motivation. The results reveal a strong correlation between the organizations local
community relations and employees internal motivation. This has far-reaching
implications for industrial/employee relations as organizations can and should
utilize their CSR initiatives to foster harmonious employee relations. HR practitioners can draw a number of readily implementable takeaways from the results of
study. First, both internal and external CSR have a significant and positive impact
on the employees internal motivation. Managers can make use of this insight to
ensure greater employee involvement in the organizations CSR initiatives. The
employees need to be involved more in local community development and engagement activities to foster increased interaction and rapport between the company and
its immediate local community members. Trustful, mutually respectful and goodwill-based community relations would in turn yield improved industrial/employee
relations as the organization would enjoy the support of local community leaders
and members. Secondly, HR managers can effectively exploit CSR to build their
credibility and image as an employer of choice. Thus, this paper has sought to
understand CSR as a factor influencing harmonious employee relations.
Appendix
Table 25.1 Rotated component matrices (where there were more than one factors), for the
principal component analysis (varimax rotation and standard Kaiser Criteria) of items concerning
attitudes and preferences
Factor
Corrected loadings KMO
Bartletts test
item total
of sphericity
correlation Factor 1 Factor 2 (significance)
Item
Internal CSR
Providing equitable
0.812
wage system and career
prospects for all
employees
Improving psychological 0.806
climate at work
Engaging in open,
0.825
honest and flexible
communication with
employees
Involving employees
0.79
into decision- making
process
Contributing to the
0.766
personal and career
development of the
employees
External CSR (local communities)
Supporting local sport,
0.702
cultural or other
community activities
and projects
Donating money to local 0.569
charities
Investing in the
0.558
communitys
development (i.e.
investments in roads,
schools or hospitals)
Involving into
0.695
partnership with
community-based
organizations
External CSR (business partners)
Engaging in fair trading 0.628
transactions with
suppliers
Implementing
0.743
complaints procedure
for the suppliers
Avoiding business
0.666
partners that do not
behave according
to the law
0.892
Composite
reliability
(Cronbachs
alpha)
0.9
0.000
0.922
0.77
0.000
0.807
0.69
0.000
0.820
0.884
0.878
0.868
0.849
0.724
0.558
0.561
0.724
0.899
0.855
0.825
(continued)
25
323

Corrected
item total
Item
correlation
Internal employee motivation
The more difficult the
0.635
problem, the more I
enjoy trying to solve it
What matters most to
0.762
me is enjoying what I do
No matter what the
0.483
outcome of a project, I
am satisfied if I feel I
gained a new experience
It is important for me to 0.724
have an outlet for
self-expression
I want to find out how
0.758
good I really can be at
my work
I enjoy trying to solve
0.677
complex problems
I enjoy tackling
0.690
problems that are
completely new to me
I enjoy doing work that 0.661
is so absorbing that I
forget about everything
else
I want my work to
0.806
provide me with
opportunities for
increasing my
knowledge and skills
Im more comfortable
0.761
when I can set my own
goals
I prefer to figure things 0.730
out for myself
It is important for me to 0.783
be able to do what I
most enjoy
Curiosity is the driving 0.725
force behind much of
what I do
Factor
loadings KMO
Composite
Bartletts test reliability
of sphericity (Cronbachs
Factor 1 Factor 2 (significance) alpha)
0.551
0.92
0.000
0.932
0.770
0.850
0.758
0.744
0.822
0.821
0.723
0.779
0.722
0.633
0.633
0.661
(continued)
324
S. Agarwal et al.
Item
External CSR (ECC)
Implementing a
procedure to handle
consumers complaints
Providing truthful and
honest information to
the consumers
Avoiding false and
misleading advertising
or sales promotions that
use deception or
manipulation
Factor
Corrected loadings KMO
Bartletts test
item total
of sphericity
correlation Factor 1 Factor 2 (significance)
Composite
reliability
(Cronbachs
alpha)
0.730
0.402
0.000
0.625
0.372
0.676
0.389
0.7
0.821
Table 25.2 Demographic characteristics of the sample

Measures
Gender
Age
Sector
Years in company
Department
Value
Male
Female
Less than 25
Between 25 and 29
Between 30 and 39
Between 40 and 49
50 and above
Retail and wholesale
Consultancy
Tourism and entertainment
Manufacturing
Transportation
Communication and publishing
Construction and real estate
Others
Less than 1 year
Between 1 and 2 years
Between 2 and 4
5 years and above
General administration
Marketing
Sales
HR
IT
Accounting and finance
Others
Frequency
94
92
30
74
21
37
24
9
28
3
85
3
4
5
36
31
47
36
73
49
11
10
18
39
5
55
Percentage
51
49
16
40
11
20
13
5
15
2
45
2
2
3
19
17
25
19
39
26
6
5
10
21
3
29
25
325
References
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Aguilera RV, Rupp DE, Williams CA, Ganapathi J (2007) Putting the S back in corporate social
responsibility: a multi-level theory of social change in organizations. Acad Manage Rev
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Amabile TM (1993) Motivational synergy: toward new conceptualizations of intrinsic and extrinsic motivation in the workplace. Hum Resour Manag Rev 3(3):185201
Balasubramanian NK, Kimber D, Siemensma F (2005) Emerging opportunities or traditions reinforced? An analysis of the attitudes towards CSR, and trends of thinking about CSR, in India.
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Bradford M (2001) Employers trying new ways to create office harmony. Bus Insur 35(3):3
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Commission of the European Communities (2001) Promoting a European framework for corporate social responsibility, green paper. European Commission, Brussels
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Heslin PA, Ochoa JD (2008) Understanding and developing strategic corporate social responsibility.
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Jose PD, Bandi R, Mehra M (2003) Corporate social responsibility in the information and communication technologies sector: discussion. IIMB Manag Rev 15:6177
Mohan A (2001) Corporate citizenship: perspectives from India. J Corp Citizenship 2:107117
Sagar P, Singla A (2004) Trust and corporate social responsibility: lessons from India. J Commun
Manag 8:282290
Singh R, Agarwal S (2013) Does CSR orientation reflect stakeholder relationship marketing orientation? An empirical examination of Indian banks. Market Intell Plan 31(4):405420
Singh R, Agarwal S (2014) Corporate social responsibility in emerging markets: corporate Indias
engagement with local communities. In: Fukukawa K (ed) Corporate social responsibility and
local community in Asia. Routledge, London, pp 6585
Skudiene V, Auruskeviciene V (2012) The contribution of corporate social responsibility to internal employee motivation. Balt J Manag 7(1):4967
Venkata Ratnam, C. S. (1995). Economic liberalization and the transformation of industrial relations policies in India. In: Employment relations in the growing Asian economies. London:
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Chapter 26
Improving Efficiency of Emerging Market

Banks: A Matter of Ownership, Control,
or Getting Ones Hands Dirty?
Giang Phung and Michael Trge
Abstract Under the Vietnamese strategic partnership program, a range of foreign

banks have been allowed to take minority participations in local banks. This paper
studies the effect of this program on different measures of bank profitability. We
demonstrate that the presence of a foreign partner had a positive impact on performance only if the financial participation was also accompanied by an active implication of foreign bankers. We also observe that whereas foreigners on supervisory
board seem to boost accounting return on equity (ROE), a more operational involvement of foreigners on the executive board improves fundamental characteristics
such as the net interest margin (NIM).
Keywords Foreign investment Strategic partnership Board participation
Emerging market Banking performance
Introduction
Transforming a socialist-style centralized banking system into a competitive,

efficient, and stable financial market is a major challenge for all transition countries. The disastrous experiments of many Eastern European countries with
financial sector reform (Bonin and Wachtel 1999; Brta and Singer 2006) have
demonstrated that the key to a successful transition is to increase the efficiency
of local banks without disrupting the human capital and knowledge embedded in
the existing structures.
Vietnam has tried to achieve these goals with a policy of strategic partnerships
where large international banks are allowed to acquire minority stakes in important
G. Phung (*) M. Trge

ESCP Europe, 79, avenue de la Rpublique, 75543 Paris Cedex 11, France
Springer India 2015
327
328
G. Phung and M. Trge
local banks. Officially starting in 2007 with investments in seven banks representing
roughly 17 % of Vietnams banking assets, the program has successively expanded
to 13 banks in 2013 covering around 40 % of the countrys banking assets. Currently
the law allows a single foreign owner to own a stake of up to 20 % in a bank, the
total non-Vietnamese ownership is limited to 30 % (Vietnam News 2013).
The policy is hotly debated within Vietnam, with the State Bank of Vietnam
announcing that they are likely to increase the threshold allowing single entities to
hold more than 20 % of local banks equity but hesitating to give foreign owners the
right to own majority stakes (Thuy 2013). Foreign banks are arguing that in order to
make their investments in domestic banks profitable, they would either need a controlling stake or at least receive a right to operate the bank, which under the current
20 % ownership is not possible (Talkvietnam 2012).
This paper assesses the success of the strategic partnership policy in improving
the profitability of Vietnamese banks. We find that the policy has only been a partial
success. In fact neither foreign ownership nor the mandatory representation of foreign shareholders on the supervisory board has an effect on the fundamental profitability of banks, measured by the net interest margin (NIM) or return on assets
(ROA). If anything, there is a weak relation between foreign ownership and return
on equity (ROE), a flawed and easily manipulated measure of bank performance
(Admati and Hellwig 2013) that we know not to be related to shareholder wealth
(Moussu and Petit-Romec). What does improve the operating profitability of banks,
however, is the presence of a foreigner on the banks executive board. Banks with
foreign managers have significantly higher net interest margins.
These findings add to the growing literature about financial systems in transition
countries in Eastern Europe and Asia. In particular, we directly complement the
results of Berger et al. (2009) on the Chinese strategic partnership program. They
observe that minority foreign ownership is associated with significantly improved
efficiency and conjecture that foreigners take positions on the board and in the
management of Chinese banks and leverage these positions to improve the corporate culture and management of these banks. However, they do not collect data
on board membership and therefore cannot directly test this hypothesis. Our results
corroborate and qualify their findings, by demonstrating that it is indeed not ownership which leads to better performance but that active management participation
is required.
Similar evidence on the positive effect of foreign minority investment and board
participation in the context of other formerly nationalized banking sectors is also
given in Choi and Hasan (2005) for Korea and Gulamhussen and Guerreiro (2009)
for Portugal, corroborating for the banking sector the results obtained for foreign
directors of nonfinancial corporations by Oxelheim and Randy (2003) in
Scandinavia. In contrast to these papers, however, we exploit the two-tiered board
structure of Vietnamese firms, similar to the study of Firth et al. (2007) of Chinese
nonfinancial companies.
Related evidence on the importance of foreign influence comes from the large
literature following cross-country study by Demirg-Kunt and Huizinga (1999)
26
Improving Efficiency of Emerging Market Banks: A Matter of Ownership, Control 329
demonstrating that foreign-owned or majority-controlled banks perform better than

their local counterparts. For example, in a study of Argentina and Mexico, Dages
et al. (2000) have found that foreign-owned banks both performed better and were
less risky than their domestic counterparts. Bonin et al. (2005a) make this observation
for Eastern European transition countries. Note however that with 20 % ownership,
the Vietnamese banks with strategic partnership in our sample cannot be considered
to be foreign controlled.
Finally our insight that board membership influences reported as opposed to true
performance is reminiscent of Beltratti and Stultz (2012) and Minton et al. (2011),
who show that financial experts on the board might incite the banks to take higher
risk and focus on flawed performance measures such as ROE.
In addition to our principal result, we are able to confirm or contradict for
Vietnam a number of additional relationships that have been identified for other
countries. For example, there is a large literature on the efficiency of state-owned
banks. Micco et al. (2004) show that state ownership decreases bank profitability
in developing economies, and Bonin et al. (2005b) and Heffernan and Fu (2008)
confirm this observation for Eastern European and Chinese state-owned banks. It
should be emphasized however that there is no mechanical relation between state
ownership and financial profitability. In Africa (Figueira et al. 2009) and Europe
(Micco et al. 2004), bank performance seems to be relatively unaffected by states
ownership. We observe that in Vietnam, state-owned banks even seem to be more
profitable than privately owned banks, probably because they benefit from a number of advantages, in particular privileged access to cheap refinancing from the
central bank.
There is also a strand of literature arguing that listing in the stock market will
improve the efficiency of banks in emerging markets. For example, Luo (2003)
finds that in China, publicly listed banks have better asset quality. Wang and Zhu
(2008) finds that listing on the stock market makes banks more efficient by reducing
NPL ratio, enhancing capital adequacy and improving profitability. A stock market
listing can also improve capital ratios (Xue 2007 and Peng 2008) as well as increase
efficiency (Shih et al. 2007) that listing makes banks more efficient in improving
profit. However, these results are not unchallenged; for example, Heffernan and Fu
(2008) do not find increased profitability for listed banks in China. As Lin and
Zhang (2009) indicate, some banks might perform better only before being listed
but not subsequently, because large capital injection was received to move off NPLs
prior to listing but tailed off post listing. Our results point in the same direction: We
cannot confirm that the small number of listed Vietnamese banks (from 2 listed
banks in 2006 to 13 in 2013) perform better than unlisted banks.
In the next section, we will give a short overview of banking sector reform in
Vietnam as well as a detailed description of the strategic partnership program and
its objectives. We then explain in Sect. 3 the construction of the dataset and provide
descriptive statistics for the key variables used in our study. Section 4 presents our
principal results, Sect. 5 discusses political implications and robustness, and Sect. 6
concludes.
330
2
2.1
Some Institutional Background

From a Mono-bank System to a Two-Tiered System:
The Transition of Vietnams Banking Sector
After its reorganization in 1976, the State Bank of Vietnam (formerly the National
Bank of Vietnam) became the central bank of the country. As recent as 1988,
Vietnams economy was essentially supported by a one bank system with a head
office in Hanoi, a division in Ho Chi Minh City, and numerous provincial branches
nationwide. The state banking system was essentially operating as a budgetary tool,
having no monetary business activities following market principles.
The year of doi moi (reform) 1986 marked an important change in the economy as well as in the banking system of Vietnam. In March 1988, the issuance of
Decree 53/HDBT directed the banking system towards more business orientation.
In May 1990, the State Council then passed two ordinances1 that officially transformed the banking system in Vietnam to a two-tiered system. The State Bank of
Vietnam performs the state managerial function of monetary and banking business
activities, that is, it focuses on the tasks of a central bank; commercial banks and
credit institutions carry out currency trading and offer credits as well as payments,
foreign exchange, and banking services. Today, the State Bank of Vietnam has
devolved the commercial activities except the regulatory functions of a central bank
to five state-owned banks. The Bank for Foreign Trade (Vietcombank) handles over
80 % of all trade transactions, including foreign exchange. The Bank for Investment
and Development of Vietnam (BIDV) focuses on the financing of infrastructure.
The two others are the Vietnam Bank for Industry and Trade (VietInBank formerly
Industrial and Commercial Bank, abbreviated Incombank), focusing on financing
industry and trade, and the Housing Bank of Mekong Delta. The Bank for Agricultural
Development maintains the largest network in the country, corresponding to the
needs of an agriculture-dominated economy.
Alongside the state-owned commercial banks, since 1991, Vietnamese jointstock banks have been gradually founded and come into operation, contributing to
the development of the countrys banking system. As of December 2010, there were
37 Vietnamese private joint-stock commercial banks, in addition to foreign bank
branches, joint venture banks, credit cooperatives, and finance companies.
Today, the State Bank of Vietnam supervises a large network of credit institutions comprising of five state-owned commercial banks (of which, two banks were
partially privatized (equitized), namely, Bank for Foreign Trade of Vietnam and
Vietnam Bank for Industry and Trade), Vietnam Development Bank, 37 joint-stock
commercial banks, 5 joint venture banks, 40 foreign bank branches, 5 100 %
foreign-owned banks, 16 financial companies, 13 financial leasing companies, 49
foreign credit institutions representative offices, one central peoples credit fund,
1
The Ordinance on the State Bank of Vietnam and The Ordinance on banks, credit cooperatives
and finance companies.
26
Improving Efficiency of Emerging Market Banks: A Matter of Ownership, Control
331
and 1,030 local peoples credit funds. Commercial banks today are diversified in
terms of ownership and business focus.
In total, eight banks were listed on the stock market as of 31 December 2012, on
either HOSE (Ho Chi Minh City Securities Trading Center) or HaSTC (Hanoi
Securities Trading Center). More banks are having been preparing themselves to be
qualified for listing.
2.2
The Vietnamese Strategic Partnership Program
Before the official start of the strategic partnership program launched by the government in 2007, five banks had welcomed foreign shareholders with ownership ranging from 5 % to 30 %. Saigon Thuong Tin Commercial Bank (Sacombank) initiated
the trend in 2001, receiving a financial contribution from the financial group Dragon
Financial Holding (United Kingdom) equal to 10 % of the charter capital.
Today, under Article 4 of the Government Decree 69/2007 dated 04/20/2007, foreign shareholders may own up to 30% of a joint-stock bank; the shareholding of a
strategic partnership and its related parties may be up to 15 % of a Vietnamese bank,
and in special cases with the Prime Ministers approval, this may be up to 20 %.
The motivation for these partnerships is twofold: They allow Vietnamese banks to
increase capital (which was especially true during 2007 when the stock market
boomed in Vietnam) but also to exploit the global brands of the foreign partners, to
learn from the international practices through knowledge transfer projects. For the
foreign partners, they have a chance to probe the market potentials and can utilize the
opportunity to export their expertise. As this paper demonstrates, the real benefits of
this kind of collaboration are still much open to questions; nevertheless, during the
period 20072009, the banking system witnessed a wave of strategic partnerships.
It should be pointed out however that since Vietnam joined the WTO in 2007,
foreign banks are also allowed to establish 100 % foreign-owned banks in Vietnam.
Today five foreign banks are active in Vietnam, which were all were all established
in 2008. Interestingly some foreign banks are present in Vietnam through a strategic
partnership as well as with an own subsidiary, which predictably has led to problems.
As a consequence, a number of strategic partnerships have been dissolved recently
(Vietnam Investment Review 2013).
3
3.1
The Data
Indicators of Bank Performance
Measuring bank performance is difficult because information about returns is meaningless without controlling for risk. A very large number of papers have assessed
bank efficiency using frontier analysis (see Berger and Humphrey 1997 for a survey
of the early literature) and several papers have applied this tool to the Vietnamese
332
banking sector (Ngo 2012; Sun and Chang 2011; Vu et al. 2010; Phan and Daly
2012; Dinh 2013; Nguyen 2007), however, with sometimes counterintuitive results.
For example, Ngo (2012) shows that the efficiency of Vietnamese banks measured
with a frontier analysis approach has decreased over time, whereas Vu and Turnell
(2010) obtain the opposite result. We therefore follow the approach of DemirgKunt and Huizinga (1999) and rely on simpler accounting measures of bank
performance. In particular we focus on the net interest margin (NIM), return on
equity (ROE), and return on assets (ROA).
ROE defined as net profit divided by book equity is obviously the key performance indicator used by most bank managers and financial analyst in developed
countries. By focusing on the return for shareholders, this measure aggregates rents
earned on the asset side as well as rents earned from the liability side of the bank
balance sheet and in particular deposits.
Unfortunately ROE has major flaws as a performance indicator (Admati and
Hellwig 2013). In particular it is very sensitive to variations of bank risk taking in
particular leverage and therefore often not closely correlated with shareholder value
creation (Moussu and Petit-Romec 2013).
In an emerging market context, the flaws of ROE have been evident for a long
time, in particular because the level of book equity is highly dependent on accounting
choices regarding nonperforming loans. Vietnamese bank managers and financial
analysts do not consider it as reliable indicator of bank performance (KPMG 2013).
The measure most looked at in Vietnam is indeed the NIM, defined as interest income
minus interest expenses divided by the amount of interest-earning assets. As this
measure excludes noninterest income which can be substantial for some banks, it is
often complemented by ROA defined as net profit divided by total assets.
3.2
Foreign Control and Management
Vietnamese companies have a two-tiered board structure and use a slightly unusual
terminology to describe these boards. The term board of management is used in
Vietnam to refer to what in Europe would be called executive board. This board is
presided by the CEO. The equivalent structure in the United States would be the
executive committee, operating committee, or executive council.
The term board of directors is used in Vietnam to refer to the supervisory
board (European terminology) which in US terms would correspond to a board of
nonexecutive directors. This board is presided by a chairman who always differs
from the CEO. It is worth noting that in Vietnamese banks, there is a third board
named supervisory board comprised of independent supervisors, whose role is to
help the board of directors in controlling the board of managements activities.
Shareholders are entitled to be represented on the board of directors (i.e.,
supervisory board using the European terminology), and therefore, the percentage of foreign supervisory board members is basically a rounded value of the
percentage of foreign ownership. This is not true for the fraction of foreigners on the
26
board of management, which is only weakly correlated with the percentage of foreign
equity ownership.
For this study we have not used direct information about foreign ownership. We
only focus on the fraction of foreign board members in the board of management
(BOMF) and the fraction of foreigners on the board of directors (BODF). Obviously
the second variable can also be viewed as a direct proxy of overall foreign ownership.
3.3
Construction of the Dataset
The data for this study were hand collected from the banks annual reports. As
required by the State Bank of Vietnam, all the banks in the sample use local generally accepted accounting practices (Vietnamese Accounting Standards VAS);
hence, all the data used for analysis came from the audited standardized financial
statements built on VAS. The financial data for all Vietnamese commercial banks in
7 years from 2006 to 2012 are used for calculating the ratios measuring performance. Apart from that, other sources of data were consulted through reference to
the library (BankScope) and the review of banks official websites, different articles,
papers, and relevant previous studies.
During the period of our study, the number of Vietnamese commercial banks
ranged from 38 to 42 banks; the fluctuation is explained by the creation of new banks
and mergers. Among this population of banks (of which five are state-owned), only
the data for Vietbank was unavailable for the entire period of our research, some other
small banks did not disclose their financial information for some years. Agribank is
the only big bank whose data was missing for 2012, explained by its size in total assets
and the huge number of branches nationwide (see Appendix A1 for a detailed list of
banks included and data availability). In 2011 and 2012, our data covers, respectively,
91.8 % and 79.4 % total Vietnamese commercial banks assets. For the whole
researched period, Vietnamese commercial banks stably accounted for 8586 % of the
total assets of the whole credit institution system in Vietnam (see Appendix A2).
Table 26.1 gives a breakdown of the different types of banks included in our
study together with the size of their assets. In particular, Table 26.1 illustrates the
impressive progress of privatization in Vietnam over the last years. In 2012, the five
state-controlled banks only own slightly more than half of the total banking assets,
down from 75 % 6 years earlier.
3.4
Descriptive Statistics
Table 26.2 provides an overview of the variables used in the empirical analysis.
Table 26.3 provides summary descriptive statistics (in Appendix A3 we also
provide the correlations). Overall profitability is highly variable with interest margins ranging from 0.59 % to 8.74 %, ROE ranging from 16 % to 43 %, and ROA
ranging from 0.39 % to 5.95 %.
334
Table 26.1 Bank types
Total bank
observation
2006
32
2007
36
2008
39
2009
40
2010
40
2011
36
2012
33
Total
256
22
10
11
12
12
64
24
24
23
19
20
158
1,375
1,360
1,742
2,181
2,050
1,650
11,319
62 %
61 %
54 %
47 %
47 %
42 %
53 %
0%
0%
0%
11 %
21 %
27 %
10 %
60 %
59 %
52 %
35 %
25 %
14 %
42 %
2%
2%
2%
1%
1%
1%
2%
38 %
39 %
46 %
53 %
53 %
58 %
47 %
16 %
22 %
24 %
30 %
32 %
25 %
24 %
22 %
17 %
22 %
23 %
20 %
34 %
22 %
Observation by ownership
1. State-owned commercial banks
Big-Four banks w/
0
0
foreign minority
Big-Four banks
4
4
w/o foreign
minority
Non-Big-Four
1
1
state-owned bank
2. Joint-stock commercial banks (JCBs)
JCBs w/foreign
4
6
minority
JCBs w/o foreign
23
25
minority
Market share of assets by group
Total assets (bil
961
VND)
1. State-owned
75 %
commercial banks
Big-Four banks w/
0%
foreign minority
Big-Four banks
73 %
w/o foreign
minority
Non-Big-Four
2%
state-owned banks
2. Joint-stock
25 %
commercial banks
(JCBs)
JCBs w/foreign
10 %
minority
JCBs w/o foreign
15 %
minority
Overall 13 % of our observations are for state-owned banks and 14 % for listed
banks. The majority is therefore for privately owned non-listed banks.
The Empirical Results
This section presents the regression results. Table 26.4 reports our main regressions
of the net interest margin (NIM), return on equity (ROE), and return on assets
(ROA) on the independent variables using a random effects model. The presence of
26
Table 26.2 Summary of the variables

Variables
NIM
ROE
ROA
GDPr
BOMF
BODF
GDPr
Logasset
Leverage
State
Listed
Definition
Net interest margin
Return on equity
Return on assets
Growth rate of gross domestic product on annual
basis
The ratio of foreign managers to total managers on
the management board
The ratio of foreign directors to total directors on
the supervisory board
Growth rate of gross domestic product on annual
basis
The natural logarithm of total assets (Pathan et al.
2007; Pathan 2009; Azofra and Santamaria 2011)
The ratio of banks total asset over banks book
equity
Dummy variable which is 1 in case bank is
state-controlled (i.e., the state owns more than
50 % of shares)
Dummy variable which is 1 in case bank is listed
Data source
Annual reports of banks
World development indicators
of the World Bank
World development indicators
of the World Bank
State Bank of Vietnam
Table 26.3 Descriptive statistics

Continuous variables
Variables
Mean
NIM
3.09 %
ROA
1.21 %
ROE
10.25 %
GDPr
6.56 %
Logasset
4.26
Leverage
10.41
BOMF
2.80 %
BODF
4.72 %
Min
0.59 %
0.39 %
15.95 %
5.03 %
2.65
1.51
0.00 %
0.00 %
Max
8.74 %
5.95 %
43.20 %
8.46 %
5.53
92.95
50.00 %
40.00 %
SD
1.45 %
0.82 %
6.76 %
1.21 %
0.61
7.89
8.72 %
9.22 %
a foreigner on the board of management (BOMF) has a significant positive effect

only on NIM, but not on other variables. The mandatory representation of foreign
shareholders on the board of directors (BODF), however, only has a weakly significant effect on ROE but does not impact other performance measures. In particular
ROA is not affected by any of the board characteristics. This is likely because of the
high volatility of noninterest-related income included in ROA but not in NIM.
A fixed effects regression will lead to qualitatively similar results, however, some
of the results, in particular those with ROE as dependent variables will become
insignificant. This is not surprising as we do not have many observations and our
336
Table 26.4 Regression results
Dependent variables
ROE
NIM
ROA
BOMF
0.071
0.032
***
0.002
1.37
2.82
0.23
BODF
0.107
*
0.009
0.006
1.88
0.69
0.77
State
0.028
0.014
**
0.002
1.59
2.49
0.71
Listed
0.031
**
0.008
***
0.003
2.48
2.76
1.64
GDPr
1.548
***
0.244
***
0.101
5.51
4.04
2.77
Logasset
0.033
***
0.012
***
0.005
3.22
4.74
3.52
Leverage
0.003
***
0.000
*
0.000
4.90
1.92
2.23
0.3924
0.1945
0.2048
R2 (overall)
Wald chi2
117.81
58.85
49.95
Prob > chi2
0
0
0
Nr of obs
256
256
256
Estimations were performed using random effects regression
The numbers in italic are z-statistics
*, ** and *** indicate statistical significance at the 10 %, 5 %, and 1 % level
*
***
***
**
independent variables do not vary very much over the time. The Hausman test
(1978) for testing fixed against random effects results is insignificant, implying
that the random effects model will yield more precise errors.
There are several ways to interpret the results of our study. One result is a negative one: Foreign ownership alone makes no difference to performance. This is an
important insight because it implies that the strategic partnership program has
missed an important objective.
Of course we also want to claim that putting a foreigner on the management
board will increase the performance of the bank but this result is more likely to be
the outcome of an endogeneity problem. In the following section we will discuss the
robustness of our results.
Discussion
Governance studies are always plagued by endogeneity problems. We do not have

an appropriate instrumental variable to address this problem; however, we want to
argue that, when carefully interpreted, our result can nevertheless be used to derive
policy implications.
26
There are two obvious endogeneity problems that could influence our empirical
results from the previous section: First, it is possible that foreign investors
choose the better-performing local banks or local banks for which they anticipate
a better future performance, when deciding about their strategic partnerships.
We would then get a relationship not because of causality but because of a
selection effect.
Our finding that NIM is not influenced by ownership (or the closely correlated
BODF) partially dispels these concerns; however, the relationship between ROE
and BODF might be caused by this selection, in particular given that BODF becomes
insignificant in the fixed effects regression with ROE as dependent variable. We are
nevertheless not much concerned about this because, as explained above, in any
case we do not consider ROE as a reliable indicator of bank performance.
The second and potentially more severe concern is that only more reform-minded
and innovative banks will seek to bring a foreigner on its management board. It is
therefore not obvious whether it is really the presence of the foreigner which makes
a difference or whether these banks would have performed better even without
foreign management. We think that it is likely that causality runs both ways. Better
banks are more likely to ask a foreigner to join the management board, but the
presence of a foreigner probably still makes a difference, if only because it reduces
agency conflicts and wealth extraction by different interest groups. Indeed reformminded CEOs might use the presence of foreign member on the management board
exactly with the intention to reduce these types of behavior. Anecdotal evidence
shows that some of the banks participating in the strategic partnership program
viewed the foreign partner solely as financial investors but refused to cooperate in
any way with these minority investors, whereas others seized the opportunity to
benefit from knowledge and technology transfers.
Conclusion
This paper examines the success of the Vietnamese strategic partnership program
in improving the profitability and efficiency of local banks. We complement
existing literature by differentiating between board of directors and executive
(management) board membership. In particular, we show that partial ownership
or board of directors membership alone is not sufficient to achieve efficiency
improvements in locally managed banks; what is really needed is the active
involvement of foreign management.
We think that our research has implications for the design of the Vietnamese
strategic partnership program. In particular this opens a possibility for the
Vietnamese government to attract foreign capital into the banking sector without
necessarily allowing foreign banks to own majority stakes. Foreign investors are
not interested in control but think they need control to implement the reforms that
make sure that their investment will perform. As our results show this is not true.
338
Performance can also be improved without majority control as long as the

Vietnamese banks agree to cooperate with the strategic investor and allow foreign
management to participate in operational decisions. It should therefore be possible for foreign banks to make profitable investments even if the foreign ownership
threshold is not increased. It might be sufficient to get foreign management
actively involved.
Appendices
Appendix A1: Data availability
Banks
ABB
ACB
Agri
BacA
BIDV
BV
DaiA
DongA
EIB
Ficom
GP
HBB
HD
KL
LV
MariB
MB
MDB
MHB
NA
NV
OCB
OceanB
PG
Sacom
SB
2006
1
1
1
N/A
1
2007
1
1
1
N/A
1
2008
1
1
1
N/A
1
1
1
1
N/A
N/A
1
1
1
1
1
1
1
N/A
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2009
1
1
1
N/A
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2010
1
1
1
N/A
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2011
1
1
1
1
1
1
1
1
1
2012
1
1
N/A
1
1
1
1
1
1
N/A
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
N/A
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Total
7
7
6
2
7
4
7
7
7
4
3
6
7
7
5
7
7
7
7
7
7
7
7
7
7
7
(continued)
26
(continued)
Banks
SCB
Sea
SG
SHB
Tech
TN
TPB
Trust
VA
VCB
VIB
VietCap
VietIn
2006
1
1
1
1
1
N/A
2007
1
1
1
1
1
1
N/A
N/A
1
1
1
1
1
1
1
1
1
1
2008
1
1
1
1
1
1
1
1
1
1
1
1
1
2009
1
1
1
1
1
1
1
1
1
1
1
1
1
2010
1
1
1
1
1
1
1
1
1
1
1
1
1
2011
N/A
1
1
1
1
2012
1
N/A
1
1
1
N/A
1
1
1
1
1
1
N/A
N/A
1
1
1
1
1
Total
6
6
7
7
7
4
3
5
6
7
7
7
7
Appendix A2: Bank types in Vietnam
#
1
2
3
4
5
6
7
8
9
10
11
12
13
Category
State-owned commercial banks
Policies banks
Development banks
Joint-stock commercial banks
Joint-venture banks
Foreign banks branches
100 % foreign-owned capital
banks
Financial companies
Financial leasing companies
Central peoples credit funds
Local peoples credit funds
Small-sized financial
organization
Foreign credit institutions
representative offices
Total VN commercial banks
2010
5
1
1
37
5
48
5
2011
5
1
1
35
4
50
5
17
13
1
1,057
1
18
12
1
1,095
1
48
50
1,239
42
1,278
40
Total assets
(bil VND)
12/31/2012
2,201,660
Total assets (%)

12/31/2012
43 %
2,159,363
555,414
42 %
11 %
154,857
3%
14,485
0%
5,085,779
100 %
340
Appendix A3: Correlation matrix
* indicates statistical significance at the 5 % level

Acknowledgment The authors are grateful for financial support from the Chaire KPMG/ESCP
Europe Gouvernance, Stratgie, Risques et Performance. We also wish to acknowledge the help
of Alberta di Giuli, Martin Kalck and Christophe Moussu for advice and assistance with this study.
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Chapter 27
Influence ofDrivers forStore Choice

onStore Selection andLoyalty
DeependraSharma andPankajMadan
Abstract The present research work aims at finding out key drivers that influence
store choice. It also aims to study their influence on store loyalty. On analysis it was
found that the drivers responsible for store selection are not equally responsible for
the selection of store format, i.e., old or new. Besides it is concluded that an average
consumer of urban Uttarakhand is not loyal to any type of store format. The results
of the present article will give the retailers enough idea about the various dimensions toward which they should be more attentive as the phenomenon of organized
retailing is gaining momentum in India.
Keywords Store choice Store satisfaction Store loyalty Store trust Store
patronage
1 Introduction
Selection of store involves lot of thinking and has been widely researched specially
in western economies. Recently, this phenomenon is gaining importance in Indian
markets also, the reason being the advent of larger and diverse retail formats by organized players (Sinha and Banerjee 2004). These retailers are making all the efforts to
give a new feel, new experience, and more choices to the Indian customers who up to
now had little options. Store choice has emerged as new area of study because the
retailers as well as shoppers are in the nascent stage with respect to organized retailing. Both of them are not clear as to what drives in reality the customer to shop in a
particular store (Sinha and Banerjee 2004). Today the retailers are facing the problem
of high footfall but low conversion resulting in high cost of services and lower profitability (Sinha etal. 2002). The present formats have been a successful saga in the
western world, but in India they are still struggling (Sinha etal. 2002).
D. Sharma (*)
Amity Business School, Amity University Haryana, Gurgaon
P. Madan
Gurukul Kangri Vishwavidyalaya, Haridwar
Springer India 2015
343
344
D. Sharma and P. Madan
This emphasizes the growing need to evaluate the influence that various drivers
for store choice has in store selection. It is important for a store owner (belonging to
either of the format) to understand this behavior for developing marketing strategies
to attract and retain its customers.
2 Hypothesis Development
Through review of literature, 11 drivers, namely, location (Miu and Perihinn 2003;
Mai and Hui Zhao 2004), promotion (Grewal etal. 1998; BMSR group 2010; Sinha
and Uniyal 2000), price (Fox etal. 2004), atmospherics (Baker etal. 2002; Gueguen
and Petr 2006), sales personnel (Lee and Dubinsky 2003; Mallalieu 2006), services
(Khadilkar 2012; Bitner 1990), purpose of visit (Walters and Jamil 2003), self-concept congruity effects (Sirgy etal. 2000; Underwood etal. 2001), product (Fox etal.
2004; Boatwright and Nunes 2001; Dick and Basu 1994), congeniality (Engel etal.
1995), and institutional store reputation (Aydin and Ozer 2005; Ball etal. 2006)
were found to be responsible for the store choice. These factors have been taken as
the drivers for store choice. The researchers try to find out whether these drivers are
considered for store choice by the shopper of both the categories (i.e., old and new
format) with the same preference or not. This leads to the development of first null
hypothesis, i.e., H01.
H01. Drivers for store choice are equally applicable (i.e., there is no difference
between the importance of drivers choice) for old (unorganized) and new formats
(organized).
Loyalty has been examined from different aspects including its impact on
long-term financial performance of a firm (Reichheld 2001). Reichheld (2003) has
established the link between loyalty and bottom-line profits. Owing to its managerial
relevance, studies in the past sought to determine the drivers of customer loyalty.
Emerging from these studies, a list of factors that include location, product
range, in-store promotions, frequent buyer/loyalty programs, store operation, store
appearance, ambience, spatial layout, relative price, and convenience was identified
(Miranda etal. 2005; Noble etal. 2006). This results in H02.
H02. There is no significant correlationship between drivers for store choice and
store loyalty.
3 Research Methodology
3.1 Questionnaire Design andMeasurement
A self-administered questionnaire was designed to collect data. It included 57
measures to collect information on 11 drivers and 7 measurements for loyalty. These
drivers and questionnaire items for these drivers were developed from inferences
27 Influence ofDrivers forStore Choice onStore Selection andLoyalty
345
obtained through the review of literature and exploratory interviews. Each of these
items was evaluated on a 5-point Likert scale ranging from 1 (strongly disagrees) to
5 (strongly agrees). Thus, questionnaire before taking to pilot survey contained 64
items. A sample consisting of 30 subjects (who were representative of the main
sample) was asked to administer the measures so as to examine its clarity and
relevance of constructs/drivers. Researchers have decided that measure with the
score of 30 will be discarded. The stores selected included an organized retailer
(Vishal Mega Mart, Easy Day, 7/11) and unorganized retailer (local kirana stores of
the region). Based upon it, no measure was dropped from the final questionnaire.
3.2 Data Collection

Systematic random sampling (i.e., every tenth shopper coming out from the outlet)
was used to select the respondents. Three hundred fifty two shoppers including
males and females of all age groups from cities like Dehradun, Kashipur, Haldwani,
and Rudrapur participated in the survey. One hundred and two respondents did not
provide complete information making them unusable; this resulted in a sample size
of 250 yielding a response rate of 71.4%. Primary data has been collected in the
month of July, August, and September of the year 2012. Mall intercept method
(Bush and Hair 1985) is used to collect the data so as to assess the latest perception
of the customers about the stores (organized as well as unorganized) they have
visited. SPSS 16.0 was used for the purpose of analysis.
3.3 Sample Size Adequacy

This sample size has been finalized based upon the standard sampling table for
problems involving sample proportions (Lin 1976).
3.4 Data Analysis

To develop an authentic instrument, reliability and validity analysis has been carried
out. Further techniques like ANOVA, chi-square test, correlation, and regression are
used for the analysis.
3.5 Validity Analysis

To establish content validity, construct validity, and face validity, store managers
(06), shopkeepers (10), and senior faculty members (05) of the researchers institute
were asked to compare and evaluate the items included in the questionnaire with the
objectives of the research.
346
3.6 Reliability Analysis

Scales for this study were considered to have good reliability with a Cronbachs
alpha value of 0.738 (Clark and Watson 1995).
4 Hypothesis Testing
H01. Drivers for store choice are equally applicable (i.e., there is no difference
between the importance of drivers of store choice) for old and new formats.
Chi-square test was applied (refer Table27.1). Shoppers were categorized in
three categories, namely, A, B, and C, based upon their relative importance given to
store choice attributes in store selection.
As per Table27.2, test statistics of 0.065 and 155 indicate that the researcher has
reduced error rate by 6.5% and 15.5%, respectively, over what one could expect by
error chance. The researcher has further calculated the value of chi-square for level
=0.05, df=2 the cut off point for the test statistic that comes to be as following:
2
tab
= 5.992

and
2
cal
= 6.001.
Thus, 2cal>2tab.
Hence, the null hypothesis can easily be rejected concluding that there is a
significant difference between the importance accorded to these drivers for store
choice by the shoppers of old and new format stores.
Table 27.1 Chi-square test (type of store visited and category of shoppers)
Value
6.001(a)
5.637
1.043
250
Pearson chi-square
Likelihood ratio
Linear-by-linear association
No. of valid cases
Df
2
2
1
Asymp. Sig.
0.050
0.060
0.307
Table 27.2 Directional measures (type of store visited and category of shoppers)
Nominal by interval
Eta
Category of shoppers
Type of store visited
Value
0.065
0.155
347

Table 27.3Correlations
Total drivers
Pearson correlation
Sig. (2-tailed)
N
Total loyalty
Pearson correlation
Sig. (2-tailed)
N
**Correlation is significant at the 0.01 level (2-tailed)
Total drivers
1
Total loyalty
0.541**
0.000
250
1
250
0.541**
0.000
250
250
Table 27.4 Model summarya

Change statistics
Model R
1
Adjusted
R square R square
0.487b 0.237
0.234
Std. error
R square
of the estimate change
F change df1 df2
3.723
0.237
77.155
Sig. F Durbin-
change Watson
248 0.000
1.831
Dependent variable: total loyalty

b
Predictors: (constant): total drivers
a
H02. There is no significant correlationship between drivers for store choice and
store loyalty.
From Table27.3, it is clear that at =0.01 relationship between the variables is
significant and moderate in nature with r=0.541.
Regression analysis was used to identify statistically significant relationships
between variables. Beta and R2 coefficients were used as indicators of the strength
and explanatory power of the relationships. In this analysis, R2 indicates the fit of
the linear relationship between the drivers for store choice (total drivers) and the
loyalty scores. R2 also indicates the proportion of the variation in the dependent
variable (loyalty) explained by drivers for store choice (the independent variable).
As illustrated in Table27.4, 24% (0.237) of the variation loyalty is explained by the
drivers for store choice scores. The statistical significance of relationship is also
shown in Table27.4 where relationship was found to be significant.
The value of R square is low, but in some studies, it is entirely expected that
R-squared values will be low, specially studies that attempt to predict human behavior. Furthermore, if R-squared value is low but have statistically significant predictors, one can still draw important conclusions about how changes in the predictor
values are associated with changes in the response value. Regardless of the
R-squared, the significant coefficients still represent the mean change in the response
for one unit of change in the predictor while holding other predictors in the model
constant. Obviously, this type of information can be extremely valuable (Frost 2013;
MacDonnell 2010).
The Durbin-Watson statistic is (refer to Table27.4) 1.831 (nearly 2) which indicates that there is no first-order autocorrelation. An acceptable range is 1.502.50.
Secondly, if the Durbin-Watson statistic is greater than R square, it is likely that
348
Table 27.5ANOVAa
Model
Sum of squares
1
Regression
1,069.338
Residual
3,437.178
Total
4,506.516
a
b
Predictors: (constant): total drivers
df
1
248
249
Mean square
1,069.338
13.860
F
77.155
Sig.
0.000b
Table 27.6Coefficientsa
Model
B
Std. error
1 (Constant)
6.056 2.061
Total drivers 0.102 0.012
a
Beta
0.487
t
2.938
8.784
Sig.
0.004
0.000
autocorrelation exists, but in here Durbin-Watson statistic is lower than R square,

indicating the absence of autocorrelation.
The most important part of the Table27.5 is the F-ratio and the associated significance value of that F-ratio. For these data, F is 77.155, which is significant at
p<0.01. This result tells us that there is less than a 1% chance that an F-ratio this
large would happen if the null hypothesis were true. Therefore, we can conclude
that our regression model results in significantly better prediction of loyalty than if
we used the mean value of loyalty. In short, the regression model overall predicts
loyalty significantly well.
According to Table27.6, regression equation may be drawn as

Total loyalty = 6.056 + .102 Total drivers.
5 Discussions
Results from H01 testing indicate that these drivers are responsible for store selection made by a shopper visiting either of the formats, but the order in which they are
preferred varies.
Results of H02 show that relationship of significant nature exists between drivers
for store choice and store loyalty where it is moderate in nature. It suggests that factors are correlated and do have an impact on each other, but the strength of relationship is not very strong.
The findings that there is a relationship between drivers for store choice loyalty
are in congruence with the past studies carried out by Oliver (1999) which have
found the variables to be correlated.
349
6 Conclusions/Implications
The result of H01 leads to the conclusion that though same drivers are applicable in
the decision-making process of the store selection (i.e., shopper visiting to either
type of format was looking for the same type of facilities), the order in which these
drivers are being applied by the shopper in store choice varies according to the type
of store being visited (organized or unorganized). Therefore, unorganized and organized retailers need to identify and work upon those drivers which are relatively
more important from their respective type of stores.
The result of H02 indicates that there exists a significant relationship between
drivers for store choice and store loyalty, but it is moderate in nature. The retailers
need to focus on these drivers to enhance the loyalty which will directly influence
its profitability.
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Chapter 28
ISFTA: Lessons for Bangladesh

Kumar Gaurav, Nalin Bharti, and Priyanka Sinha
Abstract Global financial crisis has offered many lessons for the developing
economies. Regional trade network in South Asia is weak compared to many other
regional trading blocs of the world. It is the size of the domestic markets that matter
especially at the time of crisis. Trade theorist Michael Porter pioneered that the
competitive advantage of nations is created and sustained through a highly localized
process: the nature of home market demand for industrys product or service. In the
aftermath of the financial crisis, countries need to expand the size of its domestic
market with more regional economic integration. Economic integration does
provide the solution to enhance and enlarge the size of the domestic markets; like in
case of the European Union (EU), economies associated with EU operate as a
domestic market. Similar benefits can be attributed in the case of bilateral Free
Trade Agreements (FTAs) in South Asian Association for Regional Cooperation
(SAARC) region or at the level of South Asian Free Trade Area (SAFTA). This will
assist and facilitate economies to recover by means of engaging themselves in
regional trading agreements. The recent Revised Sensitive Lists under SAFTA
(Phase II) announced on January 1, 2012, by India, Sri Lanka, and Bangladesh is
examined here with a special attention to the India-Sri Lanka Free Trade Agreement
(ISFTA). In the current context of ongoing negotiations on Bangladesh-Sri Lanka and
Indo-Bangladesh bilateral FTA, paper advocates for the gains in reducing sensitive
list because it gives fresh impetus in terms of providing new technology, expansion
of the international markets, and new opportunities for investment. The local business entrepreneurs in Bangladesh raise the fear of losing local industry and agroactivities, but Bangladesh may also realize the intra-SAARC trade, differently.
Instead of trade competition, Bangladesh may look for intra-industry/intra-business
compliments as is evident in the case of ISFTA. Sensitive lists are one of the prime
reasons for the slow speed of SAFTA and other respective bilateral FTAs. The prime
hypothesis of this paper is around the argument that the bilateral FTAs in South Asia
are going to move SAFTA ahead which leads to more trade and investment even in
the post-financial crisis-damaged markets. The paper adds new dimension in the
K. Gaurav (*) N. Bharti P. Sinha
Department of Humanities and Social Sciences, Indian Institute of Technology, Patna,
Patliputra Colony, Patna 800013, India
e-mail: [email protected]; [email protected]; [email protected];
[email protected]; [email protected]; [email protected]
Springer India 2015
351
352
K. Gaurav et al.
field of South Asian economic integration through examining how boosting trade
and investment are linked with the bilateral FTA. It may also pave the ways for
Bangladesh to enter into bilateral FTAs with India and Sri Lanka.
Keywords ISFTA Competitive advantage SAARC Bilateral FTA SAFTA
Sensitive list, Economic integration
Introduction
The free trade debate dates back to the times of the founding father of economics,
Adam Smith. In his monumental work, The Wealth of Nations, he argued in favor of
laissez faire policy. This was perhaps the beginning of free trade doctrine. Adam
Smith has propounded the absolute advantage theory of international free trade.
David Ricardo also favored the policy of free trade through his comparative advantage principle of international trade. A more advanced version of comparative
advantage theory of trade is the Heckscher-Ohlin model. Thus, the rationale for free
trade is more than two centuries old. Free trade is a policy whereby the government
does not intervene in trading between nations by tariff, quotas, or other means
(Samuelson and Nordhaus 2007). Free trade allows the maximization of worlds
output, thus making it possible to increase the consumption basket of consumers
than without free trade. There are dynamic gains from free trade. Bhagwati (2002)
has stated that Smith-Ricardo analysis of gains from trade via specialization and the
associated case for free trade was to win approval since the beginning. Countries
impose trade barriers in the forms of tariff and nontariff on different grounds to
restrict the free flow of international trade. Import tariff has become the most vibrant
means of trade policy instruments. Besides tariffs, nontariff barriers like quota,
domestic content requirements, export subsidies, antidumping regulations, and
other government policies have also been used in order to restrict free trade. The
efficiency case of free trade states that trade restrictions in form of a tariff leads to
production and consumption distortions. The cost-benefit analysis provides the theoretical grounds for free trade. Consumer and producer surplus forms the basis for
costs and benefits.
Free trade with the imposition of tariff on a countrys import has three effects:
firstly, reduction in the imports and consumptions; secondly, increase in the domestic
price and production of a commodity; and finally, increase in tariff revenue to the
government. After imposition of tariff, import reduced from GF to HI and consumers
surplus also decreased as in Fig. 28.1. The tariff raises the price in the domestic
markets from 0P to 0P2 and domestic production increases from 0Q2 to 0Q2.
Government now receives tariff revenue equal to the area KJIH.
New advancement in trade theory emphasizes on the competitiveness of the
domestic markets. It can be found in the works of trade theorist Michael Porter.
He pioneered the national competitive advantage theory of trade in the 1990s.
The theory of competitive advantage rests on four factors called as the diamond of
28 ISFTA: Lessons for Bangladesh
353
Fig. 28.1 Effect of tariff in a free trading economy
national advantage. These are factor conditions, demand conditions, related and
supporting industries, and firm strategy, structure, and rivalry. According to Porter
(1990), a nations competitiveness depends on the capacity of its industry to
innovate and upgrade, and it not merely depends on natural endowments, its labor
pool, its interest rates, or its currencys value. Countries benefit from having strong
domestic rivals, aggressive home-based suppliers, and demand from domestic consumers. Competitive advantage is created and sustained through highly localized
process. The need for a strong domestic market is attributed to sustain the economies,
especially at the times of crisis. Global financial crisis has offered many lessons for
the developing economies in recent past. Regional trade network offers a strong
case for enhancing and enlarging the size of the domestic markets. Regional trading
agreements (RTAs) can be seen as a strong case for liberalization of the world trade.
There are basically three forms of trade liberalization: unilateral, bilateral, and
multilateral. When countries remove their trade barriers without waiting for other
countries, it signifies unilateral trade liberalization. Unilateral trade liberalization
promotes countrys competitiveness in the worlds markets and encourages comparative advantage. The other involves the reciprocal reduction of trade barriers on
a nondiscriminatory basis, as seen in the operation of World Trade Organization
(WTO). Finally, the bilateral (or plurilateral) route manifests itself in what
economists have come to call preferential trade agreements (PTAs). In the case of
PTAs, two or more countries reciprocally liberalize trade with each other but not
354
K. Gaurav et al.
to the rest of the world. The process of bilateral or plurilateral reductions in trade
barriers among the member countries is commonly known as the process of
economic integration. It is the process of eliminating restrictions on trade. It results
in the uniting of two or more national economies in a regional trading arrangement
(Carbaugh 2008).
Economic integration commences with signing a preferential trade agreement
(PTA). It is the first stage of economic integration which gives preferential access to
certain products from the participating countries. A PTA is followed by the free
trade area (FTA) and is an association of trading nations in which members agree to
remove all tariff and nontariff barriers among themselves. Each member, however,
maintains its own set of trade restrictions against outsiders. Like a free trade area, a
customs union is an agreement among two or more trading partners to remove all
tariff and nontariff trade barriers among themselves. In addition to this, all member
nations impose identical trade restrictions in terms of common external trade policy
against nonparticipants. The next stage of economic integration is common market.
It is a group of trading nations that comprises all the features of a customs union.
Besides this, it ensures free movement of factors of production across national
borders within the economic bloc. The next stage is the economic union in which
national, fiscal, taxation, and social policies are harmonized and governed by a
unified institution. The final stage may be the monetary union in which national
monetary policies and the acceptance of a common currency governed by a supranational monetary authority takes place.
Viner (1950) introduced the concepts of trade creation and trade diversion which
provide the theoretical grounds and rationale for the creation of PTAs. Trade
creation is the replacing of relatively high-cost domestic production with lower cost
imports from the partner country. Trade diversion takes place when a country
switches its source of imports from a more efficiently producing country to a less
efficiently producing country. Efficiency gains are captured through the trade
creation and efficiency losses through trade diversion in the case of free trade areas
and other forms of economic integration. A regional trading bloc enlarges the size
of domestic market. The entire bloc serves as a domestic market. Like in case of
the European Union, the whole EU is like a domestic market. It is argued that trade
liberalization and regional economic integration can help a region increase its
intra-regional trade by exploring the size of the market. This may in turn yield efficiency and bring benefits not only by exploration of economies of scale but also by
dynamic and upward shifts in production function (Ali and Talukder 2009).
Economic Rationale for Free Trade Agreements
Free trade agreement is a form of preferential trading agreement (PTA) which

provides the second-best option, the first being the multilateral trade liberalization
as is evident in the operation of the WTO. It is worth to mention that regional trade
355
agreements can complement the free trade process but cannot replace multilateral
liberalization (OECD Policy Brief 2003). The theory of second-best proposes that
given a distorted system, eliminating one of the distortions does not ensure a better-off
overall economic welfare as long as distortions remain unchanged (Plummer et al.
2010). There are static and dynamic effects of an FTA. Jacob Viner provided the
theoretical analysis for the assessment of customs union which was extended to
analyze an FTA through the theory of trade creation and trade diversion. It is the
partial equilibrium model that analyzes the potential effects of an FTA. It is worth
to note that welfare changes by the formation of an FTA are the sum of changes in
producer and consumer surplus and the government revenue due to tariffs (World
Bank 2006). Conventional wisdom argues for the improvement in the welfare
because these agreements include a degree of trade liberalization. Viner showed that
an FTA can adversely affect the welfare of a country. The major drawback of
Vinerian model is that it takes into account the market for just one good ignoring
any interaction with multiple goods market. Plummer et al. (2010) assert that one of
the departures from this model is the general equilibrium model based on the works
of Meade (1955), Lipsey (1970), and Wonnacott and Wonnacott (1981). There are
limitations in these models. To overcome these limitations, computable general
equilibrium (CGE) and gravity models are used to evaluate the effects of an FTA.
General equilibrium analysis provides the sound ground for policy implications as
it takes into account the interactions between the markets. To analyze the economic
effects of multilateral and bilateral trade agreements, the CGE modeling framework
of Global Trade Analysis Project (GTAP) provides one of the best tools of analysis
(Sikdar and Nag 2011). On the other side, gravity model is useful in the analysis
because it provides better explanation in real-world situations. Dynamic effects of
FTAs include scale economies, technology transfer, structural policy reforms, and
competitiveness and growth effects.
The latter half of the 1980s to the early 1990s witnessed an explosion of regional
trade agreements (RTAs) in the global economy (Weerakoon 2001a). Likewise
there arises a need for the countries in the south Asia to form a regional trading
bloc to foster the process of economic integration in this region. The establishment
of the South Asian Association for Regional Cooperation (SAARC) on December
8, 1985, marked the beginning of economic cooperation in South Asia. In accordance with the sixth SAARC summit, SAARC Preferential Trading Arrangement
(SAPTA) was signed on April 11, 1993, much ahead as was agreed and it become
functional from December 7, 1995. Article 2 of SAPTA emphasizes on the broad
commitments for the promotion of trade in multilateral framework among the
member countries. Article 10 of SAPTA grants preferential treatment to LDCs in
tariffs, free access to members market, removal of nontariff barriers, limited
removal of para-tariffs, and others. In the year 2004, SAARC took a leap forward
when it signed South Asian Free Trade Area (SAFTA). It became operational in
the year 2006 (January 1) with broader objectives of facilitation of trade by elimination of trade barriers in a phased-wise manner. It emphasized on enhancing trade
in South Asia and economic integration for mutual benefits. As a part of achieving
356
K. Gaurav et al.
such goal of SAFTA, it was realized to liberalize trade policy through various
reforms. Sensitive list is one of the major issues in trade liberalization and policy
reforms in South Asia.
Trade Policy Reforms in Sri Lanka,

Bangladesh, and India
Export promotion (EP) an outward looking development policy was adopted by

Sri Lanka to attract foreign investments. Unilateral trade liberalization process
was initiated in 1977 in Sri Lanka which makes it unique in South Asia as it started
its reforms early than any other country in this region. The policies included import
liberalization, relaxation of exchange controls, facilitating foreign direct investments,
and private sector-driven economic strategies.
Bangladesh which lies in close proximity with India started opening its
economy in the 1980s but was marked by limited progress, and its scope was also
of limited extent. It further started the reform process when it engrossed a deeper
and enlarged spectrum of reforms in trade policy in the early 1990s. To cater the
needs for rapid and sustained growth and development of the country, Bangladesh
reduced its tariffs substantially and rationalized tariff rates to bring about harmonization in tune with other South Asian economies. Further reduction and removal
of quantitative restrictions were incorporated. Bangladesh moved from multiple
systems of exchange rates to a unification of exchange rates in conformity with
world economies. Current account was made convertible as a part of export promotion outward-oriented trade regime. The trade to GDP ratio increased to 18 %
in 1990 to 43 % in 2008 (World Bank 2013), as result of these initiated policy
measures. Further this ratio increased to 50.4 % on an average in 20092011.
Bangladesh which was traditionally known for its primary products exports like
jute and tea is now well known for ready-made garments (RMG) sector and leather
products (Harun 2010). Due to heavy agricultural and nonagricultural import tariff,
Bangladesh is still marked as one of the least liberalized regimes in trade policy in
the world.
Indias trade policy after independence was restrictive for many years after independence. It was reflected in restrictive import policy during period 19471952.
During 19521953 to 19561957, liberalization of foreign trade was adopted through
liberalizing the import licenses. A very restrictive import policy was adopted from
19561957 to June 1966, and the import controls further screened the list of
imported goods. To check imports and to boost exports, the government of India
undertook devaluation of the rupee in 1966 as a major step. Trade policy was quite
successful during fourth plan in restricting imports and promoting exports. This
period continued till 19751976. During Janata rule (19771979), import liberalization was also adopted to augment domestic supply of essential goods and to check
rise in price level (Tendulkar and Bhavani 2007).
357
India embarked on the path of industrial, financial, and external sector reforms in
the 1990s which were initiated creating an environment conducive for the expansion
of trade (Reserve Bank of India 2003). Trade policy (1991) aimed to reduce
administrative controls and barriers which acted as obstacles to the free flow of
exports and imports. The basic instrument developed by the policy was the Exim
scrip in place Rep licenses. The purpose of this instrument was to permit imports to
the extent of 30 % on 100 % realization of export proceeds. Obviously, the purpose
was to bridge the BOP gap.
Tariff Reduction: India, Bangladesh, and Sri Lanka
WTO explains most favored nation (MFN) tariffs as the normal nondiscriminatory
tariff charged on imports. It excludes preferential tariffs under free trade agreements
and other schemes or tariffs charged inside quotas. Figure 28.2 shows the average
MFN applied tariff rates (unweighted) by India, Bangladesh, and Sri Lanka during
19902009. India has 81.8 % tariff rate in 1990, declined rapidly after the economic
reforms. In 1991 it stood at 79.2 % and declined to 53 % in 1992. Further in the year
2009, it declined and remained at 10.1 %. Bangladesh on the other hand underwent
reforms in the early 1990s. In 1990 average MFN applied tariff rates stood at 94 %
and declined to 88.6 % in 1991. In 2008 it stood at 14.8 %. Sri Lanka which is
marked by one of the most liberalized economies in South Asia had tariff rate of
28.3 % in 1990. It is the lowest compared to these three economies. In 1992 the
tariff rate was at 26.9 % which further declined to 10.1 % in 2009. Thus, the data on
average MFN applied tariff rates in these three countries shows a declining trend.
Of these three South Asian countries, Bangladesh still remains less liberalized
compared to other two countries.
Fig. 28.2 Trends in average MFN applied tariff rates in India-Bangladesh-Sri Lanka (Source:
Compiled by Authors from World Bank (2010))
358
K. Gaurav et al.
India-Sri Lanka Free Trade Agreement (ISFTA)
India and Sri Lanka envisage at establishing a free trade area in accordance with the
provisions of the ISFTA and in conformity with relevant provisions of the General
Agreement on Tariff and Trade (GATT), 1994 (Article 1 of ISFTA). The ISFTA was
signed on December 28, 1998, to promote mutually beneficial bilateral trade. The
agreement came into effect on March 2000. It contains different articles and several
annexures. Article 1 defines the broad objectives of the agreement. Annexure A of this
agreement describes the concessions offered by India and phaseout schedule for
elimination of tariffs in 3 years from ISFTA being effective. Concession offered by Sri
Lanka is mentioned in Annexure B of India-Sri Lanka Free Trade Agreement. It provides tariff concessions on exports from India in respect of items freely importable
into Sri Lanka and phaseout schedule for elimination of tariffs in 8 years time
framework from ISFTA being effective. According to ISFTA, a wide range of products
are granted free access to exports from these countries. But it also contains list of
items which are restricted between these two countries for bilateral trade in Annexure
D of the ISFTA. The agreement contains so-called negative list (sensitive list) intended
to protect their respective national interests. Additionally, Rules of Origin (ROO) were
introduced into the agreement to ensure minimal national content of traded products.
The Issue of Reducing Ne gative List
Maintaining respective negative lists does exist in the bilateral or multilateral FTAs.
There have been multiple criteria for preparing and maintaining these lists. The
major part of these lists includes agricultural products for food security. Along with
the most important element of negative list, others like small-scale manufacturing
products and noncompetitive domestic industries are also protected in form of
inclusion in the list. There are two distinct features of India-Sri Lanka trade, namely
a low volume of bilateral trade and a persistent balance of trade in favor of India
(Weerakoon 2001b). Taneja et al. (2011) have provided an approach and economic
rationale to policymakers for pruning the negative lists maintained by India for
SAARC countries. There are several other commodities which seem no rationale to
be in the negative lists of these countries. These unnecessary items should definitely
be removed from the list. The approach of SAFTA is the negative list maintained by
all the eight members of this agreement. India is the largest country among the
SAARC members in terms of both geographical area and in terms of GDP. India has
reduced its items in the negative list for LDCs to only 25 items and 614 items for
non-LDCs. It reflects its commitment under the SAFTA. Other contracting states of
this agreement have huge respective negative lists. One of the hypotheses for SAFTA
being not so effective is the existing negative list. The table that follows gives a quick
recap of respective sensitive lists under SAFTA and ISFTA.
Table 28.1 shows the volume of negative list among three of the SAARC countries.
As can be seen Table 28.1, items in Indias negative list for non-LDCs are 614 which
No. of items (under SAFTA)a

Bangladesh
India
(for NLDCs) (for LDCs) Sri Lankab
Sr. no Description
Column 1
Column 2
Column 3
1.
Live animals, animal products
19
0
90
2.
Vegetable products
31
0
204
3.
Animal or vegetable fats and oils
3
0
37
4.
Prepared foodstuffs, beverages, tobacco 71
25
165
5.
Mineral products
10
0
22
6.
Chemical products or allied
51
0
22
7.
Plastics and rubber
49
0
84
8.
Leather products
12
0
25
9.
Wood products
6
0
2
10.
Paper products
44
0
49
11.
Textile and textile articles
364
0
20
12.
Footwear and others
13
0
30
13.
Stone, plaster, cement, ceramic, glass,
26
0
36
and glassware
14.
Pearls, precious stones, precious metals
1
0
3
15.
Base metals and articles
89
0
114
16.
Machinery and mechanical appliances,
84
0
69
electrical equipment
17.
Vehicles, transport equipment
41
0
37
18.
Optical, photographic equipment
22
0
7
19.
Arms and ammunition
0
0
0
20.
Misc. manufactured articles
57
0
49
21.
Works of art, antiques
0
0
0
Total
993
25
1,065
a
Source: Compiled from SAARCs Revised Sensitive Lists under SAFTA (Phase 2)
b
Source: Compiled by authors from Department of Commerce, Sri Lanka
Table 28.1 Distribution of items in negative list
0
0
0
0
0
0
0
0
431
0
60
28
4
2
0
4
0
614
India
(for NLDCs) India
Column 4
No. of items
28
0
38
2
21
0
57
17
5
0
36
0
97
100
0
0
11
5
14
12
182
295
17
0
10
0
100
% share
0.46
3.95
23.20
1.16
2.78
68.45
43
8
0
50
0
1,220
3
113
81
3.52
0.66
4.09
100
0.25
9.26
6.64
Sri Lanka
No. of items % share
160
13.11
227
18.61
40
3.28
176
14.43
23
1.89
32
2.62
86
7.05
16
1.31
5
0.41
66
5.41
20
1.64
32
2.62
39
3.20
No. of items and % share (ISFTA)b

359
360
K. Gaurav et al.
Table 28.2 Results from compression at bilateral level

Bangladesh-India
Column 12
India has only 25 items,
but Bangladesh has 993 items
in the negative list
Sri Lanka-India
Column 34
It suggests that being NLDCs
(both India and Sri Lanka),
they would have to trade on
the basis of SAFTAs respective
negative lists
The common products are in the But the trade between these
prepared foodstuffs, beverages, two countries is governed on
and tobacco items only
the basis of ISFTA and SAFTA
Bangladesh largely protects
These lists suggest that
its textile sector
vegetable products of Sri
Lanka and textile sector of
India are heavily protected
Bangladesh-Sri Lanka
Column 13
There are 993 sensitive items
on Bangladesh side, whereas
1,065 from Sri Lankan side
The common items are huge

between these two countries
Large volume of common

items are in the prepared
foodstuffs, plastics and
rubber, paper products,
base metals, vehicles and
transport equipment, misc.
manufactured articles
Other sectors which are largely Other common items seems
Other common items of
protected by Bangladesh are
to be live animals category,
significance are live animals
prepared foodstuffs, base
animal or vegetable fats and
and animal product, vegetable
metals, machinery and
oils, prepared foodstuffs,
products, chemical products,
mechanical appliances,
chemical products, plastics and leather items, textiles,
chemical products, and
rubber, base metals, machinery footwear, and stone and
plastics and rubber products
and mechanical appliances, etc. ceramic items
Thus, India is unilaterally
Thus, both the countries are
Thus, both the countries
providing opportunities
benefitting from FTA. India
maintain huge negative
for exports for LDCs like
being asymmetrical in terms
list which reduces the
Bangladesh under SAFTA
of volume of world trade, it is opportunities for bilateral
providing more opportunities
trade under SAFTA
to Sri Lanka (lesser items in
framework
negative list than Sri Lanka)
Source: Authors. Based on the available data in Table 28.1
will be applicable to Sri-Lanka, but due to ISFTA, the operational list includes only
431 items. The negative list of Sri Lanka for India included 906 items under SAFTA,
but ISFTA includes 1,220 items. Thus, India on the one hand restricts lesser items,
while Sri Lanka maintains not only huge negative list but also maintains bigger list
than SAFTA. India thus provides unilateral benefits to Sri Lanka. The list hinders the
trade and investment, and thus the South Asian region remains insignificant as far as
share in global trade is concerned. During the period from the year 1995 to 2005, the
share in world trade of this region increased marginally from 0.9 to 1.2 %. The limited
product coverage and the existence of huge negative list effectively reduce the scope
of intra-regional trade in South Asia. It has been estimated that almost 53 % of the
total import trade in SAFTA has been subject to the negative list of the respective
countries (Weerakoon and Thennakoon 2006). The negative list thus significantly
limits the scope of the SAFTA. In India-Sri Lanka Free Trade Agreement (ISFTA),
each country maintains its negative list. Out of 431 items in Indian side and 1,220
from Sri Lankan side, the number and % share have been shown in Table 28.1.
Table 28.2 presents the summary of the data presented in Table 28.1.
361
Trade-Investment Linkages: Benefits from ISFTA
There is a need to recognize the strong trade-investment linkages in South Asia.

These links provide the rationale for achieving higher levels of intra-regional trade in
regional trading blocs. Trade-creating joint ventures thus become crucial not only
because it renders export potentialities of the countries in the regional blocs but also
because it enlarges the size of the markets. They also help in creation of employment
at mass level by leveraging the productive capacity. An FTA provides avenues for
joint ventures to seek the benefits of foreign capital and investment inflows. The
trade-creating joint ventures are in a position to take advantage of the regional FTA
as in the case of ISFTA. Such agreements can also induce investment flows both
between the countries of the bloc and from outside the region (Taneja and Sawhney
2007). The South Asian region is characterized by large asymmetries in terms of
their size and GDP. Trade allows smaller countries in this region to specialize and
produce a few products at high enough levels of output to reap the economies of
scale. Trade and investment integration in the South Asian region is far below its
potential due to several policy-induced factors like lack of adequate treatment of
nontariff barriers, among others, as well as structural factors like infrastructural
bottlenecks and restraints on factor mobility in the region (Dubey 2007). This manifests the need for increasing economic integration in this region.
7.1
Investments and Joint Ventures (JVs)
India has been a major player in terms of investments to Sri Lanka (see Fig. 28.3 for
more details). Sri Lankan economy has attracted foreign investments in multiple
areas including retail to tourism and petroleum, financial sectors including banking,
telecommunications, food processing, vanaspati, cement, copper, tire, glass industry,
hospitality, and real estate. Indian investment in Sri Lanka reached a total of US$600
million, making it number four in the world (Doing Business in Sri Lanka 2012).
7.2
Lanka Ashok Leyland
JV investment in Sri Lanka by an Indian company (Ashok Leyland) is Lanka Ashok

Leyland in 1982 which has started its production from 1983. This venture is having
the objective of reaping the benefits from the expansion of markets locally and
further development of ancillary industries domestically.
7.3
Ceat-Kelani
Sri Lankan economy has the benefits as it underwent three-way venture with AMW,
Ceat Tyres India, and Kelani Tyres Sri Lanka in 1999. This venture aims to fulfill the
twin goals of low-cost manufacturing and larger market access in this island nation.
362
K. Gaurav et al.
The venture resulted in Ceat-Kelani Associated Holdings Pvt. Ltd. which is the
largest domestic tire manufacturing company in Sri Lanka. According to Mel
(2011), this joint venture started operations with one plant in Kalutara. Today it has
three plants with a radial tire plant established in 2006. The technology and management inputs are sourced from India. The venture manufactures a varied range of tires
for all modes of transport such as light trucks, buses, trucks, vans, cars, motorcycles,
and three wheelers as well. The high manufacturing cost was contained after it joined
the hands with Indian tire manufacturing giant Ceat. As a result, the average annual
production increased manifold as compared to previous production. It stood at
12,800 metric tons currently and was 7,400 metric tons during 19992002. With
increased production and productivity as a result of investments in technology, the
JV now exports to many Asian and European countries including Dubai, Nigeria,
and Egypt. The JV also exports to India under ISFTA. It is claimed that economies
of scale in tire manufacturing sector in Sri Lanka has brought the cost below the
levels of Ceats plant in India.
7.4
L&T Infrastructure and UltraTech Cement
A joint venture between L&T and National Housing Board of Sri Lanka was concluded to develop the Iconic Diamond Tower Project of Sri Lanka. The land has
been secured and required permissions from the Colombo Municipal Corporation
have been finalized. Apart from that, UltraTech Cement plant has also been started
in Sri Lanka. The current turnover has been $US59 million which is expected to
almost double in the coming years.
7.5
Telecommunications
Bharti Airtel Lanka is a subsidiary of Indian Telecom giant Bharti Airtel. It started
its commercial operations in Sri Lanka from 2009 and now has distinctive feature
of the fastest growing wireless operator in the island nation. Apart from that, Tata
Communications Lanka Limited becomes operational in Sri Lanka in 2004. It was
able to obtain an External Gateway Operator License in 2003. These provide the
global telecommunications needed by the Sri Lankan customers.
Apart from these JVs and investments, many other Indian companies have
started investing in Sri Lanka. Indian Oil Corporation (IOC), Taj Hotels, Asian
Paints, J.V. Gokal Ceylon Pvt. Limited, Tata Housing, Piramal Glass Ceylon,
ITC, and banks like State Bank of India (SBI), ICICI, Indian Bank, Indian
Overseas Bank, and Axis Bank are some important investors (Doing Business in
Sri Lanka 2012).
7.6
363
Tourism
Tourism has been an important sector and crucial for foreign exchange earnings for Sri
Lanka. Total number of tourists who visited Sri Lanka in 2012 and 2013 was 1,005,605
and 1,274,593, respectively. India accounted for the highest number of tourists arrival
in Sri Lanka. Total number of tourists from India who visited Sri Lanka in 2012 was
176,340 which increased to 208,795 in 2013, a rise of 18.4 % in just 1 year (Sri Lanka
Tourism Development Authority 2013). Sri Lanka also is in the top ten countries from
where tourist arrivals are registered in India. It stood at fourth position in terms of
tourists arrival in India. In 2009, 2010, and 2011, a total of 239,995 and 266,515 and
305,853 Sri Lankan tourists visited India (Ministry of Tourism 2012). Thus, tourism
has become an important area for cooperation between India and Sri Lanka.
Lessons for Bangladesh
The potential benefit of an FTA is the large trade creation by shifting manufacturing
from high-cost domestic production to low-cost imports from the member country.
The India-Sri Lanka Free Trade Agreement (ISFTA) has generated many possibilities and has potential to boost bilateral trade and investments in the South Asian
region. Sri Lanka has benefitted a lot in terms of Indian investments and able to
explore Indian technology, expanded its markets locally and globally, and explored
opportunities for investment in many areas in the form of mutual cooperation and
joint ventures (JVs). Sri Lanka has reaped the benefits of low-cost manufacturing in
the tire segment and also able to push up labor productivity. This has initiated rising
production and brought down the cost of converting raw material to finished products
in the manufacturing JVs. Similarly Bangladesh can avail similar and even more
benefits (geographical proximity) if it undergoes FTA with India. In the same way,
Bangladesh can be benefitted after signing FTA with Sri Lanka.
Bangladesh has comparative advantage in the ready-made garments (RMG), leather,
and footwear manufacturing sector. India and Sri Lanka on the other hand may take the
advantage of cheap labor in garments sector and leather and footwear by collaborating
with Bangladeshi companies through joint ventures. These countries can also avail
benefits in the area of oil and gas exploration and in pharmaceuticals and shipbuilding
industry as Bangladesh has comparative advantage in shipbuilding. Other potentials in
Bangladesh are cooking gas distribution and power stations construction.
Bangladesh is one of the prime destinations for Indian investors. The free trade
regime will attract more FDI from India in Bangladesh due to certain key factors
such as easier access to Indias north eastern region, on the one hand, and abundant
availability of low-cost labor as a major incentive for setting up of manufacturing
plants, on the other. The main areas where investments will have to flow are energy
and power, transportation, urban infrastructure, border infrastructure, information,
communication and technology, warehousing and cold storage facilities, education
364
K. Gaurav et al.
services and skill development, etc. Some recent investments in Bangladesh from
India are highlighted as follows:
A deal of US$1.5 billion has been signed by Indian power sector giant NTPC
with Bangladesh in order to build coal-based plant with a capacity of 1,320 MW
to generate electricity. This will be Bangladeshs biggest power project aimed at
fulfilling the needs of power shortages in Bangladesh. 250 MW power will be
exported to Bangladesh.
US$300 million has been invested by Indian telecom operator Bharti Airtel in
Warid Telecom of Bangladesh in a view to expand the domestic operations. It has
thus become the largest Indian investor in Bangladesh.
A memorandum of understanding (MoU) has been signed with Nitol-Niloy
Group of Bangladesh by Indias Tata International Limited for manufacturing of
footwear and bicycle. A total of US$15 million has been invested by Tata.
Meru Cabs of Bangladesh and Tata Motors-Nitol Group underwent a memorandum
of intent for investing in radio taxis in January 2010.
Marico has an advantage to become the first Indian company to be listed in Dhaka
Stock Exchange in Bangladesh. Now it announced for its expansion by investing
Taka 5060 crores which will lead to a total investment of Taka 100 crores.
Bangladesh imports 95 % of its domestic tire requirements. Ceat India has thus
announced its interest to invest Rs. 250 crores in a view to set up manufacturing
plant in Bangladesh. Sixty five tons per day was expected initial capacity of this
plant. It will commence production in FY2013 (Acharya and Marwaha 2012).
The level of FDI from India in proportion to the total FDI in Bangladesh shown
in Fig. 28.3 is much lesser than the level of FDI from India in proportion to the total
FDI in Sri Lanka. This shows how FTA is a reliable base for more FDI.
The Sri Lanka-Bangladesh current trade and investment relations are also
showing many positive indications which may be also presented as follows:
During last 45 years, the bilateral trade between Sri Lanka and Bangladesh has
marked an improvement. The trade between these two nations at the level of
US$48 million in the year 2010 has seen an increase by 73 % in 2012. It crossed
the figure of US$80 million and remained at US$83.19 million (Department of
Commerce of Sri Lanka 2012).
More than US$292 million of Sri Lankan investments by 45 Lankan companies
is now in Bangladesh. Bangladeshi investments in Sri Lanka, however, are at a
low level of US$3 million (only in six projects) due to restrictions on capital and
current investment outflows by Bangladesh side.
This has limited the full potential of mutual investment development and protection capacity for both countries.
Thus, Bangladesh can be benefitted if it signs an FTA with India and Sri Lanka
as well. Huge investments in the form of FDI or through other channels can have
positive advantage in many ways. Large industries if established in Bangladesh by
India may help Bangladesh develop ancillary industries locally. There is also need
for diversification and commercialization of agricultural sector in Bangladesh.
365
Fig. 28.3 Comparative FDI from India in Sri Lanka and Bangladesh (Source: Compiled by
Authors from Acharya and Marwaha (2012) and doing Business in Sri Lanka, Handbook for Indian
Business (2012), CII)
This sector has potential for the development of agro-based and food processing
industries, limited by lack of proper infrastructure. The bottlenecks can be eliminated by reducing negative list and through more regional FDI.
Conclusion
ISFTA has generated a strong case for trade creation as is evident from the reduction
in the negative list from volume of bilateral trade and investments in the form of
joint ventures between India and Sri Lanka. The dynamic gains of an FTA like scale
economies, technology transfer, trade and investment policy reforms, and competitiveness have been seen in the case of ISFTA. The scale economies and
price competitiveness have been witnessed in the case of Ceat-Kelani and many
other industries. India-Sri Lanka FTA has the potential for boosting more economic
cooperation. ISFTA offers the conditions for more bilateral FTAs and quick and
planned reduction of negative lists. Thus, only the South Asian region has a real, viable,
and potential free trade that will ensure benefits as well as development of this region.
India-Sri Lanka FTA has the potential for boosting more economic cooperation.
It also advocates for similar FTAs with other countries like India-Bangladesh and
Sri Lanka-Bangladesh in South Asian region to take the comparative advantage in
the form of economic cooperation and investment. The local business entrepreneurs
in smaller economies in South Asia raise the fear of losing local industry and agroactivities, but these economies may also think of intra-SAARC trade, differently.
Instead of competition, these economies may look for intra-industry/intra-business
compliments. Raghavan (1995) also advocates that regional economic cooperation
enables the participating countries to exploit the potential of complementarities and
also to establish strategic alliances between enterprises with a view to improve their
366
K. Gaurav et al.
competitiveness in global markets. Furthermore, trade liberalization and regional

economic integration can help a region increase intra-regional trade by exploring
the size of the market as advocated by the competitive advantage of nations.
Competitive advantage is created and sustained through a highly localized process,
and nations can be benefitted from having strong and aggressive rivals at the
domestic level and also due to strong domestic demand. Countries will thus be protected at the times of crisis due to enlarged domestic markets in the form of regional
trading agreements and regional blocs. Countries would succeed only when their
domestic business environment is dynamic and outward oriented. Integration is
the key to innovate and upgrade in larger domestic setup. This paper may add
new dimensions in the field of economic integration through boosting trade and
investment. It may also pave the ways for Bangladesh to enter into bilateral FTAs in
this region with India and Sri Lanka. Lack of connectivity, geopolitical issues, and
asymmetry between countries of the South Asian region are the main obstacles that
hindered the economic connectivity in this region. Thus, these obstacles should be
removed to capture the full potentialities and expand the size of domestic markets
in South Asia.
References
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Bhagwati J (2002) Free trade today. Oxford University Press, New Delhi
Carbaugh RJ (2008) International economics. Cengage Learning, New Delhi
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Harun YA (2010) Regional cooperation in South Asia: Bangladesh perspective in promoting economic cooperation in South Asia: beyond SAFTA by Ahmed, Sadiq, Kelegama, Saman and
Ghani, Ejaz (edited). Sage, New Delhi
Lipsey R (1970) The theory of customs unions: a general equilibrium analysis. Weidenfeld and
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Mel Sd (2011) Ceat Kelani Holdings: a synergy driven by quality and reliability. Business today.
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Meade J (1955) The theory of customs unions. North-Holland, Amsterdam
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CMSPagePicture/file/Primary%20Content/MR/FTAs/NATIONALITY-WISE%20FTAs.pdf
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Plummer MG, Cheong D, Hamanaka S (2010) Methodology for impact assessment of free trade
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Porter ME (1990) The competitive advantage of nations. Harv Bus Rev 68(2):7393
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using applied general equilibrium modelling. Working paper series, no 107, Asia-Pacific
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Chapter 29
Japans Recovery from the Lost 20 Years

Susumu Yamamoto
Abstract Japan has experienced a long-term economic slump, the so-called Lost
20 Years, since the beginning of the 1990s. This paper first reviews some leading
economists diagnosis on the cause of the slump. Based on the review, an alternative
view, an industrial approach, is proposed.
Keywords Recovery Japans Lost 20 Years Industrial approach Semiconductor
industry
Introduction
When we discuss recoveries, many in the business world may think about recovery
from the global financial crisis triggered by the so-called subprime mortgage crisis.
However, for most Japanese, the word recovery reminds them of the Great East
Japan Earthquake and Tsunami that struck on 11 March 2011, claiming 15,884 lives.
As of the time of writing, 2,640 people are still missing, and 274,088 still live in
evacuation shelters outside of their hometowns. Many of these evacuees face serious challenges stemming from psychological and physical stresses of relocation.
The number of the so-called disaster-related death has reached 2,916 so far. While
Japan should be proud that there was no looting or rioting, many Japanese are still
struggling to recover from this calamity.
This being said, the word recovery also reminds many Japanese of the recovery
from the aftermath of the bubble economy. In the middle of this fiasco, the
Japanese economy was considered invincible or Japan as the number one in the
world. When the bubble economy finally burst, there was no time for a hangover.
The Japanese economy underwent unprecedented persistent deflation for more
than two decades. Some have called this the Lost 20 Years. In this paper, I review
how Japans bubble formed and subsequently burst along with the accompanying
persistent deflation, and I examine their influence on Japanese industry.
S. Yamamoto (*)
Ritsumeikan Asia Pacific University (APU), Oita, Japan
Springer India 2015
369
370
S. Yamamoto
Euphoria and the Bubble Economy
It was believed that the Japanese economy was driven by property standard
instead of the gold standard. Obviously, this relied on an almost religious belief
that land price would never fall. Indeed, property price in Japan rose steadily after
World War II because of rapid economic growth particularly in the 1960s and
the 1970s.
From 1955 to 1985, the beginning of the bubble economy, the average annual
increase rate of land price was 14.4 %.1 The largest jump in land prices was 68.0 %
recorded in 1961. Property prices dropped only once 8.1 % dip in 1975.
Consequently, by 1985, property prices had risen to 56.0 times their level in 1955
(Fig. 29.1).
Because of the steady growth of property-based assets during this period, it is no
wonder that a large part of the credits that banks issued to individuals and firms was
extended with property serving as collateral. Investment in property was a safe and
profitable way to allocate assets in Japan. At the same time, bank credit issued to
firm against property-based collateral was mostly used to invest in new technologies
and to expand production capacity before the bubble economy. The rules of the
game changed, however, with the signing of the Plaza Accord in 1985.
100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985
Fig. 29.1 Land price index (six major cities) (Source: The Japan Real Estate Institute)
Soaring rate is calculated on the land price index of six major cities.
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In the first half of the 1980s, the US dollars appreciated against the Japanese yen,
German marc, French franc and British pound by almost 50 %. Although US export
industries faced difficulties, Wall Street benefitted from the dollars rise, and the US
government needed the currency appreciate to combat domestic inflation. However,
exporters pressured lawmakers to do something and the demand for protectionist
laws mounted. Meanwhile the Reagan administration was busy dealing with the
deficits, the current account deficit (including trade deficit) and the fiscal deficit.
On 22 September 1985, representatives from the G5, i.e. the USA, Germany,
France, Great Britain and Japan, met at the Plaza Hotel in New York and signed the
Plaza Accord. The main objective of this agreement was to make the five countries
intervene in currency markets to depreciate the US dollar against the currencies of
the other four countries.
This strong pill had a drastic effect on the Japanese yen which appreciated 27.2 %
against the US dollar in just 1 year, from 254 yen in 1985 to 185 yen in 1986. The
Japanese yen eventually reached 127 yen in 1988. This steep appreciation brought
about a severe downturn in the Japanese economy, the so-called yen appreciation
recession. To rescue the Japanese economy from falling into serious depression, the
Nakasone administration introduced active and expansionary fiscal and monetary
policy, which triggered the bubble economy.
An overabundance of money rushed into the market, particularly the stock market and the property market. People bought pieces of land which they could then use
as collateral to borrow money from a bank to buy other pieces of land. Banks in
those days extended these kinds of collateral-based loan for more than 100 % of the
value of the piece of land. This caused property market speculation to snowball.
Those who became successful from speculation did not hesitate to enjoy themselves. Sales of luxurious sports cars hit a record high, and a large number of expensive restaurants opened. The fruits of this booming economy were not evenly
distributed among the people, but no one made an issue of this. The atmosphere was
one of sheer euphoria.
The Bursting of the Bubble and the Aftermath
Alas, the party could not continue forever. After hitting its peak at the end of 1989,
the stock market started to gradually decline in 1990. Two years later, in 1992, stock
prices dipped to half their peak price and continued to fall. Ten years later, stock
prices had fallen to just a quarter of their peak price (Fig. 29.2).
Land prices were no exception. They peaked slightly later than the stock market.
The property market slump started in 1991 and continued to decline for more than
two decades. The land price index in 1991 was 285.3, but in 2004, more than two
decades later, it was only 68.6, less than a quarter of its peak value.
S. Yamamoto
372
110
Land Price Index
300.0
105
250.0
100
200.0
95
150.0
90
Land Price Index (Six

major Cities)
85
Consumer Price Index
100.0
2004
2002
2000
1998
1996
1994
1992
1990
1986
1988
1984
1982
1980
50.0
80
75
Year
Fig. 29.2 Bubble formation and burst (Source: The Japan Real Estate Institute, and the Prime
Ministers Office)
The asset market collapses served as a strong recessionary pressure onto the
whole economy. As early as 1994, prices stopped rising, which marked the beginning
of Japans persistent deflation.
A standard textbook of macroeconomics teaches us that price adjustments may
not take place instantly, but that the economy will eventually reach an equilibrium.
However, it makes no mention of how long such an adjustment will take. It might
take a few years, perhaps, but surely not 20 years.
The Long Persistent Deflation and Japanese Industry
The Japanese economy, as we have seen, has undergone deflation in parallel with
stagnation for more than two decades, although there have been a few ups and
downs. There are few cases in history of deflation continuing for such a long time,
but Japan can still be considered a rare case in that deflation has persisted for more
than two decades. We might ask ourselves why the Japanese economy has been
suffering from deflation and stagnation for such a long time.
Iwai pointed out that deflation itself worsens the recessions.2 Deflation causes the
debt burden of firms and individuals to be even heavier. If debtors, under mounting
pressure from their net burden of debts, postpone repayment, they may default on
their loans, which will serve to further reduce demand.3
2
3
Katsuhito Iwai, Nihon Keizai Shimbun, 14 March 2013, 28p.

This is based on Irving Fishers theory on Debt based deflation process.
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Fukao discussed this insufficient demand hypothesis from a longer-term point

of view.4 The productive population, which is the population of those aged
1564 years old, stopped growing in the 1990s and started to decrease from the new
millennium. The decline of new employees led to a substantial decrease in necessary
new investment, inevitably pushing up the capital-labour ratio. This brought about
a decline in the marginal productivity of capital and consequently a negative impact
on aggregate investment. He also pointed that there was a substantial decline in
Japans total factor productivity (TFP), which also acted as negative pressure on
investment. On the other hand, Japan has maintained one of the highest saving rates
among industrialised countries. These widened the investment-saving (IS) gap and
then insufficient aggregate demand.
In fact, according to Yoshikawa,5 firms saving far surpassed their borrowing
while the government continued to be a large borrower. This is entirely a peculiar
phenomenon that goes against common sense. The main motives of running business are first to find a business opportunity and second to maximise profit by borrowing money to make an investments. The cause of this stagnant investment, he
argues, is lack of innovation.
The Japanese government and the central bank repeatedly introduced expansionary
monetary policies in the post-Bubble Economy decades, but these did not succeed
in rescuing the Japanese economy from the doldrums. Krugmans research6 on the
liquidity trap in Japan offered some interesting suggestions. Under the liquidity trap
where monetary policy becomes ineffective because the nominal interest rate is
practically zero, he suggested that the central bank should make a credible
announcement to seek higher future price level. However, his model is based on a
stable price rather than deflation. It might have limited applicability to the case of
persistent deflation in Japan.
Having viewed these discussions, there does not seem to be any satisfactory
explanation from an industrial point of view. In fact, the transformation of industrial
structure and competitive environments might be one cause for the lack of innovation
pointed out by Yoshikawa.
Changing the Rules of the Game and Business Models
In the 1970s, the American semiconductor manufacturers held more than 50 % of

the global market share. In 1971, Intel launched the worlds first micro-processor
unit (MPU). However, by developing an integrated quality control system, the
Japanese DRAM (dynamic random access memory) manufacturers became
4
Kyoji Fukao, The Lost 20 Years and the Japanese Economy (in Japanese), Nihon Keizai
Shimbun Press, 2013.
5
Hiroshi Yoshikawa, Nihon Keizai Shimbun, 15 March 2013, 33p.
6
Paul Krugman, Its Baaack: Japans Slump and the Return of the Liquidity Trap, Brookings
Papers on Economic Activity, 2:1998, 137187p.
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S. Yamamoto
dominant players in the semiconductor market. At one point, NEC, Hitachi and
Toshiba were the three largest semiconductor manufacturers in the world. In 1990,
for example, six out of ten largest semiconductor manufacturers in the world were
Japanese firms.
During the 1980s and the early 1990s, it was crucial for any semiconductor
manufacturer to keep its yield rate as high as possible to achieve higher cost competitiveness. The Japanese manufacturers achieved higher yield rates and exported
a large percentage of their products to the USA. In the face of increasing competitive pressure, American semiconductor manufacturers lodged a complaint with the
US government. Given the large trade deficit with Japan, the US government
demanded that Japan start trade negotiations. The result of these negotiations was
the USA-Japan Semiconductor Agreement in which Japanese semiconductor manufacturers voluntarily restricted their export to the USA and purchased foreignmade semiconductors.
There seem to be two major consequences of this agreement. First, many
Japanese electronics manufacturers started to import foreign-made semiconductors
to fulfil the voluntary purchase obligation. This provided Korean and Taiwanese
semiconductor manufacturers with prime business opportunities. Second, the agreement was almost equivalent to an internationally authorised cartel between the two
largest semiconductor manufacturing countries. Semiconductor prices kept stable
and high enough to let semiconductor manufacturers enjoy lucrative business.7
This strong dose of medicine had a serious side effect. The agreement drastically
deteriorated the competitive environment in the semiconductor market and weakened motives for R&D. In addition, the comfortable situation blinded Japanese
semiconductor manufacturers to the fundamental change in the rules of the game in
the semiconductor industry.
In the early 1980s, it took a few hundred million dollars to build a semiconductor
manufacturing factory. However, as semiconductor technology advanced, the
required investment for semiconductor factory construction rose drastically.8
The phenomenon in which the number of transistors on a chip increases
exponentially is known in the semiconductor industry as Moores Law. In parallel
with this, economy of scale and learning-by-doing play dominant roles in determining the cost competitiveness of a semiconductor manufacturer. These imply
that a company that makes a decision on a very large investment first and takes
advantage of economy of scale and learning-by-doing will dominate the competition in the market.
Korean and Japanese semiconductor manufacturers are significantly different
from each other. Samsung is a family-owned conglomerate where the owner exhibits
strong leadership. On the other hand, Japanese manufacturers are public companies
where decentralised governance prevails. In one of the largest Japanese semicon7
The Rise and Fall in the Semiconductor Industry Part 2, Nihon Keizai Shimbun, 12 January
2014, 11p.
8
Hiroyuki Chuma, Searching for Factors Deciding the Weakening Process of the Competitiveness
of Semiconductor Production System, May 2006, RIETI Discussion Paper Series 06-J-043.
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ductor manufacturers, Hitachi, for example, the semiconductor manufacturing business was merely one of the companys many major segments. Under these
circumstances, it became increasingly difficult to obtain permission from the top
management board to make huge investments in risky business ventures.9
After almost a quarter century, the world semiconductor market is now dominated by two giants, Intel and Samsung.
Conclusion
When we discuss Japans recovery from the Lost 20 Years, the image of the countrys
declining semiconductor industry inevitably comes to mind. In fact, this decline
coincides almost perfectly with the stagnation of the Japanese economy. This was
caused by a drastic change of competition in the market and has raised questions
about how quickly Japans industries can adapt. A real sustainable recovery from
the Lost 20 Years might require companies to not only forge into new business fields
but also to rethink Japanese style management systems.
References
Benhabib J, Schmitt-Grohe S, Uribe M (2002) Avoiding liquidity traps. J Polit Econ
110(3):535563
Chuma H (2006) Searching for factors deciding the weakening process of the competitiveness of
semiconductor production system, May 2006, RIETI discussion paper series 06-J-043
(in Japanese)
Fukao K (2013) The lost 20 years and the Japanese economy. Nihon Keizai Shimbun Press
(in Japanese)
Iwai K (2013) Essence of deflation (1). Nihon Keizai Shimbun, 28p (in Japanese)
Kobayashi Kei-ichiro (2013) Mystery of long term deflation. The Keizai Seminar, Nihon
Hyoronsha, pp 2429 (in Japanese)
Krugman P (1998) Its Baaack: Japans slump and the return of the liquidity trap. Brook Pap Econ
Act 2:137187
Yoshikawa H (2013) Essence of deflation (2). Nihon Keizai Shimbun, 33p (in Japanese)
The Rise and Fall in the Semiconductor Industry Part 1, Nihon Keizai Shimbun, 5 January
2014, 11p.
Chapter 30
Crisis Communication in the Digital Era

Gita Bajaj, Anandan Pillai, and Rajen Gupta
Abstract In times of economic turmoil, companies may have to go through crisis

more often than otherwise. Needless to say, PR practitioners have to manage communication during these crises. Communication among stakeholders has undergone paradigm change owing to fast-paced development of communication media
technologies. Citizen-generated content is attaining prominence, and it has been
observed that traditional media tends to capture news from the citizen-generated
content. The high interactivity feature of new media has tremendously increased
the participation of external stakeholders in the organizational conversations in
public domain. This high interactivity may cause positive or negative consequences
for the organization, and hence, public relations managers have to worry about the
implications of this wider, faster and unmediated communication.
This research paper presents an exploratory study conducted to understand how
practitioners have leveraged various digital media channels to combat crisis situations. An in-depth interview was conducted on ten senior-level corporate communication executives from varied industries. They were asked to rank 13 digital media
channels in the order of their preference that they would choose to control a crisis
situation. They were also asked to elaborate on advantages and disadvantages of
each medium they chose. This paper presents the findings and draws up guidelines
for practitioners to manage crisis communication in the digital era and directions for
future research in this domain for researchers to take up.
Keywords Crisis communication New media Digital communication
International conference on Global Conference on Managing in Recovering Markets (GCMRM)

Management Development Institute, Gurgaon March 5th7th, 2014
Declaration: The authors do hereby declare that this paper is an original piece of research work
and is not currently under review, accepted for publication, or published elsewhere.
G. Bajaj (*) A. Pillai R. Gupta
Springer India 2015
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G. Bajaj et al.
Introduction
In times of economic turmoil, companies may have to go through crisis more often
than otherwise. Needless to say, PR practitioners have to manage communication
during these crises. Crisis communication studies have been largely descriptive in
nature with focus on post-crisis situations (Avery et al. 2010). A need for prescriptive
research in crisis communication was established in literature (Avery et al. 2010).
Due to the increasing penetration of Internet and digital media, organizations have
started adopting these media to manage crisis situations irrespective of the organization size and the crisis type (Perry et al. 2003). The citizen-generated content is
attaining prominence due to easily available new media technologies, and it has
been observed that traditional media tends to capture news from the citizengenerated content (Wigley and Fontenot 2011). The high interactivity feature of
new media has tremendously increased the participation of external stakeholders in
the organizational conversations in public domain. This high interactivity may cause
positive or negative consequences for the organization, and hence, public relations
managers have to worry about the implications of this wider, faster and unmediated
communication (Ann Mei et al. 2010). Considering that the rhetoric is of much
importance for image safeguarding or restoration during and after crisis, it is important to study the impact of new media on crisis communication.
There exist two well-established streams of research: (1) new media technologies
and (2) crisis communications. However, hardly any research exists that addresses
how new media technologies are leveraged by organizations to communicate during
crisis situations. Hence, we decided to address this void with the help of our contribution. In this research paper, we have attempted an exploratory study to understand
how practitioners have leveraged various digital media channels to combat crisis
situations. An in-depth interview was conducted on ten senior-level corporate communication executives from varied industries. They were asked to rank 13 digital
media channels in the order of their preference that they would choose to control
crisis situation, and secondly, they were asked to elaborate on advantages and
disadvantages of each medium they chose. It was found that SMS (short messaging
service) was a prominent choice among respondents followed by email, mobile
telephony and corporate websites. New media channels were used by few of them;
however, it did not emerge as a unanimous choice among all. This paper is an attempt
to draw up guidelines for practitioners to manage crisis communication in the digital
era and directions for future research in this domain for researchers to take up.
Literature Review
Crisis Management and Communication: Crisis is a natural part of an organizations lifecycle and development (Seeger et al. 2005; Ulmer and Sellnow 2002;
Weick 1988). Some scholars (Stern 1997) highlight it as part of an organizations
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379
learning process. Studies on crisis management delve on management of the various

stages of crisis and the rhetoric that accompanies it.
Crisis Management Stages: Common models depicting life cycle of a crisis are
Finks (1986) four-staged model and Mitroffs (1994) five-staged model. However,
the most common and regularly used model is the three-staged model, which divides
a crisis into the precrisis, crisis and post-crisis stages. But, in real life, a crisis is like
a process which cannot be divided into clear-cut stages, raising questions on the
applicability of these theoretical models. However, their importance cannot be
disregarded because to a certain extent these models have a pedagogical and
analytical value. Scholars have traditionally focused on the last stage and viewed
the crisis as an anomaly, but the biased interest in this stage is a rather reactive and
defensive stance (Falkheimer and Heide 2009).
Rhetoric and Crisis Management: The other construct that has received
extensive attention is the management of rhetoric. Image recreation discourse is
influenced by context, media, genre and text (Johansen and Frandsen 2005) (see
Fig. 30.1). According to agenda setting research (Scheberle 1994), media coverage
is determined by factors such as causality, responsibility and blame. The amount of
media coverage and the vividness of the information shape the perception of risk
or damage (Walberg and Sjoberg 2000).
Traditionally rhetoric has been managed on a mass communication paradigm.
Sender-oriented perspectives and rational message distribution through traditional
media has been the practice. The authenticity was judged by the type of medium
used (Gonalez-Herrero and Smith 2008).
The new media influencers are different. For instance, bloggers could be important influencers and blogs can be used for crisis communication (Valentini and
Romenti 2011) to address varied audience people who blog about organizations,
critics, people who are exposed to blogs of influential bloggers, media that covers
blogposts and people who follow blogs for information (Jin and Liu 2010).
Fig. 30.1 Image recreation discourse (Source: Johansen and Frandsen 2005)
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G. Bajaj et al.
Message Strategy: Another crucial aspect of crisis communication research is

the need for different technical explanations to the diverse stakeholders.
An organizations choice of message strategy affects both how people perceive the
crisis and the organization in crisis. There might be places where consistency actually decreases legitimacy if some stakeholders fail to understand the technical nature
of crisis. Prior research suggests that the public wants more technical translation
(Roger 2005), and the organizations are not providing those details. Augustine
(2000) warns organizational leaders that during crisis, organization stakeholders
often have a special need for information. They should not be abandoned by the
organization and expected to get information elsewhere. The question here is if or
how do organizations direct specific message strategies to different stakeholder
groups during crisis.
Crisis Communication and Digital Medium: With increasing use of ICT,
importance of relationship with community at large has increased substantially,
communication has become a strategic element rather than just tactical message
broadcast activity, media relations have become complex, Internet is not just a tool
but a strategy which needs to be planned and executed carefully, communication
speed has increased manifold and crisis might arise from any part of the digital
economy (Goodman 2001). An effective crisis communication through a digital
medium should be credible, committed, efficient, responsible and resolving in
nature (Segars 2003). Organizations have understood the importance of digital
medium, and irrespective of the size of the organization, they have started adopting
them during crisis situations (Perry et al. 2003).
However, still very little is known about organizations use of ICT in crises (Taylor
and Perry 2005). And it still seems that organizations are generally missing the interactive potential of ICT (Taylor et al. 2001). Earlier research indicates that the need for
an audience orientation to crisis communication has not been addressed properly.
The new media platforms are replacing traditional one-to-many communication
to many-to-many model, which has brought dimensions of trust and transparency as
key criteria of consideration (Gonalez-Herrero and Smith 2008) (see Fig. 30.2).
The benefits of new media over nave one-way online communication through
Internet are it allows organizations to include expertise in crisis response, allows
interaction with varied stakeholders at same time, allows organization to track conversations and understand their stakeholder sentiments and provides organization
an opportunity to uncover true perceptions (Fjeld and Molesworth 2006).
Thus, there exists a vast audience with the ability of multidirectional communication. Hence, the importance of sender-oriented perspective is not as vital in the
new media (Falkheimer and Heide 2009). Both the advices sender-oriented and
rational message distribution may not work in the new paradigm. Therefore,
there is a need for greater theoretical and practical work in this new context.
Argenti (2006) argues that technology has fundamentally changed the dynamics
among corporations. As insiders and outsiders disseminate and collect information
about companies at will, there is new sense of entitlement. This medium is not limited
to business-to-consumer conversations but is increasingly used in consumer-toconsumer conversations (Hearn et al. 2009, p. 49). The users are empowered to
express their views, and this has created a new equality in communication.
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Fig. 30.2 Many-to-many model of public relations (Source: Gonalez-Herrero and Smith 2008)
Further, the viral nature of new media platforms could be a boon or curse in crisis
situations as they possess the capability to bring crisis situation under control, and
alternatively the same viral capability might create a crisis situation with a just a
small information. It is vital for the organizations that they understand the role of
processing information and continuing interactivity in times of crisis.
The new media comprise three key layers of communication social, content
and technology (Hearn et al. 2009). These layers are evolving and in turn are continuously improvising the richness of communication between stakeholders of a
firm. Thus, there is a need to understand the new media technology for seamless
communication among various stakeholders like employees, customer and suppliers
(Hearn et al. 2009). Ann Mei et al. (2010) suggest New Media Communication
Model (Fig. 30.3) to prescribe guidelines for managing crisis on new media. The
focus of the recommendations is broad and the next level of understanding would
require practitioners to distinguish between the nuances of the several technologies
to have distinct approaches for each.
2.1
Will These Guidelines Work for New Media?
Martin and Boynton (2005) advised five practical guidelines for organizations in
dealing with press: (1) prompt response, (2) truth/avoidance of absolutes, (3) constant flow of information, (4) concern for victims and their families and (5) choice
of appropriate spokesperson(s). But these guidelines advise organizations in dealing
with the press rather than communicating directly with the public (Taylor and Perry
2005). A recent trend is to use the Internet for unmediated and interactive communication with the public. As above guidelines were relevant mostly for the press, and
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Fig. 30.3 New media crisis communication model (Source: Ann Mei et al. 2010)
not for the end user who, because of the Internet, are better informed, guidelines are
needed to address the end user. Hence, this research paper attempts to understand
how crisis communication could be managed with new media technologies especially from the perspective of the end user. The lack of adequate research as a
background motivated us to attempt an exploratory design of research, where the
focus was mainly to understand the phenomenon on a larger scale rather than build
relationships or prove with any inferential statistics.
Research Gap
Previous crises communication literature has highlighted the importance of new

communications technologies. However, rarely any research has developed a
systematic method to identify which new media technologies are used or to assess
their application across various crisis situations. Although, there are many relevant
individual studies, there is no systematic body of research about crisis communication on new media.
30
Research Objectives
383
The prime objective of this research paper was to identify the new media technologies
that were applied in practice by organizations to address crisis situations. Secondly,
we intended to understand the differential advantage or disadvantage that one
particular technology had over other available technologies. Thirdly, we tried to
identify probable course of actions that practitioners could adopt in future while
facing crisis situations, and finally, we attempted to identify some research areas
that crisis communication researchers could target in future studies.
Unit of Analysis and Data Collection: The unit of analysis for our research was an
organization. Crisis communication decisions are made by senior-level corporate
communication executives in an organization. Hence, we decided upon such seniorlevel executives as unit of data collection. The basic assumption was that these
executives were aware of new media technologies that were prevalent in the media
industry and had used some of them in past few years. The basic purpose of interviewing these respondents was threefold (1) to understand their experience of new
media technologies, (2) to understand the concerns and challenges that they faced
while using new media technologies and (3) ways in which they have dealt with
those challenges. Our objective was to capture live experiences of these respondents
and present key learning which could be helpful for future practitioners. Our secondary objective was to identify research questions which could be of interest to
future researchers.
Data Collection: Owing to the little literature that exists in this domain, a detailed
understanding of the topic was essential. Hence, we adopted the interpretative
approach. We attempted phenomenological interviewing method (Roulston 2010).
This interviewing method enabled us to examine respondents live experiences with
the crisis situations and the response actions that they took in those situations. The
major motivation of interviewing senior-level executives was to understand their
feelings, perceptions and understandings in their own words. We conducted in-depth
unstructured interviews of ten senior-level corporate communication heads of leading organizations. In order to have a broader understanding of the topic, we decided
to have representatives from varied industry sectors (see Table 30.1).
Respondent Profile: As we were attempting an exploratory study, we focused on
diversification of respondents to ensure we captured varied perspectives. The intention was not to aim for generalization of results, which is not an objective in exploratory studies (Yin 2011). Hence, we chose senior-level communication executives
from varied and major industries like banking, automobiles, retail, oil and gas, financial bodies, etc. (see Table 30.1 for details). Initially, these respondents were asked to
rank the importance of impact of the 13 new media technologies/applications on
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Table 30.1 Respondent profile

Respondent identity
R1
R2
R3
R4
R5
R6
R7
R8
R9
R10
Designation
Head, Corporate Affairs
CEO
CEO
Head, Corporate Communication
Sr. Manager, Corporate Communication
VP, Corporate Communication
Industry
Financial regulatory body
Organized retail
PR agency
Oil and gas
Banking
Conglomerate
Stock exchange
Automobiles
Banking
Banking
crisis communication (Appendix A1). For communication applications that they

ranked as the top 5, in-depth questions were asked to unravel what were the concerns
of the practitioners, regarding these applications and what these practitioners were
struggling to handle.
Findings
The rankings of all respondents are provided in Appendix A1.

Ranking of New Media Technologies: The initial ranking data were subjected to
descriptive analysis to understand which new media technologies scored importance
among the corporate communication executives. As the number of respondents was
less for an inferential statistics, we settled with just the descriptive analysis. Each
new media technology that gained position in top 3 ranks for a respondent was
calculated, and the most widely preferred technology was inferred. It was found that
70 % of respondents consider SMS to have major impact in crisis situations and
ranked it in top 3 positions. Secondly, 60 % of respondents considered emails to be
of importance. Thirdly, 40 % of respondents ranked mobile telephony as important
medium in crisis situations. About 30 % of respondents voted for websites and blogs
as relevant mediums during crisis situations.
Analysis of Interview Data: The recorded interviews were first converted into
transcripts. Thereafter, interviews were read and analysed by two of the authors, and
interpretations were matched with each others to gain consistency. The thematic
analysis (Roulston 2010) was performed on the interview transcripts, where the
focus was to generate themes, which captured the description of events and actions
taken by respondents in those situations.
SMS/Mobile Phone: From the practitioners responses, SMS and calls through
mobile phones have emerged as the prime and the third most critical IC applications,
respectively. One of the prime concerns in their regard is that in case of a malevolent
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SMS/MMS, it is difficult to trace who all have been informed and therefore difficult
to reach the right audience. For obvious reasons, the two-pronged approach that any
company adopts is (1) to reach out and respond to the relevant audience that has read
the SMS/MMS and (2) to track where the SMS/MMS originated. The second activity
requires communication practitioners to have links with mobile companies that are
to finally track the originator. Also, considering the tight privacy regulations that
mobile companies have to follow, the communication professionals have to go
through the Cyber police to lodge an FIR and get the desired information. However,
SMS had some benefits as respondent R2 mentioned:
SMS is most important because of following reasons, 1. Reach is very large, 2. Mind space
occupation is high i.e. it definitely gets the personal attention and 3. The attention is received
instantly
It requires special attention in addressing the information receivers concerns.

For instance, it would have been fairly easy for an organization to reach the same
target audience with a common message to all through a newspaper or television.
The SMS/MMS audience spread is however viral and uncontrolled, and therefore, it
is difficult to find out who all have received the message. Thus, ensuring that the
message traces the path of the original message seems undoable. What could a practitioner do in such circumstances?
One of the practitioners shared that reaching the target audiences is possible if
the audience is known (e.g. the client database). One could send an SMS and have
a call centre set up to respond to further queries. The challenge here is the training
of the call centre executive who may end up parroting the response rather than
responding. Thus, one of the critical aspects is writing the SMS to be communicated and training/handing the client queries.
Another source of worry was the credibility and emotion that an SMS or mobile
conversation from a known person evokes. Practitioners felt that when a person you
know confirms the news, people associate with it better, they act on it and it gets
propagated through a viral network. The respondent R7 emphasized relative importance of SMS vis--vis telephone call as he expressed:
During crisis, I stop taking telephone calls because it is impossible to respond to so many
journalists who wish to reach out to me. So, I dont take anyones calls and focus first on
website and emails. This also ensures fast and correct dissemination of information. Then I
respond to the SMSes. Thereafter I take calls of the media. This is because not everyone is
in online at that moment and therefore all mediums have to be kept updated.
Online marketing professionals have been using this opinion to their advantage
but during crisis when negative message spreads through this application, implications are opposite. Practitioners need to learn how they can use this association to
their advantage during crisis. Also, practitioners need to keep track of cyber policies, telecom regulations and accordingly adapt themselves.
Email: Respondent R1 clearly highlighted the benefits of email as he mentioned:
Email has made it very convenient to share complex technical information. It has also
ensured that more accurate information is made accessible to the journalists
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With email as the channel of communication, a journalists query along with the
date and time lands in the mailbox of the communicator. It is therefore impossible
for the latter to avoid a journalists query which in yesteryears was on telephone and
could be avoided. The communicator is thus bound to respond, and with responses
over emails, it is not possible for a communicator to even deny a quote. The liberty
is much less than when the questions were asked verbally.
Every country would have some or other information dissemination/transparency laws (for instance, Right To Information Act in India), to which an organization should abide and respect the laws. Corporate Communicators must now respond
at a much faster pace, with accurate information, and therefore, the internal communication and approval mechanisms have to be extremely robust and nimble to
respond effectively. Practitioners must now review the organizational communication mechanism to enable smooth flow of correct information from varied channels
and levels to make the response effective.
Crisis situations always demand quick response. Researchers can study how
much more paced up it is expected to be now and what implications it would have
on organizational structure and communication in this context.
Key concern that relates to malevolent chain emails is same as that for viral SMS
except for that mass SMS costs more to the sender than mass emails. For instance,
respondent R1 who was associated with the Reserve Bank of India shared his experience of malevolent email and how RBI responded immediately to avoid future
damage. He said:
Emails announcing non-existent lotteries have been able to cheat many people. In one of the
fraud chain emails, an authentic looking letter from the RBI Governor substantiated a lottery. After sending the email, a lady called Kangana Kapoor who claimed to represent RBI
called the recipients. When it came to RBIs notice, it uploaded announcements on its
website and the announcement ticker was running all the time in 13 Indian languages to
inform people of this cheating.
Thus, implications for practitioners and researchers are similar. One of the
respondents felt that email chains are not credible, and therefore, their company
does not bother to respond to malevolent chain emails. Yet, email emerged as the
third highest concern among practitioners.
The other side of the argument is that with emails it is possible for anyone to
reach any key influencer, say the authority, the stock exchange, the newspaper, etc.
and thereby cause major implications for the target company which may be unaware
of the same and therefore unable to respond.
Thus, three key concerns of communicators were (1) if a journalist sends an
email posing a question, Corporate Communicators are bound to respond. This
response is also bound by a deadline. (2) If there is a chain email spreading among
stakeholders, it is difficult to trace the origin. (3) Consumers and offenders now
have more access to authorities, regulatory bodies, grievance cells etc.
Websites: A newspaper is read in specific regions depending on its circulation; a
TV channel may be available in one region and not in another, again depending on
the coverage rights. However, anything posted on the Internet is accessible across
the globe. Be it a journalist, a stockbroker, a competitor, a consumer or any other
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stakeholder, the access is instant. This could be a threat because all stakeholders
have access to a medium that allows them to broadcast their views, opinions, grievances etc. On the other hand, companies now have a choice of voicing their response
on their websites and thus reaching larger and wider audiences instantly. As respondent R7 mentioned:
Why we consider website first is because a lot of people log on and try to see the information. Communication has to be controlled during a crisis & website is a space where you do
have control on whats being communicated
Thus, websites can be a great relief because there is universal access. So in times
of crisis, one can post ones response on their own websites and on related websites
that drive traffic to their websites. This may circumvent the need to respond to multiple perpetrators.
But, this too comes with a caveat. If a company responds on the website, it goes
on record. Record is archived forever. Second, a company has to ensure legal compliance before responding. Third, if it also has to construct a response, for instance,
a video, an audio, etc., and that takes time. This again has paced up race against
time, once the exposure has happened. One of the practitioners shared experience of
a server crashing due to traffic overload. This can be another challenge as a failing
server can further pique or irritate the audience. Moreover, there could be other
issues as respondent R1 mentioned:
The other side of the coin is the possibility of hacking the website which can have very
damaging effects
and according to respondent R2:

The negative side is that this means is passive or one way communication only
Hence, some of the key issues that practitioners need to address are to understand
and adapt to legal rules related to websites and to establish a seamless process
within organization to collate information from various departments and disseminate it through website.
Social Networking Websites (SNWs): With most social media networks
coming into existence towards the turn of the century (year 2000), SNW is a
more recent development among all the IC applications and users, and researchers are exploring the huge and yet to be tapped potential of this medium. Still it
has emerged as the fifth major concern among practitioners. The increasing popularity of Facebook, Orkut, LinkedIn and many others has created unprecedented
connects among friends, professionals and strangers. Some have emerged as a
network of friends and others as a network of professionals. Just like websites,
here too the access is not regional; it is much wider, viral, but unlike a website it
cannot be controlled. The personal touch or association attached with the source
can possibly increase the credibility and readability of the information as respondent R8 emphasized:
There is absence of authority and everything is transparent there. One has to be present
there. The modus is ask me or tell me. I am actively promoting this initiative but one needs
resources. People to support and publicize it. This requires offline promotion.
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Further, respondent R10 highlighted the network effect as she mentioned, SNWs
have a force multiplier effect. Complete transparency is there and therefore cannot
be ignored.
Online marketers are already employing these characteristics of SNWs to
promote their cause. When the message spreading on this medium is negative, the
implications are opposite. Crisis communicators have to deal with these implications and explore how they could use it to change the crisis into an opportunity.
Moreover, communicating through SNWs requires adequate quantity of relevant
content that could convey the message an organization intends to, which is a huge
challenge as respondent R10 highlighted:
It requires rich media like audio, video etc. which takes time to produce and it is often a race
against time to contain damage, once exposure occurs.
Hence, organizations need to understand the needs of target audience and accordingly match the social object. Also, its key to understand the privacy and regulations
related to data sharing on social networking websites.
Consumer Forum Websites (CFWs): CFWs are focused and mostly domain
centric as respondent R10 mentioned:
Its focused and domain centric to a particular class of product and business so requires a
high level of technical, product awareness and knowledge.
They also have a force multiplier effect as the complaints may get picked by
print, TV and/or radio, thereby increasing the criticality of the issue. But today consumer forums are an agenda on TV, print, radio, etc. also. However, TV and radio
are one time access. Unless the TV and radio companies air the message again and
again, access is not unlimited. Accessing archives requires money and effort. In case
of CFWs however, the voices get archived and these archives are easily accessible
to all. So gathering momentum when a crisis hits may be more feasible here than in
any other space.
Podcasting: Audio and video have higher impact than text. With applications
like YouTube, everyone has the option of uploading videos to broadcast. With
option of podcasting available now, larger number of interested people can get relevant digital audio and video files with very little effort and time lag. Thus, the
access to these files is increased but the screening of content broadcasted is missing.
Thus, anyone can voice whatever they wish to, and whoever is ready to listen can
join the group. In the absence of screening, the test of authenticity and credibility of
information is missing, and it is difficult to segregate news from fiction, and hence,
there exists a challenge in using this medium as respondent R6 mentioned:
Create negative noise across the world, make an issue a larger issue than required.
Lack of this distinction can become important in times of crisis when the victims
of crisis, competitors and media have access to the medium, but the reader is not
aware of who is sharing the information and what could be the agendas behind the
information.
Blogs: Blogs emerged as the fourth dreaded IC application among the practitioners. Anyone can start his/her blog. But only a persistent blogging with thought and
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marketing capability has followers. There are debates on credibility of blogs, but a blog
with large following/readership cannot be ignored, as respondent R2 highlighted:
They too are important because they are real time. They are becoming powerful as they
have a wide audience and the message can be managed.
Some practitioners shared that bloggers pick up stuff from each other, and therefore, quotes around the world can damage reputation. The challenge for a practitioner starts from knowing what has been written when and where. Many companies
have official blogs to communicate with people. However, not all companies are
ready to invest into blogs, and many are anxious about the implications of the same,
as respondent R5 shared her insight:
It is an unconventional communication; people are shrill; they use it as a last resort; customer complaints only when the case is extreme; during crisis tracking the source is
difficult.
Twitter has introduced the option of microblogging and increased by many folds
the participation of people. Everyone is welcome to share what they are doing.
Experiences of Shashi Tharoor, Chetan Bhagat and Amitabh Bachchan are examples of crisis that large fan following can throw on you. The larger the number of
followers, the larger is your access to people. But not everyone has large number of
followers.
Online Surveys and Newsletters: Online surveys and newsletters have surfaced
as low concern areas of the practitioners. However, one may argue that surveys and
many interactive newsletters engage the readers more than plain text news. Online
surveys are extensively used by television and print medium and do seem to have an
impact. However, considering the low concern of the practitioners, it may be worthwhile for researchers to study the impact of surveys and newsletters.
The insights shared by practitioners helped us understand uniqueness of using a
particular new media technology in crisis situation. We have suggested a few guidelines for practitioners based on our interview data which would be helpful for them
in preparing themselves for crisis situations (Appendix A2).
Summary
The literature review helped us understand that there is a need for a process-oriented
theoretical as well as practical development rather than a stagelike explanation of crisis
because in reality crisis cannot be segregated into stages. The review of literature also
suggests that scholars have largely focused on the last stage of crisis, but in todays age
of virally networked communication, it becomes very essential for practitioners and
organizations to be prepared for any kind of crisis. Hence, it is important to study crisis
as a process so that quick and effective communication strategies can be employed at
any stage of the crisis. Secondly, in the past researchers have largely concentrated on
dealing with the traditional media but have had less orientation towards the audience
who possess the power of content creation in the new age media.
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This research paper helps one understand (1) insights on practitioner experiences
and perceptions and (2) guidelines for practitioners and research agenda for
researchers.
Conclusion
This research paper establishes the need for awareness of the legalities associated
with new media technologies. It is necessary to scan, monitor and manage communication on new media in a perpetual manner. These new media technologies have
enhanced the scope of both coverage and vividness of information, and hence, it has
become inevitable for organizations to develop an expertise to use these technologies
and communicate effectively with their stakeholders during crisis situations. The
critical part of new media technologies is to sustain the communication in a dialogic
manner rather than one-sided information dissemination process. Organizations
should plan accordingly to prepare and equip themselves in precrisis stage. Precrisis
stage may assume greater importance in the new age as reactive strategies may be
more difficult to implement on these new media technologies.
Finally, this paper suggests an agenda for researchers and guidelines for practitioners to better understand the new media technologies for effective use in crisis
situations when conversation in real time becomes a necessity to save an organization from much harm.
Future Directions of Research
The potential of new media usage would increase on a larger scale in the future, and
hence, end users would be better informed than they were in the era of traditional
media. This research clearly establishes the necessity to leverage new media technologies during crisis situations. However, it is surprising to note very sparse literature exists in this intersection domain of new media technologies and crisis
communications. We based on our interaction with the respondents have identified
potential research areas that researchers could attempt in future with respect to each
new media technology.
It has been noticed that there is insufficient direct information available about the
information-seeking behaviour of individuals during a crisis (Seaton 2005). This
could be a potential domain of research, where researchers focus on understanding
end users information-sourcing behaviour from new media technologies during
crisis situations.
Also, we have suggested few research arenas that future researchers could pursue
in the integrated research domain of crisis communication and new media technologies (Appendix A3).
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391
Limitations
This paper provides researchers an agenda for future research and practitioners
learning from peer experiences. However, the conclusions may not be exhaustive
as the findings are based on interviews of a small number of practitioners from
India. But, we believe the insights presented in this research paper would be
relevant to organizations based in developing countries and emerging economies.
A larger set of interviewees could have revealed more areas of research and could
have lent itself to quantitative inferences. Practitioner guidelines are also based on
analysis of peer experiences. Interviews were conducted only of senior-level executives; however, communication decisions in an organization may get affected by
thoughts from various team members. So, it would be advisable for future
researchers to interview multiple members from each team to have a comprehensive perspective.
Appendices
Appendix A1: Ranking of New Media Technologies
by Respondents
New media
technologies
R1
R2
R3
R4
R5
R6
R7
R8
R9
R10
SMS
3
1
7
1
3
1
2
2
9
Mobile telephony
1
10
1
2
9
3
13
Email
2
8
5
1
2
1
3
5
1
Websites
4
4
13
9
4
3
1
10
2
SNS
6
3
1
13
10
4
4
4
3
Microblogging
3
4
10
9
8
13
10
CFWs
6
8
6
10
13
6
4
Podcasting
3
5
11
5
12
6
Blogs
3
2
8
5
7
2
1
5
Online news channels
5
2
5
7
7
12
7
8
Online newsletters
11
7
8
13
1
9
12
Online surveys
12
13
12
11
8
7
MMS
9
3
13
6
11
11
Note: The indicates that a particular respondent did not use that new media for any purpose.
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Appendix A2: Agenda for Practitioners

Medium
SMS/mobile
phone
Email
Website
Social networking
websites (SNWs)
Consumer forum
websites (CFWs)
Podcasting
Blog
Online surveys
and newsletters
Agenda
Understand cyber policy and regulations
Be updated about mobile service provider procedures
Possess access to skilled and trained call centre executives
Develop skills of appreciating and using messaging through this medium
Scan each email as part of continuous process to avoid crisis at very early
stage
Be aware of cyber policy and regulations
Have sufficient knowledge of Internet companies procedures and people
involved in tracking mechanisms
Hone the skill of appropriate messaging through email
Identify appropriate key influencers who could be leveraged as
spokesperson during crisis situation
Ensuring systems for quick legal vetting
Expertise in constructing media-friendly messages such as video, audio etc.
How do online news channels function?
What is the organizational structure and method of collecting news in case
of online channels?
Match the social object that a particular SNW offers with that of the
characteristics of target audience
Understand the individual privacy and data sharing rules on these SNWs
Execute relevant content strategy that ensures more positive engagement
with the stakeholders
Identify popular CFWs in respective domain
What are the operating and success parameters of CFWs?
Continuously scan all pertinent/relevant podcasts
Develop the skill of quickly making audio/digital footage
Have clear understanding of the IC companies policies of uploading,
removing and podcasting. Have clear understanding of legal policies on
the subject
Identify leading and influential bloggers in the respective domain
Arrange for blogger meets and build long-term relationship with them
Identify the widely discussed topics during crisis situation, address them
and prepare to be ready with a response strategy for any explanations
expected by blog readers
Possess expertise in developing effective online surveys
Should have capability to come up with relevant content in newsletters at
regular intervals
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Appendix A3: Agenda for Researchers

Medium
SMS/mobile
phone
Email
Websites
Social
networking
websites (SNWs)
Consumer forum
websites (CFWs)
Podcasting
Blog
Online surveys
and newsletters
Agenda
Establish the differential advantage of using SMS compared to other
traditional mediums like newspaper, TV etc.
Compare the relevance of message content communicated by this medium
to respective stakeholders and its effectiveness vis-a-vis if it was done by
print or television
Identify appropriate proactive/reactive strategies that can be applied to
handle crisis situations through email
Establish relationship between hierarchy within organizations and
readiness to follow an appropriate crisis communication process
What attributes a company should consider before disclosing an official
statement on third party websites?
Establish impact of credit ratings of websites on information sharing
decisions during crisis situations
What would be the impact of reach and virality of a particular SNW on
effectiveness of messaging?
Establish SNW content characteristics that result in effective control of
crisis situation
Establish entry and exit barriers of users for CFWs
What would be the implications of differences in the governing laws in
different countries?
Establish impact of rich media communication such as podcasting
platforms, in containing crisis situation
How would the image of a person featured in the podcast influence the
ability to control a crisis situation?
What blogging strategies should firms follow during crisis?
What methods should be developed to verify credibility, tone and pitch,
description and other evaluative detail of messages posted on blogs?
Is it critical to monitor all surveys/newsletters/channels or should the
follow-up be limited to the prominent ones in relevant domain? Is it critical
to build relationships with online hosts? Does it matter?
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Chapter 31
Mutual Impacts of Human Resources

Management and Knowledge Management:
Issues of Functions and Effective Factors
Jelena Horvat and Samo Bobek
Abstract Knowledge management (KM) and human resources management

(HRM) are increasingly regarded as key leveler of competitive advantage and are
one of key areas for management in recovering markets especially in knowledge-based
economies. Combination of KM process and organizational skills and intellectual
capital as a strategic organizational asset enables the increases of organizational
effectiveness. Human resources, employees and their effective managing are essential
for the company, and the peoples most valuable resource is knowledge; therefore,
HRM and KM are closely interrelated. In this paper, mutual impacts between
knowledge management and human resources management are explained based on
theoretical findings, and as a result, a preliminary model assessing the impact of
human resources issues on knowledge management is presented. In the model,
HRM is observed from two aspects: (1) functions which are derived from the best
fit among recruitment and selection of employees, training and development and
performance appraisal and (2) effective factors which are empowerment, quality
of work, culture, individual factors and learning.
Keywords Knowledge management Human resources management Knowledge
management IT/IS solutions
J. Horvat (*)
Faculty of Organization and Informatics, University of Zagreb,
Pavlinska 2, HR 42000 Varadin, Croatia
S. Bobek
Springer India 2015
395
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J. Horvat and S. Bobek
Introduction
In todays shift to a knowledge-based and highly complex business environment in

order to achieve sustainable competitive advantage, organizations are trying to facilitate collection, storage and distribution of knowledge. Human resources are key components in every organization representing total knowledge, talent, attitude, creative
ability, aptitude and belief of an individual involved in an organization (Dhamija
2012). New and essential asset of companies resides in the minds of employees; therefore, organizations have to convince and motivate their workers to create and share
their knowledge. Knowledge management (KM) and human resources management
(HRM) are increasingly regarded as key leveler of competitive advantage in global,
dynamic and complex business environment (Brewer 2010) through which a company can enhance performance, innovation and practices (Wang and Wang 2012). The
two concepts, people and knowledge, considering from the context of knowledge
work, are inextricably joined (Oltra 2005). The contribution of HRM to KM is at
the high end of value chain as it is primarily used to create and sustain a culture that
fosters innovation, creation, creativity and learning (Chivu and Popescu 2008).
Combining these two areas of management, various researchers have analysed
segments of their mutual impacts. Based on previous research, this paper aims to
explain several important findings on the mutual impacts between knowledge
and human resources management and to propose a preliminary model based on
theoretical analysis and research activities.
Theoretical Background
Knowledge, as the most important intellectual property and asset of the company
(Collins 2010; Chan et al. 2011), is conceptualized as codified information and
enhances the companies value and achievement of its objectives (Anand and Singh
2011). Its importance has been recognized in the 1990s and after that literature began
to publish research and analysis regarding knowledge and management (Jengard
2010). Authors deliver different definitions of knowledge and knowledge management, but they all have income that knowledge in organizations is an essential element in defining career success of employees and it combines all of their skills (Fong
et al. 2011). The term knowledge management does not imply just a set of technologies or methodologies, but also a practice and discipline which involves interaction of
people, processes and technology. Importance of knowledge management lies in the
fact that it could result in empowerment of individuals and an organization itself to
accomplish activities effectively through organizing of knowledge (Jantz 2001). It is
defined as creating, acquiring, storing, sharing, transferring and utilizing both explicit
and implicit forms of knowledge at individual, group, organizational and community
level through harnessing of people, process and technology (Madhoushi et al. 2010).
Generally, it relates to unlocking and leveraging the knowledge of individuals to gain
appropriate knowledge from appropriate individuals in appropriate time (Hutchinson
31 Mutual Impacts of HRM and Knowledge Management
397
and Huberman 1994). Iske and Boersma (2005) identified ten different approaches of
knowledge management: strategic and human resources management approach,
learning organization and intellectual capital approach, knowledge technology, ICT
and organizational approach, innovation approach and network and quality control
approach. Territory and aspects of knowledge management lately have been dominated by two main factors the supporters of information and communication
technology (ICT) and the human resources management (HRM) views.
Human resources management includes decisions that affect the success of
business, with aim of achieving long-term company strategy (Noe et al. 2000 p. 4).
This specific area of management has been explored throughout the last few decades,
and various authors have defined range of classification and functions of HR management. Renuka and Venkateshwara (2006) defined seven practices of HRM,
whereas Fombrun et al. (1984) summed up five generic HRM functions which are
performed by different HRM practices in organization, and Foot and Hook (2008)
defined 17 main areas of human resources management activity. Human resources
practices and functions differ from industry to industry as well as from size of the
organization. Exploratory analysis and overview of the meaning of HRM in 104
empirical articles published in internationally refereed journals (19942003) has
been done by Boselie et al. (2005). Based on content analysis, their findings have
revealed that majority of the studies define HRM in terms of HR practices or bundles
of practices. There is no fixed list of generally applicable HR practices that defines
HRM. Taking in consideration that there is no universal prescription for HRM policies and practices and everything lays on the organizations context, culture and its
business strategy, it is important for every company to find the best fit. In addition
to HR functions, literature defines several effective factors that lead to enhancement
of HR productivity: employee empowerment (Greasley et al. 2005), quality of work,
(Cole 2005; Lin 2007), culture (zbebek and Toplu 2011; Hussock 2009), individual
factors (Attafar et al. 2012; Lin 2007) and learning (Dicke et al. 2006). These factors
have impact on HR productivity and can be influenced by internal and external elements in HR process.
One way of HRM to reinvent itself is through contribution to effective linkages
between human capital and knowledge management within organizations (Gloet and
Berrell 2003). The aim of knowledge management is to support and enhance the
employees knowledge processes, and therefore, it is important to identify different
knowledge management initiatives that HR practices need to support. Below, the mutual
impacts between knowledge management and human resources management will be
explained based on theoretical findings, and as a result, a preliminary model assessing
the impact of human resources issues on knowledge management is presented.
Linking HRM to KM
The role of HR is to be a human capital steward, knowledge facilitator, relationship

builder and rapid-deployed specialist, whereas the knowledge management has
the capacity to significantly expand the role of professional human resources
398
management (Gloet 2002). The HR view in KM is increasingly gaining more attention

in recent years (Brewer 2010; Ahmed and Ahmad 2012), also various researchers
(Davenport and Vlpel 2001; Hussock 2009; Ishak et al. 2010; Lin 2007; Oltra
2005; zbebek and Toplu 2011; Theriou and Chatzoglou 2008; van den Hooff and
de Ridder 2004; and many others) have been interested in the area of knowledge
management and employees, combining it with perspectives of strategic, project
management and information technology.
Significate impact on the research in fields of KM and HRM had Gloet (2002).
With the model of relationship between KM and HRM, Gloet (2002) specified that
there is a greater need to revitalize human resources function to respond to demands
of the knowledge economy and to develop linkages with KM which requires major
changes across four key areas: roles, responsibilities, strategic focus and learning
focus. Several years later Chivu and Popescu (2008) analysed the main role of HR
in knowledge management. Concluding that human resources help organizations to
articulate the purpose of KM systems, they perceived HR management as a knowledge facilitator and experience creator and which has to integrate effective knowledge sharing and usage into daily life. They discussed the ways in which specific
functional areas of HRM (employee recruitment, career management, development
and others) can respond to challenges of knowledge management. Mathew et al.
(2011) conducted a study which showed that KM initiative is determined by organizational culture, structure and technology. They concluded that organizations
should have affect on all factors to be able to successfully exploit knowledge in the
organization. Daud and Yusoff (2011) suggested that a combination of KM process
and organizational skills and intellectual capital as a strategic organizational asset
enables the increases of organizational effectiveness. If human resources, employees and their effective managing are essential for the company and if the peoples
most more valuable resource is knowledge, then HRM and KM are closely interrelated (Svetlik and Stavrou-Costea 2007).
For the purpose of this paper, HRM is observed from two aspects: (1) functions,
which are derived from the best fit, defined as recruitment and selection of
employees; training and development and performance appraisal (Armstrong and
Armstrong 2009); and (2) effective factors, which are empowerment, quality of
work, culture, individual factors and learning.
According to research done by Oltra (2005) and Thite (2004), selection of
employees has been introduced as one of the most important activity of human
resources in knowledge-oriented organizations, and an accurate selection of employees
has a significant impact on knowledge management success (Wong and Aspinwall
2005). After successful selection, employee training and development plays a major
role for KM. This was confirmed by Lin and Joe (2012) showing that the transfer
of tacit knowledge depends on confidence in commitment of employees and
organization. Significant are also attitudes of employees on mutual transfer of tacit
knowledge. Paying attention to the needs of employees, giving feedback to them
and performance appraisal based on accurate standards are effective on facilitation
of knowledge management process (Attafar et al. 2012).
399
Observing the aspect of effective factors of the enhancement of quality of work

life in the organization helps in facilitating knowledge management processes
(Attafar et al. 2012), and according to Horak (2001), developing employees proficiencies
in communications, networking, learning, team formation, cooperation and creative
thinking is necessary for knowledge management success. Research has shown that
motivated employees are willing to share when they think that knowledge sharing
will be worth the effort (Lin 2007). Results of Lam and Lambermont-Ford (2010)
research showed that external motivational factors help knowledge sharing in organizations. Organizational culture has been regarded as an effective factor on KM and
HR success in many researches (Carrin et al. 2004; Davenport and Prusak 1998;
Oltra 2005). It plays an effective role in KM effectiveness as the identity and foundation of the organization (Attafar et al. 2012) and can have direct effect on employees
empowerment and knowledge sharing behaviour (zbebek and Toplu 2011).
According to Attafar et al. (2012), individual factors show significant relation with
KM which emphasizes the importance of paying attention to individual factors in
selection process. Communication climate and employee-affective commitment are
antecedents for knowledge sharing (van den Hooff and de Ridder 2004). Research
done by Tavari et al. (2009) proves existence of proportion between individual interests and job and between individual proficiencies and job, and also having work
experience affect enhancement of human resources productivity considerably.
Analysing previous research, the main goal of this paper is to present a preliminary
model of the relationship between HR and KM. As mentioned above, there is a relationship between HR and KM, but if digging deeper and analysing two HR aspects,
the literature supports this relationship and proves that effective factors of HR and
functions have positive impact on KM process in organizations (see Fig. 31.1).
Through analysis of literature regarding specified areas of HRM, thus effective
factors and functions and their relation to KM, it has been shown that there is an
unquestionable relationship between these three elements. Preliminary theoretical
model is done on the basis of literature review which supports the belief that strong
relationships between functions of HRM, effective factors and KM can be established. Based on literature findings, the contribution of HRM to KM is at the high
end of value chain as it is primarily used to create and sustain a culture that fosters
innovation, creation, creativity and learning. Therefore, paying attention to human
resources management, its effective factors and functions, it could be regarded as
activities related to knowledge management.
Functions of HRM
Knowledge
management
Effective factors of
HRM
Fig. 31.1 Preliminary conceptual model
400
Conclusion and Perspective for Further Work
If human resources, employees and their effective managing are essential for
company and if the peoples most valuable resource is knowledge, then HRM and
KM are closely interrelated (Svetlik and Stavrou-Costea 2007). Individuals and
human potentials are in the centre of knowledge management, so knowledge
management is individuals management and individuals management is knowledge
management (Davenport and Vlpel 2001).
Effective factors and functions of HR have enhancing impact on HR productivity
(Attafar et al. 2012) and since the HRM has impact on KM, it can be stated that
effective factors and functions are related to knowledge management. As per conducted case research in the past, improving the awareness of significance of HR
issues on KM in IT organizations is important. In addition, emphasis is placed on
development of an appropriate model that can provide support with assessing the
impact of human resources issues on knowledge management in IT companies.
More elaborate research is running where sample of IT companies in two central
European countries is used. For the purpose of this research selection and recruitment,
training and development and performance appraisal were observed as HR functions
and quality, organizational culture and individual factors were observed as effective
factors of HR. Proposed preliminary theory-based model does not intent to simplify
the direct relationship between HRM practices and knowledge management. This
relationship has already been examined thoroughly in the past. The main purpose is
to highlight processes and effective factors of HR practices which should activate
for long-term knowledge management as competitive advantage, and therefore, this
paper presents the preliminary theoretical model for future research.
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Chapter 32
Preselection of Contractors Before Inviting

for Bidding Using AHP
Satyendra Kumar Sharma
Abstract Contractor preselection is a typical multi-criteria decision-making problem that includes both quantitative and qualitative criteria. Contractor preselection
requires a tool that will help managers in reducing the no. of bidders, and this process
is critical in recovering markets where emphasis is on the cost, quality and sound
management of contractors. The analytic hierarchy process (AHP) is a structured
technique for organizing and analysing complex decisions. It has particular application in group decision-making and is used around the world in a wide variety of
decision situations, in the fields such as government, business, industry, healthcare
and education. AHP methodology provides a comprehensive and rational framework
for structuring a decision problem, for representing and quantifying its elements, for
relating those elements to overall goal and for evaluating alternative solutions. This
paper seeks to take full advantage of AHP and solve the contractor preselection
problem using it.
Keywords Contractor selection Multi-criteria decision-making AHP
Introduction
Contractors play a major role in success of any construction project. Therefore,

contractor selection represents a critical decision for any construction company.
Preselection is a pretender process used to investigate and assess the capabilities of
contractors to carry out a contract, satisfactorily, if it is awarded to them. Contractor
preselection is generally preferred by clients to minimize risks and failures accompanied with ineligible contractors. Holt et al. (1994) confirmed that a prequalification should be integrated as part of any contractor selection process, performed just
prior to invitation to tender. Contractor preselection is a complex decision problem
which requires the identification of criteria involved, their interrelationships and the
method required for solving the problem. The components of a decision problem
S.K. Sharma (*)

Department of Management, BITS Pilani, Pilani, India
Springer India 2015
403
404
S.K. Sharma
are generally described in the form of a decision tree. Preselection process is often
carried out by one individual or a small like-minded group, which makes it very
difficult to eliminate biases in the selection process (Russell and Skibniewski 1988).
Literature Review
A number of preselection models were found in literature. Nguyen (1985) has

developed a fuzzy set preselection model utilizing fuzzy set theory. This model
serves the uncertainty involved in the preselection system. The fuzzy logic is suitable to deal with ambiguous qualitative information, but it is not easy to apply
(Jaskowski et al. 2010; Wang et al. 2008). Russell and Skibniewski (1988) applied
five contractors selection strategies: dimensional weighting, two-step preselection,
dimension-wide strategy, preselection formula and finally the strategy of subjective
judgement. These strategies are subject to biases of the decision-maker. Russell
(1990) developed a decision model for contractor preselection. The disadvantage of
this model is that the contractors who are not sufficiently compatible for some decision factors are eliminated in the initial stages of the preselection process. Russell
and Skibniewski (1990) developed a dimensional weighting aggregation model; the
aggregate weighted ratings of contractor scores are calculated based on the analysis
of results obtained from questionnaires. Russell and Skibniewski (1990) developed
a computer program called QUALIFIER-1 to aid decision-makers in preselection.
This program was based on an aggregated weighting for each contactor obtained
through the input rating for each decision criterion. Russell et al. (1990) further
developed QUALIFIER-1 by using a prototype knowledge-based expert system and
adding extra functions, thereby producing QUALIFIER-2. However, QUALIFIER-2
does not adequately deal with uncertainties associated with heuristic knowledge
(Russell 1996). Holt et al. (1994) developed a model which utilizes multi-attribute
analysis and utility theory (UT) to evaluate contractor prequalification criteria and
provide guidelines for practitioners. Holt (1996) applied cluster analysis to reduce a
large number of potential bidders, to identify only those most suitable to tender for a
particular project. Cluster analysis can handle a large number of data points and
groups of similar subsets together, which seems like a good idea for a preselection
system. Hatush and Skitmore (1998) used multi-criteria UT for contractor selection
problem. The utility model used utility curves to represent the relationship between
the specific capability of a contractor and the value of that capability in risky situations. Multi-attribute UT is not easy to apply. It is very sophisticated to be implemented and operated by construction professionals who need an extensive
mathematical background and a long learning process to understand its methodology. Lam et al. (2000) applied the neural network (NN) approach for contractor
preselection by inputting the contractors attributes to the NN and outputting the
clients decision. NNs are often criticized for exhibiting a low degree of
32
Preselection of Contractors Before Inviting for Bidding Using AHP
405
comprehensibility and requiring a large amount of historical data for training. Other
research efforts include those of Fong and Choi (2000), Wong et al. (2000),
Palaneeswaran and Kumaraswamy (2001), Snmez et al. (2002) and Topcu (2004).
Research Gaps
Literature review shows that the current preselection models are based on subjective
judgement or qualitative analysis, tend to ignore vagueness and do not take into
consideration the uncertainty and imprecision of criteria involved in the contractor
prequalification process. In addition, current models require exact numbers for
expressing the relative weights of decision-makers preferences for some of the
prequalification criteria. Since some of the criteria are subjective and qualitative, it
is very difficult for the decision-maker to do that using exact numerical values
Ossama and Nassar (2013). And many papers have put a greater emphasis on fuzzy
theory which in recent times proved to be wrong (Hemanta K. Baruah et al. (2011)).
Therefore, there is a need to a contractor prequalification model to overcome the
shortcomings apparent in the current models.
Problem Definition
The main objective of this paper is to use a decision model composed of analytic
hierarchy process (AHP) approach that tackles the uncertainty and imprecision of
contractor preselection and then choose the most reasonable and least reasonable
criteria at the prequalification stage out of the six criteria defined below. The criteria
used in this model had been collected through the literature review and experts
opinion for building projects.
Proposed Model
AHP is the proposed model, and here we first decompose our decision problem into
a hierarchy of more easily comprehended subproblems, each of which can be analysed independently. The elements of the hierarchy can relate to any aspect of the
decision problemtangible or intangible, carefully measured or roughly estimated,
well or poorly understoodanything at all that applies to the decision at hand. Once the
hierarchy is built, the decision-makers systematically evaluate its various elements
by comparing them to one another two at a time, with respect to their impact
on an element above them in the hierarchy. In making the comparisons, the
406
S.K. Sharma
decision-makers can use concrete data about the elements, but they typically use
their judgements about the elements relative meaning and importance. It is the
essence of the AHP that human judgements, and not just the underlying information, can be used in performing the evaluations.
The AHP converts these evaluations to numerical values that can be processed
and compared over the entire range of the problem. A numerical weight or priority
is derived for each element of the hierarchy, allowing diverse and often
incommensurable elements to be compared to one another in a rational and consistent way. This capability distinguishes the AHP from other decision-making techniques. In the final step of the process, numerical priorities are calculated for each
of the decision alternatives. These numbers represent the alternatives relative ability to achieve the decision goal, so they allow a straightforward consideration of the
various courses of action. AHP requires several time-consuming calculations.
Depending on the number of criteria and candidate contractors taken into consideration, a lot of time is necessary to make all calculations in order to reach the final
solution. As the number of criteria and contractors increases, the dimension of the
problem expands. This could lead to a great number of mathematical operations.
Therefore, a software aid may be very useful to automatically carry out the AHP
process. A software prototype for AHP application was developed using Microsoft.
Methodology and Its Implementation
Here we are applying the proposed AHP model to solve the preselection process in
the following steps:
Step 1. Identify the main criteria and sub-criteria to be used in the model. A crucial
task in the contractor selection is to establish a set of decision criteria through
which the capabilities of contractors are measured and judged to make the preselection process efficient in its costs and durations (Ng and Skitmore 1999). The
following criteria below as shown in tree diagram were previously suggested in
Russell and Skibniewski (1988, 1990), Russell et al. (1990), Holt et al. (1994,
1995), Bubshait and Al-Gobali (1996), Holt (1996), Hatush and Skitmore (1998),
Hatshu (1998), Ng and Skitmore (1999), Fong and Choi (2000), Wong et al.
(2000), Palaneeswaran and Kumaraswamy (2001), Snmez et al. (2002) and
Topcu (2004). A comparison between the preselection decision criteria adopted
by some of the previous researchers is made. And the most common criteria
considered by decision-makers are taken into account, and they have been
grouped in six main criteria such as contractors organization, financial consideration, technical capability, past experience, past performance and reputation.
They are structured as shown below.
Qualific
ations
of key
person
s(QP)
Size of
projects
handled(S
H)
Experien
ce in
handling
technical
strong
projects(
EX)
Experi
ence
in
local
area(
E)
Type of
projects(TP)
Actual
Quality
achieved(
AQ)
Hierarchical structure representing Contractor preselection variables
Equipment(E
Q)
Technic
al
Capabili
ty(TC)
Past
Experi
ence(
PE)
Time
over
run(TO
)
Cost
Overru
n(CO)
Past
Performanc
e(PP)
Pre-Selection of
contractors
Ratio
Analysi
s(RA)
Credit
Rating(CR)
Bank
Arrang
ement
s and
accoun
ts(BA)
Financial
Considerations(FC)
Failu
re to
have
com
plet
ed
proj
etcs(
FP)
Litig
atio
n
tend
ency
(LT)
Reputation(RP)
Healt
h and
safet
y(HS)
Length of
time in
buisness(
LT)
Contractors
Organisation(
CO)
32
407
408
S.K. Sharma
Table 32.1 AHP rating scale

Definition
Equal importance
Moderate importance
Intensity of
importance
1
1.5
Strong importance
Very strong importance
2.5
Extreme importance
Explanation
Two elements contribute equally to the objective
Experience and judgement moderately favour one
element over the other
Experience and judgement strongly favour one
element over the other
One element is favoured strongly over other and its
importance is demonstrated in practice
The evidence favouring one element over the other
is of highest affirmation
Step 2. Consider the most fundamental scale in AHP for assigning relative weights
(Table 32.1).
Step 3. Now, to determine the weights assigned to each criterion by consulting
around 20 contractors and passing them a questionnaire and then taking averages
of their responses and scaling them down to five-point scale. And the matrix is
constructed in the next step where criterias acronyms are as follows:
RP-Reputation
CO-Contractors organization
PE-Past experience
PP-Past performance
TC-Technical consideration
FC-Financial consideration
Step 4. Now by using a calculation software by CGI as shown in the figures below,
construct a comparison matrix by assigning weights and then find out priorities
for each of the main criteria and sub-criteria. Each of the below steps is shown in
the tables. The following sections present the AHP calculations for first-level
criteria and second-level criteria.
Analysis (Table 32.2)
Weights and CI
Maximum eigenvalue = 6.15864
CI = 0.0317279
Weights (eigenvector)
0.0985417
0.119368
0.151029
0.152562
0.23828
0.24022
32
409
Table 32.2 AHP pairwise comparison matrix for level 1 criteria

1
1.5
1.5
1
3
2.5
0.666667
1
1
1.5
2
2.5
0.666667
1
1
1
2
1
1
0.666667
1
1
1
2
0.333333
0.5
0.5
1
1
1
Table 32.3 AHP pairwise

comparison matrix for level 2
CO sub-criteria

FC sub-criteria
0.4
0.4
1
0.5
1
1
1
0.5
1
0.66
0.5
1.51515
1
0.66
2
1
2
1.51515
1
Contractors Organization (CO)
Health and safety of programme (HS) and length of time (LT) in business are subcriteria taken, and they are put in the respective order in column and row (Table 32.3).
Weights and CI
Maximum eigenvalue = 2
CI = 0
0.666667
0.333333
Financial Consideration (FC)
Ratio analysis accounts, credit rating and bank arrangements and bonding are
sub-criteria taken and are put in the same order in the column and row (Table 32.4).
Weights and CI
CI = 0.0010564
0.461131
0.318661
0.220208
S.K. Sharma
410
TC sub-criteria

PE sub-criteria
10
1
0.66
0.5
1.51515
1
0.66
1
1
0.5
2
1.51515
1
1
1
1
2
1
1
Technical Capability (TC)
Plant and equipment (PE), qualification of key persons (QP) and experience with
company (EX) are sub-criteria taken and are put in the same order in the column and
row (Table 32.5).
Weights and CI
CI = 0.0010564
0.461131
0.318661
0.220208
11
Past Experience (PE)
Size of projects completed (SZ), type of projects completed (TP) and experience
in local area (LA) are sub-criteria considered and are put in the same order in the
column and row (Table 32.6).
Weights and CI
CI = 0.0268108
0.412599
0.32748
0.259921
32

FP sub-criteria

R sub-criteria
12
411

1
2
1.5
0.5
1
0.66
0.666667
1.51515
1
1
0.66
1.51515
1
Past Performance (PP)
Actual quality achieved (AQ) and time overrun (TO) are sub-criteria chosen and are
put in the same order in the column and row (Table 32.7).
Weights and CI
CI = 0.000907991
0.221019
0.461282
0.317699
13
Reputation (R)
Failure to have completed contracts (FL) and litigation tendency (LT) are the subcriteria taken into account and they are put in column and row in the same order
(Table 32.8).
Weights and CI
Maximum eigenvalue = 2
CI = 0
0.60241
0.39759
Once we calculate the priority vector for level 1 criteria and level 2 criteria, then
we find the overall weights of all the criteria listed at level 2 in Fig. 32.1 by multiplying local weights with their global weights. Table 32.9 presents all criteria used
in preselection of contactor selection with relative weights.
412
S.K. Sharma
Pre selection
of
Contractors
Technical
Capability (TC)
Eqipment
Past Experience
(PE)
Past Performance
(PP)
Ratio
analysis
Experience
in
handling
Size of
proejct
Qualificati
on of key
person
Financial
Consideration (FC)
Arrangem
ents with
banks
Reputation (R)
Failure
rate
Litigation
tendency
Contractor
Organization (CO)
Health &
safety
Time in
Buisness
Type of
proejcts
Credit
rating
Exp. In
local area
Actual
qualtity
Achieved
Cost
overrun
Time
overrun
Fig. 32.1 Contractor preselection variables - A Hierarchical structure

Table 32.9 Overall weights of preselection of contractor criteria
S. no.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
14
Criteria used in preselection

Health and safety of programme (HS)
Length of time (LT) in business
Ratio analysis accounts
Credit rating
Bank arrangements and bonding
Plant and equipment (PE)
Qualification of key persons (QP)
Experience with company (EX)
Size of projects completed (SZ)
Type of projects completed (TP)
Experience in local area (LA)
Actual quality achieved (AQ)
Actual quality achieved (AQ)
Time overrun (TO)
Failure to have completed contracts (FL)
Litigation tendency (LT)
Local weight
0.666667
0.333333
0.461131
0.318661
0.220208
0.461131
0.318661
0.220208
0.412599
0.32748
0.259921
0.221019
0.461282
0.317699
0.60241
0.39759
Global weight
0.119368
0.119368
0.24022
0.24022
0.24022
0.23828
0.23828
0.23828
0.151029
0.151029
0.151029
0.152562
0.152562
0.152562
0.0985417
0.0985417
Overall
weight
0.08
0.04
0.111
0.077
0.053
0.11
0.076
0.053
0.063
0.05
0.04
0.034
0.71
0.049
0.06
0.04
Conclusion
From the analysis of financial consideration like ratio analysis, it is evident that
financial strength of firms is most considered, and this can be imagined because
while approaching the contractor for a project, the most sensitive thing to look out
is finances, as any irregularities in them could lead to total fatal consequences.
Technical consideration, plant and equipment are equally important. Reputation is
least considered while looking out for suitable contractors.
32
413
Based on the decision criteria, judgements about the relative importance of each,
and on the judgements about each criterion, have been carefully considered and analysed, thus arriving at plausible consistency ratio of less than 10 % in each case.
Because we have used the AHP, it has become easy for us to trace the thinking and to
justify the steps along the way to the decision. If we have any second thoughts about
the final outcome, we can revisit the process and make changes if appropriate.
References
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Snmez M, Holt GD, Yang JB, Graham G (2002) Applying evidential reasoning to prequalification
construction contractors. J Manag Eng 18(3):111119
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Environ 39(4):469481
Wang YM, Luo Y, Hua Z (2008) On the extent analysis method for fuzzy AHP and its applications.
Eur J Oper Res 186(2):735747
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clients tender selection process. Constr Manag Econ 18(7):767774
Chapter 33
Role of Passion in Organizational Cynicism:

A Mediating Effect of Sustainable Leader
in the Process Model
Niharika Gaan
Abstract With the increasing economic turbulence all over the world, it is apparently
becoming difficult on the part of the corporate to remain as a high-performing
organization and intensify the engagement of the employees by keeping enormous
pressure to hold down costs as long as market does not show the sign of recovery.
Even though the attempt is made to increase ones engagement, ones psychological
well-being is always ignored. Moreover, the engagement has always been discussed
in the literature of burnout as reported in the past study. It is in this context we would like
to view from the lens of work passion as it is considered to be self-generated motivation
associated with work-related activity involving less pressure on reward system.
In this conceptual paper, the author argues how the work passion is related to
organizational cynicism through a process model. The process model involves
the moderating role of sustainable leadership which facilitates the occurrence of
psychological well-being. Consequently, the ramification is quite evident in the
form of reduced organizational cynicism.
Keywords Work passion Sustainable leadership Psychological well-being
Organizational cynicism
Introduction
Over the last three decades, research in burnout has drawn a lot of attention
(Freudenberger 1974; Maslach and Jackson 1981; Maslach et al. 2001). Such studies have even dealt with social-related factors and work-related attitudes influencing
burnout extensively. However, a noticeable gap is observed when all these studies
have measured the burnout from three-dimensional perspectives (emotional exhaustion,
depersonalization, and personal accomplishment) rather than from four-dimensional
N. Gaan, Ph.D. (*)
Assistant Professor Cum Chairperson, Student Welfare,
MDI-Murshidabad, DB-3, Sector-1, Salt Lake 700064, Kolkata
Springer India 2015
415
416
N. Gaan
perspectives wherein the fourth component is named as organizational cynicism

(Vallerand et al. 2010). MBI depersonalization is deciphered as feeling of alienation
from people (Maslach 1993) and not from the job. On the contrary, MBI cynicism
is defined to be mentally distancing from the work not from the people (Salonova
et al. 2005). The latter could be proved as an appropriate variable as an outcome of
work-related attitudes.
One of the work-related attitudes called work passion has been explaining well
the differences in the experiences of individuals toward burnout while thriving in
the same environment (Vallerand et al. 2010). However, studies examining the
causal relationship between the former and latter have also emphasized upon the
construct from three-dimensional perspectives: emotional exhaustion, depersonalization, and self-efficacy ignoring MBI cynicism. It is also reported that work passion shares distal relationship with burnout and the same thing possibly can be
argued in the relationship between former and organizational cynicism (Donhaue
et al. 2012; Vallerand et al. 2010). The past literatures have also reported that their
relationship is basically activated through mediating variables like work rumination, recovery experiences, work satisfaction, and conflict. The other variables like
leadership style and other psychological variables, for instance, psychological wellbeing, may mediate and activate the relationship and it seems to be scarce.
With changing environment where sustainability has become buzzword, the
human sustainability has been gaining much ground, and in such context the passion is more relevant as it directly pertains to thriving force (Spreitzer et al. 2012).
Moreover, this focus is reinforced with the evidence that employee engagement
faces the debates of not having any specific definitions, and there exists a wide gulf
between practitioner and academicians in its understanding for which HRD professionals are unable to increase its effective applied use (Zigarmi et al. 2009).
In this paper, we start looking into this apparent gap. This paper is structured as
follows. We start with an overview of why the concept of work passion has become
of increasing interest and importance. Thereafter, we undertake a review of existing
research on work passion and why the concept has taken precedence over employee
passion. In the third section, we start developing tentative propositions showing
relationship between work passion, perceived interpersonal relationship, and support through sustainable leadership, psychological well-being, and organizational
cynicism. We end this paper with papers contributions, discussions, and summary
in nutshell.
Why Passion Matters
Though passion seems to have long philosophical history, the field of psychology
has not captured the concept pertaining to its romantic relationships involving
intense personal interests, commitment, and over commitment until recently (Krapp
2002). The past literature reports its coverage in the context of numerous nonwork
activities like sports, gambling, romance, and Internet use (Amiot et al. 2006;
33
Role of Passion in Organizational Cynicism: A Mediating Effect of Sustainable
417
Mageau et al. 2005; Rousseau et al. 2002; Seguin-Levesque et al. 2003). Most of the
creative work is an outcome of passion influenced both by a persons basic interest
in a particular kind of work and by the work environment surrounding the person
(Amabile 2001; Fisher and Smith 2006). It is stated to result in cognitive, affective,
and instrumental outcomes (Vallerand and Houlfort 2003). It is even argued to be an
active ingredient for venture growth (Baum et al. 2001), well-being (Burke and
Fiskenbaum 2009), and entrepreneurial success (Cardon et al. 2005). Further, passion seems to be an essential driver for employee engagement and its important
facets (Pati 2012; Ho et al. 2011). That may supposedly lead one to assume that
employee passion takes precedence over employee engagement.
Lately, the work passion (WP) has become catchphrase of the researchers and
practitioners because of some inherent weaknesses attached to the concept of
employee engagement. This leads to clear distinctions between former and latter
that can aid practitioner to prefer indicator which positively influence the performance of the organization without any anomaly. Firstly, the key indicators that differentiate employee engagement with passion are organizational and job-related
factors (Zigarmi et al. 2009) which together explain the construct. WP construct not
only considers both organizational and job factors, but it is even termed as selfdefining activity which strengthens ones identity (Zigarmi et al. 2011a; Vallerand
and Houlfort 2003). On the contrary, the engagement construct is connected solely
to job-related factors as perceived by academicians, whereas practitioner has related
it solely to organizational factors creating a debate in their interpretation. From
social cognitive theory perspective (Zigarmi et al. 2011a), WP has been discerned to
emphasize on appraisal process of an individual on events and environment impacting ones well-being, whereas, from role theory perspectives of Khan (1990), it is
described as one kind of stable psychological presence wherein the individuals in
organization express themselves physically, cognitively, and emotionally to their
discretionary work roles. Secondly, the emotional and intellectual involvement is
referred to as emotional and intellectual commitment to the organization (Baumruk
2004; Richman 2006; Shaw 2005) or the amount of discretionary effort exhibited by
employees in their jobs (Frank et al. 2004), and the duo explains variance in
employee engagement substantially. However, it has been also observed that organizational commitment and job involvement are interchangeably used. Therefore, it
draws criticism that how both the predictors are explaining engagement at the same
time if they are interacting with each other (Harrison et al. 2006; Saks 2008).
Thirdly, work engagement is neither strong enough nor descriptive enough to be
associated with affective, cognitive, and intention and/or behavioral components
found in social cognitive theory and the appraisal literature, whereas WP presupposes the key underlying drivers of intense desire and intentionality that are not part
of engagement, but it is extensive enough to provide incentive for work behaviors
(Zigarmi et al. 2009). Given the preceding discussions and the criticisms attached to
the term employee engagement, WP being proactive than being simply engaged at
work has been gaining ground as HRD professionals could be more precise about
the concepts, antecedents, and modifiers that affect employee motivation and work
passion (Zigarmi et al. 2009).
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3
3.1
N. Gaan
Overview of Work Passion

What Is Work Passion?
Passion makes employees excited about their work and gives a sense of personal
accomplishment. It is an intrinsic motivation in its highest form, which makes
work interesting, engaging, and positively challenging and can lead to complete
absorption in the work (Csikszentmihalyi 1990). Passion for work is the outward
manifestation of individual purpose and the connection with organizational purpose
(Love 2005); however, there is no one-size-fits-all solution for restoring passion to
ones life (Boyatzis et al. 2002). In line with these different constructs, WP is defined
as a strong inclination toward a self-defining activity that people love and feel
devoted and in which they invest significant time and energy (Vallerand and Houlfort
2003). With these criteria the internalization of activity with ones identity becomes
an underlying meaning to WP construct. Vallerand and colleagues (2003) proposition is based on self-determination theory that believes internalization of activity is
influenced by the interaction of their innate, psychological needs of autonomy, competence, and relatedness (Williams and Deci 1996). Furthermore, they postulated
the dualistic existence of passion consisting of harmonious and obsessive passion
unlike the other studies. The former one is considered to emanate when a person
freely accepts an activity as important for them and represents their identity (Ryan
and Deci 2000). The harmonious passion of it has shared congruency with the social
cognitive theory (Vallerand and Houlfort 2003) advocated by Zigarmi et al. (2011a).
This component of passion is supposed to yield positive outcome. On the contrary,
the latter emanates uncontrollable urge to partake in the activity where one can
experience contingencies attached to it. This may lead to negative psychological
adjustment (Mageau et al. 2012) as the activity controls individual interests. As per
Zigarmi et al. (2011a) extensive study, WP is an individuals persistent, emotionally
positive, meaning-based, state of well-being stemming from reoccurring cognitive
and affective appraisals of various job and organizational situations which results in
consistent, constructive work intentions and behaviors (Zigarmi et al. 2009). It measures
affective, cognitive, and intention and provides a clearer sense of how the individual
intends to behave on behalf of the organization. The cognitive aspect of the formation
of WP involves the growth of mental schema or thought patterns that contain the
features, images, feelings, and ideas associated with the work experience being
appraised (Lord and Kernan 1987; Wofford and Goodwin 1990), whereas the
emotions generated through cognitive aspect of WP in the appraisal process are
known as work affect that helps appraiser to perceive the work experience to be
either threatening or enhancing (Gotlieb et al. 1994; Jaussi 2007; Swailes 2002).
As defined by Schaufeli et al. (2006), job well-being is a positive, fulfilling, workrelated state of mind characterized by vigor, dedication, and absorption which is
nomologically networked with employee engagement. During the second phase of
the appraisal process, intentions are generated which is defined as ones inclination
to act in a given way toward a particular commitment target (Brown 1996). In sum,
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the conceptualization of WP by Zigarmi et al. (2011a) has revealed it to be process

oriented. Although they tried operationalizing the construct which apparently seems
to be comprehensive, it suffers from methodical lacunae. As discussed from social
cognitive point of view, WP is supposedly sharing relevance with harmonious
passion of dualistic model but not showing any relevance with obsessive passion.
The sample drawn in the study was representing solely to one of the divisions of
Electronics Company based at western United States. This may pose greatest limitations to its generalization. Finally, Maslach and Leiter (2008) discussed passion in
terms of vigorous immersion in rewarding activities that build self-efficacy. Owing
much to this foundational work, studies have recognized that passion is a complex
construct capable of eliciting employee reactions ranging from exceedingly positive
to highly destructive (Marsh et al. 2013).
Present Research with Theoretical Propositions
The purpose of the present research is to propose and test a model on the role of
work passion toward organizational cynicism. Although work passion shares distal
relationship with burnout, the relationship is always activated by mediating variables like work rumination, recovery experiences, work satisfaction, and conflict
(Donahue et al. 2012; Vallerand et al. 2010). From the perspective of Vallerand et al.
(2010), if work passion has dualistic feature, then as per his findings, it is reported
that the harmonious passion prevents the occurrence of emotional exhaustion and
the obsessive passion facilitates emotional exhaustion. Past literature investigating
the relationship between them has taken emotional exhaustion as the best indicator
of burnout out of the other two dimensions: depersonalization and personal accomplishment (Piko 2006) ignoring organizational cynicism as another component of
burnout. This component was found out to be important component and different
from depersonalization as it connects with the work not with the people (Salanova
et al. 2005). Therefore, it can be argued here that the harmonious passion will be
reversibly related to organizational cynicism, whereas the obsessive passion will be
directly related to organizational cynicism. Since the past literature has shown a gap
wherein the relationship of passion with organizational cynicism is scarce, hence
the following propositions can be arrived at:
Proposition 1a: Harmonious passion will be negatively related to organizational
cynicism.
Proposition 1b: Obsessive passion will be positively related to organizational
cynicism.
As it is already reported that work passion shares a distal relationship with burnout,
it sets things in motion by triggering a causal sequence wherein psychological
mediators like work conflict and work satisfaction (measures of well-being) are
activated (Vallerand et al. 2010). The scholars also contend that environmental
factors exercise more influence on display of passion than individual differences.
420
N. Gaan
Thus among such environmental clues, psychological well-being is reported to be

an important factor which results into positive outcome (Zigarmi et al. 2009).
There are two facets of well-being which have been identified in the past literature
(Ryan and Deci 2000). The first facet deals with ones happiness toward life (hedonic
well-being: Diener et al. 1985). The second is concerned with self-realization or
personal growth (eudaimonic well-being; Ryff and Keyes 1995). As observed in
past studies, the harmonious passion is expected to facilitate sustainable increases
in psychological well-being and prevent against ill-being. Obsessive passion, while
ensuring regular activity engagement, does not produce such psychological gains
and may even facilitate some deleterious effects. Further, it is reported that being
non-passionate leads to a small decrease in psychological well-being (Vallerand
2012). However, such potential drop and exacerbation in well-being by passion is
mediated through affective experiences. As indicated previously, these two passions
orient the person to engage in the activity leading to experience of positive and
negative affectivity. If the affective experiences occur on repetitive basis, then it
results in the occurrence of psychological well-being or ill-being (Brown et al.
2007; Hodgins and Knee 2002).
Additionally, perceived interpersonal relationship with managers has got potential ramification on affective inferences (Zigarmi and Roberts 2012). If leader or
manager follows developmental model and shows concern to ones personal growth
with compassion as well as adopts sustainable practices, then it can mitigate negative
effects such as productivity, losses, and absenteeism (Avery and Bergsteiner 2011;
Mariappanadar 2003) and leads to healthy and safe environment for employees. It
can be argued here that such kind of leadership approaches emanate in the disguise
of sustainable practices. Moreover, intervention of sustainable leadership may
mitigate the occurrence of depletion of energy underneath passion as a result of
perceived finite job resources that hinders task completion (Vallerand et al. 2010)
and lack of opportunities to grow. Thus with intervention of sustainable leadership,
employees may experience positive affectivity which subsequently reported to
result into positive outcome (Vallerand 2012).
Since an individual experiencing harmonious passion does not experience any
burnout or anxiety, they might be called thriving employees (Vallerand et al. 2010)
as they are the ones who feel passionate about what they do. They produce their own
energy through excitement for their work and actively seek out opportunities to
learn new things and develop (Spreitzer et al. 2012). Further, as per the past research,
it is also noted that harmonious passion shares a weak relationship with one of the
environmental factors, that is, work conflict (Vallerand et al. 2010) which may influence
psychological well-being indirectly leading to negative affective outcomes.
In such pretext, the role of sustainable leader becomes very essential whose first
principle advocates leadership for learning and leadership for caring, among others
(Hargreaves 2003). Such approach of sustainable leader can intensify their excitement
for learning new things solely on the basis of their merit and eventually leading to
positive and sustainable psychological well-being. Conversely, if employees
have energy at work but lack opportunities to learn and grow, they are likely to feel
stagnated and depleted (Spreitzer et al. 2012) and may experience obsessive passion.
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421
In such context, sustainable leadership can facilitate by renewing peoples energy

through growth and development strategy and other enablers too to prevent the
occurrence of ill-being as a result of display of obsessive passion.
Therefore, propositions are as follows:
P2a: Sustainable leadership moderates the relationship between work passion and
psychological well-being.
Although empirical evidences on the relationship between psychological wellbeing and organizational cynicism seem to be murky, one of the research studies has
argued that when physicians psychological well-being is at higher side, then there
is less chance of them to be suffering from the burnout. Further, this study has not
been replicated in any other occupations. Yet, another research study cites that
teachers who are passionate about their job and passion being more explained
through harmonious one, it leads to increase in psychological well-being. This in
turn reduces the burnout suffering. On the contrary, if they are ruled by obsessive
passion, then it is unrelated with psychological well-being and contributes significantly to increase in the level of burnout (Carbonneau et al. 2008).
Looking into backdrop discussion, we can arrive at the following propositions:
Proposition 3a: Psychological well-being of an individual is negatively related to
organizational cynicism.
Proposition 3b: Psychological well-being will mediate the relationship between
harmonious passion and organizational cynicism.
Proposition 3c: Obsessive passion will be significantly and directly influence
organizational cynicism if not mediated by sustainable leadership.
Sustainable leadership is newly perceived leadership style by the employees
which has been recently introduced after two decades of dramatic changes in business
and academic interests in building sustainable organizations. Part of the responsibility
lies with industry, business, and government in building sustainable organization.
Organizations within these sectors must identify and disseminate the changes they
wish to make in their leadership structures. These form no less than a cultural
transformation in many organizations and include insuring congruence between
organizational strategy and actual output; implementing a people-centered strategy
for identifying, recruiting, training, and retaining leaders; and designing an organizational strategy which provides employees with opportunities to develop the skills
needed by future leaders (Emerald 2011). Such kind of cultural transformation and
change can facilitate process model of passion which subsequently prevents the
occurrence of organizational cynicism. Thus under the realms of organizational
change and in its underneath, a wave of cultural transformation toward sustainability germinates making sustainable leadership to be imperative. In such context, the
process model of passion as a part of human sustainability can well be accentuated.
Eventually, it attempts to improve psychological well-being which again mitigates
the cynicism in the organization. The entire process model of work passion is represented through conceptual model as illustrated in Fig. 33.1.
N. Gaan
422
Sustainable
Leadership
Organizational Change of Sustainability
Work
Passion
Psychological
Well Being
Organizational
Cynicism
Fig. 33.1 A conceptual model of the role of passion in organizational cynicism
Theoretical Implications
This paper makes a considerable contribution toward human sustainability by dealing with the process model of passion embedded in work environment where sustainability is of prime importance. The study is the first in its kind to provide a
theoretical framework on human aspect of sustainability which can be supposedly
achieved if ones passion toward work can result in positive psychological wellbeing, and this relationship can be well sustained if sustainability as a key principle
to leadership approach becomes more imperative.
Besides that the double-edged sword passion where one type of it named obsessive passion leads to ill-being, thereby accentuating cynicism in organization, can be
well mitigated through mediating the role of sustainable leadership. The proposition
is first in its kind as it strongly argues that the presence of sustainable leadership can
activate the process of passion majorly dominated through display of harmonious
passion yielding in improved psychological well-being which is quite sustainable.
From the perspective of self-determination theory, if one is persistently engaged
with few activities among many other activities, then one can establish himself/
herself with his/her own personal identity. However, as per the social cognitive theory,
human functioning is more explained through triadic causality in which behavior,
cognitive, and other environmental events all operate as interacting determinants of
each other. Therefore, while proposing theoretical framework in this study, we
argue here that Vallerand and Houlfort (2003) double-edged sword of passion can
be better viewed from an integrative model which is following social cognitive
theory principle.
Managerial Implications and Discussions
At present, managerial techniques for passion, that is, inviting voluntary contribution
beyond the observable, measurable, enforceable minimum, are much less developed
than managerial techniques that stem from hierarchy, control, or structure and that
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423
rest on formal order. The process model of passion in reducing cynicism will be of
great assistance in this context as it is fundamentally based on self-motivation and
voluntary effort. Further, it serves two-pronged objective: reduces the expenses
incurred in practicing all the interventions of engagement and burnout suffered
through the way of engagement practices. Such voluntary contribution by way of
work passion can be made sustainable through embedded work context involving
best practices. The organization must cultivate the seed of change by building
sustainability in its strategy and practices which in turn wrap in structural changes
in leadership. Moreover, sustainable leadership believes in the conservation of
resources by virtue of sustainability practices. This further ensures the prevention of
depletion of energy and resources leading to the occurrence of ill-being and thereby
resulting in burnout (cynicism).
Although organization may face challenges initially by building capacity to
endure and simultaneously satisfy triple bottom line of economic, environmental,
and human performance, the long-term objective of sustainability in employees
performance can be realized with reduced cynicism and healthy well-being, and this
whole phenomenon is dependent upon ones passion. Thus it focuses on the significant benefits that can accrue to corporations, society, and employees by making
human sustainability like passion work.
Conclusion
This paper aims at developing theoretical model which focuses on the human
sustainability, that is, how the passion at work can lead to sustainable psychological
well-being which in turn mitigates the cynicism in organization. The passion of
employee can result into favorable and unfavorable outcomes due to its doubleedged nature. One type of passion (obsessive) is presumed to be conducive, whereas
on the other hand, the other type of passion (harmonious) prevents its occurrence.
However, the environment of sustainability can support employees to thrive and
sustain their harmonious passion toward their work. This is so because sustainable
leader not only adds learning to vitality of passionate employees but also help them
to design and implement the routine to renew themselves; otherwise their health and
performance are likely to suffer (Spreitzer et al. 2012). Furthermore, the sustainable
leader creates an environment for employees where they can be refrained to undergo
through obsessive passion which has much debilitating effect on employees
psychological well-being. Subsequently, the reduced cynicism can be realized.
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Chapter 34
The Role of Technological Innovation

in Managing Through Business Cycles:
A Study on Indian ICT Firms
Arindam Das and Sheeba Kapil
Abstract The global economic downturn of 2008 has impacted almost all industry
segments in all geographies, and even after 5 years, many of them are in different
stages of recovery. Emerging economies and technology firms in these economies
have braved this headwind relatively better, and they have witnessed a significant
growth in the recent years. In this study, we conduct an empirical research on Indian
ICT firms and analyse how factors related to innovation and inorganic growth contribute to their sustenance and growth during boom and bust cycles. A set of 442
Indian firms in the ICT sector have been studied for the period 19992012, a period
when this sector has witnessed all the four phases of business cycle. The results
show that acquisitions vary significantly across phases of business cycle, whereas
R&D investments do not vary over the cycle. Contrary to established findings in
developed economies on technology firms focus on R&D, we find that Indian ICT
firms R&D investments are significantly lower and may not play any significant
role in the long-term growth of the firms.
Keywords ICT sector Acquisitions Innovation Emerging markets India
ANOVA
Introduction
High-tech industries are characterised by fierce competition and the threat of obsolescence. In order to create a sustainable edge over competitors, firms must constantly
invest in the creation of new technological capabilities. Acceleration of R&D efforts
and development of internal innovative capabilities are no longer sufficient to cope
with the increasing cost, speed and complexity of technological developments in
high-tech industries. In addition, even the largest companies are forced to use
A. Das (*) S. Kapil

Indian Institute of Foreign Trade, B-21, Qutub Institutional Area, New Delhi 110016, India
Springer India 2015
427
428
A. Das and S. Kapil
external sources of technology through licensing, strategic technology agreements

or M&A (Vanhaverbeke and Duysters 1997). The ICT sector, in particular, has
experienced rapid growth and increasing economic importance over the past two
decades. It has also changed the working methods in almost all other sectors in the
economy. It is a sector with a high degree of uncertainty and change, impacted by
technological breakthroughs as well as global business environment.
Business cycles refer to the periods of expansions and contractions in the level of
economic activities around a long-term growth trend. The Indian ICT industry has
been on a growth trajectory over the past two decades, thanks to globalisation.
However, it has been subjected to demand fluctuation and cost sensitivity due to
cyclical events in the global economy. Specifically, since 1999, it has witnessed
dot-com bubble, the industrial boom of 2004 and again the economic crisis of 2008.
There are various factors that influence survival of a firm during the downturn and growth during the expansion cycle. The capacity of the firm to absorb
disturbance, identify opportunities and reorganise while undergoing changes so
as to still retain profitability, growth avenues, structure and identity forms the
backbone of a resilient and growing organisation. In the technology sector,
quick obsolescence of existing technology and emergence of new technology
also play a critical role.
Mergers and acquisitions (M&A) have been popular means of growth for firms
over several decades, and in recent years, M&A volumes have surged in emerging
markets as well. Liberalisation of the domestic economy, globalisation of
industries, increasing intensity of competition and access to capital markets are
some of the enablers that are helping firms in these markets explore inorganic
growth. For example, the share of emerging economy firms in cross-border acquisition
volume has gone up from 4 % in 1987 to 13 % in 2005 and 25 % in the first half of
2011 (UNCTAD 2011).
There are various reasons why firms choose to grow through M&A instead of
organic growth. Acquiring a target in a line of business where the acquirer wants to
grow is often a faster way to grow than via internal expansion (Trautwein 1990). In
addition, if the replacement cost of assets is higher than the market value of target
assets, the acquisition turns out to be a cheaper alternative. However, M&A and
organic growth are not necessarily mutually exclusive strategies, and firms often
consider them as complementary (Luypert and Huyghebaert 2008).
In this paper, we look at R&D investments, acquisitions activities as well as
quantum of intangible assets held by ICT firms in India during different stages of
business cycle to explain a firms strategic intent to leverage these for sustenance
and long-term growth. We use analysis of variance (ANOVA) to test the hypotheses.
Our work attempts to: (a) provide a general assessment of M&A and R&D activities
in Indian ICT sector; (b) examine the role of R&D, intangible assets and acquisitions
as response to changes in business environment and (c) provide evidence that
suggests that while R&D is perceived to play a critical role in technology industry,
in Indian ICT sector, there is little relevance to R&D activities with changing business
environment and strategic directions.
34
The Role of Technological Innovation in Managing Through Business Cycles
Background
2.1
429
Technology Firms and Inorganic Growth
In the context of technological sourcing, Hitt et al. (1991) argued that acquisitions
caused lower R&D and patenting intensities, and this explained poor post-merger
performance encountered frequently. They found that decreasing returns from existing
knowledge base and the choice between doing R&D and buying R&D were the
main drivers for acquisition and concluded that there was a substitutive link between
firms own R&D and acquisitions, which was confirmed by other researchers
(Christensen and Bower 1996; Blonigen and Taylor 2000). On firm survival and
growth in high-tech industry, Christensen et al. (1998) found that these were linked
to an interesting phenomenon dominant design, and once such a design emerged,
the number of players in the industry came down, and the entry barrier for the
newcomer went up. In addition, intangible asset of the firm was found to be an
important explanatory variable for core competencies that provided the leadership
edge to the firms (Onyeiwu 2003).
However, in a study of European high-tech industry, Wagner (2008) found that
the determinants for acquisitions were mostly related to firm size, financial conditions
and geographical origin of the firm. Patenting and R&D intensities of firms were only
rarely associated with firms acquisition activities, and the most consistent predictors
for acquisition were found to be sales volume (a proxy for firm size) and financial
leverage.
Kayo et al. (2010) analysed the determinants of the choice among different firm
growth strategies: acquisitions and joint ventures or arms-length alliances in an
emerging market like Brazil. The results supported the learning perspective of the
firms choice. A firms previous experience in a specific growth strategy was found
to be determining its future strategic choices. Financial factors as explanatory
variable showed no statistical significance.
2.2
Emerging Markets MNEs (EMNE)

and Their Inorganic Growth
There have been several studies focused on emerging economies. Dunning et al.
(2008) noted that unlike developed country MNEs, the EMNEs rarely had the firmspecific ownership advantages (notably organisational and management skills) to
ensure success in their outward FDI. What they did have was a variety of home
country-specific advantages that they were able to internalise and use outside their
national boundaries. Mathews (2006) identified Dragon multinationals as firms
that started from behind and overcame their deficiencies by turning initial disabilities into sources of advantage by leapfrogging to advanced technological levels or
by leveraging their way into new markets through partnerships and joint ventures.
430
A. Das and S. Kapil
Ramamurti (2010) hypothesised a set of firm-specific advantages (FSA) in

EMNEs: products suited to emerging markets, production and operational excellence, privileged access to resources and markets, adversity advantage and traditional intangible assets. On intangible assets, only a handful of EMNEs seemed to
be close to their industrys technology frontier when measured through R&D-tosales ratio derived their FSA from being late-movers rather than first-movers and
took advantage of technology licensing and alliances.
The literature on performance of emerging market firms in M&A space is mixed.
Bhaumik and Selarka (2008) examined the impact of M&A on profitability of firms
in India and concluded from their study on M&As during 19952002 that M&A in
India led to deterioration in firm performance. They also found that negative effects
of entrenchment of owner managers trumped the positive effects of reduction in
owner vs. manager agency problems. Kumar (2009) confirmed that unlike western
companies that used M&A primarily to promote efficiency or instant growth,
emerging giants acquired companies for more strategic reasons like obtaining
knowledge and technology. Even after the economic crisis engulfed the world in the
last quarter of 2008, the Indian technology majors continued their selective acquisitions. He concluded that Indian companies have become self-assured and savvy
investors, financing large deals and paying global prices.
Bhaumik et al. (2009) found that both China and India achieved very high growth
rates in patents granted with resident research and significant involvement from MNEs
from developed countries between 1992 and 2007. However, it is not known how
these patent stocks are influencing inorganic growth strategies of technology firms in
these countries. In a relevant study, Niosi and Tschang (2009) found that large Indian
software services firms, enabled by higher market capitalisation, adopted a notable
shift in strategy, using acquisitions to complement their previously dominant strategy
of organic growth. Many of their acquisition targets were in developed country
markets and served as bases to help the Indian MNEs to operate in those markets.
Resource dependence is another factor for acquisition decisions and R&D-related
assets or lack of them influence firms acquisitive behaviour. However, high-tech
EMNEs operate with different FSA than their western counterparts and may not have
the first-mover technology advantage. In addition, EMNEs do consider acquisitions as
a dominant strategy, while local business press eulogise acquisitive behaviour of
EMNEs, irrespective of real value creation. Patenting activities and focus on intellectual property are also on the rise in these economies. In such a context, we would like
to see how R&D investments, acquisitions and quantum of intangible assets contribute to firms sustenance during a downturn and growth during expansion phase.
3
3.1
Hypotheses
The Role of R&D Investments and Intangible Assets
Technology firms have propensity to source technology through acquisitions

because such actions can mitigate specific weaknesses, such as lack of R&D investment or low R&D output. In order to address the challenges imposed on business by
34
431
different phases of business cycle, firms are expected to vary their R&D activities to
ensure sustenance and growth. R&D investment weighted by firm size measures a
firms focus on developing intangible assets (Harzing 2002; Lu and Beamish 2004).
Hypothesis 1: Technological focus, measured through R&D intensity, is expected to
contribute to a firms sustenance and growth and will be at different levels during
different business cycle phases.
However, for a large number of ICT firms, formal R&D may be limited. This is
especially true for IT services firms where a firms strategic advantage lies not so
much in explicit R&D expenses but in tacit knowledge that the firm and its people
possess. These typically include firms execution processes, knowledge base and
tools it use to deliver business. Thus, quantum of intangible assets becomes an
important factor in shaping a firms sustenance and growth strategy.
Hypothesis 2: Intangible assets that include non-codifiable assets are expected to
contribute to a firms sustenance and growth and will be at different levels during
different business cycle phases.
3.2
Effect of Prior Acquisition Experience
A choice of only greenfield growth tends to make a firm simple and inert, whereas
acquisitions broaden a firms knowledge base (Vermeulen and Barkema 2001). We
extend this argument that a firm will actively pursue acquisition opportunities to
secure its sustenance and growth strategies, and these activities are expected to vary
across business cycle phases. This is applicable for both related acquisition as well
as unrelated acquisition. Firms in emerging economies demonstrate such behaviour
more vigorously as the environmental factors put up additional barriers and uncertainty
to firms who have not experienced acquisitions.
Hypothesis 3: Acquisition opportunities are expected to contribute to a firms
sustenance and growth and will be at different levels during different business
cycle phases.
4
4.1
Method
Sample and Data Collection
We decide to identify the technology companies by 5-digit NAICS (North American

Industry Classification System) codes and include firms primarily engaged in
computer and electronic manufacturing, IT and telecom business. The broad range
of companies helps us to understand the nuances of the industry happenings better.
We select 442 firms based on revenue reported and analyse firm level, and we use
432
A. Das and S. Kapil
multiple sources of data to compile our dataset. The acquisition-related data are
collected from Euromoney ISI Emerging Markets Information System, the firmlevel annual data are collected from Prowess database, maintained by Centre for
Monitoring Indian Economy (CMIE). We also verify acquisition-related data with
available public announcements in the Indian stock market. By following this
process, we arrive at a dataset consisting of 6,188 firm-level information spanning
14 years between Indian financial years (FY) 19992012. However, we do have
missing values for some variables for certain firm, year combinations. In addition,
not all firms were in operation during the complete period of observation.
4.2
Statistical Technique
We deploy analysis of variance (ANOVA) to test statistical significance of the

differences in our observed variables between different stages of business cycle.
One-way ANOVA is used to determine whether there are any significant differences
between the means of two or more independent (unrelated) groups. It is important
to realise that the one-way ANOVA is an omnibus test statistic and cannot tell which
specific groups are significantly different from the other; it only tells that at least
two groups are different. As we have four groups (stages) in our study design,
determining which of these groups differ from each other is important for our analysis.
We do this using Tukeys post-hoc test.
As mentioned earlier, we consider three variables as our measures for this analysis
as mentioned below:
R & D Intensity: We follow Lu and Beamish (2004) and use R&D expenditure
weighed by sales as the measure of R&D intensity.
No. of Acquisitions: We consider all acquisitions as well as majority stake purchases
by these firms as a measure of external technology acquisition. While some
acquisitions may not be carried out for specific technological benefits, past
studies show that almost all related acquisitions contribute to technological
assets of the acquirer.
Intangible Assets: A large number of ICT companies, especially firms in IT sector
do not have a large direct R&D investment, but at the same time, they possess
significant intangible assets; a lot of these lie in their experiential knowledge,
processes and people skills. Firms do report indicative intangible assets in
monetary terms, and we use this information to calculate the share of a firms
intangible assets as a proportion of firm size (measured in terms of revenue).
These measures are studied over four groups that represent for stages of business
cycle: depression, expansion, boom and recession. Table 34.1 provides the details of
the variables, their definitions and source of information.
34
433
Table 34.1 Variable definitions and source of data

Variable name
Financial year
(FY)
Business cycle
phase
Data type
Numeric
Total income
Numeric
EBITDA
Numeric
Net intangible
assets
Numeric
Number of
acquisitions
Numeric
integer
Total R&D
expenses
Numeric
R&D intensity
Numeric
Intangible
assets %
EBITDA %
Numeric
Numeric
integer
Numeric
Definition/calculation
Financial year of the reported
data
Four possible values: expansion,
boom, recession and depression.
A financial year is categorised
under one of these phases
Reported stand-alone total
income of the firm for the
financial year
Reported earnings before
interest, tax, depreciation and
amortisation
Reported valuation of intangible
assets of the firm for the
financial year
Number of acquisitions made by
the firm during the financial year
Total of R&D operating
expenses, R&D capital
investment and royalties paid
during the financial year
Total R&D expenses as
percentage of total income
Net intangible assets as
percentage of total income
EBITDA as percentage of total
income
Data source
Authors assessment
based on macroeconomic
information as well as
sources like NASSCOM
CMIE prowess
CMIE prowess
CMIE prowess
ISI emerging markets

information systems and
CMIE prowess
Authors calculation based
on CMIE prowess
Authors calculation
Authors calculation
Authors calculation
Results and Discussion
We first present a descriptive overview of our dataset. Table 34.2 provides the total
view of the complete Indian ICT sector, summing up information from all the 442
firms under study. The data shows that the size (revenue) of the ICT sector has been
growing at a CAGR of 16.15 %, while the profit (EBITDA) has grown at a CAGR
of 17.02 % over the period of study. Similarly, total intangible assets, reported in
monetary value, have grown at a rate of 16.61 %. In contrast, R&D expenses, which
include capital expenditure and royalty payments, have increased by a CAGR of
4.25 % only. This suggests relative lack of relevance of R&D investments in the
growth of the industry sector.
Before conducting ANOVA, we verify key assumptions on the data, i.e. test for
outliers, approximate normal distribution for dependent variables and homogeneity
of variances.
Year
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Business
cycle
phase
1
1
2
2
2
3
3
3
4
1
1
2
2
2
Total income (in

Rs. million)
383,679.8
482,971
717,808.2
928,906.2
1,003,928.7
1,271,732.7
1,544,193
1,904,976.9
2,545,373.7
3,127,499.4
3,696,247.4
3,887,083.2
3,820,959.4
3,121,263.9
EBITDA (in
Rs. million)
92,279.1
114,971.1
222,637.9
339,095.5
313,597.9
413,858.8
487,180.8
579,366.1
761,080.1
904,352.2
966,572.5
998,508.4
846,528.2
833,485.1
Net intangible
assets (in Rs.
million)
66,827
26,234.9
31,965.8
62,206.1
65,673.1
85,647.7
81,997.4
82,814.7
118,518.9
195,929.3
351,857.5
604,614.6
860,774.3
574,743.6
No. of
acquisitions
0
21
29
20
29
34
35
50
94
78
48
50
48
46
Table 34.2 Trend of Indian ICT sector growth, M&A and innovation activities
Total R&D
expenses
(in Rs.
million)
13,595.4
14,514.8
11,274.1
13,754.7
14,403.4
16,667.3
9,182.5
12,780.4
14,422.8
17,703
21,905
26,286.6
24,045.6
24,341.6
R&D
intensity
%
3.54
3.01
1.57
1.48
1.43
1.31
0.59
0.67
0.57
0.57
0.59
0.68
0.63
0.78
EBITDA
%
24.05
23.80
31.02
36.50
31.24
32.54
31.55
30.41
29.90
28.92
26.15
25.69
22.15
26.70
Intangible
asset %
17.42
5.43
4.45
6.70
6.54
6.73
5.31
4.35
4.66
6.26
9.52
15.55
22.53
18.41
Growth
in
revenue
24.82
25.88
48.62
29.41
8.08
26.68
21.42
23.36
33.62
22.87
18.19
5.16
1.70
18.31
Growth
in profit
27.65
24.59
93.65
52.31
7.52
31.97
17.72
18.92
31.36
18.82
6.88
3.30
15.22
1.54
434
A. Das and S. Kapil
34
435
Table 34.3 Descriptive statistics in ANOVA

Variable
R&D intensity
No. of acquisitions
Intangible asset ratio
1
2
3
4
Total
1
2
3
4
Total
1
2
3
4
Total
396
537
317
114
1,364
104
170
88
51
413
532
791
482
200
2,005
Mean
10.7365
3.0691
2.7572
5.4605
5.4225
1.4135
1.3059
1.3523
1.8431
1.4092
76.4873
29.5223
26.0564
1394.5289
177.3109
Std. deviation
156.1306
5.4821
4.4820
31.0759
84.6936
0.7710
0.6798
0.7587
1.2550
0.8242
642.6147
109.9653
163.0761
17827.3145
5643.0974
Std. error
7.8459
0.2366
0.2517
2.9105
2.2932
0.0756
0.0521
0.0809
0.1757
0.0406
27.8609
3.9099
7.4279
1260.5815
126.0261
Table 34.4 Analysis of variance (ANOVA) output

Variable
R7D
intensity
No. of
acquisitions
Intangible
asset ratio
Between
groups
Within
groups
Total
Between
groups
Within
groups
Total
Between
groups
Within
groups
Total
Sum of squares
16,408.578
df
3
Mean square
5,469.526
9,760,405.958
1,360
7,176.769
9,776,814.536
11.705
1,363
3
3.902
268.140
409
0.656
279.845
330,035,698.058
412
3
110,011,899.353
63,486,438,284.515
2,001
31,727,355.465
63,816,473,982.574
2,004
F
0.762
Sig.
0.515
5.951
0.001
3.467
0.016
Tables 34.3 and 34.4 summarise the output of ANOVA from SPSS where we
establish if our observed variables demonstrate significant difference between
different business cycle phases. The results show that the number of acquisitions
demonstrates significant difference across business cycle phases (p < 0.01).
Intangible assets percentage demonstrates only limited difference across business
cycle phases (0.01 < p < 0.05). However, R&D intensity does not demonstrate any
significant difference across business cycle phases (p > 0.05).
436
A. Das and S. Kapil
Table 34.5 Post hoc test (Tuckey HSD)

Dependent variable
No. of acquisitions
(I) Cycle
1
Intangible asset ratio
(J) Cycle
2
3
4
1
3
4
1
2
4
1
2
3
2
3
4
1
3
4
1
2
4
1
2
3
Mean difference (IJ)

0.1076
0.0612
0.430
0.1076
0.0464
0.537
0.0612
0.0464
0.491
0.430
0.537
0.491
46.9650
50.4309
1,318.0416
46.9650
3.4659
1,365.0066
50.4309
3.4659
1,368.4725
1,318.0416
1,365.0066
1,368.4725
Std. error
0.1008
0.1173
0.1384
0.1008
0.1063
0.1293
0.1173
0.1063
0.1425
0.1384
0.1293
0.1425
315.8296
354.2065
467.1987
315.8296
325.4763
445.8107
354.2065
325.4763
473.7733
467.1987
445.8107
473.7733
Sig.
0.710
0.954
0.011
0.710
0.972
0.000
0.954
0.972
0.004
0.011
0.000
0.004
0.999
0.999
0.025
0.999
1.000
0.012
0.999
1.000
0.020
0.025
0.012
0.020
As the next step, in order to test on which groups (business cycle phases) acquisitions
and intangible assets demonstrate significant differences, we conduct Tuckeys
post hoc test. The results in Table 34.5 show that the number of acquisitions is
significantly different between phase 4 and other phases, i.e. phases 1, 2 and 3
(p < 0.01). However, for intangible assets ratio, we do not find statistically significant difference across phases.
5.1
The Role of R&D Intensity and Intangible Assets
We find support for hypothesis 1 but not for hypothesis 2. Our studies indicate that
the quantum of intangible assets varies significantly across business cycle, but it is
not true for R&D investments. In fact, R&D investments for the whole industry is
less than 1 % of the total sectoral revenue, indicating significantly lower R&D investments by Indian ICT firms in comparison to their global counterparts. However,
Wagner (2008) explained such trend as obstacles to innovation experienced by larger
34
437
technology firms. When innovation tends to become organisationally radical or firms

do not have sufficient absorptive capacity, then firms tend to avoid investments in
innovation and instead go for acquiring necessary product/platform to maintain leadership positions. In addition, larger firms may tend to let their smaller counterparts
carry out technological exploration and then pick out the survivors among these
smaller ones. This helps in acquiring an amplified output towards definitive product/
platform and economise on resources. However, a few large firms in our study,
including the top two technology companies in India, Tata Consultancy Services and
Infosys, have been very selective about acquiring smaller firms in the past decade.
Studies conducted on firms in developed economies indicate that intangible
assets, like patent portfolio, R&D infrastructure etc., influence firm growth (Christensen
and Bower 1996; Grimpe and Hussinger 2008; Luypaert and Huyghebaert 2008).
However, lack of importance of R&D investments can be explained by Ramamurti s
(2010) observation that EMNEs in mid-tech industries have insignificant R&D-tosales ratios and probably derive their FSA from being late-movers rather than
first-movers.
R&D investments limited relevance on Indian technology firms strategies may
get addressed through some of the corrective measures taken by Indian policymakers.
The Science, Technology and Innovation Policy 2013 of the Indian government
(DST 2013) intends to promote and foster research and innovation in India and has
a target to double Indias Gross Expenditure on Research and Development (GERD)
to at least 2 % of GDP through increased R&D investments from the private sector
firms. Facilitating such initiatives is expected to result in improved self-sufficiency
on products and solutions for Indian technology firms and therefore create sustainable
competitive advantage.
5.2
Role of Acquisitions
Hypothesis 3 does find strong support from this study. The number of acquisitions
carried out by firms varies significantly across business cycles with the average
acquisitions coming down during downturn. This may suggest that the firms become
cautious about investments when the macro-environment is not positive. On the other
hand, they look at acquisitions as a way to enhance growth during other phases. The
fact that R&D does not play an important role in these companies emphasise that
firms may look at acquisitions as a mechanism to acquire new technologies.
Conclusions
This study contributes to the understanding on the role acquisitions, R&D investments and intangible assets play during different business cycle phases. By studying
a large volume of secondary data and analysing information on a number of
438
A. Das and S. Kapil
acquisitions, R&D investments and intangible assets ratio during different business
cycle phases, we try to establish how these factors may play a role in surviving a
downturn and grow during expansion phase of the business cycle. The results clearly
highlight that Indian ICT firms acquisition behaviour vary significantly across
business cycle phases, whereas R&D investments do not differ at all between
different phases.
The primary role of acquisition seems to be consolidation of resources and pursue
growth. In addition, as another departure from western technology firms, we find
that firms R&D intensity does not play an important role in India ICT firms growth
strategy. The findings suggest an interesting perspective: the firms in technology
sector in a country like India may not have as much focus on technology when it
comes to growth. As Ramamurti (2010) suggested, these firms are probably late
entrants. Therefore, though they operate in technology sector, they may not possess,
develop or intend to acquire cutting-edge technologies and are probably more reliant on technology alliances with partners from developed economies. This view is
also supported by the fact that Indias GERD to GDP ratio has consistently remained
below 1.00 and below other BRIC countries since 2000. As of 2010, Indias GERD
to GDP was 0.88 %, while that of China was 1.75 %, and patenting activities in
India, though it has grown in the new millennium, was less than half of that in China
(Mani 2010; Thomson 2013). The insight on the role of acquisitions, R&D and
intangible assets in Indian ICT firms provide inputs to strategy practitioners and can
be further extended to study the effect of these decisions on firms growth.
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Chapter 35
Sustainable Supplier Selection: A Case

of Indian SME
Jitendar Bittoo Khatri and Manoj Srivastava
Abstract The challenges offered by sustainable manufacturing deeply affect supply
chain strategies and the entire procurement process. The need to improve organizational efficiency, overcome supply chain risks, achieve competitive position, and
realize zero wastes, concern for the environment, and awareness among consumers
has made companies to start considering triple bottom line (3BL) sustainable value
creation approach in their supply chain strategy. Supplier selection is an important
process for achieving this objective. Only through the active participation of suppliers, the buying firms can truly integrate societal, environmental, and economic sustainability in their supply chains. There are limited examples, within the context of
developing economies like India, where firms have adopted 3BL sustainability
approach in their procurement process. This paper deals with specific considerations of sustainability approach by an Indian automotive Tier-I, aluminum die casting parts manufacturing company. The company develops and applies an AHP-based
model for ranking raw material suppliers. Implication of this approach, limitations,
and future research direction conclude this paper.
Keywords Sustainable supply chain management (SSCM) Small and medium
enterprises (SMEs) Analytic hierarchy process (AHP) Aluminum high-pressure
die casting (HPDC)
Relevance to the Present Conference This paper is very relevant to the present conference.
There are numerous opportunities to include sustainable 3BL (economic, environmental, and
social) initiative in the manufacturing and supply chain operations in the recovering market.
Researchers have recognized that including these issues in organization strategy makes strong
business sense and presents new and largely unresolved challenges to be addressed. In this case, in
order to make sustainable supply chain, company creates sustainable 3BL values in its supply
chain through its supplier. Other SMEs in similar industries throughout emerging markets can be
motivated and benefitted by the simple methodology applied by the case company.
J.B. Khatri (*)
EFPM- 2009, Management Development Institute (MDI), Gurgaon, India
M. Srivastava
Associate Professor, Management Development Institute (MDI), Gurgaon, India
Springer India 2015
441
442
J.B. Khatri and M. Srivastava
Introduction
It is being increasingly realized that the most significant societal and environmental
impacts made by many companies occur outside of their internal operations. These
impacts include social and environmental impacts of their suppliers in upstream
supply chain and use and disposal of products by customers/consumers in downstream supply chain. In the recent years, researchers and managers have been focusing on how organizations and their supply chains are creating sustainable economic,
societal, and environmental values for the stakeholders. Supply chains play an
important and critical role toward achieving sustainability objectives of organizations. Company is no more sustainable than its supply chain (Krauss et al. 2009,
p. 4). In most manufacturing industries, the cost of raw material and component
parts constitutes the major cost elements of a product, such that in some cases it can
account for up to 70 % (Ghodsypour and OBrien 1998). In addition, companies are
increasingly including sustainable development in their strategy and competitive
priorities (Hart 1992; Bansal 2005; Sharma and Henrique 2005).
The supplier selection decision is one of the most critical issues faced by operations and purchasing managers to help organizations maintain a competitive advantage under sustainable supply chain management (SSCM) practice. Suppliers
furnish buying firms with raw materials, semifinished assemblies, and finished components in timely and cost-effective manner to help them achieve competitive
advantage. This article has been written in following sections: Sect. 2 refers to supplier selection criteria under sustainable supply chain environment, Sect. 3 refers to
AHP methodology, Sect. 4 refers to sustainable supplier selection model, Sect. 5
refers to how the case companys supplier evaluation, and finally Sect. 6 deals with
conclusion, research findings, and limitation of the research work.
SSCM and Supplier Selection Under Sustainable Supply

Chain Environment
The issue of sustainable supply chain management (SSCM) is gaining recognition in

both academia and practice, as an area of opportunity to enhance competitiveness.
Truly sustainable supply chains are expected to keep on generating profits for a longer period of time without impacting social and environmental system and perform
well on economic, social and environmental dimensions, the triple bottom line
(Pagell and Wu 2009). Researchers conclude that SSCM can contribute positively to
the reputation of an organization as good citizen (Wolf 2014). Owing to obvious
benefits in incorporating sustainability issues in their supply chains, the companies
are reinventing the way their entire procurement process is executed. Sustainability
in supply chain is one such initiative which has been linked to the additional environmental and societal performance objectives while taking care of profitability, customer satisfaction, quality, and delivery to gain competitive advantage. To make the
35 Sustainable Supplier Selection
443
supply chains truly sustainable, the environmental, economic, and social factors need
to be addressed at strategic and at Daily Work Management (DWM) levels along the
entire value chain. Supplier selection is described as the process by which firms
identify, evaluate and contract with suppliers (Beil 2010, p. 1). Buying firms have to
deploy large amount of resources in supplier selection and evaluation process; therefore, a well-defined criterion is required at each stage of the screening process.
Selecting the suitable suppliers is always a challenging task for purchase managers
under sustainable supply chain environment, since Sustainable SCM means that
buying organizations are held responsible for the environmental and social performance of their suppliers (Walker and Brammer 2007, p. 15).
SSCM and Performance of SMEs
Although SSCM is considered to be additional component of competitive advantage,

researchers (Blackhurst et al. 2012) highlight that small and medium enterprises
(SMEs) lag behind larger businesses in integrating environmental and societal
management into corporate strategies (Revell et al. 2010). Most SMEs are found
to adopt reactive approach to sustainability issues and hence do not exploit the
full potential available. Incapability of focal company (Maignan et al. 2002), nonalignment with corporate strategy (Narsimhan and Das 2001), only focus on cost
reduction (Min and Galle 2001) and lack of conceptual understanding (Cooper
et al. 1997) have been identified as key factors in literature that limit their role in
sustainable supply chain initiatives.
Analytic Hierarchy Process (AHP) Methodology
The AHP methodology, developed by T. L. Saaty (1980), is an important multicriteria decision-making (MCDM) technique. The main advantages of AHP are its
simplicity, robustness, and the ability to incorporate intangibles into a decisionmaking process. MCDM techniques consider an alternative set of methods that
allow multiple criteria to be used concurrently in the decision-making process
(Sarkis and Talluri 2002).
A hierarchy has at least three levels: overall objective/goal of the problem for
which solution is sought is at the top, multiple criteria that define alternatives are
placed in the middle, and alternatives from which selection is to be made are at
the bottom level. Data is collected from experts or decision-makers corresponding to
the hierarchy structure, in a pairwise comparison of alternatives on a qualitative scale.
Experts can rate the comparison as equal, marginally strong, strong, very strong, and
extremely strong. The comparisons are made for each criterion and converted into
quantitative numbers. Subjective evaluations are converted into numerical values and
decision-makers rank each alternative on a numerical scale (Saaty 1980).
444
Case Study: ABC Die Casting Company (P) Ltd.
The incorporation of sustainable issues in supply chain is at an initial phase of

development (Ageron et al. 2012). This could be probably one of the reasons of few
literatures in this field for guidance to SMEs in emerging economics. Relatively
little research has been conducted on the extent to which corporations have integrated sustainability principles into the management of their supply chain and evaluation of supplier performance (Morali and Searcy 2013, p. 635).
In this paper, we present the case study of an Indian SME, known as ABC Die
Casting Company (ABC Co.), which applies scientific principles in evaluating sustainability performance of its suppliers. The case company is a Tier-1 supplier to
major automotive original equipment manufacturers (OEMs) in India and abroad.
The company is into business of manufacturing and supply of aluminum die casting
parts for passenger cars and light commercial vehicles (LCVs). Partly, as a part of
new manufacturing philosophy and partly owing to customers demand, the company management decided to evaluate its suppliers on the basis of economic, environmental, and societal sustainable value creation performance for awarding future
business. The management chooses to apply AHP methodology to evaluate and
select its suppliers. The step-by-step procedure adopted by the company is shown in
Fig. 35.1.
With the help of external and internal four criteria, 15 sub-criteria and 36 subsub-criteria were considered important for the company (Table 35.1).
This information was captured into hierarchy model, as shown in Fig. 35.2. The
sustainable supplier selection (problem to be solved) is at the top of the hierarchy
structure, while criteria, sub-criteria, and sub-sub-criteria are in the middle. The
suppliers (alternatives) are at the bottom of the structure.
Criteria selection
from literature
and with help of
experts.
Identification and
finalization of criteria,
sub-criteria and sub
sub-criteria through
questionnaire, group
discussion and brain
storming by experts
from industry and
academia
Pair-wise
comparison and
Hierarchy
Development
Synthesis of
priority and
measurement
of consistency
Measure
supplier
performance
Making final
decision
(Supplier
selection)
Fig. 35.1 Framework of supplier selection using AHP
Table 35.1 Hierarchy level

and description
Hierarchy level
First level
Second level
Third level
Fourth level
Fifth level
Description
Goal
Criteria
Sub-criteria
Sub-sub-criteria
Suppliers
Factor(s)
One
Four
Fifteen
Thirty six
Three
445
Sustainable Supplier
Selection
QS
COPQ
FC
TC
SIC
TL
RC
EM
S
EHS
CSR
ELS
EIA
LS
NP
CAPA
IE
CR
LFA
RHC
USM
THC
IS
VOC
RTM
TMC
NPD
HF
RS
THR
HC
LC
LT
RF
PS
IC
SA
Supplier A
FM
RSC
PMA
MI
CHC
HR
PCC
PE
SWC
OC
VSH
ECC
DE
EC
VM
DC
PC
HC
EF
ROI
RR
Re
Con
Supply
Chain
Societal
Environmental
Economic
Supplier B
Supplier C
Fig. 35.2 Supplier assessment model for sustainable supply chain
Table 35.2 Criteria for sustainable supplier selection
ECO
ENVO
SOC
SC
Sustainable
economic value
criteria (ECO)
1
0.5
3
2
Sustainable
environmental
value criteria
(ENVO)
2
1
0.5
2
Sustainable
societal value
criteria (SOC)
0.33
0.5
1
0.33
Supply chain
consideration
criteria (SC)
0.5
0.5
3
1
The pairwise comparisons of various criteria generated were organized into a

square matrix. The pairwise comparison of the second level of the hierarchy, which
included four criteria, is shown in Table 35.2.
In the beginning, pairwise comparison of all the four identified criteria (Hierarchy
level 2) was done. The eigenvector and maximum eigenvalues were calculated and
matrix was validated for consistency by calculating CR value. The eigenvector
value of each criterion with respect to other criterion in the matrix is indicative of
the relative importance of those criteria. For example, the eigenvalue of sustainable
societal criteria (0.40) is almost twice that of sustainable economic value creation
value (0.19). The results are shown in Table 35.3.
ECO
ENVO
SOC
SC
TOTAL
ECO
ENVO
SOC
SC
Sustainable
economic value
criteria (ECO)
1
0.5
3
2
6.5
0.15
0.08
0.46
0.31
Sustainable
environmental value
criteria (ENVO)
2
1
0.5
2
5.5
0.36
0.18
0.09
0.36
Sustainable
societal value
criteria (SOC)
0.33
0.5
1
0.33
2.16
0.15
0.23
0.46
0.15
Supply chain
consideration
criteria (SC)
0.5
0.5
3
1
5
0.10
0.10
0.60
0.20
0.77
0.59
1.62
1.02
0.19
0.15
0.40
0.26
Eigenvector
1.25
0.81
0.87
1.28
4.22
Max.
eigenvalue
0.07
RI
0.08
C.R
Table 35.3 Normalized pairwise comparison matrix for four criteria of sustainable supplier selection and the eigenvector, maximum eigenvalue, and CR
values
446
447

Table 35.4 Pairwise comparison matrix for sustainable societal value creation
EHS
ELC
CSRP
VSH
Total
Employees
health and
safety (EHS)
1
1/5
1/3
1/2
2.03
Employment for
local community
(ELC)
5
1
2
5
13.0
CSR projects
implemented
(CSRP)
3
1/2
1
3
7.50
Voice of
stakeholders
(VSH)
2
1/5
1/3
1
3.53
Table 35.5 Normalized matrix of paired comparison and eigenvector
EHS
ELC
CSRP
VSH
Total
Employees
health and
safety (EHS)
0.492
0.098
0.164
0.246
1
Employment for
local communities
(ELC)
0.385
0.077
0.154
0.385
1
CSR projects
implemented
(CSRP)
0.40
0.067
0.133
0.40
1
Voice of
stakeholders
(VSH)
0.566
0.057
0.094
0.283
1
Eigenvector
0.461
0.075
0.136
0.328
1
To explain the entire process of pairwise comparison matrix for sub-criteria, the
procedure adopted for evaluating criteria and sub-criteria (Hierarchy level 3) under
Sustainable Societal Value creation criteria is illustrated as an example (Table 35.4).
After obtaining the pairwise judgment for all sub-criteria, priority vector or the
weight of an element in the matrix (eigenvector or principal vector of the
matrix) was calculated, by adding members of each column to find the total. Each
column in the matrix is normalized to sum to 1 or 100 % by dividing the elements
of that column by the total of the column and sum them up. The principal eigenvalue
and the corresponding normalized right eigenvector of the comparison matrix give
the relative importance of the various criteria being compared. The elements of
normalized eigenvectors are termed weights with respect to the criteria or subcriteria and ratings with respect to alternatives. The results are shown in Table 35.5.
In the next step, data inconsistencies were checked with an aim to capture enough
information to verify whether decision-makers have been consistent while making
choices among alternatives. The inconsistency index is based on maximum eigenvalue which is calculated by adding the product of each element in the eigenvector
(Table 35.5) by the respective column total of the original comparison matrix
(Table 35.3). The maximum eigenvalue max (4.09) and CR (0.03) values were
calculated as suggested by Saaty (1980). Since CR <0.1, matrix is consistent. In
contrast, whenever the value of CR is more than the acceptable value, the matrix is
considered inconsistent and exempted from further analysis (Saaty 1980).
Similar calculations were done for all the three shortlisted suppliers under four
criteria (Hierarchy Level 1) and the results were summarized (Table 35.6).
448
Table 35.6 Suppliers evaluation on the basis of four criteria

Supplier Supplier
A
B
Economic criteria
A
1
3
B
0.33
1
C
0.16
0.2
Total 1.49
4.2
A
0.671
0.714
B
0.221
0.238
C
0.107
0.048
Environmental criteria
A
1
2
B
0.5
1
C
0.2
0.2
Total 1.7
3.2
A
0.588
0.625
B
0.294
0.313
C
0.118
0.063
Societal criteria
A
1
B
3
C
2
Total 6
A
0.167
B
0.500
C
0.333
0.33
1
0.25
1.58
0.209
0.633
0.158
Supply chain criteria

A
1
0.5
B
2
1
C
1
0.33
Total 4
1.83
A
0.250
0.273
B
0.500
0.546
C
0.250
0.180
Supplier
C
6
5
1
12
0.500
0.417
0.083
5
5
1
11
0.455
0.455
0.091
0.5
4
1
5.5
0.091
0.727
0.182
1
3
1
5
0.200
0.600
0.200
Max.
eigenvalue C.I
Eigenvector
0.671 0.885
0.876 0.292
0.238 0.079
0.668 0.556
0.061 0.354
0.271 0.090
0.466 0.155
0.860 0.620
0.673 0.224
0.723 0.241
0.646 0.549
0.630 0.210
C.R
0.628
0.227
0.953
3.117
0.058 0.086
3.071
0.035 0.086
3.147
0.074 0.086
3.019
0.010 0.086
0.945
0.132
0.994
0.933
0.980
0.235
0.964
0.004
0.051
449
Local weights of each criterion, sub-criterion, and sub-sub-criterion at each level

of hierarchy (refer Fig. 35.2) were calculated and global weight of each sub-subcriteria was determined and a composite matrix was prepared (Table 35.7).
In the last step, overall priority matrix was calculated for each supplier
(Table 35.8). Overall priority rating calculation for supplier A is shown as below:
Overall Supplier A rating = (0.19*.63) + (.15*.56) + (.4 *.93) + (.26 *.24) = .64
Conclusion, Limitations of the Research,

and Scope for Future Study
On the basis of this calculation, Supplier B achieved highest priority rating (1.43)
and was selected as the most preferred supplier, closely followed by Supplier C
(1.38), which was chosen as second source. The management of ABC Co. distributed share of business (S.O.B.) in the ratio of 70:30 between the two suppliers.
The selection of the most preferred suppliers has been the area of interest for
researchers and practicing managers since the 1960s, but incorporating the issue of
sustainability dimensions into supply chain is comparatively new. The main contribution of this research work was selection of suppliers who could help focal company in achieving sustainable value creation in their supply chain. This objective
was successfully achieved by selecting most suitable supplier for their supply chain.
The second achievement was the development of a multi-criteria model for evaluating suppliers by using AHP methodology. The AHP model developed can be utilized by other small and medium enterprise (SME) companies for selection of
supplier in their own supply chains. Since SMEs have limited resources and cannot
invest heavily in costly software and training programs, their contribution toward
supply chain sustainability is very limited. The third significant contribution of this
framework is that companies have found it useful for internal evaluation and
improvement of their own sustainability performance. In order to make the decision
more robust and reliable, it is recommended that fuzzy AHP methodology may be
applied in decision-making.
Sustainable
environmental value
creation criteria
Criteria
Sustainable economic
value creation criteria
0.150
Local
weights
0.19
0.390
0.260
0.15
Use of hazardous chemicals (HC)
Environmental management
system (EMS)
0.312
Technological capability (TC)
Resource conservation (ReCon)
0.379
Financial capability (FC)
0.190
0.169
Cost (C)
Recycling capability (RC)
Local
weights
0.140
Sub-criteria
Quality (Q)
Table 35.7 Composite priority weights for sub-sub-criteria

Sub-sub-criteria
Quality systems (QS)
Cost of poor quality (COPQ)
Rejection rate (RR)
Production cost (PC)
Ordering cost (OC)
Logistics cost (LC)
Sustainable Investment Capability (SIC)
Return on Investment (ROI)
Net profit (NP)
Technology level (TL)
Design capability (DC)
Cold refining (CR)
Hot refining (HR)
Use of scrap material (USM)
Electricity and fuel (EF)
Virgin metal (VM)
Land filling avoidance (LFA)
Reduction in consumption of HC (CHC)
Replacement of HC (RHC)
Training for handling HC (THC)
EMS certification (EC)
Environmental Impact Assessment (EIA)
Corrective and preventive actions (CAPA)
Local
weights
0.402
0.457
0.139
0.512
0.360
0.127
0.471
0.376
0.139
0.860
0.139
0.127
0.512
0.360
0.309
0.581
0.109
0.724
0.193
0.082
0.680
0.250
0.068
Global
weights
0.010
0.012
0.004
0.016
0.012
0.004
0.034
0.027
0.010
0.050
0.080
0.004
0.015
0.010
0.023
0.034
0.006
0.028
0.008
0.003
0.015
0.006
0.002
450
Supply chain criteria
Criteria
Sustainable societal
value creation criteria
0.260
Local
weights
0.40
0.292
0.079
Relationship and strategic

commitment (RSC)
Flexible manufacturing practice

(FM)
0.33
Voice of stakeholders (VSH)
0.628
0.141
Corporate social responsibility

projects (CSRP)
Production capacity and capability

(PCC)
0.07
Employment opportunities for local

communities (ELC)
Local
Sub-criteria
weights
Employees health and safety (EHS) 0.46
Sub-sub-criteria
Safe work conditions (SWC)
Regular health checkup (HC)
Safety audits (SA)
Direct employment to local people (DE)
Number of local suppliers (LS)
Support for self-employment generation
(IE)
Primary education (PE)
Primary health facilities (HF)
Recreation facilities for local people (RF)
Establishing communication channels
(ECC)
Procedure for monitoring and audits (PMA)
Review by top management (RTM)
Machinery and infrastructure (MI)
Trained human resources (THR)
Established production system (PS)
Information sharing with supply chain
partners (IS)
Capturing voice of customers (VOC)
Top management commitment (TMC)
New product development capability (NPD)
Routing and scheduling flexibility (RS)
Lead time reduction (LT)
Inventory cost reduction (IC)
0.042
0.005
0.009
0.072
0.028
0.032
0.016
0.133
0.014
0.036
0.007
0.014
0.019
0.004
0.014
0.002
0.210
0.241
0.10
0.812
0.087
0.480
0.093
0.182
0.249
0.201
0.680
0.118
Global
weights
0.019
0.125
0.037
0.019
0.007
0.002
0.739
0.093
0.168
0.548
Local
weights
0.118
0.680
0.201
0.681
0.236
0.083
451
452
Table 35.8 Overall priority rating of suppliers

Weights
Supplier A
Supplier B
Supplier C
Economic
0.19
0.63
0.29
0.08
Environmental
0.15
0.56
0.35
0.09
Societal
0.4
0.93
0.98
1.24
Supply chain
0.26
0.24
0.55
0.21
Overall priority
0.64
1.43
1.38
References
Ageron B, Gunasekaran A, Spalanzani A (2012) Sustainable supply management: an empirical
study. Int J Prod Econ 140:168182
Bansal P (2005) Evolving sustainability: a longitudinal study of corporate sustainability
development. Strateg Manag J 26:197218
Beil RD (2010) Supplier selection. Wiley encyclopedia of operations research and management
science. Wiley, Hoboken
Blackhurst J, Cantor D, ODonnel M (2012) Sustainable supply chains: a guide for small to
medium sized manufacturers. CIRAS, Iowa State University
Cooper MC, Lambert DM, Pagh JD (1997) Supply chain management: more than a new name for
logistics. Int J Logist Manag 8(1):114
Ghodsypour SH, OBrien C (1998) A decision support system for supplier selection using an analytic hierarchy process and linear programming. Int J Prod Econ 199(122):5667
Hart S (1992) An integrative framework for strategy making. Acad Manag Rev 17:327351
Krause DR, Vachon S, Klassen RD (2009) Special topic forum on sustainable supply chain management: introduction and reflection on the role of purchasing management. J Supply Chain
Manag 45(4):1825
Maignan I, Hillebrand B, McAlister D (2002) Managing socially-responsible buying: how to integrate noneconomic criteria into the purchasing process. Eur Manag J 20(6):641648
Min H, Galle WP (2001) Green purchasing practices of US firms. Int J Oper Prod Manag
21(9):12221238
Morali O, Searcy C (2013) A review of sustainable supply chain management practices in Canada.
J Bus Ethics 117(3):635658
Narasimhan R, Das A (2001) The impact of purchasing integration practices on manufacturing
performance. J Oper Manag 19(5):593609
Pagell M, Wu Z (2009) Building a more complete theory of sustainable supply chain management
using case studies of ten exemplars. J Supply Chain Manag 45(2):3756
Revell A, Stokes D, Chan H (2010) Small business and the environment turning over a new leaf?
Bus Strateg Environ 19(5):273288
Saaty TL (1980) The analytic hierarchy process, 1st edn. McGraw-Hill, New York
Sarkis J, Talluri S (2002) A model for strategic supplier selection. J Supply Chain Manag Winter
38(4):1828
Sharma S, Henrique I (2005) Stakeholders influence on sustainability practices in the Canadian
forest product industry. Strateg Manag J 26:159180
Walker H, Brammer S (2007) Sustainable procurement in United Kingdom public sector.
University of Bath, School of Management Working paper 2007-15
Wolf J (2014) The relationship between sustainable supply chain management, stakeholder pressure and corporate sustainable performance. J Bus Ethics 119(3):317328
Chapter 36
The Cyber Security Ecosystem: Post-global

Financial Crisis
Saini Das
Abstract The global financial crisis of 20082009 resulted in recession in majority
of the economies of the world. Information technology, considered to be one of the
major enablers of all business activities, also underwent certain changes in this
phase. New technologies such as cloud computing and mobile commerce emerged
and continued to grow. However, along with these opportunities, threats to information security in the form of malicious attacks also grew. But such threats not only
impacted individual organizations but all the organizations that were related to
the target organization in some manner. In this study, we present a cyber security
ecosystem which provides a holistic view of all the players present such as,
network, cloud, and software providers. Governing bodies and reporting agencies
also play an important role in this ecosystem. We also show the complex interactions
among the players. These interactions can be used to arrive at correlated risks of
the entire cyber security ecosystem in case of an information security breach on a
target organization.
Keywords Cyber security ecosystem Cloud providers Niche payers Keystone
players
Introduction
The global financial crisis of 2008 witnessed the largest and the sharpest drop in
economic activity of the modern era. After the crisis, most major developed economies of the world found themselves in a deep recession (McKibbin and Stoeckel
2009). Significant challenges were also faced by the IT industry as a result of the
economic crisis. With most of the global markets still in recovery phase, two new
waves emerged in the IT sector. Firstly, organizations were increasingly using the
Internet or other mobile devices to communicate and exchange data with their
business partners. Consequently, the traditional hard boundaries of an organization
S. Das (*)
Department of Information Systems, Indian Institute of Management, Indore, India
Springer India 2015
453
454
S. Das
were vanishing and so were the traditional security paradigms. Secondly, most of
the IT systems and data processing moved into the cloud which gave rise to entirely
new information security requirements. As a result of these two new trends along
with the rise of emerging markets, recovery from the financial crisis, and offshoring,
the complexity of the ever-evolving information security issues have immensely
increased. Though organizations have responded to the accelerating security issues
by investing in newer strategies, security technologies, and people, there is a need
for a holistic approach to the information security problem in order to address it best
(Ernst & Young 2012).The period of recovery after the global financial crisis of
2008 emphasized on adoption of enterprise risk management techniques to combat
risk and enhance opportunities for business continuity in the face of disaster
(Deloitte 2011).
Though a lot of studies have been done to find the impact of a cyber security
breach on a target organization, a holistic view of the entire cyber security ecosystem
is not considered in most of these works. In this study, we provide a holistic view of
the entire cyber security ecosystem and highlight the changes due to the impact of
the global financial crisis. We also show the complex nature of the cyber security
ecosystem which comprises of many players having complicated interactions. Due
to these complex interactions, an information security breach on one player affects
all the players related to it. Hence, the impact of a particular breach targeted at one
player is affected by the complex interactions between the other players. In the
future, we can use these interactions to quantify correlated risks of the entire cyber
security ecosystem in case of an information security breach on a target organization.
This highlights the importance of this study in the post-financial crisis period where
the number of information security breaches has increased.
The Proposed Cyber Security Ecosystem
A healthy cyber security (CS) ecosystem comprises of several loosely networked

players that work together to gain competitive advantage due to their symbiotic
relationships. This would not be possible had they been working alone (Hyeyoung
et al. 2010). The players of the cyber security ecosystem operate in the black market
as well as in the white market. The black market players have malicious intentions.
Sellers do not have ethical considerations, and the trade is not advertised openly.
However, in the white market, players do not have malicious intentions, and trade is
advertised openly (Frei et al. 2009). The cyber security ecosystem is shown in
Fig. 36.1. Individuals/groups of cyber criminals operate in the black market and
attack the IT resources (network, servers, and software) of organizations. Software
vendors (e.g., Microsoft) supply system/application software. Hardware vendors
(e.g., IBM) supply various kinds of hardware. Similarly, bandwidth providers
(e.g., Verizon) sell bandwidth. Network and security providers sell various security
technologies like antivirus software, firewalls, etc. Cloud providers (e.g., Amazon,
36
The Cyber Security Ecosystem: Post-global Financial Crisis
455
Fig. 36.1 Cyber security ecosystem
IBM) enable client organizations to host their applications or data on the cloud.
Organizations sometimes outsource their security functions to vendors because
vendors have expertise in providing round-the-clock cyber security. Malicious
criminals also attack vendors of famous client organizations and subsidiaries of large
parent organizations. Sometimes, individuals/groups of cyber criminals exploit
online resources and P2P networks to pirate software or music.
Governing/auditing/certifying agencies like ISACA are players of the white
market who provide controls or security standards like Control Objectives for
Information and Related Technology (COBIT) for an organization to follow. The
Government is another player operating in the white market. It regulates the environment by creating and enforcing laws like the HIPAA (The Health Insurance
Portability and Accountability Act) that an organization has to comply with. The
HIPAA created in 1996 states an organization has to protect the privacy of patients
health information during electronic data interchange. Ethical hackers belong to the
white market and are usually hired by organizations for penetration testing and network
vulnerability discovery. If vulnerabilities in the network are discovered a priori,
then they can be patched before being exploited by cyber criminals who are always
on the prowl. When cyber criminals attack an organization, it usually reports the
incident to reporting agencies like the CERT/CC or NVD who maintain a database
of the reports. Due to such attack, the organization may suffer losses (both direct
and indirect). Cyber insurers (e.g., Lloyd) are white market players who play a
complementary role to mitigate the financial losses suffered by the organization.
456
S. Das
Level of Innovation
Fig. 36.2 Position of

different players of the cyber
security ecosystem
Niche
Keystone
Commodity
Physical
Dominator
Complexity of Relationships
According to strategy literature, companies can be classified as keystone or niche

depending upon their level of innovation and complexity of relationship (Iansiti and
Levein 2004), as shown in Fig. 36.2. Software vendors like Microsoft sell system/
application software (e.g., Windows OS, Microsoft Office, etc.) to organizations.
They also provide patches when any vulnerability is discovered in the software.
Hence, they add value to the cyber security ecosystem. Thus, they play the role of
keystone (shown in orange in Fig. 36.2) in the ecosystem. Security technology providers like CISCO and antivirus companies like Symantec, Norton, etc., specialize
in their own area of operation. Hence, they can be classified as niche players (shown
in green in Fig. 36.2).
We now describe each of these major players in detail:
Players of the Black Market
1. Individual/groups of cyber criminals: They can operate as individual hackers or
as groups. These criminals identify vulnerabilities present in any network and
exploit them for their own benefit. Some of them have financial motives, while
some others do it just for the thrill, challenge, or pleasure of breaking into
unknown networks. Sometimes cyber criminals operate individually. Sometimes
they may operate as groups that operate across national borders and indulge in
activities related to cyber crime. There are international rackets operating in
many countries that target organizations in a different country either for financial
motives, cyber terrorism, or spying and information theft. There are also international
hacktivist groups like Anonymous who launch cyber attacks on high-profile
targets to protest or to reveal corruption.
2. P2P network sites: P2P technology is a distributed computing software architecture that enables individual computers to connect to and communicate with each
36
457
other. By doing so, computer users (known as peers) can share communications,
data files, and processing power among themselves. Rather than having a central
computer to store data, P2P technology allows data sharing from individual computers directly. There are three types of P2P networks: pure, centralized, and
hybrid. Although P2P framework can increase productivity by allowing file
sharing, they can also introduce vulnerabilities in the network by enabling users to
download executable codes that can introduce rogue or untraceable backdoor
applications on users machines and jeopardize the security of the entire
network. Cyber criminals can easily exploit these vulnerabilities and launch IS
breaches. Examples of such P2P networks are Gnutella and Kazaa.
Players of the White Market
1. Organization: Any organization that is electronically networked is susceptible to
be compromised or exploited by cyber criminals. The chief technology officer
(CTO) of such organizations proactively discovers and reports existing vulnerabilities to reporting agencies. Such organizations can belong to any sector or
industry. However, those belonging to e-commerce or BFSI sectors are more
prone to cyber security breaches. This is because the impact of breaches would be
larger on such firms both in terms of financial and reputation loss.
2. Software vendors: They are companies that supply software which have some
vulnerability. Vendors also have the responsibility to release patches against those
vulnerabilities once they have been discovered and declared. There are two types
of patch management policies generally followed by vendors: (A) time-driven
and (B) event-driven (Cavusoglu et al. 2008). In the time-driven patch management, the vendor releases security patches periodically, i.e., after a certain interval
of time t. In the event-driven patch management, the vendor releases patches
once a certain predetermined number of vulnerabilities are discovered. Microsoft,
Sun, etc., are examples of software vendors.
3. Other security product vendors: These are the vendors who supply various network security components like firewalls, intrusion detection systems (IDSs),
routers, etc. CISCO is one of the pioneers in this field. Apart from network
security hardware components, there are vendors who specialize in network
security software like antivirus. Norton, AVG, and Symantec are the leading
antivirus vendors. Apart from these, there are newer and more technologically
sophisticated security components released regularly by these vendors.
4. Cyber insurers: The use of appropriate defense mechanism may not always
prove effective in avoiding information security breaches due to the uncertainty
and novelty of each of these attacks. Hence, any organization would possess a
certain degree of cyber risk which needs to be mitigated. One efficient way of
cyber risk mitigation is cyber insurance. Cyber risk can be transferred to third
party insurance companies which provide insurance coverage to vulnerable
companies against possible losses due to information security breaches against
a premium amount. Such third parties are often referred to as cyber insurers.
The leading providers of cyber insurance in the world today are AIG and
Lloyds of London.
458
S. Das
5. Ethical hackers: An ethical hacker is a computer and network security expert

who is usually hired by a vulnerable organization to detect and report vulnerabilities in the network a priori, i.e., before the malicious hackers can identify
and exploit them. They play a very important role in penetration testing or intrusion testing.
6. Cloud providers: Several cloud providers such as Amazon, IBM, and others
host data and applications of client organizations on the cloud. Such cloud providers are potential targets of cyber attackers because access to a cloud would
provide access to information of many client companies. In the period following
the financial recession of 2008, there has been a steady increase in the number
of applications moving to the cloud. However, the issue of security and privacy
of data is a cause of concern.
7. Internet service providers (ISPs): ISPs are the companies that provide access to
the Internet. They can play a very important role in cyber security because they
not only control a users access to the Internet but can also identify malicious users who appear to be causing security threats and can limit their activities on the Internet or remove them from the network (Rowe et al. 2011). They
also play a preventive role in cyber security by providing antivirus, IDSs, etc.,
at a nominal rate to the subscribers. Moreover, they can sensitize the users of the
Internet about cyber security by educating them or creating awareness among
them. Comcast, Verizon, etc., are examples cyber security of companies that
belong to this domain.
8. Government: It has multiple roles to play in information security ecosystem
such as, (a) protecting the critical cyber security infrastructure of a nation, (b)
working in collaboration with the private sector to protect digital infrastructure,
and (c) creating and enforcing rules and laws to prevent cyber crimes and prosecute the criminals. Such laws act as deterrent controls to prevent cyber crimes.
For example, the US government introduced several acts like the Health
Insurance Portability and Accountability Act (HIPAA), the Federal Information
Security Management Act (FISMA), etc., to protect the privacy of individuals
and to prevent information theft.
9. IT governance/auditing agencies: These are agencies that enforce and supervise an
organizations compliance to IT laws like the Sarbanes-Oxley Act (SOX), Basel II,
etc. They also ensure that organizations comply with industry standards for security
like ISO 27001, COBIT, etc. Such agencies also audit the information security infrastructure adopted by organizations and certify them if they succeed in meeting
certain standards. The Information Systems Audit and Control Association (ISACA)
is an international organization that deals with IT governance and audit.
10. Security information providers/reporting agencies: Any information security
breach that takes place on an organization or any newly discovered vulnerability
are immediately reporting to reporting agencies or security information providers like the CERT Coordination Center CERT/CC or the National Vulnerability
Database (NVD). They have incident response teams which immediately respond
to such information. Such organizations also address existing threats and provide security-related information on queries raised by customers.
36
Conclusion and Future Work
459
The global financial crisis of 2008 resulted in recession in majority of the economies
of the world. Information technology, considered to be one of the major enablers of
all business activities, also underwent certain changes in this phase. New technologies
such as cloud computing and mobile commerce emerged and continued to grow.
Along with these, threats to information security in the form of malicious attacks
also grew. But such threats not only impact individual organizations but also all the
other organizations that are interrelated to the target organization in some manner.
In this study, we present a cyber security ecosystem which shows a holistic view of
all the players present and the complex interactions among them. In the future, we
can use these interactions to quantify correlated risks of the entire cyber security ecosystem in case of an information security breach on a target organization.
References
Cavusoglu H, Cavusoglu H, Zhang J (2008) Security patch management: share the burden or share
the damage? Manag Sci 54(4):657670
Deloitte (2011) Global risk management survey, seventh edition: Navigating in a changed world
Ernst & Young (2012) Fighting to close the gap Global Information Security Survey
Frei S, Schatzmann D, Plattner B, Trammell B (2009) Modeling the security eco system the
dynamics of security. In: Proceedings of The Eighth Workshop on the Economics of Information
Security (WEIS 2009) University College London, England
Hyeyoung K, Lee J, Han J (2010) The role of IT in business ecosystems. Commun ACM 53:151156
Iansiti M, Levien R (2004) Strategy as ecology. Harv Bus Rev 82(3):6878
McKibbin W, Stoeckel A (2009) The global financial crisis: causes and consequences. Working
paper in economics. The Lowy Institute for International Policy, Sydney
Rowe B, Wood D, Reeves D, Braun F (2011) Economic analysis of ISP provided cyber security
solutions. Institute for Homeland Security Solutions
Chapter 37
The Impact ofGold Price Changes

onSaudi Stock Market
DurgaPrasadSamontaray andAhmedAwadAlanuzi
Abstract In investment analysis gold and stock are alternate sources of investment.
Gold is a very important financial asset, and in financial crises usually investors
look at gold as the safe haven for them. Stock market is one of the most important
aspects of the economy, in Saudi Arabia; Tadawul All Share Index (TASI) has huge
market value in the region, reaching the value 1.4 trillion in 2012.
In this paper, we have investigated the long-run relationship between gold prices
and Saudi stock market, using 10-year monthly data set from 31 October 2004 to 30
November 2013 using the tool Ordinary Least Squares (OLS) method.
The investigation applying the simple regression through Ordinary Least Squares
(OLS) method shows that TASI reacts negatively to gold price movement. This
research also examines the relationship between gold prices and two important sector indexes, i.e., banking and financial services (TBFSI) and telecom and information sector (TTISI) form about 30% of TASI weight; all these sectors show a
negative reaction to gold price (www.tadawul.com.sa).
As the Asian as well as the global market is showing the recovery trend after the
turmoil and slowdown, we carried out this research to show the investors and
analysts and the researchers the impact of gold on the security market taking the
Saudi perspective. It is very important to show the relationship of equity and commodity which we think tried to be addressed in this paper.
KeywordsTASI Ordinary Least Squares (OLS) Linear regression model
Correlation Long position and short position
D.P. Samontaray (*)

Department of Finance, College of Business Administration, King Saud University,
Riyadh, Kingdom of Saudi Arabia
A.A. Alanuzi
Cash Management & Treasury Operations, Saudi Telecom Company (STC),
Riyadh, Kingdom of Saudi Arabia
Springer India 2015
461
462
D.P. Samontaray and A.A. Alanuzi
1 Introduction
Although that Kingdom of Saudi Arabia is one of the most prosperous and stable
countries in the world because of its many different raw materials that are source of
global energy, geographically it locates in the most disturbed area in the world.
Middle East in few decades has cited many wars and public revolutions that have
huge negative, at least in the short-run period, effect on all aspects of economy and
society. Recently, as the Arab spring sparks from Tunisia and goes through Libya,
Yemen, and Egypt and ends with the most tragedy in the recent history in the
civil war in Syria, has put the investors not only the local but even the global one at
challenges and pressures of the investment options and tactics.
In light of these circumstances, we have seen that both local and global media are
more focusing on the radical of price movements of stock markets with every sign
of bad or good news that comes as a result of these political tensions.
Financial and economic commentators at TV and newspapers keep saying that
gold is the safe haven investment! And make hundreds of reports about gold
around the world.
Gold is one of the most precious metals, traded or used at many levels, personal
as jewelry or even at international level when most of the central banks in the world
show it as one of their assets in the balance sheet; it has also financial usage; it is
considered as a risk diversifier, hedged against inflation, and it has other uses in
different markets. Saudi stock market from the other hand, as other stock market,
is risky investment due to its volatility which is in crisis becoming highly volatile
and causes huge loses (Barunik etal. 2013; Ahuja etal. 2012).
In this research, we are exploring the relationship between the gold price and
Saudi stock market (TASI) and its sectors from other hand, to investigate whether
the stock market investors can diversify the risk by taking position in gold or not.
2 Review ofLiterature
Ahmed etal. (2013) examine the long-run relationship between gold prices and
Karachi Stock Exchange (KSE) and Bombay Stock Exchange (BSE) in perspective
of supply and demand of gold and its impact on the value of stock index. To
investigate the existence of long-run equilibrium relationship among time series
variables, different statistical tests are used. To analyze the lead-lag relationship in
the sample, Granger causality test is used which is proposed by C.J. Granger in
1969, whereas hypotheses will be accepted based on F-test results at a significance
level of 0.05 which provide the evidence of explained relationship between
predictors and endogenous variables. This study is comprised with the period from
2005:1 to 2011:6. To analyze the impact of gold prices on KSE and BSE stock
index, monthly data is used which is gathered from reliable and official sources of
KSE and BSE statistics.
37 The Impact ofGold Price Changes onSaudi Stock Market
463
Findings of this study indicated that there is no long-run relationship that

exists between monthly average gold prices and KSE-100 Index; however, BSE has
long-term relation with average gold prices.
Subarna and Zadeh (2011) examine the co-movements of several macro-variables
in the world economy over a period of more than 20years from January 1989
through September 2009 with more than 5,200 observations. They find out that it
seems likely that stock price and gold price are more likely to move on their own
while oil price and exchange rates likely to be influenced by other variables.
Giam and Sriboonchitta (2009) focused on testing possible linkages among
international gold and ASEAN emerging markets (Indonesia, Malaysia, Philippines,
Thailand, and Vietnam) based on daily data from 28 July 2000 to 31 March 2009.
Granger causality test for short-run interdependence of index pairs and Johansen
co-integration test for long-run equilibrium relationship and short-run dynamics of
the whole gold price prove reciprocal effect on Vietnam index and also influence
Thailand stock but show no connection with stock exchange of Malaysia, Indonesia,
and the Philippines in short run. However, gold prices are not integrated with all
indexes in the long run.
Baur and Lucey (2010) first define the safe haven as the following: A safe haven
is defined as an asset that is uncorrelated or negatively correlated with another asset
or portfolio in times of market stress or turmoil. The data cover a time period of
10years from 30 November 1995 until 30 November 2005. Results show that gold
is a safe haven for stocks and gold only functions as a safe haven for a limited period
of time, around 15 trading days. In the longer run, gold is not a safe haven, that is,
investors that hold gold more than 15 trading days after an extreme negative shock
lose money with their gold investment.
Martin and Yunita (2012) took data in their research are weekly price of gold
(per troy ounce) and closing price of Indonesia Composite from 4 July 1997 to 4
November 2001. Results show that gold investment is quite safe for investors and
could be categorized as a safe haven.
Coudert and Raymond-Feingold (2011) have investigated if gold is a safe haven
and/or a hedge against stocks, by estimating a time-varying conditional covariance
between gold and stock returns from four countries (France, Germany, the USA, the
UK) and the G7 countries data for gold total returns in US$ that come from
Standard and Poors and Goldman Sachs Commodity Index (S&P GSCI) database
and are extracted from Bloomberg. Three main results emerge from our estimations.
First, the conditional covariance between the two types of assets generally
decreases during crises, whether defined as recessions or bear markets. Second,
gold qualifies for being a safe haven as it does not co-move with stock returns on
average neither during recessions nor bear markets. This result holds for all the
considered stock indexes. More precisely, gold is a weak safe haven in most cases
as its correlation with stocks is not significantly different from zero during crises.
Third, gold appears to be a hedge against stocks in most cases, but not all of them.
Overall, gold appears as an interesting asset to diversify a portfolio away from
stocks, especially in times of bear markets.
464
Contuk etal. (2013) analyze the effect of fluctuations in gold prices on ISE-100
Index using daily prices and the index data from 1 January 2009 to 31 December
2012. The raw data has been converted into earnings yields and analyzed. The study
first determines whether or not the use of a GARCH model would be appropriate
using a heteroskedasticity test. The test results show that there was an ARCH effect
in both variables and that GARCH modeling could be used. The results obtained
from MGARCH modeling show that gold and stock exchange yields have been
affected both by their own shocks and by shocks of each other.
Abdul Basit (2013) tries to help the investor to investigate the relationship in the
said investment options in Pakistan. For this purpose the researcher on the basis of
available secondary data collected the KSE-100 Index, oil prices, and gold prices
for the time period 20052011. The researcher took oil prices and gold prices as
dependent variables, whereas KSE-100 Index was taken as independent variable.
The researcher applied the simple regression models separately for both dependent
variables and concluded that there is no obvious relationship in these variables.
3 P
resent Body ofKnowledge/Learning
fromtheReview ofLiterature
In many research and study, researchers apply many test models and analysis tools,
such as Granger causality test, simple regression, multiple regression, correlations,
and GARCH model, and they use different data set like, daily, weekly, monthly, and
annually. In some research relation between gold and stock market does exist either
negative or positive, and in many other research studies, relation does not exist.
4 Research Gap
Though there are several studies that took place taking many variables including
gold to predict the stock return, the main gap we found is the lack of study of the
sector-specific relationship with gold in Saudi perspective.
In this research, the main focus is to investigate the relationship between gold
price and TASI and two more sectors in the Saudi Arabia Stock Exchange. Those
sectors are banking and financial services and telecom and information sector.
5 Objectives
To study the relationship between Tadawul All Share Index (TASI) and the gold
price movement.
465
To study the relationship between two different sectors in the market, i.e., TBFSI
(banking and financial services sector) and TTISI (telecom and info sector), and
the gold price movement.
The result will help a lot the investors to know whether the gold will diversify
away the risk of the equity market.
6 Methodology andData Description

We have used the monthly price data from years 2004 to 2013, gold price, and
Tadawul All Share Index (TASI) and two important sectors: banks and financial
services and telecom and info sector. The independent variable is the monthly gold
price. The dependent variables are the TASI, banking and financial services index,
and telecommunication and information technology index. All the data are of
secondary nature and monthly index imported from Thomson Reuters. The tool to
be used is simple regression. The computer packages/software that we used is
Microsoft Excel and EViews (Table37.1) (Sarbapriya, 2012; Sujit and Rajesh,
2011; Sharma, 2010; Subarna and Zadeh, 2011; Wang, 2012).
6.1 I n Our Research WeHave Proposed theTesting

oftheFollowing Three Hypotheses
Gold price changes have negative impact to the stock market index:
H0: =0 There is no negative impact on stock market.
H1: 0 There is a negative impact on stock market.
Gold price changes have negative impact to the banks and financial services index:
H0: =0 There is no negative impact on banks and financial services index.
H1: 0 There is a negative impact on banks and financial services index.
Table 37.1 Sector analysis
Sector
Banking and financial services
Telecommunication and information
technology
TASI
No. of
companies
11
Index
weight
22.4%
10.9%
161
100%
Index weight as of November 2013 based on Tadawul.com
Code and name

TBFSI banking and
financial services sector
TTISI telecom and info
sector
TASI Tadawul All
Share Index
466
Gold price changes have negative impact to telecommunication and information

technology index:
H0: =0 There is no negative impact on telecommunication and information
technology index.
H1: 0 There is a negative impact on telecommunication and information technology index.
7 Economic Model, Discussion, andAnalysis

In order to investigate the relation between gold price and TASI and other sectors in
TASI (banks and financial services, telecom and info sector, cement sector), we
used the Ordinary Least Squares (OLS) method, which is used usually for estimating
the unknown parameters in a linear regression model.
So our research will examine the following simple linear modes:
7.1 Gold Effect onAll Share Index (TASI)

TASI = + gold
where TASI is the monthly stock index in the Kingdom of Saudi Arabia, is the
constant (or the intercept), is the slope of the regression (which represents
the strength and the direction of the relationship between the dependent variable
and the independent variable), and gold is the monthly price of gold.
The regression functions of TASI:
TASI = 1 + 2 ( gold ) .
The dependent variable is Tadawul All Share Index (TASI) and the independent
variable is gold. Because of the error term and assumption of its probability distribution,
the econometric model will be

TASI : 1 + 2 ( gold ) + .
Estimated equation result:

TASI = 12, 500 4.03 GOLD + t .

(7.149)
The negative sign of the coefficient of gold indicates that there is a negative
relation between TASI and gold. Numerically, it means that an increase in gold price
by 100 $ will lead to decrease in the TASI by 403 points, which we think is a very
467
logical conclusion; in case of bad news, investors will short on equity and long in
gold market to be in the safe side.
By looking at the t-statistic (7.150), it is greater than the critical value (Tc=1.96)
and falls in the rejection region, which leads to rejecting the null hypothesis and
confirming the significant relation between gold and TASI.Moreover, this result is
supported by the P-value=(0)< at level 5% confidence.
Significance of the whole model:
By looking at the value of R square, it shows that 32.1% of the variability of
TASI, the dependent variable, is explained by the variation of the independent
variable, which is the gold price. The F-statistic is high and its probability is less
than 5% by far, which indicates for the significance of the model.
7.2 Gold Effect onTelecom andInfo Technology (TTISI)

The regression functions of TTISI:

TTISI = 1 + 2 ( gold ) .
The dependent variable here is telecom and info technology (TTISI) and the
independent variable is gold. Because of the error term and assumption of its
probability distribution, the econometric model will be

TTISI : 1 + 2 ( gold ) + .

TTISI = 4, 853 2.026 GOLD + t .

(9.629)
The negative sign of the coefficient of gold indicates that there is a negative
relation between TTISI and gold which supports our assumption.
The model suggests that an increase in gold price by 100 $ will lead to decrease
in the TTISI by 203 points, which we think is a very logical conclusion; which
implies that in case of bad events, investors will short on TTISI and long in gold
market to be in safe side.
In t-statistic (9.629), it is greater than the critical value (Tc=1.96) and falls in the
rejection region, which obviously rejects the null hypothesis and confirms the
significant relation between gold and TTISI; this result is also supported by
the P-value=(0)< at level 5% confidence.
R2 indicates that 46.2% of the variability of TTISI, the dependent variable, is
explained by the variation of the independent variable, which is the gold price.
468
7.3 Gold Effect onBanking andFinancial Services (TBFSI)

The regression functions of TBFSI:

TBFSI = 1 + 2 ( gold ) .
The dependent variable here is the banking and financial services (TBFSI) and
the independent variable is gold. Because of the error term and assumption of its
probability distribution, the econometric model will be

TBFSI : 1 + 2 ( gold ) + .

TBFSI = 33, 021 11.780 GOLD + t .

(8.897)
The negative sign of the coefficient of gold indicates that there is a negative relation
between TBFSI and gold. Numerically, it means that an increase in gold price by
100 $ will lead to decrease in the TBFSI index by 1,178 points, which we think is a
very logical assumption; in case of bad events, investors will short on TBFSI and
long in gold market to be in safe side.
By looking at t-statistic (8.897), it is greater than the critical value (Tc=1.96)
and falls in the rejection region, which leads to rejecting the null hypothesis and
confirming the significant relation between gold and TBFSI; moreover, this result is
supported by the P-value=(0)< at level 5% confidence.
By looking at the value of R square, it shows that 42.3% of the variability of
TBFSI, the dependent variable, is explained by the variation of the independent
variable, which is the gold price.
7.4 Correlation Between Stock Market Sectors andGold

We found that significant negative correlation exists between gold and TASI and
other three important sectors taken here. The correlation table also suggests that the
highest negative correlation exists between gold and telecommunication and information technology, i.e., 0.62, followed by banking and financial services, i.e.,
0.41. The joint effect is experienced with TASI where the correlation with gold is
0.39 (Tables37.2, 37.3, 37.4, and 37.5).

Table 37.2 Gold effects on All Share Index (TASI)
Table 37.3 Gold effects on telecom and info technology (TTISI)
Table 37.4 Gold effects on banking and financial services (TBFSI)
469
470
Table 37.5Correlations
with gold

Sectors
Banking and financial services
Telecommunication and
TASI
Correlation with gold

0.41
0.62
0.36
8 Conclusion
As we have mentioned in several literatures which support that gold and equity are
very important sources of alternate investment, therefore this research has been carried out between gold and Tadawul All Share Index (TASI) as well as gold and two
important sectors, i.e., banking and financial services (TBFSI) and telecommunication and information technology (TTISI) of Saudi Economy to test the relationship
so that it will help the investors and financial analysts to make the financial and
portfolio decisions.
The correlation of gold with TASI as well as the other two important sectors
shows significant negative relationship which strengthens our hypothesis of the
negative relationship of gold and stock market.
The negative sign of the coefficient of gold indicates that there is a negative relation between TASI and gold, which we think is a very logical conclusion; in case of
bad news, investors will short on equity and long in gold market to be on the safe
side. The negative sign of the coefficient of gold indicates that there is a negative
relation between TTISI and gold which supports our assumption. The model suggests that an increase in gold price by 100 $ will lead to decrease in the TTISI by
167 points, which we think is a very logical conclusion; in case of bad events, investors will short on TTISI and long in gold market to be in safe side. The negative sign
of the coefficient of gold indicates that there is a negative relation between TBFSI
and gold. Numerically, it means that an increase in gold price by 100 $ will lead to
decrease in the TBFSI index by 1178 points, which we think is a very logical
assumption; in case of bad events, investors will short on TBFSI and long in gold
market to be in safe side.
References
Abdul Basit (2013) Impact of KSE-100 index on oil prices and gold prices in Pakistan. IOSR J Bus
Manag (IOSR-JBM) 9(5):6669, e-ISSN: 2278-487X, p-ISSN: 2319-7668
Ahmed AR, Talib NBA, Hag IU, Khan MNA (2013) How gold prices correspond to stock index: a
comparative analysis of Karachi stock exchange and Bombay stock exchange. World Appl Sci
J 21(4):4854910. ISSN 1818-4952
Ahuja AK, Makan C, Chauhan S (2012) A study of the effect of macroeconomic variables on stock
market: Indian perspective, working paper, University of Delhi. http://ssrn.com/abstract=2178481
Barunik J, Kocenda E, Vacha L (2013) Gold, oil, and stocks. http://ssrn.com/abstract=2304771 or
http://dx.doi.org/10.2139/ssrn.2304771
471
Baur DG, Lucey BM (2010) Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold,
The Financial Review 45(2010):217229
Contuk FY, Burucu H, Gngr B (2013) Effect of gold price volatility on stock returns: example
of Turkey. Int J Econ Financ Stud 5(1). ISSN: 1309-8055 (Online)
Coudert V, Raymond-Feingold H (2011) Gold and financial assets: are there any safe havens in
bear markets? Econ Bull 31(2):16131622
Giam QD, Sriboonchitta S (2009), Cointegration and causality among international gold and
ASEAN emerging stock markets, Dec. 2009, 111, SSRN-id1533919
Martin SM, Yunita A (2012) Gold versus stock investment: an econometric analysis. Int J Dev
Sustai, ISDS Article ID: IJDS12031001
Sarbapriya R (2012) Testing granger causal relationship between macroeconomic variables and
stock price behaviour: evidence from India. Adv Appl Econ Financ 3(1):470481, ISSN
2167-6348
Sharma GD, Mahendru M (2010) Impact of macro-economic variables on stock prices in India.
Glo J Mana Bus Res 10(7). http://ssrn.com/abstract=1827462
Subarna SK, Zadeh AHM (2011) Co-movements of oil, gold, the US dollar, and stocks. Mod Econ
3:111117
Sujit KS, Rajesh Kumar B (2011) Study on dynamic relationship among gold price, oil price,
exchange rate and stock market returns. Int J Appl Bus Econ Res 9(2):145165
Wang L (2012) Investment in gold an empirical study of the gold return from 1090s to 21st,
working paper series. Applied Economics and Finance, Copenhagen Business School, Jan.
2012, 1100
www.tadawul.com.sa
Chapter 38
Waning theChallenges intheImplementation

ofSupply Chain Management Information
System: AStudy oftheIndian Automobile
Industry
ManishaSeth, RaviKiran, andD.P.Goyal
Abstract The implementation of Supply Chain Management Information System
(SCMIS) faces severe challenges, and the studies have shown a dismal picture about
its implementation success. SCMIS provides high-quality, relevant, and timely
information flow that effectively supports decision making for inventory replenishment, for capacity activation, and for synchronizing material flows at all tiers within
the supply chain. Thereby it plays an increasingly critical role in the ability of firms
to reduce costs, increase responsiveness, gain competitive advantage, and achieve
better coordination. The implementation of SCMIS is a complicated process with
significant risk. The studies have revealed that the success in implementing these
systems is not very encouraging. Therefore, it is necessary to establish the challenges in SCMIS implementation and their severity. Studies on the failure factors of
the ERP system have already been done by various researchers. The research on
SCMIS an interorganizational system is in its early stages and is still to receive that
much attention as its predecessor, whereas barriers for its implementation are more
severe. In this paper, an attempt has been made to establish the challenges being
faced for the successful implementation of the system.
Keywords Supply Chain Management Information System Impediments
Barriers Challenges Interorganizational system Technical barriers Human barriers
M. Seth (*)
Assistant Professor, Hierank Business School, Noida 201301, UP, India
R. Kiran
Professor, School of Behavioral Sciences and Business Studies, Thapar University,
Patiala-147004, Punjab, India
D.P. Goyal
Professor, Information Management, Management Development Institute,
Mehrauli Road, Sukhrali, Gurgaon 12207, Haryana, India
Springer India 2015
473
474
M. Seth et al.
1 Introduction
Supply chain management (SCM) has become a very important and critical issue
for an organization due to globalization (Gunasekaran 2004) and ever-increasing
competition. It has been recognized by many organizations as a strategy to attain
business goals (Altekar 2005; Chan and Lee 2005). SCM aims at the movement of
goods and services from one end of the chain to the other through different stages
so as to improve the efficiency, effectiveness, productivity, and profitability of the
entire process. Apart from the movement of goods and services, information is
another major flow in supply chain management. It serves as a lubricant that allows
other supply chain drivers to work together with the goal of creating an integrated
and coordinated supply chain. Information sharing in SCM is receiving attention for
achieving global competitive advantage (Khurana etal. 2011). The flow of information has gained importance due to the advancement in information technology
(Billington etal. 2004), which facilitates its movement between internal and external customers, suppliers, distributors, and other partners in a supply chain. Studies
show increase in the operational efficiency when information is readily available to
the trading partners (Gaur etal. 2005). Thus, information technology (IT) in supply
chain management (SCM) has become a very important (Li etal. 2009) and critical
issue for an organization due to globalization (Gunasekaran 2004) and ever-
increasing competition. SCMIS is an extension of ERP as shown in Fig.38.1
(Mller 2005) with additional functions and roles in interorganizational systems
and not limited to intraorganization alone.
These systems not only increase the efficiencies of the internal processes but create
an effective interactive medium with its suppliers upstream and its customers downstream. However, the achievement of these above-mentioned benefits depends upon the
effective implementation of the system (Moon 2007). Implementing these systems is a
complex, lengthy, and expensive process. These systems require huge commitment of
EAI
SCM
B
SRM
ERP
2
B
CRM
CPM
PLM
HRM
Fig. 38.1 ERPII conceptual

framework (Moller 2005)
B2E
B
2
C
38 Waning theChallenges intheImplementation ofSupply Chain Management
475
Table 38.1 Experience of ERP users with regard to enterprise software

Year
2012
2011
2010
2009
Cost
$7.1MM
$10.5MM
$5.5MM
$6.2MM
% of cost
overruns
53 %
56 %
74 %
51 %
Duration
17.8 months
16 months
14.3 months
18.4 months
% of duration
overruns
61 %
54 %
61 %
36 %
% receiving 50 %
or less benefits
60 %
48 %
48 %
67 %
funds, time, and expertise. There is a strong evidence in the literature that the implementation
of ERP projects was either not completed on time or did not bring about the planned
effects and even exceeded their estimated costs. The research by Panorama consulting
solutions summarizes the experiences of 172 ERP customers with regard to enterprise
software, vendors, consultants, and implementations overall.
Table38.1 shows the average cost of implementation for the last 4years to be $7.3
million dollars and average duration for implementation to be 16.6 months. Further
approximately 59 % of the projects have exceeded their planned budgets, 53 % have
exceeded their planned durations, and about 56 % of respondent organizations have
received less than 50 % of the benefits that was expected from the system.
The high failure rates suggest that understanding and implementing the information
system is a challenging task (Al-Mashari etal. 2006). Too much focus is on the
technical and financial part of the project, and often the nontechnical issues are
neglected. Leon (2008) defines these systems as peoples project. Therefore, SCMIS
must be viewed in a different perspective, as a new business endeavor and not just
an IT project. Changing this mindset will reduce the failure rate in the implementation of these enterprise systems.
Hence, in addition to technical factors, there are organizational, human, interorganizational, and other issues that need to be addressed for the successful implementation of
SCMIS projects. Therefore, conducting research is crucial in order to have a successful
implementation of these SCMIS projects. Thus, the study is being undertaken to find the
challenges in implementing SCMIS in the Indian automobile industry.
2 Theoretical Background
2.1 Challenges forSCMIS Implementation
Based on the extensive review of literature for the challenges or barriers (used interchangeably) to the successful implementation of SCMIS, we attempted to categorize
them into six broad categories:
(a) Financial barriers
The research by Kang etal. (2012) considers financial hindrance as a prerequisite
for any implementation. Huge investment is required for the implementation of
SCMIS (Gebauer and Buxmann 2000). Cost benefit analysis is done to justify
476
M. Seth et al.
the investment. The various costs involved are cost of the software, migration of
legacy data, implementation consultant cost, internal project team costs, training
cost, and post-implementation maintenance cost. Both tangible and intangible
benefits accrue from the implementation of the system. The company analyzes
economic feasibility and often fails to draw a clear return from the investment
that is being transpired. Thus, unclear ROI from the system forms one of the
major barriers for the implementation of the system (Koh et al. 2008).
(b) Organizational barriers
One of the prime hindrance factors is the lack of top management support,
vision, and focus. Various researchers like Supramaniam and Kuppusamy
(2011), Shah etal. (2011), Finney and Corbett (2007), Bhatti (2005), and Wong
etal. (2005) have stressed that if there is lack of commitment and participation
from the top management, there are huge chances of failure. Poor middle management support will also have an adverse effect on the day-to-day operations
associated with SCMIS, and the reluctance for adoption of the system by middle management is one of the impediments for the successful implementation of
the system (Terziovski etal. 2003). Middle management acts as a change agent,
and their uncertainty management is important in assisting their employees in
the change transition (Herzig and Jimmieson 2006).
There should be a formal communication about the benefits of the system to
the users (Sarker and Lee 2003), and the lack of clear formal communication
among implementation team, software provider, and the users would lead to
informal channels of communication which may lead to inaccurate flow of
information in the organization, thus forming a barrier to successful implementation of the system. Change management (Alballaa and Al-Mudimigh 2011;
Leon 2008) is one of the factors that affect the ERP adoption in organizations.
The studies by Lindley etal. (2008), Esteves etal. (2003), and Umble et al.
(2003) consider the lack of change management as a hindrance for successful
implementation, and Kim etal. (2005) pointed that unless change management
is appropriate in an organization, it would be difficult to adapt to the new system
and to obtain total benefits from it.
Poor quality business process reengineering (BPR) leads to unsuccessful
implementation of the system. Most of the researchers are of the opinion to fit
business process to the system so that minimal customization is to be done.
According to Bingi etal. (1999), implementing an ERP system involves reengineering the existing businesses to the best business process standard. Another
challenge faced is the absence of readiness assessment before project implementation. Individuals and organizations might not be ready for complex level
of integration leading to unsuccessful implementation of the system.
Finally an unrealistic expectation from both the management and the user
side forms the barrier to the successful implementation of the system. The management has to be prepared for the decrease in the productivity of the people in
the initial phase of the implementation.
(c) Interorganizational barriers
Study by Weston (2003) has divided barriers to the implementation of ERP
II system into two categories: general business issues and issues related to
477
technological infrastructure. The study refers issues of collaborative BPR or

business management process as a barrier to implementation. Further the
lack of trust among supply chain members has been considered by various
researchers (Vangen and Huxham 2003, Schoorman etal. 2007) as a barrier
to information sharing. Another barrier is inter-rivalry as researched by
Fawcett etal. (2012) which includes the lack of willingness to share information, risk, and rewards. Further due to cultural differences, span of relationship, and volume of transactions, trading partners may be unwilling to
collaborate leading to the unsuccessful implementation of the system.
In addition the lack of shared vision between supply chain partners leads to
less information sharing (Boddy etal. 2000; Mentzer etal. 2000) and more
resistance from people leading to reduction in the quality of information being
shared, thus causing less successful implementation of the system. Most of the
executives lack their own business understanding which becomes more challenging when external partners are included (Koh etal. 2011).
(d) Human barriers
The resistance to change by the people (Tapp etal. 2003) forms one of the critical
barriers to successful implementation of enterprise system. Leon (2008) in the
study has stressed that system implementation is not a technology but a peoples
project. Lack of sufficient training will result in users that are unable to run the
system properly (Umble et al. 2003). Insufficient training and education will
increase the resistance associated with the system and would form a deterrent to
the implementation success.
Lack of users participation, involvement, and motivation will act as a
hindrance factor to the successful implementation since users would be less
motivated to use it and at the same time they might fear the new system. Studies
by Zhang etal. (2002), Franoise etal. (2009), and Ngai et al. (2008) include
two important areas for users participation, i.e., when the organization is defining the need for adoption of the system and during the implementation phase.
(e) Project management barriers
Lack of effective project management methodology plays a major role in the
failed implementation of the systems. Without proper project management, system will not be able to deliver the promised functionalities and will experience
time overrun and cost overrun. According to the study by Umble et al. (2003),
one of the reasons for system implementation failure is the underestimation of
the scope, size, and complexity of the project. The lack of experienced project
leader also becomes a hindrance factor. He also plays a crucial role in the selection of the implementation team (Sarker and Lee 2003). Weak implementation
team forms a hindrance to the implementation of the system (Gargeya and
Brady 2005) since it is the responsibility of the team to coordinate, communicate, and reduce the resistance among the users.
(f) Technical barriers
SCMIS involves complex transition from the legacy systems to an integrated
interorganizational system; therefore, problems interfacing with existing systems
and hardware difficulties (Umble et al. 2003) lead to the failure of the IT system.
Al-Mashari etal. (2006) and Jarrar et al. (2000) in their study emphasize that lack
478
M. Seth et al.
of adequate IT infrastructure in hardware and networking will lead to the failure

of ERP system. Another important barrier to the successful implementation of the
system is related to data standards and accuracy (Kang etal. 2012). In case standardized data is not there between disparate systems, erroneous data will be
1. Lack of top management support
2. Organization not committed to change
3. Poor middle management support
4. Unrealistic expectation
ORGANIZATIONAL BARRIERS
1. Huge investment
2. Unclear ROI
3.Financial constraints for high cost of
maintenance
S
C
M
I
S
FINANCIAL BARRIERS
1. Inappropriate system integration
2. Poor data quality
3. Poor product selection
4. Poor quality of testing
5. Poor IT infrastructure
TECHNOLOGICAL BARRIERS
1. Lack of users participation
2. Resistance to change
3. Lack of employees motivation
4. Reluctance to use the system
HUMAN BARRIERS
1. Lack of agreement on project goals

2. Lack of full time and balanced project team
3. High attrition rate of project team members
4. Too tight project schedule
I
M
P
L
E
M
E
N
T
A
T
I
O
N
S
U
PROJECT MANAGEMENT BARRIERS
C
C
1. Lack of trust between members

2. Lack of willingness to collaborate.
3. Lack of standard data consistency
4. Lack of long term relationship among chain
members
E
S
S
INTERORGANIZATIONAL BARRIERS
Fig. 38.2 Conceptual model for impediments in the successful implementation of SCMIS
479
spanning to various organizations. Data flowing through the system is like blood
flowing in the body, and therefore poor data conversion and quality may cause
negative domino effect in the organization, thus causing delay in the implementation of the system and may even lead to a failure of the project.
Overreliance on heavy customization would lead to higher implementation
cost, causing project delays and unreliable system. Larger companies with
enough resources choose this type of reengineering approach where heavy customization of the software is done which otherwise becomes a barrier. Since
SCMIS is an interorganizational system, therefore customization further makes
it difficult to use the software on disparate systems. Software upgrades end up
in extensive software changes which require a huge financial implication
(Subramoniam etal. 2009). Relying heavily on customization to fit with the
business processes might lead to sacrificing best practices set in the system
(Wong etal. 2005).
The conceptual model is shown in Fig.38.2. The model shows the various
impediments, namely, organizational, financial, human, technological, project management, and interorganizational which should be waned for the successful implementation of SCMIS.
3 Research Objectives andMethodology

The main objective of this paper is to identify various challenges being faced by
organizations for the implementation of SCMIS and to calculate the severity of the
impediments in the implementation of SCMIS.
The various challenges faced by the organizations for the implementation of
SCMIS are based on the previous studies reported in the literature and discussions with the researchers, experts, and practitioners in this field. For the purpose of assessing the severity of the barriers, each was analyzed on multiple
dimensions which added to a total of 40 dimensions for all 6 barriers taken
together. The questionnaire covering these dimensions was framed on 5-point
Likert scale ranging from 1 (no problem at all) to 5 (very serious problem) to
measure the attitude of respondents for every question. Thus, the higher the
score, the higher the severity of the barrier and its dimensions. A self-designed
and pretested questionnaire was administered to 356 executives of two main
automotive companies, namely, Maruti Suzuki India Ltd. and Honda Motors
India Ltd., including their suppliers and dealers located in the national capital
region (NCR) of India. Before issuing questionnaire to the respondents, the
validity was established using a panel of experts from the area of SCM and discussions with academicians and implementers. Validity of the instrument was
done to see if the questionnaire is measuring what it intended to measure and if
the questionnaire is comprehensive enough to collect all the information needed
to address the purpose. A total of 137 respondents or 38 % have responded to
the questionnaires.
480
M. Seth et al.
The data were analyzed in SPSS and the reliability was checked. A Cronbachs
alpha coefficient for the data was 0.83 which is greater than 0.7; therefore, it was
acceptable.
To measure the severity of the barriers, weighted mean was calculated using the
formula given below:
5
Severity of a variable = xi yi / total no.of respondents
i =1
where
xi = no of responses for a rating score
yi = rating score (i = 1, 2, 3, 4,5)
Higher severity means high barrier to the successful implementation of SCMIS;
therefore, it was given the highest ranking.
4 Data Analysis
The profile of the respondents showed that 86.8 % of them were males, and based
on the number of years of work experience, 34 % of the respondents had experience
less than 5 years, 38.6 % of respondents had an experience between 5 and 10 years,
and 27.4 % of respondents had work experience of more than 10 years.
The severity was calculated for all the barriers as given in Table38.2, and
their ranking was done according to it. The table shows the severity score of
Table 38.2 Severity of the variables
Barrier
1. Organizational
barrier (OB)
Variable Dimension
OB 1
Lack of top management
support
OB 2
Lack of alignment between IT
and organizational objectives
OB 3
Organization not committed
to change
OB 4
Poor BPR failure to redesign
business process
OB 5
Absence of readiness
assessment before
implementation
OB 6
Poor middle management
support
OB 7
Perspective of SCMIS as just
a technical system
OB 8
Unrealistic expectation
OB 9
Inexperienced consultants
Variable
severity
4.56
SD
0.6
4.17
0.6
4.11
0.8
4.06
0.8
3.32
0.9
3.98
0.8
3.43
0.9
3.67
3.64
0.8
0.7
Barrier
severity
3.883
(continued)
Table 38.2(continued)
Barrier
2. Financial barrier
(FB)
Variable
FB 1
FB 2
FB 3
3. Technological
barrier (TB)
TB 1
TB 2
TB 3
TB 4
TB 5
TB 6
TB 7
TB 8
4. Human barrier
(HB)
HB 1
HB 2
HB 3
HB 4
HB 5
HB 6
5. Project
management
barrier (PMB)
HB 7
HB 8
PMB 1
PMB 2
PMB 3
PMB 4
PMB 5
6. Interorganizational
barrier (IOB)
PMB 6
IOB 1
IOB 2
IOB 3
IOB 4
IOB 5
IOB 6
Dimension
Huge investment
Unclear ROI
Financial constraints for high
cost of maintenance
Inappropriate system integration
Overreliance on heavy
customization
Poor data quality
Lack of data standards
Poor product selection
Poor quality of testing
Poor IT infrastructure
Lack of data and information
security
Lack of users participation
Ineffective communication with
the users
Lack of sufficient training to
end users
Inadequate employee
involvement
Lack of employees motivation
Users dont understand the
benefits of the system
Resistance to change
Reluctance to use the system
Lack of effective project
management methodology
Lack of agreement on project
goals
Lack of full-time and balanced
project team
High attrition rate of project
team members
Lack of a project champion/
establishment of an
inexperienced project manager
Too tight project schedule
Technological incompetence
within trading partners
Lack of willingness to
collaborate
Lack of trust between members
Culture of the partner may not
support sharing of the
information
Lack of standard data
consistency
Lack of long-term relationship
among chain members
Variable
severity
4.37
3.43
3.60
SD
0.5
0.97
0.74
3.39
3.43
0.86
0.85
4.2
3.08
3.46
3.42
3.72
4.23
0.79
0.86
0.9
0.85
0.97
0.69
4.08
4.14
0.71
0.72
4.21
0.72
3.94
0.85
3.83
3.82
0.83
0.83
4.25
3.73
4.19
0.64
0.74
0.68
0.76
3.92
0.7
3.42
1.09
4.17
0.74
3.55
3.79
0.78
1.04
3.86
0.89
3.91
3.75
0.8
0.92
3.93
0.8
3.33
0.84
Barrier
severity
3.802
3.617
4.00
3.874
3.761
482
M. Seth et al.
organizational barrier has a score of 3.883, financial barrier has a score of 3.802,
technical barrier has 3.617, human barrier has a severity score of 4.00, and project management and interorganizational barrier have severity scores of 3.874
and 3.761, respectively. The variable with maximum severity for organizational
barrier is the lack of top management support, for human barrier the resistance
to change, for financial barrier the huge investment, for technological barrier the
lack of data security, and trust among the trading members forms the severe
variable for the interorganizational barrier.
5 Discussion
The highest severity among the barriers is that of human which is supported by Leon
(2008) who stressed that system implementation is not a technology but a peoples
project. According to him 69 %, 28 %, and 13 % failure rate of the ERP systems is due
to people, process, and technological problems, respectively. The findings from the
study by Hawking et al. (2004) also reinforced enterprise resource planning implementations as people focused projects which rely heavily on change management for
success. Further studies on information system also indicate that failure is largely due
to organizational and social, rather than technical, factors (Fitzgerald and Russo 2005).
Among the human barriers, the most important is users resistance to change.
People resist change because of several reasons like rationale for change not clear;
nonparticipation of the users in the change process; modification in the working relationships between people; no proper communication with the users; threat of job,
power, or status; and benefits not adequate for the effort involved in learning. The
employees usually do not resist technical change, but the social change that accompanies it is resisted. Therefore, at the outset, it is very important for an organization to
understand the nature of resistance, before adopting any strategy for minimizing this
resistance. The most frequently used strategies to overcome resistance to change are
communication, user participation, user involvement, and training.
6 Implications andLimitation oftheStudy

The contributions of the paper are important for industry practitioners, researchers,
and policy makers. The impediments and their dimensions will provide a useful
guide for industry practitioners who are planning to implement SCMIS in their
organizations. The study can help them to improve decision making for successful
implementation of SCMIS right from inception and subsequent realization of the
enormous benefits that will accrue with right implementation.
The major limitation of this study is that the findings were limited to only two
major players of the automotive sector of the national capital region of India. Thus, it
is recommended that similar research studies should be conducted by taking a larger
483
sample of organizations in automotive industry from other parts of India so as to

include any other dimension whatsoever that might have been left out while covering
these two organizations only of the automotive industry. Secondly, the study does not
include the views, opinions, and perceptions of software experts that are involved in
the development of SCMIS from organizations like IBM, Oracle, and SAP.
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