Pijm Sep Oct08

Prabandhan: Indian Journal of Management • September-October, 2008 1

From the Editor’s DeskIn the 42nd year of our long and eventful journey, with great pride we bring to you the maiden issue of Prabandhan: Indian Journal of Management.Indian Journal of Marketing and Indian Journal of Finance received an unparalleled response and we received articles on diverse fields that could notbe circumscribed to the marketing and financial domains. In order to cater to the rapidly expanding world of management and to complement IndianJournal of Marketing and Indian Journal of Finance, we have started publishing Prabandhan: Indian Journal of Management. The journal aims toencourage and promote pragmatic research across a wide breadth of management topics; and has articles pertaining to the following fields of management:1. Human Resource Management2. Organizational Behaviour3. International Business4. Economics5. Data Analysis and Decision Making6. Technology and Operations Management7. Strategic Decision Making8. Negotiations and Competitive Decision Making9. Ethics in Management10. Entrepreneurship and Innovation11. Public Management12. Rural ManagementWe hope that you will continue to provide us with consistent support and patronage. With your unvarying encouragement, the journals are sure to crossmany milestones and achieve greater benchmarks in terms of quality and standards.The world is becoming more interconnected and organizations that want to succeed in this new environment need to become more connected as well.It is a challenge to individuals, teams, businesses, and the wider world. To innovate, many high performing firms are collaborating beyond theirorganizations with their extended networks of suppliers, customers, business partners and others. The paper “Innovation and Innovative SolutionsThrough Partnerships” tries to examine the role of organizational partnership on innovation. The purpose of this paper is to examine recent patternsand developments in the literature on innovations in business through collaboration.Most of the Chinese manufacturing units like toy manufacturing units, clothing, shoe, electronics and many others could be designated as sweatshopsstill in the early 21st century. Chinese Laws were not being enforced and this gave the scope to the manufacturer to continue their practices in the samemanner as had been done in the past. The Chinese did not have any other option due to their extreme poverty and they rushed to the sweatshops to helpthe MNCs or their subcontractors in China to cope up with the rapid global competition to produce the quality products at the cheapest possible price.The article “Chinese Sweatshops: The Result of Outsourcing by Global Business Giants” brings to light the pathetic plight of the Chinese workersand how the MNCs exploit workers and are violating human rights in China.Special economic zone is a “duty free enclave” that is to be treated as foreign territory for the operations of trade, duties and tariff. The SEZ are governed byspecial legislative policies and systems, which are otherwise not applicable in the country. The concept of special economic zones is a powerful instrument,which is designed to achieve the rapid growth in manufacturing, employment and export. It offers the only way in filling the gap between China, South EastAsian nations and India in terms of manufacturing and employment. It is also an essential tool to attract foreign capital, technology and will help to integratenational economy with global economy. In the paper “Special Economic Zones In The Emerging Economic Scenario: Issues and Challenges” an efforthas been made to examine the government policy on SEZ and thereafter an attempt has been made to analyze critically the implications of SEZ in theagricultural sector, food security situation, displacement of masses, fiscal deficit, external sector, social sector and labour laws.Polyhydron Pvt. Ltd. is a flag ship company of Polyhydron Group of Companies. It was established in 1982 and manufactures Hydraulic Radial PistonPumps, Valves and Accessories. Its products are priced unbeatably low, and Polyhydron Pvt. Ltd. has changed the price marginally in the last 25 years.Polyhydron is known for its ‘Ethical Management’. At Polyhydron Pvt. Ltd., honesty is not a policy, but ‘the policy’. It believes in building qualityfrom the SOURCE. Self-inspection is the Best Inspection is also its policy. The paper “Ethics In Business and Value Addition” A Case : PolyhydronPrivate Limited ;Belgaum - Karnataka” throws light on the importance of ethics in business and the value addition because of ethical conduct, andexemplifies the same with a case study on Polyhydron Pvt. Ltd., Belgaum.Applying the methods of the neurology lab to the questions of business world has become a common phenomenon. Use of neuroscience technologiesto boost advertising effectiveness or attain tangible marketing objectives may prove to be a potential danger to the consumer’s autonomy and choice indeciding upon a positive buying behavior. One can argue that the purpose of all marketing initiatives is to manipulate consumer behaviour yet it is anattack on the autonomy and private thought. Adding to the existing threats, neuroscientists are busy exploring possible solutions with intrusive technologyto decipher a person’s mental movements. The paper “Ethical Acceptability of Neuromarketing- Relevance, Limits and Limitation” tries to relatethe application of neuroscience to the field of marketing/advertising and examine its ethical acceptability, relevance, limits and limitations.For India, growth is an imperative. The country aspires to be a major economic power house by the end of the century’s first quarter. To achieve that,India needs to accelerate and maintain an economic growth rate that is beyond the 6-7% per annum that has been seen since the early 1990s. Strong andcapable leaders are the most critical resource for a country’s development. A nation especially a developing one, needs leaders not just in the businessarea but in all walks of life, especially political and social. The paper “Leadership through Competing and Caring” discusses the guiding principlesthat a leader, in the current Indian context, must use to effectively steer his organization and the wider community around it to success.Energy resource and transport facility are the most important resource to define the wealth of a nation. Transport consumes the petroleum resource likepetrol, diesel and gas, which are limited energy resources available in nature. For the past two decades, the cost of the petroleum products areincreasing and fuel saving or fuel economy are the trend in the universe. Economically consuming these resources is a way to save energy resource andwealth of the transport department and the nation. In this concern, the paper “Minimizing Fuel Expenses in Fleet Management by Using Theory ofConstraints” concentrates on fuel consumption in a set of selected service industry transport department buses. The successful functioning of thetransport department and its profit is limited by a number of constraints. Breaking the constraints is observed as a way to improve the profit by usinga thinking process tool -Theory of Constraints. This tool concentrates on breaking one of the selected constrains at a time instead of governing theconstraints for achieving the goal of maximizing profit by fuel economy.

Mrs.S.GilaniEditorPrabandhan: Indian Journal of Management

2 Prabandhan: Indian Journal of Management • September-October, 2008

PRABANDHAN: INDIAN JOURNAL OF MANAGEMENT

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CONTENTS

INNOVATION :Innovation and Innovative Prof. Renu Misra 3Solutions Through Partnerships Dr. Neha Parashar

INTERNATIONAL BUSINESS :Chinese Sweatshops: The Result Indrani Majumder 9of Outsourcing By GlobalBusiness Giants

ECONOMICS:Special Economic Zones in the Prof. N.K. Sharda 22Emerging Economic Scenario: Dr. Kulbhushan ChandelIssues and Challenges Dr. Raj Kumar

ETHICS IN MANAGEMENT:“Ethics in Business and Dr D.N.S Kumar 28Value Addition” A Case : Spardha KheraPolyhydron Pvt. Ltd.,Belgaum-Karnataka (India)

Ethical Acceptability of Nazia Sultana 31Neuromarketing- Relevance, Ram NangunooriLimits and Limitations

HUMAN RESOURCE MANAGEMENT :Leadership Through Competing Dr. P.K. Jain 34and Caring I.P. Singh

Minakshi JainOPERATIONS MANAGEMENT :Minimizing Fuel Expenses in K. Velmanirajan 36Fleet Management by UsingTheory of Constraints


Innovation and Innovative Solutions Through Partnerships

1. INTRODUCTIONThere is a general understanding that real value in the sciences, arts, and commerce comes largely from the process of collaboration.Collaboration is the process of shared creation. It is about collective intelligence. The whole is greater than the sum of the parts.Success through collaboration is far from inevitable. The underlying assumption is that once the benefits of collaboration areapparent to relationship participants, there is “smooth sailing” for collaborating organizations (Levitt, 1986).Leading and managing strategic partnerships is not new. For years, companies have merged or been acquired for thepurpose of delivering increased value to their customers. Reasons include reducing total capital investment, faster marketaccess and payback, technology exchange, joint research and production (Contractor and Lorange, 1988). However, asglobalisation, highly diverse workforces and new ways of competing reshape the business landscape (Naylor, 2004), thereis growing evidence to suggest that using collaborative networks to leverage all elements of a firm’s intellectual capital isnot simply a business advantage, it is a business imperative (Drucker, 1999).It has frequently been argued that technology exchange is prompting cooperation between companies (Horton and Richey,1996). As technology life cycles become shorter and shorter, it is becoming increasingly difficult for firms to maintainexcellence in all product lines (Bleeke and Ernst, 1991; Business International Corporation, 1987; Jorde and Teece, 1989;Ohmae, 1989). By pooling complementary technologies, firms can gain necessary technologies that will enable them toproduce more sophisticated products at a much faster rate than could be achieved by “going-it-alone.” Moreover, the risk ofinvesting in a project can be minimized through collaborations (Business International Corporation, 1987; Contractor andLorange, 1988; Horton and Richey, 1996). The world is becoming more interconnected and organizations that want tosucceed in this new environment need to become more connected as well. This is not simply an information technology (IT)architecture issue, but a challenge to individuals, teams, businesses, and the wider world: How can we work together better?How can we pool our knowledge to improve results? How can we make processes more efficient, while delivering personalcare and service when it matters most? How can we manage the flood of information that’s overflowing our inboxes, ourmobile phones, and our lives? Microsoft believes that the critical factor for organizational success is empowering people:specifically, those people who create, analyze, distribute or consume information as part of their jobs – the informationworkers. In a time of rapid change, agility depends on the ability to adapt and align quickly. Rigid, centrally-managedsystems can’t do that. Neither can organizations running yesterday’s technology as if it were “good enough” for today’schallenges. But give information workers powerful tools that put them in control of their business environment, tools thatmake working together as natural as working alone, and as familiar as the basic applications they already know – then youhave the kind of agility at the point of contact to drive innovation, drive insight, and drive success.2. AN OVERVIEW ON COLLABORATION:To sustain and accelerate our environmental progress, we must constantly search for better ways of solving environmentalchallenges. Innovative collaboration is one of the ways to solve such problems. Collaboration with innovative strategieskeeps the world turning. Better, faster, more sustainable results are only achieved through collaboration. But effectivecollaboration is not that straightforward.Technically, collaboration is a process of participation through which people, groups, and organizations work together toachieve desired results. Collaboration can occur among individuals, groups, or organizations at the same time (synchronous)or with a time delay (asynchronous). Collaboration can also occur between people located in the same place or separated byphysical distance. The participants of the collaboration believe that by bringing together diverse interests, skills, resourcesand sensitivities, there will be a greater ability to understand the problem before them, and a more effective solution islikely to emerge than that which any of them could develop alone.Collaboration occurs at various levels:· Informal Collaboration - This is the simplest level of collaboration, involving activities which are unstructured and informal.

Examples of this level of collaboration would include one-to-one communication, discussion groups, and one-off meetings.· Process / Project Collaboration - The next level of collaboration comprises of processes that are more structured in

nature, which have defined start and end points, as well as a defined flow of events between the two. Examples of theseactivities would include sale order, purchasing requisition, and claims settlement processes.

* Prof. Renu Misra**Dr. Neha Parashar

* Associate Professor, Symbiosis Centre for Management and Human Resource Development, Pune (Maharashtra)Email:[email protected]** Assistant Professor, Symbiosis Centre for Management and Human Resource Development, Pune (Maharashtra)Email: [email protected] / [email protected]


· Extended Collaboration - The third level of collaboration involves activities that extend beyond the enterprise to includecustomers, partners, and vendors. Activities in this category would include interaction with customer focus groups,product design sessions with vendors, and delivery of services or products by partners.

The facilitation of global expansion frequently motivates collaboration among firms. Alliances not only allow firms toovercome a country’s protectionist measures (Contractor and Lorange, 1988), but they also allow firms to gain knowledgeof unfamiliar business areas (Harrigan, 1984). In fact, recent events occurring in Western Europe provided a motivation forcollaborative alliance formation. As the countries in Europe continued their move toward economic integration, firms,fearing increased protectionism, scrambled to establish themselves as insiders. A common means of entry has been throughcollaborative alliances (Delachaux, 1990; Lei, 1990; Lynch, 1990; Magee, 1989). It has been argued that the accomplishmentof quasi vertical integration may be a rationale for forming alliances (Contractor and Lorange, 1988). Quasi vertical integrationmay represent the most desirable strategy for firms as opposed to complete integration or complete non-integration. Analliance can enable firms to experience the benefits of internalization, without incurring cost of integration, nor the strategicinflexibility it implies. Further, a firm can reduce its fixed costs by sharing through a collaborative alliance (Bleeke andErnst, 1991; Crouse, 1991; Ohmae, 1989). It has been suggested that the convergence and sophistication of consumer tastes arealso providing a rationale for collaboration (Gynes, 1991; Ohmae, 1989). Ohmae suggests that consumers in the Triad countrieshave access to the same information and are seeking similar products and lifestyles. Alliances can allow a company to market afull range of products to consumers around the world, without incurring the expense, both monetary and time, of “going-it-alone.” Thus, firms, in their effort to maximize profits, are being forced to develop new strategies to fit the rapid changes in theglobal business arena. Collaborative alliances offer companies numerous advantages as they operate within the changingenvironment. Collaboration provides a means of minimizing risk, of overcoming protectionism, of sharing fixed costs, ofmeeting consumers’ increasingly sophisticated and similar needs, and of accessing new technologies and marketing systems.

2.1 INTERSECTORAL PARTNERSHIP: A FORM OF COLLABORATIONIntersectoral partnering is the process of creating joint inter-organizational initiatives across two or three sectors. Thisstrategy generates sustainable solutions to development challenges by combining the distinct interests and resources ofdifferent actors. The three sectors of society are:Business: private, for-profit entities that produce private goods and services.Civil Society: private, nonprofit organizations that express community beliefs and values through service provision andadvocacy, and contribute to collective goods and services.Government: general and specialized governance institutions at the local, national, and international levels. ISPs are usuallyformed with representatives from local democratic governance institutions.

Chart: 1 Intersectoral Partnership

Social sector, or cross sector partnerships, by contrast, are formed explicitly toaddress societal issues of mutual concern to the parties involved (Waddock,1991), although a firm’s decision to enter into a social partnership may beprompted by stakeholder demands for business accountability and/or forinstrumental considerations, because the company perceives competitiveadvantage from the initiative (Selsky and Parker, 2005).A key hurdle to cross-sector relationships is overcoming the differentbackgrounds and values of the partners that can make knowledge exchangeespecially difficult (London et al., 2005). Alliances with nonprofit organizationscan provide a challenge to managers who often underestimate the complexity ofdealing with such groups (Hall and Vredenburg, 2005). Nonprofits have differentconcerns and cultures that business managers need to appreciate if they are toderive value from the relationship (Yaziji, 2004). However, companies that areopen to engaging with nonprofit stakeholders, have the communication skills todo so, and can assimilate the information received (Clarke and Roome, 1999), can gain competitive advantage from theacquisition and utilization of new knowledge they have accessed through the engagement (Sharma and Vredenburg, 1998).Example - Philippines: A Bisectoral Partnership: As a result of a major power crisis in the late 1980s and early 1990s, thePhilippine government sought private sector support in the form of a partnership. The private sector was needed to providecapital for additional power capacity, assistance in achieving project development and implementation of goals more rapidly,and training and technical assistance to local government units and implementing agencies. The government provided fiscalincentives, such as tax breaks and access to free land and fuel, and cost-sharing of those projects deemed the most difficult tofinance. These provisions enabled private sector firms interested in investing in the electric power infrastructure sector the


opportunity to do so under attractive commercial and financial terms. Thus, such a partnership produced results consistent withboth the investors’ financial and commercial objectives and met the government’s main need: additional power capacity. Today,the private sector has a significant role in the Philippines electric power infrastructure sector (Marks et al. 1997).Intersectoral partnering is both a process and a result. Partnerships in themselves are a valuable result since they provide astrong foundation for future collaborations.3. INNOVATION: AN OUTCOME OF COLLABORATIONNot that long ago, most executives viewed innovation as a matter of coming up with new products or services, which wasprimarily the job of the company’s R&D department. If pressed, they would have likely maintained that breakthroughinnovations – innovations that significantly change customer expectations, the basis for competitive advantage, or industryeconomics – were either the result of dumb luck, or originated with a visionary leader like Steve Jobs, Richard Branson orAkio Morita. But such views of innovation have become obsolete. Drivers such as globalization, the blurring of industryboundaries, the explosion in the availability and accessibility of information, the increasing dispersion of knowledge, andthe growing use of alliances and partnerships have dramatically shifted the landscape of innovation. As a result, it is urgentthat companies reexamine their assumptions about innovation and purge three common obsolete ideas:Innovation is all about coming up with new products and services. New products and services are vital to growth. But thereare several other ways in which companies can innovate. In particular, leaders need to ask themselves what new customersthey might serve and what these customers need, how they might configure their value chain differently, and what alternativeeconomic model they might use. Innovation is solely the job of the R&D department. “Research” and “development” arealways important in innovation. But every group inside the company and beyond it – such as partners, customers andsuppliers – need to be involved as well if you want to find opportunities to innovate that will produce competitive advantage.Breakthrough innovation occurs only through luck or a “stroke of genius” from a visionary leader. Yes, luck is good andhaving an innovative genius leading your company is wonderful. But the majority of companies can’t rely on either. So theyneed to design and implement a systematic innovation process to maximize the chances that they will identify and take tomarket new profitable opportunities time and time again.Few examples have been quoted to have an inside about innovative collaboration:1. Capgemini believes collaborative working is perhaps the single most important factor in achieving competitive advantageand long-term success for organizations.2. IBM and Nortel have formed an alliance to promote collaborative innovation between the companies and to aid carriersin meeting the opportunities and challenges of next generation services.Turning to the innovation field, studies consistently illustrate the importance of external linkages on innovative performance(Faems et al., 2005; Goes and Park, 1997; Laursen and Salter, 2006), and report increased collaborative ties betweenorganizations (Freeman, 1991). A firm’s position within its network and its experience of collaborative relationships arealso key determinants of innovation (Powell et al., 1996). Authors have considered the particular role of boundary spannerswho can act as information gatekeepers (Conway, 1995). External environments are viewed as sources of information(Koberg et al., 2000) and being open to the new ideas that these knowledge flows provide is a key predictor of firminnovative performance (Fey and Birkinshaw, 2005). Key managerial attributes for fostering innovation include having awide range of interests that facilitate environmental scanning, and an internal locus of control that enable managers toframe ideas as opportunities (Howell and Shea, 2001). However, despite the focus on inter-organizational ties within thisliterature genre, relations with nonprofit organizations have not been considered as a potential source of innovation.3.1 NEED FOR INNOVATIVE COLLABORATIONCollaboration is also a key factor in innovation and creativity in organizations, something that most organizations areconcerned about and interested in stimulating as a tool for competitive advantage and differentiation. Effective collaborationcan reduce elapsed time in situations where a large number of partners are involved, and the power of collaboration allowssmall work teams to resolve issues quickly and accelerate delivery. Collaboration is the life-blood that guides the flow ofconversation and creation of meaning in human systems.Moreover, partners engage in collaboration activity for a variety of reasons, and normally to achieve varied goals. Collaborationmust also be something an organisation needs and wants, the worth of which it can define. In fact, collaboration between governmentagencies, between subdivisions of government entities, between government and businesses, and between individuals and theirgovernment, is not new. This collaboration can lead to better service from government for its citizens, better decision-making, andimproved government processes, as well as the generation of an effective co-operation between government and private sector.Today’s global economy is presenting organizations of all sizes with new challenges:• Global permanently-connected customers, partners, and suppliers that are continuously driving the need for continued

agility in processes and people.


• Increasingly mobile global project teams, those are capable of working in multiple locations, time zones, and acrossorganizational boundaries.

• Pressures to become more transparent (to government, to customers, suppliers, and partners), yet at the same timereducing information risk.

• A global competition for talent as today’s workforce ages and the millennial generation arrives with its own values andexpectations.

• Ongoing technological innovation and the accompanying challenges of integrating useful new capabilities smoothlywith existing systems and practices.

Organizations need strong, secure networks that extend across their enterprise and beyond, while workers must manageconstant demands on their attention, master new skills, and find new ways to be productive in a more deeply connected,transparent workplace.In the New World of Work, organizations that can work together effectively will enjoy competitive advantages in a numberof areas. Those who sell information or expertise can draw on a wider pool of human talent and data to generate newinsights and new innovations, and bring them to market more quickly. Those whose businesses are built around fixedprocesses – manufacturing, distribution, resource extraction – can discover and drive new efficiencies that bring downcosts. Those who rely on expertise can cast a wider net for talent, seamlessly extending rich capabilities and access toremote and mobile users.For information workers, the New World of Work means new opportunities to add value, and a global marketplace in whichto offer their skills and expertise. Better collaboration tools can connect them easily with colleagues, managers and customers,minimize the time spent on low-value administrative activities, gather resources from disparate systems and applicationstogether in one productive environment, and reduce the burdens of “information overload.”3.2 BUSINESS MODEL INNOVATIONThere was a time, not so long ago, when “innovation” meant that companies needed to invest in extensive internal researchlaboratories, hire the most brilliant people they could find, and then wait patiently for novel products to emerge. Notanymore. The costs of creating, developing, and then shipping these novel products have risen tremendously (think of thecost of developing a new drug, or building a new semiconductor fabrication facility, or launching a new product into acrowded distribution channel). Worse, shortening product lives means that even great technologies no longer can be reliedupon to earn a satisfactory profit before they become commoditized. Today, innovation must include business models, ratherthan just technology and R&D. Business models matter. A better business model often will beat a better idea or technology.Consider Wal-Mart in retailing, Dell in PCs, or Southwest Airlines. But business models are not all the same. To innovate yourbusiness model, you must first understand what it is, and then examine what paths exist for you to improve upon it.Innovations that involve more than one element of the business model have a much better chance of being truly differentiating andsustainable. Commerce Bank is an example of a company which competes in an industry (retail banking) whose services arewidely viewed as commodities, so advantage is generally believed to be driven primarily by scale economies. Going its own way,Commerce Bank has innovated along all business model dimensions and has generated the growth and returns to show for it.• Value Proposition: The GE Aircraft engines unit crafted an innovative value proposition when they shifted from selling

airlines jet engines to selling them flight hours. This shifted the risk of downtime from the airline customer to GE, andenabled GE to establish a very profitable service operation.

• Target Market: Ryanair, a growing European discount airline, innovated a different target market by going afterleisure travelers, instead of the usual business travelers.

• Value Chain: Wal-Mart (which targeted an innovative market by going after underserved rural communities in its earlydays) is celebrated for its management of its supply chain.

• Revenue Mechanism(s): Xerox got its start in the copier business by leasing its copiers, instead of selling them. Air Productsgets paid for the delivery of its industrial gases right to the manufacturing station inside the plant, instead of by the box car.

• Value Network or Ecosystem: Ryanair again innovated here, by striking novel arrangements with underutilized regionalairports. Ryanair gets a percentage of concession sales at these airports, and in some circumstances even gets paid forlanding passengers at the airports.

• Competitive Strategy: One interesting aspect of business models is how difficult it is for others to imitate them. Manyairlines have tried to emulate Southwest’s low cost approach. Most of their attempts have not fared well. Copying theSouthwest model apparently creates too many conflicts with the airlines’ established business model.

Global connectivity (created through telecommunications, IT infrastructure and open standards) makes new skills andpartners accessible is practical to employ and enables entirely new forms of collaboration, and, thus, new business models.Of course, the same global connectivity also exposes firms to new competitors with very different business models and costbases, which in turn, can force business model innovation.


Major strategic partnerships and organization structure changes topped the list of most significant business model innovations.One CEO explained that the success of strategic partnerships depends heavily on combining each company’s strengths inan economic model that benefits all parties.As global connectivity reduces collaboration and transaction costs, companies are taking advantage of the expertise andscale that lies hidden in their own organizations and across the globe. They are assembling a business model fashioned fromgroups of “specialized” capabilities – combining internal expertise and scale through shared service centers with thecapabilities of specialized partners to create truly differentiating business designs. Partners can be instrumental in establishingnew business models.3.2.1 RESULTS OF BUSINESS MODEL INNOVATIONCost reduction and strategic flexibility were considered top benefits from business model innovation – reported by overhalf of all business model innovators (Exhibit). Business model innovation allows companies to specialize and move morequickly to seize growth opportunities as they emerge. Overall, CEOs’ rankings suggest that business model innovation ishelping their organizations become more nimble and responsive, while, at the same time, lowering costs.There are other very positive implications of business model innovation that differentiated it from the other two types ofinnovation CEOs have as a focus – products/services/markets and operations. The business model innovators were growingwas operating margins faster than those concentrating on other types of innovation. Companies innovating through strategicpartnerships had enjoyed the highest operating margin growth.

Exhibit 1: Benefits cited by business model innovators

Put in context, companies focusing on business modelinnovation have enjoyed significant operating margingrowth, while those using products/services/marketsand operational innovation continues (or intensifies),it could become the relentless battleground whereoperational and products/services/markets innovationcompete today. Innovations have sustained theirmargins over time.

3.3 SUCCESS FACTORS FORINNOVATIVE COLLABORATION:• Target and Create Value: Know exactly what

you want to achieve and then establish targets allalong the path your project will take.

• Align the Organization: Match your program tothe needs of your larger enterprise all along its lifecycle and help bring managers and staff aboard.

• Mitigate and Manage Risk: Anticipate and overcome the risks that are inherent to complex programs.• Optimize Capabilities: Understand what each partner contributes, improve performance in a lasting way, and ultimately

transfer knowledge for long-term advantage.4. CONCLUSION:It is essential for the established supplier companies to prepare themselves for a future that brings with it immense competition,globalization, new product development and generation of an environment that insists business innovation. They shouldrespond by adopting a new approach to strategy – one that combines speed, openness, flexibility, and forward-focusedthinking. It is an era of new opportunities and regeneration especially for executives who realize the importance of changeand innovation, for mature companies, which acknowledge that the time for slow change is over and it is important toaccept changes in their own best interest. To survive it is essential that companies must be able to adapt and evolve.Businesses operate with the knowledge that their competitors will inevitably come to the market with a product that changesthe basis of competition, the ability to change and adapt is fundamental to survival (Trott, 2005). Christiansen (2000) statesthat specific innovation management systems such as idea generation methods, funding systems and project managementmethods also have a profound impact on the performance of innovation and innovative ideas and not to forget the finalintervention of the senior management in specific projects. Required are flexible companies and mindsets, which canaccept failures before they look out for results and a clear definition for innovation. To innovate is a mindset, as earlierstated it’s not a one-time event; innovation should be incorporated as a daily schedule of each employee. If we fail toinnovate, we fail to move forwards and to accept any barriers to the movement of the innovation frontier within the businessprocess is unacceptable (Pitt, 2005).


The business environment today is one of intense global competition, rapid technological change and demanding consumers.Firms operating in this environment are challenged by consumers to rapidly develop wider and innovative product lines,that encompass greater technological sophistication and quality, yet are low priced. At the same time, global competitionhas forced corporations to seek new markets, which in turn has speeded up this cycle of product development, innovationand simultaneously created “world” markets. However, firms are finding that the costs of increased research and developmentand entry into new markets are formidable. Today’s corporations are realizing that the days of large, vertically integratedbusinesses are rapidly vanishing, that one firm can no longer afford (monetarily and/or organizationally) to maintainsophistication in all levels of technology, develop distribution channels in multiple countries or develop new markets.Rather, as a means of meeting the combined challenges of entering or maintaining markets with new, better products, manyfirms are realizing that they must find outside partners to share the risks and, hence, are forming collaborative alliances.The Buddhist principle of “dependent co-arising” states that every recognizable entity on every scale of existence participatesin the universal exchange of energies, supporting and being supported by the existence of others. Future trends suggest thatthe kinds of interdependent communities described in this paper will play an increasing role in a company’s ability to keeppace with the level of complexity in its world and the amount of innovation required to compete. As global corporationscontinue to grow significantly, covering more countries, employing more people and addressing more market sectors, theknowledge pool is growing while the organization’s capability to leverage that knowledge is effectively decreasing. As thedemands of customers become ever more sophisticated and change more rapidly, old organizational cultures become barriersto keeping up with demand, and responding with innovative products and solutions.To manage external partnerships, managers must continually assess when experimentation is moving away from the guidingvalues and core mission of the company. Such a balance between adaptation and innovation is essential if knowledgegeneration is to continue to feed the strategic aspirations of the firm while ensuring the basics are taken care of.

BIBLIOGRAPHY:Argote, L. and Ingram, P. (2000), “Knowledge transfer: a basis for competitive advantage in firms”, Organizational Behaviour and Human DecisionProcess, Vol. 82 No. 1, pp. 150-69.Bleeke, J. and Ernst, D. (1991), “The way to win in crossborder alliances”, Harvard Business Review, November-December.Berg, S.V. and Friedman, P. (1980), “Corporate courtship and successful joint ventures”, California Management Review, Vol. 22 No. 2.Buckley, P.J. and Casson, M. (1988), “A theory of cooperation in international business”, in Contractor, F.J. and Lorange, P. (Eds), Cooperative Strategiesin International Business, D.C. Heath, Lexington, MA.Butterfield, K., Reed, R. and Lemak, D. (2004), “An inductive model of collaboration from the stakeholder’s perspective”, Business and Society, Vol. 43No. 2, pp. 162-95.Coombs, R., Richards, A., Saviotti, P. and Walsh, V. (1996), “Introduction: technological collaboration and networks of alliances in the innovationprocess”, in Coombs, R., Richards, A., Saviotti, P. and Walsh, V. (Eds), Technological Collaboration: The Dynamics of Co-operation in Industrial Innovation,Elgar, Cheltenham.Ernst, David and James Bamford, “Your alliances are too stable”, Harvard Business Review, June 2005.Faerman, S.R., McCaffrey, D.P. and Slyke, D.M.V. (2001), “Understanding interorganizational cooperation: public-private collaboration in regulatingfinancial market innovation”, Organization Science: A Journal of the Institute of Management Sciences, Vol. 12 No. 3, pp. 372-88.Faems, D., Van Looy, B. and Debackere, K. (2005), “Interorganizational collaboration and innovation: toward a portfolio approach”, Journal of ProductInnovation Management, Vol. 22 No. 3, pp. 238-50.Flores, F. (1993), “Innovation by listening carefully to customers”, Long Range Planning, Vol. 26 No. 3, pp. 95-102.Gadman, S. (2004), “Adaptive innovation: interdependent approaches to knowledge creation and organisational transformation”, Journal of ManagementSystems, Vol. 16 No. 2.Goes, J.B. and Park, S.H. (1997), “Interorganizational links and innovation: the case of hospital services”, Academy of Management Journal, Vol. 40 No.3, pp. 673-96.Gray, B. (1985), “Conditions facilitating interorganizational collaboration”, Human Relations, Vol. 38 No. 10, pp. 911-36.Hamel, G. (1989), “Collaborate with your competitors and win”, Harvard Business Review, January-February.Hamel, G. and Prahalad, C.K. (1994), Competing for the Future, Harvard Business School Press, Boston, MA.Harrigan, K.R. (1987), “Strategic alliances: their role in global competition”, The Columbia Journal of World Business, Vol. 22 No. 2.Kruk, R. (1999), Guidelines for Collaboration and Integrated Services, Circular No. 99-31, Office of the Director-General, NSW, Sydney.Naylor, J. (2004), Management, Prentice-Hall, Englewood Cliffs, NJ. Sveiby, K. and Simon, R. (2002), “Collaborative climate and effectiveness ofknowledge work – an empirical study”, Knowledge Management Journal, Vol. 6 No. 5, pp. 3-5.Powell, W.W., Koput, K.K. and Smith-Doerr, L. (1996), “Interorganizational collaboration and the locus of innovation: networks of learning in biotechnology”,Administrative Science Quarterly, Vol. 41 No. 1, pp. 116-45.Pyka, A. (2002), “Innovation networks in economics: from the incentive-based to the knowledge based approaches”, European Journal of InnovationManagement, Vol. 5 No. 3, pp. 152-63.Rodan, S. (2002), “Innovation and heterogeneous knowledge in managerial contact networks”, Journal of Knowledge Management, Vol. 6 No. 2, pp. 152-63.Teece, D.J. (1992), “Competition, cooperation and innovation: organisational arrangements for regimes of rapid technological progress”, Journal ofEconomic Behaviour and Organisation, Vol. 18.Tether, B. (2002), “Who co-operates for innovation, and why. An empirical analysis”, Research Policy, Vol. 31.Wilkinson, I.F. and Young, L.C. (2002), “On cooperating: firms, relations and networks”, Journal of Business Research, Vol. 55 No. 2, pp. 123-32.


Chinese Sweatshops: The Result of Outsourcing By GlobalBusiness Giants

*Indrani Majumder

“The difference between the money price of labour in China and Europe is still greater than that between the money priceof subsistence; because the real recompence of labour is higher in Europe than in China.”1

*Adam Smith 2

“China does not have to depend on having clean manufacturers to get work — what China has is incredible mass andeconomies of scale,” 3

**Frost“I was dealing with a society that had no rules; or more accurately, plenty of rules but they were seldom enforced. Chinaappeared to be run by masterful showmen: appearances mattered more than substance, rules were there to be distorted andsuccess came through outfacing an opponent”4

***Clissold, former head AsimcoEverywhere on this earth where there was enormous surplus, perhaps the ultimate destination of desperate workers werethe sweatshops. It has its origin between 1830 and 1850: A special kind of workshop where a middleman, “the sweater”,directed the workers in garment making “under arduous conditions” was termed as sweatshops. To fulfill their minimumbasic needs, the workers aggressively went there as they had no other way. Analysts sometimes used it to describe aworkplace which was “physically or mentally abusive, or that crowds, confines, or compels workers, or forces them towork for long and unreasonable hours, as would be the case with penal labor or slave labor”. Charles Kingley in his writing‘Cheap Clothes & Nasty’ in 1850 used the term “sweater” for the subcontractor and “sweating system” for the process theydid their business. It was the National Labor Committee5 which brought the sweatshops “into the mainstream media”.Though trade unions, minimum wage, fire safety codes etc. reduced the number of sweatshops around the developedcountries, it could not stop the increasing trend of these units in the developing countries. Analysts view was that it’s theglobalization and an urge for excellence of developing nations that kept alive the sweatshops around the globe.Most of the Chinese manufacturing units like toy manufacturing units, clothing, shoe, electronics and many others could bedesignated as sweatshops (still in the early 21st century). Since the Chinese Laws were not being enforced strictly, thesweatshops thrived in the same manner as they had in the past. The Chinese did not have any other option to choose and “toput food on the table” they rushed to the sweatshops to help the MNCs or their subcontractors in China to cope up with therapid global competition to produce the quality products at the cheapest possible price.

OUTSOURCING: THE URGE OF 21ST CENTURY “Global sourcing has become a corporate mandate for both leading corporations and global service suppliers,” stated AtulVashistha, CEO of neoIT6. Enterprises outsourced various functions for many kinds of reasons. Outsourcing institutesplaced comparative cost advantage in the first position. A greater access to the world-class capabilities and improvement inthe company focus were among the others. Martin Cole, managing partner for Outsourcing and Infrastructure Delivery atAccenture7 explained that “Traditionally, the outsourcing market focused on infrastructure, data operations and cost takeout1 Wealth of Nations, 17762 Adam Smith, FRSE, (baptized and probably born June 5, 1723 O.S. (June 16 N.S.) – July 17, 1790) was a Scottish political economist and moralphilosopher. His Inquiry into the Nature and Causes of the Wealth of Nations was one of the earliest attempts to study the historical development ofindustry and commerce in Europe. That work helped to create the modern academic discipline of economics and provided one of the best-known intellectualrationales for free trade, capitalism, and libertarianism.3 Reuters: In China, Toil Works for Business: http://www.chinalaborwatch.org/Honest%20Toil%20Reuters.htm?article_id=503014 “A disorderly heaven”, www.economist.com, March 18th 20045 The National Labor Committee in Support of Human and Worker Rights, commonly known as the National Labor Committee or the NLC,is a non-profit NGO founded in 1981 by David Dyson to combat sweatshop labor and United States government policy in El Salvador andCentral America. Today the NLC has offices in New York City, Bangladesh, and Central America; when Dyson left to become ExecutiveMinister of Fort Greene’s Lafayette Avenue Presbyterian Church, Charles Kernaghan became Executive Director.The National Labor Committee engages in fact-finding missions throughout the world to expose and document labor and human rightsabuses; they then use this information to raise public awareness in an effort to change corporate policy.6San Ramon, California based neo IT is a consulting firm that is singularly focused on helping leading firms improve operations and growtheir business by capitalizing on services globalization.7 Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation,Accenture collaborates with its clients to help them become high-performance business and governments. Accenture has more than110 offices in 48 locations.

* Lecturer, Department of Commerce (PG , Marketing), Rashtraguru Surendranath College, Barrackpore, West Bengal. Email: [email protected]


as primary drivers,”. “Now, in addition to reduce the cost of operations, enterprises are looking to outsource business areasto achieve greater flexibility and to gain greater ability to respond nimbly. It is critical to be able to respond to changingmarket conditions and a competitive environment frequently driven by mergers and acquisitions”. According to Dr. JamesBrian Quinn, a professor at Dartmouth College’s Amos Tuck School and author of Innovation Explosion, “Outsourcing tothe best in the world ups the value and lowers the cost”. Allie Young, a chief analyst at Stamford, Conn.-based Gartner, Inc.,explains that the “outsourcing market has been shifting gradually from a cost focus to a business focus, and that a newemphasis on access and speed to market has emerged. The focus now is on business outcomes, not just infrastructure. Thisis about taking advantage of relationship types and models, and a variety of contracting modes and structures”. Accordingto Gartner Inc8 in the year of 2003, outsourcing business had generated $298.5 billion. Forrester Research estimated that by2015 as many as 3.3 million US jobs and $ 136 billion in wages will move to China, India, Russia ,Pakistan & Vietnam.China, India, Vietnam, Honduras these developing countries encouraged outsourcing for their country’s benefit, to relievetheir economy from the vicious circle of poverty. To these countries, outsourcing was the only way to provide employmentto their people and to give a scope to their economy to make enormous profits and in this way to make a position in theworld economy. According to a worldwide poll conducted by Pew Global Attitude Survey, “more, not less economicintegration is good for the world”. Director of Development Policy of World Bank, David Dollar argued that “globalizationindeed helps to reduce poverty and inequality”. To support his argument he pointed out that since 1980 world’s extremepoor decrease significantly. But the result of this game was not the win-win one. Human rights could not take place in thevictory-stand. It became a spectator of the award-distribution ceremony of this game.

CHINA AS AN OUTSOURCING DESTINATIONMNCs Interest in ChinaIn the early phase of 21st century, there was more and more talk about China becoming the world’s factory. Most of globalleaders recognized China as an emerging market and as the newest destination for outsourcing. During the period 2003-2007, outsourcing growth in China was 18.5% (Exhibit1). For decades, China led outsourcing charge of manufacturing andtextile goods.

Exhibit 1

Source: The Changing Face of China ATKEARNEYhttp://atkearney.com/shared_res/pdf/ChinaOffshore_S.pdf

Gradually it became the hottest destination offshore (Exhibit 2). Many reasons influenced both the big giants all over theworld and start-up companies to move towards China (Exhibit 3). Companies like IBM, Qualcomm, Agilent made thedecision to move to China because of the sheer operational scale that was possible because of labor pool in China (Exhibit4). With a population of more than 130 million, China was widely known to have low labor costs with a lower growth ratecompared to other developing and developed countries (Exhibit 5). The average hourly manufacturing compensation in2002 was $0.57, which was just about 3 percent of the average hourly compensation of manufacturing production workersin the United States and of many developed countries of the world. Regional competitors in the newly industrialized

8 Gartner, Inc. is the leading provider of research and analysis on the global information technology industry


Source: The Changing Face of China ATKEARNEY http://atkearney.com/shared_res/pdf/ChinaOffshore_S.pdf

Exhibit 3

Source: The Changing Face of ChinaATKEARNEYhttp://www.atkearney.com/shared_res/pdf/ChinaOffshore_S.pd

Exhibit 4(a) China’s Share in Total WorldPopulation

Exhibit 2China : World’s Most Attractive Offshore Location

Exhibit 4(b) Inter country comparison ofdependency ratio


economies of Asia had, on an average, labor costsmore than 10 times those for China’smanufacturing workers and Mexico and Brazilhad labor costs about 4 times those for China’smanufacturing employees. In labor intensive,low-tech industries such as textile, garments &household products, China took away FDI andexport share from Thailand, Indonesia, Malaysiaand Philippines.In the late 1970s, China started its export strategywith a greater emphasis on coal and petroleum.By the 1990s, exports were predominantlycomposed of labor intensive manufacturedproducts: textiles, apparel, footwear, toys andsporting goods alone accounted for 40% of thetotal exports. Electric equipments—such astelephones, television sets, videocassettesrecorders made up another 10%. According toNicholas Lardy, these products were basedoverwhelmingly on processing and assemblytype activity and thus they too were laborintensive. In 2004 & 2006, the FDI growth rateof China was14% & 8% simultaneously. By1990s, many foreign investors discovered Chinaas an optimal place to manufacture and assemblelow tech goods requiring abundant quantities of

Exhibit 5(a)Wages in different provinces of China in 2005

Source: http://neweconomist.blogs.com/photos/uncategorized/20060318_chinaswagecostchallenge_bw.gif

cheap labor. Cost minimizing firms thus naturally regarded the country as an important place to invest and conduct operations.China’s Interest to Open the Door:An urge to modernize the Chinese economy led China to open its doors in 1970. Since late 70s its GDP gradually increasedwith an increase in FDI (Exhibit 6). One of the basic objectives of the Chinese government policy to encourage foreigncapital was “exchanging technology with market”. “Socialism with Chinese characteristics”9 was started in 1978 in thePeople’s Republic of China (PRC). The initiative was taken by pragmatists within the Communist Party of China (CPC) ledby Deng Xiaoping which were ongoing as of the early 21st century. Opening to the outer world was central to the country’sdevelopment. About 45% of its exports were by Foreign-invested enterprises. In 2005, its foreign exchange reserve exceeded$800 billion and in November 2006, it further exceeded to $1 trillion which placed it in the number 1 position in this field.CHINESE SWEATSHOPS: A RESULT OF REFORMTwo forms of ownership of industrial enterprises existed in China before the economic reforms in 1978: “all people’” ownership,which was changed into “state ownership” in the late 1980s, and collective ownership (owned by villages or communities). Todescribe the industrial employment and its associated benefits the phrase “iron rice bowl”10 was often used. With low wages,employees used to enjoy lifetime employment, guaranteed pension benefits, health care, housing, and education for dependents,paid maternity leave, and other such benefits that created a high level of security and societal equity. In addition to that, manyChinese workers engaged in decision making and management issues at their place of employment.In 1978, the Chinese government began an official “reform” era which initially included: breaking up of rural communes;designating Special Economic Zones (SEZs); and introducing “market mechanisms” into state-owned enterprises (SOEs).“Architect of China’s reform”, the “capitalist roader”, Deng Xiaoping consolidated power in late 1978 with an objective totake China into a new direction. During his visit to the U.S. in January 1979 (the first official state visit between the twocountries), he became deeply impressed by the material wealth of the U.S. Reform slogans such as “to get rich is glorious,”and “development is the absolute need” was the consequence of his impression.

9 “Socialism with Chinese characteristics” is an official term for the economy of the People’s Republic of China which as of 2006 consists ofmixed forms of private and public ownership competing within a market environment.10 “Iron rice bowl” is a Chinese term used to refer to an occupation with guaranteed job security, as well as steady income and benefits. Traditionally,people considered to have iron rice bowls included military personnel, members of the civil service, as well as employees of various state runenterprises (through the mechanism of the Work unit).


Source:http://knowledge.wharton.upenn.edu/papers/download/BCG-Wspecialreport-final.pdf

Exhibit 5(b)Inter country comparison of compensation of production over the Period 2003-2009


In late 1979, the government selected several thousand state-owned enterprises to operate on a profit making basis. In early1980, the program was expanded to cover 16 percent of SOEs. After a short break of 4 years the program resumed in 1984with a mission “smashing the iron rice bowl”. The objective was to increase the labor productivity by ending the lifetimejob security. Some new bonus and profit sharing schemes were implemented to get better results.

With a little halt after the protests at Tiananmen Square11, the market oriented reform was started again in 1992 with agreater pace with Deng Xiaoping’s “Southern Tour”. Privatization of collective enterprises and SOEs further increased.Tax advantages were extended to private and foreign businesses that were not given to SOEs. Unable to compete withadvantages given to foreign-owned firms, SOEs fired millions of workers and decreased social benefits during this period.With a surplus of workers and no competition from diminishing SOEs, industries had tightened their grip on workers andsweatshops had become the norm. Especially in the coastal SEZs—where most foreign corporations did business—Chinese

Exhibit 6(a)

Source: http://en.wikipedia.org/wiki/Image:Prc1952-2005gdp.gif#file

Exhibit 6(b)China’s Economic Growth Since 60s

Source: Why Has China’s Economy Taken Off Faster than India’s? June 2006 David E.Bloom, David Canning, Linlin Hu, Yuanli Liu, Ajay Mahal, and Winnie Yip1 http://www.hsph.harvard.edu/pgda/Bloom_Canning_China_India.pdf

11 The Tiananmen Square protests of 1989, also known as the Tiananmen Square Massacre, June 4th Incident, or the Political Turmoil between Spring andSummer of 1989 by the government of the People’s Republic of China, were a series of demonstrations led by students, intellectuals and labour activists inthe People’s Republic of China between April 15, 1989 and June 4, 1989. The demonstrations centred on Tiananmen Square in Beijing, but large scaleprotests also occurred in cities throughout China, including Shanghai.


workers earned lower wages in terms of purchasing power, fewer benefits, longer working hours, increasing work-relatedinjuries, and other associated problems .

CHINESE SWEATSHOPS: THE PLAYGROUND OF MNCS The Walt Disney Company is one of the largest media and entertainment corporations of the world. Founded on October16, 1923 by brothers Walt and Roy Disney as a small animation studio, in the year 2005 it earned total revenue of US $31.9billion. This revenue was not generated from one source. It was from the largest Hollywood studios and eleven themeparks, two water parks and several television networks ( including the American Broadcasting Company12). Wide variety ofconsumer products from garments, stuffed toys, to plastic toys, and many other accessories such as traveling kits, hairaccessories, belts, bags, caps, and watches. In late 20th century, Disney’s production lines had been shifted to China, Indonesia,Thailand, Sri Lanka, and El Salvador where abundant cheap labor was offered. Government suppression along with thecheap labor pool helped China to take no. 1 position in Disney’s outsourcing destination list. Two decades ago HK, Taiwan,and Korea were the production bases for Disney. Labor cost in Indonesia was much lower than that in China but politicalinstability and the government failure to control the riots had left it behind. Moreover, workers in China were not allowedto organize themselves and had no collective bargaining power. Disney and its licensee took this advantage.Most of the workers of Disney in China were from rural areas in inland provinces like Sichuan, Hunan, Hubei, Henan,Jiangxi, Shaanxi, Anhui and Guangxi. Their families’ livings always depended on their farms. Their low level of annualhousehold income (US$24-49) forced their young members to rush to the sweatshops in Southern China to explore morejob opportunities to gain more money. As described by per the report by HKCIC on February 2001, the conditions of theworkers in Disney factories in China were really heart breaking. Lower wage, longer working hours, unhealthy workingenvironment were the facts in those units (Exhibit 7).According to the AFL-CIO13, “Wal-Mart is the single largest importer of foreign-produced goods in the United States”.According to Lee Scott, President and Chief Executive Officer “Each of our business units continues to thrive to innovateand to bring its customers quality products at affordable prices.” and “When it comes to our performance during fiscal2006, we have a lot to be proud of at Wal-Mart. Our net sales rose 9.5% to a record $312.4 billion. Net income rose 9.4% toa record $11.2 billion. In 2004, their trade with China alone constituted approximately 10 percent of the total US tradedeficit. In the year of 2004, along with China, about 60% of its products were imported from South Korea, Philippines,Malaysia, Cambodia, Thailand and Vietnam which were just 6% in 1996.Panyu United Stationery Products Factory is located in Shipai Village, Dongyong Township, Panyu County, Guangzhou,Guangdong, in China. It is a Holiday season card, soft and hard-covered notebooks producer and was a supplier for Wal-Mart.According to a report by China Labour Watch in December 2005, (Holiday Cards of Abuse) over 2000 workers were workingthere, produced Christmas related goods for Wal-Mart of worth $768,092 in just a period of 10 days. The messages of the cards,its colorfulness hardly matched with the lives of the makers of these cards. As per the study of China Labor Watch (2005), theworkers in the Panyu employees used to work 11½ hours a day and 80 ½ hours a week and during the peak holiday rush period(July, August and September) they had to work 13 ½ hours a day (7.30 am to 9.00 pm), seven days a week, i.e. 94 ½ hours aweek with a return of just 34 cents an hour (20% lower than China’s subsistence-level legal minimum wage).Workers wereforced to work 40 ½ hours of overtime a week (exceeded China’s legal limit by 487 percent. During the slow season also theworkers were required to put in 12 hours shift with 2 hours off for lunch and supper, 6 days a week and 20 hours of overtime perweek and 86.6 hours of overtime each month which exceeded China’s legal limit by 2.4 times. Workers were housed in dark andgloomy dorm rooms. The workers did not have any right to freedom of association, to organize and demonstrate for morehumane conditions. The factory management prohibits husbands or wives from even visiting the dorm to see their spouses.During the holiday season maternity leave, leave to get married or to bury a family member who has died were without payand authorities strictly denied workers their legal right to national holidays, especially the most important Spring Festival.

Lungcheong Toy factory in Zhouwn Industrial District, Dongguan City, Guangdong Province, produce battery-operatedradio controlled toy cars and trucks for Wal-Mart, Mattel, MGA and others. About three thousand workers working at theLungcheong Toy factory in Dongguan City in Guangdong Province specialized in manufacturing radio operated plastic toytrucks—like MGA’s “Big Foot Ragin’ Monster Truck”. Wal-Mart store purchased about $64.97 in December 2005. As ofDecember 10, 2005, the legal rights of the Lungcheong Toy workers continued to be systematically violated.

12 “The American Broadcasting Company (ABC) operates television and radio networks in the United States and is also shown on basic cable in Canada.Created in 1943 from the former NBC Blue radio network, ABC is now owned by The Walt Disney Company and is part of Disney-ABC TelevisionGroup. Its first broadcast on television was in 1948”.13 American Federation of Labor and Congress of Industrial Organizations, commonly AFL-CIO, is America’s largest federation of unions, made up of 53national and international (including Canadian) unions, together representing over 9 million workers. The AFL-CIO was formed in 1955 when the AFLand the CIO merged after a long estrangement. From 1955 until 2005, the AFL-CIO’s member unions represented virtually all unionized workers in theUnited States. Since 2005, when several large unions split with the federation, the American Federation of State, County and Municipal Employees(AFSCME), with over a million members, is the largest union in the AFL-CIO.


Exhibit 7: Working Conditions Of Disney factories in China as of 2001


Women workers at Lungcheong were routinely denied their legal right to three months maternity leave with pay. Thefactory authority illegally denied Health Insurance to workers and work injuries resulted in termination of work (Article 72of China’s Labor Code). As per the China Labor Watch’s statement, the new workers had to sign an agreement that statedon the job injury was not the company’s responsibility.All overtime work was mandatory in Lungcheong. During the peak season (May to early December), the standard shift wasfrom 8:00 a.m. to 9:00 p.m., or 13 hours a day, six to seven days a week. Violating the legal norms, the Lungcheong factorydid not pay for national statutory holidays, such as New Years. Authorities also denied legal rights to paid leave to getmarried, for the birth of a child, or to bury family members.There were many young girls below the age of 16 who are working in the factory illegally .As per the study, before inspections,supervisors used to remind the underage workers to remember the false names and ages on their factory ID cards.In 2004, a union was established at the Lungcheong plant. But workers hardly knew much about the union’s activities.They did know very well only one thing that they had to pay 1 Yuan (12 cents) per month to the emergency fund, meant toprovide assistance to destitute workers; especially for new workers who arrived penniless from the countryside.

Lungcheong subcontracted large orders to the Xingyue Toy factory in Guangzhou, where working conditions were muchworse than at Lungcheong. At Xingyue, workers could be at the factory up to 19 hours a day, seven days a week, whileearning just 21 cents an hour. Some Lungcheong subcontractors paid wages as low as 13 cents an hour.In March 2005, the legal minimum wage in China was raised from 450 Yuan ($55.49) a month to 574 Yuan ($70.78). TheLungcheong factory actually raised the rate to 570 Yuan. This raised the hourly wage only a nominal 27 percent (from 32cents to 41 cents).

According to the workers, the wage increase was basically an eye wash. To cope up with the increased wage rate, themanagement sped up production lines and increased production quotas. At the same time, fees for dorms and food wereincreased. For a 11 feet by 20 feet dorm room (contained 20 bunk beds, three fans), the company charged 30 Yuan ($3.70)per month to 50 Yuan ($6.17). Each floor had one public bath and shower room. Fees for food increased from 110 Yuan($13.56) a month to approximately 183 Yuan ($22.56) a month, while the quality of the food further deteriorated.

Source:Be aware of Mickey Disney’ Sweatshop in South China: A report by HKCIC, February 2001http://www.somo.nl/monitoring/reports/disneychart.pdf


Lungcheong and its subcontractor Xingyue Toy factory were not the distinct cases. Perhaps it was the Toy industry’sscenario (Exhibit 8).

Source: Falling Through the Floor. Migrant Women Workers’ Quest for Decent Work in Dongguan,China. China Labour BulletinCLB Research Series: No. 2, September 2006http://gb.china-l abou r.o rg .hk /ga t e /gb /www.ch ina - l abou r.o rg .hk / f s /v i ew/ r e sea rch - r epo r t s /Women_Workers_Report.pdf

Exhibit 8: Working Conditions in Different Industries in China in 2006

Wellco Factory, in Dongguan, Chang’an is a Korean-invested factory was contracted by Nike. As of December 2005, nearabout eight thousand workers were working there without signing any contract with the factory. In the sewing departmentof the factory, all the workers were women and mostly they were between 18 and 25 years of age.The workers worked there about 11 hours a day with $30-$42 per month (in 2005). In addition to that, all the workers mustwork 2-4 hours overtime with just $0.19-$0.33 per hour of overtime which again violated the Chinese Labor Law and anykind of refusal caused a fine of $1.20 - $3.61. Sometimes the workers lost the entire day’s pay. After deducting the chargesfor housing, meals etc, a worker in a month just got $36.14-$72.29, including overtimes. Every month workers got only 2-4 days off (those who were working at the factory for one year used to get an annual leave of five days and in the case ofthose workers who had been serving since two years or more, they were entitled to an annual leave of seven days). Theworkers were working there by a quota system. They had to complete the given assignment in the working day. If someonefailed to do this, they forcefully had to participate in “prolonged work” without any pay.Moreover at the time of their joining, the workers had to pay a deposit, which was verbally promised as refundable. Butthe fact was that it was very difficult to reclaim this amount.2005s survey of China Labor Watch revealed that the working conditions at the factory were too dangerous for the healthof the workers. The workers and their colleagues were suffering from dizziness, skin irritations, headaches and dyspnea.The supervisors did not regard the workers’ well-being at all.


Talking was strictly prohibited in working hours in Wellco factory. And if the workers disobeyed this rule, they were fined$1.20-$3.61.Most of the workers at Wellco factory were unaware about the factory Code of Conduct. The factory had no trade union.In March 1997, the assembly production department went on strike because the factory did not pay them their wages. Allthe workers who went on strike were fired.According to several workers, the factory employed children aged between 13-15 in the sewing, handwork and cuttingdepartments which was a clear violation of China’s Labour Law (which did not allow children under 16 to be employed)and Nike’s code of conduct (insisted not to employ children under 15).Nority International Group Ltd was a shoe factory, located in Dongguan, Chang’an County. In 2005, about 6,000-7,000workers, most of whom were women, worked there. This Taiwanese-owned factory used to produce shoes for Reebok. AtNority, the normal work week, excluding overtime, was 12 hours a day (8am-11:30am, 12:30pm-4:30pm, and 5:30pm-10pm), 6 days a week, 72 hours a week and 3-4 days off each month. Workers at Nority were often forced to work anadditional 2-5 hours of overtime (a gross violation of both Reebok’s Code of Conduct and the Chinese Labor Law). Byworking in a clearly hazardous environment, bearing so much dust and noise pollution, excessive heat, dangerous fumesand congestion, the workers used to get only $1.20-$1.45 per day whereas in Dongguan, minimum wage was $1.93 for 8hours of work, overtime work gave a return to the workers $0.36 an hour ($0.10 below the legal minimum). A fine of $7.23to $21.67 was charged if someone refused to work overtime and the person refusing to work overtime three days in a rowwould be fired. Women workers were fired for becoming pregnant. The factory used to provide food and housing to theirworkers by charging $3.86 per month for housing and $4.82-$8.43 for meals per month. Excluding the benefits and addingthe overtimes, each worker made a net amount of $60.24-$72.29 per month.Here also the workers worked in a quota system. Any failure to fulfill the quota during work hours resulted in overtimework without pay. At the time of joining, the work deposition of one month’s salary was mandatory which according to theauthorities was refundable, but very rarely they received the amount after they left the job. Before work, calisthenics wasmandatory and whoever missed it could be fined. Talking during the work was strictly prohibited at Nority and there wasalso a fine system for the violation of this rule. Per offence, more commonly, the authority charged fines of $7.23-$21.69and sometimes they could be told to sweep the floors as a warning for minor offences.KTP Holdings Ltd in Bao’an and Donguan counties produced mostly for Reebok. Adidas and LA Gear was the otherpurchaser of KTP. 45-50 percent of dealings of KTP were with Reebok. 4,000-6,000 workers from Hunan, Sichuan, andJiangxi provinces were working at the factory of Bao’an. Most of them were women aged between 22-25 years.The workers at KTP were paid by piece rate. Wages ranged from $60.24-$72.29 per month including the overtime(compulsory) for 8am to 11 pm schedule, and 2days off in a month(during the peak season the workers did not get a singleday off). As per factory regulation, calisthenics at 7 am was mandatory.Workers who live in the factory dorms had to pay $9.04 per month. Child care, social security benefits, medical insuranceand bereavement leave were not provided. Fines were common in this factory as well. If someone did not attend themorning exercise session, then they were fined. Refusal to work overtime would cost a fine of $1.20.There was no tradeunion or collective bargaining in the factory.A Taiwanese shoe company, Yuan Yuen Industrial Holdings Co. Ltd., in Dongguan near the first Special Economic Zonein China was established in 1989 and from its establishment it had a contract both for Nike and Reebok. From December2005, about 50,000-60,000 workers from Hunan, Henan, Jiangxi and Hubei were working there. It was registered in HongKong and belonged to the Pao Chen Cooperative. According to a business magazine published in Taiwan, the Pao ChenCooperative was the biggest sports shoe producer in the world. About 80 percent workers of Yue Yuen were women andmost of them were aged between 18-22 years.As per the study, the workers in this factory used to work additional 2 hours of overtime along with their daily norms of10-12 hours - 60-84 hours in a week (16 hours more than the limit set by Chinese Labor Law) and get a very nominalreturn to their services, $48.19 and $72.29 per month including overtime. The respondents reported to the enumerators ofChina Labor Watch and National Labor Committee in their survey in December 2005 that failure to work overtimeresulted in a fine. Nobody could leave the factory premises without completing their daily quota.Social security benefits, health care, child care and bereavement leave were not provided by the factory, although they are mandatoryby law.Health care was also not provided on a regular basis, and less than half said health check-ups were given by the factory.Workers complained about noise, air pollution and fumes. Many of them had skin irritations, and several suffered fromdizziness and headaches.Participation in calisthenics was mandatory in Yue Yuen. Workers were not allowed to talk to their coworkers while working. Verbalabuse and fines were popular methods of punishment in Yue Yuen. Many workers mentioned that for minor offences, they were chargeda fine of $3.61 and if the mistakes were major in the management’s eye, then the fines could be as much as $10.84.The government trade union existed at the Yue Yuen factory. But it was not for the workers sake rather; it favored theauthorities more.


Almost all of the workers in the Yue Yuen factory had no knowledge of Nike’s or Reebok’s Codes of Conduct. The workerswho thought they knew about the Codes were often confusing them with the ISO9002 (the international quality controlstandards which products must meet in order to be exported).Panyu United Stationery Products, Lungcheong Toy factory, Xingyue Toy factory, Nority International Group Ltd, KTPHoldings Ltd, and Yuan Yuen Industrial Holdings Co. Ltd were not distinct cases where there was a clear violation ofhuman rights. More or less every where the workers had to face the worst kind of exploitation (Exhibit 8 & 9).

Source: Falling Through the FloorMigrant Women Workers’ Quest for Decent Work in Dongguan, ChinaChina Labour BulletinCLB Research Series: No. 2, September 2006http://gb.china-labour.org.hk/gate/gb/www.china-labour.org.hk/fs/view/research-reports/Women_Workers_Report.pdf

Exhibit 9 Overtime rates in different industries in China in 2006

In their Blue Paper on “Developing Human Resources in China (Report No. 3)”, 2006 the Chinese Academy of SocialSciences reflected the fact that 70% of China’s intellectuals died prematurely from overworking and the scene was muchmore pathetic in comparatively advanced areas of eastern and southern coast. In July 2006, the journal Liaowang DonglandZhoukan revealed that at least 1 million people in China died from overwork each year in China.


TEARS IN SWEATSHOPS FOR UPLIFTMENT OF THE ECONOMYHistorical Perspective The World Bank estimated that about 1/5th of human beings on the earth in the 1st phase of 21st century lived under theinternational poverty line. And if one could trace the history then this figure was relatively better. World poverty has gotbetter largely due to the economic success of China and India, the two countries with the largest number of workers insweatshops. Economists opined that anti-sweatshops activities might be the cause of worse-off condition of workers in thethird world countries. They boldly stated that “Either you believe labor demand curves are spiraling downwards, or youdon’t”. In the UDCs, choice was not between the high-paid work and low-paid work rather it was between low-paid workand unemployment and only the right choice might make the nation glorious.Great Britain and United States used sweatshops as part of the Second Industrial Revolution. Economists’ view was thatsweated industries were the result of “flexible specialized production” which was an urge of the competitive era. Specializationhelped the producers to offer quality products to consumers. And flexibility led to full basket & time delivery of satisfaction.A flexible producer could efficiently adjust himself with the market demand. To meet new demands, it could expand veryquickly and at the time of downturn could retract very efficiently and in this way became successful to optimize the cost ofoperation. Collective efforts of all these flexible producers would ultimately be beneficial for the economy as a whole. Theydid not at all obey the social responsibility of production as this was not costless and used to shift all onto society. Theseproducers used to avoid union rules and legal regulations and restrictions that set wages, benefits, and conditions by workingin hidden shops and moving frequently. They create a secondary labor market, which often involves the most vulnerable ofworkers: immigrants (often illegal), young women, and the undereducated. All these were for the sake of society, for thewell being of the economy.Domestic Manufacturers & SweatshopsDeveloping countries needed foreign investment to continue their walking on the road of economic growth. This urge ledthem to compete with the others on this earth who had the same will and this allowed the MNCs to dictate their purchaseprice. Helplessly these producers tried to produce cheaply by minimizing worker salaries and benefits, and by demandingthe highest levels of productivity from their workers.Wal-Mart, the retail-giant had a clear policy for their suppliers, “On basic products that don’t change, the price Wal-Mart willpay, and will charge shoppers, must drop year after year”. They went with the slogan “Save more, Smile more”. Like Wal-Mart,every retailer did know very well the law of demand. And in order to gain sufficiently, they offered the consumers to buy moreat “discount” prices and seek lowest-cost supplier. Retail chains pressure contracted manufacturers by refusing to pay more thana rock-bottom price for manufacturing orders. Manufacturers coped-up with this financial squeeze not by compensating fromtheir own pockets, but by cutting workers’ wages and benefits, and by compromising workers’ physical safety.One Study showed that in September 2005, Lungcheong Toy factory shipped 10,000 radio-controlled toy trucks (Item #B7431) to Mattel, landed Customs value of which was total of $157,650. This included the entire cost of productionincluding all materials, labor (direct and indirect), shipping costs and profit to the factory. At Wal-Mart stores, a singlepiece was sold by $29.97. So the mark-up of each truck was $14.40. Another survey by the American Chamber of Commercein Beijing during October 2006 revealed the fact that the profit margins for 42% of 1800 US businesses in China washigher than their average world wide margin. Now the question is that was it the internal competition within the Chineseeconomy or the unwillingness of the MNCs to guarantee the legal rights of human resources that was responsible for theexistence of Chinese sweatshops even in the ultra modern era.Since 1992, Wal-Mart made its suppliers sign a code of basic labor standards. Likewise, others such as Nike, Reebok etchad their own code of conduct. They did just have only one responsibility that was the investigation of compliance ofthese rules and regulations. Nike’s Code of Conduct clearly stated that “employer should provide a safe and healthyworking environment to prevent accident and injury to health”, “workers are entitled to at least one day of rest everyweek”, and “workers should have the right to organize”. It was totally against of coerced labor, it insisted not to employchildren under the age of 15. Reebok’s code of conduct stated that workers “are not to work more than 60-hours a week”,“should have the freedom to choose whether they want to work overtime”. So it’s the manufacturers’ responsibility, totake care of the human rights. MNCs could do only one thing that was the investigation of the factory environment andcould cancel the agreement if any violations of code of conduct could be traced and this was the only by which they couldrespect the human rights. According to Chinese factory managers, all these standards settled by the foreign companieswere one of the promotional tools; it helped them to prove that they were followers of responsible capitalism.Analysts’ view is that the MNCs didn’t have any willingness to respect human rights. In most of the cases, the factoryauthority came to know of the visits in advance. And naturally the authorities managed everything as per the code ofconduct at the time of their visits in order to get a green signal to proceed. Workers also could not be so brave to go againstthe factory authority as by doing so they might loose their job.

(Continued on page 40)


Special Economic Zones In The Emerging Economic Scenario:Issues And Challenges

*Prof. N.K. Sharda**Dr. Kulbhushan Chandel

***Dr. Raj Kumar

HISTORICAL PERSPECTIVE OF SEZS China is a pioneer in introducing the concept of SEZ as a part of economic development strategy that it adopted in 1978,nearly after the 30 years of self-imposed isolation. The need of such economic adjustment in China was felt primarily dueto the reasons that the per capita GNP of China had grown at an average annual rate of 2.5-3.0 percent since 1957, wellbelow the average of its neighboring countries like Japan and South Korea. The total factor productivity of the Chineseindustry had been either stagnant or declining since 1957. Hence, Deng Xiao-Peng successfully put economic reforms inthe Central Committee of China, which were consequently adopted by the committee. Later, ‘Open Door Policy’ (KaifangZhenze) was formally adopted by Central Committee of China, which visualized that inflow of capital, particularly foreigndirect investments (FDI) and portfolio investments (FPI) can play a significant role in the economic development. Hence,it was decided to establish SEZs to attract the inflow of foreign investments by exempting investors from regulationsapplicable in China. It also provided an excellent infrastructure. In this series, four SEZs had been established by Chinaalong the south-east coast - Shenzhen, Zhuhai, Xiamen and Shantou by 1980. These SEZs were aimed at to serve as thetesting grounds for economic and social reforms. Second, their locations-Shenzhan right next to Hongkong, Zhuhai, adjacentof Macao and other two opposite to Taiwan-were chosen to facilitate the eventual reunification of China. In 1984, theconcept of SEZs was extended to another 14 coastal cities and Hainan island. To improve the investment in China, newprovisions were made in 1986 and cooperative joint venture law was passed in 1988. In 1995, the concept of SEZs wasextended to Shanghai. Initially only neighboring countries invested in the Special Economic Zones (SEZs), but later on, thesuccess of SEZs across regions encouraged other countries also to invest in China due to the investment friendly policyadopted by the government. The policy of SEZs was highly successful to attract foreign investment in China. China’sapproach has been constantly pragmatic to invite foreign investors from every source and allow them to attain the benefitsof the country’s competitive advantages in low labour cost and growth potential in the backward areas. The largest share ofFDI in China has been in the manufacturing sector, this is about 60 percent.

The success of SEZs policy in the transformation and development of Chinese economy highly impressed the Indiancounterparts and in the year 2000, Indian Union Commerce Minister, Murasali Maran also visited China to have an overview of the experiment. He thought that the policy of SEZs can also be a useful and powerful instrument in the developmentof the Indian Economy. Consequently, the policy of SEZs was incorporated in the 1997-2002 Foreign Trade Policy of India.The annual trade policy 2000-01 was a landmark trade policy for introducing the concept of SEZ in India for the first time.However, the policy on SEZs in India has failed to produce the desired results in its present form. Hence, the need to makecertain reforms in SEZs policy was realized. The Ministry of Commerce started serious deliberations over making SEZpolicy a successful instrument for the economic development and it was decided that government should enact a separateSEZ Act. The act was passed by the Indian Parliament in May 2005 which became effective from 10th Feb 2006. The SEZRules 2006 also came into effect the day SEZ Act became effective and extend to the whole of the Indian territory includingJ &K. It also overrides any provision, which is inconsistent with the current Act. Globally, SEZs are known by the differentnames such as Free Trade Zones, Export Processing Zones, Coastal Economic Open Zones, Economic and TechnologicalDevelopment Zones etc. It is evident that in manufacturing industries, about half of the FDI has been in labour intensiveproducts. FDI in service sector contributes about 25 percent of the total investment in China. The overseas Chinese communityappears to be a major investor in China. Due to huge inflow of foreign capital in China, the economy is fast integrating withthe global economy. In this regards, the experience of SEZs have proved to be very significant and helpful in China.

SCOPE: The concept of SEZs had gained much significance in the present economic scenario because it is essential to integrateNational economy with the World economy. This concept has already proved its vital relevance in the economic integration ofSouth East Asian Countries and China with the global economy. Though, the concept of SEZs has been adopted by the Government,yet the social, political and economic circumstances of China and South East Asian Countries are quite different from that ofIndia. Therefore, there is a need to implement the philosophy of SEZs in India cautiously and transparently. It is also evident thatonly few studies have been carried out in India on SEZs which establish the need to critically analyze the

* Director, ICDEOL, Pro-Vice Chancellor, Himachal Pradesh University, Shimla, Himachal Pradesh.**Assistant Professor, Dept. of Commerce, Himachal Pradesh University, Shimla, Himachal Pradesh.Email: [email protected]*** Head, Department of Commerce, Govt. College, Theog, Shimla, Himachal Pradesh.


concept of SEZs. In the present research paper, an attempt has been made to evaluate the issues, challenges and implicationsof SEZ policy in the emerging economic scenario in India.

OBJECTIVES: The major objectives of the study are:1) To examine the Government Policy on SEZs.2) To analyze the issues and challenges of SEZs in the present economic scenario and to make certain suggestions.

METHODOLOGY:SEZs policy is a very wide subject. It has all-round impact on Indian economic, social, political and technological environment.The scope of the present study includes SEZs Policy Act 2005, WTO, IMF, World Bank and certain other SEZ relatedstudies. It also encompasses the Indian Industrial sector, external sector, agriculture sector, social sector and environmentalanalysis both social and biological. SWOT analysis has been applied to analyze the issues and challenges of SEZ in theemerging economic scenario. Delphy method is also used to analyze the government policy on SEZs.

SEZ POLICY IN INDIAN SCENARIO The SEZ Act 2005 and SEZ rules 2006 provide enough guidelines to the developer, Govt. and entrepreneur of SEZ units,for the establishment, development and management of SEZs in India. The act specifically defines the SEZs as “Duty FreeEnclaves” within a country, which are to be treated as foreign territory for compliance of various legislation and in particularfiscal legislation. These zones are called special economic zones as they are governed by the special legislative policies andsystem, which are not otherwise applicable in India. The philosophy of SEZs was adopted in India for the attainment ofeconomic objectives such as: to enhance foreign trade, to attract foreign investments, technological and know howadvancement, infrastructure development, development of backward regions, employment generation etc. It was observedthat why the policy of export promotion zones established in the past had not been very successful and why the governmenthas to shift to the policy of SEZ. It was also decided to convert the four former ‘export promotion zones’ Viz., Santa Cruz,Kandla, Vizag and Cochin into SEZs. The SEZ Act States that SEZs can be established by the central government, StateGovernments or by any person individually or jointly for manufacturing the goods and rendering the services or for both orfor trading and warehousing activities. The application for setting up an SEZ has to be made by the developer to the StateGovernment. The government has to forward the application to the Board of Approval within 45 days of receipt of application.The application to set up SEZ can also be sent directly to Board of Approval. While forwarding the application, the StateGovernment has to ensure that the requirements for minimum area of land has been fulfilled or not by the applicant.The SEZs are broadly divided into five categories such as multiproduct SEZs, sector specific SEZs, gems and jewellery, biotech, non conventional energy SEZ and free trade and warehousing SEZs. The minimum area required for the establishmentof these SEZs is 1000ha, 100ha, 10ha, and 40ha respectively. In case of special states, the minimum area required is reducedto 200ha , 100ha, and 50ha in relation to multi product SEZs and sector specific SEZs respectively. No change of minimumarea requirement has been made in case of other SEZs. The special states include Assam, Meghalaya, Nagaland, Manipur,Tripura, H.P., J.K., Sikkim, Goa and UTs. There are two separate designated authorities in the process of development ofSEZs i.e. Board of Approval headed by an Additional Secretary in the Ministry of Commerce and Industry and ApprovalCommittee headed by Development Commissioner. BOA is designated authority for the approval of SEZs and other relatedissues and Approval Committee is the designated authority for setting up units in SEZ. There are two main players in thedevelopment and establishment of SEZ i.e. developer and entrepreneur. Developer is a person who has been granted, theletter of approval and develops the SEZ. Entrepreneur is a person who sets up a unit in the SEZ. The SEZ Acts offers variousincentives for SEZ Developers and SEZ units which are as follows. INCENTIVES FOR DEVELOPERS� Duty free imports and procurement of goods for the development and operation of SEZ.� Income Tax exemption for a block of any 10 years in 15 years.� Freedom to allot developed plots to approved units on commercial basis.� Foreign funds to develop the townships.CONCESSIONS FOR SEZ UNITS� A duty-free enclave that is treated as a foreign territory for trade and tariffs� License free imports.� Custom duty exemption on imports.� No excise on capital goods, raw materials procured in domestic market.� Supplies to SEZ units from domestic territory area (DTA) are treated as deemed exports.� 100% income tax exemption for a block of five years, 50% for two years and upto 50% of ploughed back profit for the

next three years.� For offshore financing units, 100% income tax exemption for three years and 50% for two years.


� Freedom to subcontract even abroad.� In manufacturing, barring a few sectors, 100% FD through automatic route.� No cap on foreign investment for 55% reserved items.

The developers of multi-product zones need to have a net worth of at least Rs 250 crores and a minimum investment of Rs1,000 crores whereas for the developer of sector specific zones, it requires at least 50 crores as net worth and minimuminvestment of Rs 250 crores. SEZs act issued the guidelines for the developers of sector-specific SEZs that they can buildmaximum of 7,500 residential houses, a 100-room hotel, and a 25- bed hospital and have an office space of upto 50,000 sq.meters in the non-processing area. While in multi-product zones, developers can build 25,000 residential houses, a hotelwith 250 rooms, a 100-bed hospital and office space of not more than 2.50 Lakh sq. meters. The area within the SEZ canbe classified as processing and non-processing area, which is demarcated by the Development Commissioner of SEZ. Asper the present guidelines, 25 per cent to 35 per cent of the area will be the processing area and 75 percent to 65 per cent areawill be the non-processing area. This non-processing area will be used for the development of social infrastructure. Theactivities in the development of social infrastructure includes building of basic infrastructure, water and sewage treatmentplants, office space, shopping area, schools, houses, hospitals, recreational and sports facilities, restaurants and power andgas connections. SEZs would provide world class infrastructure to attract local and foreign investments. Furthermore, theState Governments will acquire the land at market rates. In the policy of SEZs, the question of land acquisition and potentialdisplacement has been left unattended by the Union Government because the land is under the jurisdiction of state subject.It is pertinent that the Central Government approves the SEZs but the State Governments are responsible for allocating theland and only those proposals for SEZs will be approved for which the land used is either wasteland or barren land or not avery good farm land. The Board of Approval has decided that proposal for setting up SEZs on prime agricultural land would notbe cleared. The Central Government further made it clear that the area of double cropland should not be more than 10 percent ofthe total area required for setting up of SEZs. While the balance 90 percent must be single crop, waste and barren land.

ISSUES, CHALLENGES AND IMPLICATIONS OF SEZS IN EMERGING ECONOMIC SCENARIO In the emerging economic scenario, every country of the world is under immense pressure to increase the efficiency andcompetitiveness. India has decided to go forward with the programme of economic reforms to enhance its competitivenessglobally. Therefore, adoption of SEZ policy is an outcome of this situation and the philosophy of SEZ has now come to stay.What is essential is an effective implementation of the policy so that it could secure the twin objectives of economicdevelopment and welfare of society. No doubt, the philosophy of SEZ has been very successful in China and it could beequally helpful in India but the government should properly address the issues that are emerging out of the implementationof SEZ concept. The issues, challenges and implications that may crop up out of implementation of SEZ policy are discussedin detail as follows. The Agricultural sector of the economy will be worst affected by the policy of SEZs. Land, which is anessential component is now receding due to the developmental activities and increasing population pressure. Consequently,the land-man ratio is declining. The SEZ Act states that only those proposals will get approved which are on either barrenland or single crop land or only 10% of total land used for SEZ could be fertile land. This is very unfortunate on the part ofthe Government that on one side, land is squeezing due to population pressure and on the other hand, Government isframing such policies which are unfavorable for the agricultural sector. If we want to achieve the growth target of 8 to 10%,then the contribution of the agricultural sector is essential for achieving this overall G.D.P. growth rate. But this is notpossible under the current policy of SEZs. The Government should review the policy of SEZs and should make laws thatonly barren land or least fertile land should be used for SEZs. The land, which is cultivated land, permanent pastures,grazing land, fallow land, village common land, cultivable waste, land under miscellaneous crops and trees should bestrictly prohibited to be used for SEZs. The life of a farmer is not only depended on cultivated land but also on pastures,grazing land, forest land and common village land. Till date, the Government has approved near about 400 SEZs, whichaccording to an estimate require 2.80 lakh hectare land i.e. 2800 sq.km. area. Notwithstanding, the Government’s assurancesthat no farm land will be given to SEZs developers, the State Governments are providing all types of land to these SEZs.Many SEZs in Haryana, Punjab, Maharashtra, Andhra Pradesh, Madhya Pradesh, and in other States have mostly allocatedthe prime agricultural land. Hence, agricultural land will be reduced by 2.80 lakh hectare. According to a report by AgricultureMinistry, about 13 lakh hectare agricultural land have been used for non-agricultural purposes during 1999-2005. In 1999-2000, the total agricultural land was 1942 lakh hectare which has been reduced to 1892 lakh hectare. The network of SEZswill further affect the agricultural land. This decline in agricultural land will have a deep impact on the production of allfood grains. The production of food grains includes the production of cereals and pulses. The production of all food grainsin 2004-05 during Kharif season was 14.58 quintal per hectare and 20.54 qtls. per hectare during rabi season. If 2.80 lakhhectare land is taken as base, then production of food grains will decline by 2.80,000 x 14.58 = 4184460 qts during kharifseason and 280,000 x 20.54 = 5894980 quintal during rabi season. Hence the production of food grains will reduce by(4184460 + 5894980) 10, 07,944 quintals. The share of cereals in food grains was 93.5% and in pulses the share was 65%in 2003-04 (P.K. Dhar pp. 311). It is evident from this study that impact will be more on cereals. It is pertinent to mentionhere that India is not self sufficient in case of pulses and the policy of SEZs will further affect the production of pulses. The


policy will not only affect production of food grains but also affects the annual growth rate of food grains. The annualgrowth rate of food grains was 2.4% during 1964-65 to 2004-05, which may also decline. The decline in the production ofcereals and pulses will adversely affect the food security situation in India. Regarding the food security situation, ourcountry is facing a dismal situation where millions of people remain underfed and the problems of starvation are raising itsugly head. The availability of cereals and pulses per capita per day was 427.4 gram and 35.9 gram respectively in 2004. Theper capita per day food grains availability is (427.4 + 35.9 gram) 463.3 in 2004 whereas annual food grains availability is168.99 kg. per capita. Where as, per capita food availability in China and U.S. are 325 kg and 850 kg. respectively. Hence,the policy of SEZs will be a challenge to the food security situation in India because due to decline in cultivatable area, theproduction of cereals and pulses will further decline and consequently it will affect the net food grains availability. ThusIndia may face acute food grain crisis in future as population is increasing and per capita food availability will decline dueto decline in cultivated land. This food grain crisis will have deep impact on India and its precious foreign exchangereserves. To solve the food crisis problem in India, the Government will have to import food grains from other countries.Even at present we are still deficient in pulses and vegetable oils and we are importing these commodities in huge quantity.Hence, due to affect on foreign exchange reserve, our development work will suffer a lot. The crisis of food securityproblem may also affect the general price rise situation in the country. As we know, in the recent period the prices ofcommodities are rising very steeply and inflation had reached 7% in the month of April, 2008. Hence, the policy of SEZswill further deteriorate the situation of prices in India. This will make the life of common man very miserable. Therefore, itis essential to save the fertile agricultural land of India in larger interests and the low biological potential area or only barrenland should be earmarked for the development of SEZs. There is enough data to complete such work speedily.

Since land is a state subject and as per the guidelines of SEZ Act, it is essential for State Govt. to provide land for approvedSEZs. In this way State Govt. are playing the role of middlemen between SEZ developers and farmers and forcing thefarmers which is unfortunate on part of the Government. Ministry of Commerce and Industry has cleverly declared SEZ aspublic utility services, so that State Governments can utilize the Land Acquisition Act 1894 to acquire the land for privatecompanies. Whereas there are provisions in the Land Acquisition Act, 1894 that Government can only acquire the land onlyfor those projects which are of public utility like roads, railway tracks, hospitals etc. Hence, the Act is misused as aninstrument for acquiring the control of land for the private companies. There is pressure on states to acquire land forapproved SEZs.The Government should declare SEZs as private utility service so that the misuse of Land Acquisition Actand other Acts in force may be avoided.

SEZ Act States that 75% or 65% of land acquired by SEZ can be used for non-commercial purpose. In the non-commercialarea, land will be used for the development of social infrastructure e.g. restaurants, educational institutions, hospitals etc.This lacuna in the SEZ Act and more economic incentives attract the industrialists to block the large piece of land. Thismass grabing of agricultural land is giving rise to the business of real estate. A Morgan Stanley report suggested that manyof the applications are made in rush just to block the piece of land. Social worker Medha Patekar also labeled allegationsagainst Mega Company that they have purchased land at Rs. 1 lakh per acre and bargained with foreign investors for Rs. 4crore per acre. This huge earning of money out of the sale and purchase of land leads to the situation of large scale grabbingof agriculture land. The grabbing of land has two impacts- one, this system is going to create a new kind of society i.e.corporate feudal society and second, it has deep impact on marginal and small farmers, which constitute 78% of the totalholding in India. This conspiracy of land grabbing will push this section of society to the below poverty position. The RBIhad also directed the nationalized banks to treat SEZs as real estate and ruled out any commercial finance to the developersof these zones. It is pertinent to note here that as compared to China’s SEZs, Indian SEZs are very small in size and large innumber. Till date, China has only six SEZs and they too are stretched across hundred of kilometers, for instance HainanSEZ is as big as Kerala and Shantou is 234 sq. kms. whereas in India the total number of applications for SEZs are about500 and approved SEZ are 400. The minimum size of SEZ in India is 10 hectares out of which only 3.5 hectares can be usedfor commercial purpose and 6.5 hectares for the development of social infrastructure. This creates the doubt against thesuccess of SEZ policy in India and raises the question that how an SEZ of small size can boost the growth of the industrialsector. There are two reasons behind it- one, our SEZs are very small in size and second they are using 35% of the area forcommercial purpose. The findings of Morgan Stanley report in June 2006 suggest that the minimum sized SEZ should besomewhat between 40-50 sq. miles. To setup the SEZ of a proper size, the Government should merge the small SEZs tomake a big SEZ. Further it is also suggested by many economists that 50% of the area of SEZs should be utilized forindustrial purpose and Government should develop a proper mechanism to plug these loopholes. The lack of transparentmechanism of land acquisition has bred corruption and led to massive losses for the Indian exchequer. The attractionstowards real estate business and incentives of tax sops attract the SEZ developers. This situation may lead towards thediversion of capital and investment from non- SEZ area to SEZ areas which may have deep impact on urban employment.The big threat of SEZ policy is displacement of millions of farmers, artisans, landless people, small businesspersons andothers. As it is estimated that land required from SEZs is 2, 80,000 hectares and average holding size in India is estimatedabout 1.3 hectare. Consequently, it will displace about 215,385 families of farmers and if one family has near about seven


members then it will affect about 15, 07,692 farmers. Apart from farmers, millions of landless laborers and artisans willalso be displaced. The displacement of millions of people without any social and economic security will create unrest in thesociety. Regarding the displaced masses, nothing has been made clear in the SEZ policy .The Government has no concreteand transparent plans that will help the rehabilitation of farmers. India is keeping a very poor record of rehabilitation offarmers and tribal people, whose land has been taken away. Till date the government has failed to solve the rehabilitationproblem of about 10 crore farmers and tribals, who were displaced under the various development plans. There are 50 to 60lakh displaced people in Jharkhand only and every fourth person is a displaced one and further among these displacedpeople one is tribal. The mass displacement of millions of people will create social tension and regional imbalances in thesociety, which may also increase the rate of crime in India. The strength of landless, homeless and slum dwellers is going toincrease due to the policy of SEZs. The policy may also have an adverse impact on rural employment. There is already ahigh degree of unemployment and under employment among the agricultural workers in the country. The unemploymentrate has increased from 6.2% in 1993-94 to 8.6% in 2004 in rural India based on current daily status. The displacement ofpeople from rural area will further aggravate the problem of unemployment in rural areas of the country. The situation ofunemployment will also be worst in urban areas as many industrialists are making efforts to shift their industries to SEZarea to attain the benefits of tax sops. Apart from this social and economic impact, the establishment of SEZs and displacementof millions of people will also adversely affect the ecology and environment. No one seems to be worried for the environmentalloss being caused by the SEZs, neither Ministry of Commerce nor Ministry of Finance and Environment.

Many special economic zones are coming up around the major cities and developed areas of India. The policy of SEZs willcreate serious regional disparity or imbalance in our economy. India is already experiencing huge regional imbalances asmany states are economically advanced and some others are backward. RBI recently, in its annual report mentioned thatSEZs could aggravate an uneven pattern of development as industrialists may pull out resources from less developed areasto advanced areas. India’s renowned firms have applied for more than 500 SEZs and 400 have been approved and the stateswith most number of SEZs are Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Gujarat, Haryana, Uttar Pradesh andPunjab. Against it in the north- eastern states, hilly states and economically less developed states, there are a few SEZapplicants. No firm is ready to set up SEZs in backward states and areas. Hence, the policy of SEZs will further increase theregional imbalances. This regional imbalance may further increase the mass migration of people from less developed areasto more developed areas and will breed the seed of social tensions at later stages. Marathi and Northern Indian dispute inMaharashtra is one such example. When the local residents feel economically and politically suffocated, then they mayraise the voice of separatism.The Khalisthan movement of Punjab, Ghorkhaland movement of West Bengal, North Easternseparatist movements and other separatist and regional movements and outbursts in the country can be seen in this perspective. The issue raised for the formation of separate states is also supported by such ill logics. Therefore, to maintain nationalunity and integrity, the Government should scientifically analyze the implications of the SEZ policy.

The main objectives of economic development are the development and utilization of human resources and improvement inoverall quality of life of the people. There is a direct relationship between human development and overall economicprogress. National Institute of Public Finance and Policy estimated a revenue loss of 1, 75,000 crores by 2011, resultingfrom the loss of income tax, excise and custom duty. This financial loss has been estimated when the number of SEZsapproved was 182, but now the number of approved SEZs has reached about 400 and hence, the financial loss to theGovernment exchequer has also increased manifold. Dr. Raghuram Rajan, chief economist at IMF expressed concern thatIndia, with its big fiscal deficit finds difficulty to afford this revenue loss and this may affect the central assistance for thedevelopment of social sector. Consequently, budget allocation to health, education, poverty alleviation programmes andpublic distribution system and other developmental schemes will get affected. On the one hand, the Government would findit difficult to fulfill its social obligations and on the other hand, the functioning of the Government would be affected due tocash crunches .We know that India is the biggest democracy in the world and the constitution offers certain fundamentalrights to its citizens. Any law that violates the fundamental rights is null and void. The SEZ act has deep implications notonly for fundamental rights but also for labour laws. The SEZ act does not allow trade union activities in the SEZ areas.This not only violates the constitution but also violates the preamble of International Labour Organization. For thesereasons, these SEZs are “undemocratic enclaves” within the “democratic India”. Therefore, this seems to be the genuinerequirement of the time that Government of India should carry a sincere review of the Act and work properly over thecrystal chokes of the policy. It should lay down certain new norms to limit irrational numerical growth of the SEZs andmake enough amendments in the SEZ Act so that labour laws could be implemented and labour interests safeguarded.

CONCLUSIONThe shift from an agricultural economy to industrial economy is essential and vital for the economic development andemployment generation in any country. The apparent harm to the interests of farmers, artisans, landless people, laborers,small businesspersons and others is inevitable, but there is no other way as the agriculture sector is incapable of providingthe jobs of satisfaction to the new generation. Industrialization is the only way out to meet these urgencies and it’s a globally


accepted truth now. China has proved this with its man power resource and it has not only survived as a political system butalso emerged as a major world power. Conversely, Soviet Union had to face adverse effects and even a collapse to turn outas a defunct state. India also has the potential to compete with China with its man power resource. That is why India hasadopted the SEZ policy, which has already proved its significance as an engine of economic growth in China. In thisresearch paper, the impact of SEZ policy on agricultural sector, food security situation, displacement of masses, imbalancedregional development, external sector, employment situation and labour laws has been studied in detail. To make the SEZpolicy successful, the Government has to address the issues and challenges that are emerging out of implementation of SEZpolicy. Though we have followed this model from China, yet the Government has not fully endorsed it. The Governmentshould fix the priorities of SEZs. There is a mad race for the SEZs as the Government have approved 400 SEZs till date.However, in China until now there are 14 SEZs only. In India, the Government should identify the areas and should limit thenumber of SEZs. This blind rush for SEZs will not only affect the present structure of industrialization but will also provethe biggest failure on the part of government exchequer. The business of real estates and getting exemptions from tax seemsto be the real motive behind the investors. The SEZ policy can prove as an engine of economic growth but it requiresdetermination, discipline, transparency and political will in governance. If the Government is sincere and willing to exploitthe economic potential and social objectives of SEZ, then it has to make amendments in SEZ Act or it will widen the gapbetween the ‘Suffering India’ and ‘Shining India’.

SUGGESTIONSThe following suggestions are made in respect of the philosophy of Special Economic Zones (SEZs) in India.1. The farmer’s land is not only the means of generating income but is also a source of life security. Therefore, regarding

the displaced farmers, government should offer reallocation package by ensuring them jobs in special economic zones.2. In China, the displaced farmers are given urban hukou status. A Hukou was a locality residence license that allowed the

hukou holders to assess social benefits and local public goods such as health, education facilities and goods at subsidizedprices. In addition to financial compensation, these tangible benefits will make compensation packages more effectiveand farmer resistance can be addressed in a better way.

3. The policy of compensation should be transparent and compensation should not only be at present market value but itshould be decided after assessing the future income from that land. Displaced peasants should be ensured jobs in andout of SEZs.

4. It is also suggested that land should be given on lease to the developers of SEZs and in addition to monitory compensation;peasants should be given perpetual royalty as dividend is given to shareholders.

5. The Government of India should make it mandatory that more than 50 percent area of SEZs be utilized for manufacturingactivities so that it could also be ensured that SEZ policy has been kept away from the land grab Mafia. It will alsodiscourage the development of neo-corporate feudalism.

6. It should also be ensured that while approving the SEZs for a particular area, the ecological loss should be properlyassessed and a complete social-cost benefit analysis be carried out.

7. The concept of SEZs should basically mean to develop immense backward area. Therefore, the Government should carefully ensure and identify the areas for SEZs so as to remove the regional imbalances caused due to the implementationsof the SEZ policy.

8. The Government should discourage the establishment of small sized SEZs. The small sized SEZs should be merged tomake it bigger ones. It will be helpful for the Government to manage and control it in an effective way.

9. Government should make transparent and scientific policy for the rehabilitation of displaced people before approvingSEZs for a particular area.

10.Although, it is evident that the concept of SEZ has contributed significantly in China but simultaneously it has alsocreated numerous problems in China. Therefore, the Government of India should implement the concept of SEZs bytaking into consideration the social, political, ecological and economic circumstances of India only.

11. The Government should ensure the implementation of labour laws in SEZ areas to bridge the rift of bitterness betweencapital and labour relations.

12.To discourage the business of real estate, the land ceiling for SEZs should be fixed.13.The Government should identify priority areas for the establishment of SEZ’s. Hence, SEZs should not be a general

phenomenon; rather it should be specific one.14.Encouragement should be given for those SEZs which will attract foreign technology and are only export-oriented.15.Government should limit the land ceiling area for the development of industrial activities that should not be more than

25 per cent of the total land in any case.Lastly, we can say that if the aforementioned suggestions are considered fairly and rationally by the policy makers, the conceptof SEZ can be a powerful and healthy means to transform rural economy into manufacturing economy and finally to acceleratethe pace of overall economic development. Or else, it will be a complex amalgam of infinite and uncontrollable problems.BIBLIOGRAPHYhttp://www.sezindia.nic.inAhya Chetan, Sheth Mihir, The SEZ Rush, Morgan Stanley research, India Economics, 21 June,2006.


“Ethics In Business and Value Addition”A Case: Polyhydron Pvt. Ltd., Belgaum-Karnataka (India)

*Dr D.N.S Kumar

**Spardha Khera

INTRODUCTIONThe new millennium has given way to the growth of knowledge based, seamless global society, characterized by constantrapid change quite difficult for an average mind to even gauze.The Indian economy is in transition from government controland stagnation to one of free market economy, competition, and innovation.The Government of India initiated the economicreforms in 1991.The government went about putting an end to the license – permit raj; automatic approval of foreigninvestment up to 51% in most industries, opening up of the insurance sector etc. India is also one of the members of theWorld Trade Organization (WTO).The agreements of the WTO specify that equal treatment should be given to both domesticand imported products and there should be no discrimination among the member countries.Thus, the Indian economy willfurther integrate with the global economy, and at the same time, Indian industries will face fierce competition in theglobalized economy.In the last two decades of the 20th century, business throughout the world was rocked by scams and other unethical behaviors.People began to realize the damage such conduct could have on the image of the respective products/services and countries.Acceptability of products/services of the concerned companies and their credentials were at stake.This resulted in a greaterdemand for ethics and values in conducting a business.In the new millennium it has become imperative for businesses throughout the world to conduct business ethically, in orderto survive, grow, and thrive.The process of globalisation of the Indian economy will make it inevitable for all the Indianbusinesses to evolve into ethical organizations; else their very survival will be at stake in the seamless global economy ofthe new millennium.At this stage, one underlying issue is-Are ethics and ethical practices new to Indian Business Environment?The answer is “NO”.i) In Bhagvad Gita, Lord Krishna says that a manager must look upon the task that has been set for him, or that he sets for

himself not in terms of personal gain or profit, but purely in terms of its fulfillment and the satisfaction that it gives him.ii) In the Aryan ethical code, sons inherited their father’s debts along with his property.iii) Artha Shastra lays it down as a duty to keep complete accounts and be audited for their clarity and truth.But unfortunately (In India) in the 20th century, especially after Independence till the year 1991, the Indian economy wasstrictly controlled by the Government under the pretence of safeguarding the interest of the people. Competition wasconsidered to be bad. As a result, the economic growth was paralyzed, monopolies were created and a few companies wereable to reap the benefits through exploitation of all the stakeholders.Customers had no choice but to purchase low quality goods at exorbitant prices, managerial talent and time was spent moreon managing the power centers and less on Creativity, Innovation, and Improvement.During License Raj, strategic planning for industry was done more at Shastri Bhavan and Yojana Bhavan, and less in theboardrooms.Not to miss, the Indian economy was also racked by the infamous stock scams that involved top brokers,respected banks, and other financial institutions of the country.

WHAT ARE ETHICS?The word ‘ethics’ comes from the Greek word ‘ethos’ meaning character or custom. According to Robert C. Solomon,Professor in Philosophy, ethics suggest two basic concerns:i) Individual character, including what it means to be “a good person” andii) The social rules that govern and limit our conduct, especially the ultimate rules concerning right and wrong, which we

call morality.Business ethics is the study of what constitutes right and wrong, or good and bad human conduct in a business context.

RELATIONSHIP BETWEEN PERSONAL ETHICS AND BUSINESS ETHICS:The relationship is very much integrated and cannot be separated. As organization is of people; moral and ethical decisionswill be taken only when people in the organization have studied and taken it seriously about ethics in general and moralvalues in particular.

* Associate Dean and Professor of Finance, Alliance Business School, Bangalore. Email: [email protected]** Research Associate, Alliance Business School, Bangalore. Email: [email protected]


Business today cannot be developed only with technocrats; it needs a good synergy of technocrats and managers. Therefore,management students who can base their decisions on ethical standards and build their individual and organizational reputationon integrity are very much needed. So, business schools should mould their students to be managers of high integrity whowill be capable of taking ethical decisions in any organization they join.Evolving one’s organization into an ‘ethical’ organization is much easier said than done. But it is not impossible.In this paper, the authors have made an attempt to highlight the ethical practices and effects of the same at PolyhydronPrivate Ltd., Belgaum (Karnataka).

“Visiting this temple of ethical management is a great learningexperience for me. My optimism now has a solid practical proof.”

- Avinash Dharmadhikari, I. A. S. ( Retd. )

PPL – A TEMPLE OF ETHICSPolyhydron Pvt. Ltd., (PPL) is a flag ship company of Polyhydron Group of Companies. It was established in 1982 andmanufactures Hydraulic Radial Piston Pumps, Valves and Accessories. Its products are priced unbeatably low, and PPL haschanged the price marginally in the last 25 years.It has maintained this strong marketing strategy through carefulimplementation of Just–in–time Production system, Kanban System etc., where waste elimination is the key.Polyhydron is known for its ‘Ethical Management’. At PPL, honesty is not a policy, but ‘the policy’. It believes in buildingquality from the SOURCE. Self-inspection is the Best Inspection is also its policy.A. MANAGEMENT BY SOUL:What good ethical behavior comes down to is soul – where you house your values, your purpose in life, including thepicture of the kind of person you want to be. Without your Soul, you have nothing to guide you.The soul that Shri. Suresh B. Hundre CMD calls as “Jiva” of Polyhydron is deep rooted in the culture, and is expressed asa mission statement.“We will nurture an ethically managed organisation. We will not exploit our Customers, Employees, Suppliers, Government,Society, and Nature”.B. CODE OF ETHICS:a. Each of the employees is responsible for both the integrity and consequences of his own actions.b. Each and every employee must follow the highest standard of honesty, integrity, and fairness.c. The company expects that no employee will undertake any activity while on the company premises or while engaging

in company business, that is immoral or that could in any way harm or embarrass the company and its customers.C. MANAGING WITH A CONSCIENCE:

You don’t have to cheat to win

PPL has adopted by replacing the old “we” against “them” mentality with a new perception of “us” that encourages the growthof profitable relationships with employees, customers, clients, suppliers, and alliance partners. It stimulates, creativity, adaptationto change, promoting excellent service, and communication, builds trust, and energizes the work force.D. PROFIT MAKING IS NOT BAD:Profits generate funds (taxes) for the government, which in turn serves society and the nation. Profits also provide wagesfor the employees. But, the manner in which the profits are made should be ethical.The chart below, developed by S. B. Hundre, depicts the relation between the goal, means, and the time required toaccomplish the goal. G O A L

TO MAKE MONEY

02 – 05 YRS 05 – 10 YRS 10 – 20 YRS FOREVER

Unethical Unethical Ethical EthicalBusiness Business Business Business

Unethical Ethical Unethical EthicalWay Way Way Way


Therefore, the goal should be to make money now, as well as in future, and not just now.PPL operates under the overall umbrella of ethical management, which guides all the decisions taken by the organization.Hundre says, “I will live up to my values and never compromise”.

E. GENERAL PRACTICES:i) Processes

a. Material b. Paper c. Ideas.ii) Factory–within–factory

iii) The basic unit of time at PPL is a weekiv) Negative inventory turnover (for some)v) No Stores Department

vi) Single source of supplyvii) All unnecessary paper work has been eliminated

viii) No Receptionist, i.e., open door system.ix) S. B. Hundre’s beliefs for ethical management are as follows:

a. Trustworthiness. b. Making money ethically c. Transparency d. Freedom to think individuallye. Congenial living conditions f. Access to advanced technology g.Freedom of expressionh. A reason to live and lead life i. An opportunity to learn j. Tension free atmosphere

x) An organization to get information from employees before it is needed and not afterxi) No Supervisors, S. B. Hundre says “Supervisor’s basic job is policing, and we trust our employees and do not want

to police them, and therefore we have “eliminated Supervisors”xii) Value addition bonus for employees.

xiii) Welfare Activities:a. Robin Hood Scheme. b. Vehicle Scheme. c. Janata Policy

xiv) Marketing without Marketing DepartmentF. MANAGEMENT BY WORKING ALONG (MBWA):Suresh B. Hundre rubs shoulders with the machine operators, administrative staff, designers, and even computer programmers.He believes it is necessary to work, and says – even though faults may be found in his work, but not in one thing, hiscommitment to work.

Nothing motivates a man more than to see his boss putting in an honest day’s work.

G. IDEAS IN PROCESS:At PPL, it is the knowledge of workforce; the training and intention of engineers; know-how of workmen, and dedicationand commitment of the Managing Director Shri. S. B. Hundre, that have not only improved the factory efficiency but alsodiscovered new, innovative products worth millions of rupees ( to name few; Lever optd., Directional Control Valve in2002 – 03, Feed and power Hand Pumps in 2001 – 02, Mono Block Directional Control Valve in 2001 – 02, Pilot operatedpressure Relief Valve in 2001 – 02, Joystick controlled pilot oil unit in 2001 – 02, Cartridge Directional Control Valve in2001 – 02, Radial Piston Pumps 11 p.m. 750 bar and Solenoid Directional Control Value).H. EFFECTS OF ETHICAL PRACTICES:The more ethical and knowledge intensive the Company is, the greater the M/B Values.

M/B value of PPL in comparison with world players

Company Market Value ( M ) Book Value (B) M/B

IBM $ 70.7 Billion $ 16.6 Billion 4.25

Microsoft $ 85.5 Billion $ 930 Million 91.93

PPL - Belgaum Rs. 1,719.75 Lakhs Rs. 749.90 Lakhs 2.29

I. CONCLUSION It can be said that, managing business ethically is no longer an option in the new millennium. To evolve any business in toan ethical practice, one requires tremendous efforts and commitment of people at all the levels in the organization. This hasbeen proved at Polyhydron Private Ltd., Belgaum, a Medium Scale Industry. Through ethical practices, Shri. Suresh B. Hundre, CMD of PPL has been able to satisfy all the Stakeholders. The contributionsare as follows: (Continued on page 41)


Ethical Acceptability of Neuromarketing- Relevance,Limits and Limitations

* Nazia Sultana** Ram Nangunoori

The human brain is arguably the most complex biological organ in the known universe with billions of cells makingmillions of connections with other cells into the complex repertoire of behaviour exhibited by humans. Psychologists,behavioural scientists, economists, marketers are all concerned with the study of nervous system as there is an intimaterelationship between various aspects of individual behaviour including thoughts, cognitions, decisions and our physiologicalsystem. Neuroscience has recently seen a surge of applications in marketing research to understand consumer behaviour.Neurological research is being tested as a new source of evaluating the initial and ultimate “emotional impact” of advertisingand marketing beyond what individuals can assess.Let’s understand what Neuroscience is all about. Neuroscience is a branch of scientific and clinical knowledge dealing withthe nervous system, particularly the brain. It is a science that deals with neurons, their patterns that influence the decision-making process. And marketing as such is a process of creating awareness, propagating and inducing a positive buyingbehaviour on the part of the current and potential consumer. Marketers believe that neuroscientists should supplement alltheir efforts that are destined to bring consumers in the marketing realm. Neuromarketing is an emerging field that appliesmedical technologies such as fMRI to scan the brains of people as they consume particular products or look at theadvertisements. It aims to discover what kind of stimuli trigger neural responses. Marketing initiatives tries to influencehuman behaviour and grow market share/achieve tangible results of profitability by understanding the human condition.Ethical questions need to be answered when considering modern advertising techniques:� What responsibility, if any, does a company hold for honestly educating the consumer about its product/service?� Is it ethical to use technological advancements to sell products/services?� Is it the buyer’s responsibility to be aware of these strategies and not allow them to manipulate their emotions?Ethical behaviour as such implies conducting one’s life in complete accord with a firmly held set of values and principles.These principles may be derived from religious beliefs, philosophical understanding, and social norms etc. The question isthat whether creating tools that attempt to reveal preferences, choices and responses to specific products and campaignsideas is ethical or not. Some have aired criticism that neuroscience may reveal too much about the brain to those who wouldseek to use the information to their advantage. The major concern is that everyday a person could be made vulnerable to themechanisms of persuasion that neuroscience reveals.Neuromarketing is an applied extension of neuroscience. The application of brain scan technology to marketing, especiallythe use of fMRI gave rise to the term. Conventional marketing influences both, how people experience the brand and theresultant emotional memories; and how people experience the advertising and the resultant emotional memories. Marketingcomprises of the management of the emotional memories of both the brand and all its communications. Using experimentalmethodologies combined with imaging and other neuroscience tools can better help marketers understand the mechanismsof decision-making, choice, preference, risk seeking or avoidance. Brain wave recording devices have been availablethrough decades but now they can pinpoint more precisely which regions are active as people respond to products or makebrand choices or are exposed to advertisements.LITERATURE REVIEWLet us throw some light on various studies done so far in application of neuroscience to the field of marketing and itscriticism. In 1957, Vance Packard wrote “The Hidden Persuaders”, a book about marketing that featured harsh criticism of“psychology professors turned merchandisers”. Packard opined that marketers were using the resources of the social sciencesto understand consumer’s irrational and emotional urges to increase the product consumption. Rita Carter (2000), “Mappingthe mind”, London, Phoenix, uses a wonderful analogy that brain-scan machines are opening the territory of the mind as thefirst ocean-going ships once opened up the globe. However, she cautioned that our exploration and the vision of the brainthat we now have is probably no more complete or accurate than a sixteenth century map of the world.

Various studies have used -verbal reports, behaviour and segment reactions. But mostly, the focus has been on correlationwith so called “known-centres” such as reward centre, self referencing centre, face recognition, liking centre, anticipationcentre etc. As a result, neuromarketing studies have been increasingly pointed to various “known centres” in the brain.Javier Cervantes et al.,(details in reference) , have presented that marketing research is often still limited to traditionalmethodologies or qualitative techniques that can fall prey to subjectivity and purely descriptive analysis. Medicalmethodologies - such as the exploration of the human brain using Neuroimaging (and especially functional Magnetic

* Assistant Professor, Department of Commerce, Osmania University College for Women, Hyderabad. E-mail: [email protected]** Vice President, RGS Infotech Inc., 3620, Pelham Road, # 124, Greenville-SC 29615, U.S.A. Email: [email protected]


Resonance Imaging) - and their application to marketing research are able to fill this gap, and to at least partially explainthe underlying neurophysiological processes of consumers’ decisions and perceptions. This opens up the possibility of abetter understanding of the potential impact of different marketing elements. This paper gives a comprehensive introductionof the application of neuroimaging methodologies to consumer research, and focuses on consumers’ purchasing decisions,as well as discussing the opportunities and limitations offered by such an approach. Valérie Morrisson and Pierre Gomy,(details in reference) are of the opinion that neuroscience, in particular, dramatically improved industry knowledge of howmemory works, and how attitudes develop. This paper draws on research into emotional and implicit attitudinal measures, andargues that ‘hidden’ effects are important to understanding how advertising works. Among its findings were that engagementwith an ad, and recall of it, lies in the ‘emotional’ reactions consumers have; advertising can also change or reinforce previouslyheld brand perceptions; and that consumers do combine rational action with more emotional behaviour.David Penn, (details in reference) offers a critical discussion of neuromarketing (the application of neuroscience to marketing).Since 2003, there appears to have been little progress to justify the prediction then made that it would become a key part ofthe decision-making process, and it is now generally considered that neuroscience complements, but does not supersede orreplace, conventional research. The key reason is that it can only tell that there has been a response, not the nature of thatresponse, so a huge amount of subjective interpretation is needed to make sense of brain-imaging data. However, neurologicaltechniques do pick up unconscious emotional responses. As such, the most interesting challenge may be at the frontierbetween the cognitive and the emotional brain.Hilke Plassmann, et al., (details in reference) proposed that marketing actions, such as changes in the price of a product, canaffect neural representations of experienced pleasantness. The paper provides evidence for the ability of marketing actionsto modulate neural correlates of experienced pleasantness and for the mechanisms through which the effect operates.In the long term, neuromarketing will be far more socially welcome for applications that focus on products and causes witha clear social benefit-application like road safety messages and persuading people to give up smoking or to resist over-eating. Developing and testing strategies that are designed to cure rather than create social pathologies is hard to argue with.Used in this type of application, neuromarketing will be refined to public applause rather than public alarm.LIMITS OF NEUROMARKETINGMyth and mystique will be difficult to dispel and will prompt regulation to constrain neuromarketing. Marketers shouldinfluence thinking, feeling and willingness of a potential consumer, but there is no clear indication of genes that are activatedto influence thinking, feeling and willingness. For argument sake, let us say, we have identified set of genes (G) that areactivated and will generate set of enzymes (E) that will influence thinking process of a consumer and lead to a positivebuying behaviour towards the product. Now the question arises is, how to induce the activation of gene set G and generationof enzymes set E. We cannot use medical pills/tools to induce this physical change in the mind of buyer that causesneurological impact for positive buying decision. In essence, even if we precisely find set of neurons that participate inpositive buying decision of a consumer, we still need to influence these neurons, genes and enzymes which is already takenup under the conventional means of advertising and marketing.Even if we have not identified the neurological changes that are taking place in the buyer’s mind to influence positivebuying behaviour, it only indicates that we did not understand the chemical processes that are taking place internally. Butwe already influenced the buyer using conventional methods of marketing and advertising. Companies scan the brains ofa representative sample of its prospective customers, assess their reactions to the company’s products and advertising andtweak the corporate image accordingly. Companies place test subjects in MRI (Magnetic resonance Imaging) machines andanalyzing their brain activity. MRI scanning offers the promise of concrete facts- an unbiased glimpse at a consumer’s mindin action. It is noted that to an MRI machine, one cannot misrepresent ones responses. We believe that fMRI only givesinsights about the snapshot of brain during the decision making process. But it will not explain how to instigate the brain toreach to that state. It has to be done by using conventional methods of marketing only. We can examine how the study of process is irrelevant to the actual activity of marketing by taking the example from our“Sweet-ball Theory”. For a cook to cook it, all he/she needs to know is the recipe consisting of condensed milk, flour, sugarand sugar syrup wherein flour is mixed with condensed milk and other ingredients to make fine balls of the flour which arefried in oil. But if we try to understand the taste of the same by taking it to the lab and decompose it and try to find how manysugars are bonded with how much of flour at what ratio and temperature etc, it would make an interesting study. But we willnot be able to explain the taste well. On the other hand, if you just eat it, we will be able to explain it much better. Similarly,if we try to explain the process of neurological changes that are taking place in the process of making positive decisions, wewill just consider the snapshot of the brain but it doesn’t really facilitate us much. To manipulate the brain to get it to thatstate, we still need to depend on conventional methods of marketing. Thinking, feeling and willingness are the aspects thatgenerate different states within the brain that may make consumers to take decisions but to get to those states we still needto use conventional marketing considering the well known social, economical and environment factors.Ralph Nader’s “Commercial Alert” in their website has condemned neuromarketing experiments as unethical. They opinethat Neuromarketing is likely to be used to promote “human disease and suffering”. Chris Firth of the Institute of Neurologyin London, “A probe inside the mind of the shopper”, puts it in more realistic perspective stating that just because one can


see and measure the increased level of activity of the brain, it doesn’t mean that they are more authoritative than the personactually thinking or feeling. There are some limitations to neuroscience techniques as it serves to tell us what happens in thebrain or what is activated when we make decisions or are in the process of making decisions or responding to outcomes. Itdoes not however give us any insight into why we make these decisions and why we respond in the manner that we do.‘Discovering the feeling’ has largely been neglected in traditional research. Researchers have even tried to physicallyrecord the emotions a respondent is experiencing through a variety of techniques like fMRI, galvanic skin response, andsmile /frown muscle movement. But these approaches have only served to reinforce the idea that measuring emotions isdifficult. Current research methodologies concentrate on the overly cerebral approach and force respondents to make logicalconnections to explain their behaviour. This has three serious flaws:• Often respondents can’t tell us why they did something because they don’t understand it themselves (although this

doesn’t necessarily stop them from trying).• Direct questioning results in respondents logically projecting from what they know about the brand – giving us a list of

imagery that the brand portrays and what they believe makes sense.• This type of research results in an over reliance on intuitive analysis.

ETHICAL ACCEPTABILITY OF NEUROMARKETINGThere is, of course, nothing inherently problematic about the use of scientific technology to advance commercial interests(Eaton and Illes, 2007). But the use of technology that probes the inner workings of the human brain, especially beyondwhat one might divulge in traditional behavioral testing, raises substantial ethical issues. Neuromarketing, like humancloning or embryonic stem cell research, stirs the question of whether or not its application in the real world is ethical. Anumber of studies are now being made under a more socially acceptable label-Neuroeconomics. A code of ethics needs tobe framed for implementation of neuroscience to marketing. Mounting social pressure may see the required changes especiallyif neuromarketing technology delivers on its promise and finds wider use.Critics point out that ‘the brain’ is an enigma and just because we can see neurons firing doesn’t mean we always know what themind is doing. For all the admirable success, neuroscientists do not yet have an agreed-upon map of the brain. Neuromarketingmay be able to speak out the difference between advertisements that people merely like and those that are actually effective.Creating an immediate bond between consumer and product is the dream of every company. With the help of neuroscience,marketers claim that companies can know with certainty whether their products are making that special connection. Neuromarketingstudies obtain objective information about the inner workings of the brains of consumers without resorting to the subjectivereports that have long been the mainstay of marketing studies. Thus, neuromarketing purports to provide qualitatively differentinformation, ostensibly superior to that obtained by traditional means, about the economically valuable topic of consumerpreferences. Yet it raises several ethical concerns on its applicability like protection of various parties who may be exploited bythe deployment of neuromarketing and protection of consumer autonomy if neuromarketing reaches a critical level of effectiveness.Neuroethics comes as a rescue in proactively dealing with ethical issues unique to knowledge about and manipulation of thehuman brain to offer guidance for beneficent and non-harmful deployment of neuromarketing techniques. The issue that advancedtechnology in the neurosciences, in particular fMRI, might allow invasion of the inner sanctum of private thought needs to beaddressed. The question is whether it is ethically correct to use the new tools of neuromarketing that provide sufficient insightinto human neural function to allow manipulation of the brain such that the consumer cannot detect the artifice and that suchmanipulations result in the desired behavior in at least some exposed persons. Such neuromarketing is not to be encouraged asit would represent a major incursion on individual autonomy.CONCLUSION:Like genetically modified human organs, cloning and stem cell research, some applications will be desirable but others willrequire guidelines and ethical code of conduct or even legislation from regulatory authorities to control the direction oftechnology to business in general and marketing in particular. Whatever be the outcome, it should be taken in the right spiritthat research in business should be used to understand the consumer better and make their life better. There would surely bea long-lasting conflict between the marketers using neuroscience to attain marketing goals and those condemning its use toinfluence consumer decisions to help consumers retain control over their minds.BIBLIOGRAPHY1. David Plunkett, The advertiser, October 2007, pp93-96, “ Head Games”2. David Penn, Admap, January 2008, pp27-29, “Beyond neuroscience-whatever happened to neuromarketing”3. Emily R.Murphy, judy Illes and Peter B.Reiner “Neuroethics of neuromarketing” supported by Institute of Neuroscience, Canada, Dana Foundation, the British Columbia

Knowledge development Fund, Greenwall Foundation and MacArthur Foundation.4. Hilke Plassmann, John O’Doherty and Baba Shiv, published online 2008 January14.doi:10.1073/pnas.0706929105 PMCID2242704, The National Academy of Sciences of

the USA “ Marketing action can modulate neural representations of experiences pleasantness”5. Javire Cervantes, J.Philipp Hillenbrand, Alejandra Ruiz-Contreras and Oscar Prospero Garcia, ESOMAR, Latin America Conference, Mexico City, May 2008, “ The

secrets of neuromarketing –reading consumer’s minds”6. Max Sutherland, Feb 2007, Inaugural Australia Neuromarketing Symposium, “Neuromarketing: what’s it all about?”7. Valerie Morrison and Pierrie Gomy, ESOMAR, Worldwide Multimedia Measurement (WM3), Budapest, June 2008, “Should we forget advertising awareness? Measuring

emotions and implicit attitudes”8. Priya Shah, 06/01/2005, “Neuromarketing : Smart Marketing or Jedi Mind Control Trick?” www.wenpronews/topnews/2005/06/019. Neuroscience and Marketing –Avenues for further research www.psychwiki.com/wiki.NeuroscenceandDecisionmaking#Neuroscience, retrieved 26.Sept.200810. www.standford.edu/group/stanscimag/volume4-1/pdf4-1/buyButton.pdf


Leadership Through Competing And Caring* Dr. P.K. Jain

** I.P. Singh*** Minakshi Jain

INTRODUCTION “Leadership is not a private reserve of a few charismatic men and women. It is a process ordinary people use when they arebringing forth the best from themselves and others. Liberate the leader in everyone, and extraordinary things happen”.Leadership is defined by what we do, not the role we are in”. Some people in “Leadership Roles” only can perform asLeaders, they are bosses not leaders. Conversely, many people have no formal leadership role and yet are excellent leaders.In today’s fast changing world, we all need to be leaders. To lead is to show the way by going in advance. To lead is to guideor direct a course of action. To lead is to influence the behaviour or opinion of others. We all need to be leaders, regardlessof our formal title or role. The process of becoming a leader is the same as the process of becoming a highly effective humanbeing.Leadership development is personal development.

LEADERSHIP - COMPETING AND CARINGThese are two words that seemingly do not belong in the same sentence, but on deeper reflection are the two most criticalguiding principles for the growth of a developing nation. To grow economically, a country’s people and corporates need tocompete effectively not just among themselves but also with their global counterparts.For overall development, a country must continuously ‘Care’ about the underprivileged sections of the society, to ensuretheir development and contribution to this growth. If our efforts do not include the empowerment of all, the nation cannotsustain a medium to long term progress graph. In fact in the absence of this ‘Caring’, there is fear of increasing socialdisparity, leading to internal instability.

THE ROAD TO COMPETITIVENESS: CREATING LEVERAGE THROUGH CARING ANDMENTORINGAbout a hundred years ago, when modern business organizations were conceptualized, Management built a world of squares,boxes and pyramids.The world operated on principles of control, order hierarchy and other concepts such as climbing theladder, top and bottom, etc. In this world, rank equaled authority and the CEO sat at the top of the pyramid looking downat the rest of the organization.But there is revolution going on currently. Global competition and blurring boundariesindicate that the old rules and structures are inapplicable in the current environment. There is cynicism inside the organizationthat is structured in the conventional way. The tightly boxed structure and the organizational hierarchy are killing theinnovativeness, spirit and morale of the employees.There is also a new set of the organizations that have emerged or are emerging, which lead with a difference. A new moreinclusive, language of leadership is being developed – “Learning to lead people and not contain them”, “Followershipcomes from trust”.Jack Welch once stated, “Ten years from now, we want magazines to write about GE as a place where people have thefreedom to be creative, a place that brings out the best in everybody; an open, fair place where people have sense that whatthey say matters and where that sense of accomplishment is rewarded – both in the pocket book and the soul”.

* Assistant Professor & Head,Department of Entrepreneurship,SLIET, Longowal, Punjab. E-mail: [email protected]** Assistant Professor & Head,Department of Architecture,National Institute of Technology, Hamirpur – 177005, H.P. E-mail: [email protected] *** Professor,Department of Architecture,National Institute of Technology,Hamirpur – 177005, H.P. E-mail: [email protected]

Fig. 1 Climbing Pyramid

The Importance of People in the organization is aptly reflected by the title thatMr. N.R. Narayana Murthy of Infosys has chosen for himself: Chairman andChief Mentor. Over the years, one of the obvious focus areas that Mr. NarayanaMurthy has highlighted is the people, their development and his desire to createan entrepreneurial mindset within his large organization.

PRINCIPLES - A LEADER MUST FOLLOW TO CREATEAN ORGANIZATION OF MOTIVATED, DEDICATEDAND SUCCESSFUL EMPLOYEES:1. Develop and communicate a Common Shared Vision:Across organizations, industries and countries are undergoing change; leadershave to work harder to carry their communities and constituencies with them.


They need to value people and emotions, make things interesting and most importantly provide inspiration. Herb Kelleher,Chairman, President and CEO of Southwest Airlines, one of the most successful national airlines in America says, “Our realaccomplishment is that we have inspired our people to buy into a concept, to share a feeling and an attitude to identify withthe company – and then to execute.2. Treat People differently, based on their strengths:It is up to the leader to develop a deep understanding of each of his/her employees, their strengths and weaknesses, theirmotivators and personal ambitions. With an adequate understanding of these elements for each individual, the leader canchannelise and leverage each employee’s energy in the most effective manner.3. Set high standards, but give people the freedom and responsibility to do their job:High standards along with adequate degree of freedom transform people to be creative and resourceful. It is important tomake people feel liberated at the job – to be creative, to think out-of-the-box. On the other hand, without this freedom, toexperiment and be creative employees end up becoming puppets that can only follow the orders of their superiors and lackall leadership and entrepreneurial qualities.4. Make Communication a Priority:Employees have a deep rooted need to be informed about what is happening at all levels in the organizations. The Presidentof an International organization has one-to-one, twenty minutes conversation with each employee in his organization aboutideas, improvements and whatever is on the employee’s mind. He devotes about 170 hours to this task every year and feelsit is time well spent.5. Anything is possible if you Share the Glory:Giving another the chance to claim credit and bask in the praise is an effective and often easy way to get results. Successand its recognition can be the best motivators for the employees in the organization.6. Responsibility – “If it’s to be, it’s up to me”:Leadership means accepting responsibility for all choices in life. They refuse to succumb to the ‘Victimitus Virus’ (“It is alltheir fault and there is nothing I can do”).7. Passion and Commitment:Successful people are energized by a love for what they do because it brings them ever closer to who they are. They overcomeapathy and cynicism, develop a burning commitment to their cause, and with discipline, achieve their dreams and desires.Sant Balbir Singh Seechewal, Chairman of Ek Onkar Trust took the cause of cleaning the rivulet “Kali Bein” (once associatedwith Guru Nanak Dev and it had been reduced to a dirty drain). With extraordinary leadership qualities of Sant Seechewal,the clarity of his vision and his ability to inspire the masses, he steered his movement through the labyrinths of politics andhis vision and ability to inspire, all played a major role in bringing his mission to completion. However, the Sant himself isthe first to comment that it is the ‘Sangat’– the people – who have made the difference. They have transformed a dirty draininto a pristine river and have shown the way.CONCLUSION:Leaders don’t motivate with rewards and punishments. They engage people’s hearts as well as their minds. They get theminvolved and participating. They actively nurture the ‘being’ on culture of the group, not just the “doing”. The list above isno way comprehensive. Each leader has to discover what applies best in his/her organization and best suited to his/herpersonal style. However, if the overall realization exists that the people of the organization are going to be at the core of theorganization’s sustenance and growth; and adequate efforts are made to align the employees’ energies with those of themotivators, success cannot be elusive.The more the world changes, the more Leadership Principles stay the same. Leadership Principles are timeless. And theyapply to all of us, no matter what role we play in society or organizations. Genuine leadership comes from within. It isauthentic and based on honesty, integrity, trust and ensuring consistency with our stated values and principles.BIBLIOGRAPHY1. Frances Hesseibein, Paul M. Cohen, The Drucker Foundation: Leader to Leader.2. Arie D Geus, The Living Company.3. Peter Drucker: What the Nonprofits are Teaching Business: Managing for the future.4. W. Chan Kim and Renee A. Mauborgne, Parables of Leadership.5. Robert Tannebaum and Warren D. Schmidt, How to Choose a Leadership Pattern.6. People’s Power Sant Seechewal shows the way. The Tribune dated 7th October, 2008. Page 10.


Minimizing Fuel Expenses In Fleet Management By UsingTheory of Constraints

*K.Velmanirajan

1.0 INTRODUCTION:The profit directly relates with fuel consumption after investment of the initial amount. The fuel consumption plays themajor role in fleet management. There are different types of humans in handling the vehicles. Due to the difference indrivers, there is change in fuel economy. Beyond that the maintenance also plays the role. By maintaining the vehicleproperly, there is an improvement in fuel economy. Less amount of fuel consumption increases the profit of transportmanagement.1.1 FLEET MANAGEMENT:Fleet Management involves maintaining workshops, trip management, managing fuel filling stations and labour management.Providing efficient leaders and cost effective fleet management services are the key factors determining the efficiency of fleetmanagement. This can be achieved through a visionary leadership team that is committed to the perpetual pursuit of excellence.The best way to predict the future is to create it. Strategic planning, benchmarking, and goal achievement can determine thedestiny of the Fleet Management Division. Specific goals and objectives with time lines, can be utilized to maintain the higheststandards of excellence in fleet management and administration. Vehicle acquisition and disposal, assignments and utilization,repair and replacement, commodity and service bids, and fueling of the fleet, also need to be satisfied.1.2 THE TOC CONCEPT:The concept of the TOC is,· Every system must have at least one constraint. If it were not true, then a real system such as a profit making organization

would make unlimited profit. A constraint therefore, “is any thing that limits a system from achieving higher performanceversus its goal” (Goldratt, 1988, p.453).

· The existence of constraints represents opportunities for improvement. Contrary to conventional thinking, constraintsshould be viewed as positive, not negative. Because constraints determine the performance of a system, a gradualelevation of the system’s constraints will improve its performance.

1.2.1 USES OF THEORY OF CONSTRAINTS:Some of the relevant uses of the TOC are listed below:· Improved quality of products and services· Drastic increase in profitability· Management of statistical fluctuations· Improved competitive position.TOC has evolved into a philosophy that can be extended towards service industries in different facets. TOC provides a goodway among constraints based approach. TOC also helps in determining whether the resources are fully deployed to have themost impact on the overall performance of the company.2.0 OBJECTIVE OF THIS PAPER:Use of the TOC concept in Automobile business for its continuous development and trails to break the constraints insteadof governing it is our innovative objective. Thus, this research is designed to achieve the following objectives:· To coin a method of connection between Fleet Management , Fuel Consumption and profits;· Develop desirable qualities of Drivers;· Develop professionalism in handling difficult operation and vehicle conditions;· Understand the benefits of fuel economy; and· Understand and apply management tools in profit limiting system.2.1 ASSUMPTIONS FOR TOC IN BUSINESSThe assumptions that are used to develop TOC in implementation of fuel economy in transport department are1. The goal of the transport department is to make profit in all aspects.2. Throughout fuel quantity variable is used as a way to measure improvements.2.2 PROBLEM DEFINITION:“Integrate the use of the theory of constraints to evolve fuel economy approach for continuous development and profit inthe transport department”.

* Senior Lecturer, Dept. of Automobile Engineering, K.L.N. College of Engineering, Pottapalayam - 630611, Sivagangai District, Tamil NaduE-mail: [email protected]


2.3 PROBLEM ENVIRONMENT:Our management has 23 buses, 1 minibus and 7 LMVs. To maintain those vehicles, we have 2 mechanics and 1maintenancesupervisor beyond the vision of transport officer. There is an accountant to manage the accounts.The strategy adopted for the function of the transport department towards positive motivation approach and observation ininitial records shows us the difference in fuel economic performance of the same class of vehicles. It needs to fill the gap inimprovement side when compared with efficient operating vehicle.TOC is one of the continuous improvement tool applied in many areas. It can be extended to profit maximization in serviceindustries. Study on fuel economy and its issues in automobile service industries and their continuous improvementpossibilities are discussed in the following sections.3.0 SOLUTION METHODOLOGYIn complex environments, each system is facing a number of critical problems for holding their operation in the growingtrend. In order to face the problems, the transport department has to make a number of attempts and approaches to reachtheir goal. Fleet management consumes money for fuel, maintenance and labour. Out of these, fuel plays the major role insizing the total expenditure of fleet management. Hence we consider fuel economy for reducing the total cost of fleetmanagement. Maintenance also plays a role in determining the fuel economy. So that we consider fuel economy integratedwith maintenance for evolving the goal. Theory of Constraints is taken as a tool to break the constraints available to bringout maximum profit from better fuel consumption.TOC will continue to be a tremendous tool for profit improvement regardless of the nature of the problem. Althoughpriorities and success factors may change, the industry can utilize TOC as an effective framework for identifying, prioritizingand solving issues that constrain the profit of the transport department.3.1 THE FOCUSING PROCESS USING TOCThe working principle of TOC provides a focus for a continuous improvement process. The principle consists of fivefocusing steps (Goldratt, 1990) [4], which are summarized below within the defined problem area.Step 1: Identify the system’s constraints:Constrains under consideration:Some of the constrains evaluated from the transport department are:-o Unskilled driving o Maintenance of vehicle o Record maintenance o Road typeo Improper loading[GCW] o Condition of vehicle o Traffic situations o Improper reportingo Frequent change of drivers o Rolling friction o Fuel quality o Drive line frictiono Air resistance o Auxiliaries o Idle timing o Weather o Improper time management[speed]Maintenance:Maintenance can be subdivided into two:• Lubrication • Cleaning, inspection and adjustmentLubrication:In an automobile, different parts need different types of lubricants for their state of operation. The parts moving fromnormal speed to high speed need lubricating oil. Such parts are engine bearing, cams and gears. Some of the slow movingparts need heavier lubricant or grease. Such parts are joints, pivot pins, spring shackles etc.

� Check the engine oil level daily morning, add oil up to maximum mark on dip stick if the level is low.� Replace the engine oil for every 15000 kms.� Use the grade of fuel as per manufacturer’s recommendation.� Replace the gear oil and crown oil for every 24,000 kms.� Lubricate the free wheel of starter with some special grease and plunger with some thin oil.� Lubricate the wheel and steering system properly.

Cleaning:� Clean the FIP regularly.� Clean the exhaust line (manifold, exhaust pipe, catalytic converter, and blower).� Clean the engine cylinder, piston & piston rings.� Clean the sump regularly.� Clean the fuel filters with kerosene for every 5000 kms.� Clean the injector nozzle regularly.� Clean the air filter with heavy blow of air.

Inspection:Maintenance schedule differs from vehicle to vehicle. Hence the maintenance is done periodically or on basis of mileage.Periodical maintenance is split up into different periods such as weekly, monthly, yearly etc.Daily inspection:

o Check engine oil level o Check water level in radiator o Check fan belt tension o Check air cleanero Check tyre pressure o Check brake pedal toe-board clearance o Check clutch pedal toe-board clearance

Driving mode:Each person drives the vehicle in a different manner. Some adopt rash driving just for style but it increases consumption offuel. Some drive the vehicle with average speed and during sudden changes in acceleration, its very effective.


Fuel efficient driving:Fuel-efficient driving is a manner of driving intended to reduce the fuel consumption of an automobile. Apart from drivingtechnique, the other factors contributing include technical aspects of the car, road conditions, and fuel quality. Though insome cases these may be outside the driver’s control, any attempt to conserve fuel may prove rewarding to him or her, forreasons of personal, financial, or global concern.One method of improving fuel efficiency is by driving at constant, conservative speeds. This allows the engine to operatepowerfully without being hindered by the aerodynamic drag associated with high speed.Road condition:

o More obstacle o Speed brakes o Traffic jam & signals o Curves or bends in roadImproper loading:

o Load the vehicle to their capacity o Load the stock equally in the cabinControlling of fuel consumption:Tuning: Always keep the vehicle properly tuned up to get maximum mileage.Brake binding: Brake drag not only puts extra load on engine resulting in high fuel consumption but can be a reason foraccidents, due to poor brakes.Clutch: If the acceleration is poor when the accelerator pedal is pressed, one of the reasons could be the slipping of theclutch. Slipping of the clutch will waste a lot of fuel.Clogging of air cleaner: The air cleaner is clogged with dust. There will be restriction in flow of fresh air and then fuelconsumption will increase.Tyres: Running a vehicle with low air pressure causes load and drag on drive mechanism resulting in high fuel consumption.Exploit the system constraints:These constraints are evaluated and ranked based on driver survey. The survey rating was made for the following constraints.The survey was made at different level and handling of drivers. The results of the ranking isRank for constraints identification:

Rank for constraints identification:

Sl.no Constraint Rank

1. Driving habit 2

2. Maintenance 1

3. Road type 3

4. Higher load 5

5. Speed 4

Sub-ordinate all other processes to the above decision:The maintenance and its related impacts show us the top priority amongother constraints and all other constraints are sub-ordinate to it and neednegligible consideration. For first attempt we consider maintenance andin second attempt driving mode is the constraint. To elevate the constraintsone and two, we use two attempts and these are discussed in followingsections.Step 4: Elevate the system’s constraints:In this step, the identified constraint is analyzed in detail, which involvesstudy and survey of the maintenance procedure towards fuel efficiencyand decides the type of service required. The possible ways ofimprovement and its route cause can be worked out by exploring thisconstraint to find the better solution from them.The feasible way is to study the real needs in maintaining a vehicle by considering the study samples of K.L.N.C.E transportbuses. Analysis tools, like fishbone diagram, can represent the limiting factors of this analysis.Fuel consumption deciding parameters:Mainly two parameters affect the fuel consumption:• How the vehicle has been driven• How the vehicle has been maintainedStep5: Continuously improve the quality and avoid managerial inertiaSome of the effective strategies for improving the fuel economy by maintenance are discussed as under;Maintenance can be arranged in various ways:• Written contract with commercial mechanics.• Development of an in-house maintenance program.• A combination of any of the above.Several factors should be evaluated in deciding on a maintenance arrangement:• Extent to which the transit system wants to maintain control over maintenance.• Interest in using an employee as a mechanic to maintain control.• Effectiveness of communication if service is provided in-house versus privately.• Cost to the system.• Availability of the proper facilities.• Ability to recycle or dispose of oil/fluids.• Availability of equipment to lift vehicles.• Availability of a complete set of tools.Suggestions for initiating a maintenance program are:• Obtain a list of authorized maintenance facilities from vehicle vendor(s).


• Work with the transit system’s transit project manager.• Talk with transit systems that have established maintenance programs.• Make use of maintenance software.• Take advantage of training offered by professional transit organizations, vendors, manufacturers, etc.Maintaining a good scheduled maintenance programScheduled maintenance is performed at predetermined inspection intervals. The intervals are usually determined by accumulatedmileage, time or condition of specific parts. Scheduled maintenance helps keep public transit vehicles on the road.An organized program of inspections, scheduled service, and immediate adjustments or repairs increase vehicle safety,vehicle useful life and minimizes mechanical failures.Perform Daily Vehicle InspectionDaily inspections can detect problems at an early stage and are crucial to a successful preventive maintenance program.Prior to departure, the driver performs these inspections, and records the results on a Daily Vehicle Inspection Checklist.Record starting mileage, date, and vehicle numberInspect each item on the checklist, and make a check mark if it is satisfactory.Describe problems that are found. If a problem affects safety, it should be reported to the mechanic for correction before thevehicle starts its run.Implement a Maintenance ScheduleAfter a maintenance system has been selected, a basic maintenance schedule should be reviewed with drivers and mechanics.Mechanics should become familiar with the scheduled maintenance requirements for each of the transit system’s vehicles.Most scheduled maintenance information, covering the chassis, bus and major subcomponents, can be found in the applicableowner’s manuals. Some vendors and manufacturers offer training. Follow the manufacturer’s maintenance schedule containedin the owner’s manual. Maintenance checklists can also be developed.Maintain a Comprehensive Maintenance RecordA good maintenance program should also include a comprehensive maintenance record or file for each vehicle in the transitsystem. This file provides:o A quick reference guide. o A complete history of repairs.o An indication of fuel consumption and mileage trends. o A record of responsibility for repairs.o A record of the amount of time a vehicle is out of service. o A list of chronic problems.Rotating buses between routes and/or locationsSchedule newer buses for work at farthest locations, which is away from maintenance facilities. Rotate buses between ruraland urban routes so that wear and tear on vehicles is equalized.By adopting this methodology for evaluating constraints to achieve customer satisfaction and organizing workshops earnsthe increased profit. The constraints are again evaluated and the step 1 to 4 continues until we keep the workshop at thedesired profit level.

4.0 RESULT AND DISCUSSION:In the conventionally used system, the mileage of a vehicle is determined by filling the fuel in the fuel tank, noting theodometer reading and noting the odometer reading when the fuel gets exhausted in the fuel tank. The ratio of differencebetween odometer reading gives the total kilometers run by the vehicle to the number of litres of fuel filled in the tank givesthe mileage of vehicle.• Let X1 be the odometer reading when the fuel is filled• Let X2 be the odometer reading when the fuel is exhausted.• Let n be the total no of litres of fuel filled

Mileage = X2-X1 / nTable: 1 Record of fuel consumption

Bus code Kilometre run Diesel consumption

April 2005 May 2005 April 2005 May 2005

Q 705 878 219 200

V 1258 1066 317 249

L 1486 452 472 137

Total 3486 2396 1008 586

Total cost of transport operation= fuel cost +maintenance cost +labor wages + documents (F.C permit, insurance)Except the fuel cost, all the other costs are assumed as constant for this work. Also we have taken Fuel Cost Rs: 35/lit,average mileage run/vehicle per month=1000.


Table: 2 Mileage Improvement

Bus code Month & yearApril 2005 May 2005 Percentage increase

Q 3.2 4.3 1.1V 3.0 4.3 1.3L 3.1 3.9 0.8

Table: 3 Cost analysis

Bus code Fuel consumed Cost of fuel in Rs Savings in Rs April 2005 May 2005 April 2005 May 2005

Q 312.50 232.55 10937.05 8139.25 2797.8V 333.55 232.55 11674.25 8139.25 3535L 322.58 256.41 11290.30 8974.35 2315.95Total 968.63 721.51 33902.05 12525.28 21376.77

There is an improvement observed and fuel cost was saved.5.0 CONCLUSION:By using the theory of constrains, we break out the selected constrain and attain the improved profit based on fuel consumption.The constraints selected for this work based on the survey made are poor maintained vehicle producing less mileage andpoor driving skill towards fuel economy. There is an improvement in less fuel consumption in May compared with April, soprofit is attained by the transport department in May. Average saving per vehicle per month is Rs 7125. Total cost savingwill be Rs 1, 63, 875, if all heavy vehicles are playing in the routes. In this work we have achieved a considerable improvementin the profit by considering one of the strategy (Theory Of Constrains) and the fuel economy is also improved. We canextend this work for maximizing the profit of transport industry in considering all cost function.Acknowledgement: The author thanks the President, Secretary, Director, Principal, Vice Principal, Dean (Admin), Dean(ARD) of KLNCE for their support, encouragement and facility provided to carry out this work. Also the author is thankfulto the R&D department of KLNCE for financial assistannce to conduct this research work. BIBLIOGRAPHY1. John H. Blacksone, “Theory of Constraints- a status report”, International Journal of Production Research, Vol.39, No.6, PP1053- 1080 (2001).2. HEAVY VEHICLES Technology Description, U.S. Climate Change Technology Program – Technology Options for the Near and Long Term, August

2005 – Page 1.1-73. Panyiotis “Fandoudas and Bruce Gurd,” The implications of the theory of constraints for Management Accounting- a case of the pricing decision,”

International Graduate school of Management, Adelaide (2000).4. Tradable Fuel Economy Credits- Impact and Effectiveness of Corporate Average Fuel Economy Standards by James L Sweeney, August 12, 2001.5. www.clean-diesel.org6. Improving Fuel Economy and Saving Fuel in Mexico, Lee Schipper, Ph. D.,Director of Research,The WRI Center for Transport and Environment.7. “Success Story- Advanced Diesel Technologies”, Help Manufacturers Meet 2007 Emissions Standards , U.S. Department of Energy, Freedom CAR

and Vehicle Technologies Program(202) 586-8032.

One internal industry documents review by Business Week revealed another fact that maximum factories in China used tokeep double sets of books. In the past 4 years, the percentage of Chinese manufacturers caught in submitting false payrollrecords has risen from 46% to 75%. According to Tang Yinghong, Former Administrator of Ningbo Beifa Group, “Tutoringand helping factories deal with audits has become an industry in China”.Nike and some other companies thought that improvement in the method of production might reduce the labor-hourrequirement. But was it possible to change the profit-seeking mind of the producer which helps the economy to grow-up?BIBLIOGRAPHY1. http://www.usmra.com/china/Labour%20Law.htm2. http://www.chinalaborwatch.org/upload/Wal-MartPanyuReport.pdf3. http://www.chinalaborwatch.org/upload/toyindustryreport.docThe Toy Industry in China: Undermining Workers’ Rights and Rule of LawA report by

China Labor WatchSeptember, 2005.4. http://gb.china-labour.org.hk/gate/gb/www.china-labour.org.hk/fs/view/research- reports/Women_Workers_Report.pdfFalling Through the FloorMigrant

Women Workers’ Quest for Decent Work in Dongguan, ChinaChina Labour BulletinCLB Research Series: No. 2, September 20065. Source:Be aware of Mickey Disney’ Sweatshop in South China: A report by HKCIC, February 2001http://www.somo.nl/monitoring/reports/

disneychart.pdf6. Why Has China’s Economy Taken Off Faster than India’s? June 2006 David E. Bloom, David Canning, Linlin Hu, Yuanli Liu, Ajay Mahal, and

Winnie Yip1 http://www.hsph.harvard.edu/pgda/Bloom_Canning_China_India.pdf7. http://en.wikipedia.org/wiki/Image:Prc1952-2005gdp.gif#file8. http://knowledge.wharton.upenn.edu/papers/download/BCG-Wspecialreport-final.pdf9. http://neweconomist.blogs.com/photos/uncategorized/20060318_chinaswagecostchallenge_bw.gif10. http://knowledge.wharton.upenn.edu/papers/download/BCG-Wspecialreport-final.pdf11. The Changing Face of China ATKEARNEYhttp://www.atkearney.com/shared_res/pdf/ChinaOffshore_S.pd

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To employees : Increase in Salary, Productivity Bonus, Efficiency Bonus etc.To Customers : I) Depots Close to Customers Business houses.

II) Quality product at minimum cost and in time.To Suppliers : Single Supplier, Prompt Payment and Constant

Assistance.To Government : Prompt in paying advance Income – tax (won an award for the same ).To Society : Liberal donations and continuous financial assiatance to needy people.To Fellow businessmen : Constant effort to propagate the advantages of ethical business practices.




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