KINDLERTHE JOURNAL OF ARMY INSTITUTE OF MANAGEMENT KOLKATA(FORMERLY NATIONAL INSTITUTE OF MANAGEMENT CALCUTTA)

VOLUME IX q NUMBER 1 q ISSN 0973-0486 q JANUARY-JUNE 2009

Page No.

EDITOR'S NOTE 3

RESEARCH CONTRIBUTIONSMergers and Acquisitions in Global Context 7— Sudha Dhawan

RFID: Its Increasing Use in Retail Industry 17— Dr. Saumya Singh, Prakash Singh

Impact of Experiences of Venture Capitalist on Contractual Elements 27— Dr. Chimun Kumar Nath

Small and Medium Enterprises in India: Opportunities and Threats 45under Globalisation Process— Dr. Sriparna Guha, Anindya Guha

A New Cryptographic Scheme for Asynchronous Checkpointing and 57Message Logging in Mobile Computing Environment— Sumona Mukhopadhyay

STUDENTS’ CONTRIBUTIONSArticle :Cyber Crime and Their Prevention 73— Himanshu Dilip Kulkarni

Synopsis :An Analysis of Awareness Level Among Investors Towards Insurance Products 77— Punita Kumari

Assessing Efficacy of Microsoft’s Midmarket Relationship Program (MMRP) 87among Local EA customers and recommending road ahead for FY10— Bhavna Appaya

Page No.

BOOK REVIEWApplied Econometric Time Series 95— Walter Enders

Operations Research – An Introduction 97— Hamdy A Taha

The Call of the Mall: How We Shop 99— Paco Underhill

Editor's NoteEconomic downturn in the USA has sent ripples down the global economy. The impactis seen in drastic cost cutting measures across organisations including freeze on hiring.Change management is at its best during this turbulent time.

The current issue has concentrated on articles related to the global context: one onmergers and acquisitions and the other on the opportunities and threats faced by Smalland Medium Enterprises in India. Besides, there is a paper on Impact of Experiencesof Venture Capitalist on Contractual elements. From the arena of Information Technologyand Communication, we have articles related to cryptography in mobile computing andradio frequency identification and detection (RFID) in the retail sector. Our studentcontribution on cyber crime is a much-addressed topic of importance.

I would like to sign off by quoting Franklin D Roosevelt, former President of the USA,who had said, “The only thing to fear is fear itself” and I am optimistic that “We shallovercome” the difficult times in the near future.

Parveen Ahmed AlamEditor, Kindler

RESEARCH CONTRIBUTIONS

6 Kindler Vol. IX No. 1 January-June 2009

Kindler Vol. IX No. 1 January-June 7

Mergers and Acquisitions in Global ContextSudha Dhawan*

ABSTRACTMergers and Acquisitions (M&A) have been an important element of corporate strategy all over theglobe for several decades. Every day, Wall Street investment bankers arrange M&Atransactions, which bring separate companies together to form larger ones. It has become anaspect of corporate finance and management dealing with the buying, selling and combining ofdifferent companies that can aid, finance, or help a growing company in a given industry growrapidly without having to create another business entity.

INTRODUCTION

Mergers and Acquisitions

In business or economics a merger is a combination of two companies into one largercompany. Such actions are commonly voluntary and involve stock swap or cash paymentto the target. Stock swap is often used as it allows the shareholders of the two companiesto share the risk involved in the deal. A merger can resemble a takeover but results ina new company name (often combining the names of the original companies) and newbranding; in some cases, terming the combination a “merger” rather than an “acquisition”is done purely for political or marketing reasons.

An acquisition, also known as a takeover or a buyout, is the buying of one company(the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, thecompanies cooperate in negotiations; in the latter case, the takeover target is unwillingto be bought or the target’s board has no prior knowledge of the offer. Acquisition usuallyrefers to a purchase of a smaller firm by a larger one.

Sometimes, however, a smaller firm acquires management control of a larger or longerestablished company and keeps its name for the combined entity. This is known as areverse takeover. A reverse merger occurs when a private company that has strongprospects and is eager to raise funds buys a publicly listed shell company, usually onewith no business and limited assets. The publicly traded corporation is called a “shell”since all that exists of the original company is its organizational structure. Achievingacquisition success has proven to be very difficult. The acquisition process is very complex,with many dimensions influencing its outcome.

* Lecturer, Mangalmay Institute of Management & Technology, Greater NoidaEmail: sudhadhawan@rediffmail.com

8 Kindler Vol. IX No. 1 January-June 2009

EVOLUTION OF MERGERS AND ACQUISITIONS

Tracing back to history, mergers and acquisitions in India have evolved in five stages andeach of these is discussed here. As seen from past experience, mergers and acquisitionsare triggered by economic factors. The macroeconomic environment, which includes thegrowth in GDP, interest rates and monetary policies play a key role in designing theprocess of mergers or acquisitions between companies or organizations.

First Merger Wave (1897-1907)

The first merger wave followed the Depression of 1883. About two thirds of all mergeractivity during the first merger wave was concentrated in a handful of industries: petroleumproducts, mining, metals, food products, and transportation. The first merger wave includedmany horizontal mergers, so the affected industries became highly concentrated. Forexample, during this period J.P. Morgan merged U.S. Steel with Carnegie Steel and morethan 700 small steel firms. The resulting mega-steel company controlled 70-80% of thesteel production in the United States. The monopolies created during the first mergerwave spurred a backlash. The Justice Department charged a number of the largemonopolies with violating the Sherman Antitrust Act (1890).

Second Merger Wave (1916-29)

The second merger wave began during World War I and continued until the stock marketcrash of October 29, 1929. Because of the heightened government vigilance that occurredtowards the end of the first merger wave, mergers during the second merger wave facedincreased governmental scrutiny. The Clayton Act (1914) was an additional tool thatfederal authorities could now wield against uncompetitive mergers. Overall, mergers ofthe second merger wave were characterised by oligopolies rather than monopolies. Therewere more vertical mergers than horizontal mergers.

Third Merger Wave (1965-1969)

The third merger wave coincided with a period of economic prosperity in the UnitedStates. The strong economy gave many firms the resources necessary to acquire othercompanies. Mergers among unrelated companies, also known as conglomerate mergers,characterised the third merger wave. The horizontal mergers that occurred during thethird merger wave were subject to strict anti-trust enforcement. Anti-trust enforcers nowhad yet another piece of key legislation in their arsenal: the Celler-Kefauver Act of 1950.This law reinforced the Clayton and Sherman Acts. The Johnson Administration (1963-1969) favored aggressive anti-trust enforcement. Richard M. Nixon, who took office in1969, was generally more tolerant of merger activity.

Fourth Merger Wave (1981-1989)

The fourth merger wave coincided with the presidency of Ronald Reagan, and the economicprosperity of the mid- to late-1980s. Although most mergers that occurred during thefourth merger wave were “friendly,” this period included more hostile takeovers thanprevious merger waves. It was during the fourth merger wave that the term “corporate

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raider” entered the American lexicon. Mergers of the fourth merger wave were larger thanthose of earlier periods. Mergers in the billion-dollar range became common. Debt wasmore widely used to finance mergers.

Fifth Merger Wave (1993-2000)

The fifth merger wave followed the economic recession of 1990-91, and coincided withthe presidency of Bill Clinton. Large mergers occurred at about the same level as theyhad during the fourth merger wave, but hostile takeover activity diminished. Whereasmany of the mergers of the fourth wave were executed for short-term financial gains,mergers of this period emphasized longer-term business strategies. Debt-financed mergerswere less common than they were during the fourth wave.

MERGER AND ACQUISITION TRENDS

Merger and acquisition trends are seen to affect an economy’s product market, moneymarket, capital market and labour market. Global markets are also considerably influencedby the merger and acquisition trends.

Global Merger and Acquisition Trends in 2007 and 2008

2008 and 2007 were marked by a spate of mergers and acquisitions all over the globein both developing and developed countries. The general trend was that, there was adecline in the number of public sector undertakings along with a hike in the number ofprivate sector enterprises. This was due to the fact that many public sector organizationsworldwide were either acquired by large private sector enterprises or merged with them.

The explanation to this merger and acquisition trend as observed in 2007 and 2008 layin the robust growth recorded by the Private Equity Funds. The other factors propellingthis trend were the emphasis on short-term earnings growth and the strict regulatorystructure of Public-Sector Enterprises. This merger and acquisition trend towards increasedprivatisation of public sector holdings was observed in Europe, Brazil, North America, andChina. Europe in that period hosted a strong investment market, which catered to thepublic-to-private sector transition of companies.

Rise in Private Equity-Driven International Merger and Acquisition Trends

Private equity transactions had been the buzzword for the world economy in 2007 and2008. The real estate sector and the energy sector witnessed much of this type of activity.Private equity firms were working overnight for augmenting proprietary deal flaws.

China was a unique case in point. There the powerful trend towards mergers andacquisitions involving private equity dealings comprised a lot of policy and regional diversity.A great amount of equity capital flowed into China from US, Japan, Israel, and Europeas retail sector investments. This was primarily aimed at tapping China’s heighteneddomestic consumer demand. Focus shifted to the northern and western regions of Chinaas costs escalated for the commercial hubs alongside the eastern sea coast.

In the US, private equity funds succeeded in raising more than $200 billion in this periodfor international merger and acquisition dealings. As these type of funds usually involved

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a time frame of 3 to 5 years for putting the new invested capital to work, they wereexpected by the analysts to power heightened merger and acquisition activities acrossmajor global markets for the coming decade.

For Europe the general prediction was that of a high transactional demand related toprivate equity. Analysts observed that certain European markets were characterised bydifferent financial advantages and tax structures. Western European nations possessedwell-oiled legal machinery and conducive investment climates. In particular Britain exhibiteda strong market for public to private investments. After the accession of nations likePoland, Czech Republic and Hungary into the EU, a section of European funds for privateequity were seen to be abstaining from applying the ‘emerging market discount’ forinvestment in those nations.

The total M&A deals for the period January-February 2007 have been 102 with a valueof US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 witha value of US$ 21 billion. There were 74 M&A deals with a total value of about US$ 4.37billion in May 2007. Of these, the number of outbound cross border deals was 30 witha value of US$ 3.79 billion.

The total number of M&A deals during the period January-May 2008 was 287 with a valueof US$ 47.37 billion. Of these, the total outbound cross border deals were 102 with avalue of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India.There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April2008. Of these, the number of outbound cross border deals was 32 with a value of US$3.41 billion. The sectors attracting investments by Corporate India include metals,pharmaceuticals, industrial goods, automotive components, beverages, cosmetics andenergy in manufacturing; and mobile communications, software and financial services inservices, with pharmaceuticals, IT and energy being the prominent ones among these.

Cross-border Mergers and Acquisitions

In a study conducted in 2000 by Lehman Brothers, it was found that, on an average, largeM&A deals cause the domestic currency of the target corporation to appreciate by 1%relative to the acquirer’s. For every $1 billion deal, the currency of the target corporationincreased in value by 0.5%. More specifically, the report found that in the period immediatelyafter the deal is announced, there is generally a strong upward movement in the targetcorporation’s domestic currency (relative to the acquirer’s currency). Fifty days after theannouncement, the target currency becomes, on average, 1% stronger.

The rise of globalization has exponentially increased the market for cross border M&A.In 1996 alone there were over 2000 cross border transactions worth a total of approximately$256 billion. This rapid increase has taken many M&A firms by surprise because themajority of them never had to consider acquiring the capabilities or skills required toeffectively handle this kind of transaction. In the past, the market’s lack of significanceand a more strictly national mindset prevented the vast majority of small and mid-sized

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companies from considering cross border intermediation as an option which left M&Afirms inexperienced in this field. The same reason also prevented the development of anyextensive academic works on the subject.

Due to the complicated nature of cross border M&A, the vast majority of cross borderactions have unsuccessful results. Cross border intermediation has many more levels ofcomplexity to it than regular intermediation which can be seen as as corporate governance,the power of the average employee, company regulations, political factors, customerexpectations, and countries’ culture are all crucial factors that could spoil the transaction.However, with the weak dollar in the U.S. and soft economies in a number of countriesaround the world, we are seeing more cross border bargain hunting as top companiesseek to expand their global footprint and become more agile at creating high-performingbusinesses and cultures across national boundaries.

Even mergers of companies with headquarters in the same country are very much of thistype (cross border mergers). After all, when Boeing acquires McDonnell Douglas, the twoAmerican companies must integrate operations in dozens of countries around the world.This is just as true for other supposedly “single country” mergers, such as the $27 billiondollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).

Major Mergers and Acquisitions in the 1990s

Top 10 Merger & Acquisition deals worldwide by value (in Million USD) from 1997 to 1999:

Rank Year Purchaser Purchased Transaction value(in Million USD)

1 1999 Vodafone Airtouch PLC Mannesmann 183,000

2 1999 Pfizer Warner-Lambert 90,000

3 1998 Exxon Mobil 77,200

4 1999 Citicorp Travelers Group 73,000

5 1999 SBC Communications Ameritech Corporation 63,000

6 1999 Vodafone Group AirTouch Communications 60,000

7 1998 Bell Atlantic GTE 53,360

8 1998 BP Amoco 53,000

9 1999 Qwest Communications US WEST 48,000

10 1997 Worldcom MCI Communications 42,000

(Source : Economic Times, 28 July, 1999)

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Major Mergers and Acquisitions since 2000 onwards

Top 9 Merger and Acqusition deals worldwide by value (in Million USD) since 2000 onwards:

Rank Year Purchaser Purchased Transaction value(in Million USD)

1 2000 Fusion: America Time Warner 164,747Online Inc. (AOL)

2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961

3 2004 Royal Dutch Shell Transport & Trading Co 74,559Petroleum Co.

4 2006 AT&T Inc. BellSouth Corporation 72,671

5 2001 Comcast Corporation AT&T Broadband & Internet 72,041Svcs

6 2004 Sanofi-Synthelabo SA Aventis SA 60,243

7 2004 Spin-off: Nortel 59,974Networks Corporation

8 2006 Pfizer Inc. Pharmacia Corporation 59,515

9 2007 JP Morgan Chase & Co. Bank One Corp 58,761

(Source : Economic Times, 15 January, 2007)

Recent Mergers and Acquisitions: A Few Major Cases

The Long Success International (Holdings) Ltd. merged with City Faith Investments Ltd.on the 8th of April 2008. The value of the merger was US $3.2 million. The agency in thisinstance was Bermuda Monetary Authority, Hong Kong Stock Exchange and other regulatoryauthority that was unspecified.

Novartis AG acquired 25% stake in Alcon Inc. This acquisition was worth 73,666 millioncommon shares of the company. They bought this stake from Nestle SA for $10.547billion by paying $143.18 for every share. It was a privately negotiated transaction thatneeded to have a regulatory approval. Simultaneously, Novartis AG also received anoffer of 52% interest that was equivalent of 153.225 million common shares of AlconInc.

Kinetic Concepts acquired each and every remaining common stock of Life Cell Corp for$51 for each share. Their total offer was $1.743 billion. The deal was done in accordanceto regulatory approvals and the conventional closing conditions.

Kapstone Paper & Packaging Corp acquired the Kraft paper mill as well as other assetsof MeadWestVacoCorp. They paid them $485 million. The deal was conducted as perthe regulatory approvals, receipt of financing and conventional closing conditions. Thisdeal included a lumber mill in Summerville, 100% interest in Cogen South LLC. The

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Chip mills in Kinards, Elgin, Andrews and Hampton in South Carolina are also part ofthis deal.

Petrofalcon Corp. acquired the remaining shares of Anadarko Venezuela Co. from AnadarkoPetroleum Corp. The deal was worth 428.46 million Venezuelan Bolivar or US $200million. The deal was completed as per the regulatory approvals.

Discover Financial Services, LLC acquired Diners Club International Ltd. from CitigroupInc. The deal was worth US$ 165 million. The deal was subjected to regulatory approvalsand normal closing conditions. Cobham PLC took over MMI Research Ltd. The deal wasworth $16.6 million. In this deal $12.2 million was paid in cash, $1.4 million in loan notesand almost $3 million in payments related to profits.

WNS (Holdings) Ltd. from India, took over the total share capital of Chang Ltd. The dealwas worth $9.6 million. Of this amount $8 million was to be paid in cash and the rest wasto be paid from the profits made by the company.

Aptar Group Inc. acquired the Advanced Barrier System wing of the CCL Industries Inc.The deal was worth almost 9.4 million Canadian dollars. The entire amount was paid incash. Varian Inc. from USA took over 23% stakes of Oxford Diffraction Ltd. The deal wasworth 4.6 million pounds. 3.5 million pounds was paid in cash, and the rest was to bepaid from the profits made by the company.

Spice PLC took over Melton Power Services Limited. The deal was worth 4.5 million. $2.5million was paid in cash and the rest was to be paid from the profits made by thecompany. Spice PLC also got Utility Technology Ltd., GIS Direct Ltd., and Line DesignSolutions Ltd. as part of the deal.

Atlas Iron Ltd. took over a 19.9% stake in the Warwick Resources Ltd. This wasequivalent of $15.124 million new common stock of the Warwick Resources Ltd. Theypaid A$ 3.781 million in a transaction that was privately negotiated. The transactionwas executed as per the approval from the shareholders. The selling price of the shareswas A$ 0.23 and it was based on the value of each share that stood at A$ 0.25 on4th of April 2008.

Republic Gold Ltd. of Australia took over the remaining stocks of Vista Gold (Antigua)from Vista Gold Corp. The deal was worth $3 million. Republic Gold also got theAmayapampa project in Bolivia as a part of the deal. Manpower Software PLC took overKey IT Systems Ltd. The deal was worth $0.83 million. $0.375 million was paid in cashand the rest is supposed to be paid from profits.

Spice PLC took over Utility Technology Ltd. The deal was worth $0.2 million – $0.1 millionwas to be paid in cash and the rest was to be paid from the profits. As part of this dealSpice PLC also acquired Melton Power Services Ltd., GIS Direct Ltd. and Line DesignSolutions Ltd.

Spice PLC took over Line Design Solutions Ltd. and GIS Direct Ltd. The total deal wasworth $0.1 million and the entire amount was paid in cash. Spice PLC also acquired UtilityTechnology Ltd. and Melton Power Services Ltd. as part of the deal.

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Thomas Cook Group PLC acquired Elegant Resorts Ltd. from Barbara Catchpole andGeoff Moss. Australian Social Infrastructure Fund merged with API Fund. The deal wassubjected to regulatory approvals by the Government and shareholders (who share therisk) of the company. Greenbier Cos Inc. took over Roller Bearing Industries Inc., fromAB SKF. Fijian Holdings Ltd. has taken over 50.2% interest in RB Patel Group Ltd.

Honeywell International Inc. has acquired Norcross Safety Products LLC from OdysseyInvestment Partners LLC. The deal was worth $1.2 billion. It was subjected to variouskinds of regular closing conventions and regulatory approvals.

Here are the top 10 acquisitions made by Indian companies worldwide:

1. Tata Steel’s mega takeover of European steel major Corus for $12.2 billion - thebiggest ever for an Indian company. This is the first big thing, which marked thearrival of India Inc. on the global stage. The next big thing everyone is talking aboutis Tata Nano.

2. Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion. Essar groupstill holds 32% in the Joint venture.

3. Hindalco of Aditya Birla group’s acquisition of Novellis for $6 billion.

4. Ranbaxy’s sale to Japan’s Daiichi for $4.5 billion. Sing brothers sold the company toDaiichi and since then there is no real good news coming out of Ranbaxy.

5. ONGC’s acquisition of Russia-based Imperial Energy for $2.8 billion. This marked theturn around of India’s hunt for natural reserves to compete with China.

6. NTT DoCoMo-Tata Tele Services deal for $2.7 billion was the second biggest telecomdeal after the Vodafone. Reliance-MTN deal, if successful, would have been a goodaddition to the list.

7. HDFC Bank’s acquisition of Centurion Bank of Punjab for $2.4 billion.

8. Tata Motors’ acquisition of luxury car-maker Jaguar Land Rover for $2.3 billion. Thiswas probably the most ambitious deal after the Ranbaxy one. It certainly landed TataMotors into lot of trouble.

9. Wind Energy premier Suzlon Energy’s acquistion of RePower for $1.7 billion.

10. Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 crores or$1.6 billion.

(Source: Economic Times)

If we calculate the top 10 deals only, they account for nearly US$ 21,500 million. This ismore than double the amount involved in US companies’ acquisition of Indian counterparts.

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Figure Graphical representation of Indian outbound deals since 2000.

(Source: http://ibef.org)

CONCLUSIONS

Indian companies are now aggressively looking at North American and European marketsto spread their wings and become global players. The Indian IT and ITES companiesalready have a strong presence in foreign markets; however, other sectors are also nowgrowing rapidly. The increasing engagement of the Indian companies in the world markets,and particularly in the US, is not only an indication of the maturity reached by Indianindustry but also the extent of their participation in the overall globalization process.

A study published in the July/August 2008 issue of the Journal of Business Strategysuggests that mergers and acquisitions destroy leadership continuity in target companies’top management teams for at least a decade following a deal. The study found that targetcompanies lose 21% of their executives each year for at least 10 years following anacquisition – more than double the turnover experienced in non-merged firms.

REFERENCES1. Cartwright, S., Schoenberg, R. (2006), “Thirty Years of Mergers and Acquisitions Research:

Recent Advances and Future Opportunities”. British Journal of Management 17 (S1), S1–S5;doi:10.1111/j.1467-8551.2006.00475.x

2. DePamphilis, D. (2008), Mergers, Acquisitions, and Other Restructuring Activities. New York:Elsevier, Academic Press, ISBN 978-0-12-374012-0, pp. 740

3. Exxon, Mobil mate for $80B, Dec. 1, 19984. Fool.com: Bell Atlantic and GTE Agree to Merge (Feature) July 28, 19985. Harwood, I. A. (2006), “Confidentiality constraints within mergers and acquisitions: gaining

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insights through a ‘bubble’ metaphor”. British Journal of Management, 17 (4), pp. 347–359,doi:10.1111/j.1467-8551.2005.00440.x

6. King, D. R., Slotegraaf, R., Kesner, I. (2008), “Performance implications of firm resourceinteractions in the acquisition of R&D-intensive firms”. Organization Science 19 (2) pp. 327–340, doi:10.1287/orsc.1070.0313

7. Lien, K. (2005-10-12), “Mergers And Acquisitions - Another Tool For Traders”, Investopedia,Finklestein, Sydney. “Cross Border Mergers and Acquisitions”, Dartmouth College.

8. Maddigan, R., Zaima, J. (1985), “The Profitability of Vertical Integration”, Managerial andDecision Economics, 6 (3), pp.178–179; doi:10.1002/mde.4090060310

9. Platt, G. “Cross-Border Mergers Show Rising Trend As Global Economy Expands”.findarticles.com. http://findarticles.com/p/articles/mi_qa3715/is_200412/ai_n9466795. Retrievedon 2007-08-09

10. Rosenbaum, J., Joshua P. (2009), Investment Banking: Valuation, Leveraged Buyouts, andMergers & Acquisitions. Hoboken, NJ: John Wiley & Sons. ISBN 0-470-44220-4

11. Straub, T. (2007), Reasons for frequent failure in Mergers and Acquisitions: A comprehensiveanalysis, Wiesbaden, Deutscher Universitätsverlag, ISBN 9783835008441

12. Scott, A. (2008), China Briefing: Mergers and Acquisitions in China (2nd ed.)13. “Top Mergers & Acquisitions (M&A) Deals”. Institute of Mergers, Acquisitions and Alliances

(MANDA). http://www.manda-institute.org/en/statistics-top-m&a-deals-transactions.htmWeb Sites1. http://en.wikipedia.org/wiki/Mergers_and_acquisitions/10-9-072. http://ibef.org/accessed /accessed on 11/01/083. http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/

accessed on 11-01-084. http://www.themanager.org/me/restructuring.htm/accessed on 11/08/07

 

Kindler Vol. IX No. 1 January-June 17

RFID: Its Increasing Use in Retail IndustryDr. Saumya Singh*, Prakash Singh**

ABSTRACTBusiness, as a trend, has become competitive and complex these days. Enterprises are underincreasing pressure and looking for rapid cycles of change on the business front. Almost everyenterprise in every industry feels the need to strive for greater agility as a key competitivedifferentiator. Increasingly, applications are the cornerstone of supporting these rapidly changingbusiness conditions and enterprises’ agility endeavors.

To support retail industry, a system is needed which can provide a quick response to customer(such as providing product information, less billing cycle time, less searching time, etc.), advancedinventory management, theft prevention and product backtracking, etc. RFID (Radio FrequencyIdentification) is one such technology that helps achieve these and many more. This paper is anattempt to focus how Information Technology is helping Retail Industry in optimizing the entirebusiness flow by using RFID.

INTRODUCTION

With the advancement of Information and Communication Technologies, RFID has recentlyemerged as one of the emerging technologies for asset tracking, inventory management,supply chain management, payment systems, information sharing, access control andsecurity using radio waves. RFID is increasing its horizon in various industries such asretail, aerospace, defence, health care, logistics, pharmaceutical, etc. Retail is one suchindustry that offers greatest opportunities to use RFID.

STATUS OF RFID ADOPTION IN RETAIL INDUSTRY

Retail industry represents one of the largest industries in the world. According to oneestimate in the United States it is the second largest industry in terms of the number ofemployees as well as the number of establishments for doing business. Retail sector isone of the most important business sectors that have seen potential in the use of RFIDtechnology in order to stay at a competitive edge and to achieve profitability in short orlong terms. With increasing globalisation the retail industry is facing more and morecompetition, which is making them struggle harder and harder to succeed through betterperformance. The global RFID market is expected to reach $ 3 billion by 2008 with agrowth rate of 23%.

Apart from Wal-Mart, other major retailers like Albertsons, ASDA, Best Buy, Home Depot,Marks and Spencer, Meatco, METRO, Sainsbury, Sears, Target, Seattle’s Best Coffee,Tesco, Woolworth’s and so on are the other major players in the retail industry who

* Assistant Professor, Indian School of Mines University, Dhanbad; Email: saumyasingh@rediffmail.com

** Associate Projects, Cognizant Technology Solutions, New York; E-mail : spvatsa@gmail.com

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have either mandated their major suppliers to tag the supplies at pallet or case level orare intending to do so in the near future. According to IdTechEx (2006), the retail industrywill comprise 44% of the global RFID market value for systems including tags by theyear 2016. The expected growth of RFID usage in the retail industry is primarily becauseof the perceived benefits that could be obtained by implementing the technology. In theretail industry RFID technology is expected to replace the barcode technology as itprovides much more functionalities without requiring the line of sight of the reader, thusensuring speed and process efficiency. Most importantly, it provides supply chain visibility,thus resulting in a tighter integrated supply chain, which is more efficient and is thefoundation for future profitability. This will help the retailers stay at a better competitiveedge, which is what all retailers are striving to achieve in the modern times of everincreasing competition.

The most significant benefits from RFID implementation for retail industry are improvedinventory management, improvement in-store operation, integrated business model, andpace in retail cycle. The preliminary payback from the technology for the retail sector isimproved accuracy of inventory management, which can easily head towards savings.Overall we can see betterment in the supply chain cycle that can be transformed intohuge savings in long run. It can be observed that most of the profits that are talked aboutfocus on achieving operational efficiency for businesses. But there is a lot more to thistechnology, which is yet unexplored and deserves more attention. Many of these benefitsare related to each other as well which could be of interest to businesses and researchers.Past studies have not taken these relationships into account. This will be novel in thisresearch domain.

ORIGIN OF RFID

As a technology RFID is not new. It was first used over sixty years ago by Britain toidentify aircrafts in World War II and was part of the refinement of radar. It was duringthe 1960s that RFID was first considered as a solution for the commercial world. The firstcommercial applications involving RFID followed during the ’70s and ’80s. Thesecommercial applications were concerned with identifying some asset inside a single location.They were based on proprietary infrastructures.

By the ’90s the RF open standards started emerging for RFID and the technology wasimplemented across toll collection, animal tagging and personal identification. During thistime, the researchers at the Massachusetts Institute of Technology (MIT) Auto-ID Centerbegan to research new ways to track and identify objects as they moved between physicallocations. This research centered on radio frequency technology and its implications. Itfocused on how information held on tags can be effectively scanned and shared withbusiness partners in near real time. By 2000, RFID technology was in wide use acrossvarious industries all over the world.

What is RFID?RFID is the reading of physical tags on single products, cases, pallets, or re-usablecontainers that emit radio signals to be picked up by reader devices. These devices and

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software must be supported by a sophisticated software architecture that enables thecollection and distribution of location-based information in near real time. The completeRFID picture combines the technology of the tags and readers with access to globalstandardized databases, ensuring real time access to up-to-date information about relevantproducts at any point in the supply chain.

Tags contain a unique identification number called an Electronic Product Code (EPC), andpotentially additional information of interest to manufacturers, healthcare organisations,military organisations, logistics providers, and retailers, or others that need to track thephysical location of goods or equipment. All information stored on RFID tags accompaniesitems as they travel through a supply chain or other business process. All information onRFID tags, such as product attributes, physical dimensions, prices, or launderingrequirements, can be scanned wirelessly by a reader at high speed and from a distanceof several meters.

RFID Components:

RFID is an automatic identification technology and mainly consists of two components,Transponder and Interrogator.

a. Tag or Transponder –

An RFID tag is a tiny radio device that is also referredas a transponder, smart tag, smart label, or radiobarcode. The tag comprises a simple siliconmicrochip (typically less than half a millimeter insize) attached to a small flat aerial and mounted ona substrate. The whole device can then beencapsulated in different materials (such as plastic)dependent upon its intended usage. The finishedtag can be attached to an object, typically an item,box, or pallet, and read remotely to ascertain its identity, position, or state. For anactive tag there will also be a battery.

Types of Tag –

i. Active Tags (With Battery)

Can be read from a long-range distance of more than 100 feet. Are ideal for tracking high-value items over long ranges, such as tracking shipping

containers in transit. Have high power and battery requirements, so they are heavier and can be costly.

ii. Passive Tags (No Battery) Can only be read from a short-range distance of approximately 5–10 feet. Can be applied in high quantities to individual items and reused. Are smaller, lighter, and less expensive (and therefore more prevalent) than active

tags.

SIGNAL

READER

SIGNAL

TAGEnergy

20 Kindler Vol. IX No. 1 January-June 2009

b. Reader or InterrogatorThe reader — sometimes called an interrogator or scanner — sends and receivesRF data to and from the tag via antennas. A reader may have multiple antennas thatare responsible for sending and receiving radio waves.

Three primary frequency bands are being used for RFID –

i. Low Frequency (125/134 KHz) - Most commonly used for access control, animaltracking, and asset tracking.

ii. High Frequency (13.56 MHz) - Used where medium data rate and read rangesup to about 1.5 meters are acceptable. This frequency also has the advantageof not being susceptible to interference from the presence of water or metals.

iii. Ultra High Frequency (850 MHz to 950 MHz) - offer the longest read ranges ofup to approximately 3 meters and high reading speeds.

Application of RFID

Although RFID is a proven technology since its existence, it took several years for a large-scale implementation. The implementation eventually included freeway tollbooths, parkingareas, vehicle tracking, factory automation, and animal tagging.

In 1998, researchers at the MIT Auto-ID Center began to complete global research onRFID. The Auto-ID Center focused on:

Reducing the cost of manufacturing RFID tags.

Optimizing data networks for storing and delivering large amounts of data.

Developing open standards for RFID.

The work of the Auto-ID Center has helped to make RFID technology economically viablefor pallet and carton-level tagging. The Auto-ID Center closed in October 2003, transferringall its RFID technology and information to the EPC Global organisation.

The most common application of RFID technology today is for tracking goods in thesupply chain, tracking assets, and tracking parts from a manufacturing production line.Another common application is for security — RFID is used to control building access andnetwork security, and also for payment systems that let customers pay for items withoutusing cash. As technological advancements in RFID lead to an even higher level of datatransmission — in addition to an inevitably lower cost — RFID technology will becomeubiquitous within the supply chain industry and other industries, increasing overallefficiencies and dramatically improving the return on investment (ROI).

RFID IN RETAIL - THE POSSIBLE SCENARIOS

RFID in retail industry has solved major problems related to customer services. Improvedcustomer service would ultimately lead to increased sales. With the help of RFID, itbecomes easy for the sales staff to locate a particular item in the store and check itsavailability in less time. It gives accessibility to the products from store to store and alsoto the entire database.

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a. Improves the level of customer service:

The overall time spent by the customer in shopping is reduced as the desired itemis found in less time making shopping a better experience. Also while scanning ofa particular product is done, this technology provides access to the information aboutthe product. It calculates the prices of the products kept in the shopping bagsimultaneously, so the shopper is aware of how much he/she is spending. As thetotal of the shopping done is already calculated the customer has to just pay, thuswaiting time for billing is reduced.

b. Increases customer’s loyalty:

The RFID tags attached to the items has the ability to provide feeling of a ‘virtualpersonalised shopper’ to the customer. It also facilitates in tracking down the shoppingpreferences and habit of the customers and thus helps in introducing right rewardsconnected to it. The information about customers’ shopping style, their shoppinghistory, past purchases, etc. can be tracked down, thus value added services couldbe provided to them giving the customer the feel of personalised treatment. Evendecision regarding purchase of a product could be made in fitting room, as the RFIDreaders in fitting rooms that are connected to the computer, provides all informationregarding the garment. Also, if the information related to the item is confidential andnot to be unveiled to the customer, it can be protected by the IT department. Thus,security is also ensured from seller point of view. These added benefits lead to bettershopping experience for the customer, which ultimately leads to customer loyalty.

c. Better inventory management:

Scanning of bar code has become mandatory in inventory processing, but it hascertain drawbacks compared to RFID technology. The bar code stickers show humanerrors as it has the capacity to encode limited and stagnant information. Bar codeis unable to read or write multiple codes. RFID’s capacity to track the items efficientlyand encode multiple codes, result in improved inventory management. It providesbetter safety in terms of fast recall of the stock and minimises the theft also. It helpsthe supplier in maintaining the stock of goods and keeping the shelf filled with goodswhenever needed which results growth in sales and thereby profits. The key elementin today’s market is to maintain appropriate in-stocks and not having too muchadditional inventory. To manage inventory is a costly affair for the retailers. Theinformation accessed through RFID helps in keeping a check on the inventory andits supply; thus, maintaining the right percentage of inventory. The ratio of demandand supply can be well maintained as the items which have increased sales istracked down and the stock is uploaded likewise.

d. Item level tracking:

Item level tracking is the most important objective of RFID system. This trackinggives a personalised ID to every unit of inventory. This results in better tracking ofthe items. As it saves time, the re-ordering of the items becomes easy and can be

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done in lesser time. The percentage of shrinkage is reduced due to proper andtimely shipments of the items.

RFID technology can be used to manage out of stocks that usually affect sale items orother high demand items during peak trading hours and can result in lost sales. Maincauses of out of stocks are a lack of accurate product visibility. In order to maintain goodproduct visibility, retailers need to be aware of whether the product arrived at the storewas placed in the shelf and registered as a sale. Theft also causes poor product visibility.

Retail managers can use RFID technology to streamline and improve several processes.Problems that occur at the Point of Sale (POS) can be time consuming and inconvenientfor both staff and customers. If a bar code item cannot be scanned, for example, staffmust try to identify the cause of the problem or find a similar bar coded item to scan inits place

RFID bar code do not require line of sight with readers and can be read in batches. Checkout staff can therefore scan a number of items at the same time. RFID scanning also hasa much higher accuracy rate than bar code scanning. The use of RFID technology atcheck-out counters could greatly decrease the wait time to customers and thus, canprocess more number of customers at POS sites. RFID offers new levels of visibility forcompanies that want to track physical items between locations. In the retail supply chain,goods tagged at the point of manufacture can now be traced from the factory to the shopfloor, providing a real time view of inventory for all supply chain partners.

FUTURISTIC VIEW

Technologies are being developed in the field of RFID tags that are more advanced andare of reduced costs. Generally the cost of RFID tags range from twenty cents to one

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dollar, which is not so reasonable. Therefore, in order to make it cheaper, the prices arerequired to fall to five cents instead of twenty cents. RFID tags are a part of RFID systemso in order to increase its usage, it is required to be cost effective. The future of RFIDis very bright in retail sector as right from inventory management to product manufacturing,this system provides more efficient and advanced retail experience to both customer andthe seller.

VIP care: Service people know when VIP customers should be provided welcome messagewhile entering, shopping guidance, shopping suggestions, and so on. The goal of theseservices is to make VIP customers feel like true VIPs. Some top-grade electronics andclothing retailers have already begun providing such services.

Intelligent shopping guide: Often, customers want to know where certain goods arelocated in a mall. Personal Digital Assistant (PDAs), kiosk and other electronic devicescan provide customized, valuable information through an intelligent shopping guide service.

RFID goods card: While shopping for certain electronic goods or large appliances, suchas air conditioners, refrigerators, and microwave ovens, customers don’t put the goodsdirectly in the shopping basket. Instead, they simply select an RFID card. The cards arechecked out before payment.

RFID checkout channel: Currently, most checkout channels in supermarkets use barcodescanning. However, consider an RFID-enabled check-out channel, where one can put hisshopping cart in an appointed area and all the information, including types of goods,prices, and total amount, are checked and calculated in a few seconds. It also reducesthe amount of labor required for the service people at the checkout channel, and itimproves the efficiency and veracity.

Define the utilisation scope: For better utilisation of RFID technology in stores, a carefulplan is required with pilot testing. In pilot testing, integration with the existing system canbe checked. If this could be followed by the valuable customer feedback the results wouldbe more realistic.

Integrate with the point-of-sale (POS) system: A POS integrated system with barcodescanners increases the utility of the total system. To build RFID-enabled checkout channels,it is required to integrate the RFID system into the POS system. In most cases, localIndependent Software Vendors (ISVs) provide and maintain the old POS system. This canbe coordinated with the ISV to plan the integration, estimate the workload, and determinethe budget.

Integration with finance system, CRM system, store-level inventory managementsystem, and other business systems: RFID technology can be used as a smart channelto get information. Most of the information is related to goods encoding, price, financialdata, and customer information. Thus, the integrated RFID system with existing back-endIT system, including finance system, CRM system, and store-level inventory managementsystem will be helpful.

24 Kindler Vol. IX No. 1 January-June 2009

POTENTIAL CHALLENGES OF RFID IMPLEMENTATION

The following list represents potential challenges while implementing an RFID solution-

Large volumes of data – Readers scan each RFID tag several times per second,which generates a high volume of raw data. Although the data is redundant anddiscarded at the reader level, processing large volumes of data can be difficult.

Product information maintenance – When the reader processes a high volume ofRFID tags, the attributes of each tagged product must be continually retrieved from acentral product catalog database — a process that results in challenges for large-scaleimplementations.

Configuration and management of readers and devices – When a large numberof readers and related hardware devices are deployed across multiple facilities,configuration and management can be challenging. The implementation of automateddevices for these processes is essential.

Data integration across multiple facilities – In an enterprise with multiple facilitiesthat are geographically distributed, it is increasingly difficult to manage data in real timewhile at the same time aggregating it into the central IT facility — a process that canplace a significant burden on the network infrastructure.

Data ownership and partner data integration – When there are different companiesinvolved in business processes, for example, in the retail supply chain, it can createissues pertaining to the ownership and integration of the data, thereby compromisingthe integrity of the solution architecture.

Data security and privacy – Depending on the nature of the business application andthe solution scenario, security and privacy challenges could have a significant impacton the architecture.

CONCLUSION

RFID has the potential to transform retail management. It is becoming cheaper forcompanies to produce tags because the technology is becoming standardised. Awarenessof RFID technology and the potential benefits of its usage across the industries aremaking this technology popular day by day. By playing a key role in developing theinfrastructure required for RFID, Microsoft is contributing to the momentum of massdeployment. The fully integrated Microsoft architecture for RFID cuddles a vision forincreased operational efficiency and reduced costs. It enables the exchange of RFID-related data in near real time across different systems and corporate boundaries. It alsosupports standards for global data synchronisation.

India is also playing a leadership role in RFID technology. To standardise the RFIDtechnology, the Wireless Planning & Coordination (WPC) wing of India’s Ministry ofCommunication assigned the 865-867 MHz UHF band for use by RFID devices. Clearingthe spectrum in India will enable Indian manufacturers to tag shipments of goods to meetthe UHF RFID requirements of customers in Europe and the United States.

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RFID has been heralded as a technology that can revolutionise the retail industry. Numerousbenefits of the technology have been suggested and an increasing number of firms areeither testing or implementing various RFID applications. Four major benefits of RFIDwere recognised, which provide empirical evidence for various anecdotal claims of thebenefits for retailers: (a) improved inventory management, (b) velocity of retail cycle,(c) integrated business model for inventory and supply chain management, and (d) improvedstore operation. In short, we can say RFID technology adds value in Smart RetailingConcepts. Now, retailers should notice the RFID programs started by their suppliers, andthey should begin to fund for RFID infrastructure establishment. The technology will helpboth retailers and suppliers to perform their business with an improved and precise wayand beyond doubt that will result in profits.

REFERENCES1. Accenture. (2004), “Retail Supply Chain: Creating and Sustaining High Performance,” at:

http://www.accenture.com/Countries/Canada/About_Accenture/Newsroom/HalfSurvey. htm2. College of Information Sciences and Technology, The Pennsylvania State University at http:/

/citeseerx.ist.psu.edu/viewdoc3. Hardgrave, B. C., Waller, M., & Miller, R. (2005). Does RFID reduce out of stocks? A preliminary

analysis. Fayetteville, AR. University of Arkansas, RFID Research Center, InformationTechnology Research Institute. .(Internal Library)

4. http://ezinearticles.com/?Pros-and-Cons-of-RFID-Technology&id=5220155. http://retailsolutionsonline.com/article.mvc/6. http://msdn.microsoft.com/en-us/library.(Internal Servers)7. http://msdn.microsoft.com/en-us/library/aa479362.aspx8. http://library.skillport.com/IBM e learning.(Internal Servers)9. http://www.rfidjournal.com/article/view/410. http://www-128.ibm.com/developerworks/library (Internal Servers)11. Learning from Prada (2002). RFID Journal. Retrieved May 13, 2005 from 25.12. Professional Leadership Technical Exchange Library, IBM.(Internal Servers)13. RFID Implementation in Retail Industry: Mithu Bhattacharya, Chao-Hsien Chu, Tracy Mullen

at http://www.docstoc.com/docs/DownloadDoc.aspx?doc_id=3369625414. The Boston Consulting Group: Best Practices in Customer Relationships and Retail Marketing

at http://www.docstoc.com/docs/33696254/Best-Practices-in-Customer-Relationships-and-Retail-Marketing

15. TIBCO. (2005). Implementing RFID for rapid ROI and long-term success. Palo Alto, CA:TIBCO at http://www.escinst.org/pdf/TIBCO_RFID_white%20paper.pdf

16. 2004 Conference RFID-IP.  http://www.rfidjournal.com/whitepapers

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Kindler Vol. IX No. 1 January-June 27

Impact of Experiences of Venture Capitaliston Contractual Elements

Dr. Chimun Kumar Nath*

ABSTRACTThe focus of this paper is on the role of experience in situations where venture capital contractsare drafted and applied. Based on a study of 18 Financial Institutions offering venture capital, itwas observed that investors with venture capital and business experience include more protectiveclauses in venture capital contracts than their inexperienced colleagues. However, experiencedinvestors were less likely to exercise these rights. The only deviation from this pattern was priorexposure to conflicts, prompting the use of contractual rights and discouraging compromise andpatience in problematic situations with entrepreneurs.

INTRODUCTION

Venture capital plays an increasingly important role in the financial system and the economy.Providers of venture capital attempt to identify firms, typically in early or developmentalstages, especially those possessing strong potential for profitable growth. Open andfrequent communication between a venture capitalist and an entrepreneur is a prerequisitefor the ‘value-added’ services provided by the venture capitalist, and is deemed to beconsidered as important for the success of the portfolio company. However, prior researchindicates that co-operation between venture capitalists and entrepreneurs is far fromfrictionless, (Sahlman 1990; Barney et al. 1994; Gompers1997), and that tensions andconflicts often arise in this relationship. The conflicts, if not solved in a proper manner,could be disastrous for the success of the venture. Contracts that accompany venturecapital investments may help manage these tensions emanating from the venture capitalist-entrepreneur relationship. Venture capital contracts typically serve two major functions.First, they define the rights and responsibilities of the parties involved, set the boundariesof acceptable behaviour, and direct the attention to the key issues in the relationship,(Sapienza and Korsgaard 1996; Landström et al. 1998, Wright and Lockett 2003). Second,contracts provide mechanisms for conflict resolution, when problems arise (Sahlman1990;Kaplan and Stromberg 2003; Kaplan et al., 2003).

In particular, the paper explores the impact of venture capitalists’ prior professional andconflict experience on the covenants included in venture capital contracts. The paper isalso interested in how prior experience affects venture capitalists’ tendency to resort toa number of contractual and non-contractual responses to disagreements, incompetence,

* Lecturer, Department of Commerce, Dibrugarh University, Dibrugarh- 4, Assam;Email: nathchimun@yahoo.com

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shirking, and opportunism on the part of the entrepreneur. Finally, the paper seeks tothrow light on the relationship between the existence of particular contractual rights andtheir application in problematic situations.

The rest of the paper is divided into five distinct parts. We have started by laying afoundation for this study by reviewing the sources of disappointments in the venturecapitalist-entrepreneur relationship and the types of responses to unmet expectations.Thereafter, we formulate hypotheses describing the relationship between experience,content of the venture capital contract, and venture capitalists’ response to unmetexpectations. This is followed by a description of the method adopted and reporting ofthe results. Finally, this paper is concluded by a discussion of results and possibleimplications.

SOURCES OF DISAPPOINTMENT IN THE VENTURE CAPITALIST – ENTREPRENEURRELATIONSHIP

In an ideal venture capitalist-entrepreneur relationship, both parties exert themselves fullyand perform competently in order to maximize the value of a portfolio company. In reality,either the venture capitalist or the entrepreneur may fail to live up to the expectations.Disappointments in the venture capitalist-entrepreneur relationship may take one of fourforms: disagreements, incompetence, shirking and opportunism. First, although both partiesmay be willing to keep their respective promises, they may fail to honour their commitmentsbecause of divergent interpretations. For example, the venture capitalist and theentrepreneur may disagree over the goals or strategies of a portfolio company.

Second, both parties may be willing to contribute their respective shares, but one or theother may be incompetent and thus unable to contribute successfully. For instance, theentrepreneur’s lack of ability may result in serious delays in product development or in theloss of key employees of the firm.

Third, one or both of the parties may have an incentive to shirk, that is, avoid exertingsufficient effort to carry out the task assigned. Shirking involves a wide array of behavioursranging from the failure of the entrepreneur to actively pursue growth opportunities orrecruit key personnel to missed deadlines or lower product quality.

Fourth, one or both parties may have an incentive to act opportunistically, that is, to seekone’s own self-interest at the expense of the other party and contrary to the other party’sreasonable expectations. Opportunistic behaviour may be manifested in dishonesty orfraud in the entrepreneur’s dealings with the company or in spending excessive time andmoney on various perquisites (Barney et al. 1994).

These four sources of disappointment resonate in the psychological contract literature(Rousseau, 1995) and play a key role in the venture capital literature. For example,previous empirical literature gives us a reason to believe that the potential incompetenceof the entrepreneur resulting from the adverse selection mechanisms (Sapienza andGupta 1994; Kaplan and Strömberg 2003) may jeopardize the success of a portfoliocompany. In addition, moral hazard taking the form of opportunism and shirking (Sahlman

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1990; Barney et al.1994; Gompers 1997; Kaplan and Stro¨mberg 2000; Elitzur and Gavious2003) may lead either to the maximization of the private benefits of the entrepreneur atthe expense of the venture capitalist or to insufficient effort from the part of the entrepreneur.Divergent objectives (Sahlman 1990; Sapienza and Gupta 1994; Gompers 1997) maytransform into excessive risk-taking by the entrepreneur (Green 1984; Cornelli and Yosha2003) or disagreements over the direction of the development of a portfolio firm (Sorensonand Stuart 2001).

Prior literature identifies a number of different responses available for individualsexperiencing disappointments in their personal or business relationships. For instance,the psychological contract literature and the conflict management literature list numerousbehavioural options in the face of dissatisfactory conditions (Hirschman 1970; Thomas1992). The literature on the sociology of law (Bernstein 1992, Macaulay 1963, 2000)tends to contrast contractual and non-contractual (relational) approaches. Because ofour interest in the interplay between experience, venture capital contracts, and venturecapitalists’ responses to unmet expectations, we decided to take the sociology of law asour point of departure. We thus focus on legal strategies (exercising one’s contractualrights) and non-contractual (compromise and patience) as venture capitalists’ majorresponses to problems arising in the venture capitalist-entrepreneur relationship.

The potential for opportunism and disagreements over the goals and strategies of aportfolio company is addressed in venture capital contracts principally through contractualcontrol rights. In a corporation, the most conspicuous means of control are voting rights.Venture capital investments typically involve general voting rights (i.e., rights shared amongall equity holders) and targeted voting rights (negative covenants empowering venturecapitalists to veto certain transactions, but not allowing them to initiate transactions). Inaddition to protective clauses against major opportunities for abuse – such as dividendsor share repurchases, charter amendments that adversely affect the venture capitalists,and mergers – targeted voting rights may also constrain many other transactions thatseem more mundane, such as decisions relating to the budget, employment agreements,any material contracts and any deviation from the business plan, (Smith and Parhankangas2000; Isaksson et al. 2004). In addition, venture capitalists may seek to exit sooner thanplanned, for instance, by exercising a put option, or using registration rights to force thecompany to complete to an initial public offering.

HYPOTHESES

In this paper, we focus on the link between: (1) the conflict, venture capital (VC), andbusiness experience of the venture capitalist and the content of the venture capital contract;(2) the conflict, venture capital, and business experience of the venture capitalist and hisor her tendency to resort to contractual vs. non-contractual approaches in the face of thedisappointments emanating in the venture capitalist-entrepreneur relationship; and (3) thecontent of the contract and the nature of venture capitalists’ response to unmet expectations.Our research framework is illustrated in Figure 1.

30 Kindler Vol. IX No. 1 January-June 2009

Figure1: Research framework

The quality of past venture capitalist-entrepreneur relationships is likely to affect thedegree to which a venture capitalist anticipates problems with his or her portfolio companiesin the future (Rusbult 1987; Robinson 1996; Labianca et al. 1998; Hibbard et al. 2001).Past conflict experience may thus play a crucial role in determining whether a venturecapitalist chooses to rely on written contracts to identify and resolve the implications ofdisagreements, opportunism, shirking and incompetence in his or her relationship with theentrepreneur (Chan et al. 1990; Barney et al.1994; Landstro¨m et al.1998). An alternativeto the contractual approach would be ‘relational’ contracting (Steier 2003), referring toignoring the contractual covenants and relying on a ‘man’s word, a handshake, commonhonesty or decency’ (Macaulay 1963, p. 58).

Hypothesis 1a: VCs with more conflict experience will include more control and exitcovenants in their contracts.

Hypothesis 1b: VCs with more VC experience will include more control and exit covenantsin their contracts.

Hypothesis 1c: VCs with more business experience will include more control and exitcovenants in their contracts.

Scholars have long recognized that business people resolve conflicts using mechanismsother than contractual covenants (Macaulay, 1963, 2000; Ellickson, 1991; Bernstein, 1996;Labianca et al., 1998). It has been suggested that the members of tight social groups willinformally encourage each other to engage in collaborative behaviour, as opposed toexercising their contractual rights. For instance, (Bernstein 1996) observes that ‘the contoursof the transactors’ legal relationship may not be the same as the scope of the rights andduties memorialised in their written, legally enforceable contract.’ In their paper on venturecapital contracting, (Landstrom et al. 1998) they quote an entrepreneur saying that ‘[relyingon the contract] is the last possible scenario that you want’.

Thus, based on these reviews, we assume that the extent to which the venture capitalistsbelieve that their current problems with entrepreneurs may be solved through collaborationas opposed to exercising contractual rights is partly based on their experience.

Hypothesis 2a: VCs with more conflict experience will rely more on legal strategies.

Hypothesis 2b: VCs with more conflict experience will rely less on compromise.

Hypothesis 2c: VCs with more conflict experience will be less patient when faced withdisappointments with portfolio companies.

Content of the Contract Control Covenants Exit Covenants

VC’s Response Legal Strategies Compromise Wait and Watch

Experience Conflict Business Risk VC

Kindler Vol. IX No. 1 January-June 31

Landström et al. (1998) observed that experienced venture capitalists are more likely tounderstand that not all issues of importance can be specified in a written contract: ‘They[experienced venture capitalists] will realise that the spirit is more important than the letterin dealing with these issues [problems with portfolio companies]’. In a similar way, earninga reputation as a venture capitalist, who exits from an investment as soon as problemsarise or uses his contractual power to get his way, is likely to make it more difficult forthe venture capitalist to attract the best entrepreneurial talent in the future (Smith, 1998,1999; Wright and Lockett, 2003). Therefore, we expect that the more experienced aventure capitalist, the more he or she will de-emphasise exercising the legal rights andemphasise compromise or being patient with disappointing entrepreneurs.

Hypothesis 3a: VCs with more VC experience will rely less on legal strategies.

Hypothesis 3b: VCs with more VC experience will rely more on compromise.

Hypothesis 3c: VCs with more VC experience will be more patient when faced withdisappointments with portfolio companies.

Prior literature emphasises the business experience of the venture capitalist as a key tothe success of individual venture capital firms and communities (Karaomerliodlu andJacobsson, 2000). It is also suggested that previous experience will lead to the developmentof experientially acquired skills or expertise that will, in turn, lead to more knowledgeableactions and decisions (Chandler and Jansen, 1992; Reuben and Fischer, 1999). Followingthe same line of reasoning, we expect that business experience will make a venturecapitalist more knowledgeable about the antecedents and potential cures of the problemswith portfolio companies and thus, more capable and active in responding to them.Venture capitalists with business should also be better able to identify themselves with thesituation of the entrepreneur and more likely to be constructive and patient when problemsarise.

Hypothesis 4a: VCs with more business experience will rely less on legal strategies.

Hypothesis 4b: VCs with more business experience will rely more on compromise.

Hypothesis 4c: VCs with more business experience will be more patient when faced withdisappointments with portfolio companies.

DATA COLLECTIONWith the sample of 18 Financial Institutions (FIs) who offer/are willing to offer venturecapital in the states of Karnataka and Assam, primary data have been collected by servinga questionnaire. Instead of addressing the questionnaire to individual FIs offering VCF asan organisation, we chose to contact all investment managers (eg. Manager - Operations,Assistant Manager - Operations, Manager - Investments, etc.) of the FIs of Assam andKarnataka. This deviation from the traditional approach in venture capital research is likelyto improve the quality of our findings, since the venture capitalist-entrepreneur relationshipis more likely to be based on the interaction between the individuals, i.e., the investmentmanager and the entrepreneur, than interaction between organisations (the venture capitalfirm and the portfolio company). Though there is a discernible growth of VCF in Assam,

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hence for utilising an experience of comparatively advanced growth of VCF in other partof India, the state of Karnataka has been selected. Moreover, from the review of literaturesit emerges that Karnataka has over the years developed in venturing into this type ofcapital, and for that reason the present study has made an attempt to monitor the growthof VCF in Karnataka to compare it to a relatively unorganised environment of VCF in thestate of Assam. The study could have been more broad based had the experiences ofMaharastra, Gujarat and Tamil Nadu been used for developing a more comprehensivemethodology for VCF in Assam. But due to constraints of time and economy, the workhas been limited to Karnataka only. More over, Karnataka happens to be the state whereit has been observed that, before the information technology (IT) revolution since 1995onwards; there was negligible diffusion of venture capital funding, (Verma 1999).Predominantly having an agro-based economy, Karnataka has started giving focus on ITindustry in addition to their traditionally focused area of Agriculture during the first generationof reforms and has started enjoying the benefits during the second-generation reformsstarting from 1995 onwards. So far, it has also been observed that the other top positionedstates in terms of VCF penetration differ in characteristics as compared to Assam. Becausein those states the mindset of the people has been found to be of entrepreneurial characterby tradition, which attribute has been found to be very poorly penetrating in the mindsetof the people of Assam, that too very recently. However, to make a comprehensivecomment on the psyche of the people of a particular region is outside the scope of thisstudy. Thus, the study has attempted to gather the experiences of Karnataka in thedirection of VCF development to have a comprehensive methodology of comparing VCFdevelopment in Assam because Assam is still an agrarian economy like pre-1995Karnataka.

The study has been conducted during 2003 to 2007. Due to the relatively negligible sizeof the venture capital market in Assam and relatively upcoming VCF in Karnataka (during2003), it was possible to include all the existing FIs offering venture capital in the respectivestates into our study. We have used the listings of the venture capitalists published on thehomepages of Indian Venture Capital Association (IVCA).

MEASURES

Control and exit rights were operationalised by using contractual covenants listed in(Isaksson et al. 2004) as a point of departure and as shown in Table 1. In our questionnaire,we asked the venture capitalist to describe their most likely behaviour (the use of legalstrategy, compromise and patience) in four hypothetical situations, referring todisagreements, incompetence, shirking and opportunism. The use of legal strategy wasmeasured as general tendency to use contractual covenants when faced by thedisappointments on the part of the entrepreneur, and the use of particular contractualcovenants listed in Table 1 (Isaksson et al., 2004).

Factor analysis shows that these items load on the same factor. Compromise andpatience were operationalised using a set of statements modified from Hagedoorn et al.1999, Lin and Germain 1998 and Rusbult et al. 1988. Consistent with previous literature,

Kindler Vol. IX No. 1 January-June 33

the respondents were allowed to choose more than one of the options among legalstrategy, compromise and patience as their response to disappointments caused by theentrepreneur.

It has been suggested that rather than using a single conflict management strategyindependently, people tend to adopt configurations of conflict management strategies,(Munduate et al., 1999; Van de Vliert et al., 1995).

Table 1. Operationalisation of Measures

Variables Measures VC Experience Years as Venture Capitalist

General ConflictExperience

Measured on a 7-point Likert scale (1=totally disagree;7=totally agree with statements below)1. During the past years, there have often beendisagreements between us and the portfolio companiesregarding how to manage the firm.2. During the past years, we have had serious conflictswith the entrepreneurs.3. Our relationships to our portfolio companies havebeen Harmonious (reversed).Cronbach’s alpha: 0.70;Source: (Zaheer et al., 1998)

Frequency ofDisappointmentsin Past VC-ERelationships

Percentage of cases, where the venture capitalist hasexperienced disagreements, incompetence, shirking, oropportunism from the part of the entrepreneur (thisapplies both for the cases where the failure of theentrepreneur to live up to the expectations carrying majoror minor implications for the performance of the portfoliocompany). CEO Experience Number of years in ageneral managerial position in a company.Source: (Sapienza et al., 1994; Sapienza and Gupta,1994)

34 Kindler Vol. IX No. 1 January-June 2009

Operational Experience

Number of years in research and development,production, or marketing and sales functions, includingalso managerial experience within these functionsSource: (Sapienza et al., 1994, Sapienza and Gupta,1994)

Control Rights

Tendency to include the following rights in venture capitalContracts measured on a 7-point Likert scale (1=never;7=always)1. Nominate board members2. Veto business transactions3. Veto material changes in the business plan,4. Veto the distribution of funds to common stockholdersCronbach’s alpha: 0.7026;Source: Adapted from (Isaksson et al., 2004)

Exit Rights

Tendency to include the following rights in venture capitalContracts measured on a 7-point Likert scale (1=never;7=always)1. Call a ‘put option’2. To force the company to initiate an IPO3. Replace the CEOCronbach’s alpha: 0.750;Source: Adapted from (Isaksson et al., 2004)

Legal Strategy

A) General tendency to use written contracts, when facedwith disagreements, incompetence, shirking oropportunism from the part of the entrepreneur, measuredby the following statements on the scale from 1 to 7 (1=completely disagree; 7= completely agree)1. Refer to the written contract if that is possible.2. Use written agreements, if possible, as a tool to getyour wayB) Tendency to exercise the control and exit rights listedabove (1= never; 7= always)Cronbach’s alpha: 0.670;Source: Adapted from (Isaksson et al., 2004)

Kindler Vol. IX No. 1 January-June 35

Patience

Tendency to resort to the actions listed below whenfacing disagreements, incompetence, shirking oropportunism, measured on a 7-point scale (1= totallydisagree; 7= totally agree)1) Have faith that something like this will be taken careof without you intervening2) Assume that in the end everything will work out3) Optimistically wait for the problem to be solved withoutyour help4) Trust the decision making process of the firm withoutyour interferenceCronbach’s alpha:0. 8747;Source: (Hagedoorn et al., 1999; Rusbult et al., 1988)

Compromise

The tendency to resort to the actions listed below whenfacing disagreements, incompetence, shirking oropportunism, measured on a 7-point scale (1=totallydisagree; 7=totally agree):1) Try to come to an understanding with the entrepreneur.2) Suggest solutions to the entrepreneur3) Enter into discussion with the board of directors todeal with the issue4) Try to think of different solutions to the problem5) Work to create consensus with the investors to handlethe situation6) Approach the entrepreneur with the proposal andwork it out together7) In collaboration with the entrepreneur, try to find asolution that is satisfactory to allCronbach’s alpha:0. 8884;Source: (Hagedoorn et al., 1999; Rusbult et al., 1988)

Size of Portfolio

Number of portfolio companies managed by a venturecapitalist at the time of the study

Average InvestmentSize/InvestedCapital

Investment size in Euros/Invested Capital

36 Kindler Vol. IX No. 1 January-June 2009

Hours/AveragePortfolio Company

Number of hours the venture capitalist spends on anaverage portfolio companySource: (Sapienza et al., 1994)

Investment Stage

The classification of European Venture CapitalAssociation Distinguishes between four investmentstages, including 1) Seed financing; 2) Start-up;3) Growth (expansion); 4) Replacement capital andbuyout. A sum was calculated by adding these numbersand dividing them by the total number of investmentsstages the VC invests in. The sample was then split upbetween early stage (with a mean of 2.5 or lower) andlater stage investors (with a mean of 3 or higher)Source: (Mayer et al., 2003)

Ratio of SyndicatedInvestments

The total number of syndicated investments divided bythe total number of investments made by the venturecapitalistSource: (Manigart et al., 2002)

Debt Capital

The percentage of cases where the venture capitalistinvests also as creditor

Source: Isaksson, A., Cornelius, B., Landström, H. and Junghagen, S. (2004) Institutional theoryand contracting in venture capital: The Swedish experience, Venture Capital – An InternationalJournal of Entrepreneurial Finance, 6(1), pp. 47 – 71.

The measures of legal strategy, compromise and loyalty accruing from four differentscenarios detailing disagreements, incompetence, shirking and opportunism were combined.The factor analysis shows that this measure is unidimensional. The operationalisation ofour independent, dependent and control variables is shown in Table 1.

RESULTS

Our respondents were working as venture capitalist for approximately six years to twelveyears and managed a portfolio of companies in a wide variety of industry sectors, such

Kindler Vol. IX No. 1 January-June 37

as IT, biotechnology and pharmaceuticals, electronics and computer hardware, medicaldevices and equipment, software and information services, healthcare services as well asretailing and consumer products (Canfina, ICICI, Global, SIDBI, to name a few). Theventure capital firms in our sample were mostly making investments in early stage portfoliocompanies (61% of the responses in total of the respondents of both the states). Wefound that the rejection rate of business plans is significantly higher (92.57% of therespondents) in Assam than in Karnataka (87.95% of the respondents), p=0.04. In asimilar way, we found that debt funding is much more common in Karnataka (54.33%)than in Assam (14.20%), p=0.000.

TESTS OF HYPOTHESES

Table 2 shows the correlations among the independent, dependent and control variables.The inter-correlations among the independent variables are reasonably low, with thehighest correlation existing between debt capital and the size of the portfolio, r =0.331,p50.01. Table 2 also indicates that venture capitalists use most often compromise (meanof 5.82 on a scale from 1 to 7), when dealing with disappointments with entrepreneurs.Exercising legal rights and being patient were less common (means of 4.60 and 1.74,respectively). This finding is in line with the literature in the sociology of law stating thatbusiness people engage more often in collaborative behaviour than exercising theircontractual rights, (Macaulay, 1963, 2000; Ellickson 1991; Bernstein, 1996). In addition,these findings seem to confirm our perception of venture capitalists as active problem-solvers as opposed to passive bystanders (Fredriksen et al., 1997), thus supporting thegeneral validity of our data.

Multiple linear regression analysis was used to test the afore-mentioned hypotheses, asshown in Table 3. The models with all variables and the ones resulting from the backwardelimination procedure are reported. As predicted by hypothesis 1a, conflict experiencedefined as overall level of conflict and frequency of disappointments in prior venturecapitalist-entrepreneur relationships is positively associated with the inclusion of controland exit rights in venture capitalist contracts. Hypothesis 1b states that the more experienceda venture capitalist is, the more likely it is to include control and exit rights in venturecapital contracts. This hypothesis was confirmed for exit rights. Relative to hypothesis 1c,we have observed a positive, statistically significant relationship between the venturecapitalist’s CEO experience and control and exit rights, whereas operational experiencewas positively associated with control rights only.

Hypothesis 2a predicting a positive relationship between disappointments in past venturecapitalist-entrepreneur relationships and the tendency to exercise contractual rights issupported by our data. In a similar way, we observed that prior disappointments have anadverse, statistically significant relationship with the tendency to compromise or resort topatience, thus giving support to hypothesis 2b and 2c. In line with Hypotheses 3a and 3b,we observed that VC experience is negatively associated with a tendency to use legalstrategies and positively associated with the tendency to compromise. However, weobserved no evidence confirming hypothesis 3c stating that experienced VCs show morepatience towards disappointing entrepreneurs.

38 Kindler Vol. IX No. 1 January-June 2009

Our data shows that the venture capitalist’s promoting (CEO) experience is negativelyassociated with a tendency to exercise contractual rights and positively associated withthe tendency to resort to compromise and patience. Operational experience has an adverserelationship with legal strategies and a positive relationship with patience.

These findings seem to support hypotheses H4a, H4b, and H4c. In line with the assumptionthat the greater the number of exit covenants in the contract, the more venture capitalistswill rely on legal strategies when faced with disappointments with entrepreneurs, exitrights have a positive, statistically significant relationship with the tendency to exercisecontractual rights. In a similar way, our data supports that the greater the number ofcontrol covenants in the contract, the more venture capitalists will rely on compromisewhen faced with disappointments with entrepreneurs, predicting a positive relationshipbetween control rights and compromise. Finally, we were able to detect a positiverelationship between patience and exit rights and an adverse relationship between patienceand control rights, relationships though not hypothesised in our study.

Kindler Vol. IX No. 1 January-June 39

Tabl

e 2.

Cor

rela

tions

bet

wee

n in

depe

nden

t, de

pend

ent

and

cont

rol

varia

bles

12

34

56

78

910

1112

1314

1516

Cont

rol v

ariab

les1.

Size

of P

ortfo

lio1

2.Inv

estm

ent S

tage

0.211

13.

Aver

age

Inves

tmen

tSi

ze /

Inves

ted C

apita

l0.1

08-0

.121

14.

Debt

capit

al0.3

31**

0.094

-0.05

01

5.Ho

urs/A

vera

gePo

rtfoli

o Co

mpan

y-0

.216

-0.05

6-0

.064

-0.13

21

6.Ra

tio o

f syn

dicate

dInv

estm

ents

-0.13

6-0

.213

0.038

-0.07

40.0

731

7.Co

nflict

Exp

erien

ce-0

.154

-0.21

70.0

35-0

.192

0.046

0.049

18.

Freq

uenc

y of

Disa

ppoin

tmen

ts in

Past

VC-E

Rela

tions

hips

-0.10

10.1

46-0

.202

-0.04

20.0

100.1

580.3

08*

1In

depe

nden

t var

iables

1.VC

Exp

erien

ce0.2

69*

0.108

-0.15

10.1

40-0

.218

0.000

-0.22

2-0

.170

12.

CEO

Expe

rienc

e-0

.004

0.007

-0.07

9-0

.106

-0.08

2-0

.038

-0.15

1-0

.145

0.058

13.

Oper

ation

al e

xper

ience

0.161

0.293

*0.0

660.3

39**

-0.15

30.1

77-0

.042

-0.02

8-0

.066

0.120

14.

Contr

ol Ri

ghts

-0.00

3-0

.066

0.002

-0.09

9-0

.017

-0.08

8-0

.031

-0.17

90.0

340.2

41*

0.032

15.

Exit

Righ

ts0.2

50*

0.034

0.216

0.261

*-0

.325*

*0.0

53-0

.089

-0.22

00.2

88*

-0.12

20.1

430.2

97*

16.

Lega

l Stra

tegy

0.110

0.040

0.025

0.230

*-0

.028

0.002

0.067

-0.15

1-0

.015

-0.15

1-0

.166

0.228

*0.4

54**

17.

Comp

romi

se0.0

41-0

.130

-0.16

20.3

94**

-0.03

30.1

90-0

.234*

-0.30

3*0.0

490.0

000.3

17*

0.209

0.161

0.052

18.

Patie

nce

0.048

-0.01

2 -0

.129

-0.00

4-0

.071

0.027

-0.00

8-0

.051

-0.02

5-0

.027

-0.14

1-0

.319*

*0.1

740.1

56-0

.096

1Me

an6.7

60.6

0 0

.376

24.3

21.58

0.606

2.85

17.84

6.43

4.37

14.6

5.49

3.84

4.60

5.82

1.74

Stan

dard

Dev

iation

7.30

0.494

1.53

29.0

19.5

0.820

0.914

11.3

5.45

6.34

12.1

1.42

1.63

1.46

0.768

0.693

**C

orre

latio

n is

sig

nific

ant

at t

he 0

.01

leve

l (2-

taile

d);

*Cor

rela

tion

is s

igni

fican

t at

the

0.0

5 le

vel (

2-ta

iled)

.

40 Kindler Vol. IX No. 1 January-June 2009

Tabl

e 3.

Tes

t of

hyp

othe

ses

1 –

4a,b

Con

trol

right

sE

xit

right

sLe

gal

stra

tegy

Com

prom

ise

Pat

ienc

e

Con

stan

t7.

466.

063.

643.

104.

443.

905.

835.

694.

955.

41C

ontr

ol v

aria

bles

Cou

ntry

-0.2

74-0

.221

-0.2

08-0

.667

*-0

.534

-0.0

570.

033

Siz

e of

Por

tfolio

0.20

1-0

.103

0.11

6-0

.379

+-0

.432

**-0

.496

+-0

.226

Inve

stm

ent

Stag

e-0

.079

0.02

60.

142

166

0.13

10.

177+

0.21

3Av

erag

e In

vest

men

tS

ize

/ In

vest

ed C

apita

l0.

054

0.03

90.

335+

0.28

9+-0

.454

**-0

.489

**-0

.390

*-0

.351

*D

ebt

Cap

ital

-0.0

22-0

.048

-0.2

190.

691*

*0.

741*

*0.

198

Hou

rs/A

vera

geP

ortfo

lio C

ompa

ny-0

.091

0.55

0+-0

.408

*0.

197

0.24

1+-0

.314

*-0

.342

**0.

200

Rat

io o

f S

yndi

cate

dIn

vest

men

ts-0

.234

-0.3

06+

-0.2

81-0

.125

0.29

2*0.

272*

-0.3

67+

-0.3

38*

Inde

pend

ent

varia

bles

Con

flict

Exp

erie

nce

(H1a

, H

2a,

H2b

,H2c

)-0

.258

0.47

2+0.

555*

*0.

136

-0.0

81-0

.412

-0.3

50+

Freq

uenc

y of

Dis

appo

intm

ents

in

Pas

t V

C-E

Rel

atio

nshi

ps(H

1a,

H2a

, H

2b,

H2c

)0.

409

0.37

6+0.

363+

0.48

2**

0.35

6+0.

429*

-0.2

75+

-0.3

07**

-0.5

02+

-0.4

54*

VC

Exp

erie

nce

(H1b

, H

3a,

H3b

, H

3c)

-0.3

160.

550+

0.52

6**

-0.2

81-0

.369

*0.

313+

0.30

9*0.

221

CE

O E

xper

ienc

e(H

1c,

H4a

, H

4b,H

4c)

0.48

0+0.

326+

0.32

80.

342*

*-0

.297

+-0

.417

*0.

213

0.21

4+0.

181

0.28

6+O

pera

tiona

l E

xper

ienc

e(H

1c,

H4a

,H4b

, H

4c)

0.54

8+0.

502*

0.03

9-0

.393

+-0

.477

*0.

050

0.72

7**

0.62

2**

Adj

uste

dR

20.

129

0.13

50.

201

0.36

80.

217

0.37

20.

651

0.74

00.

303

0.39

4F

1.74

7+3.

030*

1.59

3+3.

518*

*1.

741+

2.7

08*

4.47

0**

9.20

8**

1.80

8+1.

528*

a The

firs

t col

umn

show

s th

e re

sults

of t

he r

egre

ssio

n an

alys

is w

ith a

ll in

depe

nden

t and

con

trol v

aria

bles

. The

sec

ond

colu

mn

pres

ents

the

resu

lts d

eriv

edfro

m t

he b

ackw

ard

elim

inat

ion

proc

edur

e.b

+ p<

. 10

; *

p<.0

5 **

; p<

.010

. O

ne-ta

iled

test

s.

Kindler Vol. IX No. 1 January-June 41

To sum up, we have observed that relatively strong support for hypothesis 1 suggestingthat venture capitalists with substantial venture capital, business and conflict experienceshield themselves from the disappointments caused by the entrepreneur by includingmore control and exit rights in venture capital contracts than their less experiencedcolleagues. Relative to hypotheses 3 and 4, we observed that the more experienced aventure capitalist, the more likely they are to solve problems in collaboration with theentrepreneur, and less likely to exercise their legal rights. However, negative experiencesin the past make the venture capitalist more willing to rely on contractual covenants andless inclined to work out problems together with the entrepreneur or being patient withdisappointing entrepreneurs, thus supporting hypothesis 2. Finally, our results suggestthat the existence of exit covenants may decrease venture capitalists’ willingness tocompromise when faced with unmet expectations. However, the control rights seem tohave an opposite impact on the venture capitalist’s behaviour.

CONCLUSION AND AVENUES FOR PRACTICAL IMPLICATIONS

Our findings highlight the crucial role of experience in situations, where venture capitalcontracts are drafted and applied. Interestingly enough, we observed that experiencedinvestors include more protective clauses in venture capital contracts, but are less likelyto exercise these rights. The only exception to this pattern was investors’ exposure toconflicts, prompting the use of contractual rights and discouraging compromise and patiencein problematic situations with entrepreneurs.

In addition, our study gives a reason to believe that depending on a type of contractualcovenant, contractual and relational governance may either act as complements orsubstitutes to each other.

Our paper extends some of the earlier findings on legal contracting and conflict resolution.First, this paper throws light on the existing knowledge on conflict resolution in the venturecapital context by exploring the interplay between contractual and non-contractualapproaches to solving problems in the venture capitalist-entrepreneur relationship. Second,prior literature suggests that due to institutional pressures, venture capital contracts arerather standardised, regardless of the characteristics of the investor or the portfolio company(Jog et al., 1991; Isaksson et al., 2004). In our study, we were able to demonstrate thatexperience, and thus possibly learning play an important role in guiding the contractualchoices of a venture capitalist and their response to unmet expectations. Third, by makinga distinction between conflict, professional and business experience, we were able toconduct a more fine-grained analysis on the interplay between the choice of a conflictresolution strategy and experience than some of the prior studies (Thomas,1992; Jameson,1999). Finally, our results contradict a commonly held belief in the literature on thesociology of law (Macaulay, 1963, 2000; Ellickson, 1991; Bernstein, 1996), according towhich contracts make little difference in situations, where the members of tight socialgroups will informally encourage each other to engage in collaborative behaviour. Incontrary, our findings suggest that contractual covenants have the potential of modifying

42 Kindler Vol. IX No. 1 January-June 2009

responses to unmet expectations by shaping the values and norms of the contractingparties.

The practical implications of this study are many. First, it is crucial for entrepreneurs tounderstand that it is dealing with an active partner, not likely to overlook problems in oneof the portfolio companies. This study also shows that venture capitalists prefer solvingproblems in collaboration with entrepreneurs, rather than resorting to legal sanctionswhen faced with disappointments in the venture capitalist-entrepreneur relationship.According to our results, entrepreneurs can expect more understanding and sympathyfrom venture capitalists with extensive venture capitalist and business experience, whereasinvestors exposed to problematic portfolio companies in the past may adopt lessconstructive approaches to dealing with disappointments caused by the entrepreneur. Ina similar way, the inclusion of control covenants in the venture capital contracts maysupport entrepreneurs in their efforts to build a harmonious relationship with the venturecapitalist. For venture capitalists, the results of this study indicate that venture capital andbusiness experience may help them deal with disappointments so characteristic to allbusiness relationships in a more constructive way.

ACKNOWLEDGEMENT

The author acknowledges the valued comments forwarded by the esteemed reviewers onthe earlier version of this paper.

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44 K i n d l e r V o l . I X No. 1 January-June 2009

Kindler Vol. IX No. 1 January-June 45

Small and Medium Enterprises in India:Opportunities and Threats under

Globalisation ProcessDr. Sriparna Guha*, Anindya Guha**

ABSTRACTSmall and Medium Enterprise’s (SMEs) role in the Indian economy is well known to the peopleof India. Growth of the SMEs has been captured for the past 25 years approximately. Afterthe effect of liberalisation and globalisation it is imperative that SMEs have faced a tremendouscompetition. This paper focuses on the opportunities and threats in front of Indian SMEs underglobalisation and also highlights performance of SMEs and finally gives some suggestion aboutfuture of SMEs.

INTRODUCTION An enterprise, by its very nature, is risk taking. Its rate of success is generally small, butwhen it succeeds it is notably rewarding. Its success depends partly on the ability of theentrepreneur to making appropriate decisions at several levels; in the choice of appropriateproduct to manufacture, location of the plant, appropriate technology and inputs, supervisionof the activity of workers, resolving conflicts among various interest groups within the firm,deciding the scale of output, exploring the markets, caring for the clients, maintenance ofquality and goodwill, handling competitive forces, and so on. It also depends on thefinancial strength of the entrepreneur as well as his ability to obtain and manage fundsfrom the market. As Galbraith (1980) put it, poverty entails risk aversive behaviour andtherefore goes against entrepreneurship. Further, as Veblen (1904, 1921) pointed out,entrepreneurship thrives on industrial culture, the mental make up to account and strivefor pecuniary gains. Poor economies do not provide a fertile base to the pecuniary cultureof thinking and action (Veblen, 1899). A vicious circle of poverty, lack of entrepreneurialabilities and the resultant poverty make a low equilibrium trap. This vicious circle may notautomatically give a way to industrialisation and therefore may necessitate interventionfrom outside and perhaps a big push.

Small and Medium Enterprise’s (SMEs) role in Indian economy is well known to thepeople of India. In case of global economic growth, SMEs are important in terms of theirpositive effort to industrial employment, output or production and exports. By the end of

* Lecturer, Department of Business Administration, Narula Institute of Technology, West BengalE-mail : sriparna110@rediffmail.com

* Assistant Professor, Department of Humanities, JISCE, Kalyani, West Bengal;Email anindyaguha@rediffmail.com

46 Kindler Vol. IX No. 1 January-June 2009

March 2002, there were 3.4 million small industry units, accounting for more than 40%of the gross value of output in the manufacturing sector, about 35% of the total exportsand provided employment to over 19.2 million persons which are second only to agriculture(Planning Commission, 2002). Infact, since the early 1990s, Indian SMEs have faced stiffcompetition because of rapid process of globalisation. So under this circumstance, theexistence of SMEs became questionable. It is true that globalisation gives some newopportunities to the Indian SMEs. This paper consists of six major parts. We start withdefinition and rationale of SMEs in Indian Economy followed by the opportunities andthreats in front of Indian SMEs under globalisation. The performance of SMEs is highlightednext, followed by a discussion on the different incentives and facilities that are given bythe Government to SMEs. Suggestion about the future of SMEs and a firm conclusioncompletes the paper.

DEFINITION AND RATIONALE OF SMEs IN INDIAN ECONOMY

Different countries define the SME sector differently. The characteristics they use areeither turnover, or number of employees, or investment upon fixed capital. In India, thebasis of the definition is the amount of investment on fixed capital that is productive plantand machinery. Recently, a unit having gross investment in productive plant and machineryof up to Rs.1 crore is considered as Small and Medium Scale enterprise. However,depending on growth in some sectors like drugs and pharmaceuticals, stationary, etc.,there is a possibility of shifting small-scale industry to small and medium enterprise,extending their limit of investment on fixed assets from Rs. 1 crore to Rs. 10 crore, it willbe considered as Medium Enterprise.

In Japan, a SME in the manufacturing sector is defined in terms of upper limit of paid–up capital of 300 million Yen or 300 employees (Small and Medium Enterprise Agency,2004).

In South Korea, SMEs are defined as firms, which are independently owned and employless than 300 persons in the manufacturing, mining, transportation and construction sectors(Baek, 2002).

According to European Union SMEs, this limit is extended to Rs. 5 crore. Under governmentconsideration they are defined in terms of employment and turnover/ balance sheet totalas shown in the following table:

Criteria of different types of Enterprises

Criteria Micro Enterprises Small Enterprises Medium Enterprises

No. Of Employees <10 >50 <250

Turnover 2 10 50(Million Euros)

Balance Sheet 2 10 43(million Euros)

Source: United Nations –Economic Commission for Europe, 2005

Kindler Vol. IX No. 1 January-June 47

The Government of India has officially defined a small-scale enterprise under the IndustrialDevelopment and Regulation (IDR) Act, 1951, in terms of upper limit of original investmentin plant and machinery at Rs.10 million. But the recently introduced small and mediumenterprises Bill 2005 (SIDO, 2005) has proposed a definition of a medium enterprise interms of investment in plant and machinery in the range of Rs. 50 million to Rs.100 millionand proposed to revise the upper investment limit for a small scale enterprise to Rs. 50million. If this definition is accepted, then SMEs would cover all enterprises havinginvestment in plant and machinery up to Rs. 100 million. But there is no single source ofdata, which provides statistics on the size and composition of SMEs in India.

It is important to consider the role of small-scale industries in economic development. Themost common definition of economic development could be “an increase in real percapita income of a person resulting in improvement in the standard of living”. Thedevelopment of small-scale industries contributes to the increase in per capita income,that is, economic development in various ways. It generates immediate employmentopportunities with relatively low capital/ investment, promotes more equitable distributionof national income, makes effective mobilisation of untapped capital and human skills andleads to dispersal of manufacturing activities all over the country, leading to growth ofvillages, small towns and economically logging regions. This promotes balance in regionaldevelopment.

PERFORMANCE OF SMES IN INDIA

Figure-1 : Trends in Growth of Small-Schale Industries in India: 1901-2001

48 Kindler Vol. IX No. 1 January-June 2009

The SSI sector has been exhibiting good growth patterns. During the Financial Year 2005,the SSI sector is estimated to have recorded a growth of 13.5 percent in output at currentprices and 8.1 percent at constant prices. The comparison of SSI sector with large scalemanufacturing sector covered through ASI (Annual Survey of Industries) reveals that theSSI sector is a better employment-generating sector. From different research studies, ithas been found that the employment generated by the SSI sector per Rs. One lakhinvestment was 1.39 as against only 0.20 in respect of ASI. This means that the organisedsector requires an investment of Rs. 5 lakhs to generate employment to one personwhereas the SSI sector generates employment for 7 persons with same investment.

Table 1 :

The growth of small scale industry in terms of units, employment, production andexport based on figures given in the Economic Survey (Ministry of Finance)

TABLE1 : YEAR-WISE VALUE OF PLANT & MACHINERY (VPM in Rs. LAKH) INSTALLED BY OPERATING REGD. SSI UNITSYear VPM Units Year VPM Units Year VPM Units Year VPM Units Year VPM Units1901 320 180 1921 146 90 1941 448 235 1961 8045 1196 1981 44864 224641902 262 203 1922 310 154 1942 497 356 1962 4432 1771 1982 54950 309941903 204 187 1923 296 124 1943 662 312 1963 3432 1163 1983 48679 277671904 294 226 1924 184 142 1944 570 335 1964 5607 1375 1984 60141 350861905 487 306 1925 443 229 1945 2035 451 1965 5913 2897 1985 84045 490561906 242 250 1926 130 129 1946 1627 398 1966 3860 1489 1986 76148 417461907 463 263 1927 232 186 1947 1810 439 1967 5579 2021 1987 79482 459801908 282 236 1928 553 153 1948 1031 432 1968 7227 2904 1988 82287 492581909 713 310 1929 231 166 1949 1005 317 1969 7871 2937 1989 95525 496021910 252 83 1930 458 315 1950 1780 683 1970 18794 10009 1990 130800 810711911 39 42 1931 159 174 1951 1244 223 1971 9700 4344 1991 97216 545541912 141 52 1932 462 271 1952 1264 487 1972 16194 7510 1992 132197 708461913 93 41 1933 293 297 1953 687 270 1973 13663 6866 1993 121802 602081914 145 48 1934 305 240 1954 604 326 1974 17138 7708 1994 149086 660051915 118 66 1935 632 360 1955 1056 571 1975 20541 11848 1995 191714 850801916 51 58 1936 260 287 1956 1225 452 1976 26628 10287 1996 194591 857001917 214 57 1937 616 345 1957 1914 558 1977 25872 10388 1997 199852 854461918 567 72 1938 666 351 1958 1493 573 1978 33027 15525 1998 231529 861241919 175 57 1939 424 283 1959 1634 527 1979 33492 15728 1999 205248 723761920 318 318 1940 1159 381 1960 5549 2409 1980 63252 37381 2000 150406 56736

[Source: 1. SIDBI (1999)]

Table 2:The growth of small scale industry in terms of units, employment and export

Sl. No. Period Units Employment Output Exports

I1980-81 to 1985-86 9.18 6.21 16.88 11.00

1985-86 to1990-91 7.63 5.47 20.46 28.40

II1990-91 to 1995-96 6.88 4.02 18.05 30.42

1995-96 to 2000-2001 4.37 3.99 12.62 11.56

[Source: GOI (2002)]

Kindler Vol. IX No. 1 January-June 49

An idea about the performance of SMEs in the total exports of India is given in the Tablebelow:

Table 3: Performance of SMEs in total exports of India

Year Total Export Share of SSI Exports % Share1990-91 32553.34 9664.15 29.71991-92 44041.81 13883.40 31.51992-93 53350.54 17784.82 33.31993-94 69546.97 25307.09 36.41994-95 82674.11 29068.15 35.11995-96 106464.86 36470.22 34.21996-97 117524.98 39248.54 33.41997-98 126286.00 44442.18 35.21998-99 141604.00 48979.00 34.6

1999-2000 159561.00 54200.00 33.9

(Source: Small industryindia.com)

Growth of SMEs in terms of units, employment ,output and exports

0

5

10

15

20

25

30

35

1 2 3 4

Periods

Perf

orm

ance 1980-81 to 1985-86

1985-86 to1990-91

1990-91 to 1995-96

1995-96 to 2000-2001

50 Kindler Vol. IX No. 1 January-June 2009

Table 4: Indicators of Growth in Small Sector

Years No. of Units Production Employment Exports(in Lakhs) Rs. Crores) (Rs. Crores)

1977-78 2.964.48 14300 54.0 8451980-81 4.48 28060 71.0 16431985-86 8.55 61228 96.0 27691986-87 9.50 72250 101.4 36481987-88 10.48 87300 107.0 43731988-89 11.59 106400 113.0 54901989-90 16.58 132320 119.6 76261990-91 19.40 157550 126.2 91001991-92 20.00 160000 126.0 126581992-93 22.35 2093000 134.0 177851993-94 23.84 241648 139.4 253071994-95 25.71 293031 146.6 290681995-96 27.24 356213 152.6 364701996-97 28.57 412636 160.0 392491997-98 30.14 465171 167.2 439461998-99 31.21 538357 175.2 57488

(Source: Small Industries Development Organisation and Eighth Five Year Plan, 1992-97And 1998-99)

Performance of SMEs in case of exports

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

Year

Expo

rt Total export

Share of SSI Exports

Kindler Vol. IX No. 1 January-June 51

The small scale industries have registered phenomenal growth in their number, production,employment and exports over the years. Their number has phenomenally grown from16,000 in 1950 to 31.21 lakhs in 1998-99. While production has registered an increaseof more than twenty-times, employment grew by about three times over the period 1974-99. Growth in exports has increased significantly over the period. But the increase ishigher in the post-reform period than that of the pre-reform period. On the other hand,the employment growth remains more or less same in the sector throughout the entireperiod.

Table 5: SMEs in Indian Industry

% Share in No. % Share in %Share in Value % Share inYear of Factories Employment of Production Gross Value

Added

1989/90 93.00 66.00 52.00 44.00

1996/97 92.31 61.29 43.57 34.19

[Source: EPW Research Foundation (2002)]

According to ASI, SMEs account for a major share of registered factories, employment,production and gross value added in Indian industry. Table No.3 shows that percentageshare in registered factories of SMEs is 93 percent in 1989-90. In the same yearpercentage of share of SMEs in employment is 66 percent, 52 percent in value ofproduction and percentage share in gross value added is 44 percent. But by 1996-97,the share of SMEs declined marginally in terms of the number of factories andemployment generation and considerably in terms of value of output and value added.From the above discussion, it is clear that SMEs plays an important role in Indianeconomic growth.

GLOBALISATION AND SMEs: THREATS AND OPPORTUNITIES

The term ‘Globalisation’ has acquired considerable emotive force. Some view it is aprocess that is beneficial - a key to future world economic development and also inevitableand irreversible; others regard it with hostility, even fear, believing that it increases inequalitywithin and between nations, threatens employment and living standards and thwartssocial progress.

Economic “globalisation” is a historical process, the result of human innovation andtechnological progress. It refers to the increasing integration of economies aroundthe world, particularly through trade and financial flows. The term sometimes alsorefers to the movement of people (labour) and knowledge (technology) acrossinternational borders. There are also broader cultural, political and environmentaldimensions of globalisation that are not covered. This process is characterised bynational governments across the world moving towards more open and market–oriented regimes, with greater reliance on private business and less direction ofresource allocation. Protective barriers are being lowered, restrictions to Foreign Direct

52 Kindler Vol. IX No. 1 January-June 2009

Investment (FDI) removed and the private sector allowed into areas previouslyreserved for public enterprises (Lall, 1995).

During 1991-2003, the number of countries that have introduced changes in their investmentregimes has more or less steadily increased from 35 in 1991 to 82 in 2003 and thenumber of regulatory changes introduced favouring FDI increased from 80 in 1991 to 220in 2003 (UNCTAD, 2001; 2004). As a result, there was a remarkable increase in FDIinflows: it increased from us $209 billion in 1990 to US$ 560 billion in 2003 (UNCTAD,2001; 2004). Of course, in the last three years, there has been a consistent decline inglobal FDI inflows, which was caused more by economic decline in developed countries,particularly the US, Latin America and Caribbean countries (UNCTAD, 2004).

In case of market, globalisation promoted efficiency through competition and the divisionof labour - the specialisation that allows people and economies to focus on what they dobest. It is true that global markets offer greater opportunity for people to tap into more andlarger markets around the world. It also means that they can have access to more capitalflows, technology, cheaper imports and larger export markets. But marketers do notnecessarily ensure that the benefits of increased efficiency are shared by all countriesmust be prepared to embrace the policies needed, and in the case of the poorest countriesmay need the support of International Community as they do so.

The formation of World Trade Organisation (WTO) in 1995 has only accelerated theprocess of scaling down of tariff and non-tariff restrictions on imports. India, as a memberof the WTO has substantially done away with its quantitative and non-quantitative restrictionsby April 1, 2001 (Ministry of Finance, 2002). As a result, industry will have to face muchstronger international competition (Planning Commission, 2002). The process of removalof quantitative and non-quantitative restrictions across countries has led to free movementof goods between countries including India. As a result, world exports grew in dollar termsat an average rate of 5.9 percent during 1990-99 as against 5.2 percent during 1980-90(Ministry of Finance and Company affairs, 2003).

The SMEs showed the growth of 13.5 percent in output at current prices in the financialyear of 2005. Though the growth rate is good but certain problems faced by the SMEsare happening needs the attention of the Government. The major problems with theexisting SMEs are:

Technological obsolescence

Inadequate availability of credit facilities

Management of the sectors by non-professional personnel

Proper Marketing strategy

The above-mentioned problems should be viewed in context of increasing liberalisationand globalisation on Indian economy. Globalisation linked with the import liberally. Thisresulted in stiff competition of the domestic products with the imported items regardingtheir quality and cost. The quality definitely is related with advanced technology. Theequipment and machineries used in most SMEs are old and not good for the production

Kindler Vol. IX No. 1 January-June 53

of good quality product. Technological obsolescence has been a characteristic of smallindustry in India across a wide variety of sectors. In the early ’90s, two survey-basedstudies brought out that technological obsolescence of small industry affect quality andproductivity adversely. These empirical studies indicated that small industry, in general, ischaracterised by technological obsolescence and therefore, inferior quality as well as lowproductivity (Awasthi, Krishna and Sebastian, 1996; NCAER, 1993). However the need forimproving the competitive strength of small industry through technology improvement andmodernisation was recognised as early as in the 1950s with the setting up of SmallIndustries Development Organization (SIDO) and a network of Small Industries ServiceInstitutes (SISIs), National Small Industries Corporation (NSIC) and National ResearchDevelopment Corporation (NRDC). Since then, over a period of time, particularly in the1990s, exclusive technology transfer occurred. Thus, policy makers in India have consideredtechnology development in small industry only from a single dimension, that is, throughinstitutional technology transfer. This implies that small industry in India is perenniallyexternal technology dependent (Bala subrahmanya, M.H, et.al, 2002).

ASSISTANCE AND FACILITIES FOR SMEs TO SURVIVE

The most important element of any business is the available credit facilities. Withoutadequate flow of funds no industrial sector can work with its full potential. A surveyconducted by the All India Management Association has identified ‘lack of finance’ as oneof the most crucial hurdles in the growth of SSIs, more so in the Eastern region. TheSurvey found that 60 percent of the units fail due to lack of demand for products, 36percent due to marketing failure and 46 percent due to lack of adequate finance.

Table 6: Reasons for Sickness of SMEs unit

Reasons for Sickness / Registered Un-registered TotalIncipient Sickness:

Lack of Demand 111508 (58%) 4 35121 (69%) 5466299 (66%)

Storage of Working capital 109844 (57%) 269648 (43%) 379492 (46%)

Non-availability of Raw 23493 (12%) 76029 (12%) 99522 (12%)Material

Power Shortage 33099 (17%) 77345 (12%) 110444 (13%)

Labour Problems 12182 (6%) 26282 (4%) 38464 (5%)

Marketing Problems 70202 (37%) 224002 (36%) 294204 (36%)

Equipment Problems 16995 (9%) 76038 (12%) 93033 (11%)

Management Problems 9124 (5%) 21088 (3%) 30212 (4%)

(Source: SSI in India Census Report)

54 Kindler Vol. IX No. 1 January-June 2009

From the above table it is very clear that lack of demand is the main reason for sickness.To meet the challenges of international competition and to promote exports of SSI products,following promotional schemes are also being implemented.

1. Technology Development and Modernisation Fund Scheme

2. Quality Awareness Scheme

3. Subsidy for obtaining ISO–9000 Quality Certification

Other Assistance:

The National Small Industries Corporation (NSIC) through its export developmentprogramme is playing a vital role to promote the SSI sector in exporting their products /projects in international markets by providing following assistance to the small enterprises:

1. Marketing and Promotion Organising International Exhibitions Organising and participation in Buyers-sellers meet Sponsoring delegation from different SSI sectors to various countries Providing information related to sales opportunities available in international

markets Product specific catalogue preparation Advertising and publicity in various countries through Indian High Commissions Organisation of Seminars and Workshops to upgrade and update SSI with

regard to international developments.2. Financial Assistance

Pre and Post shipment at concessional rate of interest Financial assistance for procurement of indigenous and imported raw material Financial assistance for upgradation and modernisation of SSI unit Assisting in the process of claiming exports incentives.

3. Technical Assistance Laboratory and Testing assistance for improving quality of products Providing assistance in packaging Providing assistance for obtaining inspection documents Conducting various programmes related to technology upgradation Assisting SSI sector in technology assimilation Imparting technical training

CONCLUSIONSo it has been found that in case of SMEs the growth rate in the field of employment,output, and export, it is decreasing from pre-liberalisation period to post-liberalisationperiod because of free trade policy. In Stiglitz’s (2002) word “globalization is the closer

Kindler Vol. IX No. 1 January-June 55

integration of the countries and peoples of the world which has been brought about bythe enormous reduction of costs of transportation and communication and the breakingdown of artificial barriers to the flows of goods, services, capital, knowledge and (to alesser extent) people across borders”. However, the development that have been takingplace since the early 1990s are mostly with reference to the free movement of only oneof the factor inputs - capital, commonly known as Foreign Direct Investment (FDI) andfree movement of goods, particularly from the developed to the developing countries. Inthis circumstance it is very difficult for the SMEs to survive. But simultaneously it is alsoidentified that there is a big market for them. This paper suggests that financial assistanceand other monetary facilities by the Government is not the ultimate solution. It is true thatGovernment creates some favourable situation but small industries also plays active rolein case of technological upgradation, attending seminar and conferences, and if possible,visit various developed countries to identify the product range, market range and theirmarket demand. Apart from these, the small industries should be proactive in nature andby self-evaluation they must identify their thrust areas and also their weaknesses. Thepaper points to the fact that growth rate of small industries increases at a decreasing rate.Therefore, to maintain the increasing rate of growth of the SMEs and for their nourishment,emphasis should be put on the above-mentioned factors so that the sector can help inachieving sustainable economic development.

REFERENCE1. Bala Subhramanyu, M.H. (1995), “ Reservation policy for Small Scale Industry: Has it Delivered

the Goods?” Review of Industry and Management, Economic and Political Weekly, Mumbai,30 (21), May 27

2. Brockhaus, R.H. (1982), “The Psychology of the Entrepreneur” in Encyclopedia ofEntrepreneurship, Prentice Hall, New Jersey, pp. 39-57

3. Galbraith, J.K. (1980), The Nature of Mass Poverty, Penguin Pelican Books, New York4. Government of India, (2006), Annual Report 2005-06, Ministry of SSI , Govt. of India, New

Delhi5. Government of India, (2001), Evaluation Study on Khadi and Village Industries Programme,

Programme Evaluation Organisation, Planning Commission, Govt. of India, New Delhi6. Government of India, (2003), Third All India Census of Small Scale Industries 2001-2002,

Development Commissioner, SSI, Ministry of Small Scale Industries, Govt. of India, NewDelhi

7. Government of India, Ministry of Finance (1998), Economic Survey 1997-98, New Delhi8. Government of India, Ministry of Finance (2001), Economic Survey 2000-2001, New Delhi9. Government of India, NEC (2000) Basic Statistics of North Eastern Region 2000, North

Eastern Council, Ministry of Home Affairs, Shillong10. http://planningcommission.nic.in/reports/peoreport/peoevalu/kvic_fin.pdf11. Harper, D.A. (2003), Foundations of Entrepreneurship and Economic Development, Routledge,

New York12. Lipset, S.M. (1960), Political Man: The Social Bases of Politics, Doubleday, Garden City, New

York

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13. Lotka, A.J. (1945), “The Law of Evolution as a Maximal Principle”, Human Biology, 17(3), pp.167-196

14. McClelland, D.C. (1961), The Achieving Society, Princeton, New Jersey15. Medawar, P. B. (1953), “Tradition: The Evidence of Biology,” in his (ed) The Uniqueness of

the Individual, Basic Books London, 1957, pp. 134–14216. Medawar, P.B. (1973), “Technology and Evolution”, in his (ed) Pluto’s Republic, Oxford, New

York, pp.184-190 from http://www.cscs.umich.edu/~crshalizi/Medawar/technology-and-evolution17. Mishra, S.K. (2007), “Analysis of Gender Disparity in Meghalaya by Various Types of Composite

Indices”, Social Science Research Network, in SSRN: http://ssrn.com/abstract=99466918. SAAP Annual Conference (2007), “Veblen, Dewey, and the Price System: Corporate Sabotage

and the Democratic Engineer”, http://www.philosophy.uncc.edu/mleldrid/SAAP/USC/TP16.html19. Srinath, T.T. (2002), “The Emerging Personality of a Small-Scale Entrepreneur”, Business

Line (Internet Edition) May 2120. Suri, K.B. (ed.), “Small Scale Enterprises in Industrial Development”, The Indian Express,

Sage Publications21. Veblen, T.B. (1898-99), “The Instinct of Workmanship and the Irksomeness of Labor” American

Journal of Sociology, 4, http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/veblen/irksome22. Veblen, T.B. (1899), “The Theory of the Leisure Class”, The New American Library, NY,

(Reprint – George Allen & Unwin, 1957)

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A New Cryptographic Scheme forAsynchronous Checkpointing and MessageLogging in Mobile Computing Environment

Sumona Mukhopadhyay*

ABSTRACTMobile computing technology deals with transmission of data through wireless communication.Mobile data communication is rapidly finding its roots in e-commerce, online transaction systemsand stock trading where security and integrity of information are equally important as the seamlesstransfer of data from remote locations to other remote or fixed locations. As the internetcommunication has evolved over the years, users have witnessed breach of information. Thispaper seeks ways to combine secure checkpointing and message logging while handling of mobiledisconnections and thereby attempting to induce fault tolerance. The logging process has beenmade secure and if the mobile host (MH) is authenticated by the MSS then only its log is recordedby the MSS. Similarly only a legitimate MH can communicate with other legitimate MH in its sameor different cell. It is assumed that the MSS’s are stable and the probability of their failure-freeoperation is more as compared to the MHs. The scheme adopted is asynchronous checkpointingwith message logging at receiver’s end, which works with very less overhead during failure-freeoperation. It has been observed in this attempt that the time taken to checkpoint a message isnegligible hence giving a scope for an attempt to only utilize message-logging scheme withouttaking a checkpoint.

Keywords: Distributed System, Mobile computing, Diffie-Hellman key exchange protocol, digitalsignature algorithm, cryptography, secure checkpointing, Message Logging.

INTRODUCTION

Evolution of mobile computing

Mobile voice communication is widely established throughout the world. An extension ofthis technology is the ability to send and receive data across these cellular networks. Thisis the principle of mobile computing.

Wireless connection ties the mobile device to centrally located information or applicationsoftware through the use of battery powered, portable and wireless computing andcommunication devices and users have access to information service through a sharedinfrastructure regardless of their physical location or movement behavior. Such a newenvironment introduces technical challenges in area of information access such as thefollowing:

* Lecturer, Computer Science, Army Institute of Management, Alipore, Kolkata 700 027Email:sumona.mukhopadhyay@gmail.com

58 Kindler Vol. IX No. 1 January-June 2009

Resource constraints (limited bandwidth, battery power etc) Dynamically adaptation of MHs to resources during migration Faults Handoff Security of data communicated over wireless link Intermittent disconnectionsSecurity is a pre-requisite for every network especially for mobile hosts (WLAN or AD-Hocnetwork) due to the following listed issues: Constrained network bandwidth Energy constraint Decentralized Infrastructure Node selfishnessCheckpointing and Message Logging: A Feasible SolutionBasic Concept of CheckpointingCheckpointing is a technique for inserting Fault tolerance [Johnson 1989; Laha 1984] intocomputing systems. It consists of storing a snapshot of the current application state anduses it for restarting the execution in case of failures. Its main property lies in preservingthe system consistency. It saves the status information.According to Elnozahy, Alvisi et al checkpointing [Kalaiselvi & Rajaraman, 2000] can becategorized into three classes: Independent or uncoordinated (asynchronous) checkpointing Co-ordinated checkpointing Communication induced protocols Independent or uncoordinated (asynchronous) checkpointingThis scheme was presented first by Acharya and Badrinath in 1994 for mobile systems.Here each process can independently take the decision when to take its own checkpoints.Main advantage is that each process of a MH may take a checkpoint in accordance toits convenience. But there are certain disadvantages. Firstly it is unsuitable for applications,which commit their output frequently as these require global coordination to computethe recovery line. Secondly, a process may take an unnecessary checkpoint, which maynever be a part of a global consistent state. These are undesirable for they incuroverhead. Thirdly, uncoordinated checkpointing forces each process to maintain multiplecheckpoints, and to invoke periodically a garbage collection algorithm to reclaim theoutdated checkpoints. Lastly, there is always a possibility of domino effect and inconsistentstates.

Coordinated checkpointing

Also known as synchronous checkpointing. Here processes are forced to organize theircheckpoints in order to generate a single, consistent application checkpoint. The main

Kindler Vol. IX No. 1 January-June 59

advantage is that there is no domino effect. This is achieved using synchronized clock orsystem messages.

Communication induced protocols

Whenever a process changes its communication status from the sending to the receivingmode, each process independently takes checkpoint. Although there is no overhead relatedto the coordination, the frequency of checkpointing cannot be controlled by each MH [Lala,1984]. Therefore, MH may have to transfer a checkpoint with every outgoing message toMSS, which is not feasible and impractical for a mobile network with limited bandwidth.

Basic concept of Message Logging

In message logging processes log their received messages and checkpoint their localstate. A log-based rollback recovery makes use of deterministic and nondeterministicevents in a computation. A nondeterministic event can be a receipt of a message fromanother process or an event internal to the process. A message send event is a deterministicevent. So a log-based rollback recovery views a process as a sequence of deterministicstate intervals, each starting with the execution of a nondeterministic event. Messagelogging advantage lies in its ability to avoid synchronization of processes duringcheckpointing.

Security Aspect in Checkpointing and Message Logging

Security vulnerabilities exist when during recovery process the checkpointing data istransferred from a local host to the stable storage when a checkpoint occurs and fromthe stable storage to a recovery host. To inject security into any system there are twocategories of encryption modes- Symmetric (also known as Private key encryption) andAsymmetric (or Public key encryption). Below is a table consisting of the two classes ofencryption modes

Symmetric Encryption Techniques Asymmetric Encryption Techniques

Symmetric Cipher Model RSA algorithm

Transposition technique Digital Signature algorithm, Diffie-HellmanKey exchange protocol

Steganography Elliptic curve cryptography

Encryption Standards for symmetric encryption are of the following flavors:

Data Encryption Standard (DES) Block Cipher Principle Advanced Encryption Standards (AES) cipher Triple DES Blowfish RC5

60 Kindler Vol. IX No. 1 January-June 2009

RC4 Stream Cipher Serpent

Generally, public key cryptography is used only for key exchange or for digital signaturesdue to slow computational speed. Moreover, it founds its importance in message integrityduring key exchange session and authentication of communicating parties. There are twotypes of ciphers:

Block ciphers

Stream ciphers

This paper adopts DSA with DH to exchange the keys between the communicating partiesby stream cipher technique. After successful authentication using DSA, the signaturealong with the message to be transmitted is encrypted using stream cipher. DSA ischosen, as it is suitable to process small pieces of data.

MOBLE COMPUTING ENVIRONMENT AND SYSTEM MODEL

This paper follows the model of distributed mobile system used in [Cao & Singhal, 2001;Elnozahy et. al., 1992; Nam et. at., 2003)]. A mobile computing environment consists ofa set of static Mobile Support Stations (MSSs) and Mobile hosts (MH). A set of dynamicand wireless communication links can be established between a MH and a MSS; and aset of high-speed static and wired communication links is assumed between MSSs. Ageographical region covered by a MSS is called a cell. Each MSS is responsible formanaging a number of MHs in its cell. A MH on entering its cell informs the MSS aboutits presence. The MSS servicing the MHs is known as the Base station or the Base MSS.Each MH must be connected to one Base MSS.

MHs communicate only with its Base MSS. In order to communicate with another MHwhich is located in another cell, it has to communicate through its local/base MSS. It is

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assumed that the links in the dynamic network support FIFO communication in bothdirections, however, there is no assumption on the message delivery order by the staticlinks.

PROPOSED SCHEMEMobility ManagementIn apropos to the above discussion, this paper combines a secure optimistic checkpointingtechnique with receiver-based message logging strategy which is a non-blocking algo-rithm such that the underlying computations by the MSS are not stalled when it does theauthentication and securely logging the message. Checkpoints are taken after the handoffparameter for a MH exceeds a certain threshold, which can be a function of failure rate,log arrival rate and the mobility rate of the MH.

Mobility management is handled by sending the message leave when a handoff occursindicating the sequence number of the message received from MSS. The MH can estab-lish a connection with MSS when it enters a new cell by sending the message join(MH_id, prev MSS_id ) to this new MSS. The id of MHs which are currently connected toa MSS are recorded in a list known as Active_MH_List stored at the MSS and an entryis made when a MH joins the MSS, whereas an entry is deleted when a MH leaves thatMSS.

Security IssueThis paper extends secure checkpointing proposed by Hyochang Nam et al [Nam et. al.,2003] by attempting to make the log system secure using a proxy server to store thesessional private keys generated using DHKE protocol together with digital signaturealgorithm (DSA) for authentication. DHKE is a method of digital encryption that uses largeprime numbers raised to specific powers to produce decryption keys on the basis ofcomponents that are never directly transmitted, making the task of a hacker/” man- in-the –middle “ impossible to break the mathematical code.

A digital signature is an electronic signature that can be used to authenticate the identityof the sender of a message or the signer of a document, and possibly to ensure that theoriginal content of the message or document that has been sent is unchanged.

The key generated using DH key agreement protocol is used and shared by the MH andthe MSS. With this the logged message is encrypted and stored at MSS. Duringcheckpointing, the DHKE agreement is again used to encrypt the checkpoint data. TheMSS and MH communicate privately over a public medium via a proxy key server likeinterface implementation with the encryption and authentication processes so that theMSS is not kept busy and other computations are not blocked. Once the MH is authenticatedby the proxy server for the local MSS, encrypted data is transferred seamlessly betweenMH and MSS, which buffers it. The private keys are not transmitted over the networkthereby overcoming “man-in-the-middle” attack. Here n and g are two large prime numbers,which may or may not be kept secret. AUTHENTICATE_PROTOCOL (function signature)is used to securely log the messages communicated. The overhead involved in thisproposed technique is beyond the scope of this paper as this is just in partial completion.

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Data structureMHid.................................................MH identity number communicating with a MSS.

Active_connected_mh_list……………This contains all the MH id’s of the connectedMH’s

Disconnected_mh_list…………………It contains all the MH id’s which are currentlydisconnected or are in sleep mode. This is also stored at the base mss.

leave(prev_mss,leaving_mh)..............When a MH leaves a cell, it sends this messageto the MSS by informing the MSS about the sequence number of the message it receivedfrom the MSS.

chkpt_seq_num...................................It keeps a record of the number of checkpoints ofMH

mg…………………………………………. is the message. Consists of non negative integersource and a string denoting the data.

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log_table……………………………………This structure contains the log of the MHid andstores checkpoint data which is also logged along with it. It contains a non negativeintegers dependency_log_list, chkpt_seqnum, chkpt_mssid all initialized to zero whichstores

the id’s of the MSS where the log is taken,

the sequence order of taking the checkpoint,

the MSS where the checkpoint has been taken respectively.

It also contains variable msg_source indicating the MH, which has sent thecommunication message (process).

The log table logs the messages received by the logging MH and the process, which tookthe checkpoint in the string msg_received and chkpt_process respectively. Mobility historyof the logging MH is thus maintained by keeping the record of msg_received, chkpt_seqnumand dependency_log_list. When a MH takes a checkpoint the chkpt_seqnumb variable isupdated and the identification of the MSS under which it took checkpoint is put inchkpt_MSS_id. In order to retrieve the logged messages after the latest checkpoint, thedependency_log_list can be used which stores the MSS_id of the last MSS where the logof the message for this failed MH was stored. The order in which checkpoint was takencan be easily found out by looking at the log table entries which are recorded in stackformat.

mobility_rate…………………………………Counter which keeps the record of the numberof times a MH leaves its cell.

x…………………………………………………One time sessional Private key of MH.

y………………………………………………… One time sessional Private key of proxy server

Proxy_sig_digest……………………………Digitally signed message done at the proxyserver.

MH_sig_digest……………………………….Digitally signed message generated at MH

g…………………………………………………large prime number

hash(mg)………………………………………Function which produces the hash code ofthe message mg transmitted.

q…………………………………………………large prime number

K1, K2………………………………………….shared public key

mh_sig…………………………………………Signature generated by mobile host

mss_signature_s…………………………….Signature generated by MSS

encrypt(mh_sig,public key)……………….Stream encryption function to encrypt the digitallysigned data i.e signature.

decrypt(mh_sig,public key)………………Stream decryption function which decrypts thesignature of the MH at MSS).

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MH_AUTHENTICATE_FLAG…………………It is set to one if the MH is authenticated bythe MSS else it is reset to zero.

Algorithm

LOGGING OF MESSAGESCase:- Sender_mh base_mss

When sender_mh sends Message mg to its base_mss which serves as the sender_mss:

if(mg {join, leave, disconnect, reconnect}) then

{ if (mg belongs to {leave,disconnect}) then { leave(base_mss,sender_mh) from base_mss Reconnect(base_mss,sender_mh) to other mss chosen randomly Sender_mh handoff = sender_mh handoff + 1; Send [mg,mobility_history] to base_mss } Else { Join(base_mss,sender_mh) }Else { /* If mg is a communication message */ Flag=AUTHENTICATE_PROTOCOL(base_mss,sender_mh,mg,process_id) }

When base_mss receives Message from sender_mh:if(mg {join,leave, disconnect, reconnect}) then{ if (mg {leave,disconnect}) then { search if(sender_mh Active_mh_list ) then {

Update Active_mh_list stored at base_mss Update Disconnected_mh_list of base_mss } Else sender_mh is already disconnected from base_mss } Else /* If mg is a join message*/ { Join(base_mss,sender_mh)

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Update Active_mh_list stored at base_mss Fetch log_table from previous mss to this base_mss }Else { /* If mg is a communication message */ If (flag is true) then { Base_mss accepts mg from sender_mh Mgsource = sender_mh; Mgdata=process_id Receive [mg,mobility_history] from sender_mh Base_mss transmits mg to receiver_mss of the destination receiver_mh }else message mg is discarded by the base_mss}

Case:- receiver_mss receiver_mh

if ( receiver_mh belongs to receiver_ mss Active-mh_list) for all mg belongs to communication message do { Flag=AUTHENTICATE_PROTOCOL(receiver_mss,receiver_mh,mg,process_id) Take_log(sender_mh,mg,receiver_mh,receiver_mss,process_id)

If( flag is true) then { Receiver_mh receives the message mginsert_log(sender_mh,mg,receiver_mss,receiver_mh,process) into receiver_mh volatilelog_tablelog the checkpoint data if any Periodically flush the log into receiver_mss log_space }else discard mg

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CHECKPOINTINGProcedure: checkpoint(MH){if (mh handoff > max(mobility_rate) then { Take checkpoint mh chkpt_mssid = chkpt_mssid mh chkpt_seqnum = mh chkpt_seqnum + 1 insert(mh chkpt_mssid, mh chkpt_seqnum,checkpointing process_id) intolog_table of chkpt_mss Reset handoff counter}elseno checkpointresume computation}Procedure : AUTHENTICATE_PROTOCOL (mss,mh,mg,process_id)

{

1. The MH generates a random Diffie-Hellman secret x and the correspondingpublic value A where A=g^x mod n

2. The MH sends A to the MSS which forwards it to the proxy server.3. The proxy server generates a random Diffie-Hellman secret y and the

corresponding public value B where B=g^y mod n4. They then exchange these public keys.5. The server computes the DH shared secret by the formula K2=A^y mod n6. The server signs a string consisting of the public values A and B with the

server’s private DSA key - y.Let this message digest be known asProxy_sig_digest.

7. The server sends B and the signature Proxy_sig_digest to the MH via theMSS.

8. The MH computes the shared secret key K1=B^x mod n9. The MH validates the signature, failing if it isn’t valid.10. The MH signs A concatenated with B using its private DSA key x with the

message mg to be sent and it encrypts the result using the shared secretkey K1 using any standard symmetric key encryption algorithm(the secretcan be post processed first, as long as both sides do the same processing).This result is known as MH_sig_digest.

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11. The MH sends this encrypted signature (which also contains the data) tothe server like interface implemented function.

12. The server decrypts the signature and validates it.

The message transmitted to the MSS is accepted if validated and stored in stable storage.Else it is discarded and the MH is declared to be unauthenticated and no informationtransmitted by it is recorded.

}

IMPLEMENTATIONThe algorithm is implemented using Turbo C/Borland C++ programming language underWindows XP operating system. The processor used is Intel Pentium IV. This program canwork in Linux environment with processor higher than Pentium II. The messages arestrings of characters of any length since the usage of actual text; voice streaming or videostreaming is beyond the scope of the paper. The time taken is in milliseconds unit.

Each operation has its own clock which is not synchronized with other clocks.

Result

Log_table:

DEPENDENCY_ LOGGING MSG_ CHKPT_ CHKPT_ MSG_LOG_LIST _MH SOURCE SEQNUM MSS RECEIVED

MSS2 15052 10432 0 MSS0 SMS

MSS1 15052 14744 0 MSS0 MMS

MSS1 15052 14744 1 MSS1 MMS

MSS2 15052 8276 2 MSS1 VIDEO

Program_statistics

No. of No. of Time to Time to Time for Time forMH Disc Leave Take Log Checkpointing Authentication

40 0 6 65236.65535 0 46928.1851

1 6 65236.65535 0 46928.1851

2 6 65236.65535 0 46920.1859

3 6 65356.65535 0 46920.1859

5 6 65356.65535 0 46920.1859

AnalysisTime to Leave involves the time taken to transfer log from one MSS to another MSS.Time to take log involves the time to search the logging MH from Active_connected

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0123456789

N o o f D is cT im e t o L e a v e

N o o f D is c 0 1 2 3 5 6 7 8

T im e t o L e a v e 6 6 6 6 6 4 4 4

1 2 3 4 5 6 7 8

_mh_list and time to insert log into the log table. It has been observed that the time takento checkpoint is negligible hence giving a scope for an attempt to only utilize messagelogging. Also total time taken for authentication process is constant.

Fig: a PLOT OF MOBILITY RATE vs TIME TO LEAVEShows relation between mobility rate and time take to leave. It is observed that time to leavewas constant when number of disconnections is 6, after which time to leave decreases withincrease in mobility rate.

Fig b: PLOT OF MOBILITY RATE vs TIME TO TAKE LOG

Shows that time to take log was constant for mobility rate=5 after which it decreasessharply.

Fig c: PLOT OF NUMBER OF DISCONNECTION vs TIME TAKEN TO AUTHENTICATE

0

10000

20000

30000

40000

50000

60000

70000

No of DiscTime to take log

No of Disc 0 1 2 3 5 6 7 8Time to take log 6523 6523 6523 6535 6535 1840 1840 1820

1 2 3 4 5 6 7 8

05000

100001500020000250003000035000400004500050000

1 2 3 4 5 6 7 8

No of Disc

Time forAuthentication

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This plot shows that time taken to authenticate remains constant with the increase inmobility rate. This is because authentication takes place each time a mobile leaves its celland joins a new cell.

CONCLUSIONS AND FUTURE WORK

This paper thus attempts to minimize the need for taking checkpointing by using securemessage logging at receiver’s end maintaining a history of the communication. Moreoverthe log is only stored if the communicating MH is authenticated by the sender andreceiver MSS. A recovery protocol can be developed using password based authenticationand with DSA-DH. Also it has been observed from result that checkpointing can beeliminated and message logging at receiver end can reduce orphan messages andmaintain log of messages. The log table can be used to retrieve the communicationhistory. However this is just a suggestive work.

Another attempt for secure cryptography can be to use keys generated by synchronizationof neural networks. These keys can form a secure key generator, which can be used forencryption using any standard methods. The keys may not be transmitted over the networkbecause the systems generating them are synchronized. So the same keys can be usedfor decrypting at the receiver end.

REFERENCES1. Acharya, A. and Badrinath, B.R (1994), Checkpointing Distributed Applications on Mobile

Computers, in Proceedings of the third international conference on Parallel and DistributedInformation Systems, pp. 73-80

2. Cao, G. and Singhal, M. (2001), Mutable Checkpoints : A New Checkpointing Approachesfor Mobile Computing Systems, IEEE Transactions, 12(2), pp.157-172

3. Elnozahy, E.N, Johnson, D.B. and Zwaenpoel, W (1992), The Performance of ConsistentCheckpointing, in Proceedings of the 11th IEEE Symposium on Reliable Distributed Systems,Houston, TX.

4. Johnson, D.B. (1989), “Distributed System Fault Tolerance Using Message Logging andCheckpointing“, Ph.D Thesis, Rice University

5. Kalaiselvi, S. and Rajaraman, V. (2000), A Survey of checkpointing algorithms for parallel anddistributed computers”, Sadhana, 25 (5), pp. 489-510

6. Lala, P. K. (1984), Fault Tolerant and fault Testable Hardware Design, Prentice Hall7. Nam, H., Kim, J., Hong, S. J. and Lee, S. (2003), Secure Checkpointing, Journal of Systems

Architecture, 48, pp. 237-254

STUDENTS’ CONTRIBUTIONS Article

Snapshot: Internship Project Synopsis

72 Kindler Vol. IX No. 1 January-June 2009

*

Kindler Vol. IX No. 1 January-June 73

ARTICLE

Cyber Crime and Their PreventionHimanshu Dilip Kulkarni*

Technology is a proven double-edged sword. If it is a boon for socio-economic developmentof the global community, it also makes life easier for social deviants.

In the current age of the IT revolution, more and more people are getting addicted intothe cyber world for their various needs. There is a distinct reliance on computers and theInternet for online shopping, banking, trading, email, entertainment, airline and railwaybooking and many more. While it does make our lives simpler and convenient, it alsoposes dangers to us in an uncontrolled and unprecedented way.  A complete reliance oncomputers has created more opportunities for cyber crime, reduced the ability to preventthis crime, and made the potential consequences of these crimes more serious.

The Cambridge Dictionary defines cyber crimes as “crimes related to computers orcommitted with the use of computers, especially through the Internet”. Computers areelectronic tools and like any other tools, people intent on causing damage or carrying outillegal activities, can use it. The nature of today’s Internet and computer networks meansthat criminal activity can be carried out across national boundaries without much restriction.In cyber crimes, computer is either used as target of offence or used as a tool forcommitting the offence. Hacking, cracking, espionage, cyber-warfare, and maliciouscomputer code viruses are common forms of crimes that target the computer. In crimeswhere computers are used as tool, the criminal uses a computer to commit a traditionalcrime, such as counterfeiting currency, creating forged documents, creating morphedimages, and used in almost all illegal activities to store data, contacts, account informationetc. Cyber crime has a unique attribute from the point of view of the victims – the victimoften does not know that he or she is a victim. In short, cyber crimes taking place in thesociety can be enumerated as following:

1. Financial crimes involving cheating, credit card frauds, money laundering, etc.

2. Cyber pornography involving production and distribution of pornographic material

3. Sale of illegal articles such as narcotics, weapons, wild life etc.

4. Online Gambling

5. Intellectual Property crimes such as theft of computer source code, software piracy,copyright infringement, trademark violations, etc.

6. Harassments such as cyber stalking, cyber defamation, indecent and abusing mails,etc.

* Student, MBA12, (2008-10), Army Institute of Management, Kolkata

74 Kindler Vol. IX No. 1 January-June 2009

7. Forgery of documents including currency and any other documents

8. Cyber attacks and Cyber terrorism

9. Deployment of viruses, trojans and worms

It is just not viruses; Trojans or worms that might come attached to an email and theninfect the machine. If one is on internet, then the possibility that the machine is open toattacks of many different kinds, from hackers trying to gain direct access to machine,malicious web sites tricking user into parting with money, tricks to get personal detailssuch as credit card information or password, software slipped onto computer that may doany number of tasks without detection.

The original web pages that people surfed early in the ’90s consisted only of text formatwith HTML (Hyper Text Markup Language - the document format used on the Web. Webpages are built with HTML tags (codes) embedded in the text) together with images andtables. Not much risk was involved. But things are now much more complex. Now wehave embedded videos, JavaScript, PHP codes and many more rich and interactivefeatures. With this level of complexity also come programming errors and loopholes.

The cyber crime in the banking sector is mainly focused on stealing money through thesystem itself, without any physical aspect to the crime.  The fact that the banks use acompletely computerised system allowed a single individual with malicious intent to stealmillions.  Although it could be argued that banks implement safety measures such as amarker or alert for large or suspicious transactions, all these transactions arecomputerised. The program actually carrying out the transfer can be modified so as notto issue such an alert by the person who has carried out such modifications. Externalattacks are significant because they are conducted by people who usually do not haveintimate knowledge of a system.  The fact that these types of crimes are becoming morecommon indicates that it is becoming easier for common criminals without specific linksto a company to commit cyber crimes. 

Now the question is how can these types of computer crimes be prevented?  How couldthe modification to the system have been detected before it was released? Banks haveno way of verifying that the software they receive is free of malicious code, becauseBanks are probably unable to view the code itself; it received compiled executable.  Theissue here is one of trust; a bank assumes that software from software developers is freeof defects, but has no way to verify it.  Software company could perform a final evaluationof the code itself once the program is completed, but this would be time-intensive andcostly, especially for a system like banks with various branches, which likely consists ofmillions of lines of code.  Such an evaluation would give no complete assurances ofsecurity, because employees conducting the tests could themselves insert the maliciouscode.  Other, stricter, version-control options are available, but with each layer of protectionthere is additional cost and time involved.  Building a three-meter high wall around someproperty will cost more than a two-meter wall, but will provide almost exactly the samesecurity, since a determined criminal can scale a wall of almost any height.  This analogyrelates well to software development.  Adding additional security costs money, yet

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determined hackers can break almost any amount of security.  The goal in most projectsis, therefore, to create enough security to discourage the majority of hackers from attemptingto break in.   

If one receives an email from unknown source, most people know the danger involvedand that clicking on any link in it would lead to computer infection but what if the emailappeared to be from a known source. What if it appeared to be from one’s own bank,and included right graphics, logos and seal? One may be much more likely to click onthe link in order to reset PIN or password, as suggested. If the link led user to a webpage, apparently with the correct URL (Uniform Resource Locator, an address widget thatidentifies a document or resource on the World Wide Web.), that looked exactly likebank’s correct page, complete with Verisign security certificate logo, this method of sendingemail projecting to come from bank and asking for personal information is known asphishing. Phishing is a form of con-trick and any such trick stands a better chance ofworking the more believable it is. The most common form of attack used in phishing isknown as cross-site scripting (XSS). In this method an attacker will insert code in theembedded link – not the link that user will see. Another variant kind of attack is knownas frame–spoofing; in this an attacker is able to insert their own window as a frame withinthe window of a legitimate website. This simply means that the page user is viewing iscorrect but part of it has been replaced with malicious code. Many of the websitessupporting online transaction are backed by large SQL databases. If the data has beenmanipulated in some way a skilled attacker can make use of special SQL character andinfiltrate his own command in order to execute as attack. This method is specially usedto obtain customers’ credit card and transaction details.

Traditionally terrorist acts target a specific locale and are executed precisely in this spot.This has been a limit of the damage inflicted upon those the perpetrator hopes to influenceand the general public. This playing field has grown enormously to what could be conceivedas boundless proportions. Individuals or groups can now use cyberspace to threateninternational governments, or terrorise the citizens of a country. To prevent such activitiesnew international relationships needs to be built, because “international borders don’tmean anything” to cyber criminals.

Very knowledgeable computer engineers or skilled users write programs like viruses orexploit codes. We can simply call them hackers because they have successfully brokeninto a file or the gate that secures company information. Hackers illegally gain access to,and sometimes tamper with, information in a computer system. Due to recent mediacoverage and corporate interest, the activities of hackers are now looked down on bysociety as criminal. Hackers intensify fears of industrial espionage. Devices, such asamplifiers assist the hacker in resending the signal repeatedly, causing vulnerable serversto lag or crash, making it disabled for blameless users to visit the website for the informationthey seek justifiably.

To prevent all the above stated menaces, programs like Firewall (hardware or software,or combination of both) were developed to protect server Internet protocol or “i.p.” numbers

76 Kindler Vol. IX No. 1 January-June 2009

to secure the integrity of data. Unfortunately, programs can only protect specific intrusions,but still, there are forms of viruses that exploit systems by transferring codes throughwireless devices, and fibre optic cable connections. There is no such thing as completelysecure computer, or IT network. Prevention of cybercrime can be assisted througheducation.  Training can increase awareness of the potential for cybercrimes to occur, andeffective measures of eliminating or reducing losses incurred from these crimes.

REFERENCES

1. Cybercrime prevention and digital forensics: report of the international workshop :Bangkok, Thailand, 19-22 April 2005 : an ancillary meeting of the 11th UN CrimeCongress on Crime Prevention and Criminal Justice, Author : Asian DevelopmentBank. Institute Publisher: ADB Institute, 2005

2. www.symantec.com/norton/cybercrime/index.jsp3. www.cidap.gov.in/documents/Cyber%20Crime.pdf4. www.federalgrantswire.com/economic-high-tech-and-cyber-crime-prevention.html5. www.itu.int/wsis/geneva/index.html

Kindler Vol. IX No. 1 January-June 77

SYNOPSIS

An Analysis of Awareness Level AmongInvestors Towards Insurance Products

Punita Kumari*

INTRODUCTIONThe following project studies the importance of personal finance of an individual. Thestudy stresses to find out the investment behaviour of the investors or common man inKolkata, the need of the consumer and the investment opportunity in the market. Whatimportance does insurance hold in the consumer’s investment portfolio? With introductionof private companies in life insurance, the scenario of the insurance sector has changedfrom security to investment opportunity.This study aims to find whether “Unit-linked insurance, as an insurance cover, is analternative investment plan providing solutions for all kinds of investors”.

OBJECTIVES

Understand customers’ current knowledge, attitudes and practices regarding futureinvestment planning (investment and unit-linked insurance)

To make life of an asset secure against the uncertainty

Customer segmentation in terms of attitudes, behaviour and demographics.

METHODOLOGY

Data Collection Methods used

PRIMARY

Questionnaires: 100 questionnaires were administered to people from diverse educational& occupational backgrounds within varying age groups.

Personal Interviews: The attitude of the investor has been measured by the surveymethods like face-to-face interview.

SECONDARY

Company Websites: Official website hosted by the companies were visited and datacollected from them.

Research Articles: Articles from books, publication, magazines, journals were referredand help taken.

* Student, MBA12, (2008-10), Army Institute of Management, Kolkata

78 Kindler Vol. IX No. 1 January-June 2009

DATA ANALYSISThe following questions were asked to the target group with specific purpose. Thefindings of each were noted and analysed.

Q1) Which income group do you fall in?

The purpose of asking this question was to find out the income group and the perceptionabout investing their savings in market.General FindingsOut of 100 people, 29% of people were earning under Rs. 15,000 per month; 37% of thepeople were earning between Rs. 15,000-30,000 per month; 19% of the people wereearning between Rs. 30,000-50,000 and 15% of the people were earning aboveRs. 50,000 per month.Analysis 29% of the people with income under Rs. 15,000 per month had less savings. They

were aware of unit-linked insurance but due to less earning most of them were underinsured and invested basically for saving tax. 32% of the people who belonged toage group 30-40 were aware of their growing responsibility and had more savings.Their investment portfolio had NSC, fixed deposits.

People having income within Rs. 15,000-30,000 had more savings. 33% of thepeople in the age group 30-40 were becoming aware of their family responsibilitiesand were thinking for investing in fixed deposit, insurance, NSC. 20% people belongingto the banking sector preferred investment in secured investments like GovernmentBonds, Life Insurance, NSC, Fixed Deposits. 25% of people who were operatingown business preferred investment in their business and insurance.

People having income between Rs. 30,000-50,000 had the most diversified investmentportfolio; Out of which 38% people were more into investments in Real Estate. 30%of people in age group 20-30 were more keen to invest are willing to take high riskand prefer investment in equity as compared to others in same income group,reason being they are active investors in equity market.

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Q2) Which is the most preferred investment to fulfill your future?

Purpose of asking this question was to know about the public’s preference for investment,saving habit, and inclusion of risk in investment portfolio.

General Findings

Out of 100 people, 34% invested in Insurance, 16% in Fixed Deposit, 15% in NSC, 13%in Real Estate, 8% in Equity, 7% in Mutual Funds, 5% in Government Bonds and 2% inothers.

Analysis

Insurance: Changing scenario of insurance industry has led many people to investin insurance. Individuals prefer the newly introduced flexible unit-linked insuranceplans. People, now, are considering it, as an investment and tax saving instrument.30% of people who have invested in insurance have income under Rs. 30,000. Andrest 4% is above Rs. 30,000.

Fixed Deposit: People invest in fixed deposit, because it is a source of fixed incomeand guaranteed return. But due to fall in fixed deposit rates their investment portfoliohas changed to mutual funds and unit-linked insurance.

Real Estate: People with income group above Rs. 50,000 preferred investment inreal estate since the risk involved is the least and the return is above 20%. Peopleunder this group also get return in small span of time. Some of the investors in thissegment invested only in insurance, reason being, they have good knowledge basein different insurance products and are efficient financial planners.

On enquiring interviewers about preferred investment they had little knowledge thatinsurance can also be called as an investment opportunity. With innovation of productsin insurance sector and introduction of unit-linked insurance plans insurance sectoris emerging as another foot hold for investors.

80 Kindler Vol. IX No. 1 January-June 2009

Q3) Does long term investment helps in getting these returns?

This question was asked to find out the attitude of investors with regard to time periodand expectancy of return.

General Findings

Out of 100 people, 54% strongly agreed on investing in long term investment and 18%on long term investments giving stable returns; 10% of the people had invested in shortterm investments and 12% people were strong believers of short term investment; 6%people were not sure of either long term or short term investments.

Analysis

With introduction of the concept of diversification of risk through division into portfolio ofvarious sectors and time people invest in long-term investment,

54% of the people prefer long-term investment as the risk is diversified through outthe term. 31% of these people invest for long term in mutual funds and insurance.

18% investors invest in stock market for a period of 6 months to 1year. They dodeep study before investing so that they do not lose money in stock market.

In general, shorter the period higher is the risk expected and higher the return. 10%of the investors prefer investing in short term investment in equity market and theythink they can get much better returns on short term to fulfill their short term financialneeds but they have also invested in insurance sector to make their investmentportfolio to give a positive return. 12% of the investors believe that short terminvestment on real estate is the best investment of getting good return.

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Q4) Does Unit-linked Insurance plans helps you in obtaining your investment goals?

Introduction

Reason for asking this question was to know the response of investors about unit-linkedinsurance plans with respect to their preference.

General Findings

Out of 100 people, 34% were confident about return on unit-linked insurance; 18% agreedthat they can give returns; 11% were not fully aware about the unit-linked insurance plans;10% were not at all satisfied with insurance and risk getting along; 27% said they cannotcomment on the fact.

Analysis

Most of the people gave their opinion about the unit-linked insurance plan as animprovement over traditional insurance product. With growing inflation and drop ininterest rate by the banks, people find unit-linked insurance as a better opportunityfor investment.

18% of the respondents agreed that they can give good return but were not confidentabout the concept of investing in stock market.

10% of the respondents strongly disagreed on the unit-linked plans giving betterreturns than their preferred investment, i.e. real estate. Since the people are nowmore dependent on insurance advisor for dealing with their money, people tend notto invest in such plans where their knowledge about the market is less. 27% of thepeople said they cannot comment on unit-linked insurance as it is a new conceptand yet to see the returns - there is market investment involved and the track recordis less.

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Q5) Do you think tax-free returns on such investments are affected by Government’sBudget?

The purpose of asking this question was to know about the awareness among therespondents about the recent effect on their investments by budget announced by theFinance Minister applicable for the year 2009-10.

General Findings

Out of 100 people interviewed, 56% of the people said their investment was affected bythe budget; 44% of the people were not aware of the effect on investment.

Analysis

Most of the people are financially aware about their investments. They do tax planningto save their income. 56% of people said they have to change their investment plan toavoid taxes in this financial year. Some of the investors said their investments are affectedby the government’s budget both positively and negatively.

Positive impact

People with income group whose annual income is above Rs. 1,00,000 have an opportunityto get an exemption of direct Rs. 1,00,000 under sec 80C. Some of the portion such asinsurance on maturity is still tax-free and was not touched by the Finance Minister.

Negative impact

People with high-end income or business will be taxed more in comparison to peopleearning less than Rs. 5,00,000 per annum. Out of 44% of the people who said theirinvestment is not affected by government budget, 37% of people who invest in real estatesaid that the budget has no effect on their returns and the rest are not aware of thechanges in their investment by the recent budget.

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Q6) Are you aware of Unit-linked Insurance products launched by “Bajaj AllianzLife Insurance?

INVESTORS’ AWARENESS ABOUT BAJAJ ALLIANZ LIFE INSURANCE PLANS

The purpose of asking this question was to know how many people in the market wereaware of the unit-linked insurance plans launched by Bajaj Allianz Life insurance.

General FindingsOut of 100 people, 31% of the people were aware of the Bajaj Allianz Life insurance.

Analysis One of the major drawbacks has been its policy regarding the advertising of the

unit-linked insurance. Adopting the distribution channel of insurance throughbancassurance and other alternative through its agents restricts its popularity in themarket.

Other private sector companies have been searching new ways of publicity so thatthe public starts recognizing them as brand ambassador of life insurance.

Many of the private insurance companies have stepped up their Advertisementexpenditure for the current financial year. Though majority of the market is dominatedby LIC but for establishment of the companies into the market it has to adopt newstrategies for distribution channels, positioning of the product, etc.

CONSTRAINTS/ LIMITATIONSFollowing constraints were observed during the preparation of the project:

Availability of time: Since project required a broad overview of the market perceptionthe time was a big constraint.

Scarcity of Data: Some of the data from the customers was required from thecompany but for security purposes the data was not available.

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Problem in data collection: Few limitations in the data collection were observed aspeople who were interviewed had less knowledge about the new concept of unit-linked insurance plans. Few people would not give full disclosure of their preferredinvestment to hide their black income.

Responsiveness of Customer: The respondents did not want to disclose theirpersonal investments and were not forthcoming in sharing information.

Perception of Customers: People’s perception about the life insurance is not goodbecause of the lack of customer satisfaction at the time of claims. Secondly they didnot trust private companies for maintaining their hard earned money. Lastly theadministrative cost is borne by the policyholder, which is not appreciated by thegeneral public.

RECOMMENDATIONS

On analyzing the secondary, primary and observational data, following recommendationsare suggested to the company for convincing the public about the better performance ofunit-linked insurance plans:

Change in advertising strategy: The Company has to change its advertising strategy.Only 31% of the people were aware of the Bajaj Allianz Life Insurance Company.This shows that company has invested less in publicity of its products. While therecent study shows that other companies are stepping up their expenditure oninsurance but Bajaj Allianz Life Insurance is still not opening up in market. TheCompany should put banners and hoardings across the city.

Change in customer relationship management: With the liberalisation of insurancesector, a lot of changes have come but still a lot remains to be done. Customersmust be disclosed full pros and cons before selling a policy but probably this is notthe usual practice. Currently customer is allowed changes for two times in theirfunds free of cost. This should be increased to four times in a year.

Low premiums: New products should be launched where the premiums are incompetitive range with other companies and much more facilities are provided withthe products such as: -

Flexibility in submission of premium.

Policy is not lapsed even if the premium is not submitted on due date.

Internet facility to pay the premium.

Mailing the clients through emails on weekly basis and informing them abouttheir fund with the company.

Micro-insurance products for rural areas: Company has some insurance products,which can be modified into micro-insurance products. But lack of agents in ruralsector is making company’s market share lower than other companies in competition.Some products should be launched specifically with rural perspective.

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Change in product distribution strategy: The Company has to include newinsurance distribution channels to expand its business such as Village panchayats,NGOs, charitable institutions, etc.

Opening up of more branches: The Company has only 44 branches in the country.It needs to open more branches in well-developed cities to establish its reputation.

Disclosure of full information: Insurance advisors should disclose all informationto the investors like type of funds and leave the investor to choose the type of fundshe prefers. Agent should not recommend investing in specific fund if it has beengiving good returns, as it will also have more risk factor in it.

Targeting different segments of market: India has the most diversified marketwith many segments in society. There is lot of potential in the rural sector whereprivate companies have not reached. The company should make a product designedfor the village people to have control over the loans taken by them. It will help insocial security of the farmers and reduce the number of suicides in villages. Productswith low premium should be launched for farmers.

Introduction of Innovative products: Indian market is a diversified market, withconsumers of different needs. Company should continuously be in touch with thecustomers to bring in products of their needs. This will help the company to establishitself in the market.

Ease of process: Company should ease the process of subscription, renewal andclaim settlement to make itself more customers friendly.

SCOPE FOR FURTHER STUDIESSince the concept of unit-linked insurance plans is still not popular in the market there isneed to study the resources from which the unit-linked insurance plans can be mademore popular.

The rural segment of the population still is away from the reach of such policies. Newinsurance products need to be made for the benefit of the rural population who areinvolved in agricultural sector. A lot of potential is hidden in the rural sector and there isneed to study their perception about the unit-linked insurance plans.

There is still lot of study to be done on customer satisfaction and making claims proceduremore relaxed and faster.

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Kindler Vol. IX No. 1 January-June 87

SYNOPSIS

* Student, MBA12, (2008-10), Army Institute of Management, Kolkata

Assessing Efficacy of Microsoft’s MidmarketRelationship Program (MMRP) among Local

EA customers and recommending roadahead for FY10

Bhavna Appaya*

Microsoft Corporation is a multinational computer technology corporation that develops,manufactures, licenses, and supports a wide range of software products for computingdevices. Headquartered in Redmond, Washington, USA, its best selling products are theMicrosoft Windows Operating System and the Microsoft Office Suite of productivity software.

Originally founded to develop and sell BASIC interpreters for the Altair 8800, Microsoftrose to dominate the home computer operating system market with MS-DOS in the mid-1980s, followed by the Windows line of operating systems. Microsoft’s original missionwas “a computer on every desk and in every home, running Microsoft software” is a goalnear fulfilment. Microsoft possesses footholds in other markets; with assets such as theMSNBC cable television network, the MSN Internet portal, and the Microsoft Encartamultimedia encyclopaedia. The company also markets both computer hardware productssuch as the Microsoft mouse as well as home entertainment products such as the Xbox,Xbox 360, Zune and MSN TV. The company’s initial public stock offering (IPO) was in1986; the ensuing rise of the company’s stock price has made four billionaires and anestimated 12,000 millionaires.

Microsoft entered India in 1990 and has since worked closely with the Indian government,IT industry, academia and local developer community for ushering in some of the earlysuccesses in the realm of IT. Microsoft currently has offices in 16 cities like Ahmedabad,Bangalore, Chandigarh, Chennai, Coimbatore, Hyderabad, Indore, Jaipur, Jamshedpur,Kochi, Kolkata, Lucknow, Mumbai, Nagpur, New Delhi, and Pune. Since its entry intoIndia, Microsoft has focused on three things, namely:

Becoming a key IT partner to the Indian government and the industry

Supporting and fuelling the growth of the local IT industry through its partnerenablement programs

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Under Microsoft Unlimited Potential, enhancing education, jobs and opportunitiesand fostering innovation through relevant, affordable access to computing.

This project was undertaken in the marketing division of Microsoft Bangalore. Microsoftin India employs about 5000 people and has six business units in India representing thecomplete Microsoft product lifecycle. The products available in various segments (basedon size) are as follows.

Segment Value Proposition Product Offering

Enterprise Provide an Interoperable, Windows Server Systemscalable and future proof Business Applications Platformtechnology. Infrastructure offerings

Have an integrated, end-to-end (Secure, Manageable,platform. Scalable)

Build a rich partner ecosystem. Ensure significant impact on Office System

bottom line / top line – great ROI Real Time CollaborationOfferings

Office 2003 InfoPath Office 12

Microsoft Dynamics Microsoft Dynamics AX

SMB Integrated, out of the box Microsoft Dynamicsofferings Microsoft Dynamics NV

Cost effective solutions Microsoft Dynamics CRM 3.0 The world’s most easy to use

and popular business front end Windows Server System(Office) Small Business Server 2005

Vertical depth and expertise Windows Server 2003through a large network of SQL Server 2005partners Exchange Server 2003

Office System Office 2003 Small Business

Edition Office Professional Office Standard

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Segment Value Proposition Product Offering

Consumer The world’s most popular Windows XP Starter Editionconsumer software offerings Windows Home

Easy to use, rich software that Windows XP Media Centerallow consumers to have more Editionfun, get more done and stay Office Student & Teacherconnected. Edition

A wide ecosystem of supporting Office Standard & Officesoftware and devices Professional under the

Cost effective products and Student Select Programsolutions Windows XP Starter Edition

Multi Lingual Windows Vista

CONCEPTUAL INTRODUCTION

Marketing with reference to the present day industrial and international operations is notprimarily concerned with the manipulation of the 4 Ps from consumer goods marketing;instead it is also connected with reaching a critical mass of relations with customers,distributors, suppliers etc.

The new approach takes in to account the dynamic changes in industries and markets(especially in computers, software, semi-conductors businesses, etc.). It is an approachthat stresses the building of relationships rather than promotion of products. The marketermust gain understanding of the market structure then develop strategic relationships withother key companies and people in the market. They must build relationships with suppliers,investors and customers.

Relationship marketing is built on a basic philosophy, which is not directly aimed atimmediate transactions but is based on building, supporting and extending customerrelationships. Only companies that have developed sufficiently close relationships can calltheir marketing a success. Both parties therefore have to create structural (betweencompanies) as well as social (between persons) ties.

A first pillar of relationship marketing is the evaluation and classification of customers. Itis imperative to identify the key customers or key accounts. In relationship marketing thecompany approaches its most important customers from a holistic perspective. It does notfocus only on the product being offered but on finding solutions to complex problems byproviding the expertise and after sales follow up.

Long term and intensive interaction with customers requires an organisational underpinning.Account management is vital because it regards the customer as the unit of planning, co-ordination and control for all functional activities.

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MMRP OVERVIEW- Predictable, programmatic engagement with customers using a defined contact

strategy triggered by the customer lifecycle. Currently executed against the Depth customer’s post purchase lifecycle, which

includes Welcome, Deploy, Use, and Renew phases. MMRP leverages direct marketing (direct mail, email, web) and sales touches

(inside sales) to engage with midmarket customers. MMRP also integrates with thepartner channel.

MMRP objectives are as follows: A marketing framework used to engage Microsoft VL customers into Relationship

Marketing. It covers all SMB customers including MBS and Public Sector. A predictable and programmatic engagement model that delivers touch points using

a contact strategy that is optimised for each customer through a marketing rulesengine.

Touch points are executed both for pre-sales and post-sales activities: Nurture,Demand Generation, Welcome, and Deploy, Use, and Renew phases.

Touch points are primarily executed to customer marketing, through telesalesengagement and ultimately to partner.

Drives revenue of all types, not just recapture. Addresses customer groups beyond just those on Software Assurance. Incorporates in quarterly communications in addition to renewal touch points, to

reinforce value, ease of doing business, and that Microsoft cares.OBJECTIVE- To identify market competitors’ customer engagement & contact strategies for large

customer accounts. To identify areas with scope for improvements. To find ways to improve integration with partners.METHODOLOGYSecondary Data

A source of data used in the study is secondary data, taken from the internet,company websites, annual reports etc. A few examples are as follows-IBM-http://www-07.ibm.com/ibm/au/clientsatisfaction/index.htmlOracle-http://www.oracle.com/webapps/events EventsDetail.jsp?p_eventId=62001&src=4775748&src=4775748&Act=404Cisco-http://www.cisco.com/web/IN/itscioconclave2008/agenda.htmlHttp://www.cisco-live.com/attendees/activities/

Kindler Vol. IX No. 1 January-June 91

Some examples of CIO digests and newsletters-Symantec-http://www.symantec.com/business/theme.jsp?themeid=ciodigestSun Microsystems-http://in.sun.com/sunnews/newsletter/SAP-http://www1.sap.com/usa/about/newsroom/sapspectrum/index.epxOnline user groups-Salesforce-http://usergroups.salesforce.com/nyc/SAP-http://www1.sap.com/ecosystem/customers/user-groups/index.epxSymantec-http://www.symantec.com/connect/eventsOther initiatives include technical labs & seminars, web casts/web events and podcasts

Primary Data Interviews conducted with CIOs or IT heads of the respective organisations. Interviews were taken using questionnaires with different customers and partners. Sample size determined was 12, this included Partners and Customers.DESIGNING THE QUESTIONNAIRE-a) Since it is a descriptive study, the use of open ended questions were made along

with dichotomous and multiple choice questionsb) While preparing the questionnaire the following factors were kept in mind:

Identifying competitions relationship program for large customers Determining all marketing related activities organised Ensuring the interview to be more of a conversation

FINDINGS AND ANALYSIS-Recommendations for after-market programmesNew Customer Acquisitions Feedback system-

– Soon after fulfilment, random samples can be pulled out and a third party canmake calls to customers to understand their experience during the transaction.This will ensure that escalations if any are taken care of in time.

Customer Relationship-

– A thank you letter to new customers within 3 months of transaction with detailson how and who to reach out for support.

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HNW (High net worth) customers-

– To large and potential customers, a token of thanks could also be included

Effective CRM updating-

– Based on purchase and relevance, these new customers are incorporated intothe marketing databases and are updated of new offerings and invited to eventsand other forums

– Based on size and potential, account managers are assigned as SPOC (SpecialPoint of Contact) for the customer

– The company website should have details on support/technical helpline/freedownloads/ beta software availability

– Thank you events can be run where customer and spouse is taken on avacation (for very large customers).

Other recommendations

– Feedback sessions with the customers should be held regularly so as to bridgeany gaps if they exist.

– Company website should have details on any upcoming customer appreciationevents/thank you events or other technical gatherings being organised.

– CIO digests and other technical magazines should be sent to the large customers,also relevant updates about Microsoft (mergers, acquisitions, etc.) should besent to the customers.

SCOPE FOR FUTURE WORK-

A product or service offering is the key satisfaction derivative for a customer. However,the key differential in satisfaction or that ‘extra mile’ satisfaction is going to come from the‘extra mile post sales’ experience in terms of services and support that the vendors areable to provide to customers. One way for firm’s to demonstrate that they value theircustomers is to show them appreciation for their business. In addition to providing theservices as promised the company that explicitly thanks customers for their business cango a long way towards retaining customers. The demonstration of customer appreciationis especially important in business to business situations, because customers would liketheir suppliers to extend appreciation either in person or over the phone and not just taketheir business for granted.

The study was done primarily for Bangalore Region. The study needs to be done inother regions as well to get a more complete picture of the relationship program thatmajor IT companies have in place.

More comprehensive sampling plan needs to be drawn, so that accurate informationcan be obtained. Due to the time and logistic constraints larger sample of customersand partners was not obtained.

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BOOK REVIEW

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Kindler Vol. IX No. 1 January-June 95

Applied Econometric Time SeriesWalter EndersPublished by: Wiley India Private Limited.

Wiley India (student edition); Second edition 2008

ABOUT THE AUTHORWalter Enders is the Lee Bidgood Professor of Economics at the University ofAlabama. He is a doctorate in Economics from Columbia University in New York.His research areas include development and application of time-series models toareas in economics and finance. He has published numerous research papers inpeer reviewed International Journals. He has formal editorial responsibilities forthree different journals in the area of international economics and has served asa policy advisor to Ukraine. He is the current holder of the National Academy ofSciences’ Estes Award for Behavioural Research relevant to the prevention ofNuclear War.

Econometrics has emerged as an area of interest ever since it has responded quiteadequately to the challenges arising in the process of empirical validation of economictheories. However econometrics has also demonstrated its usefulness in unravelingempirical ‘paradoxes’, thereby challenging economic theorists to advance new explanationsto encompass these paradoxes. This book is a welcome addition in this field. The contentsare presented in a manner that creates awareness level towards methodological issues,set in historical and philosophical context and also tries to remove the inherent phobia ofstudents towards the rigors of mathematical and statistical reasoning. Real worldapplications of macro and microeconomics data using econometric packages make hisbook handier.

The book contains seven chapters. The author has tried to avoid encyclopedic treatmentof a topic or technique that has fallen out of style and has been careful about the trade-off between being complete and being concise. The book begins with its first chapter ondifference equations. Therefore readers of this book must have some background inregression analysis and must be familiar with concepts of correlation, covariance andmatrix algebra.

The second chapter deals with stationarity of time series models. The author has donewell to include a topic on comparison of out-of-sample forecasts of alternative time-seriesmodels.

The third chapter discusses the topic of capturing volatility in financial time series by thetechniques of Autoregressive Conditional Heteroscedasticity (ARCH) and GeneralizedAutoregressive Conditional Heteroscedasticity (GARCH). The chapter emphasized onforecasting of conditional variance. New additions in GARCH family like IGARCH, EGARCHand TGARCH have also been discussed.

The trend in a time series can have both stochastic and deterministic component. Stochastic

96 Kindler Vol. IX No. 1 January-June 2009

stationarity arises from the presence of unit roots in time series and leads to a breakdown of traditional hypothesis procedures. Various issues surrounding this phenomenonincluding Dicky Fuller test, Structural change, and Panel Unit Root tests are discussed inChapter four.Chapter five is devoted towards multi-equation models. It introduces intervention analysisand transfer function analysis which in the absence of feedback can be an effective toolfor forecasting and hypothesis testing. The Chapter then introduces vector auto-regression(VAR), which is used when economic systems exhibit feedback. It discusses the toolsemployed by VAR analysis – Granger Causality, Impulse Response Function and VarianceDecomposition, which are helpful in understanding the interrelationships among economicvariables and in the formulation of a more structured economic model. The chapter alsodiscusses two new techniques – structural VARs and multivariate decompositions thatblend economic theory and multiple time series analysis.Chapter six explores the issues related to cointegrating relationships. The Chapter discussesthe theory and applications of tests of cointegration – the Engle Granger methodology andthe Johansen methodology. Multiple cointegrating vectors and tests for cointegration withmixtures of I(1) and I(2) variables are examined. The issues related to selection ofappropriate lag length in unit root tests, VAR and cointegration tests have been welldiscussed. The Chapter contains a concise literature on the topic.The most notable change in this edition is the inclusion of Chapter seven on nonlineartime series models. The chapter begins with a comparison of ARMA model with varioustypes of nonlinear models. It focuses on those nonlinear models that can be estimatedby OLS methods, non-linear least squares or maximum likelihood techniques and developstests that can detect the presence of nonlinear adjustments. The process of estimationof nonlinear models is well illustrated and also the issue of unit roots and cointegrationin a nonlinear setting.This book is student centric. The author has approached a topic with a simple examplethen moved towards more general and more complicated models. Detailed examples ofeach procedure are provided with a step-by-step summary of the stages employed in thatprocedure. Application of well-known packages like EVIEWS, STATA, etc., for non-lineartime series models is well documented. Overall, this book should help the post graduatestudents of management and social sciences. The presentation is concise yet impressive,very topical and makes a lucid reading.

Reviewed by:Sharad Nath BhattacharyaLecturer (Sr Grade) - FinanceArmy Institute of ManagementJudges Court RoadAliporeKolkata 700 027Email: sn.bhattacharya@aim.ac.in

Kindler Vol. IX No. 1 January-June 97

Operations Research – An IntroductionHamdy A TahaPublisher: Pearson EducationFirst impression: 2008

ABOUT THE AUTHOR

Hamdy A Taha is a University Professor Emeritus of Industrial Engineering with theUniversity of Arkansas. He has taught and conducted research in OperationsResearch and Simulation. Having authored a variety of publications, his works havebeen translated into eight languages including Chinese, Spanish and Russian. Heis the recipient of the Alumni Award for Excellence in Research and the university-wide Nadine Baum Award for excellence in Teaching.

Operations Research (OR) is a science by virtue of the Mathematical Techniques itembodies. The success of the phases leading to the solution of the Mathematical Modeldepends on the creativity and experience of the OR team. Thus OR may also be calledan art. This book explains complex mathematical concepts through carefully designednumerical examples, eliminating the need for formal mathematical proofs.

The book uses Excel Spreadsheets extensively, with interactive user input in somespreadsheets. Excel Solver is used significantly, especially in the areas of linear, network,integer and non-linear programming. A CD containing effective case studies as appendicesaccompanies the book. All computer-related materials have been compartmentalised intosections titled AMPL/ Excel/ Solver/ TORA moment to minimise disruptions to the mainpresentations in the book.

The very vast area of Linear Programming and allied areas are effectively coveredfrom Chapters 2 to 10. Chapter 2 is committed to basic Linear Program Modeling. TheChapter introduces applications in the areas of urban renewal, currency arbitrage,investment, production planning, blending and scheduling. End of section problems includetopics from water quality management, bus scheduling, traffic control and warfare. TheChapter includes also, like many others, a helpful section on problem solving with ExcelSolver and AMPL. Chapter 3 introduces the most prevalent Simplex Method. It explainshow simplex-based Sensitivity Analysis is used to provide economic interpretations aboutoptimum solution including Dual Prices and Reduced Cost. The sequel to SensitivityAnalysis, Post Optimal Analysis is continued with in Chapter 4.

The steps of the Transportation and their obvious parallel in the Simplex method arediscussed in Chapter 5. TORA’s tutorial model is helpful in understanding the algorithm.Chapter 6 introduces Network Models and the traditional applications of finding the mostefficient way to link a number of locations directly or indirectly, determining the maximumflow in a pipeline network and finding the minimum cost flow-satisfying constraint-requirements. Chapter 7 presents the mathematical foundation of linear programming

98 Kindler Vol. IX No. 1 January-June 2009

and duality theory. Since this Chapter relies on the use of Matrix Algebra, Appendix D onthe CD provides a review of Matrices. Chapter 20 on the CD presents two additionalalgorithms that deal with large scale Linear Programming: Decomposition and theKarmarkar Interior Point algorithm. Chapter 8, which introduces Goal Programming,includes the AMPL model that applies the Pre-emptive Method interactively to any GoalProgram. Chapter 9 discusses Integer Linear Program and shows how AMPL and Solverare used with Integer Linear Programming. Dynamic Programming, introduced in Chapter10, determines the optimum solution of a multivariate problem by decomposing it intostages, each stage comprising a single variable problem.

In Chapter 11, the book moves on to Inventory Models. This chapter includes a numberof Excel spreadsheets, Solver and AMPL models. Chapter 13 introduces Decision Analysisand Game Theory. Four real life applications are included in this chapter and the casesare in Appendix E on the CD. Prior to this chapter, Chapter 12 reviews the concepts ofBasic Probability. Probabilistic Inventory Models (categorised under continuous and periodicreview situations) are discussed in Chapter 14. Chapter 24 on the CD uses a model toenable Dell Inc. to manage its inventory situation and realize sizable savings.

Chapter 15 discusses Queuing Theory and since Queuing Theory involves computationallydifficult formulae, throughout the chapter, TORA is used to carry out these calculations.Simulation Models that deal computerised imitation of the random behaviour of a systemfor the purpose of estimating its performance, is dealt with in Chapter 16. Chapter 17provides a basic background about Markov Chains and their use in practice. Two Exceltemplates are provided to handle the basic computations of Markov Chains of any size.Chapter 18 introduces Classical Optimization Theory wherein Calculus is used to find thepoints of Optima for Constrained and Unconstrained Functions. This is then followed by thedirect (gradient) and indirect Non Linear Programming algorithms introduced in Chapter 19.

Appendix A presents the principal syntax rules of AMPL necessary for the developmentand solution of complex mathematical programming models. Statistical Tables are includedas Appendix B.

The book integrates practical applications of software, allowing students to test concepts.Each chapter concludes with summary applications from published case studies.Approximately 50 mini cases of real-life situations are included within the book. Theapproach of the book is holistic in nature and the mini cases prove to be a matter ofinterest to the curious business management student.

Reviewed by:

Swapna Datta KhanLecturer - QMArmy Institute of Management, KolkataJudges CourtRoadAlipore, Kolkata 700027E-mail: captsdk@gmail.com

Kindler Vol. IX No. 1 January-June 99

The Call of the Mall: How We ShopPaco UnderhillPublisher: Profile Books, LondonFirst South Asian Edition 2004, Reprinted 2005, 2007, 2008Distributed in India by Viva Books, New Delhi

ABOUT THE AUTHORPaco Underhill is the author of the international bestseller Why We Buy. He is aworld-famous retail anthropologist and the founder and CEO of Envirosell Inc, aglobal consulting firm that specialises in consumer behaviour and whose internationalclients include Wal-Mart, Starbucks, Niketown and Bluewater.

This book is like a fine portrait of consumers’ attitude and behaviour in respect toshopping, painted in the most fascinating way. The shopping mall today has becomesynonymous with modern lifestyle. We go there not only to shop, but also to hang out,to eat, drink and be merry, to get entertained and even to socialize. This book providesa thorough understanding of how consumers spend and how far the successful retailersare able to make them spend more and manipulate them to buy things they don’t reallyneed.

The book opens with an introduction presenting the shopping experience at the mall asa learning experience in different perspectives – economic, aesthetic, geographic, spiritual,emotional, psychological and sartorial. This is followed by twenty-four chapters on differenttopics.

The first Chapter America Shops discloses the identity of American shopping, whereasin Chapter 2, You Are Here, the ubiquitous presence of malls has been highlighted. Thethird Chapter, A Mouse Hole describes the interior of a mall and how deceptive theexterior could be in revealing what’s going inside. That is why author uses the phrase “Abig wall with a little mouse hole” to condemn the ugliness of the exteriors. Americans,already avid mall-hoppers, don’t take the exteriors seriously, which is perhaps very differentfrom Indian experience.

The fourth Chapter “Dude, Where’s My Car?” talks about peoples’ expectations regardingthe parking facilities when they enter a shopping mall. Shoppers want the parking spotto be easy to find out, fast to reach, close to the mall entrance and easy to find out whileleaving. All these become more so important when somebody reaches there at a busyweekend and has to fight his way through an overfull parking lot. There comes the issueof exploiting this time and space. On crowded days, a little bit of customer care in helpingto find out a suitable parking spot would go a long way in developing a long-term relationship,whereas during the lean time, when most of the space remains unoccupied, this couldbe turned into something else that can generate revenue. In this respect, the author hascited the example of Wal-Mart, who permits overnight camping at its parking lot for the

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Campers. In the following morning, the campers would not only use the washrooms, butalso will definitely spend on food, clothing and other necessities.

The fifth Chapter “Why Malls Fear Freedom” deals with the problem mall managementfaces if they allow free movement of consumers inside the mall. Though in general, mallswelcome even the window-shoppers considering the future potential, still the author couldidentify some malls that are elitist or snobbish in dealing with them.

Chapter 6 “I Brake for Meanderthals” describes how people move inside a mall, with theirgaze fixed on the displays rather than on the way. Finding the way to the right store byusing maps or by asking at the mall’s customer service desk may sound useful, but doesnot fulfill the purpose in reality. The author’s suggestion here is to use symbols on themap. The mall management, in his view, wants to make people wander around so thatthey see more and eventually spend more.

Seventh Chapter “Nose and toes” is an extension of this. The long used strategy ofmaking shoppers move around more may not work in case of experienced shopper andthey understand this manipulation. Getting the thing I really want quickly and hassle-freemight be an attraction to today’s time-constrained shoppers. This Chapter also describesin detail how women shoppers react to this and what strategies the marketers take up indealing with this layout issue. This Chapter provides a deep insight into women shoppingbehaviour, particularly in relation to cosmetics.

In Chapter 8, Sex and the Mall, the difference in the shopping pattern, behaviour andexpectations of men and women have been pointed out. It is a strategic decision for themarketers: how they are going to attract the shoppers given this difference.

Chapter 9, The Charmin Challenge is an eye-opener for the mall management regardingthe toilet facilities they provide and how important this might be in pleasing a customer.Chapter 10, Status Anxiety and Back Pockets describes the psychology of buyers inassociating themselves with a product. The eleventh Chapter, Fun, talks about scope ofentertainment for the mall-hopper and what marketing opportunity they can provide. Chapter12, Hands Free Shopping again is dedicated to the strategic advantage of using shoppingcarts, of different categories.

Chapter 13, Pushcarts Rule brings out the importance of freestanding kiosks, pushcartsand other mobile devices in attracting the attention of the shoppers. In Chapter 14, MallCuisine, the author brings in the flavour of finding good food inside the mall. Chapter 15,Breakfast at Cartier, describes the behaviour of window-shoppers, particularly in high-endstores and how marketers of these big-ticket items are reacting to this.

A Man and His Mall, Chapter 16 is dedicated to the description of male behaviour in amall, their likes and dislikes. Chapter 17, Who is Your Dad, concentrates on behaviourinside a CD store. Eighteenth Chapter, Malls of the World, talks about the major differencesin the ambience and shopping behavior at malls of different countries. Again in Chapter19, Where the Girls Are, the author focuses on teenagers’ attitudes and expectationswhile shopping.

Kindler Vol. IX No. 1 January-June 101

After a tiring experience of mall browsing, what does a tired shopper take relief at? Herecomes the significance of some relaxing experience like aqua massage. Chapter 20, TheMall Touch, describes this experience. In Chapter 21, Short Hills or Seoul, the authorfocuses on aesthetics of the mall and how it help in getting people more attracted andfeel good. Chapter 22, Other Venues, talks about comparison of malls with other shoppingdestinations, as experienced by the shoppers. Chapter 23, Scenes from a Mall againdescribes the experience inside and outside the movie halls at the mall. The last chapter,The Postmall World, is an analysis of the success or failure factors for a mall. The authorhas explained several examples in describing different types of shopping situations andthe mall’s ability to cater to different levels of shoppers’ needs and expectations.

Overall, the book is quite engaging, as the author has used a unique treatment ofconversation in dealing with different issues of shopping-related experience. The flow isuninterrupted and the reader can very easily identify himself/herself with the situations.The coverage of different aspects of shopping is also quite extensive.

Reviewed by:

Dr. Malini MajumdarAssistant Professor, MarketingArmy Institute of ManagementJudges Court RoadAlipore, Kolkata 700 027Email: malini.majumdar@aim.ac.in

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