Strategic Management Wolaita Sodo University

Module 3
Thematic area: Public service Operations and
Administration

Collage of Business and Economics

Department Of Public Administration and Development Management

By
1. Hika Nigatu (Asst.Prof.)…………. Development Management
2.

Wolaita Sodo, Ethiopia

Year 2023
 List of Tables
List of Courses Page

Public Service Delivery and E-Governance……………………………………………………...……3

Chapter One: Introduction ………………………………………………………………………..……..4
Chapter Two: Service Delivery approaches………………………………….…………………………11
Chapter Three: Services Excellence and Its Important…………………………………………………19
Chapter Four: Customer Perceptions and Expectations in Services………...………………………….31
Chapter Five: E-Government……………………………………………...……………………………44
Human Resource Management…………………………………………...………………………….54
Chapter- One: An Overview of Human Resource Management……………..………………………...54
Chapter- Two: Job Analysis and Design………………………………………...……………………...59
Chapter- Three: Employee Resourcing……………………………………………..…………………..65
Chapter- Four: Training and Development…………………………………………..…………………92
Chapter- Five: Performance Appraisal………………………………………………………………..100
Chapter-Six: Wage and Salary Administration……………….……………………………………….108
Chapter- Seven: Employee Safety, Health & Labor Relation Management……..……………………120
Governance and Management of NGOs……………………………………………………………137
Chapter 1: Overview of Nongovernmental Organizations………………………………………...….138
Chapter 2: Nongovernmental Organization Theories……………………………………………...….147
Chapter 3: Functions of Nongovernmental Organizations …………………………………………155
Chapter4: NGO Approach to Solving Community Problems…………………………………………165
Chapter 5: Building Capacity of Nongovernmental Organizations……………………………...……174
Strategic Planning and Management…………………...…………………………………………..182
Chapter One: The Basics of Strategic Management……………………………………………….….183
Chapter Two: Setting Strategic Direction…………………………………………….…………….…191
Chapter Three: Formulation of Strategies……………………………………………………………..202
Chapter Four: External and Internal Environmental Analysis…………………………………….…..209
Chapter Five: Strategic Implementation……………………...…………………………………….…239
Chapter Six: Strategic Evaluation……………………………………………………………………..246
Urban Governance and Administration………………………………………...………………….253
Chapter One Introduction………………………………………...……………………………………254
Chapter Two: Causes and Consequences of Urbanization………………………………...………… 263
Chapter Three: Urban Management and Governance…………………………………………………278
Chapter Four: Urban Functions and Finance………………………………...……………………….288
Chapter Five: Urban Governance in Ethiopia and in selected LDC’s…………………………….…..291
Governance and Management of Public Enterprises……………..…………….…………………297
Chapter One: Introduction ……………………………………………………..……………………..298
Chapter Two: Meaning, Characteristics and Rationale……………………………………………….304
Chapter Three: Organization and Management Forms………………………………………………..313
Chapter Four: The Interface of Government and Public Enterprises………………………………….323
Chapter Five: The Structures and Roles of Boards………………………………..…………………..340
Chapter Six: Comparisons of Public and Private Enterprises …………………………..…………..345
Chapter Seven: Issues in the Performances of Public Enterprises…………………………………....348
Chapter Eight: Problems and Remedial Measures of Public Enterprises……………………………..356

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Course: Public Service Delivery and E-Governance
Course Code: PADM 3084
Course Credit: 2cr.hr

Introduction
Service to the public is often treated as the “black box” of public administration. Despite the lack of
attention, it is arguable that the most significant ongoing reform in public administration in recent years
is the transformation of service delivery. Largely uncelebrated, many public servants at all levels of
government have been fixated with improving the quality of public services. This has led to different
service improvement initiatives within individual agencies and governments. This course is designed to
focus attention on this ongoing service transformation movement and familiarize students with the
skills and techniques that are being used in progressive governments across the world to improve
service delivery.

The Public Service Provision course aims to deliver a range of learning experiences that that help
students to develop their knowledge, understanding and applied skills in the area of the delivery of
public services. The course focuses of three aspects of service delivery: an improvement of the
behavior of the service provider (who); the improvement of the services being delivered (what); and the
improvement of the service delivery system itself (how).

Course Objective
 Understand the rationale for service transformation;
 Have developed your own framework for assessing service shortfalls, designing solutions and
delivering them;
 Be familiar with the wide variety of techniques and alternative service delivery mechanisms
being used to reform service;
 Understand how to work through the challenges associated with developing and maintaining
service
 Evaluate the advantages and disadvantages of public service delivery reform
 Provide clear and persuasive written and oral advice to public policy clients on various aspects
of public sector service provision
Course Content
 Meaning and characteristics of services vs. products Rationale of studying of services
 What is public service?
 Service Delivery approaches
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  Measuring performance: satisfaction or outcomes
 Service quality dimensions
 Service Excellence and Its Importance
 Developing Customer-Oriented Service Culture
 Understanding Ourselves and the Customers
 Skills in Building Customer Satisfaction
 Customer Perceptions and expectations in Services
 Employees' Roles in Service Delivery
 Customers' Roles in Service Delivery
 Delivering Service through Electronic Channels
 E-government

CHAPTER ONE: INTRODUCTION

1.1 MEANING AND CHARACTERISTICS OF SERVICES
1.1. What is service?
In simple words, services are deeds, processes, and performances. But, the increasing interest in the
services sector has been accompanied by considerable disagreement and debate as to what constitutes a
service and whether service marketing is a distinctive subject area. In order to develop clarity on
service as a concept, it is desirable to look at the way various researchers and scholars have defined it
over the years.
One of the first to define services was the American Marketing Association which as early as in 1960
defined services as “activities, benefits, or satisfactions which are offered for sale, or provided in
connection with the sale of goods”. This definition took a very limited view of services as it proposed
that services are offered only in connection with the sale of goods.

The other definition which was proposed in 1963 by Regan suggested that “services represent either
intangible yielding satisfactions directly (transportation, housing etc.), or intangibles yielding
satisfactions jointly when purchased either with commodities or other services (credit, delivery, etc.)”.
For the first time services were considered as pure intangibles - capable of providing satisfaction to the
customer and can be marketed like tangible products.

Kotler and Bloom in 1984, defined service as, “any activity or benefit that one party can offer to
another that is essentially intangible and does not result in the ownership of anything. Its production
may or may not be tied to a physical product”.

We may conclude service as, “an activity or series of activities rather than things which has some
element of intangibility associated with it, which involves some interaction between the customer and

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the service provider, and does not result in a transfer of ownership. Customer has a vital role to play in
the production process as the services are provided in response to the problems of customers as
solution. The production of the service may or may not be closely associated with a physical product”.

1.2 NATURE OF SERVICES

It is utmost important to explore the distinctive features of services, because recognition of these
special characteristics will provide insights for enlightened and innovative management. One reason for
the poor quality of service levels across different service industries is that managers often tend to solve
service marketing problems with tools and techniques that are essentially meant for tangible products.
It happens because of inadequate understanding about the nature of services. As our knowledge of the
characteristics of services grows, so does our ability to deal with them from both an economic and
marketing perspective. Services have a number of unique characteristics that make them different from
products.

Some of most commonly accepted characteristics are as follows:

(i) Intangibility: The most basic and universally cited characteristic of services is intangibility, because
services are performances or actions rather than objects, they cannot be seen, felt, tasted, or touched in
the same manner that we can sense tangible goods. For example, when we buy a cake or soap, we can
see, feel, smell and use to check its effectiveness in cleaning. But, when we pay fees for a semester in
the university, we are paying for the benefits of deriving knowledge, skills and education which is
delivered to us by teachers. Teaching is an intangible service. When we travel by a plane, the benefit
which we are deriving is a service (transportation) but, it has some tangible aspects such as the
particular plane in which we fly (Boeing, Avro, Concorde, etc.) and the food and drink which are
served.
The broad definition of services implies that intangibility is a key determinant of whether an offering is
or is not a service. While this is true, it is also true that very few products are purely tangible or purely
intangible. Instead, services tend to be more intangible than manufactured products, and manufactured
products tend to be more tangible than services.
Intangibility presents several marketing challenges. Services cannot be inventoried, and therefore
fluctuations in demand are often difficult to manage. It cannot be patented legally, and new service
concepts can, therefore, easily be copied by competitors. It cannot be readily displayed or easily
communicated to customers, so quality may be difficult for consumers to assess. The actual costs of a
‘unit of service’ are hard to determine and the price/quality relationship is complex.

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(ii) Inseparability: In most cases a service cannot be separated from the person or firm providing it. A
service is provided by a person who possesses a particular skill (singer, doctor, etc.), by using
equipment to handle a tangible product (dry cleaning) or by allowing access to or use of a physical
infrastructure (hotel, train, etc.). Services are typically produced and consumed at the same time. The
relationship between production and consumption, therefore, dictates that production and marketing are
highly integrated processes. The telephone company produces telephone service while the telephone
user consumes it. The service provider and the client are often physically present when consumption
takes place.

Generally, most goods are produced first, then sold and consumed. On the other hand, services are
usually sold first and produced and consumed simultaneously.

(iii) Heterogeneity: Since services are performances, frequently produced by human beings, no two
services will be precisely alike. The human element is very much involved in providing and rendering
services and this makes standardization a very difficult task to achieve. The doctor who gives us
complete attention in one visit may behave a little differently in next visit. The new bank clerk who
encashes our cheques may not be as efficient as the previous one and we may have to spend more time
for the same activity. This is despite the fact that rules and procedures have been laid down to reduce
the role of the human element and ensure maximum efficiency. Airlines, banks, hotels, etc. have a large
number of standardized procedures. Human contact is minimal in the computerized reservation
systems, but when we go to the hotel there will be a person at the reception to hand over the key of the
reserved room. The way that person interacts with us will be an important factor in our overall
assessment of the service provided by the hotel. The rooms, the food, the facilities may be all perfect,
but it is the people interacting with us who make all the difference between a favourable and
unfavourable perception of the hotel. Heterogeneity also results because no two customers are precisely
alike; each will have unique demands or experience the service in a unique way. Thus, the
heterogeneity connected with services is largely the result of human interaction (between and among
employees and customers) and all of the vagaries that accompany it.

Levitt argues that owing to the industrialisation of services, their production can no longer be viewed as
being heterogeneous. Attempts have been made to improve productivity in the service sector by
introduction of technology. Uniformity can be achieved by substituting equipment and machinery for
labour. Hostage suggested that service firms could also reduce variability by training the service
providers in appropriate responses to each customer situation. They can also monitor customer

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satisfaction through suggestion and complaint system so that poor service can be detected and
corrected.
Services are heterogeneous across time, organization’s, and people and as a result, it is very difficult to
ensure consistent service quality. Quality actually depends on many factors that cannot be fully
controlled by the service supplier, such as the ability of the consumer to articulate his or her needs, the
ability and willingness of personnel to satisfy those needs, the presence (or absence) of other
customers, and the level of demand for the service. Because of these complicating factors, the service
manager cannot always know for sure that the service is being delivered in a manner consistent with
what was originally planned and promoted.

(iv). Perish ability: Perishability refers to the fact that services cannot be saved, stored, resold, or
returned. Since, a service is deeds, performances or acts whose production and consumption takes place
simultaneously, they tend to perish in the absence of consumption. Goods can be stored and sold at a
later date in the absence of a customer. Services, on the other hand, go waste if they are not consumed.
A seat on an airplane or in a restaurant, an hour of a professor’s time, or telephone line capacity not
used cannot be reclaimed and used or resold at a later time.

(v) No Transfer of Ownership: When we buy a product, we become its owner-be it a pen, book, shirt,
TV or Car. In the case of a service, we may pay for its use, but we never own it. By buying a ticket one
can see the evening film show in local cinema theatre; by paying wages one can hire the services of a
chauffeur who will drive his car; by paying the required charges we can have a marketing research firm
survey into the reasons for our product’s poor sales performance, etc. In case of a service, the payment
is not for purchase, but only for the use or access to or for hire of items or facilities; and transfer of
ownership does not take place.
The above cited characteristics of services make it unique and that is why services receive special
treatment from marketers. There is general agreement that inherent differences between goods and
services exist and that they result in unique, or at least different, management challenges for service
businesses and for manufacturers that offer services as a core offering. The difference between goods
and services can be best understood from the table 1.1.

1.3 Differences between physical goods and services

Goods Services
A thing An activity or process
Tangible Intangible

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Homogeneous Heterogeneous
Production and distribution are separated from Production, distribution and consumption are
consumption. simultaneous process.
Core value produced in factory Core value produced in buyer-seller interactions.
Customers do not participate in the production process. Customer may participate in the production
Can be kept in stock. Cannot be kept in stock.
Transfer of ownership. No transfer of ownership.
Source: Christian Gronross, Service management and Marketing, Massachusetts:
Lexington Books, 1990,
1.4What are public services?
Public service is a service which is provided by government to people living within its jurisdiction,
either directly (through the public sector) or by financing provision of services. The term is associated
with a social consensus (usually expressed through democratic elections) that certain services should be
available to all, regardless of income. Even where, public services are neither publicly provided nor
publicly financed, for social and political reasons they are usually subject to regulation going beyond
that applying to most economic sectors.

Public services are defined as those services which are mainly, or completely, funded by taxation. As
such, they can differ markedly from commercial private-sector services in a number of ways. These
differences need to be both acknowledged and discussed, because of their potential implications for the
development of delivery systems. Most typically, public services would include the following areas of
public management: central and local government, the health authorities, education, defense,
justice/home affairs and noncommercial semi state organizations.

In developing countries public services tend to be much less well developed. For example, water
services might only be available to the wealthy middle class. For political reasons the service is often
subsidized, which reduces the finance available for expansion to poorer communities. Now days, in most
of the countries in the world the term public services often include the following services:
 Electricity, Education, Health care, Public transportation, Environmental protection
Law enforcement, Postal services, Public broadcasting, Military, Public library
Water services, Waste management, Telecommunication
1.5 How do public and private services differ?

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Public services can differ significantly from commercial private sector services in a number of
ways.

 public services do not normally operate for financial profit or require immediate payment for
goods or services prior to delivery
 Public services are often distinguished by an absolute, or at least comparative, lack of
competition in the normal market sense of seeking to entice customers away from their
competitors or rival service providers.
 In the public services, different guiding principles, such as equitable treatment and the
allocation of resources according to need, pervade the processes of decision making,
management and provision.
 The principles of fairness and equity are most important when we come to examine the concept
of quality in public administration.
 Fairness and equity are not normally indicative of the private sector. Within a commercial,
market led context, private sector companies would not normally be obliged, because of their
primary obligations to provide financial returns to their shareholders, to maintain nonviable
services to geographically or financially disadvantaged groups.
 Public and private bodies also differ significantly in their service relationships with external
customers. Within the market oriented private sector, the relationship between service provider
and customer is normally direct and comparatively straightforward
 The comparative freedom of consumers to choose between competing service providers, to
select on the basis of price and/or quality, as well as to express satisfaction (or otherwise) with
the service provided, means that customer needs are paramount in services provided by the
private sector.
Figure 1: Customer Relationship: Private Sector

With regard to the provision of public services, the provider customer relationship is often more
complex and indirect (see Figure 2). Payment is not normally made directly for the service received
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and so customer control is weakened. Customer choice is very limited when provision is monopolistic.
From the providers' viewpoint, ability to pay is often not a key determinant of demand and accordingly
market disciplines of price control frequently do not apply. Indeed, the providers' ability to supply is
likely to be determined by budgetary funding outside its direct control.
Customer Relationship: Public Service

Funding which comes directly or indirectly from the state is often fixed by annual allocation, through
the Exchequer budgetary arrangements. Consequently, within the public service, mismatches in
demand and supply can find expression in longer waiting lists or the rationing of services.
1.6 Rational in Studying Services
 Services dominate economy in most nations

 Understanding services offers your personal competitive advantages

 Importance of service sector in economy is growing rapidly:

 Services account for more than 60 percent of GDP worldwide

 Almost all economies have a substantial service sector
 Most new employment is provided by services
 Strongest growth area for marketing
Most new jobs are generated by services

 Fastest growth expected in knowledge-based industries

 Significant training and educational qualifications required, but employees will be more highly
compensated
 Will service jobs lost to lower-cost countries? Yes, some service jobs
 can be exported

Chapter Two
Service Delivery approaches

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2.1 Service delivery
Service is any activity that is made to satisfy the needs and wants of customers. As it is stated by
WMCC, service is defined as the activity that has been done to satisfy the needs and wants of
customers on the bases of knowledge, capacity and/or profession of employees (WMCC; 2016: 35).
Afande stated that customer service is defined as activities and programs provided by the seller to the
buyer to make the relationship a satisfying one. It is an activity or benefit that one party offers to
another, which is, essentially, intangible and does not result in the ownership of anything. Its
production may or may not be tied to a physical item. Variability of services is dependent on who
provides them and when they are provided. Afande (2015: 50). WMCC also indicated that Service is a
goal oriented process that is done to satisfy customers need; and it is a process that is delivered by
deliverers to add economic value to customers. Therefore, we can say that service is an activity that is
made by service providers or sellers in order to satisfy the needs and wants of customers, its goal is
satisfying the needs of the customers.
Service delivery is the process providing the service to customers. Service delivery is the
systematic arrangement of activities in service giving institutions with the aim of fulfilling the needs
and expectations of service users and other stakeholders with the optimum use of resources, (Dereje;
2017). Generally, service delivery is a systematic and sequential follow of a service from service
provider to customers and it can be achieved by the relationship between service providers and
customers.
The service delivery approach identifies and describes resources, processes, and interfaces that are
essential to successful service delivery over time.
A service delivery approach addresses how the following activities should be carried out:

 Delivering services in accordance with an established schedule

 Preparing and updating the schedule for daily operations
 Making and transferring assignments for performing service delivery operations
 Communicating appropriate information to operations staff, management, customers, and end
users
 Using methods and tools for performing service delivery operations
 Assigning and transferring responsibility for resolving requests
 Assigning and transferring responsibility for monitoring the status of requests and for tracking
the progress of actions related to requests
 Enabling customers and end users to submit requests

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  Categorizing requests
 Using methods and tools for request management
 Collecting, distributing, and analyzing performance data

2.2 Measuring the productivity in the public sector

Productivity is ultimately related with money, and money does much to explain the social welfare. The
appraisal of the governmental performance is necessary to explain the rationale use of public resources
within a country, in which the fiscal restrictions and the tough economic conditions endanger the
sustainability of the public programs, consequently hurting the outputs (public services) received by
citizens.
In the OECD countries the public services productivity analysis has been developed by a branch of the
Performance Budgeting program that consists in providing information on whether the government is
doing effectively and efficiently the job required by citizens. Government has a noticeable role within
the social welfare as it is the main provider of some services that people are unable to access by other
means. Some pure public goods such as defense and justice can't be provided by the private sector, as it
may reproduce several market failures that may lead to a decrease in the society wellbeing level.

So, as the market cannot produce some services it’s mandatory that the government provide metrics
that can be used to measure the performance of the public services. In a general framework, such
performance has been undertaken by several countries and organizations. For instance, the OECD has a
Performance Budgeting program that consists of the building of measures related with the equity,
efficiency and effectiveness of the public spending.

2.3 The Performance Measurement framework and the Service Process concept
The service process is a key element of the Performance Information analysis. In terms of public
policy, the public services are supported by the public program objectives, and are made up of inputs,
processes and outputs, as shown in Fig. 1. Generally speaking, inputs are related to the resources
needed for carrying out an action. For instance, this coincides with the factors of an economy, land,
labour and capital. However, in some services, knowledge will be itself a factor as it allows some
technology-based services to be executed. The service process is the economic activity carried out to
transform inputs into outputs. The process refers to the technology in which a service is delivered or
generated. As the services are consumed at the same time they are produced, outputs are highly related
with consumption. The previous characteristic refers to a services principle known as the inseparability
of service's production and consumption process
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 Additionally, as services can’t be stored, since services are intangible (pure services are not expected to
be stored, seen or even held), the output will emerge at the same time as the service process is carried
out, with no chance that any of these services could be stored for later consumption.
Along with external influences as the economy and social environmental, just after the service has been
consumed some outcomes will become visible. Generally speaking, outcomes are related with a public
program objective fulfillment through which the social welfare is susceptible to improve.

Public program objectives

Out comes

Input Process Output

Fig. 1: The Service Process

The service process provides the general framework to analyse the public function production, and it’s
a simple tool to evaluate the performance of the public services. Seen within a wider spectrum,
outcomes and inputs will be used to measure the effectiveness of the service process, while the input-
output relationship will be used to estimate the technical efficiency through a productivity-based
calculation.
In other words, this last approach refers to the way in which government transforms inputs into outputs.
In a way that measures the government technology used to generate services.

2.4 Measurement of effectiveness, efficiency and quality in public sector services

Efficiency measurement in the public sector
Measuring an organization’s efficiency is about the relationship between the outputs it produces and
the inputs it uses. An efficient organisation would be one that produces the maximum possible outputs
given its inputs, or one that produces a certain level of output with the minimum amount of inputs. The
process of trying to measure an organisation’s efficiency can therefore be broken down into three steps.
First, its inputs and outputs need to be defined and measured. Secondly, it is necessary to define what
is feasible in other words, what outputs could be achieved for any given set of inputs. Finally, the
organisation’s actual inputs and outputs are compared with the set of feasible inputs and outputs. At
this stage, one of two questions can be asked: ‘Is it feasible to achieve superior outputs, given the set of

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inputs being used?’ or ‘Is it feasible to use less inputs to achieve the same outputs?’. The way the first
two steps are carried out will typically be highly influential on the outcome of the third.

Definition and measurement of outputs, inputs and environmental factors

Efficiency measurement is relatively straightforward for an organization producing one type of output
with one type of input. But most organisations public and private produce a wide range of outputs and
use numerous inputs. In the case of a private firm selling its output in a competitive market, different
outputs can be aggregated by using the observed prices. But public sector organisations usually
produce goods that are provided either free at the point of use or at a price that is not determined by
market forces.

This makes it very difficult to define the aggregate output of a public service provider such as a school,
hospital or police force. Inputs, such as hospital beds, are usually easier to deal with, as prices are more
often observed. Another difficulty arises because some inputs are not under the control of an
organisation. These can include environmental variables such as the characteristics of individuals using
the service for example, their underlying health – that may have an impact on measured efficiency. It is
therefore necessary to find a way to take account of their effects when comparing organisations.
Measuring Service Effectiveness
The degrees to which objectives are achieved and the extent to which targeted problems are solved. In
contrast to efficiency, effectiveness is determined without reference to costs and, whereas
efficiency means "doing the thing right, "effectiveness means "doing the right thing.
In general, effectiveness the extent to which stated objectives are met — the policy achieves what it
intended to achieve. The goal can be as broad or as narrow as is deemed appropriate — a continuum
exists, ranging from achieving very specific outputs (such as ‘increasing the number of solar heating
panels installed in new houses’) to very general outcomes (such as ‘improving the environment’ or
even ‘improving community living standards or wellbeing’).

Measuring Service Quality

Service quality is a concept that has aroused considerable interest and debate in the research literature
because of the difficulties in both defining it and measuring it with no overall consensus emerging on
either. There are a number of different definitions as to what is meant by service quality. One that is
commonly used defines service quality as the extent to which a service meets customers’ needs or
expectations. Service quality can thus be defined as the difference between customer expectations of

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service and perceived service. If expectations are greater than performance, then perceived quality is
less than satisfactory and hence customer dissatisfaction occurs.
Unlike goods quality, which can be measured objectively by such indicators as durability and number
of defects, the service quality is an abstract and elusive construct because of three features unique to
services. First, services, as opposed to goods, are intangible; they are performances and experiences
rather than objects. While precise manufacturing specifications can be set concerning uniform quality
standards for objects like vehicles and shovels, the same cannot be said for services like tactical and
strategic analytical support since the criteria that are set for evaluating performance of service delivery
by the customers is likely complex and difficult to capture precisely. Second, services, as opposed to
goods, are heterogeneous; their performance often varies from producer to producer, from customer to
customer, and from day to day. In this case, the quality of interactions that the customers have with
service providers cannot be evaluated under a set of uniform standards.
Finally, services, as opposed to goods, are inseparable in terms of their production and consumption.
Quality in services often occurs during service delivery, usually in an interaction between the customer
and the provider, rather than being engineered at the manufacturing plant and delivered intact to the
customer. Service providers do not have the luxury of producing an object outside of the observation of
their customers before it is actually consumed. Rather, the customers are able to observe the production
of the service while they receive it.
Therefore, due to these three features, objective measurement is impossible for measuring service
quality. In the absence of objective measures an appropriate approach for assessing the quality of the
firm’s service is to measure the customer’s perceptions of quality. However, there is no quantitative
yardstick is available for gauging these perceptions.
SERVQUAL method
SERVQUAL is a multi-dimensional research instrument, designed to capture consumer expectations
and perceptions of a service along the five dimensions that are believed to represent service quality.
 Reliability; the ability to perform the promised service dependably and accurately
 Assurance; the knowledge and courtesy of employees and their ability to inspire trust and
confidence. It includes competence, courtesy, credibility and security.
 Tangibles; the appearance of physical facilities, equipment, personnel and communication
materials
 Empathy; the provision of caring, individualized attention to customers. It includes access,
communication, understanding the customer.
 Responsiveness; the willingness to help customers and to provide prompt services
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SERVQUAL as service quality measurement model was developed by a group of American authors,
Parasuraman, Valarie Zeithaml, and Len Berry, in 1985. It highlights the main components of high
quality service. The authors originally identified ten elements/dimensions of service quality including,
tangibles, competence, courtesy, credibility, security, access, communication, knowing customers,
reliability, and responsiveness. But due to the overlapping nature of these dimensions, these had refined
to five elements by the early 1990. These are identified as reliability, assurance, tangibles, empathy and
responsiveness-that create the acronym RATER. Therefore, the majority of the work to date has
attempted to use this methodology in an effort to measure service quality.
SERVQUAL as the most often used approach for measuring service quality has been to compare
customers' expectations before a service encounter and their perceptions of the actual service delivered.
The SERVQUAL instrument has been the predominant method used to measure consumers’
perceptions of service quality. These five generic dimensions are described as follows:
In the SERVQUAL instrument, 22 statements (questionnaire) measure the performance across these
five dimensions, using a seven or five point likert scale measuring both customer expectations and
perceptions. Therefore, by distributing questionnaires, that measures both the customer expectations of
service quality in terms of these five dimensions, and their perceptions of the service they receive, it is
possible to measure the service quality. When customer expectations are greater than their perceptions
of received delivery, service quality is deemed low. It is important to note that without adequate
information on both the quality of services expected and perceptions of services received then feedback
from customer surveys can be highly misleading from both a policy and an operational perspective.

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Citizens Report Card (CRC)
The CRC tool involves collecting and using feedback on public services to bring about improvements
in service delivery. The CRC is a simple but powerful tool to provide public agencies with systematic
feedback from users of public services. It can provide citizens and governments with qualitative and
quantitative information on current standards and gaps in service delivery at national, regional or local
level or be used to compare regions and districts, for example urban versus rural, etc. It can also
provide information on gaps in services in terms of the general population or various groups of citizens,
for example migrant workers, ethnic minorities, women or children, and opportunities to seek
comparisons within these groups, for example poor versus non-poor, etc. By collecting feedback on the
quality and adequacy of public services from actual users, CRCs provide good evidence and instigate a
proactive agenda for communities, civil society organizations (CSOs) or local governments to engage
in dialogue with service providers to improve the delivery of public services. It also measures levels of
public awareness on citizens’ rights and responsibilities. The results can be used by governments to
take into account social, political and ‘soft-side’ considerations when planning and allocating budgets,
thus making the process more transparent and accountable. They can also be used by citizens to air
their views, raise awareness of issues regarding service provision and hold governments to account.

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CRCs can also provide an overall satisfaction score based on the totality of critical service-related
parameters as well as reasons for (lack of) satisfaction. CRCs can look at a variety of services and
provide a comparative picture of their quality. They can also focus on a specific service and compare
this across locations. CRCs can also enable a comparison of perceptions of different demographic
groups to identify segments where service provision is significantly weak; through disaggregating the
data (e.g. by gender, age, ethnicity, income level etc.), the findings can demonstrate if services favor
some groups and leave others out.

The success of CRCs depends in large part on the ability to negotiate change, the degree of
participation and the presence (or absence) of a political champion. It also depends on strong media
support to disseminate findings (and to bring pressure to bear on service providers). Much effort and
time is required to stimulate action both from public officials and from citizens.
The amount of time it takes to conduct a CRC depends on its size and scale. The larger the population
sample and the more questions you ask, the longer it will take both to collect and to analyze the data. In
addition, the amount of time it takes for information to be disseminated and acted on depends in large
part on the success of advocacy strategies employed and the willingness and/or ability of government
agencies to respond.

It is necessary to have clear and detailed terms of reference, fieldwork plans and a full description of
the research protocol, including all tools and required documentation. It is also imperative to document
the process both for replication purposes and to ensure it is implemented rigorously. In the following
section some of specific tools were discussed.
Customer Feedback Surveys
Surveying customers can be a very useful tool in governing. It is a major way to obtain credible,
reasonably accurate feedback from customers of government services. Surveys need to be undertaken
in a reasonably sound, professional manner. Customer surveys can provide various types of
information for outcome measurement, including the following:
 Ratings from citizens about their overall satisfaction with individual public services (thus
providing data for outcome indicators as the percentage of surveyed customers who rated a
particular service as “excellent” or “good” and “fair” or “poor”).
 Ratings from customers of the specific characteristics of those services, such as their timeliness
and helpfulness (thus providing data for outcome indicators such as the percentage of surveyed

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 customers who rated a particular service characteristic, such as timeliness, as “excellent” or
“good” and “fair” or “poor”)
 Factual information about citizens’ conditions, attitudes, and behavior, such as citizens’ health,
earnings, use of public services (such as public transit), and extent of crime victimization, and
the extent of extra payments (bribes) needed to obtain services (thus providing data for outcome
indicators such as the percentage of citizens who have been a crime victim at least once during
the past six months).
 Reasons why citizens had problems with specific services (asked of respondents who gave
negative responses on questions about their experiences with particular services), thus providing
useful information about problems that need attention.
 Suggestions for improving services, which may provide specific guidance to public managers
 Demographic information on the population surveyed (thus helping identify which population
groups have had particular problems with services so that attention can be directed toward
them).
Therefore, citizen surveys, if properly done, provide reasonably representative feedback. This is
unlike other sources of citizen feedback, such as open meetings, group discussions, and tabulations of
complaints received by an agency (because only some people attend such meetings, and only some
people are willing or know how to complain).
For some services an agency would survey samples of all households (for services that most
households can be expected to have first-hand experience with). For services that serve only small
proportions of the population, only those who have been customers of the service need to be surveyed
(such as families that have received maternal health care, or farm families that have received technical
assistance on farming practices). Surveys can be done of individuals, households, or businesses.
Businesses are likely to be customers for many public services.
A principal use of surveys of customers is to obtain regular feedback in order to track trends and to
assess the extent of improvement after the government has changed its service delivery approach.

Chapter Three

3.1 Services Excellence and Its Important

Service is a give-and-take relationship wherein there is no exchange of goods.

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Some benefits are transferred from one stakeholder to the other. There are many types and forms of
services. Also, several companies offer various kinds of services to consumers.

In any business, customer satisfaction is of the most considerable importance. In the case of the
companies providing services instead of products, its importance increases manifolds. It is because
service is all that the company relies on.

Whether the reputation of the company or the revenue being generated, everything depends on the
service and the quality of the service. This quality of service is service excellence.

It’s no secret that how well you serve customers will define your company’s long term success. In fact,
great customer service leads to better customer loyalty, higher revenue, and lower costs. But if you
have to focus on the customer and become a service-oriented organization, it’s not merely enough to
attain a passable grade. You have to strive for service excellence to reap its benefits.

When you go beyond the expectations of your customers and offer an industry-leading experience that
truly bowls over them – then such activity is understood as Service Excellence.

If you want to have a loyal customer base who buys again-and-again from you or you want to increase
the repeat footfalls of your store visitors, Service Excellence will be the key. However, the process of
accomplishing this excellence doesn’t occur by some coincidence.

What is Service Excellence?

Service is for the people. It is meant to satisfy the demands of the customer.

As the term rightly suggests, service excellence means excellent treatment and excellent service quality
to your customers.

Service excellence does not necessarily mean increasing the expectations of the customer and then
struggling to meet them. It merely means delivering what you have promised. Before providing any
service, the problems, requirements, and expectations of the customer are considered.

The act of meeting these expectations and solving the challenges of the customer effectively is service
excellence.

Service excellence is the act of going beyond customer expectations and delivering an industry-leading
experience that really wows your clients. Most organizations provide good customer service, but
customers keep coming back to the ones that go beyond to provide service excellence. It’s the reason
Zappos and Amazon are leaders in their respective domains and are hailed for their commitment to
serving their customers.

3.1.1Why is Service Excellence Important?

Customer service is where your brand comes to life. While you can design a really informative great
looking website and have all your internal processes running smoothly, it’s your frontline teams and

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their interaction with customers that make the biggest impression. So it’s important to remember how
big a role customer service plays in defining that impression.

Another thing to keep in mind is that improving the sales of a product or service is not possible without
continuously striving to redefine the standards of service excellence. 69% of customers stop doing
business with a company due to one bad experience. People sign up for a product or service but stay
for the customer experience.

3.12 Importance of Services Excellence

Wherever a service is concerned, service excellence comes into play. It is of great value, and the
reasons why it is so are listed below-
1. Attract more customers and excellence
More the number of customers, who avail of your service, more will be your profits. So, it is beneficial
to have more customers. Service excellence helps you do so. It enables you to create a good impact on
your current customers. The customers who are happy and satisfied with your service spread the word.
2.Less negative customer feedback
The success of the service provided depends on the input the consumers give. Positive feedback adds a
feather to the cap, whereas negative feedback drags the service provider’s position down. Hence, the
service should be excellent to minimize negative feedback.
3. Lesser clashes with the customers
In the case of bad service, the customers get agitated and file complaints against the same. It can cause
substantial losses to the company. However, if you consistently provide excellent service, there are far
lesser chances of getting into clashes with the customers.
4. Profitability
Apart from the benefits of having a good reputation and positive feedback, the tangible benefit of
service excellence is the profit the company gains.

For a service that is assured of excellent quality, consumers are ready to pay higher prices. Also, the
customer’s network continues increasing, which helps in getting more revenue and, in turn, increases
profits.
5. Branding
Branding is the process of establishing a brand in the market. We all know about companies that have
been providing the same services for over decades but have still stood firm because of service
excellence. It helps us understand that to get name and fame; your services have to be of excellent
quality.
3.1.3 Benefits of Achieving Service Excellence
Pursuing excellence in customer service has benefits beyond just customer satisfaction. Here are two
benefits of centering your strategy around service excellence:
#1 Service excellence can become a key differentiator you can leverage to get ahead of the
competition. If you focus your efforts on being great at customer service you’ll convert customers into
loyal advocates.
#2 Great customer service can lead to viral word of mouth as satisfied customers share their
experiences with your brand. It’s a great way to drum up both awareness and new business.

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3.14 Qualities that help you achieve Services Excellence and Success
Service excellence is of high quality. To achieve this, you need to have specific values and abilities.
Given below are some of them.

1. Analysis of the situation

Every situation is different, and there is something to learn from every situation. The one who
understands this can succeed in achieving service excellence. There needs to be a proper analysis of
any given situation from different perspectives.

2. Awareness of all the concerned factors

In any service-providing company, there are various stakeholders. All of them observe, evaluate, and
analyze them in different ways. But, if you are aware of all these perspectives and consider all these
factors while designing service, you will emerge excellently.

3. Empathy towards the consumers

Empathy understands what the other person is feeling and what he/she is going through. In this case, if
you try and empathize with the consumers, they will get friendlier with you and become easy to handle.
It will also give you a better insight into their problems and help you resolve them in a better way.

4. Questioning but not doubting

Indeed, doubting will not lead you anywhere – but, interviewing with a tinge of curiosity helps. No
service is perfect, and it is essential to admit that even the service you are providing has scope for
improvement. This will make you ask questions, and the eagerness to continually improve will make
your service better.

5. Maintaining positive relationships

Providing a service is not a job done by only one person. There is a team of people working on it, and
then, there is a network of stakeholders, including clients. If you succeed in maintaining healthy and
positive relationships in these networks, your service will get excellent.

6. Responsible attitude
If you hold just one person responsible for service excellence, you will never achieve it. However, if
each team member has a sense of responsibility and works wholeheartedly towards offering excellent
service, this attitude will go a long way.

7. Adaptability
These days, the markets are continually changing. The requirements and expectations of consumers are
changing at a faster pace. Hence, even the service needs to evolve. You should design a service that
caters to the client’s expectations and adapts to newer ways of working. That will help you keep with
the times.

8. Bouncing back
Every business and every service faces problems irrespective of how good they are. But, instead of
getting bogged down by these setbacks, the one who learns and comes out with a better version of the

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services emerges excellent. Therefore, dealing with complaints and negative feedbacks in a good stride
helps achieve service excellence.

Now, after knowing different qualities that can help a business in ensuring service excellence, let us
have a look upon the critical steps of ensuring service excellence that plays a pivotal role in making
best-performing Customer Service Business Model-

3.1.5 Steps of ensuring Excellence in Service

1. Having Vision and Mission Statements

Having a vision and mission that is known, possessed, and comprised of each employee is an integral
part of service excellence. Companies that offer excellent customer service have vision statements that
explain what they seek to be in the future and mission statements tell about their motivations and things
they stand for.
2. Having clear Business Objectives
Successful businesses with a good culture of service excellence have clear, straightforward, and
quantifiable business objectives that everyone in the organization knows. Such companies not only
have objectives related to growth and profitability but also have service-oriented objectives.
3. Having Service Standards
Having service standards is essential for explaining to the employees precisely about the activities,
practices, and behavioral patterns that are anticipated from them in ensuring excellence in day-to-day
performances.
4. Including Intervention and Learning Strategy
For ensuring service excellence, businesses need to ensure that their service philosophy (that is the
vision, business objectives, mission, and service standards) are interlaced into each part of the
hierarchical structure of the organization.

5. Ensuring Organizational Alignment

Top-rated companies that ensure service excellence utilize each communication channel or resource to
continually channelize their service philosophy to every level of the organization. Different mediums
that are used as communication resources in this are meetings, posters, wallet cards, bulletin boards,
newsletters, etc.

6. Measuring Service Excellence

Finally, you need to measure performances and ensure leadership accountability to track service
excellence. For this, you can use basic scoreboards that employees can use for tracking the company‘s
success in ensuring excellence.

Final Thought on Service! Service excellence is a wonderful quality by which the service provider can
achieve fame, success, and financial profits. There are some qualities and abilities that one needs to
master to be served excellent. Incorporating a culture of service excellence in your organization is a
journey, a continuous process, and not the final destination. Indeed, there is no alternate way or
convenient solution for this.

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With the six steps mentioned above, you will be able to elevate customer experience from average to
extraordinary that will ultimately foster service excellence and a loyal customer base.

3.2 Developing customer –Oriented Services Culture

The ultimate customer experience does not start with your customer purchasing or even interacting
with your business.

It starts with the culture you foster and indoctrinate employees into. When you develop a customer-
centric culture in your business, excellence naturally bolsters the experiences that your customers have
when doing business with you

Service Oriented Culture Starts with Happy Employees .Before you can satisfy your customers, you
must first satisfy your employees.

11 Tips for Creating a Culture Dedicated to Customer Service

Ready to cultivate a workplace culture where everyone is dedicated and excited about the consumer
experience?

1. Hire People with a Customer Service Mindset

The leaders you chose to chart the course of your company’s culture are critical. Leaders not only set
the stage for culture, but they also act as ongoing role models for all employees they interact with. But
the right leadership is only one half of the answer. You also want to make sure that you are hiring the
right employees. These individuals will be interacting with your customers on a regular, if not daily,
basis so you want to make sure that they can empathize.

2. Craft a Customer Service Vision Tailored to Your Company

If you have a well-defined vision for what you want customer service to look like at your company,
you’re more likely to make that vision come to life. Consider creating a customer service statement or
mantra. Boiling down your vision to a simple, straightforward, and memorable phrase will make it easy
for everyone to remember your vision. These mantras can also work to excite employees and influence
the way they interact with customers.

3. Align Your Team With Your Vision

Communication is critical for putting in place a company culture that prioritizes customer
service. Once you’ve established your vision statement, it is imperative that you communicate that
vision to all members of your company. With this kind of top-down communication, you can make
sure your team is aligned with your vision and fully understand it. Consider holding brief stand up
meetings with your employees before beginning each workday. This allows you to discuss the day’s
agenda, job, individual tasks, goals, and any roadblocks before dispatching your team to start work.

4. Educate Employees on the Customer Service Basics

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New employees might have the right attitude and personality for your company culture, but they may
not have all of the skills necessary for delivering excellent customer service right off the bat.

Training new employees (or all employees) on the basics of exceptional customer service can help
employees become invested in the company’s culture and perform essential job functions better.
Outline a customer service onboarding program for all employees. Highlight what customer service
means and the ways in which your employees can deliver top-notch service routinely, with multi-modal
learning mechanisms like role-playing, videos, presentations, and articles. Establishing this resource
early on will allow you to train employees consistently without too much hassle.

5. Provide Ongoing Training

Education is an ongoing process. While training employees on the fundamentals of customer service is
imperative, continuing to improve their emotional intelligence by exposing them to thought leaders and
networking at conferences, for example, can have a lasting impact on performance. Ongoing education
can also take the form of mentorship programs. Consider establishing a program in which more
seasoned service team members mentor new team members to help them grow and stay motivated.

6. Lead by Example

As we mentioned above, leadership is a crucial element of any customer-service oriented culture.

Culture starts at the top and trickles down. Company leaders must be excellent examples of customer
service so that the people below them can clearly see how to conduct themselves. Leaders also act as
role models for other employees. Getting employees to emulate excellent customer service starts with
emulating that mentality yourself.

7. Create Customer Service Rituals

Rituals are a great way to reiterate, reinforce, and advocate for custom-service centric culture. By
embedding routine activities devoted to customer service, your employees will be immersed in the
customer-service mindset. Rituals take many shapes and forms. Use the above as a general guide to
find what feels right for your team and your company.

8. Empower Employees to Experiment

You want to empower your employees to deliver outstanding service to each and every customer they
interact with. Whether this means changing the metric that measures the success of employees. Tony
Hsieh, co-founder and CEO of Zappos, realized that call centers were traditionally optimized for
number of calls per hour, but this goes against the goal of a call center – quality customer service.
Hsieh changed this metric to measure quality time spent on the phone.

This trust can not only lead to enhanced employee satisfaction, but it can also lead to remarkable
customer service. When your employees feel that they have the power to provide for their customers, it
may be easier for them to meet and exceed your customer service expectations. Empowering seasoned
employees to experiment with customer-service tactics can also unearth a trove of new and successful
customer-service strategies you may have never considered.

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9. Analyze Your Wins and Losses

while it’s important to empower your employees to deliver and experiment, it’s also important to
regularly analyze your wins and losses. Regularly measuring your customer service performance can
help you identify the strengths and weaknesses of your customer service tactics. Overall customer
satisfaction and customer retention are two great metrics to focus on when assessing the efficacy of
your customer service tactics.

Consider holding bi-monthly or monthly performance meetings devoted to analyzing customer service
success. This will give you an accurate understanding of what’s working versus what isn’t and will
give employees the chance to share their experimentations.

10. Recognize and Reward Employees

After you’ve identified customer service wins from regular analysis, it’s important to acknowledge
those wins and the employees behind them.

Personal recognition from management and peers is critical in making employees feel valued,
acknowledged and appreciated for all of the hard work they put into delivering outstanding customer
service. Recognition and reward can take whatever shape best suits your company. It can be either
private or public, in person or in writing, or potentially accompanied by a financial reward. Consider
instituting “Employee of the Month” as a way to consistently acknowledge employees who are going
above and beyond. Gifts are also another effective way to reward employees’ hard work. This form of
recognition can incentivize employees to continue performing well and can motivate their peers to
improve their own customer service skills.

Moreover, acknowledgement can significantly inspire employees. This recognition can lead to
enhanced confidence in their ability to perform their job because you’ve taken the time to let them
know they are doing a good job.

It can also lead to improved employee retention. When employees are consistently recognized for their
good work, they may feel more invested in the company and happier with their position or career
track.

11. Celebrate Your Customers

The celebration doesn’t stop with your employees. Consider celebrating your best customers!
Recognizing exceptional customers can be an effective method for gaining critical feedback.

For example, you could send out an email survey to all of your top-tier customers, letting them know
they’ve been selected for an exclusive feedback survey based on their special experience with your
company. With this set up, you can ask customers to complete the feedback survey in exchange for a
gift card or other reward of your choosing.

You can also celebrate top customers internally to get your employees excited about the consumers
they’re serving. Try sending out monthly email blasts that highlight top customers or use one of your
regular meetings as an opportunity to showcase these customers in person to your team.
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3.3 Understanding Ourselves and the Customers

Understanding customers is the key to giving them good service. To give good customer care you must
deliver what you promise. But great customer care involves getting to know your customers so well
that you can anticipate their needs and exceed their expectations.

To understand your customers well, you need to be attentive to them whenever you are in contact with
them. The potential rewards are great: you can increase customer loyalty and bring in new business
through positive word-of-mouth recommendation.

There are three main ways to understand your customers better. One is to put yourself in their shoes
and try and look at your business from their point of view. The second way is to collect and analyse
data using a Customer Relationship Management (CRM) system in order to shed light on their buying
behaviour. The third way is simply to ask them what they think.

Put yourself in your customers' shoes

Understanding your customers requires you to put yourself in their shoes and take a hard look at the
points at which your customers have contact with your business. These include your website, phone
calls and emails as well as meetings, visits and deliveries. Do your premises look scruffy, is your
receptionist unfriendly, do emails go unanswered or is it hard to navigate your website? All of these
things can make a customer feel disappointed.

The most common customer complaint is being kept waiting. If you're slow to return calls or fulfil
orders, then you're in danger of losing customers. Above all, customers want you to deliver what you
have promised and surpass their expectations.

As a small business, you can offer a personal service. If you remember a customer's name and recall
your last conversation with them, you will have brightened up their day. They will also tell their friends
what a great service you provide.

Understanding your customers and improving your service must be a priority throughout your business.
Everyone from the front desk to the delivery staff should focus on exceeding customer expectations.

Using data to understand your customers

Your database or customer relationship management system (CRM) holds valuable information about
your customers that will help you understand their needs.

Investigate the data you hold on your customers, it can tell you a lot. Look for patterns so you can see
when your customers typically make orders. You can also use the data to analyse your performance.
Check how quickly you're responding to orders or delivering goods.

CRM systems are more sophisticated than simple mailing lists. Because they hold information about
customer behaviour and preferences they can improve customer satisfaction and retention. They can
help you to identify customer needs more effectively, allowing you to up-sell and cross-sell, increasing
profitability.

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Ask your customers what they think

Conduct a customer satisfaction survey and you will make your customers feel valued. You will also
gain valuable insights. But don't ask for feedback if you're not prepared to make changes. When you do
make improvements, tell your customers what you have done as a result of their feedback.

Well-compiled customer surveys can tell you things you may not know, including human factors such
as staff behaviour. Not everyone complains when they are dissatisfied. Instead, they tell their friends
about their bad experience and take their business elsewhere. Unless you proactively consult your
customers, you may never discover where you are going wrong.

As well as asking for feedback, set up a customer contact programme to ensure you keep in touch with
your clients. A good customer contact strategy will allow you to listen to your customers and tell them
more about what you offer.

3.4 Skills in Building Customer Satisfaction

Customer service skills are crucial to the success of your company. A positive customer experience can
differentiate a brand from its competitors even more than pricing.

Businesses that are conscious of that advantage often go to great lengths to improve their customer
experience. They widen their support channels, personalize their offerings, and make more customer-
centric decisions. Because they know that:

 70% of consumers say they have already made a choice to support a company that delivers
great customer service.
 68% of customers believe the key to great customer service is a polite customer service
representative.
 Service insight and knowledge is also key to a good experience according to 62% of
consumers.
 Attracting a new customer is 6-7 times more expensive than retaining a current one.

Customer Service Skills to Increase Customer Satisfaction

Let's explore the customer service skills that are guaranteed to increase customer satisfaction.
 Empathy
Your staff need to be able to empathize with your customers. Seeing things from the customer
perspective helps them understand their specific concerns. Any employee engaged in face-to-face,
phone or other forms of one-to-one customer communications must demonstrate a genuine, caring and
concerned attitude. Empathy means interacting with customers in a very human way. Almost like
treating customers as family members and never being dismissive or uncaring.

 Knowledge of the Product

In order to advise customers properly, you’ll need a thorough understanding of the product they use
every day. If you aren’t a master of the product or service you provide, you won’t be able to grasp the
issues your customers run into. There are some key ways to ensure you stay up-to-date with your
product/ service:

 Initial and ongoing training

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  Continue to actively use the product or service while doing your job
 Role-playing
 Provide easy to read and accessible resources
 Active Listening and/or Reading: Less talk. More listening.
One of the great paradoxes of communication is that if you want to be known as a good
conversationalist, you have to stop talking and let the other person say what’s on their mind. In the
best selling self-development book, The 7 Habits of Highly Effective People, author Steven Covey
states ‘Most people do not listen with the intent to understand; they listen with the intent to reply.’

A Customer Service Representative should ask open-ended questions instead of yes or no questions.
This helps to reveal complete thoughts, so that the Rep thoroughly understands the issue. A Rep
should also seek to clarify all points with appropriately timed verbal responses, by asking questions as
needed and also summarizing what the customer has said back to them. This is necessary because
sometimes customers’ may gloss over important points, which can be key to solving issues.
Remember to avoid distractions as this type of activity will increase the probability of error.
Barriers to effective listening include:
 Distractions (your phone, noise, another conversation)
 Mental preoccupation and drifting off in another direction
 The topic is something you dislike
 The tendency to rebut
 Being put off by the way the customer is communicating
Corresponding Solutions:
 Manage distractions so that you can focus. Put away your personal phone!
 Develop a curiosity of what the other person is saying by mental and physical energy to juggle
your priorities
 Don’t worry about your response, worry about a solution to the customer issue
 Try not to be too judgmental of the speaker, have a bit more compassion and don’t worry about
how the customer is performing as a communicator

Be patient and remember it's about the customer.

 Time management skills
Great customer service demands quick responses to every customer enquiry. These days customers
expect an almost instantaneous reaction, especially online.

For example, do you offer a Twitter-based customer service channel? Customers will perceive this as a
service so it must be highly responsive. The key is to immediately acknowledge the customer’s initial
communication, then let them know how quickly you’ll respond.

Another important aspect of time management is efficiency. Employees shouldn’t waste their own time
or the customer’s time. Giving customers accurate expectations on timescales is a crucial part of time
management.

 Fast Response Time

The ability to solve customers’ problems in a timely manner is the yardstick by which customer service
customer and experience is measured. There are two key variables that come into this:
- First Contact Resolution (FCR) - if a customer’s issue is solved on their first contact.
- Average Handle Time (AHT) - the total duration of an interaction. For example, if you call a support
centre, are on hold for 5 minutes, speak to a Rep for 10 minutes and then are transferred to another rep
for 5 minutes, that’s an AHT of 20 minutes.
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A rapid response to a customer query is one that meets or exceeds customer expectations, creates
confidence and conveys the quality of service. The goal should be to return emails, phone calls, and
tickets the same day they are received. If a customer is having a high priority issue, the goal should be
to provide a solution immediately.

The best companies take a dedicated stance to providing stellar customer service, practicing proactive
outreach, creating a sense of urgency, and the ability to anticipate needs ahead of a customer's’ request.
The easier you make the resolution of problems, the better off your customer is going to be.

Another way to increase response time is through preprogrammed artificial customer service agents to
aid human representatives and serve as a buffer to weed out non-value, repetitive questions. This
improves operational efficiency and makes it much easier to delight customers.

The reality is, people want whatever they need fast. Customers pay extra to upgrade shipping from 2
days to next day. Speed is a competitive strategy, so how fast you return a call or an email is sometimes
a deal breaker for clients.

Fast is good, instant is even better, so this should be the operational parameter of all departments.

 Building Rapport
When it comes to customer service, building close and co-creative relationships with customers should
be second nature.
Here are a few things companies can do to promote rapport:
 Feel, Felt, Found: Teach new Reps to use phrases that include the words feel, felt and found.
This is an age-tested, proven strategy of moving your customers gently to a new way of
thinking.
 See it from the customer’s perspective: Showing empathy is a crucial part of building
rapport, as it helps to create trust and mutual understanding, while it enables Reps to show the
customer that they are the priority.
 Allow them to vent: Angry customers are the most difficult callers to build rapport with, but
it’s not impossible, as long as the Rep lets them “get it all out” first.
 Share their priority: Make your customers’ problem your problem!
 The value of an apology: A genuine apology at the appropriate time can defuse a difficult
customer and break down the barriers to allow space to build rapport.
 Be flexible with formality: Try addressing your customers in the way that they introduce
themselves.
 Be adaptable: There is no reason to think that all customers should be approached using the
same style.

 Communication Skills
Communication is integral to every customer experience. Even something that is not obvious, like an
online order, has many layers of communication attached to it. From the language on the website, to the
email that is sent once the order is placed, communication plays a crucial role, even in automated
experiences.

Communication is at the heart of an organization’s relationship with itself, with its external
stakeholders, and, of course, with its customers. At the organizational level, communication is a
strategic imperative that should be aligned with goals and, whenever possible, carefully crafted to
produce maximum impact.
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On the front lines, it’s a skill that must be trained and mastered. Effective spoken and written
communication depends both on your manner and on your confidence. The latter can be inflated by
knowing the product like the back of your hand and having faith in your own abilities to solve a
customer’s problem. By being confident in your stance, you’ll be able to take charge of the
conversation, accompany the customer’s understanding, and manage their expectations.
You can improve the former by making an effort to speak slowly, giving yourself time to think ahead.
Enunciate clearly, and give the caller a chance to chime in if they need you to explain further or
reformulate. In any case, keep things simple and leave nothing up to chance. Here are a few ways to
ensure great communication with customers:

 Persuasive speaking skills: Persuasion has long been recognized as an important sales skill,
but it can also be invaluable for customer service.
 Empathy: The bottom line in most customers’ minds aren’t financial. They’re emotional.
 Ability to use positive language: Steer the conversation toward a positive outcome with the
use of positive language. Focus on the solution, and thank customers for their patience,
understanding and valued loyalty.
 Pace and lead: Start by showing urgency, confidence and care in your speech patterns to
match and reassure. Then gradually begin to calm and slow your speaking pace.
 Be aware of intonation: Go up at the end of the sentence for questions, go down at the end of
sentences for statements.

 Thick Skin

Your reps are on the front lines of your business, and they need some solid armor.

Insults, anger, and frustration need to bounce off of you. Make sure they know you support them and
foster an environment where it’s okay to take a head-clearing moment between difficult calls. Finding a
customer service team member with all these skills is difficult, but there’s no need to feel
overwhelmed. Training your staff doesn’t happen overnight, so take it a day at a time. Each skill builds
on and complements the others; focus on skills that can be improved the most and move on to each
additional skill from there. Chances are, you’ll see a marked improvement sooner than you think.

Here is a list that you can use to build a mentally resilient Customer Service team:Don't take things
personally, Don't be self-focused, Stop the self-talk, Learn to be patient

 Patience and serenity

Patience and the ability to remain calm amid very challenging circumstances is another of the great
customer service skills.
This is essential to soothing agitated, angry customers, so that you can identify and resolve their issues.
These are similar to parenting skills, where the employee (in the role of mother or father) doesn’t allow
themselves to be distressed or distracted by the situation but instead remains focused on the best
interests of the customer (not child!).

Impatience from a customer service representative is guaranteed to upset customers. For example, if a
customer service representative is dealing with a customer with limited computer skills, they must not
display impatience at the customer’s inability to use a mouse.

31
Likewise, a loss of control or the onset of panic should be avoided. Empathy is essential as is
professionalism – this is your job, whereas customers are “always right” (even when they aren’t). This
asymmetry has to be accepted, but not to the level where abuse is permitted. Customers need to
understand that they must never verbally or physically intimidate, threaten or harm your employees
– whatever happens.

 Problem solving skills

Most customer service tasks involve some degree of problem solving. Some problems may be very
simple, such as where to find a specific resource on your website. Or highly complex requiring a series
of steps and processes to achieve what a client desires.

Problem solving begins with a clear definition of the problem. The employee must then be able to
determine and evaluate optimum solutions, often without the luxury of consulting with colleagues.
Then it’s a case of selecting the best from the identified solutions available, to fit the customer’s needs.
Finally that solution needs to be implemented, and subsequently checked to verify that it resolved the
issue to the satisfaction of the customer.

Generally it’s crucial to develop the customer service skills of your team. Doing so will greatly
increase customer satisfaction and customer retention.

Your department should be specialized in dealing with clients empathetically and committed to their
goals. Don’t forget that ultimately, the evaluation that customers make of your company is based on the
experience they’ve had with it. Remember, ‘Your attitude, not your aptitude will determine your
altitude.’ – Zig Ziglar

CHAPTER FOUR

CUSTOMER PERCEPTIONS AND EXPECTATIONS IN SERVICES

Reforms in the public sector aimed at improving service delivery have received considerable focus
during the last decade. Global trends such as rising customer expectations, budgetary constraints, and
global competition for investment, public sector reform programmes and changing demographics have
transformed the environment in which the public sector operates. This, in turn, has broken down old
constraints and created new opportunities. Fundamental to the demand for better public services are the
heightened expectations of citizens – expectations that transcend economic status, geographies and the
different methods of funding, managing and delivering these services.

Driven by these changing expectations, the public sector is increasingly required to redefine its role,
strengthen its customer focus and build integrated service delivery models. If they are to realise the
desired benefits, these models must be based on meeting customer needs more efficiently and more
effectively.

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This means keeping the customer’s needs at the core of every decision, from strategy formulation and
design through to execution. Government process re-engineering is often needed to put in place
improved, value-for-money processes that will reduce waste and duplication, producing an effective
‘customer journey’ (the experiences a customer has when interacting with service providers).

There are many initiatives already underway which demonstrate how, in the right circumstances,
effective public service delivery models can be developed by combining the complementary
capabilities and cultures of the public and private sectors. Technology can also be a key enabler. The
development of customer-centric models calls for customer insight, looking at customers’ wants and
needs (both demographic and attitudinal), in a holistic manner distinguishing means and ends, focusing
on improved customer journeys and measurable benefits, and understanding the strategic risks
associated with various service delivery models.

‘Delivering on the customer promise’ is based upon five key strategic enablers:
1 Understand your customer – ‘Customer-centricity’
2 Pull down the walls – ‘Connected government’
3 Empower your institution – ‘Build capacity’
4. Realize benefits through appropriate models – ‘Deliver the promise’
5 Continuously improve – ‘Innovate’

1 Customer-centricity
For the public sector, the provision of customer-centric services is no simple task. A number of
significant challenges need to be overcome. Services must be delivered on a wide scale. Customer
journeys often interface with several different public sector agencies. Diversity issues must be
addressed to take into account the unique attributes and channel preferences of individual customers.
And a detailed understanding of the costs involved in providing these services must be developed.
Customer-centricity will often also need to take account of internal customers – the public sector
agencies that have to be integrated as part of the drive towards enhanced service delivery. One of the
core requirements for any customer-centric strategy is customer insight. In-depth knowledge about the
customer can be drawn from various sources of data - demographic, behavioural, needs-based and
attitudinal. Once assembled, this data is built into a joined-up ‘big picture’ of customer segments,
providing a foundation for the creation of multiple service delivery channels aligned with customer
journey needs.

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2 Connected governments
Almost all public and private sector organisations have hierarchical structures. Within these structures,
independent vertical units (or ‘silos’) are a common feature, necessary for administrative purposes.
Removing agency silos, and creating connected government, does not necessarily imply wholesale
government restructuring
It does, however, call for the alignment of a common customer-centric vision with objectives,
outcomes, information and process flows. In different organisations, key factors involved in the drive
to build connected government will include building visible leadership at a strategic level, setting
common goals (service standards) for connected government, focusing on the front end (where services
are actually delivered), breaking down intra-agency silos before moving to dismantle interagency silos
and putting in place an enabling policy and legal framework.

3 Build capacities
Delivering effective public services calls for multi-level transformation – changing the way public
sector organizations think and act, how they view their roles, and how they share information between
agencies, with businesses and with their customers. Five elements are integral to building this capacity

 Strategy (performance improvement and process reform, aided by technology)

 Leadership (securing the understanding and support of top level leadership)
 Organizational design (creating empowered institutions responsible for a pan-government focus
on customer-centricity and connected government)
 People/Capacity/Training (focusing on the internal capacity-building that is needed to manage
the transformation, managing talent and training public sector people to respond to changing
customer needs)
 Culture (change management throughout the organisation is the key to a successful customer
centric strategy).

4 Deliver the promise

To deliver the customer promise, the overall goals of public service delivery must be clearly
understood. These are quality of service (the accessibility, timeliness and calibre of service levels); cost
of service (the drive towards value for money); and customer segmentation (the need for different
service channels and service offerings based on comprehensive customer insight). The first step
towards delivering the promise is to clearly define the role of the public sector organisation – whether

34
this be policy-maker, regulator or service provider. This calls for close scrutiny of the division between
its ‘sovereign’ function (implementing policy) and its ‘non-core’ function (undertaking activities which
in some cases could be handled equally well, or better, by third parties). Careful evaluation of how
technology will help to meet overall goals is needed, with e-Government being recognized as an
increasingly essential medium for service delivery.

The use of collaborative partnerships (whether Public-Private Partnerships, Public-Voluntary Sector

Partnerships, shared services or outsourcing) should be carefully considered. Where any of these are
selected, assiduous risk management is a priority, achieved through clearly-defined goals, fixed time-
frames, continuous performance monitoring, risk sharing, flexible partnership agreements, expectation
management and awareness of any challenges arising from ethical impacts.

5 Innovate
Innovation and continuous improvement are essential to the sustainability of public sector
transformation. However, some public sector organisations have resisted the concept of innovation,
believing that it is more relevant to the private sector. There has sometimes been a perception that,
because the public sector was not operating in the same competitive environment, it was therefore not
subject to the bottom line criteria for success or failure which drive private sector innovation. With this
clearly no longer the case, public sector organizations need to capture best practices from other
organizations (in both the public and private sectors) to drive innovation.

Benchmarking can play a useful part in this process, helping organisations to understand which aspects
of their service delivery will benefit from innovation, as well as how best to document and adopt new
approaches.

Driven by growing customer expectations, the efficiency and effectiveness of public service delivery
are increasingly seen as key metrics of public sector performance. Addressing this issue is therefore a
stated priority in most countries.

Many countries have undertaken public sector reforms to improve the quality of public service
delivery. However, while the demand for better services is a common factor, the spectrum of
expectation varies from country to country.

Hoped-for improvements in customer experience and outcomes span seven key areas:

 Speed – The time taken to deliver a service should be the shortest possible for both the
customer and the organisation delivering the service, right first time
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  Engagement – The manner in which services are delivered should be seen as customer-centric
(i.e participatory and trustworthy with the customer’s needs at the core)
 Responsive – There should be an ‘intelligent’ mechanism in place to address any variation in
meeting service levels and to drive changes in the service delivery organization
 Value – The customer needs to believe that the service delivery mechanism is cost effective,
and value is driven by customer outcomes, not organizational processes
 Integration – The service delivery mechanism should be integrated. There should be no
‘wrong door’ policy for the customer
 Choice – There should be multiple channels for service delivery, so that customers can have
‘channels of choice’, depending on specific needs at specific times the
 Experience – Personalization of service is necessary to ensure that customers’ experiences are
on a par with what they are used to receiving from the private sector.

Why focus on service delivery?

Customer awareness
Citizens today are more aware of their rights, have better access to information on public services and
consequently have higher expectations of service levels. Because they have become accustomed to
capable private sector organisations providing high levels of customisation and other benefits, they are
not prepared to accept that public sector organisations are incapable of improving their own service
delivery. They also expect a positive customer experience and better returns on the taxes they pay.
Further, a number of countries have empowered citizens with ‘Right to Information’ legislation leading
to heightened awareness about customer rights and, consequently, customer service.

A number of common challenges require the public sector to re-assess its role in public service
delivery. They are:

 Changing demographic profiles and increasing customer expectations of the public sector
 Citizens and users of public services are now more aware of their rights and – with the
heightened media and social activism – demanding greater accountability and transparency
 Already under pressure to deliver, the public sector is also facing budgetary constraints, with
higher taxes often no longer an option
 Externally, there is global competition among various economies – developed and developing
– to attract investment and this is compounded by the public sector reform agenda being
prioritized by most governments
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Guidance on Implementing the Principles for Good Governance in the Public Sector

To deliver good governance in the public sector, both governing bodies and individuals working for
public sector entities must try to achieve their entity’s objectives while acting in the public interest at
all times, consistent with the requirements of legislation and government policies, avoiding self-interest
and, if necessary, overriding a perceived organizational interest. This requires both governing body
members and staff in public sector entities to make a firm commitment to the principles in this
Framework. Acting in the public interest implies primary consideration of the benefits for society,
which should result in positive outcomes for service users and other stakeholders. In its Policy Position
Paper, A Definition of the Public Interest, IFAC defines the public interest as:

“Public interest: the net benefits derived for, and procedural rigor employed on behalf of, all
society in relation to any action, decision, or policy.”

IFAC recognizes that differences in culture and ethical systems should be considered when assessing
whether or not the public interest is being served, especially where institutions are operating
internationally. It notes that “interests of the public” in the broadest sense are all things valued by both
individuals and society, including rights and entitlements (such as property rights), access to
government, economic freedoms, and political power. They also include, for example:

 Sound and transparent financial and non-financial information and decision making on the part
of governments and public sector entities to their constituents;

 sound governance and performance management in public sector entities; and

 efficient use of natural resources in the production of goods and services, thereby enhancing the
welfare of society by their greater availability and accessibility.

The two principles required for acting in the public interest:

A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule
of law.

B. Ensuring openness and comprehensive stakeholder engagement.

A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting
the rule of law

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The public sector is normally responsible for using a significant proportion of resources raised through
taxation to provide services to citizens. Public sector entities are accountable not only for how much
they spend, but also for how they use the resources under their stewardship. This includes
accountability for outputs, both positive and negative, and for the outcomes they have achieved. In
addition, they have an overarching responsibility to serve the public interest in adhering to the
requirements of legislation and government policies. Public sector entities are accountable to legislative
bodies for the exercise of legitimate authority in society. This makes it essential that each entity as a
whole can demonstrate the appropriateness of all of its actions and has mechanisms in place to
encourage and enforce adherence to ethical values and to respect the rule of law.

Governing body members should behave with integrity. Each governing body should promote a culture
where acting in the public interest at all times is the norm, together with a continuing focus on
achieving the entity’s objectives. It should do this by taking the lead in establishing—and living up to
specific values for the entity and its staff. These values should be communicated, understood, and
shared.

They should be over and above minimum legal requirements and should build on established principles
for behavior in public life, such as objectivity, selflessness, and honesty. These principles reflect public
expectations about the conduct and behavior of entities, groups, and individuals who manage public
service provision and spend public money. In particular, in most instances, the goods and services
offered by the public sector cannot be obtained through alternative service providers. In some
instances, central agencies may have a role in promoting values and ethics and may provide assistance
and support to smaller entities. Each entity, however, remains responsible for demonstrating the
integrity of its own actions.

Demonstrating strong commitment to ethical values

Ethical values should permeate all aspects of a public sector entity’s operation, for example the
procurement of goods and services, the appointment of staff on merit, performing job responsibilities
properly, and using public funds to benefit the community. These values should underpin the personal
behavior of all governing body members and staff. It is the role of the governing body to ensure that
these ethical values are embedded throughout an entity.

Having an effective code of conduct for governing body members and for staff is one of the key
elements of good governance. Developing, reviewing, and communicating a code that illustrates what

38
the values mean in specific circumstances helps to make visible (a) how the entity operates; (b) how it
embeds its core values, such as by reflecting values in communications, processes, and behavior; and
(c) how it relates to its key stakeholders. Codes also help reassure stakeholders about the entity’s
integrity and its commitment to ethics. It is the governing body’s responsibility to ensure that the code
of conduct is understood, implemented, adhered to, and reviewed on a regular basis to ensure it remains
up to date.

It may not always be easy to objectively measure factors affecting an entity’s performance in
leadership, ethics, and culture, or to identify ethical problems before they manifest themselves in
organizational performance. It is important, however, that the governing bodies of entities seek to
know, understand, and maintain their performance in these areas. Useful evaluative approaches to
measure ethical performance include staff surveys, performance appraisals, administrative reviews, exit
interviews, whistleblower arrangements and leadership self-assessments. Stakeholders can also provide
important feedback on how an entity is performing in leadership, ethics, and culture. This can be
solicited formally or be received through comments and complaints.

Respecting the rule of law

Fair legal frameworks, enforced on an impartial basis, as well as an independent judicial system, assist
in building societies where entities and individuals alike can flourish. They do this by affording legal
protection for rights and entitlements, offering redress for those harmed, and guarding against
corruption or other crimes and unethical behavior.

Public sector entities at all levels may be involved in creating, interpreting, applying, or enforcing laws.
Such activities demand a high standard of conduct to prevent these roles from becoming tainted and
losing their credibility. Adhering to the rule of law also requires the governing body to ensure that there
are effective mechanisms to deal with breaches of legal and regulatory provisions. To ensure equity,
public sector entities should, as far as possible, be subject to the same laws that are generally applicable
to the rest of the community.

Public sector entity governing bodies and staff should, therefore, demonstrate a strong commitment to
the rule of law, as well as comply with all relevant laws and regulations. They should also strive to
utilize their powers for the full benefit of their communities and other stakeholders and avoid
corruption or any other misuse of power.

39
B. Ensuring openness and comprehensive stakeholder engagement
As public sector entities are established and run for the public good, their governing bodies should
ensure openness in their activities. Clear, trusted channels of communication and consultation should
be used to engage effectively with all groups of stakeholders, such as individual citizens and service
users, as well as institutional stakeholders.

Openness

To demonstrate that they are acting in the public interest at all times, and to maintain public trust and
confidence, public sector entities should be as open as possible about all their decisions, actions, plans,
resource use, forecasts, outputs, and outcomes. Ideally, their governing bodies should ensure that this
commitment is documented and communicated through a formal policy on openness of information.
These policies are often set government-wide rather than by individual entities.

Governing bodies should provide clear reasoning for their decisions. In both their public records of
decisions and in explaining them to stakeholders, they should be explicit about the criteria, rationale,
and considerations used in their decision making and, in due course, about the impact and
consequences of those decisions. They should restrict the provision of information only when the wider
public interest clearly demands it.

Such restrictions may be appropriate in only a limited number of situations. These might include
situations where communicating certain information might endanger national security or adversely
affect a country’s relationships with other countries or international entities. There may also be
situations involving business relationships with the private sector where information cannot be freely
communicated as it is held in private ownership. Finally, there may be situations concerning individual
citizens for example, when dealing with clients within the social welfare sector where personal
integrity and personal data protection requirements would prevent information from being publicly
available.

Engaging stakeholders effectively, including individual citizens and service users

Governing bodies should ensure that entities have a clear policy on the types of issues they will consult
on with all stakeholders (either individually or through representative groups) to ensure that the
services provided (or other interventions) are contributing to the achievement of intended outcomes.
They should also ensure that entities have processes in place to collect and evaluate the views and
experiences of people and organizations of all backgrounds.

40
Communication and consultation methods should be balanced and fair, allowing stakeholders to
express their views freely and make informed decisions based on unbiased information. Governing
bodies may also need to take account of different stakeholders’ needs and linguistic requirements. An
entity’s evaluation processes should enable the interests of more vocal stakeholder groups to be
balanced with other stakeholders’ interests to ensure that no one group becomes too dominant. In
addition, such processes should also take into account the interests of future generations of tax payers
and service users (intergenerational equity).
Representative views from, for example, current services users about the suitability and quality of
existing services are relevant, as are those of about their future needs.

Engaging comprehensively with institutional stakeholders

Few public sector entities can achieve their intended outcomes solely through their own efforts. Often
they also need to work with institutional stakeholders, such as other public sector entities, to improve
services and outcomes, or for accountability reasons. Developing formal and informal partnerships with
other entities, both in the public sector and other parts of the economy, allows entities to use their
resources more efficiently and achieve their outcomes more effectively. Relationships with other
entities are particularly important if they serve the same users or communities or if they provide
complementary or related services.

As a result, public sector entities often have a complex network of different types of relationships with
other entities, which will vary in range and strength. Some are lateral relationships between partners,
while others are hierarchical relationships, such as those between legislatures and different levels of
government. For many parts of the public sector, other entities—such as central government— play a
major role in determining policy and resources. Good governance requires the governing body to
clarify the purpose, objectives, and defined outcomes for each of these relationships. In particular,
effective engagement with other stakeholder institutions is vital to the development of defined
outcomes if these are to be achieved successfully and sustainably.
Additional considerations when working with other public sector entities include:

 clearly allocating accountabilities and responsibilities with governance options, including the
appointment of a lead entity and/or a governing body composed of representatives from the lead
agency and other involved entities;

41
  working toward a shared objective or outcome, with consideration given to the best way to
evaluate the effectiveness of joint activities in achieving goals;

 specifying clear funding arrangements and ensuring appropriate systems are in place so that
expenditures against milestones and deliverables can be properly managed; and

 Carefully considering and monitoring the risks facing each entity as part of joint work,
particularly any shared risks.

 Effective collaboration among public sector entities can reduce waste of assets, avoid
unnecessary information gathering, and improve service delivery.

Employee role in services delivery

Employees play a pivotal role in building an atmosphere of trust, confidence, and loyalty among your
customers. Every member of the team has an opportunity to contribute to creating a compelling
customer experience, or one that fails to deliver on your brand promise.

Few would argue that staff on the front line greatly influence the customer experience, but the reality is
all employees play a role in reinforcing your company’s commitment to the customer

The importance of people in the marketing of services is captured in the people element of the services
marketing mix, which is described as all of the human actor who play a part in the service delivery and
thus influence the buyers perceptions: namely the firm’s personnel, the customer and other customers
in the service environment.

In many cases the contact employee is the service there is nothing else. The offering is the employee.
Thus investment in the employee to improve the service parallels making a direct investment in the
improvement of a manufactured product.

Culture - the way we do things around here

Corporate culture - the pattern of shared values and beliefs that give the members of an organization
meaning and provide them with the rules for behavior in the organization
Service culture - a culture where an appreciation for good service exists, and where giving good
service to internal as well as ultimate, external customers is considered a natural way of life and one of
most important norms by everyone
Service leadership - the regular and consistent demonstration of one's values
Espoused values - what managers say the values are
Enacted values - what employees believe the values to be because of what they observe management
actually doing (bigger impact on employees)
The customer-contact employees:

42
 They are the service
They are the organization in the customer's eye
They are the brand
They are marketers
Employee satisfaction does not cause customer satisfaction; rather the two are interrelated and feed off
each other.

Services-Profit Chain

Employee
Retention Revenue
Interna Employee Customer Customer Growth
l Satisfactio Satisfactio Loyalty
Service n n
Employee Profitabilit
s
Productivit y
y delivery
Role of customers in service

Service delivery for customers can be seen in a factory. The place the service is produced and is
consumed interacting with the employees and other customers. E.g in a classroom or in a training
situation, students (customers) are sitting in the factory interacting with the instructor and other
students as they consume the educational services.

Since these customers are present during the service production, customers can contribute to or detract
from the successful delivery of the service and to their own satisfaction.

Importance of customers in service delivery

Customer participation at some level is inevitable in service delivery. Services are actions or
performances, typically produced and consumed simultaneously. In many situations employees,
customers and even others in the service environment interact to produce the ultimate service outcome.
As the customers receiving the service participates in the service delivery process. He or she can
contribute to the gap through appropriate or inappropriate, effective or ineffective, productive or
unproductive behaviors.

Customers who are unprepared in terms of what they want to order can soak up the customer service
representative’s time as they seek advice. Similarly, shoppers who are not prepared with their credit
cards can “put the representative on hold”. While they search for their credit cards or go to another
room or even out of their cars to get them. Meanwhile, other customers and calls are left unattended,
causing longer wait times and potential dissatisfaction.

Participation in service delivery

43
The level of participation – low, medium, high – varies across different services. In some cases, all that
is required is the customers physical presence (low level of participation), with the employees of the
firm doing all of the service production work, as in case of a Ghazal/ musical concert. The listeners
must be present to receive the entertainment service. In other cases, consumer inputs are required to aid
the service organization in creating the service delivery (moderate level of participation).

Inputs can include information, effort or physical possessions. All three of these are required in case of
accounting services who prepares a client’s income tax return effectively. Information in the form of
tax history, marital status, and number of dependents. Effort in putting the information together in a
useful fashion. Physical Possessions such as receipts and past tax returns. In case of long term
consulting engagements involvement of the customers high as they co create the service.

Customer’s roles
Customers as a productive process
Service customers are referred to as “partial employees” of the organization. They are human resources
who contribute to the organization’s productive capacity. In other words, if customers contribute effort,
time or other resources to the service production process, they should be considered as part of the
organization.

Customer inputs can affect the organization’s productivity through both quality and quantity of output.
E.g. research suggest that in an IT consulting context:

 Clients who clearly articulate the solution they desire.

 Provide needed information in a timely manner.
 Communicate openly.
 Gain the commitment of key internal stakeholders.
 And raise the issues during the process before it is too late will get better service.

Customers as quality contributors to service delivery and satisfaction

Another role customers play in service delivery is that of the contributor to their own satisfaction and
the ultimate quality of the services they receive. Customers may care little that they have increased the
productivity of the organization through their participation. But they likely care a great deal about
whether their needs are fulfilled. Effective customer participation can increase the likelihood of service
delivery that their needs are met and that benefits the customer seeks are attained. Services such as
health care, education, personal fitness, and weight loss, where the service outcome is highly dependent
on the customers participation. In such services unless the customers perform their roles effectively, the
desired service outcomes cannot be achieved. Research has shown that in education, active
participation by students – as opposed to passive listening increases learning the desired service output
significantly 5E25A5EE63214 to save 7

Customers as competitors

44
A final role played by service customers is that of a potential competitor. If self-service customers can
be viewed as resources of the firm, or as “partial employees,” self-service customers in some cases.
They can partially perform the service or the entire service for themselves and may not need the
provider at all.

Customers thus in that sense are competitors of the companies that supply the service. Whether to
produce a service for themselves (internal exchange). E.g. child care, home maintenance i.e. have
someone else provide home services for them (external exchange) is a common dilemma for
consumers.

Similar internal versus external exchange decisions are made by organizations. Firms frequently choose
to outsource service activities such as payroll, data processing, research, accounting, maintenance, and
facilities management. They find that it is advantageous to focus on their core businesses and leave
these essential support services to others with greater expertise. Alternatively, a firm may decide to
stop purchasing services externally and bring the service production process in-house.

CHAPTER FIVE
E-GOVERNMENT
INTRODUCTION
Information and Communication Technology (ICT) is one of the most important characteristics of our
age and every new development changes our lives to some extent. Its evolution has dramatically
changed how citizens interact with their government, creating an important development in their
expectations (Dodd, 2000). Following e-commerce’s evolution in the private sector, electronic
government (e-government) seems to be the next generation of the development in the public sector.
More and more governments around the world are introducing e-government as a means of reducing
costs, improving services for citizens and increasing effectiveness and efficiency at national, regional
and local levels of the public sector. 179 out of 192 UN members reported that they developed
strategies to implement e-government systems and therefore e-government has been identified as one
of the top priorities for governments across the world (UN, 2008). The main concepts of e-government
will be discussed in following sections.

E-GOVERNMENT DEFINITION

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E-government is also known by different terms such as Electronic Government, Electronic
Governance, Digital Government, Online Government, e-Gov etc. (Grönlund, 2004). In fact, there are
many definitions for the term e-Government and differences reflect the priorities in the government
strategies. Fang (2002) defined e-government as a way for governments to use the most innovative
information and communication technologies, particularly web-based Internet applications, to provide
citizens and businesses with more convenient access to government information and services, to
improve the quality of the services and to provide greater opportunities to participate in democratic
institutions and processes (2002, 1).

Moreover, the term “e-government”, as used by the OECD E-government Project, applies to the use of
ICT as a tool to achieve better government. Therefore, e-Government is not about business as usual,
but should instead focus on using ICT to transform the structures, operations and, most importantly, the
culture of government. The OECD report highlights that e-government is an important component in
terms of overall reform agendas because it serves as a tool for reform; renews interest in public
management reform; highlights internal consistencies; and underscores commitment to good
governance objectives (OECD, 2003). World Bank, (2001) define E-government as the government
owned or operated systems of information and communication technologies that transform relations
with citizens, the private sector and/or other government agencies so as to promote citizens’
empowerment, improve service delivery, strengthen accountability, increase transparency, or improve
government efficiency (Ndou, 2004).

TYPES OF E-GOVERNMENT
E-government offers services to those within its authority to transact electronically with the
government. These services differ according to users’ needs, and this diversity has given rise to the
development of different type of e-government. E-government functions can be classified into four
main categories.

Government-to-citizen (G2C)
The majority of government services come under this application, towards providing citizens and
others with comprehensive electronic resources to respond to individuals’ routine concerns and
government transactions. Government and citizens will continuously communicate when implementing
e-government, thus supporting accountability, democracy and improvements to public services. The
primary goal of e-government, is to serve the citizen and facilitate citizen interaction with government
by making public information more accessible through the use of websites, as well as reducing the time

46
and cost to conduct a transaction (Ndou, 2004). In applying the idea of G2C, customers have instant
and convenient access to government information and services from everywhere anytime, via the use of
multiple channels. In addition to making certain transactions, such as certifications, paying
governmental fees, and applying for benefits, the ability of G2C initiatives to overcome possible time
and geographic barriers may connect citizens who may not otherwise come into contact with one
another and may in turn facilitate and increase citizen participation in government (Seifert, 2003).

Government-to-business (G2B)
Government to business, or G2B, is the second major type of e-government category. G2B can bring
significant efficiencies to both governments and businesses. G2B include various services exchanged
between government and the business sectors, including distribution of policies, memos, rules and
regulations. Business services offered include obtaining current business information, new regulations,
downloading application forms, lodging taxes , renewing licenses, registering businesses, obtaining
permits, and many others. The services offered through G2B transactions also play a significant role in
business development, specifically the development of small and medium enterprises (Pascual, 2003).
Fang (2002) argued that G2B applications actively drive e-transaction initiatives such as e-procurement
and the development of an electronic marketplace for government purchases; and carry out government
procurement tenders through electronic means for exchange of information and goods. This system
benefits government from business’ online experiences in areas such as e-marketing strategies. The
government-to-business G2B is as useful as the G2C system, enhancing the efficiency and quality of
communication and transactions with business also, it increase the equality and transparency of
government contracting and projects (Moon, 2003).

Government-to-government (G2G)
This refers to the online communications between government organizations, departments and agencies
based on a super-government database. Moreover, it refers to the relationship between government and
its employees as outlined below. The efficiency and efficacy of processes are enhanced by the use of
online communication and cooperation which allows for the sharing of databases and resources and the
fusion of skills and capabilities. It renders information regarding compensation and benefit policies,
training and learning opportunities, and civil rights laws in a readily accessible manner (Ndou, 2004).
The vital aim of G2G development is to enhance and improve inter-government organizational
processes by streamlining cooperation and coordination .On another G2G front, the use of information
technologies by different governmental agencies to share or centralize information, or to automate and

47
streamline intergovernmental business processes such as regulatory compliance, has produced
numerous instances of time and cost savings and service enhancements (Gregory, 2007).

Government-to-employee (G2E)
Government to employee is the least sector of e-government in much e-government research. Some
researchers consider it as an internal part of G2G sector and others deal with it as a separate sector of e-
government (Riley, 2001).G2E refers to the relationship between government and its employees only.
The purpose of this relationship is to serve employees and offer some online services such as applying
online for an annual leave, checking the balance of leave, and reviewing salary payment records,
among other things (Seifert, 2003). It is a combination of information and services offered by
government institutions to their employees to interact with each other and their management. G2E is a
successful way to provide e-learning, bring employees together and to encourage knowledge sharing
among them. It gives employees the possibility of accessing relevant information regarding
compensation and benefit policies, training and learning opportunities, and allowing them access to
manage their benefits online with an easy and fast communication model. G2E also includes strategic
and tactical mechanisms for encouraging the implementation of government goals and programs as
well as human resource management, budgeting and dealing with citizens (Ndou, 2004).

BENEFITS OF E-GOVERNMENT
The adoption and use of the e-government strategy can provide significant benefits for government in
the delivery of more effective and efficient information and services to all e-government sectors. It
enables government agencies to align their efforts as needed to improve service and reduce operating
costs (Ndou, 2004). OECD (2006) thoroughly examined e-government initiatives in its members’
countries and listed the advantages of e-government as: improving efficiency in processing large
quantities of data; improving services through better understanding of users’ requirements, thus aiming
for seamless online services; helping achieve specific policy outcomes by enabling stakeholders to
share information and ideas; assisting government economic policy objectives by promoting
productivity gains inherent in ICT and e-commerce; contributing to governments’ reform by improving
transparency, facilitating information sharing and highlighting internal inconsistencies; and helping
build trust between governments and their citizens, an essential factor in good governance by using
internet-based strategies to involve citizens in the policy process, illustrating government transparency
and accountability.
E-government has potential for stronger institutional capacity building, for better service delivery to
citizens and business, for reducing corruption by increasing transparency and social control (United

48
Nations Division for Public Economics and Public Administration, 2001, p. 5). A study by the
Intergovernmental Advisory Board (2003, p. 1) “High Payoff in Electronic Government: Measuring the
Return on eGovernment Investments” recommends that any successful e-government program should
address at least one of the following areas: financial – reduced costs of government operations with
enhanced revenue collection; economic development; reduced redundancy - consolidating and
integrating government systems; fostering democratic principles; and improved service to citizens and
other constituencies.

Deloitte Research study (2003) states that the strategic application of IT mainly e-government has the
potential to radically reduce the amount of time, money and effort that businesses and citizens must
spend to comply with rules and regulations. It might do so in many ways: providing information in one
easy-to-access location; simplifying delivery of services to citizens; improved interactions among
government units and with business, industry and citizens; improved productivity (and efficiency) of
government agencies; simplifying and streamlining reporting requirements; reducing the number of
forms; making it possible for citizens, businesses, other levels of government and government
employees to easily find information and get service from the government and government agencies;
making transactions (paying fees, obtaining permits) easier; and more effective, cheaper and more
convenient delivery of information, knowledge and services.

Seifert & Bonham (2003) point out that implementation of e-government not only saves resources, but
it can also significantly increase service levels by reducing time spent in bureaucracy. The desire to
provide new and improved services has a tendency to concentrate more on improving the citizen’s
experience interacting with the government when seeking out information or trying to obtain various
services. The evolution of e-government and technology creates the potential for new services to
emerge, which contributes to improved service quality.

BARRIERS OF E-GOVERNMENT IMPLEMENTATION

There are several challenges that can delay progress towards realizing the promise of e-government.
The variety and complexity of e-government initiatives implies the existence of a wide range of
challenges and barriers to its implementation and management. This section, will briefly introduce the
most important and common challenges and barriers as follows.

5.1 ICT Infrastructure

49
The implementation of e-government initiatives face some technological difficulties such as lack of
shared standards and compatible infrastructure among departments and agencies. ICT infrastructure is
recognised to be one of the main challenges for e-government. Internetworking is required to enable
appropriate sharing of information and open up new channels for communication and delivery of new
services (Ndou, 2004). For a transition to electronic government, an architecture providing a uniform
guiding set of principles, models and standards, is needed. Sharma & Gupta (2003) point out that
implementation of the whole e-government framework requires a strong technology infrastructure. In
order to deliver e-government services, government must therefore develop an effective
telecommunication infrastructure. In addition, they stated that successful e-government implementation
would depend upon how the capacities of various infrastructures are structured and how they are
capitalized with an integrated focus.

5.2 Privacy

Privacy and security are critical obstacles in implementation of e -government in citizen concern
(OECD, 2003). Privacy refers to the guarantee of an appropriate level of protection regarding
information attributed to an individual (Basu, 2004). Government has an obligation to ensure citizens’
rights regarding privacy, processing and collecting personal data for legitimate purposes only (Sharma
& Gupta, 2003). Concerns about website tracking, information sharing, and the disclosure or
mishandling of private information are universally frequent. There is also the concern that e-
government itself will be used to monitor citizens and invade their privacy.

Seifert (2003) emphasised that e-government should be approached with an eye toward the protection
of individual privacy. Both technical and policy responses may be required when addressing the
privacy issue in an e-government context. In addition, there is a need to respond effectively to privacy
issues in networks in order to increase citizen confidence in the use of e-government services. Citizen
confidence in the privacy and careful handling of any personal information shared with governmental
organizations is essential to e-government applications. Basu (2004) mentioned that in developing
countries, many people are so concerned with privacy and confidentiality issues they decide to forego
e-government opportunities. A comprehensive privacy policy should specify citizens’ rights to privacy
and mandate that personal data be collected and processed only for legitimate purposes (Teeter & Hart,
2003).

Security

50
Security of an information system means protection of information and systems against accidental or
intentional disclosure to unauthorized access, or unauthorized modifications or destruction (Layton,
2007). It refers to protection of the information architecture including network, hardware and software
assets and the control of access to the information itself (Basu, 2004). Furthermore, Seifert, (2003)
points out that information security, referred to as cyber security or computer security, is an important
e-government challenge as it is a vital component in the trust relationship between citizens and
government. Thus, security policies and standards that meet citizen expectations are an important step
toward addressing these concerns (Sharma & Gupta, 2003). Security can be classified into two
elements: network security and documents security. It should include maintenance and e-infrastructure
protection in the form of firewalls and limits on those who have access to data. Furthermore, the use of
security technology, including digital signatures and encryption, to protect user IDs, passwords, credit
card numbers, bank account numbers, and other such data being transmitted over the Internet and
stored electronically is essential to fulfilling security goals in egovernment applications (Feng, 2003).
People need to be educated on the importance of security measures, such as private passwords, to
ensure their own protection. Cohen & Emicke (2002) point out that while security will remain an
obstacle to e-government, it will not extensively affect its progress as the public learns to work with
and accept its occasional lapses. Also, they mentioned three keys that affect the success of security.
The first involves continuous improvement and upgrades in an attempt to stay ahead of criminals. The
second is that security be visible and foreboding to deter would be criminals. Finally, it must be
accepted that no security system is perfect and that all can eventually be overcome. However,
governmental organizations, being responsible for the collection, maintenance, and distribution of
sensitive or confidential information, should consider methods of providing security for collected
information as well as for their web sites. Thus, a body of security professionals should be setup to
respond to threats and breaches. Also the need for authority and an infrastructure encryption system has
to be given top-priority (Feng, 2003).

Policy and Regulation Issues

Feng (2003), points out that e-government is not a technical issue, but rather an organizational issue.
Implementation of e-government principles and functions requires a range of new rules, policies, laws
and governmental changes to address electronic activities including electronic archiving, electronic
signatures, transmission of information, data protection, computer crime, intellectual property rights
and copyright issues. Dealing with e-government means signing a contract or a digital agreement,
which has to be protected and recognized by a formalized law, which protect and secure these kinds of

51
activities or processes. In many countries, e-business and e-government laws are not yet available.
Establishing protections and legal reforms will be needed to ensure, among other things, the privacy,
security and legal recognition of electronic interactions and electronic signatures (Caldow, 1999). The
effort must incorporate a holistic view, one that is not just focused on technology. Legal reforms and
new policy directives may have to be adopted before the online world can function smoothly. Archaic
laws, old regulatory regimes, overlapping and conflicting authorities can all greatly complicate or
altogether halt a project.

5.5 Lack of Qualified Personnel and Training

Another major challenge of an e-government initiative can be the lack of ICT skills. This is a particular
problem in developing countries, where the constant lack of qualified staff and inadequate human
resources training has been a problem for years (UNPA&ASPA, 2001). The availability of appropriate
skills is essential for successful e-government implementation. E-government requires human
capacities: technological, commercial and management. Technical skills for implementation,
maintenance, designing and installation of ICT infrastructure, as well as skills for using and managing
online processes, functions and customers, are compulsory. To address human capital development
issues, knowledge management initiatives are required focusing on staff training in order to create and
develop the basic skills for egovernment usage. Ongoing access to training is a fundamental
prerequisite as the rate of change increases and new technologies, practices and competitive models
appear. The full economic benefits of ICT depend on a process of training and learning skills, this is
universal for all governments (OECD, 2003).

5.6 Lack Partnership and Collaboration

Collaboration and cooperation at local, regional and national levels, as well as between public and
private organizations, are important elements in the e-government development process. However,
collaboration and cooperation are not easy factor to achieve. Governments often exhibit considerable
resistance to open and transparent systems as they try to preserve their authority, power and
hierarchical status (Nodu, 2004). Citizens distrust their governments, especially where there has been a
history of dictatorship, political instability or large-scale corruption. To ensure that the public and
stakeholders will be partners in the egovernment effort, it is important to try to build trust in
government (Carvin, 2004). Collaboration between the private and public sectors is needed too, in
order to provide resources, skills and capabilities that the government may lack. A ‘new’ development
model is emerging that focuses on partnership among stakeholders in the knowledge-based

52
development program. Government should play the role of facilitator and encourage the private sector
to participate in e-government development and implementation (Nodu, 2004).

Digital Divide
The ability to use computers and the Internet has become a crucial success factor in e-government
implementation, and the lack of such skills may lead to marginalization or even social exclusion
(UNPA & ASPA, 2001). The digital divide refers to the gap in opportunity between those who have
access to the Internet and those who do not. Those who do not have access to the Internet will be
unable to benefit from online services (OECD, 2003). In the case of the digital divide, not all citizens
currently have equal access to computers and Internet, whether due to a lack of financial resources,
necessary skills, or other reasons. In fact, computer literacy is required for people to be able to take
advantage of e-government applications. Government should train its employees and citizens in basic
skills of dealing with the computer and Internet in order to let them participate in e-government
development applications. In addition, Smith (2002) points out that making computer available in
public locations, such as grocery stores, post offices, libraries, and shopping malls, may help in
addressing the gap between those households that have access to the Internet and data services and
those who do not. Feng (2003) mentioned that the lack of Internet access among certain sections of the
population was considered the most important barrier to e-government development. Indeed, this lack
of access among vulnerable or low-income citizens prevents them from being able to make use of those
services provided specifically to them. UN (2008) survey found that an increasing in digital divide in
developing countries increases the cost of technical barriers in launching and sustaining e-government
services.

5.8 Culture
Some barriers to the implementation of e-government are not technical, but the cultural implications of
new technologies. Personal characteristics and subjective conditions are more likely to be influenced by
cultural factors than are the objective conditions surrounding the development and diffusion of new
technology (DeLisi, 1990). Cultural norms and individual behaviour patterns play a role in how citizens
and policy makers use technology. Because culture plays a significant role in an individual’s outlook,
many people resist change and adopt new technologies slowly and with great deliberation (Feng, 2003).
Hackney & Jones (2002) identified that improving working relationships between internal departments
and external agencies, and adopting a corporate approach as keys to successful e-government. To
achieve this, it was felt that major cultural changes are necessary. Organizational development should
be included in the implementation process so that internal cultural changes are accommodated. Chang
53
(2002) states that culture can be determined by several factors: social structure, religion, language,
education, economic philosophy and political philosophy. Technical enhancements are not only
structural changes, but also cultural changes. These cultural changes, though not as easily tangible,
must receive at least as much planning so that technical change is implemented successfully. 5.9
Leaders and Management Support The literature shows that without support from the top management,
an innovation is less likely to be adopted. Thus, e-government implementation needs the support from
the highest level of government for successful implementation. Top management support refers to the
commitment from top management to provide a positive environment that encourages participation in
e-government applications. Therefore, it plays a significant role in the adoption and implementation of
e-government (Akbulut, 2003). Leadership involvement and clear lines of accountability for making
management improvements are required in order to overcome the natural resistance to organizational
change, to gather the resources necessary for improving management, and to build and maintain the
organization-wide commitment to new methods of conducting government (McClure, 2001). The
involvement of high-level leadership, as well as an integrated vision of IT, is vital to vertical e-
government planning, the acquisition of necessary resources, the motivation of officials, the support of
dealings with external partners and stakeholders, to interagency and ministry co-ordination. As can be
observed in transitional democracies and developing countries, political leadership and an integrated
vision of IT are what drive the development of e-government. Leaders who perceive a potential gain
from the promotion of e-government are more likely to support such initiatives, even in the face of
obstacles, while those who believe that they stand to lose from the implementation of e-government
cannot be counted on for sustained support (Seifert & Bonham, 2003). Therefore, government needs to
educate the upcoming ranks of government leaders, managers and administrators in planning and
managing ICTs across all public sectors, focusing on access opportunity, economic development, and
effective delivery of public information and services (OECD, 2003).

54
Course: Human Resource Management
Course Code: PADM 4101
Cr. Hrs.: 3
Introduction
The human resource inputs in the management of organizations consist of an extremely complex
combination of physical and intellectual capabilities of human beings. As a group, the human resources
largely control the productivity of an organization. As individuals, they are most valuable assets. In
managing the human resources, manager’s face one of the most responsible and challenging tasks.
Therefore, this course is designed to equip students with the major concepts and techniques of
managing the human resources of organizations.
Objectives
At the end of this course, students will be able to: get acquainted with theories, concepts and principles
of human resource management that enable to undertake all the processes in managing the human
resources of organization.
Course Contents
 Human Resource Management: An Overview
 Job Analysis and Organizational design
 Employee Resourcing
 Training and Development
 Performance appraisal
 Wage and Salary Administration
 Employee safety, health and labor relations management
CHAPTER- ONE
1. AN OVERVIEW OF HUMAN RESOURCE MANAGEMENT
1.1. Introduction
Organizations use different resources such as human resource, material resource, informational
resource, financial resource and others. The human resource among this is the most important resource
that derives the effective utilization of all the remaining resources. If the human resources of an
organization are neglected of managed the organization is unlikely to do well in fact may fail.
55
1.2 Definition and meaning of Human Resource Management
The term human resource refers to the total sum of all the inherent abilities acquired knowledge and
skills represented by the aptitudes, attitudes and talents of organizational work force.
Human resource management (HRM) is concerned with the process of planning, organizing,
coordinating, directing and controlling the activities of human resource in an organization.
HRM is concerned with obtaining, developing and utilizing the right type of people within the right
quality and right quantity from the right source at the right time and right cost in order to achieve
organizational objectives.
HRM is concerned with the human side of an organization and employees relation with their work and
work environment. Its purpose is to ensure that the employees of the organization are used in such a
way that the employer obtains the greatest possible benefit and psychological award from their work
and employees obtain the maximum possible development from their work and their organization.
1.3 The Function of Human Resource Management (HRM)
The functions of human resource management include manpower or human resource planning,
recruitment and selection of personnel using different tools such as psychological testing, interviews,
and practical examinations, integration or induction, placement, utilization, administering promotions,
demotions, transfers, separation and following up absenteeism and labor turnover.
Employee training, executive development and performance appraisal are also important functions of
human resource management. One has to be aware of the fact that the listing made by different authors
like the one given above, is by no means comprehensive or necessarily representative of the work of
human resource administration. According to C.B. Mamoria, the functional areas of human resource
management include the following: -
1) Organizational Planning and Development (Strategic HR Mgt)
This function is concerned with the division of all the tasks to be performed into manageable and
efficient units (departments, divisions or positions) and with providing for their integration. This
involves determining the needs of an organization in terms of short and long-range objectives,
utilization of modern technology in production, deciding about the nature of the product to be
manufactured, and understanding and keeping in view the external environment and public policy.
The planning, development and designing of an organizational structure through the fixing of the
responsibility and authority of the employees, so that organizational goals may be effectively achieved,
is the other activity that is part of this function.
The third is developing inter-personal relationship through division of positions, tasks and jobs, the
creation of a healthy and fruitful interpersonal relationship, and the formation of a harmonious,
56
cohesive and effectively interacting informal group.
This function concerned with:-
 Human resource effectiveness
 Human resource matrix
 HR planning
 HR technology
 HR retention
2) Staffing and Employment
This includes manpower planning which is a process of analyzing the present and future vacancies that
may occur as a result of retirements, discharges, transfers, promotions, sick leave, or other reasons and
an analysis of present and future expansion or curtailment in the various departments.
The other activities include recruitment, selection process, placement, induction or orientation, transfer
process, promotion, and separation process (the severing of relationship with an employee on grounds
of resignation, lay-off, death, disability, discharge or retirement).
Staffing and employment function concerned with:-
 Job analysis
 Recruiting
 Selection process
 Placement/Orientation
 Transfer process
 Promotion and separation process …etc.
3) Training and Development (Talent Mgt)
This functional area includes:
i) The determination of training needs of personnel at all levels, skill training, counseling, and
programs for managerial, professional and employee development.
ii) Self-initiated development activities such as formal education, reading and participation in the
activities of the community.
Training and development function concerned with:-
 Training, HR development, Career planning and Performance Management
4) Compensation, Wage and Salary Administration (Total Reward)
This involves job evaluation, wage and salary program (developing and operating a suitable wage and
salary program, on the basis of the ability of the organization to pay the cost of living, the supply and
demand conditions in labor market, and the wage and salary levels of other firms); incentive and
57
compensation plan performance appraisal and motivation.
This function concerned with:-
 Compensation, Incentives and Reward, etc.
5) Employee Service and Benefits
This function concerned with:-
i) Safety provision at the workplace
ii) Counseling to help them solve their work and personal problems
iii) Medical service both curative and preventive
iv). Recreational and other welfare facilities
v) Fringe benefits and supplementary items such as:
 Old age survivor’s and disability benefits
 Unemployment compensation
 Pension and death benefits
 Sickness
 Accident and medical care
 Insurance
 Paid rest periods (paid leave)
 Profit sharing benefits, etc.
These benefits are usually given to employees to tempt them to remain in the organization, to provide
them social security, and to reduce absenteeism and labor turnover.
6) Employee Records
Complete and up-to-date information is maintained so that it may be utilized if when the need arises.
Such records include information relating to personal qualifications, special interest, aptitudes, test or
interview results, job performance, leave, promotions, rewards and punishments.
7) Employee and Labor Relations
This means the maintenance of a healthy and peaceful labor-management relation so that
production/work may go on undisturbed. This requires:
i) Developing grievance handling policy and procedures
ii) Framing rules and regulations for the maintenance of discipline
iii) Making efforts to acquire knowledge of, and to observe and comply with the labor
laws of the country.
This function of HRM concerned with:-
 Employee rights and privacy
58
  HR policies
 Union/management relations
8) Personnel Research and Personnel Audit
This function is concerned with:
 A systematic inquiry as to how to make the organization’s personnel more effective
 Procedures and policies and findings submitted to the top executives
 Data relating to quality, wages, productivity, grievances, absenteeism, labor turnover, strikes,
lockouts, accidents, etc.
 Morale and attitude survey.
9) Equal Employment Opportunity (EEO)
This function concerned with:-
 Compliances
 Diversity
 Affirmative action
10) Risk Management and Worker Protection
This function concerned:-
 Health and wellness
 Safety
 Security
 Disaster and recovery planning
1.4 Importance of Human Resource Management (HRM)
The uniqueness of human resource in organizations requires a separate and independent treatment and
study of HRM. Some of the reasons for giving emphasis to the study of human resource management
include the following.
I. Human Behavior is complex
People provide the greatest challenge in organizations and relationship between people is delicate with
highly uncertain permanence. Unlike other resources, human resource is the most complex resource
that needs strong emphasis and special attention. Workers are easily disappointed and this leads to
significant damage in performance and objectives of the organization.
II. Cost
This day’s manpower is becoming increasingly costly. The percentage composition of manpower
expenditure is increasing among the cost functions and organizational budgets. Costs such as salaries,
benefits and services are increasing from time to time. Unlike other costs, the cost of human resource is
59
difficult to reduce once it is provided to workers. Therefore careful study of human resource
management study will help to control human resource costs.
III. Human Resource is Scarce
It is difficult to have the right type of people with the appropriate skill and experience when needed
right away. The smooth operation and performance of many organizations is disrupted because of lack
of the right people when needed. The scarcity of right type of people is even acute in developing
countries than developed countries for various reasons including:
 Lack of trained and experienced workers
 Loss of few trained and experienced people to different developed countries (brain drain)
 Miss use and mismanagement of the few available trained and skilled employees
 Improper placement and assignment of workers
1.5 Environmental Challenges of Human Resource Administration
Almost all the activities and functions of human resource administration are influenced by numerous
environmental factors. Broadly categorized, there are internal and external environmental factors that
affect the human resource activities. The effects of these factors may be positive or negative depending
on the circumstances. Internal environmental factors are those that influence the HRM from within the
organization itself and they are relatively well under the control of the management of the organization.
External factors on the other hand are factors that influence HRM activities from outside the
organization and are outside the scope and control of the organization. External factors provide
opportunities and threats to the HRM functions and activities of an organization. Some of the factors
that affect HRM are:-
A. Internal Factors
- Policies and strategies of the organization
- Nature of the work
- Nature and attitude of the work group
- Leadership styles and philosophies
- Organizational style, etc.
B. External Factors
- Government rules and regulations
- Labor unions
- Economic conditions
- Diversity of the work force
- Geographic location of the organization, and Labor market conditions, etc.
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 CHAPTER- TWO
JOB ANALYSIS AND DESIGN
2.1 Definition of Job Analysis
Job analysis is a systematic analysis of each job for the purpose of collecting information as to what the
job holder does, under what circumstances it is performed and what qualifications are required for
doing the job. It is concerned with the human being or people aspect of organizations.
Job analysis deals with complete study of the job embodying every known and determinable factor,
including:-
- The duties and responsibilities involved in its performance
- The condition under which the work is carried
- The nature of the task
- The qualification required by workers and
- The condition of employment
Job analysis is the determination of the task which comprises the job and the skills, knowledge,
abilities, and responsibilities required of the worker for successful performance and which
differentiates the job from all other jobs. Information collected through job analysis relates to the job
and the jobholder. The requirements relating to the job are termed as job description where as the
qualities demanded from jobholders are known as job specifications.
  Job description and Job specification are the immediate products of job analysis.
The information which appears in job description includes:-
 Name of the job, Code Number, Working Conditions
Supervision given, Responsibility, Duties performed
Equipment’s, tools and machines
The information which appears in job specification includes
Education, Experience, Initiatives, Training, Physical requirement, Mental and visual demand and
Personality
STEPS IN JOB ANALYSIS
There are six (6) steps in doing job analysis
Step1. Decide the use of job analysis information
It is true that the information generated by job analysis can be utilized for practically all functions of
HRA. Nevertheless, it is important to focus on a few areas in which the job analysis information is to

61
be used. These areas can be decided on the bases of the need, priorities, and constraints of particular
organization.
Step2. Review relevant background information such as organization chart, and job descriptions and
process flow chart.
Step3. Select representative positions.
Step4. Carefully analyze the job – by collecting data on job activities, required employees behavior,
working conditions, and human traits and abilities needed to perform the job.
Step5. Verify the job analysis information with the worker performing the job and with his or her
immediate supervisor. This review can also help gain the employee’s acceptance of the job analysis
data and conclusions, by giving the person chance to review and modify your description of the job
activities.
Step6. Develop a job description and job specification.

Methods (Approaches) of Collecting Job Analysis Information

Interviews, questionnaires, observations, and maintenance of records are the most popular methods for
gathering job analysis data.
A. Interview
The job analyst’s interview is used for obtaining information about the job. This method coupled with
observation is considered as the most satisfactory method of job analysis.
Pros of interview
 It’s a relatively simple and quick way of collecting information, including information that
might never appear on a written form.
 Skilled interviewers can reveal important activities that occur only occasionally, informal
contacts that wouldn’t be known from the organization chart.
 The interviewer also provides an opportunity to explain the need for functions of the job
analysis.
 Cons of interview
 It can be extremely time-consuming because of the time required to schedule, get into, and
actually conduct the interview.
 Distortion in information whether due to outright falsification or honest misunderstanding. They
may tend to exaggerate certain responsibilities while minimizing others.
B. Observation

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Direct observation is especially useful when jobs consist mainly of observable physical activities like
assembly worker and accounting clerk. On the other hand, observation is usually not appropriate when
the job entails a lot of mental activities (lawyer, design engineer). By personal observation, the
analysts can come to know about facts relating to jobs though materials, equipment’s, working
condition etc.
C. Written narratives or maintenance of record
Under this method, both the employees as well as his supervisors keep a record of various facts relating
to the job. Since each employee keeps a full record of her/his daily operations starting from the
beginning till end. This method consumes more time than other methods.
D. Job questionnaires
Under this method, questionnaires are circulated among the workers who report the facts about the job.
This method is highly unsatisfactory as it places greater faith on the job holder’s ability to provide
information.
Pros
 A questionnaire is quick and efficient way to obtain information from a large number of
employees.
 It is appropriate to obtain information from a large number of employees in relatively short
period of time.
 Cons
 Questionnaires can be time consuming and expensive to develop.
 There is a possibility that either the respondent or the job analyst will misinterpret the
information.

USES OF JOB ANALYSIS INFORMATION

1. Equal Employment Opportunity (EEO) compliance- job analysis can play a big role in EEO
compliance. For Example, employers must be able to show that their selection criteria and job
performance are actually related. Doing this, of course, requires knowing what the job entails – which
in turn requires a job analysis.
2. Job definition – a job analysis results in a description of the duties and responsibilities of the job.
Such a description is useful to the current jobholders and their supervisors as well as prospective
employees.

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3. Orientation - Effective job orientation cannot be accomplished without a clear understanding of the
job requirements. The duties and responsibilities of a job must be clearly defined before a new
employee can be taught how to perform the job.
4. Employee safety –A thorough job analysis often uncovers unsafe practices and environmental
conditions associated with a job. Focusing precisely on how the job is done usually reveals any unsafe
procedures.
5. Manpower planning –It helps in developing labor supply as labor needs are laid dawn in clear terms.
6. Recruitment and selection –Job analysis provides guidance in recruitment and selection of
employees, as specific requirements of the job are laid down in concrete terms. It provides reliable data
on the bases of which the employees are selected.
7. Promotion and transfer-Job analysis helps in evaluating current employees for promotion and
transfers. If information about the job is available –employees can be transferred from one department
to another without any complication.
8. Compensation –job analysis information is crucial for estimating the value of each job and an
appropriate compensation. Compensation (such as salary and bonus )usually depends on the job
required skills and education level, safety hazards, degree of responsibility, and so on-all factors you
can assess through job analysis.
9. Training and development –The job information helps in determining the content, context and
subject matter of training and development program.
10. Performance appraisal –The standard of performance for employees can be set on the bases of
information provided by job analysis and actual performance can be compared with these standards. It
helps the management in judging the worth of employees.
11. Job evaluations-Job analysis provides data determining the value of the job in relation other jobs on
the bases of which actual wages for the jobs are fixed.

2.2 Job Description

It is factual and organized statement describing the job in terms of its title, location, duties,
responsibilities, working conditions, hazards, and relationship with other jobs. It tells us what to be
done, how it is to be done and why. The main objective of job description is to differentiate a given job
from other job and to set out its outer limits. Job description is an important document as it helps to
identify the job and give a clear idea of what the job is.
Contents of job description

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 Job identification: Job title, code number of the job, department or division where the job is
located. This part of job description helps to identify and designate the job.
 Job summary: It describes the contents of the job in terms of activities or tasks performed.
 Job duties and responsibilities: It is the heart of job description. It describes the duties
performed along with frequency of each major duty and responsibilities concerning custody of money,
supervision, training of staff, etc. are also described in this part.
 Working condition: The physical environment of the job is described in terms of heat, light,
noise level, dust, etc. Nature of risk and hazards and their possibility of occurrence are also given.
 Social environment: Size of work group and inter-personal interactions required to perform the
job are given.
 Machines, tools and equipment’s: The name of major machines, equipment’s, and materials
used in the job are described.
 Supervision: The extent of supervision given or received is stated in terms of persons to be
supervised along with their job titles. Designation of immediate superior and subordinates may also be
described.
 Relation with other jobs: The jobs immediately, above and below are mentioned. It provides an
idea of vertical workflow and channel of promotion. It also indicates to whom the jobholder will report
and who will report to him/her.

Specimen of job description

Job title: Manager, wage and salary administration
Code number: HR/1705
Department: Human resource division
Job summary: Responsible for company wage and salary programs, job analysis, job evaluation,
wage and salary surveys and benefit administration.
Job duties:
 Supervises job analysis studies and approves final form of descriptions.
 Acts as a chairman of companywide job evaluation committee
 Conduct periodic wage and salary surveys in the community and industry
 Administer the company’s fringe benefits program.
Working conditions:
Normal working conditions Eight hours per days a week.
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Supervision:
It reports to director, human resources, and exercise supervision on officers in the wage and salary
department in human resource division of the company.
Relationships: → with equivalent levels of other departments.
→ Maintain official social contacts with local officials.

2.3 Job Specification

It is a statement of the minimum acceptable human qualities required for the proper performance of the
job. It is a record of the physical, mental, social and psychological, and behavioral characteristics
which a person should possess in order to perform the job effectively. Physical characteristics include
height, weight, vision, hearing, health, age, hand foot coordination. Mental characteristics consist of
general intelligence, memory, judgment, ability to concentrate, foresight etc. Social and psychological
characteristic include emotional stability, flexibility, personal appearance, pleasing manner, initiative,
drive, conversational ability etc. Other personal characteristics include sex, education, family,
background, job experience, extra-curricular activities, hobbies, etc.
Job specification tells what kind of person is required for a given job. It serves as a guide in the
recruitment and selection processes. See the typical example of job specification of compensation
manager below

Specimen of Job specification

Position title: Manager, wage and salary administration.
Department: Human resource division.
Education and training: →Bachelor degree with at least 3.00 CGPA
→A degree or diploma in law will be desirable qualification.
→ MBA with specialization in HRM.
2.4 Job Design
Job design is the logical sequence to job analysis. It integrates work content (tasks, functions, and
relationships), Qualifications and rewards for each job in a way that meets the needs of employees and
the organization. The needs of the organization are productivity, operational efficiency, and quality of
products or services. On the other hand, workers/ employees want to satisfy their needs for interests,
challenges and accomplishment.
The information provided by job analysis, job descriptions, and job specifications can be very useful in
designing jobs; that is, structuring job elements, duties and tasks in a manner to achieve optimal
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performance and satisfaction. There is no one best way to design any job. Different situations call for
different arrangements of job characteristics. Two of the many available approaches to job design are
the rational approach and job enrichment.

Techniques of job design

1. Work simplification: A job is broken down into sub parts and each part is assigned to one individual.
F.W.Taylor was one of the first to reduce each job to its simplest tasks to be performed by one worker.
However, this technique has led to boredom, dissatisfaction, alienation, and frustration.
2. Job rotation: It involves the movement of employees from one task to another to reduce monotony
by increasing variety.
Merits: Boredom is ended; Worker becomes proficient in many jobs; Worker's image, Improves;
Interdepartmental co-operation established.
Demerits: Does not improve efficiency.
3. Job enlargement: It is opposite to work simplification. It involves combining previously fragmented
tasks into one. It increases the variety and meaning of repetitive work. E.g. 12 hours teaching becomes
15 hours. If the task was monotonous earlier, it becomes more monotonous now, thanks to the job
enlargement.
4. Job enrichment: It involves giving employees more responsibility, authority, and control in their
jobs. An enriched job will have more responsibility and autonomy (vertical enrichment), more variety
of tasks (horizontal enrichment) and more growth opportunities. Enrichment requires that workers do increased
planning and controlling of their work, usually with less supervision and more self-evaluation. It improves task
efficiency and human satisfaction; provides greater scope of personal achievement and recognition and provides
more scope for individual growth.
5. Autonomous or self-directed teams: In this arrangement, the group works without direct supervision. The
groups are allocated an overall task and given discretion over how the work is done. It gives people autonomy
and the means to control their work. Such kind

CHAPTER- THREE
EMPLOYEE RESOURCING
3.1 Meaning of Human resource planning (HRP)

Human resource planning involves forecasting the organization’s future demand for employees,
forecasting the future supply of employees within the organization, and designing programs to correct
the discrepancy between the two.
Human resource planning is the process of translating over all organizational objectives, plans, and

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programs to achieve specific performance of work force needs. The systematic and the continuing
process of analyzing an organization’s human resource needs under changeling conditions and
developing personnel policies, appropriate to the long term effectiveness of the organization.
The purpose of human resource planning is to ensure that, in the future, the organization has enough
employees with the appropriate skill so that it can accomplish its short and long-term goals.
The Activities of Human Resource Planning
Manpower planning is the responsibility of the human resource department. It involves the following:
a) Forecasting future manpower requirements, either in terms of mathematical projections of
trends in the economic environment and development in industry, or in terms of judgmental
estimates based upon the specific future plan of a company;
b) Making an inventory of present manpower resources and assessing the extent to which these
resources are employed optimally;
c) Anticipating manpower problems by projecting present resources into the future and comparing
them with the forecast of requirements to determine their adequacy, both qualitatively and
quantitatively; and
d) Planning the necessary programs of requirement, selection, training, development, utilization,
transfer, promotion, motivation and compensation to ensure that future manpower requirements
are properly met.
Thus, in short, manpower or human resource planning consists of projecting future manpower
requirements and developing manpower plans for the implementation of the projection.
The Needs (Reason) for human resource planning
The major reasons for HRP are:
A. Scarcity of personnel in some specialized areas.
One rationale for HRP is the significant lead-time that normally exists between the recognition of need
to fill a job and the securing of qualified person to fill that need. In other words, it is usually not
possible to go out and find an appropriate person overnight. Effective HRP can also help reduce turn
over by keeping employees apprised of their career opportunities within the company.
B. To achieve more effective and efficient use of people at work
HRP should precede other HRM activities. It is difficult to envision how an organization could
effectively recruit, select, or train employees without advance planning. In addition, efficient use of
those human resources already employed by an organization can really be achieved only through
careful planning activities. Especially in today’s competitive environment reduction of the work force
(downsizing) has almost become a way of life for organizations. HRP is an essential part of this process

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as well.
C. To provide organizations with the necessary qualified, skilled and experienced personnel
D. To constantly replace personnel that leave organizations because of old age, physical disabilities,
mental illness or death
E. To meet the needs of expansion programs which become necessary because of increase in the
demand for goods and services by growing population, a rising standard of living, etc.
F. To meet the challenge of a new and changing technology and new techniques of production;
G. To identify areas of surplus personnel or areas in which there is a shortage of personnel and
rearrange or rectify.
Procedures of human resource planning
The following are the main procedures in HRP:
 Deciding about goals or objectives (Conducting external and internal environmental scanning).
 Determining future HR requirements.
 Determining future HR availabilities.
 Determining net man power requirement (NMPR)
 Developing action plan.
1. Deciding about goals or objectives
 Conducting external and internal environmental scanning
A number of external influences affect the conduct of HR management. These include Economic
conditions, labor market, laws and regulations, and labor union. Accordingly, these factors are also
grist for HR planning.
Of the various areas mentioned through environmental scanning, the labor market is most directly
relevant to HR planning. If tight labor market is expected, the organization must plan to put
considerable time and money in to attracting and retaining the needed talent. It is also important for an
organization to scan its internal environment. The monitoring of key indexes such as employee
performance, absenteeism, turnover, and accident rates help us to learn what is going on in the
organization.
2. Determining future human resource requirement
This step involves considering what the organization’s HR needs will be in the future. This includes the
number of employees that will be needed, the type of skills that will be required, productivity levels
needed to complete successfully, and so forth.
The logical place to begin this process is with an organization’s business plan (long-term and
operational plan). These plans usually indicate major sales, production, and financial goals. This

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information tells the human resource planner whether volumes will be going up, staying the same, or
going down.
From organizational plan we can infer whether or not there will be any change in the basic technologies
the organization uses to make, and distribute its products /services. Such changes typically are
introduced as a means of increasing employee productivity and thus reducing future human resource
requirements.
3. Determining future human resource availabilities
The task here is to estimate the number and types of employees that will be available in various job
categories at the end of planning period. This phase of HR planning is designed to answer the question,
“how many and what kinds of employees do I currently have interims of the skills and training
necessary for the future?” It all begins with an inventory of employees expected to be available in
various job categories at the start of planning period. From these figures are subtracted anticipated
losses during planning period due to retirements ,voluntary turnover , promotions, transfers, death,
quits, resignation and others.
4. Determining net manpower requirements
This requires comparing over all personnel requirement with personnel inventory where the difference
is net requirement.
5. Developing action plans
Once the supply and demand of human resource are estimated, adjustments may be needed. When the
internal supply of workers exceeds the firms demand, a human resource surplus exists. The alternative
solutions include: early retirements, demotions, layoffs, terminations, attrition, voluntary resignation
inducement, reclassification, transfer, work sharing and hire freezing.
Decisions in surplus conditions are some of the most difficult that managers must make, because the
employees who are considered surplus are seldom responsible for the condition leading to surplus. A
shortage of raw materials such as fuel or a poorly designed or poorly marketed product can cause an
organization to have a surplus of employees.
As a first approach to dealing with a surplus, most organizations avoid layoffs by relying on attrition,
early retirements, and creation of work and the like. Many organizations can reduce their work force
simply by not replacing those who retire or quit.
When the internal supply cannot fulfill the organization’s needs, a human resource shortage exists. If
the shortage is small and employees are willing to work over time, it can be filled with present
employees. If there is a shortage of highly skilled employees, transfer, training and promotions of
present employees, together with the recruitment of employees, are possibilities. This decision can also
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include recalling employees who were previously laid off. Now days many organizations make use of
part time workers, subcontractors, and independent professionals in response to changing demands.
Using these kinds of employees give an organization surplus of labor than maintaining more traditional
fulltime employees for all jobs.
3.2 Recruitment and selection process
3.2.1 Recruitment
Definition of Recruitment
Recruitment is the process of searching for prospective employees and stimulating them to
apply for jobs in the organization. Source of manpower can be internal or external.
Recruitment is the process of attracting potential new employees to the organization. This HR
program is closely related to selection, because it supplies a pool of qualified applicants from
which the organization can choose those best suited for its needs.
Recruitment refers to the process of generating job applicants. Obviously, if an organization
fails to obtain applicants who are qualified for the job, it will face a problem in selection phase,
Likewise, if too few applicants apply, an organization may be unable to fill all of its vacancies.
It is therefore critical for organizations to identify and properly utilize effective recruitment
practice. Recruitment needs are of three types: planned, anticipated and unexpected. Planned
needs arise from changes in organization retirement policy. Resignation, death, accidents and
Illness gives rise to unexpected needs. Anticipated needs refer to those movements in
personnel, which an organization can predict by studying trends in external and internal
environments.
Features of Recruitment
 Recruitment is a process or a series of activities rather than a single act or event.
 Recruitment is linking activity as it brings together those with job (employer) and those
seeking jobs (employees).
 Recruitment is a positive function as it seeks to develop a pool of eligible persons from
which most suitable ones are selected.
 The basic purpose of recruitment is to locate the source of people required to meet job
requirements and attracting such people to offer themselves for employment in the
organization.
 Recruitment is an important function as it makes possible to acquire the number and
type of persons necessary for the continued function of the organization.
 Recruitment is a pervasive function as all organizations engage in recruitment activity.

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 But the volume and nature of recruitment varies with the size, nature and environment
of the particular organization.
 Recruitment is a complex job because too many factors affect it. E.g., image of the
organization, nature of job offered, organizational polices, working conditions,
compensation levels in the organization and rate of growth of the organization etc.
Sources of recruitment
An organization may fill particular job either with someone already employed by the organization
(Internal source) or with someone from outside (External source). Each of these sources has
advantages and disadvantage.
1. Internal sources: Internal sources consist of the following:-
Present employee-permanent, temporary and causal employees already on the payroll of the
organization are good sources. Vacancies may be filed up from such employees through promotion,
transfers, and upgrading and so on. Transfer implies shifting of an employee from one job to another
without any major change in the status and responsibilities of the employee. On the other hand,
promotion refers to shifting of an employee to a higher position carrying higher status, responsibilities
and pay. Retired and retrenched employees who want to the company may be rehired.
Internal sources have the following advantages:
 Morale and motivation of employees is improved when they are assured that they will be
preferred in filling up vacancies at higher levels. A sense of security is created among
employees.
 Suitability of existing employees can be judged better as record of their qualifications and
performance is already available in the organization. Chances of proper selection are higher.
 It promotes loyalty and commitment among employees due to sense of job security and
opportunities for advancement.
 Present employees are already familiar with the organization and its polices. Therefore, time
and cost of orientation and training is low.
 The time and cost of recruitment is reduced, as there is little need for advertising vacancies, or
arranging rigorous tests and interviews.
 Relations with trade unions remain good because unions prefer recruitment particularly through
promotion.
 Filling of a higher-level job through promotion within the organization helps to retain talented
and ambitious employees. Labor turnover is reduced.
 It improves return on investment of human resource.
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Internal source, however, suffer from some demerits:
 First, it may lead to inbreeding.
 Second, if promotion is based on seniority, really capable persons may be left out.
 Third, the choice of selection is restricted. More talented outsiders may not be employed.
Mobility of labor is restricted. Chances of favoritism are higher and the limited talent of
inside restricts growth of business.
 Finally, this source of recruitment is not available to newly established enterprises.

2. External sources
An external source of recruitment is recruitment from outside the organization. These are: _
A. Campus recruiting
- Recruiting from colleges and universities is common practice of both private and public
organizations. In college recruiting the organization sends an employee, called recruiter, to a
campus to interview candidates and describes facts about the organizations.
- The organization may conduct seminars at which company executives talk about various facts
of the organization.
- From the employer’s perspective, campus recruitment offers several advantages, as well as
several shortcomings.
- On the positive side, many organizations find the college campus an effective source of
applicants. The placement center typically helps locate applicants that have at least some
qualification, since they have demonstrated the ability and motivation to complete a college
degree. Another advantage of campus recruitment is that students generally have lower salary
expectations than more experienced applicants.
- On the negative side, the campus recruitment suffers from several distinct disadvantages
compared with other recruitment sources. First, most of the applicants have little or no work
experience. Thus, the organization must be prepared to provide some kind of training to
applicants they hire. Second, campus recruitment tends to depend on seasons. Third, campus
recruiting can be quite expensive for organizations located in another city. Costs such as airfare,
hotels, and meals for recruiters as well as applicants’ visit can become quite higher for
organizations located at a distance from the university.
B. Walk INS/ unsolicited applications
Many applicants search for jobs either by walking in to organizations and completing an application
blank or by mailing a resume in the hope that a position is available. Corporate image has a
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significant impact on the number and quality of people who apply to an organization in this manner.
Compensation policies, working conditions, relationships with labor, and participation in the
community activities are some of the many factors that can positively or negatively influence an
organization’s image.
- The major advantage of this source is that it is relatively of low cost, because the organization
is not spending money to advertise and collect the resumes.
- On the other hand, there are several disadvantages. First, although there are no advertising
costs, there is a cost associated with processing and sorting the resumes and application blanks.
Second, minorities are less likely to apply for jobs that have not been advertised.
This source tends to favor applicants who are actively searching jobs; highly qualified applicants who
are satisfied with their current jobs are unlikely to apply.
C. Employee referrals
- Many organizations involve their current employees in recruiting process.
- These recruiting systems may be informal and operated by word of mouth, or they may be
structured with definite guidelines to be followed.
- Incentives and bonuses are sometimes given to employees who refer subsequently hired people.
- Employee referral programs have pros and cons.
- Current employees can and usually will provide accurate information about the job applicants
they are referring, especially since they are putting their own reputation on line. The new
employees may also come with a more realistic picture of what working in the firm is like after
with friends there.
- But the success for the campaign depends a lot on employee morale. And the campaign can
backfire if an employee’s referrals are rejected and the employee becomes dissatisfied. Using
referrals exclusively may also be discriminatory if most of the current employees and their
referrals are from certain segment only.
- Other draw back to the use of employee referrals is that cliques may develop within the
organization because employees tend to refer only friends or relatives.
D. Newspaper advertisements
- This is method of job recruitment by advertising on a newspaper.
- If you look at the editions of newspapers such as ADDIS ZEMEN, ETHIOPIAN HERALD, and
the REPOERTER, you will find page after page job advertisements.
- Given the popularity of newspaper advertisement, it is not surprising that this source has
several advantages. First, job advertisement can be placed quite quickly, with little lead time.
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 Newspaper advertisement permit a greater deal of flexibility in terms of information.
- On the negative side , newspaper ads tends to attract only individuals who are actively seeking
employment, while some of the best candidates , who are well paid and challenged by their
current jobs, fail to even be aware of these openings. Also, a company may get many applicants
who are marginally qualified or completely unqualified for the job. Thus, this source may
generate a great deal of administrative work for the organization, with little in return.
- They also target specific geographic area.

E. Television and Radio advertisements

- This is method of job recruitment by advertising open positions using television and radio spots.
- This recruitment sources offers several potential advantages, particularly compared with
newspaper advertisement. First, television and radio ads are more likely to reach individuals
who are not actively seeking employment. Television and radio ads also enable the organization
to target the audience more carefully, by selecting the channel or station and the time of day the
advertisement is aired.
- On the negative side, television and radio ads are rather expensive. In addition airtime may be
quite costly. Because the television and radio advertisement are simply seen or heard, potential
candidates may have a difficult time remembering the information, making application difficult.
For this reason, some employers choose to use the television or radio advertisement as a
supplement to a more traditional news pepper advertisement.
- In sum, despite their costs, television and radio ads may be highly effective recruitment sources.
F. Recruiting on Internet
- A large number and fast growing proportion of employers use the Internet as a recruiting tool.
- Employers list several advantages of internet recruiting. First, it is cost effective: The
newspaper advertisement may keep attracting applications for 30 days or more. Internet
recruiting can also be timelier. Responses to electronic job listing may come the day the
advertisement are posted, where the responses to newspaper advertisement can take weeks just
to reach an employer. Some employers cite just such a flood of responses as a down side of
internet recruiting.
- The problem is that the relative ease of responding to internet advertisement encourages
unqualified job seekers to apply; furthermore, applications may arrive from geographic areas
that are unrealistically far away.
The Advantages and Disadvantages of External sources of Recruitment
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 External sources offer the following advantage:
 People having the requisite skill, education and training can be obtained.
 Expertise and experience from other organization can be obtained.
 This source of recruitment never “dries up”. It is available to even new enterprises.
 It helps to bring new employees and new ideas into the organization.
External sources, however, suffer from the following disadvantages
 It is more expensive and time-consuming to recruit people from outside. Detailed screening is
necessary as very little is known about the candidates
 The employees being unfamiliar with the organization, their orientation and training is
necessary
 If higher levels are filled from the external source, motivation and loyalty of existing staff are
affected.
3.2.2 SELECTION PROCESS
Meaning
- Selection is the process by which an organization chooses from a list of applicants the person or
persons who best meet the selection criteria for the position available, considering current
environmental conditions.
- Selection is the process of matching the qualification of applicants with job requirement.
Selection divides all applicants into the categories- suitable and unsuitable. Selection may also
be described as a process of rejection because generally more candidates are turned away than
the hired. Selection differs from recruitment. Recruitment technically precedes selection.
Recruitment involves identifying the source of manpower and stimulating them to apply for
jobs in the organization. On the other hand, selection is the process of choosing the best out of
those recruited. Recruitment is positive as it aims at increasing the number of applicants for
wider choice or increase selection ratio. Selection is negative as it rejects a large number of
applicants to identify the few who are suitable for the job. Recruitment involves prospecting or
searching whereas selection involves comparison and choice of candidates.
- The purpose of selection is to pick up the right person for every job. Selection is an important
function as no organization can achieve its goals without selecting the right people. Faulty
selection leads to wastage of time and money and spoil the environment of the organization.
The significant of Employee Selection
Effective selection is highly important for an organization’s future success because;
 Selection is more powerful way of improving productivity. Selecting qualified and competent
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 employees improves the benefits an organization reaps.
 Selection decision is a long lasting decision. Once the decision is made reversing it is very
difficult .If an organization hires poor performers, it cannot be successful long, even if it has a
perfect plan and good control system s. In today’s organizations what makes the kind of success is
mainly the human resource you have, not technology or financial resource.
 Selection affects other HR functions. If less qualified people are selected, then it will be necessary
to budget funds for training them.
The Environmental factors that affect the selection process are:-
A. Legal considerations
- HRM is influenced by legislation, executive orders, and court decisions.
- Managers who hire employees must have extensive knowledge of the legal aspects of selection.
- They must see the relationship between useful and legally defendable selection tools.
B. Organizational hierarchy
- Different methods of selection are taken for filling positions at varying levels in the
organization. For example, extensive background checks and interviewing would be conducted
to verify the experience and capabilities of the applicant for the sale’s manager position.
- On the other hand, an applicant for a clerical position (secretary) would most likely take only
a word processing test and perhaps a short employment interview.
C. Applicant pool (labor market)
- The number of qualified applicants for a particular job can also affect the selection process.
- The process can be truly selective only if there are several qualified applicants for a particular
position.
- When the applicants are very few, then selection process becomes a matter of choosing
whoever is at hand.
D. Probationary period
- Many Organizations use a probationary period that permits them to evaluate an employee’s
ability based on established performance.
Probationary period is required for either of the following two reasons:-
 A substitute for certain phases of the selection process (If an individual can successfully
perform the job during the probationary period , other selection tools may not be needed) or
 A check on the validity of the selection process ( to determine whether the hiring decision was a
good one)
SELECTION CRITERIA
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 - At the core of any effective selection system is an understanding of what characteristics are
essential for high performance.
- This is where the critical role of job analysis in selection becomes most apparent, because that
list of characteristics should have been identified during the process of job analysis and should
now be accurately reflected in job specification.
- Thus, from a performance perspective, the goal of any selection system is to accurately
determine which applicant’s possess the skill, knowledge, ability and other characteristics
required by the job.
- Different selection criteria may, indeed, be needed to assess these qualitatively different
requirements.
Categories of criteria
The criteria typically used by organizations for making selection decision can be summarized in several
broad categories: education, experience, physical characteristics, and other personal
characteristics.
A. Formal education
- An employer selecting from a pool of job applicants wants to find the person who has the right
abilities and attitudes to be successful.
- A large number of cognitive, motor, physical, and interpersonal attributes are present because of
genetic predispositions and because they were learned at home, at school, on the job and so on.
One of the more common cost- effective ways to screen of many of these abilities is by using
educational accomplishment as a surrogate form of summary of the measures of those abilities.
- Rather than using a selection test to measure each of these, the organization might simply require
that applicants have proof that they have completed the specified level of education.
- For certain jobs, the employer might go one or more steps further than simply requiring that
certain educational level has been achieved; the employer may stipulate that the education
(especially for college-level requirements) is in a particular area of expertise, such as accounting,
public administration or management.
- The employer might also prefer that the degree be from certain institutions that the grade point
average is higher than some minimum, and those certain honors have been achieved.
B. Experience and past performance
- Another useful criterion for selecting employees is experience and past performance.
- Many selection specialists believe that past performance on a similar job might be one of the
best indicators of future job performance.
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 - In addition, employers often consider experience to be a good indicator of ability and work
related attitudes. Their reasoning is that a prospective employee who has performed the job
before and is applying for a similar job must like the work and be able to do the job well.

C. Physical characteristics
- In the past, many employers consciously or unconsciously used physical characteristics as a
criterion.
- Studies found that employers were most likely to hire and pay better wages to taller men, and
airlines choose flight attendants and company receptionists on the base of beauty.
- Many times such practices discriminated against ethnic groups, women, and handicapped people.
For this reason, they are now becoming illegal unless it can be proved that a physical
characteristic is directly related to effectiveness at work.
- For example, visual acuity (eyesight) would be a physical characteristic that could be used to hire
pilots. It might not, however, be legally used for hiring a telephone reservations agent for an
airline.
D. Personality characteristics and personality type
- Personal characteristics include marital status, sex, age, and so on. Some employers have, for
example, preferred “stable’’ married employees over single people because they have assumed
that married people have a lower turnover rate.
- On the other hand, other employers might seek out single people for some jobs since a single
person might be more likely to accept a transfer or a lengthy overseas assignment. Age, too, has
sometimes been used as a criterion.
- However, minimum and maximum age restrictions for the job may be used only if they are
clearly job related. Thus, age should be used as a selection criterion only after very careful
thought and consideration.

THE SELECTION PROCESS

- The selection process consists of a series of steps.
- At each stage facts may come to light, which may lead to rejection of the applicant.
- It is a series of successive hurdles or barriers, which an applicant must cross.
- These hurdles are designed to eliminate unqualified candidates at any point in the selection
process. However, every selection procedure dose not contains all these hurdles.
- Moreover, the arrangement of these hurdles may differ from organization to organization. There
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 is no standard selection procedure to be used in all organization or for all jobs.
- The complexity of selection procedure increases with the level and responsibility of the position
to be filled.
- The strategy and method used for selecting employees varies from organization to organization
and from one job to another.
Steps involved in employee selection may be described as here under:
1. Application blank: Application form is a traditional and widely used device for collecting information
from the candidates.
- Small firms design no application form and ask the candidates to write details about their age,
marital status, education, work experience, etc. on a plane sheet of paper.
- But big companies use different types of application forms for different jobs.
- The application form should provide all the information relevant to selection.
2. Preliminary interviews: The preliminary interview is used to determine whether the applicant’s skills,
abilities, and the job preferences match any of the available jobs in the organization, to explain to the
applicant the available jobs and their requirements, and to answer any question the applicant has about
the available jobs or the employer.
- A preliminary interview is usually conducted after the applicant has completed the application
form. It is generally a brief, explanatory interview to screen out unqualified or uninterested
applicants. Interview questions must be job related and are not subject to demonstration of
validity.
3. Employment test: A technique that some organizations use to aid their selection decisions is
employment test. An employment test is a mechanism that attempts to measure certain
characteristics of individuals. The basic categories of tests are:
 Aptitude test: means of measuring a person’s capacity or latent ability to learn
and perform the job.
 Psychomotor test: test that measures a person’s strength, dexterity, and Coordination.
 Job knowledge test: Tests used to measure the job related knowledge of the
applicants.
 Proficiency test: tests used to measure how well a job applicant can do a
sample of the work to be performed, in the job with no error.
 Interest Test: tests designed to determine how a person’s interest compared
with the interest of successful people in a specific job.
 Personality test: tests that attempt to measure personality traits.
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  Polygraph test: the polygraph, popularly known as the lie detector, is a device that records
physical changes in the body as the test subject answers a serious of questions. The polygraph
records fluctuations in blood pressure, respiration, and perspiration on a moving roll of graphic
paper. The polygraph operator makes a judgment as to whether the subject’s response was
truthful or deceptive by studying the physiological measurements recorded on paper.
 Graphology (hand writing analysis): use of trained analysis to examine a person’s hand writing
to assess the personality, emotional problems, and honesty.
4. Secondary or follow-up interview or Employment interview
- Most organizations use the secondary or follow up interview as an important step in the
selection process.
- Its purpose is to supplement information obtained in other steps in the selection process to
determine the suitability of an applicant for a specific opening.
- All questions asked during an interview must be job related.
There are different types of interviews and different organizations use one or more of them to make
their selection decisions. Interview types that are generally used are discussed below.
 Structured interview
In this form of interview, the interviewer follows a predetermined approach designed to ensure that all
pertinent factors relating to he candidate’s qualifications suitability for the job will be gone over. This
type of interview also allows an interviewer to prepare in advance, questions that are job-related and
then complete a standardized interviewer evaluation form.
 Semi-structured interview
Here only the major questions to be asked are worked out beforehand. The interviewer also has the
option to prepare in-depth questions in certain areas. Clearly, the interviewer, in this approach, needs to
prepare more adequately and his role has greater flexibility than in the structured style. During the
course of the interview, where the occasion rises the interviewer has the freedom to probe. The
interviewer’s objective, in the semi-structured format, should be to achieve the ideal balance between
adequate structures facilitating exchange of factual information, with adequate freedom to develop a
clear perception of the candidate’s work.
 Unstructured interview
This may be defined as the process of active listening. Normally used in psychological counseling, it is
also widely used in selection. The interviewer has a wider canvas and the choice to prepare a list of
topics to be covered rather than the question s. little preparation is required on the part of the
interviewer. The interviewer asks general questions designed to prompt the candidate to discuss him or
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herself and often uses a thought or idea expressed on one response as the base for the next question.
The plus point of the unstructured approach is the freedom the interviewer has to adapt both to the
changing situations and a variety of candidates. The difficulties, however, lie in the maintenance of job
–relatedness and obtaining of comparable data on each applicant. Spontaneity is the chief
characteristics of this approach but the pitfalls are daunting. In the hands of untrained interviewer,
biases invariably creep in and digressions, discontinuity and a host of subjective elements may well
destroy or negate the fundamental objective of selecting the best available talent.
 Stress interview
This is a special type of interview designed to asses and provides use full information as to whether a
person would be able to cope with stress on the job or not. Stress interviews are deliberate attempts to
create tension and pressure in an applicant to see how well he or she responds to those tensions and
pressures. Methods used to induce stress, ranges from frequent interruptions and criticism of an
applicant’s opinion, to keeping silent for an extended period of time.
 Depth Interview
In this case, an attempt is made to cover completely the life history of the applicant and develop a
comprehensive profile based on in-depth understanding of the frozen aspects of his or her personality
such as education, extra-curricular activities, early childhood experiences, etc. as well as the flexible
aspects such as hobbies, interests, hopes, desires, aspirations, goals etc. This is a time consuming and
costly approach best suited for executive selection rather than blue or white collar workers, its major
advantage is in getting a complete, detailed understanding of the candidate but the price paid in terms
of time and money need to be carefully weighed.
Problems in Interviews
Despite the wide spread use of the employment interview, it continues to be the source of a variety of
problems of the selection process. There is no doubt that problems of reliability can develop in the use
of interviews when they are less structured or conducted by relatively untrained interviewers.
Following is a list of some sources of errors in the interview process.
 Contrast effects or Hallow effect: The order of interviewees’ influence ratings. For
instance, Strong candidates who succeed weak ones look even stronger by contrast.
 Similarity to interviewer: interviewee’s similarity in sex, age, ethnicity, religion and or
attitude to interviewers may lead to favorable evaluation at the expense of the expectations
of the job.
 Non-verbal signals: interviewers often fall in to the trap of using non- verbal behavior
patterns as a basis for reaching a decision. Factors such as how a candidate looks, sits in the
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 chair , maintains eye contact, fidgets or his or her facial expressions may be allowed to
become overriding criteria and this can easily in by –passing competent candidates
 Interviewer lack of knowledge: Where this happens there is almost invariably a
miscarriage of justice. The interviewer’s lack of familiarity with job requirements prevents
him or her from identifying those characteristics in the candidate that makes him or her
suitable for the job. Instead, he or she might well be eliminated for the wrong reasons.
 Over –emphasis on negative characteristics: quite often, there is a natural human tendency
on the part of interviewers to succumb to the pitfall of assigning undue emphasis to one or
two negative qualities of the applicant. Many good aspects suited to the job at hand may be
ignored in the process, the interviewer must consciously attempt to look beyond small
drawbacks in the candidate and take an objective, broad –based view.
 Snap judgment: there is a tendency for the interviewers to make up their minds on the first
impression of the candidate. Based on the first observation of the applicant and the first few
minutes of discussion, a judgment is arrived which in fact, may be quite erroneous. Too
often, interviewers from an early impression and spend the rest of the time looking for
evidence to support it. The attempt, on the other hand, should be to collect comprehensive
information about the candidate and reserve judgment until various aspects and areas have
been probed.
5. Reference Checks
The applicant is asked to mention in his application form the names and addresses of two or three
persons who know him or her well. They may be his or her previous employers, head of educational
institutions or public figures. The organization contacts them by mail or telephone. They are requested
to provide their frank opinion about the candidate with out incurring any liability. They are assured that
all the information supplied will kept confidential.
6. Selection Decision
In most of the organizations, the human resource department carries out selection process. The decision
of this department is recommendatory. The executive of the concerned department finally approves the
candidates short-listed by the department.
7. Physical examination or Medical evaluation
Applicants who have crossed the above stages are sent for a physical examination either to the
company’s physician to the medical officer approved for the purpose. Such examination serves the
following purposes:-
 It determines whether the candidate is physically fit to perform the job. Those who are
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 physically unfit are rejected.
 It reveals existing disabilities and provides a record of the employee’s health at the time of
selection. This record will help in settling company’s liability under the workmen
compensation act for claim of an injury.
 It prevents the employment of people suffering from contagious diseases.
8. Final approval or hiring decision
Employment is offered in the form of an appointment letter mentioning the post, the rank, the salary
grade, and the date by which the candidate should join and other terms and conditions in brief.
9. Reviewing the hiring process
After completing the hiring, the selection process ought to be evaluated. Here are some considerations
in the evaluation:-
- What about the number of initial applicants?
- Where there too many applicants? Too few?
- Does the firm need to think about changing its advertisement and recruiting to get the results
desired?
- What was the nature of the applicant’s qualification?
- Were the applicants too qualified enough? How cost effective was the advertising?
- Were there questions that needed to be asked but weren’t?
- How well did the interviewers do? One way to determine this is to ask the new employee to
critique the interviewing process.
- Did employment tests support or help the hiring decision?
3.3. INDUCTION/ORIENTATION
Orientation is the process of acquainting new employees with the organization. Orientation topics
range from such basic items as the location of the company cafeteria to such concerns as various career
paths within the firm.
Hence we can say that induction or orientation is the process through which a new employee is
introduced to the job and the organization. In the words of Arm strong, induction is "the process of
receiving and welcoming an employee when he first joins a company and giving him the basic
information he needs to settle down quickly and start work”.
Orientation is designed to provide a new employee with the information he or she needs to function
comfortably and effectively in the organization. It conveys three types of information:
 General information about the daily work routines;
 Organization history, objectives, operations, products, etc.
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  Organization policies, work rules and employee benefits.
Thus, orientation/induction is the planned introduction of new employees to their jobs, coworkers and
the organization.
Purposes of orientation
In general, induction serves the following purposes:
1. Removes fears: A newcomer steps into an organization as a stranger. He is new to the people,
workplace and work environment. He is not very sure about what he is supposed to do. Induction helps
a new employee overcome such fears and perform better on the job. It assists him in knowing more
about:
 The job, its content, policies, rules and regulations.
 The people with whom he is supposed to interact. .
 The terms and conditions of employment.
2. Creates a good impression: Another purpose of induction is to make the newcomer feel at home and
develop a sense of pride in the organization. Induction helps newcomer to:
 Adjust and adapt to new demands of the job.
 Get along with people.
 Get off to a good start.
Through induction, a new recruit is able to see more clearly as to what he is supposed to do, how good
the colleagues are, how important is the job, etc. He/she poses questions and seeks clarifications on
issues relating to his/her job. Induction is a positive step, in the sense; it leaves a good impression about
the company and the people working there in the minds of new recruits. They begin to take pride in
their work and are more committed to their jobs.
3. Act as a valuable source of information: Induction serves as a valuable source of information to
new recruits. It classifies many things through employee manuals/handbook. Informal discussions with
colleagues may also clear the fog surrounding certain issues. The basic purpose of induction is to
communicate specific job requirements to the employee, put him at ease and make him feel confident
about his abilities.
Some of the benefits of good employee orientation include the following: Strong loyalty to the
organization; Greater commitment to organizational values and goals; Low absenteeism; higher job
satisfaction and Reduction in turnover.
Steps in Induction Program
The HR department may initiate the following steps while organizing the induction program:
 Welcome to the organization
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  Explain about the company.
 Show the location, department where the new recruit will work. .
 Give the company's manual to the new recruit.
 Provide details about various work groups and the extent of unionism within the company.
Content of induction
The areas covered in employee induction program may be stated as follows:
1. Organizational issues
History of company; Names and titles of key executive; Employees' title and department; Layout of
physical facilities; Probationary period; Products/services offered; Overview of production process;
Company policy and rules; Disciplinary procedures; Safety steps; Employees' handbook.
2. Employee benefits
Pay scales, pay days, Vacations, holidays, Rest pauses, Training, Avenues, Counseling, Insurance,
medical, recreation, and retirement benefit..etc.
3. Introductions
To supervisors; to co-workers; to trainers; and to employee counselor
4. Job duties
Job location; Job tasks; Job safety needs; Overview of jobs; Job objectives; Relationship with other
jobs
Need for Induction
 When a new employee joins an organization, he is a stranger to the organization and vice versa.
He may feel insecure, shy and nervous in the strange situation. He may have anxiety because of
lack of adequate information about the job, work procedures, organizational policies and practices,
etc. Frustration is likely to develop because of ambiguity. In such a case, induction is needed
through which relevant information can be provided; he/she is introduced to old employees and to
work procedures. All these may develop confidence in the candidate and he/she may start
developing positive thinking about the organization.
 Effective induction can minimize the impact of reality shock some new employees may
undergo. Often, fresher join, the organization with very high expectations, which may be far
beyond the reality. When they come across with reality, they often feel shocked. By proper
induction, the newcomers can be made to understand the reality of the situation. Every
organization has some sort of induction program either formally or informally. In large
organizations where there are well-developed personnel functions, often induction program are
undertaken on formal basis, usually through the personnel department. In smaller organizations,
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 the immediate superior of the new employee may do this.
 Socialization
Socialization is a process through which a new recruit begins to understand and accept the values,
norms and beliefs held by others in the organization. HR department representatives help new recruits
to internalize the way things are done in the organization.
Orientation helps the newcomers to interact freely with employees working at various levels and learn
behaviors that are acceptable. Through such formal and informal interaction and discussion,
newcomers begin to understand how the department/ company is run, who holds power and who does
not, who is politically active within the department, how to behave in the company, what is expected of
them, etc. In short, if the new recruits wish to survive and prosper in their new work home, they must
soon come to 'know the ropes'.
3.4. PROMOTIONS, TRANSFERS AND SEPARATIONS
3.4.1 Promotion
Promotion means an improvement in pay, prestige, position and responsibilities of an employee within
his/her organization. A mere shifting of an employee to a different job which has better working hours,
better location and more pleasant working conditions does not constitute promotion. The new job is a
promotion for the employee when it carries increased responsibility and enhanced pay.
Purposes of Promotion
 To motivate employees to higher productivity
 To attract and retain the services of qualified and competent employees
 To recognize and reward the efficiency of an employee
 To increase the effectiveness of the employee and of the organization.
 To fill up higher vacancies from within the organization
 To build loyalty, morale, and sense of belongingness in the employee
 To impress upon others that opportunities are available to them too in the organization, if the
perform well.
Types of Promotion
A promotion involves an increase in status, responsibilities and pay. But in certain cases only the pay
increases and the other elements remain stagnant. In other cases, the status only increases without a
corresponding increase in pay or responsibilities. Depending on which elements increase and which
remain stagnant, promotions may be classified into the following types.
1. Horizontal Promotion
This type of promotion involves an increase in responsibilities and pay, and a change in designation.
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But the employee concerned does not transgress (go beyond the limit) the job classification. For e.g.
lower division clerk will be promoted to upper division clerk. In this case there is no change in the
nature of the job.
2. Vertical Promotion
This type of promotion results in greater responsibility, prestige and pay, together with a change in the
nature of the job.
3. Dry Promotion
Dry promotions are sometimes given in lieu of increases in remuneration. Designations different but no
change in responsibilities. The promotion may be given one or two annual increments.
3.4.2 Transfers
A transfer involves a change in the job (accompanied by a change in the place of the job) of an
employee without a change in responsibilities or remuneration. It differs from a promotion in that the
later involves a change in which a significant increase in responsibility, status, and income occurs, but
all these elements are stagnant in the former. Another difference is that transfers are regular and
frequent, but promotions are infrequent, if not irregular.
Reasons for Transfer
The reasons for transfers vary from organization to organization, and from individual to individual
within an organization. Broadly speaking, the following are the reasons for transfer:
 Workers are transferred from the surplus department to another department or plant where there
is a shortage of staff.
 Removal of the incompatibilities between the workers and his or her boss and between one
worker and another worker.
 Correction of faulty initial placement of an employee.
 A change has taken place in the interests and capacity of an individual, necessitating his or her
transfer to a different job.
 Over a period of time, the productivity of an employee may decline because of the monotony of
his or her job. To break this monotony, the employee is transferred.
 The climate may be unsatisfactory for an employee’s health. He or she may request a transfer to
a different place where his or her health will not be affected by its climate.
 Family related issues cause transfers, especially among female employees. When they got
married, the female employees want to join their husbands and this fact necessitates transfers or
resignations.
Types of transfers
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Specifically, transfers may be production, replacement, versatility, shift and remedial.
1. Production transfers
A shortage or surplus of the labor force is common in different departments in a plant or several plants
in an organization. Surplus employees in a department have to be laid-off, unless they are transferred to
another department. Transfers affected to avoid such imminent lay-offs are called production transfers.
2. Replacement Transfers
Replacement transfers, too, are intended to avoid imminent lay-offs, particularly, of senior employees.
A junior employee may be replaced by a senior employee to avoid laying off the later. A replacement
transfer program is used when all the operations are declining and is designed to retain long-service
employees as long as possible.
3. Versatility transfer
Versatility transfers are affected to make employees versatile and competent in more than one skill.
Versatile options are valuable assets during rush periods and periods when work is dull. Versatile
transfers may be used as a preparation for production or replacement transfer.
4. Shift transfers
Generally speaking, industrial establishments operate more than one shift. Transfers between shifts are
common, such transfers being made mostly on a rotation basis. Transfers may be effected on special
requests from employees.
5. Remedial Transfer
Remedial transfers are affected at the request of employees and are, therefore, called personal transfers.
It takes place because the initial placement of an employee may have been faulty or the worker may not
get along with his or her supervisor or with other workers in the department. He or she may be getting
too old in his or her regular job, or the type of job or working conditions may not be well-adapted to his
or her present health or accident record. If the job is repetitive, the worker may stagnate and would
benefit by transfer to a different kind of work.
3.4.3 Separations
When a person joins an organization, the main aim is to work and develop oneself but that does not
necessarily mean that the person will continue working with that organization only. Besides that there
can be various other reasons that may force an individual to leave the organization.
Separation refers to employee leaving the organization. It means end of service with the organization.
It is called “negative recruitment”.
Exit simply put means separation from the organization. It may take the form of retirement, either
compulsory or voluntary, resignation, dismissal, lay-off or retrenchment. Though it is end of
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relationship of an organization with an employee but it can give important guidelines to an organization
about the way it works and what change may be required. Separations are painful to both the parties
and should, therefore be administered carefully.
There may be many causes of separation/employee exit. Broadly these causes can be classified under
the following headings - Avoidable causes and Non avoidable causes/unavoidable causes.
Employee’s preferences or incompetence or poor health could be considered as unavoidable causes.
Such clear-cut demarcation is not possible in the case of avoidable causes. Avoidable causes can be on
personal reasons like incompatibility with peers or superiors, lack of interest or aptitude of the given
job, perceived fears and apprehensions about one’s own career prospects, change of technology, change
of product mix, production volume, poor working conditions, etc…
3.4.4 Lay-offs
A lay-off is a temporary separation of the employee from his or her employer at the instance of the
latter without any prejudice to the former. In other words, it refers to separation of employees for an
indefinite period due to reasons, much beyond the control of employer. It is intended to reduce
financial burden of organization. It may be for a definite period on the expiry of which the employee
will be recalled by the employer for duty. It may be occasioned by one of the following reasons:
Shortage of raw materials; accumulation of stocks; breakdown machinery and for any other reason.
As the employees are laid off at the instance of the employee, they have to be paid compensation for
the period they are laid off.
The basis for the lay-off may be merit or seniority. If merit is the basis, employees with unsatisfactory
performance are laid of first. If seniority is used as the basis of lay off, then the employees with the
shortest period of service will be first laid off and the older employees are retained as long as
conditions permit. The basis for recalling the employees as soon as the lay-off is lifted needs to be
made clear. Naturally key employees must be the first to be recalled.
Top management has to decide who are to be laid down. By and large “last in first out (LIFO)”
principle is used; when they are recalled and reemployed, last out first in (LOFI) principle is used.
3.4.5 Resignations
A resignation refers to the termination of employment at the instance of the employee. This is a manner
of separation taken up by the employee. An employee resigns when he or she secures a better job
elsewhere, or when an employee suffers from ill health, and for other reasons. The administration of
separation caused by resignation is very simple because the employee himself/herself is responsible for
it. However, such process by employee can be in either of the following two ways - Voluntary
resignation and Induced resignation.
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In voluntary resignation, the employee seeks separation from the organization due to reasons of
personal nature like lack of promotional opportunities, chances of better employment elsewhere, health
reasons, reasons of dissatisfaction of job etc.
On the other hand, induced resignation implies avoiding termination on grounds of discipline. Meaning
the individual may be induced or persuaded to leave due to any other serious charges brought against
him/her, and the proceedings of which might result in conviction and termination of service.
3.4.6 Dismissal or discharge
Dismissal is the termination of services as a punishment for some major offences done by the
employee. Such punishment is awarded through a judicial or quasi-judicial process in which ample
opportunity is given to the employee who has been accused to defend him/her, call witnesses in
defending his/her case, etc. A dismissal needs to be supported by just and sufficient reason. Principle of
natural justice is applied in such proceedings and also in the award of punishment. In case the reason of
discharge is attributed to incompetence, poor health or those due to organizational reasons, the
employee must be given adequate notice and must be properly explained the reasons of discharge.
The following reasons lead to the dismissal of an employee: Excessive absenteeism; serious
misconduct; false statement of qualification at the time of employment and Theft of company’s
property.
3.4.7 Suspension
When any serious charge is brought to light against an employee, and a prime-facie case is made out
against him, it is normally a practice to suspend the employee, during the period of investigation. These
are done mostly for the purpose of preventing the employee from tampering with the documents or
influence the witness by making use of his opportunity and power, which such employment provides.
During the suspension period, he is paid a reduced amount of salary, which is called “subsistence
allowance”. Depending on the results of the enquiry, at the end, he is either re-established if found “not
guilty” or discharged or dismissed if found “guilty” of charges. If he is re-established, the areas of pay
and allowances during period of suspension are paid to him and his service seniority is restored.
3.4.8 Retrenchment
It refers to the termination of the services of employees because of the replacement of labor by
machines or the closure of a department due to continuing lack of demand for the products
manufactured in that particular department of the organization. In other words, it is the termination of
the services of an employee, permanently due to any reason, which is economical but not discipline. It
is acceptable if it can be proved, that retrenchment alone can save the company. This may happen due
to change of technology, competition, high-rise of cost of production, mounting losses etc. On
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retrenchment, employee is entitled for gratuity in addition to some compensation. The general principle
for retrenchment is “last in first out (LIFO)”.
Retrenchment differs from lay-off in that, in the latter, the employee continues to be in the employment
of the organization and is sure to be recalled after the end of the period of lay-off. But in retrenchment
the employee is sent home for good, and his or her connections with the company are severed
immediately.
Retrenchment differs from dismissal as well. An employee is dismissed because of his or her own fault.
On the other hand, retrenchment is forced on both the employer and the employees. Moreover,
retrenchment involves the termination of the services of several employees. But dismissal generally
involves the termination of the service of one or two employees.
3.4.9 Retirement
Here there are two ways in which retirement can take place.
1. Compulsory retirement schemes
This type of separation method applies to persons working in an organization who have reached a
particular age. Currently most employers fix their compulsory retirement ages at between 60 and 65.
2. Voluntary Retirement Scheme (VRS)
VRS is yet another type of separation. Beginning in the early 1980s, companies both in public sector
and in private sector have been sending home surplus labor for good, not strictly by retrenchment, but
by a novel scheme called the VRS, also known as the Golden Hand Shake Plan. Handsome
compensations are paid to those workers who opt to leave.
Management prefers pay hefty sums and reduces staff strength than retaining surplus labor and
continuing to pay them idle wages. Further, VRS is perceived as a painless and time-saving method of
trimming staff strength, easing out unproductive older workers and other dead wood. Unions, too, can
not object as the schemes are voluntary.
3.5. ABSENTEEISM AND TURNOVER
3.5.1 Absenteeism
 Absenteeism refers to the failure on the part of employees to report to work though they are
scheduled to work. In other words, unauthorized absences constitute absenteeism.
If the absenteeism rate is four percent, then only 96 out of 100 people are available for work.
- It amounts to absenteeism when an employee is scheduled to work but fails to report for duty.
Obviously absenteeism reduces the number of employees available for work. It costs money to
the organization, besides reflecting employee dissatisfaction with the company.
- Like employee turnover, there is avoidable and unavoidable absenteeism.
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 - Absenteeism is unavoidable when the employee himself or herself falls sick, his or her
dependents at home suddenly become unwell or there is an accident inside the plant.
Unavoidable absenteeism is accepted by managers and is even sanctioned by labor laws.
- Avoidable absenteeism arises because of night shifts, opportunities for moonlighting and
earning extra income, indebtedness, lack of job security, job dissatisfaction and unfriendly
supervision. This absenteeism needs intervention by the management.
- Managers should take steps to remove causes of absenteeism. On the positive side, managers
must create a work environment which will make the employees realize that it makes sense to
work in the factory rather than staying at home and waste their time.
Controlling Absenteeism
Many factors influence whether employees attend work on any particular day.
The two most immediate causes are the employee's ability to attend and motivation to attend.
 Ability corresponds closely to involuntary absenteeism. Major reasons employees may not
be able to attend include personal illness, family problems that keep employees from the job,
and difficulties with personal or public transportation. Although involuntary absenteeism of this
sort can be predicted to some extent (and hence controlled) through the selection process,
factors influencing ability to attend are not easily changed by management actions.
 The major opportunity to control absenteeism comes through the employee's motivation to
attend. Managers often try to influence motivation through direct policies and practices
regarding attendance. Most common are policies against voluntary absenteeism, frequently
combined with penalties for offenders. These policies, however, appear to be generally
ineffective.
More promising results come from organizations that have experimented with the use of positive
rewards for good attendance, such as cash bonus, recognition, or time off with pay. Although not
always successful, such policies often reduce absenteeism.
 Another approach, so called no fault absenteeism, recognizes the inherent difficulties in
distinguishing between voluntary and involuntary absenteeism.
Organizations using this approach recognize that some absenteeism is inevitable and permit a certain
amount each year without penalty (perhaps three to five occurrences).
They make no attempt to determine whether the absenteeism was voluntary or involuntary. Claimed
advantages include; reduced supervisory time trying to determine whether an absence was “legitimate”,
placing responsibility for attendance squarely on employees and improved attendance
In summary, attendance is contingent on many factors.
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 - Some of these are outside the control of the individual and hence are essentially outside
management’s ability to influence.
- Others, however, appear to be at least partially within the organization’s control.
- Positive rewards for good attendance (such as cash bonuses, recognition, or time-off with pay),
perhaps combined with negative sanctions for absenteeism, can lead to improved attendance.
3.5.2 Turnover
- Turnover is the shifting or movement of a workforce into and out of a business enterprise.
- Managerial activities necessary to control involuntary turnover are very different from activities
required to control voluntary turnover.
Voluntary turnover presents yet another set of issues for management to consider.
It is caused by many factors. Major influences are employee’s perceptions of the ease of movement
and the desirability of movement.
 Ease of movement depends largely on the personal characteristics of the employees and on
economic conditions. For example, employees with the best work qualifications are likely to
find it easier to leave and find alternative employment opportunities. Also young employees are
much more likely to terminate voluntarily than the older employees.
 Economic conditions as reflected by unemployment levels are negatively related to voluntary
turnover.
 Voluntary turnover is influenced by employee perceptions of the desirability of leaving,
which depends partly on what opportunities for other work are seen within the existing
organization. Employees may want to leave their current jobs but stay with the organization if
other jobs are available through transfer or promotion. To some extent, these opportunities are
within the control of management and hence can be used to influence turnover.
 A major factor that influences desirability to leave is employee dissatisfaction.
 The greater the satisfaction, the lower the probability of leaving. The relationship is especially
strong when economic conditions in the external labor market are favorable.

CHAPTER- FOUR
TRAINING AND DEVELOPMENT
4.1 Definition of Training and Development
4.1.1 Meaning of Training
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  Training refers to the method used to give new or present employees the skills they need to
perform their jobs.
 Training is any process by which the aptitudes, skills and abilities of employees to Perform
Specific jobs are increased.
 It is the act of increasing the knowledge and skills of an employee for doing a particular job.
4.1.2 Meaning of Development
 Development is the systematic process of education, training and growing by which a Person
learns and applies information, knowledge, skills, attitudes and perceptions.
 Development is said to include training to increase skills and knowledge to do a particular job
and education concerned with increasing general knowledge and understanding.
 Development involves learning opportunities aimed at the individual growth but not restricted
to a specific job. Training is usually related to operational or technical employees while
development is for managers and professionals. However, they are also many times used
interchangeably.
Therefore, Training and development can be defined as planned efforts by organizations to increase
employees’ knowledge, skills and abilities.
4.2 The Importance of Human Resource Training and Development
Any organization needs to have well-trained and experienced people to perform the activities that have

to be carried out to achieve set objectives. Nowadays, jobs in organizations are becoming more

complex. This situation increases the importance of personnel training and development. So, it can be

said that in a rapidly changing society, employee training and development is not only an activity that

is desirable, but also an activity that an organization must commit resources to, if it is to secure a viable

and knowledgeable work force. Training makes employees more productive.

4.3 OBJECTIVES OF TRAINING AND DEVELOPMENT

Training and development has many objectives which include:
 To provide the knowledge skills and attitudes for individuals to undertake their current jobs
more effectively
 To help employees become capable of assuming other responsibilities within an organization
either at more senior or at their current levels (developing their potentials)
 To help employees to adapt to changing circumstances facing organizations such as new

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 technologies, new business environment, new product etc
 To reduce wastage and increase efficiency
 To minimize input and maximize output
 To relieve supervisors from close supervision and get time for other duties
 To lower turnover and absenteeism and increase employees’ job satisfaction
 To lower the number and cost of accidents
4.4 The Need for Training and development
Training and development is necessary because of the following reasons.

 To increase productivity;
 To improve the quality of products and/or services;
 To help satisfy the future personnel needs of an organization;
 To improve organizational climate;
 To prevent the stagnation or obsolescence or out datedness of manpower; and
 To enable personnel gain individual growth.
4.5 The Process of Training and Development
To achieve objectives and gain the benefits of human resource development, human resource managers
must assess the needs, objectives, content and learning principles associated with training and
development. It is often the responsibility of human resource management department to conduct
assessment of training and development needs of employees and those of the organization in order to
learn what objectives should be sought. Once objectives are set, the specific content and learning
principles and the appropriate training methods are considered.
The following are the logical steps to be undertaken to create an effective program of training and
development.
1) Identifying or discovering the training needs
2) Determining training and development objectives
3) Deciding which training technique and method to use and develop the training program
content.
4) Establishing learning principle
5) Conducting training and development programs before, during and after
implementation.
1. Identifying or discovering the training needs
Training needs may be discovered in many different ways:

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  By identifying specific problems such as productivity, high costs, poor material
control, poor quality products, excessive scrap and waste, etc.;
 By anticipating impending and future problems bearing on the expansion of
business, the introduction of new products, new services, new designs new plants,
etc.;
 By the request of the management; i.e., the supervisors and managers may make
specific request for setting training programs;
 By interviewing and observing the personnel on the job;
 By performance appraisal and analysis of the past performance records of the
prospective trainees and comparing their actual performance with the target
performance;
 By distributing questionnaire, filling out check lists, carrying out morale and attitude
surveys and applying test on the interpersonal skills of the prospective trainees
through handling of posed cases and incidents.
This step involves the following three tasks:
 Task description analysis – this involves listing the duties and responsibilities to be
undertaken in the training process;
 Listing the standards of work performance on the job- this task involves enumerating
the level of the quality of the work that is to be accomplished in the training process;
and
 Analyzing the organization – this is done to clearly know and conceptualize
everything about the organization.
The training and development needs of an organization fall into two independent categories namely,
organizational needs and employee’s training needs.
 Organizational training needs
Training should not be undertaken for its own sake. It must be geared to the objectives of the particular
organization. No organization can plan a realistic training and development unless a thorough diagnosis
of present human resource position has been made and its future plans and type of human resource
requirements have been decided up on.
Therefore, essential to know what the present skills are and, based on the agreed objectives, what
training is required to meet the development of the necessary skills for the achievement of the
organizational objectives.
Some basic questions that the human resource manager should ask before the organization is made to
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draw up a training program are:-
 What human resource does the organization have?
 What skills are lacking?
 Who needs to be trained?
 What categories of employees need special training program?
 How many of each category needs to be trained?
 How much time is available for the training?
 Employee’s Training Needs
Training and development needs may also express in terms of skills that are expected to be available in
the individual employee. As in case of organizational training needs, certain basic questions have to be
asked with regard to the training needs of individual employees. The following are some of the
questions that might be asked:
 What does the employee?
 What particular skills does he need in order to work effectively?
 What skills does he have?
 What skill must he acquire to do the job well?
In general, training and development needs are said to be existed in an organization when there is a gap
between the existing performance of an employee (or group of employees) and the desired performance
.To assess whether such a gap exists requires skills inventory and analysis in the organization.
There are different methods of gathering information to determine the need for training and
development of human resources. The most frequently used methods are the following:
 Organizational analysis
 Task analysis or analysis of job requirement
 Performance analysis
 Supervisory recommendations
 Employee suggestions
 Observations
 Test of job knowledge and questionnaire survey
 Management requests
2. Determining training and development objective.
After training needs have been determined, objectives must be established for meeting those needs.
Effective training objectives should state what will result for the organization, departments or

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individuals when the training is completed. The outcomes should be described in report.
3. Choose the appropriate training techniques and methods
Appropriateness of training techniques depends on: -
 Cost effectiveness
 Desired program content (teaching specific skills, providing knowledge or influencing
attitude),
 Appropriateness of the principles,
 Trainee’s preference and capabilities,
 Trainer preference and capabilities
 Training principles.
Categories of Training and development
Training can be conducted either on the job or off the job.
 On the job training- that is within the actual work environment.
 Off the job training- that is outside the actual work.
There are many training methods to be used. Among the training methods are:
1. Position rotation: this is a formal, planned program that involves assigning trainees to various
jobs in different parts of the organization.
2. Coaching: the trainee is placed under a close guidance and supervision of the trainer
(immediate supervisor) and he/she is given an opportunity to perform an increasing range of
tasks and the coach’s experience.
3. Internship: refers to a joint program of training where schools and different organizations
cooperate to train students by assigning them to different jobs.
4. Case study: it is a method of classroom training in which the learner analyses real or
hypothetical situations and suggests not only what to do but also how to do it.
5. Lectures, seminars, conferences and workshops: a lecture is a semi-formal discourse in which
the instructor presents a series of events, concepts, principles and theories and express problems
or explains relationships. Conference brings together individuals with common interests to
discuss and attempt to solve the problem. A seminar is a group of persons gathered together for
the purpose of studying a subject under the leadership of an expert. In workshops a group of
persons with common interest or problems after performing professional or vocational work
meet for an extended number of times to improve their individual proficiency, ability or
understanding.
6. Apprenticeship: involves learning from more experienced employees. It is generally followed
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 in technical fields in which proficiency in acquired in direct association with work and direct
supervision.
7. Distance and internet-based training: firms today use various forms of distance learning
method for training. Distance learning methods include traditional paper and pencil
correspondence courses, as well as tale-training, video conferencing and Internet based classes.
8. Vestibule training: setting up a training area very similar to the work area in equipment ,
procedures, and environment ,but separated from the actual one so trainees can learn without
affecting the production schedule
4. Establishing learning principle
Learning principles are guidelines to the way in which people learn most effectively. The more they are
included in training, the more effective training is likely to be.
The following learning principles are suggested to be applied in the process of human resource
development.
 Need for positive motivation
 Need for relevance
 Need for continuity and change
 Need for application of the system approach
 Need for overcoming resistance to training
 Need for training the rainier
 Need for feed back
5. Evaluating training program success
The final step in conducting a training program is to evaluate its success. There are four basic reasons
why you should assess the program’s success:-
 Justifying expenses: because any human recourse program takes money and time, it is
important to justify the expense, particularly given today’s emphasis on cost cutting and
accountability. Failure to prove the cost- effectiveness of a program can come back to affect
even the best-run program. In addition demonstrating the cost effectiveness of a training
program will enhance your own credibility.
 Making decisions about future programs: once you have run a program, your company might
question whether the program should be repeated, changed or discontinued. By evaluating its
success, a much more informed choice can be made.
 Making decisions about individual trainees: Depending on the purpose trainees may need to
pass the program in order to be certified or qualified for a particular task or job. In many cases,
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 passing the program will involve more than simply attending all sessions. The trainee may need
to have a certain grade or score on some types of tests. Formal evaluation of each participant’s
performance may therefore be necessary.
 Reducing professional liability: If you design or deliver a training program , you or Your
organization might be held legally responsible if a trainee subsequently become injured or
killed in the course of performing the task or job. Thus, It is important to evaluate a training
program to ensure that it can be defended against legal challenges.
4.6 MANAGEMENT DEVELOPMENT
4.6.1 Definition of management development
Management development is any attempt to improve managerial performance by imparting knowledge,
changing attitudes or increasing skills. The ultimate aim is, of course, to enhance the future
performance of the company itself.
4.6.2 Management development process
The general management development process consists of three steps. These are:-
 Assessing the company’s strategic needs (for instance, to fill future executive opining, or to
boost competitiveness)
 Apprising the managers performance
 Developing the managers (and future managers)
4.6.3 Management development techniques
One of the most important management development techniques is succession planning.
 Succession planning
Succession planning is a process by which one or more successors are identified for key posts (or
groups of similar key posts), and career moves and/or development activities are planned for these
successors. Successors may be fairly ready to do the job (short-term successors) or seen as having
longer-term potential (long-term successors).

Succession planning therefore sits inside a very much wider set of resourcing and development
processes which we might call succession management.

 Succession management encompasses the management resourcing strategy, aggregate analysis

of demand/supply (human resource planning and auditing), skills analysis, the job filling
process, and management development (including graduate and high flyer programs).
4.6.4 Uses of Succession management/Succession planning

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  What do organizations want from succession planning?
Organizations use succession planning to achieve a number of objectives including:-
 Improved job filling for key positions through broader candidate search, and faster
decisions
 Active development of longer-term successors through ensuring their careers progress, and
engineering the range of work experiences they need for the future.
 Auditing the ‘talent pool’ of the organization and thereby influencing resourcing and
development strategies
 Fostering a corporate culture through developing group of people who are seen as a ‘corporate
resource’ and who share key skills, experiences and values seen as important to the future of the
organization. It is the active development of a strong ‘talent pool’ for the future which is now
seen as the most important. Increasingly, this is also seen as vital to the attraction and retention
of the ‘best’ people.
 Who does Succession planning cover?
Succession planning covers only the most senior jobs in the organization (the top two or three tiers)
plus short-term and longer-term successors for these posts. The latter groups are often manifesting as a
corporate fast stream or high potential population who are being actively developed in mid-career
through job moves across organizational streams, functions or geographical boundaries.
Many large organizations also adopt a ‘devolved’ model where the same processes and philosophy are
applied to a much larger population (usually managerial and professional) but this process is managed
by devolved organizational divisions, functions, sites or countries.
 How are succession and development plans produced?
Succession plans normally cover both short- and longer-term successors for key posts, and
development plans for these successors. Where a number of jobs are of similar type and need similar
skills, it is preferable to identify a ‘pool’ of successors for this collection of posts.
Typical activities covered by succession planning include:
 Identifying possible successors
 Challenging and enriching succession plans through discussion of people and posts
 Agreeing job (or job group) successors and development plans for individuals
 Analysis of the gaps or surpluses revealed by the planning process
 Review i.e. checking the actual pattern of job filling and whether planned individual
development has taken place.
 How succession planning Helps
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Succession planning establishes a process that recruits employees, develops their skills and abilities,
and prepares them for advancement, all while retaining them to ensure a return on the organization's
training investment.

Succession planning involves:

 Understanding the organization's long-term goals and objectives

 Identifying the workforce's developmental needs
 Determining workforce trends and predictions

In the past, succession planning typically targeted only key leadership positions. In today's
organizations, it is important to include key positions in a variety of job categories. With good
succession planning, employees are ready for new leadership roles as the need arises, and when
someone leaves, a current employee is ready to step up to the plate. In addition, succession planning
can help develop a diverse workforce, by enabling decision makers to look at the future make-up of the
organization as a whole.
Generally, effective succession planning ultimately results in:-
 Better retention
 Valuable training goals
 Increased preparation for leadership
 Greater Employee satisfaction
 Enhanced commitment to work and the workplace
 Improved corporate image
CHAPTER- Five
PERFORMANCE APPRAISAL
5.1 Definition of performance appraisal
Performance appraisal can be defined as a human resource activity that is used to determine the extent
to which an employee is performing his job effectively. Performance is said to be a result of
employee’s efforts abilities and role perception.
Performance appraisal is the process of determining and communicating to an employee how he or she
is performing the job and, ideally, establishing plan of improvement. Other terms of performance
appraisal include: performance review, personnel rating, merit rating, performance evaluation,
employee appraisal and employee evaluation.

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 5.2 Purposes of performance appraisal
 To provide information towards strength and weakness of employees in their job
performance.
 To provide data for management for judging future job assignments, promotions and
compensation.
 To provide information to help maintain an equitable and competitive pay structure
 To supply general information on training needs for the organization or departments
 To improve motivation by increased understanding of goals, the means of attaining the
goals and the rewards associated with achievement.
 To improve performance by developing strength and dealing with weakness.
 To provide legally defensible reason for promotions, transfer, reward and discharges.
5.3 Who appraises employee performance?
In designing an appraisal system, another significant factor worthy of consideration is the appraiser.
Who should actively make the appraisal?
 The individual and group of individuals who usually do the appraisal include the immediate supervisor,
employee’s peers, employees themselves (self- appraisal), and subordinates.
I. Immediate Supervisor
 Appraisal of employees’ performance by their supervisors is the traditional and most frequently used
approach.
 In fact, this is one of the major responsibilities of all managers.
 This approach is used because it is assumed that the supervisor has greatest opportunity
Observe the subordinate’s behavior.
 It is also assumed that the supervisor is able to interpret and analyzes the employee’s performance in
light of the organization objectives.
 In most organizations, the employee’s supervisor is responsible for making reward decisions such as
pay and promotion.
 If the immediate supervisor appraises the employee, the supervisor can possibly link effective
performance with rewards.
 Supervisors are also in the best position to know the job requirements, to observe employees at work
and to make the best judgment.
II. Employee’s peers
 In an organizational setting, a peer is a person working with and at the same level of an employee.
 The peer appraisal is frequently called “mutual rating system “.
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  In effect, each employee apprises each of the other members of the work group.
 Employee’s peers represent a credible source of performance data not only because of their frequent
contacts to each other but also because of their interdependence to accomplish common assignments
and common objectives.
 Performance feedback from peers, based on observational data provides employees with a view of their
level of performance.
III. Employee self appraisal
 In many organizations self – appraisal is used for developmental purpose.
 It is getting acceptance that comprehensive self-appraisal may serve as a vehicle of professional
improvement, ensuring lasting change and development of employee’s competence and quality
of performance.
 Self –appraisal helps an employee to analyze his or her actual current level of performance in
the light of desired performance competence.
 It is also generates performance data on weakness, strength and potential of the employee,
which the appraiser, in the time of appraisal program, might not ascertain.
IV. Subordinate appraisal
 Some organizations are now using subordinate appraisals, where by employees appraise their superiors.
 This is use full in trying to develop better superior- subordinate relationship, and in improving the
human relationship of managers.
 Finally, two or more approaches may be used in combination to appraise the performance of
employees.
 That is supervisor’s appraisal may be supported by self appraisal or peer appraisal. Such approach may
help to offset bias and favoritism that may be realized when appraisal is conducted only by a single
designated appraiser.
 This approach not only helps to make appraisal results more objective but also to get the cooperation
and commitment of employees to the system of performance appraisal.
5.4 Performance appraisal process (steps)
Performance evaluation involves:-
 Establishing performance standards for each position and the criteria for evaluation
 Establishing evaluation policies on when to rate, how to rate and who should rate
 Have raters gather data on employees performance
 Have raters (and employees in some systems) evaluate employee’s performance
 Discuss the evaluation with the employee
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  Make decisions and file the evaluation
5.5 PERFORMANCE APPRAISAL METHODS
1. Graphic rating scale method
 This method is the simplest and the most popular technique of appraising performance.
 A graphic rating scale lists traits (factors) such as quality of work, job knowledge,
attendance, accuracy of work and cooperativeness.
 And a range of performance values from unsatisfactory to outstanding is obtained for
each factor.
 You rate each subordinate by circling o checking the score that best describes his/her
performance for each factor.
 You then total the assigned values for the traits.
2. Alternation ranking method
 This method involves ranking employees from best to worst on a factor or factors traits.
 Since it is usually easier to distinguish between the worst and best employees, an
alternation ranking method is most popular.
 First, list all subordinates to be rated, and then cross out the names of any not well
enough to rank.
 Then indicate the employee who is the highest on the characteristics being measured and
also the one who is the lowest.
 Chose the next highest and the next lowest till all employees have been ranked.
3. Paired comparison method
 This method helps to make the ranking more precise.
 For every factor (quality of work, quantity of work etc.), you pair and compare every
subordinate with every other subordinate.
 Example, suppose a rater is to evaluate six employees. The name of these employees is
listed on the left side of a sheet of paper. The evaluator then compares the first employee
with the second employee on a chosen performance criterion, such as quality of work.
 If he/she believes the first employee has produced more work than the second employee
a check mark is placed by the first employee’s name.
 The rater then compares the first employee with the third, fourth, fifth and sixth
employee on the same performance criteria, placing a check mark by the name of the
employee who produced the highest result in each paired comparison.
 The process is repeated until each employee has been compared to every other employee
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 on all of the chosen performance criteria.
 The employee with the most check mark is considered to be the best performer.
 Likewise, the employee with the fewest check marks is taken as the least performer.
 One major problem with the paired comparison method is that it becomes too wide
especially when comparing more than five or six employees.
4. Critical incident method
 With this method the supervisor keeps a log of positive and negative examples (critical
incidents) of a subordinates work related behavior.
 Every six months or supervisors and subordinates meet to discuss the latter’s
performance, using the incidents as examples.
5. Management by objective (MBO)
 MBO requires the manager and workers set specific measurable goals and then
periodically discuss the employees’ progress towards these goals throughout the
implementation process.
 The term MBO generally refers to a compressive, organization wide goal setting and
appraisal program consisting of six steps, which include:
 Set organizational goals
 Set departmental goals
 Discuss the goals with the workers
 Define expected results
 Performance review
 provide feedback
6. Essay appraisal
 It is performance evaluation method in which the rater prepares a written statement
describing the individual’s strength, weakness and past performance.
 There are criticisms about the accuracy and relevance of this method.
 This is mainly because comparing essays written by the same or different raters is
difficult since skilled writers can paint better picture of an employee than unskilled
writers.
7. Checklist method
 This is performance evaluation method in which the rater answers with a yes or no, a
series of questions about the behavior of the employee being rated.

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 8. Work standards
 It is a method, which involves setting a standard or an expected level of output and then
comparing each employee’s level of performance to the standard.
 This approach is most frequently used for production employees.
9. Multi-rater assessment (or 360 degree feedback)
 This is one of most recently popular method of evaluation.
 With this method managers, peers, customers, supplies or collogues are asked to
complete questionnaires about the employee being assessed.
 The person under evaluation also completes a questionnaire.
 The HR department provides the result to the employee, who intern gets to see how
his/her opinion differs from those of the group participating in the assessment.
10. Computerized and web based performance evaluation.
 Nowadays several relatively inexpensive performance appraisal software programs are
on the market.
 These programs generally enable managers to keep notes on subordinates during the
year and then to electronically rate employees on a series of performance factors.
 The programs finally generate written text to support each part of the evaluation.
5.6 Appraising performance: Problems and solutions
Regardless of which technique or system is used there are many problems which may encounter in the
process of using them. None of the techniques is perfect; they all have limitations. Some of these
limitations are common to all of the techniques while others are more frequently encountered with
some ones. The problems generally include:
I. Unclear standards of evaluation
Problems with evaluation standards arise because of perceptual differences in the meanings of the
words used to evaluate employees. Thus good, adequate, satisfactory and excellent may mean different
things to different evaluators. This difficulty arises most often in graphic rating scales but may also
appear with essays, critical incidents and checklists. There are several ways to minimize this problem.
The best way is to develop and include descriptive phrases that define the meaning of each dimension
or factor and training raters to apply all ratings consistently which will at least reduce the potential
rating problems.
II. Hallo effect

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It is a problem, which arises in performance evaluation when a supervisor’s ratings of a subordinate on
one trait bias the ratings of the person on other traits. Hello error can be either negative or positive,
meaning that the initial impression can cause the ratings to be either too low or too high. Being aware
of this problem is a major step towards avoiding it. Supervisory training can also alleviate the problem.
Besides allowing the rater to evaluate all subordinates on one dimension before proceeding to another
dimension can reduce this type of error.
III. Central Tendency
A Central tendency error occurs when a rater avoids using high or low ratings and assigns average
ratings. For example, if the rating scale ranges from 1 to 7, they tend to avoid the highs (6 and 7) and
lows (1 and 2) and rate most of their people between 3 and 5. This type of “average” rating is almost
useless-it fails to discriminate between subordinates. Thus, it offers little information for making HRM
decisions-regarding compensation, promotion, training, or what should be feedback to rates. Raters
must be made aware of the importance of discriminating across rates and the use of evaluations. This
sometimes stimulates raters to use less central (average) ratings. Rankings employees instead of using
graphic rating scale can reduce this problem, since ranking means you cannot rate them all average.
IV. Leniency or harshness error
This problem occurs when a supervisor has a tendency to rate all subordinates either high or low.
Some raters see everything as good- these are lenient raters. Others-raters see everything as bad these
are harsh raters. This strictness or leniency problem is especially severe with graphic rating scales,
when firms do not tell their supervisors to avoid giving all their employees high or low ratings. One
mechanism used to reduce harsh and lenient rating is to ask raters to distribute ratings- forcing a normal
distribution. For example, 10 percent of subordinates will be rated as excellent, 20 percent rated as
good, 40 percent rated as fair, 20 percent rated below fair, and 10 percent rated as poor.
V. Recency of Events Error
This rating error occurs when a manager evaluates employees on work performance most recently,
usually one or two months prior to evaluation. Raters forget more about past behavior than current
behavior. Thus many workers are evaluated more on the results of the past several weeks than on six
months average behavior. Some employees are well aware of this difficulty. If they know the date of
the evaluation, they make their works to be visible and noticed in many positive ways for several weeks
in advance.This problem can be mitigated by using techniques such as critical incident or MBO or by
conducting irregularly scheduled evaluations.
VI. Contrast effects
In individual evaluation techniques each employee is supposed to be rated without any regard to
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another employee’s performance. Some evidences however show that supervisors have very difficult
time doing this. If the supervisor lets an employee’s performance is rated based on the ratings that are
given to someone else, it is said that a contrast effect has occurred. Supervisors who rate their
employees should take the greatest care in evaluating workers separately based on independent
performance.
VII. Personal bias error
A personal bias rating error is an error related to a personal bias held by a supervisor. There are several
kinds of personal bias errors; some can be conscious such as discrimination against someone because
of the appraiser’s personal characteristics like age, sex and race. Some supervisors might try to “play
favorites” and rate the people they like better than people they do not like. Other personal bias errors
occur when a rater gives a higher rate because the worker has qualities or characteristics similar to the
rater.
IX. Problem with the appraised
For a system of performance appraisal to function well, it is important that employees regard it as
potentially valuable to improve their competence and to achieve organizational goals successfully.
However, most efforts of performance evaluation are narrowly focused and oversimplified that they
give little regards to the favorable perception of employees. A substantial amount of employee’s
negative attitude towards appraisal results from their doubt about the validity and reliability, and
performance feedback or ratings presented by their appraisers. Employees often question appraisers’
competence in appraisal, and consequently tend to lose trust and confidence in their appraisers and
often resist accepting performance ratings. Another appraisal problem often realized is employees’
reaction to appraisal result of low ratings. Most employees have difficulty in facing appraisal results
involving negative feedback about their performance. Such a feedback often develops in employees a
sense of tension, friction, insecurity, embarrassment, frustration, anger, resentment, and anti- feelings
and action. Performance appraisal may be less effective than expected if the employee is not work-
oriented and if he sees work only as a means of personal satisfaction. Such an employee may see an
appraisal program as only a system of paper work , unless the appraisal results is so negative that the
employee fears termination of his employment. In sum, for performance appraisal to work well, the
employee must understand it, must feel that it is fair, and must be work oriented. One way to foster this
understanding is for the employees to participate in the design and operation of the system and to train
them to some extent in performance appraisal. In general, there are problems with performance
appraisal: with the appraisers, and with the employees. It is, however, believed that the suggestions
presented hereunder may improve the system of performance appraisal.
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5.7 HOW TO AVOID APPRAISAL PROBLEM
 Improving validity and reliability of performance criteria
Validity problem – performance criteria are intended to accurately or objectively measure the
performance and potential of employees. When more subjective criteria are used, the appraisal
becomes less valid for decision making and career guidance. The most common validity errors are
caused due to the hallo effect, the recent behavior bias, the central tendency and the similar to me
errors.
Reliability problems: Appraisals may lack reliability because of the inconsistent use of differing
standards and lack of training in appraisal techniques.
 Adopting multiple appraisal and different timing
Because of bias and hello-effects, it may be more useful to adopt multiple rather than single appraisal
techniques. While the ratings of one appraisal may not be valid, the overall pattern of several ratings
provides an indication of overall performance and potential for development. Appraisal can be
improved by being done several times a year rather just once. This overcomes the bias of regency.
 Providing better feedback
The result of the appraisal , along with suggestions for improvement , should be communicated to the
appraised as soon as possible .the skill with which the appraiser handles the appraisal feedback is the
factor in determining whether the appraisal program is effective in changing employee behavior or not.

CHAPTER-SIX
WAGE AND SALARY ADMINISTRATION
6.1 Meaning of Wage and Salary Administration
- Wage is the remuneration paid for the service of labour in production periodically to an
employed/ worker.
- It is a payment made to labour
- It also refers to the hourly rate paid to such groups as production and maintenance.
- Salary normally refers to the periodically rate paid to clerical, administrative and professional
employees.
- Allowances are payment in addition to basic wage to maintain the value of basic wage over a
period of time.
- Wage and salary: Wages represent hourly rates of pay while salary refers to the monthly rate of
pay irrespective of the number of hours put in by an employee. Wages and salaries are subject

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 to annual increments. They differ from employee to employee, and depend upon the nature of
job, seniority, and merit.
Therefore, Wage and Salary administration can be defined as –essentially the application of a
systematic approach to the problem of ensuring that employers are paid in a logical, equitable and fair
manner.
Wage and Salary Administration requires establishment and implementation of several policies and
practices.
- Wage and Salary are paid as per contract of employment.
6.1.2 Objectives of Wage and Salary Administration
 To acquire qualified and competent personnel
 To retain the present employees
 To secure internal and external equity
 To ensure desired behavour
 To keep labour and administrative costs in line with the ability of the organization to pay
 To facilitate payroll
 To simplify collective bargaining procedures and negotiation.
 To promote organization feasibility
 To improve employee moral and productivity
 To pay employees according to the context and difficulty of the job.
 To reward employees according to the effort and merit.

6.1.3 Factors Affecting Wage and Salary Administration Level

 Remuneration in comparable industries
 Firms ability to pay
 Relating to price index
 Productivity
 Cost of living
 Union pressure and strategies
 Government Legislation
 Labor supply and demand
 Job requirement
 Management attitude about wage and to be paid
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6.2 Job Evaluation Techniques
- Job evaluation is the process of analyzing the various jobs systematically to ascertain their
relative worth in an organization.
- It enables us to have a job hierarchy.
- It provides a systematic basis for determining the relative worth of jobs within an organization.
- Job is evaluated on the basis of their content and is placed in the order of their importance. It
flows from the job analysis process and is based on job descriptions and job specifications.
- It should be noted that in a job evaluation program, the jobs are ranked and not the jobholders.
Jobholders are rated through performance appraisal.
6.2.1 Common features of job evaluation techniques
1. Job evaluation is concerned with differences in the work itself, not in differences that are found
between people.
2. Reference is made to the "content" of the job i.e. what the work consists of, what is being done,
what skills are deployed and the actions that are performed.
 This is normally discovered by analysis.
3. There are predetermined criteria, or factors, against which each job measured.
 These may be descriptions of the whole job, or of its component parts.
4. The practice of involving those who are to be subject to the job evaluation at an early stage helps to
ensure both accuracy in job analysis and commitment to the job evaluation scheme.
 Employees concerned and the supervisors should be educated and convinced about the
program.
 Besides supervisors should be encouraged to participate in rating the jobs. The management
has to secure employee cooperation by encouraging them to participate in the rating
program.
 It is better to discuss with the supervisors and employees about rating but not about
assigning money values to the points.
5. The outcome of a job evaluation should be wage and salary scales covering the range of evaluated
jobs.
6. All systems need regular review and updating, and have to be flexible enough to be of use for
different kinds of work, so that new jobs can be accommodated.
6.2.2 Methods of job evaluation
i. Analytical : point-rating method and Factor-comparison method
ii. Non-Analytical : Ranking method and Job grading method
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1. Analytical Method
i. Points Rating
- It is both a quantitative and analytical technique.
- The points rating technique entails the analysis and comparison of jobs according to
common factors, which are represented by a number of points, the amount depending on
the degree of each factor present.
- Jobs are then placed in order of their total points rating.
The technique requires a number of steps that must be undertaken with care:
 Identify job factors to be applied- by examining the most essential elements in the job. Job
factors need to be present in all the jobs to be evaluated. The factors selected from the
descriptions and specifications should be those that are critical for differentiation between jobs.
 Allocate points and weightings to factors and sub factors according to the degree of importance
they have in each job.
 Identify a sample of jobs and test the points and weightings against this sample.
 Fine-tune the results until the points produce the expected results.
 Evaluate the remaining posts in the organization.
Thus, the system starts with the selection of job factors, construction of degrees for each factor, and
assignment of points to each degree. Different factors are selected for different jobs, with
accompanying differences in degrees and points.
ii. Factor comparison
- The factor-comparison method is yet another approach for job evaluation in the analytical
group.
- It differs from points rating in that jobs are compared with each other on a number of different
factors rather than as whose jobs.
- It uses some of the ideas of both the points rating and the ranking methods. There are two parts
to the early stages, i.e. factor ranking and factor evaluation.
- The method is complicated and expensive.
The steps are:
 Identify the factors to be applied- not less than four or more than seven.
 Choose benchmark jobs, which must contain all these broad generic factors. These benchmark
jobs must clearly be representative of the factors, and there should be an unambiguous wage or
salary for the job in question.

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  Each factor is ranked individually with other jobs. In this case, a job may rank near the top in
skills but low in physical requirements.
 The total point values are then assigned to each factor. The worth of a job is then obtained by
adding together all the point values.
2. Non-analytical Method
- In this case, each job is treated as a whole in determining its relative ranking.
i. Ranking Method
 It is the simplest, the most inexpensive method of job evaluation.
 It assesses the worth of each job on the basis of its title or on its contents. Each job is compared
with other jobs and its place is determined.
 It is thought to be appropriate for small organizations. These are problems in handling the number
of comparisons if the number of jobs is larger.
 The main guide is usually the amount of responsibility in each job or the importance of the job to
the organization. The method looks at the whole job, not its component parts and is concerned with
the rank order of jobs.
 Generally, job-ranking method is thought to be appropriate for small organizations. There are
problems in handling the number of comparisons if the number of jobs is larger. It is also difficult
to choose benchmark jobs that do not have some flaw as yardsticks if a number of different
departments and specialisms are involved.
This method has several drawbacks. Job evaluation may be subjective, as the jobs are not broken into
factors. It is hard to measure whole jobs.
Advantages:
- Simple to use if there are a small number of jobs, people, or teams to evaluate;
- Requires little time
- Minimal administration required.
Disadvantages:
- Criteria for ranking not understood
- Increases possibility of evaluator bias
- Very difficult to use if there is a large number of jobs, people, or teams to evaluate
- Rankings by different evaluators are not comparable
- Distance between each rank is not necessarily equal
- May invite perceptions of inequity
ii. Job- Grading
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  This is also a qualitative and non-analytical method.
 This approach requires the examination of jobs in the light of predetermined definitions of the
grades. In other words, the number of grades and its definition are determined or decided first.
Facts about jobs are matched with the grades which have been established. Jobs glades are
arranged in the order of their importance in the form of a schedule.

Advantages:
- It is simple and inexpensive;
- In organizations where the number of jobs is small, this method yields satisfactory results.

Disadvantages:
- Job grade descriptions are vague and are not quantified;
- Difficulty in convincing;
- If the grades contain a wide range of skills or job requirements, this reduces the usefulness in
discriminating between jobs.
6.2.3 Essentials for the success of a Job Evaluation Programme
Following are the essential for the success of Job Evaluation:
1. Compensable factors should represent all of the major aspects of job content. Compensable factors
selected should:
 Avoid excessive overlapping or duplication,
 Be definable and measurable,
 Be easily understood by employees and administrators,
 Not cause excessive installation or admin cost and
 Be selected with legal considerations in mind.
2. Operating managers should be convinced about the techniques and programme of evaluation.
- They should also be trained in fixing and revising the wages based on job evaluation
3. All the employees should be provided with complete information about job evaluation
techniques and programme.
4. All groups and grades of employees should be covered by the job evaluation
5. The results of job evaluation must be fair and rational and unbiased to the individuals being
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 affects

6.3 Employee Remuneration/Compensation

- The evaluation methods provide the necessary input for developing the organization’s overall
pay structure.
- Remuneration is the compensation an employee receives in return for his or her contribution to
the organization.
- Compensation is fundamentally about balancing human resource costs with the ability to attract
and keep employees.
- By providing compensation, most employers attempt to provide fair remuneration for the
knowledge, skills and abilities of their employees.
- In addition, the compensation system should support organizational objectives and strategies.
6.3.1 Aims of employee compensation
 The main objective of compensation administration are to design a cost effective pay structure
that will attract, motivate and retain competent employees and that will also be viewed as fair
by these employees. In designing an effective compensation plan, we need to give due attention
to legal requirements, the rising expectations of employees and competitive pressure.
 The most important objective of any pay system is fairness or equity.
 Equity is concerned with felt justice according to natural law or right when an employee
receives compensation from the employer, perceptions of equity are affected by two factors: -
i. The ratio of compensation to one’s inputs of effort, education, training, endurance
of adverse working condition.
ii. The compensation of their ratio with the perceived ratios of significant, other
people with whom direct contact is made.
 Equity only exists when a person perceives that the ratio of outcomes to inputs is in equilibrium with
respect of self and in relation to others.
In general, the term equity has three dimensions:
 Internal equity: This ensures that more difficult jobs are paid more.
 External equity: This ensures that jobs are fairly compensated in comparison to similar jobs
in the labor market.
 Individual equity: it ensures equal pay for equal work, i.e. each individual’s pay is fair in
comparison to others doing the same/similar jobs.
The aim of employee compensation can be described as follows: -
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1. Attract capable employees to the organization:-
- Every organization looks for retaining capable employee with the organization.
- In fact, retaining an employee is the most difficult function of HR Department.
- So for retaining an efficient employee with the organization, he has to be provided with better
compensation.
- A better compensation package is going to attract the efficient employee who is very useful to
an organization.
2. Motivate them toward superior performance
- For any employee, money is the main motivator.
- If every employee of an organization is provided with better compensation, everybody will be
motivated to exhibit superior performance.
- The better pay, the better the performance.
- The compensation that is going to be provided to the employees should include better salary,
perks, increments, bonus etc. Even though the remaining components like promotion are going
to motivate the employees, but the basic motivator is better compensation.
3. Retainment of their services over an extended period of time
- Retainment of the services of an employee with an organization is the most difficult job of HR.
So, the retainment of the employee’s service over a long period of time is possible only by
providing them with better compensation.
- Thus, the ultimate goal of compensation administration is to reward desired behaviors and
encourage people to do well in their jobs.
6.3.2 Factors Influencing Employee Remuneration
- A number of factors influence the remuneration payable to employees. In general, they can be
categorized into two: Internal and external factors.
1. External Factors
- Factors external to an organization are labor market, cost of living, labor unions, government
legislations, the society and the economy.
Labor market
- Demand and supply of labor influence wage and salary fixation.
- A low wage may be fixed when the supply of labor exceeds the demand for it.
- A higher wage will have to be paid when the demand exceeds supply, as in the case of skilled
labor.
- Going rate of pay is another labor-related factor influencing employee remuneration.
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 - Going rates are those that are paid by different units of an industry in a locality and by
comparable units of the same industry located elsewhere.
- Productivity of labor also influences wage fixation.
- Productivity can arise due to increased effort of the worker, or as a result of the factors beyond
the control of the worker such as improved technology, sophisticated machines and equipment,
better managem`ent and the like.
- Greater effort of the worker is rewarded through piece-rate or over forms of incentive
payments. Productivity arising from advanced technology and more efficient methods of
production will influence wage fixation.
Cost of living
- Inflation reduces the purchasing power of employees.
- To overcome this, unions and workers prefer to link wages to the cost of living index.
- So, this criterion matters during periods of rising prices, and is forgotten when prices are stable
or falling.
- The justification for cost of living as a criterion fro wage fixation is that the real wages of
workers should not be allowed to be whittled down by price increases.
- A rise in the cost of living is sought to be compensated by payment of dearness allowance, basic
pay to remain undisturbed.
Labor unions
 The presence or absence of labor organizations often determine the quantum of wages paid to
employees.
Labor laws
 The Minimum Wages Act enables the central and the state governments to fix minimum rates
of wages payable to employees in sweated industries.
2. Internal Factors
 Among the internal factors which have an impact on pay structure are the company’s strategy,
job evaluation, performance appraisal and the worker himself or herself.
Company’s strategy
- The overall strategy which a company pursues should determine the remuneration to its
employees.
- Where the strategy of the enterprise is to achieve rapid growth, remuneration should be higher
than what competitors pay.

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 - Where the strategy is to maintain and protect current earnings, because of the declining fortunes
of the company, remuneration level needs to be average or even below average.
Job evaluation and performance appraisal
- Job evaluation helps establish satisfactory wage differentials among jobs.
- Performance appraisal helps award pay increases to employees who show improved
performance.
The employee
- Several employee-related factors interact to determine his or her remuneration. These include:-
Performance, Seniority, Experience, Potential, and even sheer luck.
6.3.3 Components of remuneration /Compensation
Remuneration is the only HR activity which has its impact on all other functions regarding personnel.
For instance,
 Competent people are attracted towards an organization if its remuneration is attractive.
 Recruitment and selection are dependent upon wages and salaries offered to prospective
employees.
 There is a close relationship between performance appraisal and remuneration.
N.B: Typical remuneration of an employee comprises:- Wages and salary, Rewards and Incentives,
Fringe benefits and non-monetary benefits. .
6.3.3.1 Rewards and Incentive
 Incentive is compensation that rewards an employee for efforts beyond normal performance
expectations. For Example, bonuses, commissions and profit-sharing plans.
- Incentive payments are quite substantial and are paid as regular as wages and salaries.
- Incentives are monetary benefits paid to workmen in recognition of their outstanding
performance.
- They are variable rewards granted according to the variations in the achievement of mechanical
(engineering) approach.
- They are compensation that rewards an employee for efforts beyond normal performance
expectations.
Importance of Rewards and Incentives
- The primary advantage of incentives is the inducement and motivation of workers for higher
efficiency and greater output.
- Fixed remuneration removes fear of insecurity in the minds of employees.
- A feeling of secured income fails to evoke positive response.
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 - Positive response will surely come when incentives are included as a part of the total
remuneration. Earnings of employees would be enhanced due to incentives.
- The other advantage of incentives payments are reduced supervision, better utilization of
equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover, and increased
output.
Guidelines for incentive systems
- Incentives systems can be complex and can take many forms however, certain general
guidelines are useful in establishing and maintaining incentive systems.
1. Recognize organizational culture and resources
 An important factor in the success of any incentive program is that it be consistent with
both the culture and the financial resources of the organization.
2. Tie incentive to desired performance
 Incentive systems should be tied as much as possible to desired performance.
 Employees must see a direct relationship between their efforts and their rewards.
 Further, both employees and managers must see the rewards as equitable and
desirable.
3. Keep incentive plans current
 An incentive system should consistently reflect current technological and
organizational conditions.
 Incentive systems should be reviewed continually to determine whether they are
operating as designed.
4. Recognize individual differences
 Incentive plans should provide for individual differences.
 People are complex and a variety of incentive systems may have to be developed to
appeal to various organizational groups and individuals.
 Not everybody will want the same type of incentive rewards.
 For this and other reasons, individual incentive systems must be designed carefully.
5. Separate plan payments from base pay
 Successful incentive plans separate the incentive payment from base salary.
 That separation makes a clear connection between performance and pay.
 It also reinforces the notion that one part of the employee’s pay must be “re-earned”
in the next performance period.
Types of incentive plans
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 i. Individual Incentives
- Individual incentive systems attempt to relate individual effort to pay.
- The most individual incentive system is the piece-rate system. Under the straight piece-rate
system, wages are determined by multiplying the number of units produced by the piece rate for
one unit.

- An individual incentive system widely used in sales jobs is the commission, which is
compensation computed as a percentage of sales in units or dollars.
- Sales workers may receive commissions in the form of lump-sum payments or bonuses. Other
employees may receive bonuses as well.
- Bonuses are less costly than general wage increases, since they do not become part of
employees’ base wages, upon which future percentage increases are figured.
- Individual incentive compensation in the form of bonuses often is used at the executive or
upper-management levels of an organization and it is increasingly used at lower levels too.
ii. Team based incentives
- Some of the reasons that companies establish group incentive programs are improve
productivity or team work; tie earnings to job performance or improve quality; improve moral
or encourage certain behaviors, recruit or keep employees /cut payroll costs.
- The size of the group is critical to the success of team based incentives. If it become to large
employees may feel their individual efforts will have little or no effect on the total performance
of the group and the resulting rewards.
- Incentive plans for small groups are a direct result of the growing number of complex jobs
requiring interdependent effort. Team based incentive plans may encourage team work in small
groups where interdependence is high.
iii. Organizational incentives
- An organizational incentive system compensates all employees in the organization base on how
well the organization as a whole performs during the year.
- Gain sharing is the sharing with employees of greater-than expected gains in profit and or
productivity. It attempts to increase “discretionary efforts” –that is the difference between the
maximum amount of effort a person can exert and the minimum amount of effort necessary to
keep from being fired.

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 - Profit sharing distributes the portion of organization profits to employees. Typically the
percentage of the profit distributed to employees is agreed on by the end of the year before
distribution.

- Employee stock ownership plan is a common type of profit sharing which is designed to give
employees stock ownership of the organization for which they work, thereby increasing their
commitment, loyalty and effort.
6.3.3.2 Employee Benefits
 Benefit is an indirect reward such as health insurance, vacation pay, or retirement pensions, given to an
employee or group of employees as a part of organizational membership.
 Employee benefits include any benefits that the employee receives in addition to direct
remuneration.
 Benefits must be viewed as part of total compensation, and total compensation is one of the key
strategic decision areas in human resources.
 From management’s perspective, benefits are thought to contribute to several strategic goals: help
attract employees, help retain employees, elevate the image of the organization with employees
and other organizations and increase job satisfaction.
 Generally, Benefits are not taxed as income to employees. For this reason, they represent a somewhat
more valuable reward to employees than an equivalent cash payment.
- Employee benefits may fail in their motivational effect as they are not tied to employee
performance but to organizational membership.
- In addition, most employees perceive benefits provided by an organization as a part of their
larger social responsibility action.
Types of Benefits
Some of the major employee benefits are described as follows:
1. Payment for time not worked
- Companies provide payment for time not worked, both on-and off-the-job.
- On-the-job free time includes lunch periods, rest periods, coffee breaks, wash-up times and
get-ready times. Off-the-job includes vacations, sick leaves, public holidays, and personal or
casual leavers.
2. Insurance benefits
- Organizations offer life and health insurance programs to their employees.
3. Workers’ compensation
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 - Workers’ compensation provides benefits to persons injured on the job.
- Workers’ compensation systems require employers to give cash benefits, medical care, and
rehabilitation services to employees for injuries or illnesses occurring within the scope of
their employment.
4. Severance pay
- It is a security benefit voluntarily offered by employers to employees who lost their job.
5. Retirement benefits
- Few people have financial reserves to use when they retire, so retirement benefits attempt to
provide income for employees on retirement.
NB: Other types of employees’ benefits are Non-monetary benefits/rewards:
It includes challenging job responsibilities, recognition of merit, growth prospects, competent
supervision, comfortable working conditions, job sharing and flextime

CHAPTER- SEVEN
EMPLOYEE SAFETY, HEALTH AND LABOR
RELATION MANAGEMENT
7.1 Employee Safety and Health
The area of safety and accident prevention is of great concern to managers, at least partly because of
the increasing number of deaths and accidents at work. Supervisors play a key role in monitoring
workers for safety. Workers must develop safety consciousness through observance of rules. The law
enforcing authorities must take all steps to bring the violators to the book and impose penalties so as to
bring about a radical change in the outlook of managers who take safety matters lightly.
Organizations are obliged to provide employees with a safe and healthful environment. Health is a
general state of physical, mental and emotional well-being. Safety is protection of a person’s physical
health. The main purpose of health and safety policies is the safe interaction of people and the work
environment. Poor working conditions affect employee performance badly. Employees may find it
difficult to concentrate on work. It would be too taxing for them to work for longer hours. Their health
may suffer. Accidents and injuries may multiply causing enormous financial loss to the company.
Absence and turnover ratios may grow. A company with poor safety record may find it difficult to hire
and retain skilled labor force. The overall quality of work may suffer. Many deaths, injuries and
illnesses occur because of safety violations, poor equipment design or gross negligence.
7.1.1 Employee Safety
 Employee safety- refers to protection of the physical well-being of people.
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  The main purpose of effective safety programs in organizations is to prevent work-related
injuries and accidents.
 A well managed factory will see to it that there are no physical hazards such as:-
i. Slipping and falling hazards,
ii. Collision and obstruction hazards,
iii. Equipment hazards,
iv. Fire hazards,
v. Hazards from falling objects, etc.
 It is documented that in every 20 seconds, throughout the world, someone dies of industrial
accident.
 An accident-free plant enjoys certain benefits.
 Major ones are substantial savings in costs, increased productivity and morale and legal
grounds.
7.1.1.1 Employee Safety program
Safety Program deals with the prevention of accidents and with minimizing the resulting loss and
damage to persons and property.
The following five basic principles must govern the safety program of an organization:
1. Industrial accidents result from a multiplicity of factors. The root causes of these factors have to be
identified.
2. The most important function of safety programs is to identify potential hazards, provide effective
safety facilities and equipment and to take prompt remedial action. This is possible only if there
are:
 Comprehensive and effective systems for reporting all accidents causing damage or injury.
 Adequate accident records and statistics.
 Systematic procedures for carrying out safety checks, inspections and Investigations.
 Methods of ensuring that safety equipment is maintained and used.
 Proper means available for persuading managers, supervisors and workers to pay more attention
to safety matters.
3. The safety policies of the organization should be determined by the top management and it must be
continuously involved in monitoring safety performance and in ensuring that corrective action is taken
when necessary.
4. The management and the supervision must be made fully accountable for safety performance in the
working areas they control.
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5. All employees should be given thorough training in safe methods of work and they should receive
continuing education and guidance on eliminating safety hazards and prevention of accidents.
A safety program generally contains six elements, namely:
1. Making strategic choices.
2. Development of policies, procedures and training systems,
3. Organization for safety,
4. Analysis of the causes and occurrence of accidents,
5. Implementation of the program
6. Evaluation of the effectiveness of the program
1. Strategic Choices
 The first step in a safety program is for management to make decisions regarding safety of their
workers. Some of the strategic choices are:
 Managers must determine the level of protection the organization will provide for employees (i.e.
Minimum /maximum level of protection).
 Managers can decide whether a safety program will be formal or informal. Formal program will
have written regulations and are carefully monitored. Informal regulations are enforced through
peer pressure or good training.
 Managers can also be proactive or reactive in developing procedures or plans with respect to
employee safety. Proactive managers seek to improve the safety of employees prior to a need to
do so, while reactive managers fix safety problems after they occur.
 Managers can decide to use the safety of workers as a marketing tool for the organization. This
type of strategy would involve publicizing what the company has done to promote safety and how
safe the plant is to work with.
2. Safety Policy
 The second step in evolving a safety program is to have a safety policy.
 A Policy specifies the company's goals and designates the responsibilities and authority for their
achievement.
 It may also provide caveats and sanctions for failing to fulfill them.
 A policy must contain a declaration of the organization's intent and the means by with the intent is
to be realized.
3. Organization for safety
 The third step in evolving a safety program is to constitute an organization for safety.

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  Companies constitute safety committees which are, composed of employees from across the
organization.
 Typically, safety committees serve in advisory capacities and are responsible for such tasks as
reviewing safety procedures, making recommendations for eliminating specific safety and health
hazards, investigating accidents, fielding safety-related complaints from employees and
monitoring statutory compliance.
4. Analysis of the causes
 The causes for accidents can be classified into two groups-human failure and machine failure.
 Human failure leads to an accident when the employee ignores safety precautions and commits
an unsafe act.
 Majority of accidents occur because of human failure.
 On the other hand, machine failure refers to faulty mechanical or physical conditions reading to
accidents.
 It is documented that 98 percent of accidents are preventable.
5. Implementing the Policy
The fifth step in a safety program is the implementation of the safety policy. For implementation, the
program must cover:
 Procedures for reporting accidents; hazards, fire precautions, first-aid.
 Arrangements for instructing workers about safe working methods and for training employees in
safety matters,
 General rules on safe working habits;
 Safety inspections,
 The provision of personal protective equipment, and rules as to its use.
6. Program Evaluation
 The methods to gauge the effectiveness of safety program can be classified as systemic or organic.
 Organic Methods attempt to evaluate how well the safety program is designed and fulfilled.
 In systemic methods, the concern is with the effects of the program, that is, the achievement of the
aim(s) the program is designed to serve (e.g. reduction in the rate accidents, cost saving and the
like).
7.1.1.2 Safety Management
Effective safety management begins with organizational commitment to a comprehensive safety effort.
This effort should be coordinated from the top level of management to include all members of the

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organization. Once the organization has made a commitment to safety, different approaches can be
used:
 Organizational Approach: - Design of jobs; Development/implementation of safety policies; Use
of safety committees and Coordinating accident investigations.
 Engineering Approach: - Design of work environment; Review of equipment; and Ergonomics.
 Individual Approach: Reinforcing safety motivation and attitudes; Providing employee safety
training and Rewarding safety through incentive programs.
7.1.2 Employee Health
Employee health:-refers to a general state of physical, mental and emotional well-being. Industrial
health is essential to:
 Promote and maintain the highest degree of physical, social and mental well-being of workers.
 Improve productivity and quality of work.
 Reduce accidents, injuries, absenteeism and labor turnover.
 Protect workers against any health hazard arising out of work or conditions in which it is carried
on.
The well- being of an employee in an individual establishment is affected by accidents and by ill health
physical as well as mental.
It is possible to see employee health from the following angles:-
 Physical health, mental health, Noise control, Stress management, HIV/AIDS. Alcoholism, Drug
abuse and violence in work place
1. Physical Health
 Ill health of employees results in reduced productivity, higher unsafe acts, and increased
absenteeism.
 On the other hand, a healthy worker is always cheerful, confident looking and is an invaluable
asset to the organization.
 As a result of ill health, organizations provide health services to their employees.
2. Mental Health
In recent years, mental health of employees, particularly that of executives, has engaged attention of
employers. Three reasons may be given for this development:
 Mental breakdowns are common in modern days because of pressures and tensions.
 Mental disturbances of various types result in reduced productivity and lower profits for the
organization.

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  Mental illness takes its all thought alcoholism, high employee turnover and poor human
relationships.
3. Noise Control
 Long exposure to excessive noise impairs the hearing of employees.
 Besides, constant exposure to high noise levels can cause hormonal imbalances, changes in blood
circulation, dizziness, and increase in respiratory rate, heartburn, sleep disturbances and fatigue.
 It is impossible to eliminate noise from industrial establishments.
 It is there as long as machinery is used in manufacturing operations.
 However, noise control can help minimize harmful effects on employees.
 You can control noise by preparing on redesigning machines, putting the machine in separate
rooms, by constructing ceilings and walls with acoustic materials to absorb sound, giving ear
protection to prevent any impairment of their hearing capacity.
4. Job stress
 It refers to an individual's reaction to a disturbing factor in the environment. It is defined as an
adaptive response to an external situation that results in physical, psychological, and/or behavioral
deviations for organizational participants. Stress is high when there is an uncertainty of outcome.
In general, it can manifest itself in both positive and negative ways.
 Stress is said to be positive when the situation offers an opportunity for one to gain something.
Positive stress is often viewed as a motivation since, in its absence, the individual lacks that
"edge" necessary for peak performance.
 Stress is negative when stress is associated with heart disease, alcoholism, drug abuse, marital
breakdowns, absenteeism, child abuse, and a host of other social, physical, organizational and
emotional problems.
 Stresses are generated from individual, group and organizational sources.
1. Organizational stressors
 In organizations, frequent causes of stress are task demands, role demands, interpersonal
demands, organizational structure, organizational leadership, and the organization's life cycle.
2. Group stressors
 Group stressors can be categorized into three: Lack of growing cohesiveness; lack of social
support and interpersonal and inter group conflict.
3. Individual stressors
 Among individual factors contributing to stress are personality and life and career changes.
4. Environmental factors
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  Extra-organizational factors also contribute to job stress. These factors include political,
economic and technological uncertainties. These factors contribute to stress because of their
negative influence on one's job tenure.
Stress Consequences
 Stress can have serious consequences for both our health and our work performance.
 In terms of health, some of the consequences are heart disease, diabetes, ulcers, high blood
pressure, depression, irritation, anxiety, fatigue, lowered self-esteem and reduced job
satisfaction, use of drugs or alcohol.
 The more serious consequences of stress relates to performance.
 It is said that moderate levels of stress stimulate the body and increase its ability to react.
 But too much stress places unattainable demands or constraints on a person, which results in
poor performance.
Coping Strategies for stress
 Coping strategies may be categorized into:
i) Individual strategies
ii) Organizational strategies.
1. Individual Strategies
 As an individual, one has several techniques available to reduce tension.
 More prominent among them are time management, Physical exercise, Relaxation, Social
support, Situation control and unburdening oneself.
2. Organizational strategies
 The management might want to consider several strategies such as personnel selection and
placement, redesigning of jobs, participative decision-making, improved communication and
establishment of corporate well- being programs.
5. Acquired Immune Deficiency Syndrome (HIV/AIDS)
 Scientists discover AIDS in 1983.
 The African continent is worst hit.
 Organizations are hard hit by additional costs-direct and indirect - when their employees contact
the disease.
 Direct costs are in the form of increased medical burden. Indirect costs result from loss of
productivity when employees refuse to work with an AIDS-infects worker.
 Much of the problem relating to AIDS stems from ignorance of people about the disease.
 They believe that the disease highly infectious and there is no remedy for the victims.
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  It is the responsibility of the government and business and non-governmental organizations to
create better awareness about the disease in the minds of people.
What is needed most for the employers is to educate workers about HIV/AIDS. The following
guidelines need to be followed to make the educational program effective: -
 Employees must be made to understand how HIV/AIDS is contacted.
 Understanding about the ways on contacting HIV/AIDS will ensure that the
activities do not occur at the workplace.
 Presentations to employees must be handled by professionals, preferably from
experts.
 All employees must attend the sessions.
6. Alcoholism and Drug Abuse
 Alcoholism is a serious and widespread disease.
 It does not strike any particular group- alcoholism can strike employees from the junior to the
general manager.
 The effects of alcoholism on the worker and on the work are serious.
 Both the quality and quantity of work decline sharply.
 Morale of the other workers is likely to suffer as they are required to do the work of their
alcoholic peer.
Organizations employ three techniques to tackle alcoholism in work places.
I. It disciplines alcoholics. When disciplining fails, the alcoholic is discharged.
II. In-house counseling will be conducted by the HR department, the company doctor or by
immediate supervisor.
III. Companies use outside agencies, psychiatrists and clinics to deal with the problem of
alcoholism.
Drug abuse is a recent phenomenon and is a serious one. It is more evident among young employees
and is found across all job levels.
 Employees who are drug addicts are often much more difficult to detect than alcoholics- liquor
is easy to smell but not drugs. Besides, it is easy for an addict to pop a pill at lunch or on a
break, undetected.
 During abuse affects job performance. As a result of the increased use of drugs in the
workplace, more and more companies have began to use some form of drug testing for both job
applicants and existing employees.
7.2 INDUSTRIAL RELATIONS
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7.2.1 Definitions of Industrial Relations
 The term ‘industrial relations refer to relationships between management and labor or among
employees and their organizations that characterize or grow out of employment.
 Theoretically speaking, there are two parties in the ‘employment’ relationship-labor and
management.
 Both parties need to work in a spirit of cooperation, adjustment and accommodation. In their own
mutual interest certain rules for co-existence are formed and adhered to.
The term industrial relation has been defined by different authors in different ways.
 Dale Yoder defined it as “a relationships between management and employees or among
employees and their organizations that characterize and grow out of employment”.
 According to R.A Lester, industrial relations, “involve attempts to have workable solutions
between conflicting objectives and values, between incentive and economic security, between
discipline and industrial democracy, between authority and freedom and between bargaining
and cooperation.
One of the most comprehensive definitions which views industrial relations from the perspective of
human relationships is by J. Henry Richardson: "Industrial relations is an art, the art of living
together for purposes of production. The parties while working together learn this art by acquiring the
skills of adjustment.
7.2.2 Features of Industrial Relations
A few notable features pertaining to industrial relations are as under:
i. Industrial relations are born out of employment relationship in an industrial setting.
 Without the existence of two parties i.e. labour and management, this relationship cannot exist.
 It is the industry, which provides the environment for industrial relations.
ii. Industrial relations are characterized by both conflict and co-operation.
 So the focus of industrial relation is on the study of the attitudes, relationships, practices and
procedures developed by the contending parties to resolve or at least minimize conflicts.
iii. As the labour and management do not operate in isolation but are a part of the large system, so
the study of industrial relations also includes vital environmental issues like technology of the
workplace, country's socio-economic and political environment, nation's labour policy, attitude
of trade unions, workers and employers.
iv. Industrial relations also involve the study of conditions conducive to the labour, management
co-operation as well as the practices and procedures required to elicit the desired co-operation
from both the parties.
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 v. Industrial relations also study the laws, rules, regulations, agreements, awards of court, customs
and traditions, as well as policy framework laid down by the government for eliciting co-
operation between labour and management. Besides this, it makes an in-depth analysis of the
intervening patterns of the executive and judiciary in the regulation of labour-management
relations.
 According to the ILO, “industrial relations deal with either the relationships between the state
and the employers and the workers’ organization or the relation between the occupational
organizations themselves”.
 The ILO uses the expression to denote such matters as “freedom of association and the
protection of the right, to organize, the application of the principles of the right to organize and
the right of collective bargaining, collective agreements, conciliation and arbitration and
machinery for cooperation between the authorities and the occupational organizations at
various levels of the economy.
7.2.3 Objectives of industrial relations
The fundamental objective of industrial relations is, to maintain sound relations between employees
and employers. The other objectives can be drawn from this objective. They are:
 To enhance the economic status of the worker
 To regulate the production by minimizing industrial conflicts through state control
 To provide an opportunity to the workers to have a say in the management and decision-making
 To improve workers’ strength with a view to solve their problems through mutual negotiations
and consultation with the management
 To encourage and develop trade unions in order to improve the worker’ collective strength
 To avoid industrial conflict and their consequences
 To extend and maintain industrial democracy
7.2.4 The Scope of Industrial Relations
The scope industrial relations are:-
 Promotion and development of healthy labor- management relations;
 Maintenance of industrial peace and avoidance of industrial strife and
 Development of industrial democracy.
Industrial relation is concerned with the relationship between management and workers and the role of
regulatory mechanism in resolving any industrial dispute.

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It is concerned with the systems, rules and procedures used by unions and employers to determine the
reward for effort and other conditions of employment, to protect the interests of the employed and their
employers, and to regulate the ways in which employers treat their employees.
Industrial relations cover the following areas:
 Collective bargaining
 Role of management, unions and government
 Machinery for resolution of industrial disputes
 Individual grievance and disciplinary policy and practice
 Labor legislation
 Industrial relations training
The major parties to Industrial Relations are:-
 The employees,
 Employee representatives,
 Employers,
 Associations of employers,
 Government, courts and tribunals.
7.2.5 Factors influencing Industrial relations
Industrial relations are influenced by various factors, viz., institutional factors, economic factors and
technological factors.
 Institutional factors: These factors include government policy, labor legislation, collective
agreements, employee courts, employers’ federations, social institutions like community, caste,
joint family, creed, system of beliefs, attitudes of works, system of power, status, etc.
 Economic factors: These factors include economic organizations like capitalist, communist,
mixed, etc, the structure of labor force, demand for and supply of labor force.
 Technological factors: These factors include mechanization, automation, rationalization,
computerization, etc.
7.3 Collective Bargaining
7.3.1 Definition of Collective Bargaining
 Collective bargaining is a procedure by which the terms and conditions of workers are regulated
by agreements between their bargaining agents and employers.
 The underlying idea of collective bargaining is that the employer and employee relations
should not be decided unilaterally or with the intervention of any third party.

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  Both parties must reconcile their differences voluntarily through negotiations, yielding some
concessions and making sacrifices in the process.
 Both should bargain from a position of strength; there should be no attempt to exploit the
weaknesses or vulnerability of one party.
 Both parties have, more or less, realized the importance of peaceful co-existence for their
mutual benefit and continued progress.
 Collective bargaining is the process by which union representatives for employees in a bargaining
unit negotiate employment conditions for the entire bargaining unit.
 It is the process whereby representatives of management and workers negotiate over wages, hours,
grievance procedure and other terms and conditions of employment.
 It is a give-and take process between representatives of two organizations for the benefit of both.
 Collective bargaining refers to the negotiation, administration and interpretation of a written
agreement between two parties that covers a specific period of time.
 This agreement or contract lays out in specific terms the conditions of employment; that is,
what is expected of employees and what limits there are in management authority
7.3.2 Objectives of Collective Bargaining
 The basic objective of collective bargaining is to arrive at an agreement on wages and other
conditions of employment. Both the employer and employees may begin the process with
divergent views but ultimately try to reach a compromise, making some sacrifices. As soon as a
compromise is reached, the terms of agreement are put into operation.
 The other objective of collective bargaining is to agree on an acceptable contract- acceptable to
management, union representatives and the union membership. Four issues appear consistently
throughout all labor contracts: Wages; Hours; Terms and conditions of employment and
Grievance procedures.
7.3.3 Process of collective Bargaining
The collective bargaining process is made up of a number of stages. Over time, each situation develops
sight modifications, which are necessary for effective bargaining.
1. Preparation
 Both labor and management representatives spend much time preparing for negotiations.
 If a previous contract is expiring, the grievances filed under the old contract will be reviewed
to identify contract language changes to be negotiated.
 Employer and industry data concerning wages, benefits, working conditions, management and
union rights, productivity and absenteeism are gathered.
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  Once the data are analyzed, each side identifies what its priorities are and what strategies and
tactics it will use to obtain what it wants.
 Each tries to allow itself some flexibility in order to trade off less important demands for more
critical ones.
2. Initial Demands
 Typical bargaining includes initial proposals of expectations by both sides.
 The amount of calmness exhibited sets the tone for future negotiations between the parties.
3. Continuing Negotiations
 After opening positions have been taken, each side attempts to determine what the other values
highly so the best bargain can be struck.
 During negotiations, both management and union must evaluate cost proposals concerning
changes in wages, benefits, and other economic items quickly and accurately.
 Both employer and employee bargaining representatives negotiate in good faith. In good faith
negotiations, the parties agree to send negotiators who can bargain and make decisions, rather
than people who do not have the authority to commit either group to a decision.
4. Settlement and contract Agreement
 After an initial agreement has been made, the two sides usually return to their respective
constituencies to determine if what they have informally agreed on is acceptable.
 A particularly crucial stage is ratification of the labor agreement, which occurs when union
members vote to accept the terms of a negotiated agreement.
 Prior to the ratification vote, the union negotiating team explains the agreement to the union
members and presents it for a vote.
 If approval is voted, the agreement is then formalized into a contract.
 If the contract does not match the perceptions and interests of those it covers, then the
likelihood of ratification decreases.
7.3.4 Bargaining Impasse
Regardless of the structure of the bargaining process, labor and management do not always reach
agreement on the issues. If impasse occurs, then the disputes can be taken to conciliation, mediation
or arbitration.
i). Conciliation and mediation
 In conciliation or mediation, an outside party attempts to help two deadlocked parties continue
negotiations and arrive at a solution.

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  In conciliation, the third party attempts to keep union and management negotiators talking so
that they can reach a voluntary settlement but makes no proposals for solutions.
 In mediation, the third party assists the negotiators in their discussion and also suggests
settlement proposals.
 In neither conciliation nor mediation does the third party attempt to impose a solution.
ii). Arbitration
 The process of arbitration is a means of deciding a dispute in which negotiating parties submit
the dispute to a third party to make a decision.
 Arbitration is used to solve bargaining impasses primarily in the public sector.
7.4 Trade union
Trade unions are voluntary organizations of workers formed to promote and protect their interest
through collective action. It is an organization of workers, acting collectively, seeking to promote and
protect its mutual interests through collective bargaining.
The reasons individuals join unions are as diverse as the people themselves. The most common reasons
are:
a) Higher wages and benefits
 There are power and strength in numbers.
 As a result, unions sometimes are able to obtain higher wages and benefit packages for their
members than employees would be able to negotiate individually.
b) Greater job security
 Unions provide its members with a sense of independence from management’s power to
arbitrarily hire, promote, or fire.
 The collective bargaining contract will stipulate rules that apply to all members, thus providing
fairer and more uniform treatment.
c) Influence work rules
 Where a union exists, workers are provided with an opportunity to participate in determining
the conditions under which they work, and an effective channel through which they can protest
conditions they believe are unfair.
d) Compulsory membership
7.5 Grievance and Grievance Handling/Management
7.5.1 Definition of Grievance
 Grievance is usually more formal in character than a complaint.

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  A grievance is an alleged misinterpretation, misapplication or violation of a provision in a union-
management agreement.
 Grievances may be real or imaginary, valid or invalid, genuine and false.
 Broadly speaking a complaint affecting one or more workers constitutes a grievance.
 It may relate to wages, the mode of payment, payment of overtime, leave, interpretation of
service agreements, transfer, dismissal or discharge etc.
 Keith Davis defines: “Any real or imagined feeling of personal injustice which an employee has
concerning his employment relationship.”
 As per Dale Yoder: “Grievance is a written complaint filed by an employee and claiming unfair
treatment.”
 According to Flippo… “It is a type of discontent which must be expressed. A grievance is usually
more formal in character than a complaint.”
7.5.2 Grievance Procedures
Grievance Procedures are formal communication channels designed to settle a grievance as soon as
possible after the problem arises. First-line supervisors are usually closest to a problem. Grievance
procedures can vary in the number of steps they include:
 Start: Formal expression of dissatisfaction by employee
Step 1: Discussion of problem between employee and supervisor
Step 2: Discussion of written grievance between union steward and supervisor
Step 3: Meeting between chief steward and supervisor’s manager or HR manager
Step 4: Meeting between union committee and unit plant manager or industrial relations representative
Step 5: Meeting between national union representative and company executive or corporate industrial
relations officer
Step 6: Arbitration by impartial entity
7.5.3 Objectives of Grievance procedure
The main reasons for which a grievance procedure is required:
 It is a channel by which any aggrieved employee may present his grievance;
 It is a procedure to ensure systematic handling of grievance
 Now having discussed the objective what will be the Basic elements in any grievance Procedure
 Existence of sound channel through which grievance may pass for redressal
 Procedure should be simple, definite and prompt
 Steps should be clearly defined

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7.5.4 Approaches to grievances
 A formal grievance procedure sometimes leads management to conclude that the proper way to
handle grievances is to abide by the “letter of the law”. Such an approach can be labeled the
legalistic approach to resolution of grievances.
 A much more realistic approach, the behavioral approach recognizes that a grievance may be a
symptom of an underlying problem that management should investigate and rectify. It is
important to consider the behavioral aspects of grievances in order to understand why
grievances are filed and how employees perceive them.
Regarding why grievances have been filled, research has found that union stewards rather than
employees tend to initiate grievances over job descriptions. Also, grievances over work rules are the
least likely ones to be settled informally without resort to the use of grievance procedures. Management
should recognize that a grievance is a behavioral expression of some underlying problems. This
statement does not mean that every grievance is symptomatic of something radically wrong. Employees
do file grievances over pretty matters as well as over important concerns and management must be able
to differentiate between the two. However, to ignore a repeated problem by taking a legalistic approach
to grievance resolution is to miss much of what the grievance procedure can do for management.
7.5.5 Grievance Handling/Management
Management should be concerned with both complaints and grievances, because complaints are good
indicators of potential problems within the workforce. Also, unresolved complaints may turn into
grievances in a union environment.
Steps in Handling Grievances
There are certain steps in handling grievances. These are:-
1. Receive and define the nature of dissatisfaction
2. Get the facts
3. Analyze and decide
4. Apply the answer
5. Follow up
7.6 Discipline and Disciplinary Action
7.6.1 Definition of Discipline
 Employee discipline may be considered as a force that promotes individuals or groups to observe
the rules, regulations and procedures.
 Discipline is a form of training that enforces organizational rules.

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  The goal of preventive discipline is to heighten employee awareness of organizational policies and
rules.
 Knowledge of disciplinary actions may prevent violations. The emphasis on preventive discipline
is similar to the emphasis on preventing accidents.
 Counseling by a supervisor in the work unit can have positive effects. Many times people simply
need to be made aware of rules.
7.6.2 Progressive discipline
Progressive discipline incorporates a sequence of steps into the shaping of employee behaviors. It uses
verbal and written reprimands and suspension before resorting to dismissal.
It suggests that actions to modify behaviour become progressively more severe as the employee
continues to show improper behavior.
Progressive discipline procedures include:
 First offence -------------------verbal caution
 Second offence----------------written reprimands
 Third offence--------------------suspension
 Fourth offence-----------------demotion
 Fifth -----------------------------Dismissal
7.6.3 Effective Discipline
 Because of legal aspects, managers must understand discipline and know how to administer it
properly.
 Effective discipline should be aimed at the behavior, not at the employee personality because the
reason for discipline is to improve performance.
 The manager administering discipline must consider the effect of actions taken by other managers
and of other actions taken in the past.
 Consistent discipline helps to set limits and informs people about what they can and cannot do.
 Inconsistent discipline leads to confusion and uncertainty.
 Effective discipline requires accurate written record keeping and written notification to the
employee.
 In many cases, the lack of written notification has been evidence for am employee’s argument that
he or she “did not know”.
 Effective discipline requires that people know the rules. When people perceive discipline as
unfair, it is often on the basis that they did not realize they had broken a rule.

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Additionally, effective discipline is immediate. The longer the time that transpires between the offense
and the disciplinary action, the less effective the discipline will be.
Finally, effective discipline is handled impersonally. Managers cannot make discipline an enjoyable
experience, but they can minimize the unpleasant effects somewhat by presenting it impersonally and
by focusing on behavior, not on the person.
7.6.4 Disciplinary Action
The term discipline is used to cover any action by an employer in relation to an employee which is
designed to correct the employee’s behavior in response to perceived misdemeanor or wrong doing or
refusal of duty by the employee.
The most commonly considered disciplinary actions are:-
 Counseling and training, Denial of certain rights, Demotion as discipline, Fines and monetary
penalties, Overtime not offered, Suspension, Transfer to different location and Warning, etc.

Course: Governance and Management of NGOs

Course Code: PADM 4124
Credit Hour: 3

Introduction
Managing NGOs is a challenging undertaking because it requires understanding the unique nature of NGOs,
interpersonal skills to deal with a wide range of stakeholders, specially, donors, the public sector and those who
need the resources mobilized by the NGOs. Hence, it also requires a broad knowledge of how communities and
society work and how to make such organizations remain efficient and sustainable.
This course will give you insights into how NGOs are different from the public sector and other private sector
organizations, different types and functions of NGOs, various approaches used by NGOs to solve community
problems, how such organizations can be more effective by using services of various stakeholders i.e. building
capacity of NGOs, raising fund to enable the organizations obtain the resources required to achieve their
objectives and so on. The course combines NGO and management related theories including stakeholder
theory, the law of unintended consequences, management and leadership as applied to NGOs and so on. The
practical part of the course will be an opportunity for you to understand the above concepts in the Ethiopian
context. In addition, practical experiences of NGO managers will also be shared with students.
Objectives
By the end of the course students should:
 Identify unique characteristics of NGOs
 Explain types and functions of NGOs
 Explain stakeholder theory
 Explain the law of unintended consequences

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  Identify approaches of solving community problems
 Identify various fundraising approaches
 Explain the NGO related situations in Ethiopia
Course Contents
Chapter 1: Overview of Nongovernmental Organizations
Chapter 2: Nongovernmental Organization Theories
Chapter 3: Functions of Nongovernmental Organizations
Chapter4: NGO Approach to Solving Community Problems
Chapter 5: Building Capacity of Nongovernmental Organizations
Chapter 6: The Ethiopian Environment vis-à-vis Nongovernmental Organizations

Chapter One
Overview of Nongovernmental Organizations
1.1 Introduction
In 1980s gradually democratization process started in the developing countries. With the restoration of
democratization process, people became more aware of their freedom of organization and freedom of speech. So
the people started to organize civil societies with different purposes such as protection of rights of women, rights
of children and other disadvantage groups, protection of forest, environment and providing health services etc. In
the field of education those civil societies worked for the elimination of illiteracy. For this purpose they initiated
many types of literacy works like functional literacy, civic literacy, legal literacy and literacy for empowerment
of women etc.
In the same time the idea of open market and globalization became strong. This process has been helping the
private sector to become strong. With the demise of planned and centrally controlled economy market economy
became much stronger. But it is well known fact that private businesses are basically profit oriented and they try
to make profit even at the cost of environment, health and welfare of the people. Therefore people started to raise
their voice that we should prevent the private enterprises to make profit at the cost of environment and the
consumer's rightful interest. Thus there are three main players in the democratic society such as :
1. Government
2. Business sector and
3. Civil Society
They interface each other as given below;
During the past two decades nongovernmental organizations (NGOs) working in development have increased
their profiles at local, national and international levels. NGOs have come to be recognized as important actors on
the landscape of development, from the reconstruction efforts to international campaigns for aid and trade
reform such as ‘Make Poverty History’. NGOs tend to be best known for undertaking one or other of these two

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main forms of activity: the delivery of basic services to people in need, and organizing policy advocacy and
public campaigns for change. At the same time, NGOs have also become active in a wide range of other more
specialized roles such as emergency response, democracy building, conflict resolution, human rights work,
cultural preservation, environmental activism, policy analysis, and research and information provision.
It is probably impossible to say how many NGOs there are in the world, since there are no comprehensive or
reliable statistics. In any case, definitions of what actually constitutes an NGO tend to vary. Some estimates put
the figure at one million, if both formal and informal organizations are included, while the number of registered
NGOs receiving international aid is probably closer to ‘a few hundred thousand’. The United Nations currently
estimates that there are about 35,000 large established NGOs.
1.2 What are Nongovernmental Organizations?
The term ‘NGO’ tends to be used in both a broad and a narrower sense. In its widest sense, NGOs are ‘privately
constituted organizations – be they companies, professional, trade and voluntary organizations, or charities – that
may or may not make a profit’. In other words, within this legal definition, all non-state organizations, whether
they are businesses or third sector, can be seen as forms of NGO. Yet these kinds of definitions, while
technically logical, are probably far too broad for people interested in NGOs and development.
A more common-sense definition focuses instead on the idea that NGOs are organizations concerned with the
promotion of social, political or economic change – an agenda that is usually associated with the concept of
‘development’. This gives emphasis to the idea that an NGO is an agency that is primarily engaged in work
relating to the areas of development or humanitarian work at local, national and international levels. A usefully
concise definition is that Provided by Vakil (1997: 2060), who – drawing on elements of the structural-
operational definition set out above – states that NGOs are ‘self-governing, private, not-for-profit organizations
that are geared to improving the quality of life for disadvantaged people’. We can therefore contrast NGOs with
other types of ‘third sector’ groups such as trade unions, organizations concerned with arts or sport, and
professional associations. In this course, we are, therefore, mostly concerned with the term ‘non-governmental
organization’ in this narrower sense.
Definition
There is no clearly cut definitions about non-government organizations (NGOs). For many professionals
providing universally accepted definition and classification of NGOs is quite difficult. Nonetheless, it is sound
to see some of the definitions and classifications given by different scholars.
 Nongovernmental organizations are nonprofit voluntary organizations which are found by people who
share common goals and co-operate to achieve it.

 Non Governmental Organizations are non-profit organizations that give services to client groups. They
include lower level organizations such as community groups, associations, co-operatives, religious and private
development organizations.

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 Microsoft Encarta 2005 says that Nonprofit, non Government Organizations or Foundations are
organizations with funds and programs managed by its own trustees or directors, established to maintain or aid
social, educational, charitable, religious, or other activities serving the common welfare.

Precise definitions vary as to what constitutes an NGO, and the challenge of analyzing the phenomenon of
NGOs remains surprisingly difficult. One reason for this is that NGOs are a diverse group of organizations that
defy generalization, ranging from small informal groups to large formal agencies. NGOs play different roles and
take different shapes within and across different societies. As a result, ‘‘NGO’’ as an analytical category remains
complex and unclear. For example, despite the fact that NGOs are neither run by government, nor driven by the
profit motive, there are nevertheless some NGOs that receive high levels of government funding, and others that
seek to generate profits to plough back into their work. Boundaries are unclear, and as one might expect from a
classification that emphasizes what they are not rather than what they are, NGOs therefore turn out to be quite
difficult to pin down analytically. This has generated complex debates about what is and what is not an NGO,
and about the most suitable approaches for analyzing their roles.
In relation to structure, NGOs may be large or small, formal or informal, bureaucratic or flexible. In terms of
funding, many are externally-funded, while others depend on locally mobilized resources. While there are many
NGOs which receive funds from and form a part of the ‘‘development industry’’ (which consists of the world of
bilateral and multilateral aid donors, the United Nations system and the Bretton Woods institutions), there are
also NGOs which choose to work outside the world of aid as far as possible.
Some NGOs are well-resourced and affluent, while others lead a fragile ‘‘hand to mouth’’ existence, struggling
to survive from 1 year to the next. There are NGOs with highly professionalized staff, while others rely heavily
on volunteers and supporters. NGOs are driven by a range of motivations and values. There are both secular and
‘‘faith based’’ organizations. Some NGOs may be charitable and paternalistic, while others seek to pursue
radical or ‘‘empowerment’’ based approaches. Some NGOs aimed to meet only people’s immediate needs, while
others take a longer-term view and seek to develop alternative ideas and approaches to problems. A single NGO
might combine several of these different elements at any one time.
A key point to note here is that NGOs can be seen as a kind of tabula rasa, onto which a range of current ideas,
expectations, and anxieties about social transformation are projected (Lewis, 2005). It is partly because of this
high degree of flexibility of the NGO as an institutional form, and the wide spectrum of different values that
NGOs may contain, that the rise to prominence of NGOs since the late 1980s has taken place against the back-
drop of the ascendancy of neo liberal policy agendas.
Hence it is argued that existing third sector organizational definitions had only limited usefulness because they
were not holistic. They were either legal (focusing on the type of formal registration and status of organizations
in different country contexts), economic (in terms of the source of the organization’s resources) or functional
(based on the type of activities it undertakes). Finding such approaches incomplete and partial, they instead

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constructed a ‘‘structural/operational’’ definition that was derived from a fuller analysis of an organization’s
observable features.
1.3 Historical Background of NGOs
Many of the world’s best known NGOs predate the emergence of the development industry. Save the Children
Fund (SCF) was founded by Eglantyne Jebb in 1919 after the trauma of the First World War. Oxfam, which was
originally known as the Oxford Committee against the Famine, was established in 1942 in order to provide
famine relief to victims of the Greek Civil War. CARE began its life sending US food packages to Europe in
1946 after the Second World War. In fact, NGOs had been active at the international level since the eighteenth
century in Western countries, when national level issue-based organizations focused on the abolition of the slave
trade and movements for peace.
By the start of the twentieth century, there were NGOs associations promoting their identities and agendas at
national and international levels. For example, at the World Congress of International Associations in 1910,
there were 132 international associations represented, dealing with issues as varied as transportation, intellectual
property rights, narcotics control, public health issues, agriculture and the protection of nature, and NGOs
became prominent during the League of Nations after the First World War, active on issues such as labor rights.
But from 1935 onwards, the League became less active as growing political tensions in Europe led towards war
and NGO participation in international affairs began to fade (Charnovitz, 1997).
In 1945, Article 71 of the UN Charter formalized NGO involvement in UN processes and activities, and some
NGOs even contributed to the drafting of the Charter itself. UNESCO and WHO both explicitly provided for
NGO involvement in their charters. But NGOs again began to lose influence, hampered by Cold War tensions
and by the institutional weakness of the UN Economic and Social Council (ECOSOC). It was not until the 1970s
when NGO roles again intensified and they played key roles within a succession of UN conferences from the
Stockholm Environment Conference in 1972 to the Rio Environment and Development (UNCED) in 1992,
where NGOs were active in both the preparation and the actual conference itself, which approved a series of
policy statements relating to the role of NGOs within the UN system in policy and program design,
implementation and evaluation.
From the late 1980s, NGOs assumed a far greater role in development than previously. NGOs were first
discovered and then celebrated by the international donor community as bringing fresh solutions to longstanding
development problems characterized by inefficient government to government aid and ineffective development
projects. Within the subsequent effort to liberalize economies and ‘‘roll back’’ the state as part of structural
adjustment policies, NGOs came also to be seen as a cost-effective alternative to public sector service delivery.
In the post- Cold War era the international donor community began to advocate a new policy agenda of ‘‘good
governance’’ which saw development outcomes as emerging from a balanced relationship between government,
market, and third sector. Within this paradigm, NGOs also came to be seen as part of an emerging ‘‘civil
society.’’ The new attention given to NGOs at this time brought large quantities of aid resources, efforts at
building the capacity of NGOs to scale up their work, and led ultimately to important changes in mainstream
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development thinking and practice, including new ideas about participation, empowerment, gender, and a range
of people centered approaches to poverty reduction work. For example, Cernea (1988: 8) argued that NGOs
embodied ‘‘a philosophy that recognizes the centrality of people in development policies,’’ and that this along
with some other factors gave them ‘‘comparative advantages’’ over government. But too much was expected of
NGOs, which came to be seen in some quarters as a ‘‘quick fix’’ for development problems.
This had led to a backlash against NGOs by the end of the 1990s, when the evidence began to suggest that
NGOs had only partially lived up to these unrealistically high expectations. A global shift also took place among
development donors towards new ways of working with developing country governments, using mechanisms
such as ‘‘budget support’’ and ‘‘sector-wide approaches’’ (Lewis, 2007).
1.3.1 Key Issues
A first wave of academic literature on NGOs emerged in the 1990s (such as Clark, 1990, Korten, 1991, Fowler,
1997) that was normative and applied rather than primarily analytical in its focus. While such work presented a
wide range of case studies of NGOs in action and began to raise important questions about NGO performance
and accountability, it was not until the following decade that a second wave of more detailed, theoretically
grounded research on NGOs began to become more common within the field of interdisciplinary field of
development studies (e.g., Hilhorst, 2003; Igoe & Kelsall, 2005).
As their name implies, NGOs also need to be viewed in the context of the government against which they seek to
distinguish themselves. As ‘‘non-governmental’’ organizations, NGOs are conditioned by, and gain much of
their legitimacy from, their relationships with government. Clark (1991) suggested that NGOs ‘‘can oppose,
complement or reform the state but they cannot ignore it.’’ NGOs will always remain dependent for their ‘‘room
for maneuver’’ on the type of government which they find themselves dealing with at international, national or
local levels. Government attitudes to NGOs vary considerably from place to place, and tend to change with
successive regimes. They range from active hostility, in which governments may seek to intervene in the affairs
of NGOs, or even to dissolve them (with or without good reason) to periods of active courtship, ‘‘partnership,’’
(and sometimes ‘‘co-optation’’) as governments and donors may alternatively seek to incorporate NGOs into
policy and intervention processes.
1.3.2 International Perspectives
There is now almost no country of the world where NGOs do not exist or operate, yet their form and values are
often strongly rooted in specific contexts. As Carroll (1992: 38) has pointed out, ‘‘all NGOs operate within a
contextual matrix derived from specific locational and historic circumstances that change over time.’’ The ebb
and flow of international NGO activities in the contexts of Western Europe and North America is only part of
the story. The diverse origins and influences on the third sector in different parts of the world also need to be
considered.
In Latin America, the tradition of peasant movements seeking improved rights to land, and the efforts of political
radicals working towards more open democratic societies both fed into the emergence of local NGOs. NGOs
were also influenced by the rise of ‘‘liberation theology’’ that signaled a renewed commitment to the poor
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among some sections of the Catholic Church. In Brazil, Paulo Freire’s radical ideas about ‘‘education for critical
consciousness’’ and organized community action was influential and inspired many other NGOs around the third
world. Alongside these radical influences there were also many highly professionalized careerist organizations in
the Latin American NGO community with close relationships with donors and governments (Pearce, 1997).
In Asia, a different set of distinctive factors has influenced the growth of NGOs, such as the influence of
Christian missionaries, the growth of reformist middle classes and in India the influential ideas of Mahatma
Gandhi, who placed a concept of voluntary action at the center of his vision of change, inspiring organizations
such as the Association of Sarva Seva Farms (ASSEFA) seeking to build village level self-reliance. Other areas
of NGO activity associated with South Asia, such as credit and savings, have been derived from local self help
traditions, such as rotating credit groups in which household pool resources into a central fund and then take
turns in borrowing and repaying. The rise of the Grameen Bank in Bangladesh has been a home-grown solution
to problems of poor people’s lack of access to credit, helping to spawn a global micro finance movement through
its distinctive group-based approach to small scale lending.

A wealth of local associational third sector activity also underpins many African societies, such as the hometown
association common in countries such as Nigeria. These organizations mediate resources and relationships
between local communities and global labor markets and educational opportunities. The well-documented
‘‘harambee’’ self-help movement in Kenya was a system based on kinship and neighborhood ties, and was
incorporated by President Kenyatta as part of a modernization campaign to build a new infrastructure after
Independence.
In the countries of Eastern Europe and the former Soviet Union, there were dramatic increases in the numbers of
NGOs as Western donors began what they termed democracy promotion and civil society development. For
example, while Armenia had only 44 registered NGOs in 1994, by 2005 the number had increased to 4,500
organizations. In this context, what constituted an NGO quickly became bound up with these external donor
agendas, and the opportunities these presented to local activists and entrepreneurs. This led to a local
classification of organizations into three categories: ‘‘genuine’’ NGOs, ‘‘grant-eaters’’ (NGOs set up as a form
of corruption that allows unscrupulous individuals to access grants), and ‘‘pocket NGOs,’’ front organizations
that belong to the government (Ishkanian, 2006).
While NGOs have ended up taking different forms across these many and varied contexts, there are basic
common features that remain at the core of people’s efforts to organize in the third sector. On the one hand is the
need to increase income, secure rights or demand services, and on the other, to avail of new opportunities that
appear in the form of links with outside organizations and resources, exposure to new ideas, and political change
which opens up new organizing spaces.
The dominant view of NGOs as heroic organizations seeking to ‘‘do good’’ in difficult circumstances has rightly
become tempered in the new millennium as their novelty has worn off. The idea of NGOs as a straightforward
‘‘magic bullet’’ that would solve longstanding development problems has also now passed (Hulme & Edwards,
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1997). For Bebbington et al. (2008), the strength of development NGOs remains their potential role in
constructing and demonstrating ‘‘alternatives’’ to the status quo, which remains a pressing need:

“In being ‘‘not governmental’’ they constitute vehicles for people to participate in development and social
change in ways that would not be possible through government programmes. In being ‘‘not governmental’’ they
constitute a ‘‘space’’ in which it is possible to think about development and social change in ways that would not
be likely through government programmes. The relationship of NGOs to social transformation therefore takes
many forms. For some, NGOs are useful actors because they can provide cost-effective services in flexible ways,
while for others they are campaigners fighting for change or generating new ideas and approaches to
development problems.
1.4 Characteristics of NGOs
NGO has the following five key characteristics:
 Formal, that is, the organization is institutionalized in that it has regular meetings, office bearers and some
organizational permanence;
 Private in that it is institutionally separate from government, though it may receive some support from
government;
 Non-profit distributing, and if a financial surplus is generated it does not accrue to owners or directors
(often termed the ‘non-distribution constraint’);
 Self-governing and therefore able to control and manage its own affairs;

 Voluntary, and even if it does not use volunteer staff as such, there is at least some degree of voluntary
participation in the conduct or management of the organization, such as in the form of a voluntary board of
governors.
The implementer role is concerned with the mobilization of resources to provide goods and services to people
who need them. The service delivery role embodies a very wide range of activities carried out by NGOs in fields
as diverse as health care, micro-finance, agricultural extension, emergency relief and human rights. Service
delivery work has increased as NGOs have been increasingly ‘contracted’ by governments and donors within the
last two decades of governance reform and privatization to carry out specific tasks in return for payment; it has
also become more prominent as increasing emphasis is given to the role of NGOs responding to man-made
emergencies or natural disasters within the framework of humanitarian action.

A catalyst is normally understood as a person or thing which brings about change. The catalyst role can therefore
be defined as an NGO’s ability to inspire, facilitate or contribute to improved thinking and action to promote
change. This may be directed towards individuals or groups in local communities, or among other actors in
development such as government, business or donors. It may include grassroots organizing and group formation,

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gender and empowerment work, lobbying and advocacy work, undertaking and disseminating research, and
attempts to influence wider policy processes through innovation and policy entrepreneurship.
A partner works together with another and shares the risk or benefit from a joint venture. The role of partner
reflects the growing trend for NGOs to work with government, donors and the private sector on joint activities,
such as providing specific inputs within a broader multi -agency programme or project. It also includes activities
that take place among NGOs and with communities such as ‘capacity-building’ work which seeks to develop
and strengthen capabilities. The commonly used policy rhetoric of ‘partnership’ poses an important challenge for
NGOs to build mutually beneficial relationships that are effective, responsive and non-dependent.
Of course, a particular NGO is rarely confined to a single role, and many organizations engage in all three types
of activities at once. When NGOs began attracting attention during the late 1980s, they appealed to different
sections of the development community for different reasons. For some Western donors, who had become
frustrated with the often bureaucratic and ineffective government-to-government, project-based aid then in
vogue, NGOs provided an alternative and more flexible funding channel, which potentially offered a higher
chance of local-level implementation and grassroots participation.
NGOs embodied ‘a philosophy that recognizes the centrality of people in development policies’, and that, this
along with some other factors, gave them certain ‘comparative advantages’ over government and public sector.
NGOs were seen as fostering local participation, since they were more locally rooted organizations, and
therefore closer to marginalized people than most officials were. Poor people were often found to have been
bypassed by existing public services, since many government agencies faced resource shortages and their
decision-making processes were often captured by elites. Many also claimed that NGOs were generally
operating at a lower cost, due to their use of voluntary community input. Finally, NGOs were seen as possessing
the scope to experiment and innovate with alternative ideas and approaches to development. Some NGOs were
also seen as bringing a set of new and progressive development agendas of participation, gender, environment
and empowerment that were beginning to capture the imagination of many development activists at this time.
For other donors and some governments, concerned with the need to liberalize and roll back the state as part of
structural adjustment policies (SAPs), NGOs were also seen as a cost-effective and efficient alternative to public
sector service delivery. Structural adjustment was a condition of many of the loans provided by the World Bank
and the IMF from the late 1970s onwards which obliged governments to reduce the role of the state in the
running of the economy and the social sectors, to open up the economy to foreign investment and to reduce
barriers to trade. By the early 1990s, soon after the Cold War had ended, the international donor community was
advocating a new policy agenda of ‘good governance’ which saw development outcomes as emerging from a
balanced relationship between government, market and third sector, alongside continuing economic
liberalization.
1.5 Types of NGOs
NGOs are of various natures they can be arranged from very large to small; international to local; long lasting to
short period. And their activities are also varies with the objectives they stand for. NGOs can be classified on the
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bases of their institutional location, organizational composition and activities. In their institutional location they
are classified under local, national and international levels. In their organizational composition there are donor
organizations of international nature and national NGOs involved in providing services to those grass root level.
This base of classification takes in to account the NGOs’ source of fund, staff composition, leadership &
management and legal framework. Based on their activities, NGOs can be categorized as those involved in
relief, research, environment, emergency, health, education and development as a whole.
NGOs can be distinguished into two groups: Operational and advocacy NGOs. This may be interpreted as the
choice between small-scale change achieved directly through projects and large-scale change promoted
indirectly through influence on the political system.
Operational NGOs have to mobilize resources, in the form of financial donations, materials or volunteer labor, in
order to sustain their projects and programs. This process may require quite complex organization. Finance
obtained from grants or contracts, from governments, foundations or companies require time and expertise spent
on planning, preparing applications, budgeting, accounting and reporting. Major fund-raising events require
skills in advertising, media relations and motivating supporters. Thus, operational NGOs need to possess an
efficient headquarters bureaucracy, in addition to the operational staff in the field.
Advocacy NGOs will carry out much the same functions, but with a different balance between them. Fund-
raising is still necessary, but on a smaller scale and it can serve the symbolic function of strengthening the
donors' identification with the cause. Persuading people to donate their time is necessary, but, in addition to a
small number of people giving a great deal of time, it is also necessary to be able to mobilize large numbers for
brief periods. External donors may not impose onerous administrative burdens, but supporters still have to be
supplied with information on an efficient regular basis. Major events will aim to attract favorable publicity rather
than raise funds.
Therefore, despite their differences, both operational and advocacy NGOs need to engage in fund-raising,
mobilization of work by supporters, organizing special events, cultivating the media and administering a
headquarters. Only the defining activities – implementing projects or holding demonstrations – serve to
differentiate them. In reality, the distinctions are not as sharp as the labels suggest. Operational NGOs often
move into advocacy when projects regularly face similar problems and the impact of the projects seems to be
insufficient. All the large development and environment operational NGOs now run some regular campaigns, at
least by supporting campaigning networks. Similarly, advocacy NGOs often feels they cannot ignore the
immediate practical problems of people in their policy domain. Human rights NGOs and women's NGOs end up
having programs to assist the victims of discrimination and injustice.
1.6 Critiques of NGOs
While there have been many advocates for NGOs who emphasize their strengths, NGOs have also been
subjected to fierce criticism in some quarters. Top of the list is the idea that NGOs undermine the centrality of
the state in developing countries. As may be obvious from the brief history outlined above, there has been a shift

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away from a focus on state institutions and towards more privatized forms of development intervention which
rely on NGOs.
Tvedt (1998), for example, analyses this trend as part of a transformation in state–society relations, and writes of
the emergence of a powerful donor state/NGO system which structures relationships globally. For such critics,
NGOs help facilitate neoliberal policy change either by participating in de facto privatization through the
contracting out of public services, or by taking responsibility for clearing up the mess left by policies such as
structural adjustment which disproportionately affect the poor.
There are also strong critiques that centre on the accountability problems of NGOs. For example, in the context
of Bangladesh, Wood (1997) raised concerns about a ‘franchise state’ in which key services were increasingly
being delegated to local NGOs with unclear lines of accountability to citizens.
Another area of criticism of NGOs is that they impose their own agendas and become self-interested actors at the
expense of the people they are in theory supporting. For example, NGOs may sap the potential of more radical
grassroots action from social movements or organized political opposition by drawing such activity into the safe
professionalized and often depoliticized world of development practice. Kaldor (2003) suggests that some NGOs
have become the end-points of ‘domesticated’ social movements that have lost their political edge.
In the field of humanitarian action and response, there have also been strong criticisms of NGOs which have not
lived up to expectations in providing assistance in emergency situations, with critics pointing to institutional
self-interest by individual NGOs, a lack of coordination leading to duplication of effort, limited understanding of
local circumstances among international NGOs and a somewhat naive approach to the underlying causes of
conflict and instability.
Critics on the left such as Yash Tandon (1996) point to the ways in which NGOs have helped to sustain and
extend neocolonial relations in Africa. More recently, Hearn (2007) has argued that African NGOs are the ‘new
compradors’, reviving an older Marxist term used within dependency theory to describe the role of an
indigenous Southern bourgeoisie which acted as the agent of international capital against the interests of local
peasants and workers. New African NGO leaders, whose positions Hearn argues are dependent on outside
agencies, manage Western aid money and then use it to build patronage networks and consolidate their political
and economic power, in return for importing and projecting developmentalist ideas and rhetoric into African
communities.
US neoconservatives are fond of arguing that development and human rights NGOs are potentially harmful to
US foreign policy and business interests. The American Enterprise Institute (AEI), a think-tank close to the Bush
administration, made headlines in June 2003 by setting up an NGO ‘watchdog’ website which set out to
highlight ‘issues of transparency and accountability in the operations of non-governmental organizations’. NGOs
were seen as organizations that served to restrict US room for maneuver in relation to its foreign policy.
NGOs have received fierce criticism in some quarters. One argument has been about the role NGOs have played
in shifting attention away from state institutions towards more privatized – and potentially less accountable –
forms of public sector reform (Tvedt, 1998). For these critics, NGOs helped facilitate neoliberal policy change
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either by participating in de facto privatization through the contracting- out of public services, or by taking
responsibility for clearing up the mess left by neoliberal policies which disproportionately disadvantaged poor
people.
Another reason why these debates have continued between NGO supporters and critics are that there are
surprisingly few data available relating to the performance and effectiveness of NGOs in either development or
emergency work. Instead, what we find in the literature is a set of writings which tend to take either a ‘pro-’ or
an ‘anti-’ NGO case, based on limited generalized evidence or a specific narrow case. Some criticisms of NGOs
are therefore ungrounded or lack firm evidence. Others remain primarily ideological in nature. However, many
of the criticisms that are made of development NGOs are perfectly reasonable. Michael Edwards (1999), a long-
standing writer and activist sympathetic to NGOs, writes: few NGOs have developed structures that genuinely
respond to grassroots demands. Although NGOs talk of ‘partnership’, control over funds and decision-making
remains highly unequal ... The legitimacy of NGOs (especially those based in the North) is now an accepted
topic of public debate …
The days when NGOs could simply rely on the ‘moral high ground’ to give them credibility among other
development actors have long since disappeared.
Chapter Two
Non-governmental Organization Theories
Stakeholder theory
The law of unintended consequences
NPM and NGOs
2. 1. Stakeholder Theory
In the past few years the concept of stakeholders has boomed a lot and academics wrote a lot about the topic.
And also non-governmental organizations (NGOs), regulators, media, business and policymakers are thinking
about the Stakeholder Theory concept and are trying to implement it in some way or the other.
2.1.1 What is Stakeholder?
“Those groups without whose support the organization would cease to exist”. Freeman (2004) has continued to
use this definition in a modified form: “those groups who are vital to the survival and success of the
organization”. This definition is entirely organization orientated so the academic circles prefer the definition of
Freeman (1984) where he defines stakeholders as “any group or individual who can affect or is affected by the
achievement of the organization objectives”. This definition is more balanced and much broader. The phrase
“can affect or is affected by” seems to include individuals of outside the firm and groups may consider
themselves to be stakeholders of an organization, without the firm considering them to be such.
2.1.2 Stakeholders Mapping and Stakeholders Management Strategies for NGOs
In order to enhance an organization’s stakeholder management it is necessary to begin by defining who the
stakeholders of the NGO are. “Who are those groups who can affect or can be affected by the achievement of the

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organization’s purpose”? This mean mapping the stakeholders, providing detailed list of the specific groups and
companies related to each category of stakeholders, and a corresponding list of interests. Each organization
should distinguish important stakeholders and negligible stakeholders. To facilitate important stakeholder
mapping the following points are suggested:
- Who are our current and potential stakeholders?
-What are their interests/rights?
-How does each stakeholder affect us?
-How do we affect each stakeholder?
-What assumption does our current strategy make about each important stakeholder?
-What are the “environmental variables” that affect us and our stakeholder?
-How do we measure each of these variables and their impact?
-How do we keep score with our stakeholders?
In order to find the optimal strategy for each group of stakeholder analyzing the stakeholder behavior and
possible coalitions between stakeholders groups are suggested. The stakeholder behavior can be delineated
investigating in the past actions of such kind of groups. Coalition may develop if different groups of stakeholder
have common interests or common issues linked to the activity of the organization. They can then form a more
powerful group which has to be taken into account. Manager should scan the environment for instance of similar
actions, interests, beliefs, or objectives between stakeholders groups. The formation of a coalition can change
stakeholder strategy and positions on issues.
These two analysis lead to a more realistic map of company’s stakeholders. It also allows the manager to
construct a logical explanation to explain why specific stakeholders act in a particular way. The NGO has to
determine the long terms objectives of each groups and consider the stakeholders as rational. This map of
stakeholders allows finding the optimal strategy for each group. Two variables are commonly determining the
optimal strategy: the relative power of stakeholders and their potential to cooperate or threaten. Savage et Al.
(1991) gave guidance on the measurement of these variables. The power of threat is determined by resource
dependence, the stakeholder’s ability to form coalitions, and relevance of the threat to particular issue. The
potential to cooperate is determined by the stakeholder’s capacity to expand its dependence with the
organization: the greater is the dependence, the greater is the willingness to cooperate. As a result Savage et Al.
distinguish four types of stakeholders:
1. Supportive: high cooperative potential and low competitive threat. Considered as the ideal type and it includes
the board of trustees, managers, employees, parent companies, suppliers, service providers and donors.
2. Marginal: low cooperative potential and competitive threat.
3. Non-supportive: low cooperative potential and high competitive threat.
4. Mixed Blessing: high cooperative potential and competitive threat.
Four main strategies are also suggested depending on the type of stakeholders:

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  Offensive strategy: Should be adopted when a group is supportive. It includes trying to change stakeholder
objectives or perceptions, to adopt the stakeholder position or to link the program to others that the
stakeholder views more favorably.
 Hold strategies: Should be adopted when a group is marginal. The company should hold its current
position and continue current strategic program.
 Defensive strategy: Should be adopted when a group is Non supportive. The objective is to prevent
competitive threat on the part of these stakeholders. It means reinforcing current beliefs about the firm,
maintaining existing programs or letting the stakeholder drive the integration process.
 Swing strategy: Should be adopted when a group is mixed blessing.
Clarkson (1995) introduce a distinction between primary stakeholders and secondary stakeholders. Primary
stakeholders as those “without whose continuing participation, the corporation cannot survive as a going
concern,” suggesting that these relationships are characterized by mutual interdependence. Secondary
stakeholders are not vital for the organization. Primary stakeholders are the partners of the firm whereas
secondary stakeholders have voluntary relationships with the firm.
2.2. The Law of Unintended Consequences
The concept of unintended consequences is a staple of economics. The basic idea is that the actions of
governments, firms, individuals and other societal actors alter the incentives and constraints faced by other
decision-makers, leading to feedback through induced behavioral response. Such feedback effects are often hard
to anticipate but very real nonetheless. Unintended consequences can be favorable, as in Adam Smith’s
“invisible hand” effect of individually self-interested behavior leading to socially desirable outcomes or the
“crowding-in” effects of certain public investments that induce complementary private investment. But generally
people think of negative effects when they refer to unintended consequences, the attenuation of expected benefits
due to some induced response to the original intervention.
Unintended consequences can be grouped into three types:-
- Unexpected benefits (a positive unexpected benefit)
- Unexpected drawback (unexpected detriment occurring in addition to the desired effect of the policy)
- Unexpected perverse result (perverse effect contrary to what was originally intended)
Unintended consequences (unanticipated, unforeseen consequences) are outcomes that are not the one intended
by a purposeful action of NGOs. In other words, unintended consequences refer to unexpected drawback or
unexpected detriment in the operation of NGOs.
Let us see, as a typical example, the intended and unintended consequences of humanitarian/relief/food aid
service provider NGOs as follow:
Intended Consequences
1. Food aid used in humanitarian emergencies is largely intended to protect human nutritional status and human
life, although in many kinds of emergencies, protecting livelihood assets is critical as well. The most common

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applications of food aid for protecting human life and nutritional status in acute humanitarian emergencies are:
(i) general nutrition support, primarily through direct distribution of a basic food ration to vulnerable groups
(based on some assessment of need); (ii) correcting malnutrition via supplementary or therapeutic feeding for
especially acutely affected sub-groups; and (iii) food for work (FFW) if the emergency intervention is mounted
rapidly enough to begin before people have been so badly affected by the crisis that they cannot undertake
sustained physical labor.
2. Market development
The main intended effect of food aid concerns market development, not in the sense of creating future
commercial export markets for donors, but in the sense of helping to nurture competitive, efficient channels
through which food can flow from producers to final consumers. Market-mediated food aid operations – whether
on the supply-side through monetization of in kind food aid, or on the demand-side through local and regional
purchases using donor cash resources – often have an explicit goal of helping to develop food marketing
channels in low-income areas where markets perform rather poorly.
3. Stimulate growth
At some level, the objective of all overseas development assistance, food aid included, is to stimulate wealth
accumulation and economic growth in poor countries. This occurs chiefly through stimulating accumulation of
productive assets – human capital being the chief asset food aid can help protect or build – and increasing the
productivity of preexisting assets.
Unintended Consequences
1. Price Effects
Food prices almost invariably fall in local markets after food aid distribution. Food aid can drive down local (or
national) food prices in at least three ways. First, monetization of food aid can flood the market, increasing
supply. Second, households receiving food aid may decrease demand for the commodity received or for locally
produced substitutes or, if they produce substitutes or the commodity received, they may sell more of it. Finally,
recipients may sell food aid to purchase other necessities or complements, driving down prices of the food aid
commodity and its substitutes, but also increasing demand for complements. Lowered prices hurt net sellers of
the commodity and, if food aid deliveries are regular occurrences, can create a disincentive for them to invest in
their own agricultural production activities. At the extreme, producers could lose their livelihoods due to low
prices, rendering them dependent, although this seems more a hypothetical extreme outcome than something
actually observed, much a less common occurrence. Further, lowered prices can decrease the relative payoff to
investing in agriculture, either by governments or by producers.
2. Production disincentives
Beyond – and building on – labor disincentive effects, food aid can have the unintended consequence of
discouraging household-level production. If food aid lowers local food prices, that may decrease the relative
payoffs to investing in one’s own production. This type of disincentive impacts not only food aid recipients –
who may enjoy a countervailing stimulative effect due to the increased resources at their disposal – but perhaps
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especially to non-recipient producers who live in or sell to areas receiving food aid flows. In theory, a producer
is more at risk of facing food aid-induced disincentives the more unresponsive (i.e., inelastic) demand they face.
These disincentive effects can be short-term in nature, in which case concerns about negative dependency are
minimal. The risk of triggering negative dependency looms largest when food aid has what producers expect to
be a relatively permanent negative effect on product prices, or when it interrupts regular investment or
maintenance cycles that maintain or enhance local agricultural productivity. The key triggers to study are thus
the medium-to long-term expected price effects and any disruptions in on-farm activities due to the method and
timing of food distribution. Both of these factors are largely driven by programming variables such as targeting
methods and timing of deliveries.
3. Household labor disincentives
Perhaps the most pervasive – and we believe, misguided – claim is that food aid somehow makes people lazy,
that food aid unintentionally discourages people from working. It is certainly true that microeconomic theory
suggests that because transfers increase recipients’ welfare, they generate income effects that will tend to reduce
labor supply simply because even hard-working people prefer more leisure to less.4 The economic reality that
any transfer – whether in the form of food or not – discourages recipients from working, everything else held
constant, undermines much popular support for transfers.
4. Changed consumption patterns
Part of the donor-oriented rationale for food aid has long been export promotion. Since the exports from
temperate zone donors are commonly different from the staple crops grown in tropical recipient countries, the
logic of export promotion necessarily entails some effort to change consumers’ preferences, to introduce them to
new foods and thereby endogenously stimulate demand for foods with which they were previously unfamiliar or
which had formerly represented only a minor share of their diet. As Barrett and Maxwell (2005) show, however,
food aid has generally failed in its trade promotion objectives. However, food aid that is relatively inappropriate
to local uses certainly can distort consumption patterns. Massive shipments of wheat and rice into the West
African Sahel during the food crises of the mid-1970s and mid-1980s were widely believed to stimulate a shift in
consumer demand from indigenous coarse grains (mainly millet and sorghum) to more western crops, notably
wheat, although hard empirical evidence of this remains scarce, especially given how widespread the claim has
become. Similarly, food aid deliveries into pastoral areas in the Horn of Africa over the past decade have been
criticized repeatedly by pastoralists as having changed dietary patterns.
2.3 New Public Management (NPM) and NGOs
2.3.1 Definition and Features of New Public Management (NPM) Reform
By the end of 70s the new changes and concepts began to acquire a coherent shape in public administration. The
challenges to Weberian bureaucracy assumed a number of names. The commonly used terms are managerialism,
NPM and entrepreneurial government. The new buzz words are downsizing, resource squeeze, cut back
management, effectiveness, efficiency, economy, privatization, outsourcing, marketization, quasi-market,
surrogate market, new public management, contractualization, atomization, agentification, so on.
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A whole array of methods and techniques employed to reform PA since the 1980s was given the broad label of
NPM. According to Richard Common NPM is ‘used to describe a vast range of contemporary administrative
change’. NPM has become a very popular concept, its secret leis in its appeal as an attractive solution to the
problem of big and inefficient government. The term was coined by Christopher Hood in 1991 and used in his
paper on ‘A public management for all seasons’ published in public administration. NPM meant that government
organizations started to use management styles and instruments derived from the profit sector. It seems safe to
say that NPM too is very much focused on rational management and increasing economic efficiency and
effectiveness. The complex natures of the term also make it difficult to provide its universally accepted
definition. NPM is an umbrella term which encompasses wide ranges of meanings, including organization and
management design, the application of new institutional economics to public management, and patterns of policy
choice.
People tend to assume that government is less efficient than the private sector. It is difficult for government to
achieve efficiency, economy and effectiveness under the traditional bureaucratic regime. Therefore, useful
private sector practices, including privatization, contracting out, contract systems and public-private
partnerships, should be adopted in the public sector. The main framework of NPM suggests that government and
public sector be managed in the same way as the private sector. NPM aims to downsize the bureaucracy,
reinforce political control, reduce government deficits, better allocate limited resources, improve service delivery
and achieve the target of small government. NPM has brought changes to the old traditional bureaucratic system
and led government to function more like private business.
Hood (1995) identified seven underlying doctrines of NPM and these principles have basically been agreed
among scholars. The principle developed by Hood and other scholars can be summarized as follow.
1. Unbundling of the public sector into corporatized units organized by product: shifting to disaggregation
of units in public sector, i,e, break up large corporatized units around products, found separately and dealing
with one another on an arm length basis. This is justified by the need to create manageable units and to gain the
efficiency advantages of franchise arrangement inside as well as outside the public sectors
2. More contract-based competitive provision, with internal markets and term of contracts: introducing
greater competition in public sector is an essential to enhance efficiency and productivity of public sector. This
is justified as using rivalry as a key to lower cost and better standard.
3. Stress on private-sector styles of management practice: military style of bureaucracy is discarded. It also
involves a move away from military style public service ethics and flexibility in hiring and reward and justified
by the need to use proven private sector management tools in public sector.
4. More stress on discipline and frugality in resource use: greater parsimony and discipline in using
resource in public sector is highly stressed or advocated in NPM. This is simply means cutting direct cost raising
labor discipline, resisting demand and limiting compliance cost to business. And is typically justified by the need
to check resource demands of public sector and do more with less.

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5. More emphasis on visible hands-on top management: this means hands-on professional management of
public organization. Manager should be given an extreme autonomy to manage their organization. Provide
freedom to the manager to manage or letting the manager manage or as hoods put it active, visible, discretionary
control of organization from named persons at the top. The justification for this is that accountability requires
clear assignment of responsibility for action.
6. Explicit formal measurable standards and measures of performance and success: this requires goals to be
well defined and performance target to be set (later defined as performance indicator). This is also expected to
enhance efficiency and ensure accountability and justified by the proponent as accountability requires a clear
statements of goal; efficiency require a hard look at objectives.
7. Greater emphasis on output controls: resources are directed to areas according to measured performance,
because of the need of stress on result rather than input and procedures.
New public management (NPM) reform entered the public sector from the private sector, and affected the
management of not only government departments and public organizations but also NGOs. It has also affected
the relationship between the government and NGOs. The past decades witnessed the New Public Management
springing up as the blueprint of the reform of Welfare State. It has become an internationalization and global
model. Under NPM, the government should shift its roles from “rowing to steering” and play the role as enabler
to encourage all sectors to shoulder the social responsibility. Commercial value and tools stressing on market
and competition are incorporated into public governance to enhance the effectiveness and accountability. The
government became more depend on “third party” to provide social service. Many governments are actively
working on the development and governance capacity building of NGOs.
2.3.2 Impacts of NPM Reform in NGOs
The NPM reform has also impacted the relationship between government and NGOs. The government monitored
and supervised NGOs through formulating & implementation of legislations. So, NGOs need to follow the
instructions of the government on, for example, the rate of service charges, number of staff members in a center
and payment of staff members to qualify for a subvention. The relationship between the government and an
NGO appeared to be straightforward, with the roles and responsibilities of each party clearly defined. However,
after the NPM reform, the government changed its attitude towards NGOs. Nowadays, the governments apply
the concept of “less government but more governance” in managing NGOs. The organizations enjoy more
autonomy and freedom regarding their development, but at the same time, have more responsibilities. In addition
to providing front-line service, NGOs also need to enhance accountability and achieve different service targets to
meet the Funding and Service Agreements. In this process, because NGOs need to fight for more subventions,
there may be more bargaining and negotiating between them and the government, which affects their previously
stable relationship.
NPM reform has brought a new culture into NGOs, which now function more like organizations in the private
sector. Follow the direction of the government, NGOs must adapt to new concepts in management and daily
operations, which include the following: (1) under the competitive bidding system, NGO need to write proposals
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and compete with other NGOs to gain new service contracts from the government; (2) NGOs have to cooperate
and interact more with the private sector to gain more financial support and ensure the continuous development
of the organizations; (3) some of the services are being contracted out to save money, such as meal services; (4)
because of the limited financial support from the government, NGOs must find different ways to achieve
financial balance, such as restructuring and cutting down the number of staff members; and (5) performance
measurement is being introduced into NGOs and becoming a common practice.
NPM leads changes in different areas/aspects of NGOs Management and Operations, such as:
1).Strategic Management
Strategic management refers to the long-term direction of an organization and the kinds of outcomes that it
should achieve. The organization should formulate its own strategic plan, implement the plan, monitor the
implementation process and evaluate the effectiveness of the plan periodically. The ability of an organization to
develop, implement, evaluate and reformulate a strategic plan is very important. Accountability and
communication are very important to achieving good governance. An organization should have clear policies
and procedures on the structure of the organization and authority and responsibilities of different staff members.
Continuous communication with stakeholders is also important.
2).Human Resource Management
HRM is about the ability of an organization to assess the right people in the right jobs at the right time, manage
staff performance and reward good performance. Hence, staff recruitment, performance appraisal and staff
training and development are all very important.
3).Financial Management
Financial management refers to the effectiveness of an organization in planning, deploying, monitoring and
reviewing the use of financial resources to achieve the organization’s objectives. The NGOs has the
responsibility to ensure the health, quality and reliability of the financial system. Of course, it is great if the
organization can utilize limited funding resources and achieve good outcomes.
4).Performance Measurement and Management
Performance measurement and management refers to the ability of an organization to measure the effectiveness
and efficiency of the major processes in the organization. Related policies and procedures should be formulated,
implemented and reviewed accordingly.
5).User Participation
User participation is important in NPM and governance. In the past, service users and their family members did
not participate very much in the decision-making and service provision processes of NGOs. They were mainly
service receivers. However, after the NPM and governance reforms, NGOs are responsible for providing
necessary information to service users, which is related to their interests. Meeting with service users are
organized annually to gather their opinions and comments.
6).Service Provision

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Although the reforms and new policies introduced by the government have not aimed at changing service
provision by NGOs, they have done so in a number of ways. First, service users have to pay more than before for
some of the services. For instance, the activity and meal fees increased because of the reduction of the
subvention. Because units need to keep a balanced account between income and expenditure, they have had no
choice but to increase the service fees. In addition, more projects or centers are self-financed.
2.3.2.1 Positive Impacts of NPM
First, it seems that NGOs have clearer development direction than they had before.
Second, the new management and governance trends have increased the autonomy of NGOs.
Third, in response to government requirements, the accountability of NGOs has been enhanced. That is, more
rules and regulations have been set to increase their accountability to the public, and more information about
their financial, managerial and operational issues is provided for the public to access and assess. This makes it
easier for the public and service users to assess the performance of NGOs.
Fourth, service quality has improved in general, especially from the point of view of service users. Nowadays,
service users have more opportunities to participate in the decision making or operational processes of NGOs.
Fifth, there is more networking and collaboration among NGOs and other sectors. In the past, these
organizations operated more independently and were more likely to focus on their own services and
development.
Chapter Three
Functions of Non-governmental Organizations
3.1. Social Functions
Some of social functions of NGOs include:
 Social development service provision
 School and health centers construction & service provision, Infrastructure facilities construction,
Cultural center construction and operation, Agricultural facilities provision and Agricultural expert
assistance
 Community Health Promotion and Education
 Contraception and Intimacy Education, General Hygiene, Waste Disposal, Water Usage, Vaccinations,
Youth Counseling Services
 Emerging health crises
 HIV/AIDS education and support, Drug Addiction recovery
 Resolving Community Social Problems
 Crimes, Street Children, Prostitution
3.2. Economic Functions
Improve the Local Business/Investment Climate NGO’s contribution to the improvement of the local business
environment is multidimensional. It accomplishes this through provision and maintenance of crucial economic

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and social infrastructure; advocacy for improved policy and governance; investment promotion and marketing
and networking to improve flows of information to enhance opportunities.
Accesses to services, infrastructure, research and technology have a decisive influence on the level and pattern of
growth and private investment. Better infrastructure can lead to increased production, technical change and
strengthen market linkages. NGOs are playing an active role in the provision and maintenance of services
needed by industrial units. In particular, organizations engaged in development work absorb a higher proportion
of NGOs workforce in developing and transitional countries than in the developed ones (Salamon, Sokolowski
and Associates, 2004). There are examples in developing countries where NGOs has taken charge and
substantially augmented or more or less substituted provision of basic services like water, sanitation by public
sector. NGOs are inherently more flexible, innovative, cost effective, participatory and responsive to local needs
their increased involvement in the provision and maintenance of infrastructure can significantly boost local
economies, particularly the initiative for targeting the poor.
Furthermore, through advocacy, NGOs can also play a very significant role in influencing economic and
political policies that impact upon local development in general and the poorer sections in particular. The agents
of an active society, for example, can give useful input on the thrust and design of economic policies. Public
policy think-tanks, as well as academic and journalistic writers are able to provide support in terms of
intellectual vision and can help to define development paradigms and objectives, as well as design and promote
specific policy agendas. This independent source of creative intellectual input and visionary thinking provides an
important conduit for the development of strategic rather the reactive approaches to development challenges.
3.2. Encourage New Enterprises and Livelihood Programmes
Encouraging new enterprises involves providing advice, technical support, information and resource to help
individuals set up their own businesses in the form of sole entrepreneurs, partnerships, cooperatives or
community enterprises in various agricultural, industrial or trading fields. Micro-enterprise financial support is
key to enabling businesses to start up, as they usually cannot access traditional financial institution.
Non-governmental organizations in recent years have increasingly widened their activities to include income
generating programme and micro-credit. Their success is in part based on their comparative advantage in both
identifying the needy segments and their ability to target them. Their impact can be significant, of course
depending on the prevailing socio-economic condition in the country. A number of countries, for example, have
replicated the successful Grameen Bank experiment of micro-finance in Bangladesh where NGO sector is well
developed.
There are a number of advantages of micro-finance. First, group based lending reduces the transaction cost of
credit delivery and mitigates problems of adverse selection. Also, peer monitoring within the group reduces the
risk of default and moral hazard. For instance, in group lending it is not the individual, but the community who is
responsible for repayment of the loan. An incentive for all members to oblige is that if a member defaults, the
whole groups’ creditworthiness is adversely affected. Second, microcredit schemes enable substitution of
physical collateral.
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Third, micro-finance provides dynamic incentives to serve high repayment rates. Micro-financing programmes
begin by lending small amounts and then increase the loan size upon satisfactory repayment. The repetitive
natures of the interaction, and the threat of cutting off a loan in the case of default, are used to overcome
problems of asymmetric information, and improve lending efficiency. Fourth, the cost of borrowing is lower for
the clients of microfinance schemes, because no physical collateral or other requirements are involved in the
loan procedure. Similarly, it is believed that the rate of interest paid by the borrower in these schemes is lower
than the interest rate charged by local moneylenders.
Besides finance, someone establishing a business for the first time needs to know how to produce his /her
product. They also need to understand finance, business planning, marketing, and some aspects of the law
including employment, taxation, and safety environmental legislature and so on. The provision of un-formable
training and support in these areas is a basic need. Also, people learn from each other. Networks facilitate that
learning. These services can be effectively provided by NGOs.
3.3. Delivery of Social Services
Efforts to sustain economic development and reduce poverty are unlikely to succeed in the long run unless there
is greater investment in human capital, particularly of the poor. Ample evidence exists that improvements in
education, health and nutrition not only directly attack some of the most important causes of poverty but is also
ensure sustained supply of productive labor – an important factor of production and contributor to economic
growth.
The link between education and productivity is well established and documented. The principal asset of the poor
is labor time. Education and training leads to a higher income at the individual level and higher growth at the
macro level. Providing training and capacity strengthening through entrepreneurial, vocational/technical training
and workshops for upcoming business and grassroots organizations is therefore, of core importance. Illustrations
of the contributions of NGOs in providing education, improving curriculum to make it demand oriented and
providing training.
Furthermore, integrating low income or hard-to-employ workers and the targeting of disadvantaged groups is
also an important cornerstone of poverty alleviation strategies. This implies institution of measures targeted at
groups of individuals such as ethnic minority groups, poor, women, redundant workers, the unemployed and
youths. There are examples of NGOs rising because market fails to offer the goods and services these groups
need. The potential measures may include retraining in skills for which there is local demand and job placement
programs, programs focused on women employment/credit provision etc. NGOs due to their flexible and need
responsive nature of their activities can play an important role in the provision of such social services in very
innovative ways.
3.4. Relief and Rehabilitation
It may take a long time for some of the poor to fully participate and benefit from policies like those mentioned
above and the old or disabled may never be able to do so. Even among those who benefit from the policies and
strategies, there will be some who remain acutely vulnerable to adverse events. Such groups of people can best
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be helped through a system of social safety nets – including income transfers, food distribution, some form of
income insurances/relief or protection through short term stress and calamities etc. NGOs role in relief and
habilitation is probably the oldest and the most common one particularly in developing countries. Providing
emergency services such as temporary shelter, food, etc. after disaster or conflict, community organization for
rehabilitation are the most traditional forms of activities undertaken by NGOs. NGOs bring five main strengths
to relief and emergency work: early warning of disaster; advocacy for international aid; speedy response;
cooperation with indigenous organizations; and, disaster preparedness.
3.3. Political Functions
3.3.1. NGOs as advocates of policy change
The increasing global trend toward democratization has opened up the political space for NGOs (e.g. CSOs) to
play a more active policy influencing role. The promise of democracy becomes a reality when people’s voices
are heard by policy makers and when groups (especially marginalized sectors of society) begin to participate in
the marketplace of competing interests. According to a World Bank report (2002), “NGOs have become
significant players in global development finance, are increasingly influencing the shape of global and national
public policy... The growing focus among policy makers and citizens on the need for good governance and
greater transparency has also opened doors for NGOs as players in the development business. Parliamentarians,
media and other opinion leaders increasingly rely on NGOs for information and policy advice”.
NGOs (particularly CSOs) are increasingly demanding involvement in the policy formulation process. They
argue that they now play a major role in the implementation of the policies that are formulated by the
government, especially those that deal with sustainable development and poverty alleviation. In other words, the
NGOs’ programs are directly affected by the policies that the government produces. NGOs feel that in order for
the government to formulate policies that are appropriate for sustainable development, their involvement is
necessary since they work for development and can make important inputs to the policy making process. This
involvement of CSOs in policy issues will increase the likelihood that the NGOs understand the policies fully as
well as ensure that policies are appropriate to the needs of the people, feasible and implementable on the ground.
They can use grassroots experiences and innovations as the basis for improved policies and strengthening local
capacities and structures for ongoing public participation.
NGOs can provide information that is vital for the development of policies that are appropriate to the community
the policy is meant to serve. CSOs, as watchdogs, can also apply pressure on the government to ensure that
appropriate policies are enacted and implemented. In the implementation of policies, CSOs can monitor the
application of the laws and also, where compatible with community interests, design programs that complement
rather than undermine or contradict government policies.
In most developing countries, NGOs have programs that complement the policy goals and programs of the
government such as the MDGs. This necessitates a close working relationship between governments and NGOs
in the formulation of policies. Also, the grassroots groups and support organizations help give voice to those
who have been historically marginalized and provide them with a crucial vehicle for exercising their rights and
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holding government accountable. As such, they play a vital role in strengthening democracy and the skills of
citizenship essential to healthy societies. Increasingly groups are concerned about gaining the necessary leverage
and power, often through coalition-building, to expand these democratic opportunities and to ensure the success
of their development and policy efforts.
However, inclusion in political systems long dominated by elites depends, in part, on the institutional strength of
policy newcomers; CSOs, and, in part, on the perceived legitimacy of their participation itself. The challenge of
building an effective policy influencing organization increases as groups seek to shape positive policy
environments as well as protest negative ones. For example, winning policy advantage requires that mobilized
public opinion be accompanied by convincing analysis that is at least on a par with the analytic capability of the
decision makers NGOs are trying to influence (Clark, 1992). The dual challenges of effectively mobilizing
arguments as well as people are great. Arguments that gain the attention of development policy makers on the
one hand call for “expert” knowledge of both the issue and the decision making process, while public outcry and
protest actions that constrain decision makers’ power call for an active and organized grassroots constituency.
Policy influence efforts may or may not create conditions that foster greater popular participation in the future. A
movement may not achieve its immediate policy objectives, but getting its issue on the public agenda expands
the range of voices engaged in the political process, and so expands political space. On the other hand,
attempting policy reform through means that too dramatically threaten vested interests may engender a
dangerous backlash from social and political elites, a problem of special importance in less open political
regimes.
Similarly, policy influence campaigns can be carried out in ways that strengthen grassroots organizations and
their direct voice in affairs affecting them, or they can be implemented by intermediaries for whom the
grassroots are clients. The latter can lead to the evolution of a civil society with a strong professional advocacy
sector and a weak (unorganized and non-participative) grassroots base (Jenkins, 1987). As such the strategy
employed in the attempt to influence policy is perhaps as important a determinant of success in participation as
the willingness to participate.

Some strategies and tactics employed by NGOs (CSOs)

Over the last three decades NGOs have played an increasingly influential role in the formulation of public
policy, not only at local and national level but also at the international level. These NGOs see themselves as
champions of the public good, with a mission to reverse the physical, environmental and social harm that they
claim has been caused by corporations and governments. They seek international regulation or prohibition of
certain activities they regard as harmful and are strident in their demands for greater transparency and public
accountability on the part of governments and industry. In some cases these organizations gain official
recognition in the regulation process and have a right to nominate representatives to tribunals, supervisory
boards and other bodies, which implement and oversee regulatory activity.
3.3.2. Role of NGOs in good governance: participation, accountability and transparency
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Good governance has recently been accorded a central place in the discourse on development. It is being argued
that without an appropriate governance structure, developing countries will not be able to either sustain
economic growth or a momentum towards rapid poverty reduction. This has been the conclusion of a number of
research studies trying to figure out why, despite resource allocation and good policies, broad improvements in
human welfare have not occurred and improvement in services, freedom from hunger, illness and illiteracy still
remain elusive.
The World Development Report, 2004 documents three ways in which services can be improved:
-By increasing poor clients’ choice and participation in service delivery, so they can monitor and discipline
providers. School voucher schemes — such as a program for poor families in Columbia, or a girls’ scholarship
program in Bangladesh (that paid schools based on the number of girls they enrolled) —increase clients’ power
over providers, and substantially increased enrollment rates. Community-managed schools in El Salvador, where
parents visited schools regularly, lowered teacher absenteeism and raised student test scores.
-By raising poor citizen’s voice, through the ballot box, and making information widely available. Service
delivery surveys in Bangalore, India, that showed poor people the quality of the water, health, education and
transport services they were receiving compared to neighboring districts increased demand for better public
services, and forced politicians to act.
-By rewarding the effective and penalizing the ineffective delivery of services to poor people. In the aftermath of
a civil war, Cambodia paid primary health providers in two districts based on the health of the households (as
measured by independent surveys) in their district. Health indicators, as well as use by the poor, in those districts
improved relative to other districts.
All of the above relate to governance structures — participation and empowerment, accountability and
transparency. In this section we raise the following questions: What is the framework of accountability? Is there
a link between NGOs and peoples’ “voice”? How can the integrity of government be improved and what can
NGOs do to curtail the menace of corruption?
Framework of Accountability
Accountability is a pillar of democracy and good governance that compels the state, the private sector and NGOs
to focus on results, seek clear objectives, develop effective strategies and monitor and report on performance
measured as objectively as possible. Transparency promotes openness of the democratic process through
reporting and feedback, clear processes and procedures and the conduct of actions by those holding decision-
making authority. It makes information understandable and keeps clear standards accessible to citizens
(Rondinelli and Cheema, 2003).
In the context of service delivery to the poor, the chain of relationship of accountability has three sets of actors:
poor people — as patients in clinics, students in school, passengers on buses, consumers of water — as clients of
service; the providers of services — frontline professionals (school teachers, doctors, bus drivers, water
companies) and organizational providers (health department, education department, water department); and
finally, the policy makers or politicians. The relationship among actors has five features: delegation, finance,
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performance, information about performance and enforceability. In a city, the citizens choose an executive to
manage the tasks of the municipality (delegation), including tax and budget decisions (finance). The executive
often acts in ways that involve the executive in relationships of accountability with others (performance). Voters
then assess the executive’s performance based on their experience (information). And they act to control the
executive — either politically or legally (enforceability) (World Development Report, 2004).
In the ideal world, the three sets of actors are linked in a relationship of power and accountability. Citizens
exercise ‘voice’ over politicians. Policy-makers have a ‘compact’ with organizational providers. Organizational
providers ‘manage’ frontline providers and clients exercise ‘client power’ through interaction with frontline
providers. Weakness in any relationship results in service failure. Providers can be made directly accountable to
clients (as in market transactions) by passing decision and powers directly to citizens or communities. As the
World Development Report (2004) puts it, this can be the ‘short’ route of accountability. However, in most
developing countries public sector involvement is likely to continue as the probable service delivery scenario. In
this case, the power of voice, the effectiveness of ‘compact’ and the capability to ‘manage’ determine the
success of accountability and thereby service provision.
Political Accountability and Citizens’ “Voice”
Political accountability means regular and open methods for sanctioning or rewarding those who hold positions
of public trust through a system of checks and balances among the executive, legislative and judicial branches
(Rondinelli and Cheema, 2003). Citizens’ voice in society and participation in politics connect them to the
people who represent the state — the policymakers and politicians. In principle, poor people as citizens
contribute to defining society’s collective objectives, and they try to control public action to achieve those
objectives. In practice, this does not always work. Either they are excluded from the formulation of collective
objectives or they cannot influence public action because of weakness in or absence of the electoral systems. The
latter is the case in non-democratic governments.
Accountability is the willingness of politicians to justify their actions and to accept electoral, legal, or
administrative penalties if the justification is found lacking. As defined earlier, accountability must have the
quality of answerability (the right to receive relevant information and explanation for actions), and enforceability
(the right to impose sanctions if the information or rationale is deemed inappropriate). One complication is that
voice is not sufficient for accountability; it may lead to answerability but it does not necessarily lead to
enforceability.
In principle, elections provide citizens with both answerability (the right to assess a candidate’s record) and
enforceability (vote the candidate in or out). In practice, democracies vary greatly on both dimensions, as do
most attempts to exercise accountability. Citizen charters may spell out the service standards and obligations of
public agencies toward their clients, but without redress the obligations may not be enforceable. In Malaysia the
client charters introduced for public agencies in 1993 do both, giving clients the right to redress through the
Public Complaints Bureau if corrective action for noncompliance is not taken. Another complication is that the
voice relationship links many citizens with many politicians — all with potentially very different interests. When
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services fail everyone, the voice of all citizens (or even that of the non-poor alone)) can put pressure on
politicians to improve services for all citizens, including the poor. But when services fail primarily poor people,
voice mechanisms operate in much more difficult political and social terrain. Elites can be indifferent about the
plight of poor people. The political environment can swamp even well-organized voice. Protest imposes large
costs on the poor when their interests clash with those of the elite or those in authority. It then matters whether
society is homogeneous or heterogeneous and whether there is a strong sense of inclusion, trusteeship, and
intrinsic motivation in the social and political leadership of the country. To expect poor people to carry the
primary burden of exerting influence would be unfair — and unrealistic.
In summary, empowering poor citizens by increasing their influence in policymaking and aligning their interests,
to the extent possible, with those of the non-poor can hold politicians more accountable. Elections, informed
voting, and other traditional voice mechanisms should be strengthened, because these processes — and the
information they generate— can make political commitments more credible, helping to produce better service
outcomes. What role can NGOs play in this? NGOs can help to amplify the voices of the poor, coordinate
coalitions to overcome their collective action problems, mediate on their behalf through redress mechanisms,
and demand greater service accountability. It needs to be kept in mind that participatory, transparent and
accountable governance does not come easy. Nobody wants to open up or relinquish power easily — be it the
politicians and bureaucrats at the helm of power or the traditional elites. Social forces must be created that would
compel them to countenance sharing of power. An essential part is, therefore, social mobilization whereby
consistent though gradual effort is required to establish, organize, strengthen and empower civil society, so that
they can, one, increase in number and, two, convert their numerical strength into genuine bargaining power.
Furthermore, better information — through public disclosure, citizen-based budget analysis, service
benchmarking, and program impact assessments — and an active, independent media can strengthen voice.
What about the contribution of NGOs where there are non-democratic governments? “At the face value, the
experience of the Kenyan NGO community collectively challenging the NGO legislation introduced by the
government in 1990 reaffirms the vision of civil society as directly engaged in action to force political change in
African countries. As this particular case shows, NGOs were organized, resourceful and conscious actors
contributing to political reform movement in Kenya” (Ndegua, 1996). The Kenyan experience underscores what
most analysts have argued is the potential of CSOs to contribute to political reforms (Diamond, Linz and Lipset,
1988; Chazan, 1992). To organize, mobilize, and act against state repression and force political /social reforms
from within civil society.
3.3.3. Social mobilization – organization and strengthening of CBOs at grass root/sectoral levels is another
major contribution of NGOs. Many civil society groups are constituted around specific issues of social concern
such as the environment, labour rights, gender equality and public health. The advocacy role played by these
groups helps to bring these issues to the public spotlight and in some cases even helps to change prevailing
social norms.
Moreover, the roles of NGOs can be grouped into four categories. These roles are
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(1) Social development, (2) sustainable community development, (3) sustainable development, and (4)
sustainable consumption
 Social Development
NGOs play an important role in global social development—work that has helped facilitates achievements in
human development as measured by the UN Human Development Index (HDI) .
One of the major strengths of NGOs is their ability to maintain institutional independence and political
neutrality. Even though NGOs need to collaborate with governments in numerous instances, failure to maintain
neutrality and autonomy may severely compromise the NGOs’ legitimacy. Unfortunately, if a government insists
upon political allegiance, the NGOs encounter the dilemma of either violating the neutrality position or failing to
provide needed services to the population. Indeed, some NGOs have been asked to leave in troubled countries
due to political reasons (Asamoah, 2003).
The major advantages that NGOs bring to this role include “flexibility, ability to innovate, grass-roots
orientation, humanitarian versus commercial goal orientation, non-profit status, dedication and commitment, and
recruitment philosophy” (Asamoah, 2003). The drawbacks in working with NGOs are similar to the advantages
that were previously listed. In addition, some other disadvantages include “over-zealousness, restricted local
participation, inadequate feasibility studies, conflicts or misunderstandings with host partner, inflexibility in
recruitment and procedures, turf/territory wars, inadequately trained personnel, lack of funding to complete
projects, lack of transparency, inability to replicate results, and cultural insensitivity” (Asamoah, 2003).
 Sustainable Community Development
NGOs have shown leadership in promoting sustainable community development. Due to their particular
ideology and nature, NGOs are good at reaching out to the poor and remote communities and mobilizing these
populations. They can also empower these populations to regain control of their lives and can work with and
strengthen local organizations. In addition, such NGOs can carry out projects more efficiently and at lower costs
than government agencies and, most importantly, promote sustainable development (Nikkhah & Redzuan,
2010).
The five dimensions of sustainable community development are as follows:
1. Increasing local economic diversity
2. Self-reliance: development of local markets, local production, local processing, greater co-operation among
local economic entities
3. Reduction in the use of energy combined with recycling and management of waste products
4. Protection and enhancement of biological diversity and stewardship of natural resources
5. Commitment of sustainable communities to social justice. (Bridger & Luloff, 1999)
Since NGOs are professionally staffed organizations aimed at reduction of human suffering and to the
development of poor countries (Streeten, 1997), they have a significant role to play in supporting women, men,
and households. The roles for such NGOs include “counseling and support service, awareness raising and

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advocacy, legal aid and microfinance” (Desai, 2005). The long-term aim for these NGOs is to assist in
sustainable community development through activities such as capacity building and self-reliance (Langran,
2002). This can be done by funding projects, contributing to awareness, and promoting the self-organization of
various groups (Baccaro, 2001).
A case study in Vietnam illustrates that NGOs play an important role in promoting sustainable community
development (Hibbard & Tang, 2004). Usually this is accomplished by providing three basic functions: (1)
service delivery (relief, welfare), (2) education, and (3) public policy advocacy (Stromquist, 2002). The idea is
that NGOs can promote sustainable community development via three functions: (1) microfinance, (2) capacity
building, and (3) self-reliance. NGOs ought to develop local products and local markets; develop social, capital,
and human resources; encourage and motivate people to participate in activities; and act as network liaisons
between community and systems. In this manner, the long-run goal of sustainable community development
would be achieved (Nikkhah & Redzuan, 2010).
 Sustainable Development
NGOs have played a significant role in promoting sustainable development at the international level. NGOs are
going beyond their primary focus on governments and starting to address large corporations. In this vein, NGOs
have focused attention on the social and environmental impacts of business activity, helped in part by advances
in information and communications technology. The brands of multinational corporations have also been
vulnerable to pressure from activists and from NGOs on the corporation’s labor, environmental, or human rights
record. As the downstream customers are targeted, even the supply chain partners and suppliers are feeling the
pressure (Hall-Jones, 2006).
In response to such concerns, many corporations are embracing a stakeholder approach that looks at the impact
of business activity on customers, employees, communities, and other interested groups. There are numerous
visible manifestations of this shift. The primary one has been an increased attention to social and environmental
affairs. Many corporations are taking responsibility for their actions and are starting to report on the impact of
their activities. A secondary shift is more heartening: Many companies have designed management structures
that integrate sustainable development concerns (Hall-Jones, 2006). NGOs can take most of the credit for
creating these trends. The question remains as to how the business world should react to NGOs in the future.
Should companies gear themselves in preparation of attacks from hostile critics? Should companies engage
NGOs to become helpful partners? Depending upon their philosophy, not all NGOs are willing to collaborate
with the private sector. Some of NGOs observe at a distance, and monitor, publicize, and criticize cases where
companies fail to consider its impacts upon the community. Agenda 21 of the United Nations has a chapter
dedicated to the role of NGOs in partnering for sustainable development.
 Sustainable Consumption
NGOs can also play an important role as partners to business/industry in promoting sustainable consumption.
Some of the instances where this partnership has been successful is in categories such as product develop¬ment,

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sustainable housing, labeling, World Wildlife Fund (WWF), green purchasing, marine stewardship, and so on.
The basic premise is, can NGOs influence behavioral change? Specifically, there are two questions that need to
be asked: (1) How are NGOs educating households to change their consumption behavior, and (2) how can
NGOs be potential partners to businesses in promoting sustainable consumption (Kong, Saltzmann, Steger, &
Ionescu-Somers, 2002)?
Chapter Four
NGO Approach to Solving Community Problems
Relationships between NGO and the public Sector
Relationships between NGOs and the private sector
Relationships between NGOs and Communities
Relationships between NGOs and Donors
4.1 NGO Relations with Government
The ‘public interest’ view of the state which was prevalent in the 1950s and the 1960s, in which it was believed
that society has a set of common interests which can be identified and served by the state, has gradually been
discredited, as Mackintosh (1992) has argued. The critique on the left has been based on the lack of identifiable
common interest in society due to the Relationships between NGOs and the private sector Relationships between
NGOs and Communities fragmentation of interests produced by class, ethnicity, gender and age, and the
argument that the state exists to serve the interests of the middle class and the interests of commerce. The neo-
liberal critique of the state centers instead on the likelihood of officials to act in their own, rather than common,
interests, and the tendency of bureaucratic structures to obstruct rather than facilitate development initiatives.
The work of Chambers (1994) advances a reformist view of the state based on the need to ‘reverse’ the
conventional relationships between professionals and clients, age and authority, masculinity and femininity, etc.
Chambers’ view is one of building the ‘enabling’ state, such that the government carries out the essential tasks of
maintaining peace and the rule of law, basic infrastructure and services, and manages the economy effectively.
Generalizations about the nature of states are probably unwise, since most states are not monolithic and, at the
present time, may be losing power and influence under the processes of globalization. However, most NGOs
realize that their impact will be limited unless they form wider links, with one important option being a link with
government.
As de Graaf (1987) has shown in his conceptual framework, the management of relationships with the state is an
important element of overall strategy for most NGOs. Although there are cases of NGOs avoiding any kind of
relationship at all with the state by ‘lying low’, or through working with communities in remote localities,
Clark’s (1991) assertion that NGOs can oppose, complement or reform the state but they cannot ignore it,
remains an important insight. As we saw in Chapter 3, some analysts have made the point that NGOs themselves
cannot be effectively understood without reference to the governments which they seek to work with or to
struggle against, and the very label ‘non-governmental organization’ may lead us to examine what it is about the

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state that the NGOs are so keen to disassociate themselves from. There are therefore major challenges for NGOs
in developing strategy in relation to government. Many NGOs have an ambivalent attitude to the state, and those
organizations which were formed under conditions of political repression may find it difficult to trust or work
with government, even when it has changed. On the other hand, NGOs which have their roots in struggles
against repressive states, such as in South Africa or in Palestine, may then find that their roles are less clear once
a more accountable, democratic government has been installed. NGOs may indeed be perceived by government
as a threat or as competitors. Even when democracy is in place it may be fragile, and government may still be
bureaucratic and inefficient, which can make formal contact hazardous for the NGO. If NGOs decide to work
together actively with the state, the risk is that they could themselves become less effective (because they may
enter into more bureaucratic ties and arrangements) and that the relationships ‘downwards’ to their community
level groups will be damaged.
NGOs adopt several strategies in relation to government. First, they can seek to maintain a low profile by
working in the ‘spaces’ which exist in government provision, sometimes with tacit government
acknowledgement or letting government take credit for what is achieved by the NGO. This gap-filling role may
bring short-term benefits, as we saw in Chapter 5, particularly when resources are severely limited, but can raise
problems of sustainability and accountability in the longer term. Second, NGOs can engage in selective
collaboration with certain government agencies, which may be restricted to a particular sector, or may be based
on individual relationships between personnel or local level links which may not have formal government
backing. This strategy has the merits of pragmatic thinking, but may lead to haphazard inconsistencies in policy
and implementation. The final stance which NGOs may take is that of policy advocacy, in which the
organization acts as a pressure group in support of the interests of certain groups, or demonstrates alternatives to
the government’s own approaches along the lines suggested by Najam and discussed earlier. However, a close
relationship with the state can also bring identity problems and organizational tensions within the NGO, if it has
grown up with opposition to government as a key plank of strategy. In Chile, Bebbington and Thiele (1993)
describe how some NGOs have moved from an opposition stance to the roles of constructive critic and
innovator, and they have shown how the contracting relations which emerged between NGOs and the
demilitarizing state led NGOs to take on many new staff, some of whom did not share the ideological
commitment of the founders or supporters recruited during the years of repression. Even when the state is
democratic, social and economic work by NGOs implies criticism of the state’s own shortcomings, which can
continue to generate tension between government and NGOs.
From the perspective of governments, it has on the whole been political factors in many developing countries
which have influenced state attitudes to NGOs, according to Bratton (1989): not the analysis of NGOs’ actual or
potential social and economic contribution. Indeed, the growth of NGOs can pose a dilemma for the state, since
private institutional initiatives can challenge the state’s legitimacy if it shows that it is unable to deliver what it
has promised to the population, or undermine its power base if discontent is fostered among certain sections of
the population. The state is interested in NGOs if it sees the potential for NGOs to broaden development services
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under an overall guiding hand from government, and of course the government may benefit from resulting public
gratitude and approval. The state also tends to take an interest in NGOs from the perspective of ensuring
financial control and accountability, particularly if there are foreign funds being channelled to the NGO sector.
As Bratton shows, the state can use at least four different strategies to define their relationships with NGOs:
monitoring (keep track of what NGOs are doing and, if necessary, restricting registration of organizations it does
not like); coordination (seeking to spread NGO activities more evenly across geographical areas and sectors in
order to avoid duplication); co-optation (in which the state seeks to ‘capture’ NGOs and steer them away from
potentially threatening roles into the kind of work which the government wants); and finally dissolution (in
which the state develops mechanisms which give it absolute control over NGOs which gives it the power to
delay approval for their activities, limiting their scope or ultimately closing down the NGO if considered
necessary). Fowler (1997) also highlights a further strategy which government can use – the creation of quasi-
governmental organizations or government-organized NGOs (GONGOs) which take the form of NGOs but are
ultimately the tools of government. Overall, Bratton (1989) suggests from his work in Africa, government–
NGO relations are likely to be most constructive where a confident and capable government with populist
policies meets an NGO that works to pursue mainstream development programmes … and most conflictual
where a weak and defensive government with a limited power base meets an NGO that seeks to promote
community mobilization (Bratton 1989: 585)
Rather than seeing government and NGOs as being in competition, Evans (1996) has instead pointed to the need
for building synergies between different kinds of public and private agency. Meanwhile Tendler (1997: 146)
observed that successful development in northeast Brazil was based on a three-way dynamic between central,
local government and civil society, and noted the movements of key individuals between different sectors such
that ‘the assumed clear boundary between government and non-government is actually quite blurred’.
4.2 NGOs and the business sector
Moving on from state and civil society, this section examines the management of relationships between NGOs
and the market. This relationship is far less widely explored in the NGO literature than that with the state, yet it
is one which is attracting growing interest. These interests centre on an increasing range of points of contact
between NGOs and business. At the most extreme level, there are companies which have set up their own
NGOs, just as governments have sometimes created their own GONGOs (Clarke 1998). However, there have
always been philanthropic links between business and the third sector in many countries. Examples include the
Ford Foundation in the United States, which owes its endowment to the famous motor car company and which
now funds a range of third sector activities (among other types of organizations), and the Tata Foundation, which
was funded by the large Indian industrialist family. It has also been fairly common practice to invite
representatives from the business sector to serve on the governing bodies of some NGOs, either to lend
respectability to the organization or to provide specialized skills to help service the NGO.
Newer types of relationships which are emerging are social action partnerships in which a private company
works with an NGO as part of a government initiated multi-agency development programme on a social or
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environmental issue, or a problem-based alliance in which a partnership develops where a business brings in an
NGO with specialized skills, such as the initiation of an ecotourism venture in an area known to the NGO. There
are also growing ‘service ties’ between NGOs and business, in which a company engages an NGO to carry out a
certain social function, an example of which is the way in which oil companies in Nigeria have used NGOs to
provide water and healthcare services to remote communities living in oilfield areas. Finally, the market has
become a potential source of income for NGOs seeking to reduce or eliminate their dependence on foreign
donors or the government. For example, NGOs have developed relationships with local businesses in order to
gain not just financial resources in the form of donations or sponsorship, but also information and advice as well
as donations in kind, such as the use of office furniture or equipment. Some NGOs have formed their own
businesses, such as BRAC in Bangladesh, which established a printing press, the profits from which are
ploughed back into the NGO. This preserves the status of the organization as a ‘not-for profit’ organization, even
though a part of the organization is engaged in profit-making activity, and this and other business ventures, along
with the service charges administered, has helped to reduce the NGOs’ reliance on foreign funding to only about
one-third of the overall budget.1 Many NGOs have moved significantly towards the private sector in the current
trend towards micro-credit programmes, because financial services require both a sound knowledge of banking
management practices and a close understanding of local business opportunities in the community.2 For some
analysts who see support to local business as the means for NGOs to address poverty through an engagement
with the market, these are taken as very positive developments, and perhaps represent one of the few
development ‘success stories’ of the postwar era. The success of the Grameen Bank has been linked with the
emerging concept of the ‘social economy’, which according to Reifner and Ford (1992) can be defined as ‘a
market economy in which asocial market forces have been socialized’, and has its roots in the work of Karl
Polanyi (1957), which analyzed the social embeddedness of the economies of pre-industrial societies, and
highlighted the norms of social reciprocity and mutual aid which dominated social and economic life and which
modern industrial consumer capitalism has weakened. The Grameen Bank and other micro-finance approaches
have focused particularly on the power of women as effective borrowers. Dignard and Havet (1995) present a
series of case studies to show that the funding of micro- and small-scale enterprises carried out by women has
become a popular development strategy, because these activities can accelerate overall levels of economic
activity and can contribute a more equitable distribution of development benefits than male borrowers. At the
household level, gendered management and investment strategies often mean that women expand their
enterprises to kin networks (i.e. social priorities) rather than growth and profits, by creating ‘multiple
enterprises’ (Downing 1991). For other analysts, such as Dichter (1997), the apparently irresistible drive among
NGOs to move into the micro-finance field may be sapping the diversity and the creativity of the sector, by
pulling them away from their social origins and values and effectively turning them into private sector
organizations.
We turn now to consider two areas of interaction between NGOs and the business world. The first is the growth
of campaigning by NGOs to improve accountability and social responsibility among the corporate sector, such
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as the campaigning work undertaken by UK NGOs and their partners in the South around business, for example
child labour (Stichele and Pennertz 1996). Zadek (2000) has analyzed the efforts of NGOs to influence the
behaviour of corporations through potential damage to their reputations brought about by civil action by NGOs.
This ‘civil regulation’ model has been observed in campaigns against high-profile companies such as Nike,
Monsanto, Shell and Nestlé which appear to have made a difference and where a potential ‘win/win’ situation
emerges because staff are more motivated and work harder under a more ethical regime, consumers buy more
products and governments provide more ‘enabling’ services. Zadek is careful to point out that there is little
detailed evidence to prove that this civil regulation model is effective in practice. He outlines the twin challenges
faced by NGOs to explore strategies for leverage in the short term and to maintain pressure on governments and
global institutions to ensure that business policy frameworks reflect concerns about sustainable development.

The second area of interaction between NGOs and the business sector is the growth of the concept of ‘fair trade’,
which serves the multiple purposes of securing better prices for developing country producers, educating
consumers to demand social, economic and environmental business standards, and generating revenue for an
NGO from the market (Box 11). Yet fair trade is an ambiguous concept, and this ambiguity creates both
opportunities and constraints for NGO management strategies. The concept of ambiguity in organizations
explains problems which emerge whenever activities take place on the boundary between the for-profit and non-
profit sectors. The concept of ambiguity has long been identified by anthropologists as a source of both
creativity and danger. Within organizational theory, the management of ambiguity has also been seen as a key
challenge to understanding the challenges faced by organizations in the postmodern world, in contrast to earlier
‘rational scientific’ theories of management (Peters and Waterman 1982; Morgan 1997). Martin and Meyerson
(1988) show how ambiguity can bring both paralysis and innovation within organizational culture. More
recently, the emphasis on the management of shared meanings in current organization theory highlights the need
for managers to clarify and project the desired future organizational identity and image in order to guide
organizational change (Gioia and Thomas 1996).

In the non-profit literature – drawing upon the work of the anthropologist Edmund Leach – Billis (1993a) has
argued that organizations may exhibit a set of organizational problems created by the existence of an ambiguous
zone between the bureaucratic and associational ‘worlds’ which operate through very different sets of rules. For
example, the bureaucratic world relies upon hierarchy and role specialization, while the world of associations is
characterized by face-to-face, egalitarian relationships and multi-faceted, informal roles. Following from this
approach, the idea has also been applied to analysis of the boundaries between sectors (Billis 1993b). An
ambiguous zone exists between the for-profit and the NGO sectors around ‘business’ and ‘development’
objectives, which creates distinctive problems for organizations of both types engaged in fair trade partnerships.
This is because fair trade explicitly mixes profit-making with the objective of social or environmental
development and change. While profit-making has traditionally been associated with the business sector, these
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other activities have been associated with the non-governmental or non-profit sectors in which NGOs and other
civil society organizations operate. Fair trade may have the potential to generate more sustainable alternatives to
conventional development assistance and project-based interventions, but it blurs further the boundaries set out
by the three-sector model as organizations within fair trade partnerships are forced to operate beyond the rules of
their usual ‘known’ environments.
4.3 NGO relations with communities
This section looks at the different ways in which NGOs need to manage relationships with people, and takes as
its starting point the discussions in Chapter 5 about empowerment and participation, through which NGOs have
tried to build sustainable development interventions. Many NGOs form direct relationships with sections of local
communities, as in the case, for example, of an organization which delivers services to a marginalized group of
people (such as landless rural women) or one which attempts to build the organizational capacity of a
neighborhood organization. Some NGOs seek a less direct relationship with local communities but attempt to
represent their interests in undertaking advocacy work, or attempt to work within broader definitions of the
public interest. Other NGOs seek to influence sections of the community, such as those working for
development education in the North. Whichever the approach, most NGOs claim to be accountable to wider
communities, and claim legitimacy on the basis of this accountability.
One of the main problems with the concept of community is its impreciseness, and there are those who find the
frequency with which community is invoked by NGOs deeply suspicious. In 1978 the Bangladeshi NGO BRAC
undertook research on the power structure of local villages, and produced a seminal study published as The Net,
which exploded the myth that villages were socially cohesive and relatively egalitarian communities. This myth
had been embodied in earlier development efforts by the government to organize ‘farmers’ cooperatives’ in rural
areas which had quickly become dominated by the rich and which excluded the poor. BRAC found that NGO
efforts (including their own) to provide material and organizational resources for low-income households were
systematically undermined by local elites who captured these resources and imposed powerful constraints on
efforts to bring about changes with the poor. Division and conflict between landowners and landless villagers,
men and women and patrons and clients, all added up to a complex working environment which NGOs needed
to negotiate with care and with the use of detailed local knowledge. More recently the ‘myth of community’ has
come under attack from feminist scholars and activists who argue that the concept is unhelpful because it masks
important areas of difference in gender and power (Guijt and Shah 1998).
In addition to the debates about empowerment and participation which have been evident in relation to NGOs,
the recent interest among policy makers in the concept of ‘social capital’ has some important implications for
NGO management. The concept can be related to the efforts of some NGOs to work towards the strengthening
of local organizational structures in the form of group building, and to the efforts of sections of the community
to organize itself into membership NGOs. Cross-cutting ties based on trust and reciprocity between organized
individuals can offer a challenge to the relationships of subordination, exploitation and oppression highlighted in
studies such as The Net, which illustrated how village-level resources in Bangladesh were appropriated by
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powerful local elite (BRAC 1978). As we saw in Chapter 2, social capital is understood differently by different
social scientists. In the context of the present discussion, Coleman’s view is useful because it refers to changing
relationships between people which make possible forms of action:

Just as physical capital is created by changes in materials to form tools that facilitate production, human capital
is created by changes in persons that bring about skills and capabilities that make them able to act in new ways
… social capital is less tangible yet, for it exists in therelations between persons. … For example, a group within
which there is extensive trustworthiness and extensive trust is able to accomplish much more than a comparable
group without that trustworthiness and trust. (Coleman 1988: 19)
Apart from the basic delivery of services, NGO roles in supporting local sustainable development initiatives
centre on the attempt to strengthen social capital. For example, traditional rotating credit groups exist in many
societies, in which trust makes possible the undertaking of group savings and loan schemes as a form of self-help
initiative by small, locally formed membership NGOs (Chhetri 1995). These may in turn be supported by outside
NGOs and can be used as the basis for new work, such as income generation or Freirean ‘conscientization’.
There are many NGOs, such as the Grameen Bank, which seek to build new groups, forms of social capital,
which will provide a stable and accountable set of local structures for microcredit provision and other services.

There is a whole raft of problems which have been raised in connection with the ways in which NGOs have
attempted to build relationships at the community level. Carroll (1992) highlights the dangers of overstatement
among NGOs and their supporters regarding the scale and extent to which NGOs have managed to build
sustainable structures among communities of the poor. In another study from Latin America, Arellano-Lopez
and Petras (1994) have argued that in Bolivia, where outside NGOs have linked with local free-standing
grassroots groups and movements, NGOs have actually weakened the structures for local action and autonomy
by bringing people into conventional donor-funded ‘poverty alleviation’ activities. A frequent area for criticism
is the tendency for NGOs to ‘hold onto’ groups for too long without withdrawing so that there can be
sustainable, autonomous group action (Carroll 1992: 113). Howes (1997) demonstrates the need for NGOs to
promote membership organizations which can be self-sustaining after NGO withdrawal, but notes the rareness of
this actually taking place. Finally, the ‘dark side of social capital’ (Putzel 1997) has been documented by those
who argue that organized local action is not always a force for ‘good’, and may reflect precisely the kinds of
subordination, narrow self interest or intolerance that an NGO programme may be seeking to challenge.
4.4 Relationships between NGOs and Donors
As we saw in Chapter 2, what might be loosely termed the ‘aid industry’ is a set of institutions and organizations
concerned with the funding of international development, and includes multilateral agencies such as the World
Bank, bilateral donors such as the UK Department for International Development (DFID), Northern NGOs such
as Oxfam, and foundations such as Ford (Robinson 1997). NGOs have always been players in development
processes, but it is only since the late 1980s that the aid industry has invested NGOs with major significance.
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This was, as we saw in Chapter 1, due to a variety of factors, including disillusionment with the apparent
inefficiency of state-centred development paradigms, and the growing voice of the third sector in parts of the
South. However, data on the precise levels of funding going to NGOs are notoriously difficult to come by,
because of the large numbers of donors and funding channels involved, and of course the matter is complicated
further by the importance of funding from governments and the resources to NGOs provided by public donations
and volunteer labour.3 Figures quoted by van Rooy (1997), based on statistics collected by the Development
Assistance Committee (DAC) of the OECD, indicate that more than US$1 billion of aid globally is now
channeled through NGOs, and that while bilateral donors such as Denmark spend less than 0.5 per cent of their
overall development assistance on NGOs, other countries such as the Netherlands and Switzerland spend more
than 10 per cent via NGOs. The pace of the increase in official funding of NGOs has been quite dramatic. For
example, in the UK, figures presented by ODI (1995) indicate that between 1983–4 and 1993–4 there was an
increase of almost 400 per cent to £68.7 million as the total share of British aid going to NGOs rose from 1.4 per
cent to 3.6 per cent.
Aside from raising the profile of NGOs, these increases in official funding have impacted on some organizations
in a variety of important ways. All non-profit organizations tend to be highly resource-dependent and may
require diverse sources of funds for their survival (Bielefeld 1994), and it has been argued convincingly that the
‘resource dependency perspective’ developed by the influential organizational theorists Pfeffer and Salancik
(1978) can be usefully applied to NGOs in seeking explanations for their relationships and activities (Hudock
1995). In some cases, the rapid growth and organizational expansion of NGOs has created structural pressures
such as the transition from the associational world of informal face-to-face organizational styles to the
bureaucratic world of formal structures and hierarchies, thus creating a new set of administrative problems
(Billis and MacKeith 1992). For other NGOs there has been the hazard of what organization theorists term ‘goal
deflection’, as funders have favoured certain approaches such as service provision over earlier empowerment-
centred activities (Hashemi and Hassan 1999). Some observers have argued that the rapid increases in official
funding for short-term humanitarian emergency funding has deflected some NGOs from longer-term
development work (Fowler 1994). An NGO may also become more vulnerable to changing donor fads and
fashions (Smillie 1995) or may face decreased legitimacy in the eyes of some of its other stakeholders (Bratton
1989).
At the same time, NGO approaches and concerns are now also beginning to influence official aid policy in a
number of ways, which Riddell (in ODI 1995) has termed the ‘reverse agenda’. For example, the concept of
participatory concerns in general and participatory planning in particular has been taken on board by most
donors, and part of the credit for this lies arguably in pressure brought to bear by NGOs. The same is true of the
increasing interest in the gender dimensions of development in which the ideas of NGOs played a part. Brown
and Covey (1983) show the need for NGOs to deal with the tensions inherent in their external relations, and
there is no doubt that NGOs have begun to develop distinctive techniques for managing the donor dimensions of
their relationships more effectively. For example, the evolution of the ‘donor consortium’ idea in which NGOs
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receiving funding from a number of different donors (each of whom may have different disbursal methods and
reporting criteria), is one such response (Smillie 1988; Wright 1996). In this model an NGO works with the
donors to form a group which can standardize procedures and timetables and establish a single point of contact
and communication working with donor consortia. Some of the major NGOs such as BRAC in Bangladesh have
found this an improved way to organize relations with donors, although in the case of Sarvodaya in Sri Lanka in
the 1980s, a donor consortium led to unnecessary administrative centralization, an increased workload for staff
and the loss of the bottom-up culture of participation within the organization (Perera 1997).
Some donors are also now considered to be looking beyond mere funding relationships. According to
Bebbington and Riddell (1995), donors can work towards helping to create an enabling environment which
would assist the work of NGOs – such as building bridges between non-membership NGOs, membership
organizations and wider political structures such as the state and international donors. This strategy too can be
hazardous. Schmidt and Zeitinger (1996) argue that donors often still do not know enough about many of the
NGOs they support, and that a more genuine partnership is needed, rather than just instinctive trust. The
increasing numbers and scale of NGOs have also highlighted the need for NGOs to coordinate more effectively
with each other, which has not proved a straightforward challenge. Carroll (1992) has argued that coordination
between NGOs is a key to improving performance, but that in practice ‘competition’ is more common, which
brings us back to the subject of resource dependence, since NGOs may wish, due to limited funding sources, to
protect their funding source information and to maintain a distinct activity niche which they can then use to
maintain access to resources. The attempt to coordinate NGOs may come from NGOs themselves, which is more
likely to succeed, or it may be imposed from outside, usually by government or donors. Coordination may take
the form of a formal structure, such as the national NGO council which was established and documented in
Simukonda’s (1992) case study from Malawi, which was ultimately an unsuccessful venture, or it may be
informal in nature, such as the flexible grassroots network in Thailand discussed by Korten (1980), in which
NGOs came together around a specific campaign, in this case against a proposed dam project.
One of the main issues in the management of NGO relationships within the ‘aid industry’ is the changing
balance of power which is emerging between Northern NGOs and Southern NGOs. Many Northern NGOs have
moved in recent years in broad terms from an approach in which they implemented projects themselves in
developing country contexts, to one in which most now seek to form ‘partnerships’ with local organizations
which they fund and support in other ways, such as ‘capacity building’ support. Overlaid onto this changing
scenario is the growth of what is often termed ‘direct funding’ of Southern NGOs by Northern bilateral donors,
in place of an earlier funding model in which ‘indirect funding’ took place through Northern NGO
intermediaries.

These changes may have profound implications for the Northern NGO community, which has increasingly found
itself in the midst of a rapidly changing aid environment and Southern institutional context. For some observers
this has been evident in a sharpening of purpose and a productive new questioning of roles, while others have
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suggested that there may be a growing ‘crisis of identity’ among Northern NGOs (Smillie 1994).4 One recent
study has analysed these changing relationships in the context of Swedish NGO assistance in Bangladesh, which
has worked to support Bangladeshi NGOs over the years (Lewis and Sobhan 1999). The study compared the
effectiveness of the new ‘direct’ route via the SIDA office in Dhaka with the more familiar ‘indirect’ route in
which SIDA funds Swedish NGOs who then work with Bangladeshi NGO partners. The study found the two
routes essentially complementary, since direct funding can cut out the costs of the Northern ‘intermediary’ NGO
and allow a direct dialogue with local leaders and organizations, while indirect funding can maintain a link and a
dialogue between the government’s aid programme and the Swedish public, and create opportunities for Swedish
NGOs to undertake development education work at home informed by their work overseas. However, the
research suggested that in general the arguments for direct funding were more compelling as a means for
identifying and channeling resources to the most effective and innovative Bangladeshi NGOs. There was some
evidence that many Swedish NGOs (particularly those which were from the more conservative missionary
backgrounds) tended to be involved in routine, operational, less sustainable NGO activities (such as running
clinics and schools) rather than the more challenging activities carried out by some of SIDA’s more innovative
NGO partners.
Chapter Five
Building Capacity of NGOs
Improving effectiveness of Nongovernmental Organizations
Fundraising
Volunteer Management
5.1 The Concept of Capacity Building
Capacity building has fast become a major topic among nonprofits and management support organizations
(funders, associations, training centers, consultants, etc.) that provide services to nonprofits. There are a variety
of definitions for capacity building. Perhaps the most fundamental definition is "actions that improve nonprofit
effectiveness". Some other discussions about capacity building refer to the concept as actions that enhance a
non-profit's ability to work towards its mission.
The concept of capacity building in nonprofits is similar to the concept of organizational development,
organizational effectiveness and/or organizational performance management in for-profits. Capacity building
efforts can include a broad range of approaches, eg, granting operating funds, granting management
development funds, providing training and development sessions, providing coaching, supporting collaboration
with other nonprofits, etc. Prominent methods of organizational performance management in for-profits are
beginning to be mentioned in discussions about capacity building, as well, for example, the Balanced Scorecard,
principles of organizational change, cultural change, organizational learning, etc.
UNDP (1997) has introduced capacity building as the process by which individuals, groups, and organizations
increase their abilities to (1) perform core functions, solve problems, define and achieve objectives; and (2)

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understand and deal with their development needs in a broad context and in a sustainable manner. Furthermore,
in terms of NGOs’ functions, Langran (2002) has defined capacity building as the ability of one group (NGOs)
to strengthen the development abilities of another group (local communities) through education, skill training
and organizational support.

5.2 Capacity Building Areas

Different studies regarding capacities have stated that the NGOs need assistance to enhance capacity to
implement development programs by establishing effective management and administrative system. The
assistance should include means for developing appropriate mechanisms to plan and carryout tasks in
collaboration with other organizations. The capacity building programs should include management training of
key decision makers of NGOs who tend to be more activists than managers, building the capacity of
management and other staff by assisting them to acquire organizational, management and behavioral skills so
that they can produce an interesting combination of home grown activism and modern management technique
that would help them to achieve better results.
The capacity building programs need to focus on assisting individual staff members to understand the
importance of performing and completing their tasks within the given time. It is necessary to assist them to learn
taking initiatives to respond to the emerging needs of the communities they serve. In addition, the staffs need to
understand their responsibilities better vis-à-vis their beneficiaries. Establishing these simple but core work
principles can make NGOs more effective in implementing development programs. Development efforts can be
more effective if they are run and managed by trained personnel who understand the process of planning,
management including decision-making, communication and human relation skills.
The training and human resource development activities will enable the NGOs to achieve what they have set out
to in the first place. The process would help them understand their strengths better and identify areas where they
should concentrate most establishing priority. This way they would be able to be efficient, transparent,
accountable and sustainable organizations.
Specifically, capacity building attempts to:
1. Build a stronger, more sustainable organization, including establishing formal or systematic organizational
structures and developing and implementing long-term planning and strategies.
2. Improve administrative and program management systems and abilities, including setting up a strong
accounting system, improving the process of planning and managing projects, or hiring an M&E specialist.
3. Strengthen technical expertise, through hiring or training staff or volunteers in program planning and design,
best practices, and other similar technical areas.
5.3 Process and Instruments for NGO Capacity Building
Capacity can be developed in different ways and, in fact each dimension of capacity will require a different mix
of both traditional, mainly training and the use of non-conventional instruments and processes in an integrated,
coordinated and concentrated manner. Capacity building should be comprehensively approached to include
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acquisition and utilization, and should focus on the institutional, organizational and environmental or attitudinal
dimensions.
The processes and instruments for capacity building should include:
5.3.1Training and other skills enhancement programs: Training and other skills enhancement programs in the
form of seminars, workshops are useful instruments for human and organizational capacity building. Such
exercises could be formal or informal with stress on methods, sequences and performance criteria relevant for
effectiveness in planning and implementation of development projects and programs. Skills enhancement should
form part of the process of design, implementation and evaluation of a program or project cycle. In expanding
the delivery capacity of NGOs, the involvement of communities becomes a critical factor. Involving
communities to work out solutions does not come naturally and would require the training of NGO officials,
both management and technical staff, to design the format and modalities for facilitating community action. This
would entail how to get beneficiaries to take initiatives; to get themselves and the community to be involved in a
committed way calls for facilitation skills. Development of facilitation skills as part of human resources
development is necessary for development of attitudes, perceptions and procedures.
5.3.2 Experiential learning: Experiential learning allows for a combination of knowledge and attitude
development, as well as practical experience in carrying out activities on the ground. It allows for the acquisition
and utilization of skills, change in behavior/attitude and application of knowledge on on-going activities. The
usefulness of this process is that it could be programmed as an integral part of service or product delivery. The
use of expert assistance to transfer knowledge and skills could be explored in the delivery arrangements.
5.3.3 Promoting and strengthening partnerships: Among NGOs is a valuable instrument for enhancing all forms
of capacity for advocacy and influencing operational management, monitoring and evaluation as well as for mass
mobilization and collective action.

The promotion of partnership as a capacity building process enhances dialogue and cooperation, which in turn
enables NGOs to respond collectively on issues at the macro level. Partnership should also be used as an
instrument to foster coordination, avoid unnecessary duplication and expand operation.
5.3.4 Promoting the formation/strengthening of alliances among NGOs: This process again can lead to the
enhancement of capacity to take on issues at the macro level and also allows NGOs to close their ranks, thus
enabling them to speak with one voice, bigger and better. The creation of networks in the form of umbrella and
networking arrangements would enhance joint action, representation of common interest, provision of training
and experiential learning opportunities. The value of networks should be viewed as a powerful tool and force
through which individual and collective interests and views could be obtained; it enhances the participatory
process. The task of change agent played by NGOs requires network, both information and assertion in strength
which can be an effective means for constructive engagement and partnership building.
5.3.5 Launching an effective communication and information dissemination program: launching of an
effective communication and information dissemination program could be an appropriate response to improve
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NGOs’ communication strategy skills. This is a valuable instrument for the sharing of experiences, expertise and
information networking, keeping in touch with each other, and obtaining information to monitor developments
taking place in the local and international community. The main emphasis of such an instrument should include
its usefulness in enhancing the following capacities: advocacy and influencing, mass mobilization and collective
action and for providing outreach. Such a program could embrace audio and visual format and includes the use
of newsletters, newspaper publications, radio talk shows, theatre and drama, video recordings all aimed at
enhancing advocacy.
5.4 Improving Effectiveness of NGOs
Local NGOs are created to bring about, or support processes to bring about, major positive change in the lives of
the beneficiaries, clients or service users they have been formed to serve. In other words, these organizations are
a means to a broader end. At the core of their work are the programmes they deliver. If they are to achieve
maximum positive impact through these programmes, organizations need to work as effectively as possible.
However, the ingredients of organizational effectiveness are not easy to unravel: different authors have
advocated different recipes for success in a wide array of books and articles. The essential ingredients of
organizational effectiveness include:-
-If an organization is to be truly accountable it will need a strong system of internal organizational governance.
This will assure its clients or beneficiaries that it exists to further their interests, and assure its members, staff
and funding agencies that its resources are being put to the best possible use.
-Without a clear focus to its programme it is difficult, if not impossible, for an organization to achieve
significant impact because its energies and resources will be poorly channeled and dissipated.
-There are many ways in which an organization can win or lose the trust of its beneficiaries, staff, funding
agencies and the general public. One of the most important aspects of building trust is to establish systems to
guarantee that financial resources are responsibly managed and efficiently used.
-In an increasingly complex world, development issues are by no means simple to address, so those working to
support communities and individuals who most need justice and redress must have creativity. A staff body that is
well managed highly motivated and working well as a team is much more likely to succeed than one
characterized by insecurity, lack of support and opportunity, hierarchy and unclear lines of responsibility and
reporting.
-To effect real change in people’s lives, all NGOs develop and deliver programmes. These may use a number of
different strategies, including advocacy, capacity building, physical projects (such as buildings or repair of rural
roads, water pumps, etc), research and information, networking, and others. An NGO must manage the delivery
of these different elements of support to beneficiaries efficiently and effectively – from planning through
implementation to the review stage – if it is to achieve the intended positive impact.
-The foundation of an efficient, effective and high impact organization is its office administration. The reliability
of these systems must be such that they are largely invisible. An untidy, chaotic office where important

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documents cannot be located easily, where visitors feel unwelcome and telephone messages go unrecorded gives
a bad impression and undermines the efforts of the staff team.
-Last, but by no means least, it is difficult if not impossible to advance the interests of beneficiaries without
carving out a public profile for the organization and its programme. Without this it will remain unknown and
isolated when it could be networking effectively with others and building a solid reputation for delivering high
quality, high impact programmes. A solid reputation is also linked to an organization’s long term security: it is
much easier for a reputable organization to secure funding for its work. Organizational sustainability is essential
for an NGO to be effective.
1) Success factors for NGOs
• Organizational vision, which includes the positioning of an organization within the external environment and
its flexibility to adapt to changes in this environment.
• Individual staff capacities, skills and aptitude, and their collective synergy.
• Organizational capacity to attract and retain a staff body and individual staff of the caliber or potential caliber
necessary for running programs effectively.
• Organizational capacity to be accountable to funders, governing bodies or boards, staff and target groups.
2) The major factors that determine their effectiveness:-
• Organizational ability to remain detached from party politics.
• Able and committed leadership with solid skills derived either from grassroots experience and connections, or
from formal educational qualifications.
• Participatory and democratic involvement of grassroots membership and NGO staff in matters pertaining to
organizational and programme development (including staff selection).
• Transparent and accountable (to grassroots membership and staff) management.
• Secure donor funding from known organizations with which partnerships have been developed.
• Donors who are committed to capacity building, skills development and conflict resolution.
• Donors who refrain from becoming enmeshed in internal organizational politics, and who are able to adopt
noninterventionist methods.
• Donors who are able to gauge the NGO’s capacity to absorb and manage resources and who tailor financial and
other support to meet this.
• Sound organizational control mechanisms deriving from democratic participation and/or measurable control
systems.
• Development of forward-thinking management and leadership strategies, and reduced reliance on
organizational crisis management.
• Investment in human capital without prejudice to individual personalities, and with carefully selected training
interventions.
There are many arguments which have been made in support of the assumed advantages of NGOs over other
types of organization (Anheier 1987). There is a social argument which is based around equity issues: the idea is
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that NGOs can encourage and facilitate participation of the poor and can reach strata of the population which
have hitherto been left untouched or bypassed by public service delivery systems. This is because government
sector agencies suffer from shortages of resources and face social and cultural access problems, and government
decision making is over-influenced by the interests of elites. There is an economic argument, based on the
concept of efficiency, which argues that NGOs provide services more cost-effectively than government agencies
can, and that NGOs are able to generate self-sufficient, self-reliant and sustainable interventions. For example,
Smith (1987) found that NGOs were generally more efficient than government projects, based on a greater cost
advantage due to lower labour costs and incomplete pricing (relying on voluntary local inputs, taking no
provision for depreciation, leaving out transaction costs such as site selection, grant seeking, information
gathering, and the exclusion of long-range recurrent costs).
The political argument is that NGOs are less vulnerable to sudden and unexpected political upheaval and change
than government agencies, and that government agencies tend to have a ‘hidden’ political agenda which seeks to
win votes or build patron–client relationships. NGOs are therefore seen as being more honest in that they are less
likely to be guided by these types of political considerations in their work. Finally, the cultural argument points
out that NGOs (and Southern NGOs in particular) are more embedded in the local culture and that they therefore
can be more sensitive to assessing and meeting local needs. NGOs can also support local organizations in their
own original contexts rather than building new ones or imposing their own large-scale organizations from
outside on local communities. Each of these arguments can be shown to have some merit, but none can be taken
for granted or assumed, and it is necessary to pay careful attention to specific cases and contexts. To make
matters worse, there is surprisingly little data about the effectiveness of NGOs in either development or relief
work (see Box 4). What we find in the literature is a set of writings which tends to take either a ‘pro-’ or ‘anti-’
NGO case based on limited generalized evidence or a specific narrow case.
NGOs therefore seek to organize people to make better use of local productive resources, create new resources
and services, promote equity and alleviate poverty, influence government actions towards these same objectives,
and establish new institutional frameworks to sustain people centered and action-centered development.
NGOs therefore possess a ‘comparative advantage’ over government agencies in four main areas:
(a) NGOs reach the poor in remote areas where government reach does not exist or is ineffective;
(b) NGOs operate at lower cost due to the voluntary nature of their activities and lower technological overheads;
(c) NGOs promote local participation by working with community groups as partners, emphasizing self-help
initiatives and local control of programs;
(d) NGOs innovate and adapt to local conditions and needs.
Fund Raising
The most important thing to remember about fundraising is that it takes time, energy and perseverance. The
options detailed should always be considered carefully in terms of the inputs they will require if they are to yield
the desired results.

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All NGOs will want to publicize themselves to different audiences and in different ways as reputable
organizations with high impact programs. One of the reasons, but by no means the only one, that publicity is
important is to raise funds for the organization. The links between publicity and fundraising are clear. But
organizations also want to publicize themselves for other reasons, such as increasing their membership base,
informing potential beneficiaries about the work that they do, and networking more effectively with other
organizations.
Many different tools can be used in a publicity strategy. Some of them are detailed below.
i).Written documents
These are good for visitors to the office and funding agencies who are accustomed to reading reports and
documents. Different documents can be developed for different purposes. All of them should carry the
organization’s full name, the name of a contact person, and contact telephone or fax numbers. Be sure to
distribute the documents widely, not only from the office. Give some to international agencies, umbrella groups,
and other organizations that may distribute them on behalf of the organization.
ii).Logos and branding
Anything that carries the organization’s logo or emblem will help others remember and identify it. Some
examples include calendars, stickers, pins, hats, T-shirts, folders, or diaries. Signs or banners can also be used
whenever appropriate to let people know that the organization is working on a specific cause or issue. The
emblem increases publicity among those who cannot read, as they associate the picture with the organization.
iii).Publicity events
Any event that an organization sponsors can be used for publicity. Some examples are:
• Open house
Open the office to the public and invite them to meet the staff, see the office, and ask questions about the
organization and its work. Display banners and brochures, and show videos of programme activities while
people network with each other.
• Project launch or closing ceremony
At the start of a project or major programme activity, invite people from that field to attend a small ceremony.
For bigger projects, government officials or funding agency representatives can be invited to make speeches to
attract more participants. Be sure to display banners, photographs and brochures, and to show videos of
programme activities if these are available..
• Local events
When invited to attend local events related to the organization’s work, ask if banners or displays can be taken.
Wear the organization’s T-shirt, if it has one, and let people know the name of the organization and what it
stands for.
iv).Media
Media can cover special events that the organization holds, or they can run general stories related to its work.

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• Television has a wide audience, which may include beneficiaries and funding agencies alike. However, the
message should be well prepared in advance, as coverage is often brief.
• Newspapers can give more attention than television to local events, although their target group will be
different. They can also carry photographs of the events. Articles can be posted in the office and seen by many
people.
• Radio also covers both beneficiaries and donors, and can be useful to spread information about recent
activities.
• A newsletter. Produce a small newsletter that describes what the organization is doing, or that reports on issues
that its target group is concerned about.
v).Conferences and workshops
Participation in conferences and workshops tells others that the organization is active and interested in a
particular topic. It can also help to inform people about the organization’s areas of work, and facilitate
information sharing. Workshops are a good place to meet other people, including funding agency
representatives, who share common interests.

vi).Developing a Fundraising Plan

Most organizations will need to develop a fundraising plan if they are to achieve their priorities.
What is the purpose of fundraising?
It is important to clarify the purpose of a fundraising strategy which might, for example, be to:
• Diversify and increase the number of different income sources the organization has.
• Develop and expand, or consolidate and maintain, the existing workforce and programme or service.
• Reduce financial dependency on funds received from any one source or any international funding agency.
• Enhance long term organizational sustainability.
Some fundraising strategies for NGOs
Funds can be raised from many sources, including those outlined below.
• Grants/project funds provided by international funding agencies and international NGOs. Before approaching
such agencies it is a good idea to consider: Which elements of the programme might best be marketed to
potential international funders?
• Income generation
Attempting to generate funds through specific events or initiatives such as training workshops or fundraising
events usually requires a great deal of staff time and effort for small returns, especially for smaller organizations.
However, the added value lies in publicity for the organization which may help boost other fundraising
initiatives.
• User charges
The introduction of charges for direct services especially if these are currently provided free of charge raises
questions about the rights and wrongs of charging for services that should be available to the public free of
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charge. It is difficult to combine corporate, business principles which are rooted in profit and commercial
enterprise with NGO values designed to promote inclusion, participation, access and social benefit. Charging for
indirect services might be an option for some organizations, but opportunities for this are often limited. For
example, some organizations hire out rooms in their office for out-of-hours meetings. Others charge consultancy
fees for advice given to, for example, other agencies.
• Private, individual donations
Some organizations canvass small individual donors by including a donations slip at the bottom of all their
brochures or leaflets. However, there may be legal and other constraints on this practice. In addition, it is usually
necessary to explain in brief what the donated money will be used for. Again, the organization would need to be
confident that it has the administrative capacity to deal with such donations.
Identifying and building sustainable relationships with large individual donors can yield significant returns,
sometimes on a regular and enduring basis. However, this is not easy for a small organization with a small
(albeit possibly growing) reputation. It is difficult to inspire the confidence of such donors. And it is not always
easy to identify individuals, for example, in the business sector, with a particular interest in supporting the work
of the organization.
• Corporate giving
A significant and growing number of corporations and businesses (large and small) have established ‘social
investment funds’ or ‘community funds’ which carry both tax and social benefits for them. Most of these funds
are devoted to specific areas of activity, but some are more flexible and open ended.
• Volunteer Management
The organization’s program may require the volunteers to co-locate to work on a complex project or to
collaborate in a virtual team environment. No matter where volunteers perform their work, it is important to
remember why they perform their work. Volunteers join an organization because they share the interest and
passion advocated by the NGO or NPO. As valuable stakeholders and resources for the organization, it is critical
that considerations are made for keeping the volunteer engaged.

Course: Strategic Planning and Management

Course code: PADM 4132
Credit Hour: 3cr.hr
Introduction
Strategic management is about running the total operations of an organization. It seeks to understand the
challenges and the environment in which it operates, the direction the management intends to head, the strategic
plans to for getting the organization moving in the intended direction and the tasks of implementing the chosen
strategy successfully. This course aims to equip you with the core concepts, frameworks, and techniques of
strategic management, which will allow you to understand what administrators/managers must do to make an
organization to achieve superior performance.
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The course will evolve around a theoretical and a practical base simultaneously. While the theoretical part
concentrates upon the fundamental factors that determine organization success, strategic planning,
implementation, monitoring and evaluation, on the other hand, the practical part is all about acquiring deep
insights into the determinants of organization success from specific cases. Students of this course, hence, are
expected to wear a bird’s-eye-view glass and yet pay intent attention to both the theoretical and practical parts of
the course.
Objectives
At the end of this course student will be able to:

 Understand basic concepts of strategy, change, strategic leadership and strategic decisions;
 Identify the best methods of strategic planning and managing change;
 Explain the differences between strategic and non-strategic decisions, and between functional, business-
level, and corporate-level strategy;
 Distinguish between different modes of strategy-making and identify which modes are prevalent in a
particular organization;
 Inculcate with basic principles of corporate governance;
 Familiarize with each steps of strategic management process;
 Understand the importance of change, how to make change and roles played in change process;
 Enhance practical skills to examine external and internal forces of change and analyze how to develop and
implement a change strategy;
Explore the dynamics of organizational change and how they can be harnessed for success.
Course Content
Chapter One: The Basics of Strategic Management
Chapter Two: Setting Strategic Direction
Chapter Three: Formulation of Strategies
Chapter Four: External and Internal Environmental Analysis
Chapter Five: Strategic Implementation
Chapter Six: Strategic Evaluation
Chapter One
The Basics of Strategic Management
Meaning and Concepts of Strategic Management
Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-
functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic
management focuses on integrating management, marketing, finance/accounting, production/operations, research
and development, and information systems to achieve organizational success. The term strategic management in
this text is used synonymously with the term strategic planning. The latter term is more often used in the
business world, whereas the former is often used in academia. Sometimes the term strategic management is used
to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to

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strategy formulation. The purpose of strategic management is to exploit and create new and different
opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.
The term strategic planning originated in the 1950s and was very popular between themid-1960s and the mid-
1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time,
much of corporate America was “obsessed” with strategic planning. Following that “boom,” however, strategic
planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s,
however, brought the revival of strategic planning, and the process is widely practiced today in the business
world. A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to
have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins
among firms in most industries have been so reduced by the global economic recession that there is little room
for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous
good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of
other, “less desirable” courses of action.
The term strategic management is used at many colleges and universities as the subtitle for the capstone course
in business administration. This course integrates material from all business courses. The Strategic Management
Club Online at www.strategyclub.comoffers many benefits for business policy and strategic management
students. Professor Hansen at Stetson University provides a strategic management slide show for this entire text
(www.stetson.edu/~rhansen/strategy).
1.2 Dimension of Strategic Decisions
There are several dimensions that distinguish a company’s strategic decisions from other decisions. Typically,
strategic issues have the following six dimensions.
1.2.1 Require Top-Management Decisions and Commitment
Since strategic decisions cover wider areas of a firm’s operations, they require top-managements' involvement.
Usually only top management has the perspective needed to understand the broad implications of such decisions
and the power to authorize the necessary resource allocations.
1.2.2 Require Large Amounts of the Firm’s Resources
Strategic decisions involve substantial allocations of people, physical assets, or money. These resources are
either redirected from internal sources or swerved from outside the firm. Strategic decisions also commit the
firm to actions over an extended period.
1.2.3 Affect the Firm’s Long-Term Prosperity
Strategic decisions commit the firm for a long time, typically five years. However, their impact often lasts much
longer. Once a firm has committed itself to a particular strategy, its image and competitive advantages usually
are tied to that strategy. Firms become known in certain markets, for certain products, with certain technologies.
They would jeopardize their previous gains if they shifted from these markets, products, or technologies by
adopting a radically different strategy.
1.2.4 Future Orientation
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Strategic decisions are based on what managers forecast rather than on what they know. In such decisions,
emphasis is placed on the development of projections that will enable the firm to select the most promising
strategic options.
1.2.5 Multi-functional or Multi business consequences
Strategic decisions have complex implications for most areas of the firm. Decisions about such materials as
customers mix, competitive emphasis, or organizational structure necessarily involve a number of the firm’s
strategic business units (SBUs), divisions, or program units. All of these areas will be affected by allocations or
reallocations of responsibilities and resources that result from these decisions.
1.2.6 Require considering External Environment
All business firms operate in an open system. They affect and are affected by external conditions that are largely
beyond their control. Therefore, to successfully position a firm in competitive situations, its strategic managers
must look beyond its operations by “thinking outside of the box.”
1.3 Stages of Strategic Management
The strategic-management process consists of three stages: strategy formulation, strategy implementation, and
strategy evaluation.
Strategy formulation includes developing a vision and mission, identifying an organization’s external
opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives,
generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include
deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether to
expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture,
and how to avoid a hostile takeover.
Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit
the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources,
and technologies over an extended period of time. Strategies determine long-term competitive advantages. For
better or worse, strategic decisions have major multifunctional consequences and enduring effects on an
organization. Top managers have the best perspective to understand fully the ramifications of strategy-
formulation decisions; they have the authority to commit the resources necessary for implementation.
Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and
allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a
strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts,
preparing budgets, developing and utilizing information systems, and linking employee compensation to
organizational performance.
Strategy implementation often is called the “action stage” of strategic management. Implementing strategy
means mobilizing employees and managers to put formulated strategies into action. Often considered to be the
most difficult stage in strategic management, strategy implementation requires personal discipline, commitment,

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and sacrifice. Successful strategy implementation hinges upon managers’ ability to motivate employees, which is
more an art than a science. Strategies formulated but not implemented serve no useful purpose.
Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation
activities affect all employees and managers in an organization. Every division and department must decide on
answers to questions, such as “What must wedo to implement our part of the organization’s strategy?” and “How
best can we get the jobdone?” The challenge of implementation is to stimulate managers and employees
throughoutan organization to work with pride and enthusiasm toward achieving stated objectives.
Strategy evaluationis the final stage in strategic management. Managers desperately needto know when
particular strategies are not working well; strategy evaluation is the primarymeans for obtaining this information.
All strategies are subject to future modification becauseexternal and internal factors are constantly changing.
Three fundamental strategy-evaluationactivities are (1) reviewing external and internal factors that are the bases
for current strategies,(2) measuring performance, and (3) taking corrective actions. Strategy evaluation is
neededbecause success today is no guarantee of success tomorrow! Success always creates new anddifferent
problems; complacent organizations experience demise.Strategy formulation, implementation, and evaluation
activities occur at three hierarchicallevels in a large organization: corporate, divisional or strategic business unit,
and functional.
By fostering communication and interaction among managers and employees acrosshierarchical levels, strategic
management helps a firm function as a competitive team. Mostsmall businesses and some large businesses do
not have divisions or strategic business units;they have only the corporate and functional levels. Nevertheless,
managers and employees atthese two levels should be actively involved in strategic-management activities.
1.4 Key Terms in Strategic Management
Before we further discuss strategic management, we should define nine key terms: competitive advantage,
strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses,
long-term objectives, strategies, annual objectives, and policies.
1. Competitive Advantage
Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as
“anything that a firm does specially well compared to rival firm”.’ When a firm can do something that rival
firms cannot do, or owns something that rival firms desire, that can represent a competitive advantage. Getting
and keeping competitive advantage is essential for long-term success in an organization. Theories of
organization present different perspectives on how best to capture and keep competitive advantage—that is, how
best to manage strategically. Pursuit of competitive advantage leads to organizational success or failure.
Strategic management researchers and practitioners alike desire to better understand the nature and role of
competitive advantage in various industries. Normally, a firm can sustain a competitive advantage for only a
certain period due to rival firms imitating and undermining that advantage. Thus it is not adequate to simply
obtain competitive advantage.
A firm must strive to achieve sustained competitive advantage by:
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(1) Continually adapting to changes in external trends and events and internal capabilities, competencies, and
resources; and
(2) Effectively formulating, implementing, and evaluating strategies that capitalize upon those factors.
2. Strategists
Strategists are the individuals who are most responsible for the success or failure of an organization. Strategists
have various job titles, such as chief executive officer, president, owner, chair of the board, executive director,
chancellor, dean, or entrepreneur. Writers on organizational behavior say, “All strategists have to be chief
learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models
during this period, then our companies won’t adapt either, because ultimately leadership is about being a role
model”
Strategists help an organization gather, analyze, and organize information. They track industry and competitive
trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot
emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners
usually serve in a support or staff role. Usually found in higher levels of management, they typically have
considerable authority for decision making in the firm. The CEO is the most visible and critical strategic
manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes,
or direct authority over a major piece of the business is a strategic manager (strategist). In the last five years, the
position of chief strategy officer (CSO) has emerged as a new addition to the top management ranks of many
organizations. This new corporate officer title represents recognition of the growing importance of strategic
planning in the business world.
Strategists differ as much as organizations themselves and these differences must be considered in the
formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of
strategies because of their personal philosophies. Strategists differ in their attitudes, values, ethics, willingness to
take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims,
and management style.
3. Vision and Mission Statements
Many organizations today develop a vision statement that answers the question, “What do we want to become?”
Developing a vision statement is often considered the first step in strategic planning, preceding even
development of a mission statement. Many vision statements are a single sentence. For example, the vision
statement of the Ethiopian Electric Power Corporation (EEPCo) is “To be a centre of Excellence in providing
quality electric service at every one’s door and being competitive export industry.”
Mission statements are “enduring statements of purpose that distinguish one business from other similar firms. A
mission statement identifies the scope of a firm’s operations in product and market term.” It addresses the basic
question that faces all strategies: “What is our business?” A clear mission statement describes the values and
priorities of an organization. Developing a mission statement compels strategists to think about the nature and

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scope of present operations and to assess the potential attractiveness of future markets and activities. A mission
statement broadly charts the future direction of an organization.
An example of a mission statement is provided below for Microsoft.
Microsoft’s mission is to create software for the personal computer that empowers and enriches people in the
workplace, at school and at home. Microsoft’s early vision of a computer on every desk and in every home is
coupled today with a strong commitment to Internet-related technologies that expand the power and reach of the
PC and its users. As the world’s leading software provider, Microsoft strives to produce innovative products that
meet our customers’ evolving needs. At the same time, we understand that long-term success is about more than
just making great products. Find out what we mean when we talk about Living Our Values
(www.microsoft.com/mscorp/).
Another example of a mission statement of the Ethiopian Electric Power Corporation (EEPCo) is
To provide adequate and quality electricity generation, transmission, distribution, and sales services, through
continuous improvement of utility management practices responsive to the socio-economic development and
environmental protection need of the public”.
4. External Opportunities and Threats
External opportunities and external threats refer to economic, social, cultural, demographic, environmental,
political, legal, governmental, technological, and competitive trends and events that could significantly benefit or
harm an organization in the future.
Opportunities and threats are largely beyond the control of a single organization-thus the word external. The
wireless revolution, biotechnology, population shifts, changing work values and attitudes, space exploration,
recyclable packages, and increased competition from foreign companies are examples of opportunities or threats
for companies. These types of changes are creating a different type of consumer and consequently a need for
different types of products, services, and strategies. Many companies in many industries face the severe external
threat of online sales capturing increasing market share in their industry.
Other opportunities and threats may include the passage of a law, the introduction of a new product by a
competitor, a national catastrophe, or the declining value of the dollar. A competitor’s strength could be a threat.
Unrest in the Middle East, rising energy costs, or the war against terrorism could represent an opportunity or a
threat.
A basic tenet or principle of strategic management is that firms need to formulate strategies to take advantage of
external opportunities and to avoid or reduce the impact of external threats. For this reason, identifying,
monitoring, and evaluating external opportunities and threats are essential for success. This process of
conducting research and gathering and assimilating external information is sometimes called environmental
scanning or industry analysis. Lobbying is one activity that some organizations utilize to influence external
opportunities and threats.
5. Internal Strengths and Weaknesses

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Internal strengths and internal weaknesses are an organization’s controllable activities that are performed
especially well or poorly. They arise in the management, marketing, finance/accounting, production/operations,
research and development, and management information systems activities of a business. Identifying and
evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-
management activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate
internal weaknesses.
Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important
information. Also, strengths and weaknesses can be determined by elements of being rather than performance.
For example, a strength may involve ownership of natural resources or a historic reputation for quality. Strengths
and weaknesses may be determined relative to a firm’s own objectives. For example, high levels of inventory
turnover may not be a strength to a firm that seeks never to stock-out.
Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and
comparing to past periods and industry averages. Various types of surveys also can be developed and
administered to examine internal factors such as employee morale, production efficiency, advertising
effectiveness, and customer loyalty.
6. Long-Term Objectives
Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission
essential. Long-term means more than one year. Objectives are for organizational success because they state
direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective
planning, organizing, motivating, and controlling activities. Objectives should be challenging, measurable,
consistent, reasonable, and clear. In a multidimensional firm, objectives should be established for the overall
company and for each division.
7. Strategies
Strategies are the means by which long-term objectives will be achieved. Business strategies may include
geographic expansion, diversification, acquisition, product development, market penetration, retrenchment,
divestiture, liquidation, and joint venture.
Strategies are potential actions that require top management decisions and large amounts of the firm’s resources.
In addition, strategies affect an organization’s long-term prosperity, typically for at least five years, and thus are
future-oriented. Strategies have multifunctional or multidivisional consequences and require consideration of
both the external and internal factors facing the firm.
8. Annual Objectives
Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives. Like
long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic, consistent, and
prioritized. They should be established at the corporate, divisional, and functional levels in a large organization.
Annual objectives should be stated in terms of management, marketing, finance/accounting,
production/operations, research and development, and management information systems (MIS)
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accomplishments. A set of annual objectives is needed for each long-term objective. Annual objectives are
especially important in strategy implementation, whereas long-term objectives are particularly important in
strategy formulation. Annual objectives represent the basis for allocating resources.
9. Policies
Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and
procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and
address repetitive or recurring situations.
Policies are most often stated in terms of management, marketing, finance/ accounting, production/operations,
research and development, and computer information systems activities. Policies can be established at the
corporate level and apply to an entire organization at the divisional level and apply to a single division or at the
functional level and apply to particular operational activities or departments. Policies, like annual objectives, are
especially important in strategy implementation because they outline an organization’s expectations of its
employees and managers. Policies allow consistency and coordination within and between organizational
departments.
Substantial research suggests that a healthier workforce can more effectively and efficiently implement
strategies. Take for example the “No Smoking” policies with in most organizations. No Smoking policies are
usually derived from annual objectives that seek to reduce corporate medical costs associated with absenteeism
and to provide a healthy workplace.
1.5 The Strategic Management Model
The Strategic Management process can best be studied and applied using a model. Every model represents some
kind of process. The framework illustrated in the following diagram is a widely accepted, comprehensive model
of the Strategic Management process. This model does not guarantee success, but it does represent a clear and
practical approach for formulating, implementing, and evaluating strategies.
Identifying an organization’s existing vision, mission, objectives, and strategies is the logical starting point for
strategic management because a firm’s present situation and condition may preclude certain strategies and may
even dictate a particular course of action. Every organization has a vision, mission, objectives, and strategy, even
if these elements are not consciously designed, written, or communicated. The answer to where an organization
is going can be determined largely by where the organization has been!
The strategic-management process is dynamic and continuous. A change in any one of the major components in
the model can necessitate a change in any or all of the other components. For instance, a shift in the economy
could represent a major opportunity and require a change in long-term objectives and strategies; a failure to
accomplish annual objectives could require a change in policy; or a major competitor’s change in strategy could
require a change in the firm’s mission. Therefore, strategy formulation, implementation, and evaluation activities
should be performed on a continual basis, not just at the end of the year or semi-annually. Hence , the strategic-
management process never really ends.

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The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-
management model suggests. Strategists do not go through the process in lockstep fashion. Generally, there is
give-and-take among hierarchical levels of an organization. Many organizations conduct formal meetings
semiannually to discuss and update the firm’s vision/mission, opportunities/threats, strengths/weaknesses,
strategies, objectives, policies, and performance. These meetings are commonly held off-premises and are called
retreats. The rationale for periodically conducting strategic-management meetings away from the work site is to
encourage more creativity and candor from participants. Good communication and feedback are needed
throughout the strategic-management process.
Application of the strategic-management process is typically more formal in larger and well-established
organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and approach are
specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing
environments, such as technology companies, tend to be more formal in strategic planning. Firms that have
many divisions, products, markets, and technologies also tend to be more formal in applying strategic-
management concepts. Greater formality in applying the strategic-management process is usually positively
associated with the cost, comprehensiveness, accuracy, and success of planning across all types and sizes of
organizations.
1.6 Benefits of Strategic management
Historically, the principal benefit of strategic management has been to help organizations formulate better
strategies through the use of a more systematic, logical, and rational approach to strategic choice. This certainly
continues to be a major benefit of strategic management, but research studies now indicate that the process,
rather than the decision or document, is the more important contribution of strategic management.
Communication is a key to successful strategic management. Through involvement in the process, managers and
employees become committed to plan supporting the organization. Dialogue and participation are essential
ingredients. The manner in which strategic management is carried out is thus exceptionally important. A major
aim of the process is to achieve the understanding and commitment from all managers and employees.
Understanding may be the most important benefit of strategic management, followed by commitment.
Strategic Management
 allows an organization to be more proactive than reactive in shaping its own future;
 it allows an organization to initiate and influence (rather than just respond to) activities-and thus to exert
control over its own destiny.
a) Financial Benefits of Strategic Management
Research indicates that organizations using strategic-management concepts are more profitable and successful
than those that do not. Businesses using strategic-management concepts show significant improvement in sales,
profitability, and productivity compared to firms without systematic planning activities. High-performing firms
tend to do systematic planning to prepare for future fluctuations in their external and internal environments.

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Firms with planning systems more closely resembling strategic-management theory generally exhibit superior
long-term financial performance relative to their industry. High-performing firms seem to make more informed
decisions with good anticipation of both short- and long-term consequences. In contrast, firms that perform
poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions.
Strategists of low-performing organizations are often preoccupied with solving internal problems and meeting
paperwork deadlines. They typically underestimate their competitors’ strengths and overestimate their own
firm’s strengths. They often attribute weak performance to uncontrollable factors such as a poor economy,
technological change, or foreign competition.
More than 100,000 businesses in the United States fail annually. Business failures include bankruptcies,
foreclosures, liquidations, and court-mandated receiverships.
Although many factors besides a lack of effective strategic management can lead to business failure, the
planning concepts and tools described in this text can yield substantial financial benefits for any organization.
An excellent Web site for businesses engaged in strategic planning is www.checkmateplan.com.
b) Non-financial Benefits
Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as an
enhanced awareness of external threats, an improved understanding of competitors’ strategies, increased
employee productivity, reduced resistance to change, and a clearer understanding of performance–reward
relationships.
Strategic management enhances the problem-prevention capabilities of organizations because it promotes
interaction among managers’ at all divisional and functional levels. Firms that have nurtured their managers and
employees, shared organizational objectives with them, empowered them to help improve the product or service,
and recognized their contributions can turn to them for help in a pinch because of this interaction.
In addition to empowering managers and employees, strategic management often brings order and discipline to
an otherwise floundering firm. It can be the beginning of an efficient and effective managerial system. Strategic
management may renew confidence in the current business strategy or point to the need for corrective actions.
The strategic-management process provides a basis for identifying and rationalizing the need for change to all
managers and employees of a firm; it helps them view change as an opportunity rather than as a threat.
Chapter Two
Setting Strategies Direction
2.1 Types of Strategies

Alternative Strategies Defined and Exemplified can depict in the following table, alternative strategies
that an enterprise could pursue can be categorized into twelve actions - forward integration, backward
integration, horizontal integration, market penetration, market development, product development,
concentric diversification, conglomerate diversification, horizontal diversification, retrenchment,
divestiture, and liquidation. Each alternative strategy has countless variations. For example, market

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penetration can include adding salespersons, increasing advertising expenditures, couponing, and using
similar actions to increase market share in a given geographic area.

Many, if not most, organizations pursue a combination of two or more strategies simultaneously, but a
combination strategy can be exceptionally risky if carried too far. No organization can afford to pursue
all the strategies that might benefit the firm. Difficult decisions must be made. Priority must be
established. Organizations, like individuals, have limited resources. Both organizations and individuals
must, therefore, choose among alternative strategies and avoid excessive indebtedness.
Scholars on Strategic Management argue that strategic planning involves “choices that risk resources”
and “trade-offs that sacrifice opportunity.” In other words, if you have a strategy to go north, then you
must buy snowshoes and warm jackets (spend resources) and forgo the opportunity of population
increases you would have by going south. You cannot have a strategy to go north and then take a step
east, south, or west “just to be on the safe side.” Firms spend resources and focus on a finite number of
opportunities in pursuing strategies to achieve an uncertain outcome in the future. Strategic planning is
much more than a roll of the dice or bet; it is a wager or stake based on predictions and hypotheses that
are continually tested and refined by knowledge, research, experience, and learning. Survival of the
firm itself may hinge on your strategic plan.
Organizations cannot do too many things well because resources and talents get spread thin and
competitors gain advantage. In large diversified companies, a combination strategy is commonly
employed when different divisions pursue different strategies. Also, organizations struggling to survive
may employ a combination of several defensive strategies, such as divestiture, liquidation, and
retrenchment, simultaneously.

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 1) Integration Strategies
Forward integration, backward integration, and horizontal integration are sometimes collectively
referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain
control over distributors, suppliers, and/or competitors.
a) Forward Integration
Forward integration involves gaining ownership or increased control over distributors or retailers.
Increasing numbers of manufacturers (suppliers) today are pursuing a forward integration strategy by
establishing Web sites to sell products directly to consumers. This strategy is causing turmoil or
disorder in some industries. For example, Dell Computer began pursuing forward integration in 2003
by establishing its own stores - within-a-store in Sears, Roebuck. This strategy supplements Dell’s
mall-based kiosks, which enable customers to see and try Dell computers before they purchase one.
Neither the Dell kiosks nor the Dell stores-within-a-store will stock computers. Customers still will
order Dells exclusively by phone or over the Internet which historically differentiated Dell from other
computer firms.
An effective means of implementing forward integration is franchising. Businesses can expand rapidly
by franchising because costs and opportunities are spread across many individuals. However, a
growing trend is for franchisees, who for example may operate ten franchised restaurants, stores, or
whatever, to buy out their part of the business from their franchiser (corporate owner). There is a
growing rift between franchisees and franchisers as the segment often outperforms the parent. For
example, often to increase growth, a franchiser will allow new owners to locate near existing franchisee
operations, or will cut back on services and training to reduce costs.
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Six guidelines for when forward integration may be an especially effective strategy are:
 When an organization’s present distributors are especially expensive, or unreliable, or incapable of
meeting the firm’s distribution needs.
 When the availability of quality distributors is so limited as to offer a competitive advantage to
those firms that integrate forward.
 When an organization competes in an industry that is growing and is expected to continue to grow
markedly; this is a factor because forward integration reduces an organization’s ability to diversify
if its basic industry falters.
 When an organization has both the capital and human resources needed to manage the new business
of distributing its own products.
 When the advantages of stable production are particularly high; this is a consideration because an
organization can increase the predictability of the demand for its output through forward integration
,and
 When present distributors or retailers have high profit margins; this situation suggests that a
company profitably could distribute its own products and price them more competitively by
integrating forward.
b) Backward Integration
Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a
strategy of seeking ownership or increased control of a firm’s suppliers. This strategy can be especially
appropriate when a firm’s current suppliers are unreliable, too costly, or cannot meet the firm’s needs.
Some industries in the United States (such as the automotive and aluminum industries) are reducing
their historical pursuit of backward integration. Instead of owning their suppliers, companies negotiate
with several outside suppliers. Ford and Daimler-Chrysler buy over half of their component parts from
outside suppliers such as TRW, Eaton, General Electric, and Johnson Controls. Reintegration makes
sense in industries that have global sources of supply. Companies today shop around, play one seller
against another, and go with the best deal. Global competition is also spurring firms to reduce their
number of suppliers and to demand higher levels of service and quality from those they keep. Although
traditionally relying on many suppliers to ensure uninterrupted supplies and low prices, American firms
now are following the lead of Japanese firms, which have far fewer suppliers and closer, long-term
relationships with those few.
Seven guidelines for when backward integration may be an especially effective strategy are:
 When an organization’s present suppliers are especially expensive, or unreliable, or incapable of
meeting the firm’s needs for parts, components, assemblies, or raw materials.
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 When the number of suppliers is small and the number of competitors is large.
 When an organization competes in an industry that is growing rapidly; this is a factor because
integrative-type strategies (forward, backward, and horizontal) reduce an organization’s ability to
diversify in a declining industry.
 When an organization has both capital and human resources to manage the new business of
supplying its own raw materials.
 When the advantages of stable prices are particularly important; this is a factor because an
organization can stabilize the cost of its raw materials and the associated price of its product(s)
through backward integration.
 When present supplies have high profit margins, which suggests that the business of supplying
products or services in the given industry is a worthwhile venture, and
 When an organization needs to acquire a needed resource quickly.

c) Horizontal Integration
Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm’s
competitors. One of the most significant trends in strategic management today is the increased use of
horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors
allow for increased economies of scale and enhanced transfer of resources and competencies. Scholars
on Strategic Management make the following observation about horizontal integration:
The trend towards horizontal integration seems to reflect strategists’ misgivings about their ability to
operate many unrelated businesses. Mergers between direct competitors are more likely to create
efficiencies than mergers between unrelated businesses, both because there is a greater potential for
eliminating duplicate facilities and because the management of the acquiring firm is more likely to
understand the business of the target.
Five guidelines for when horizontal integration may be an especially effective strategy are:
 When an organization can gain monopolistic characteristics in a particular area or region without
being challenged by the federal government for “tending substantially” to reduce competition.
 When an organization competes in a growing industry.
 When increased economies of scale provide major competitive advantages.
 When an organization has both the capital and human talent needed to successfully manage an
expanded organization.

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 When competitors are faltering due to a lack of managerial expertise or a need for particular
resources that an organization possesses; note that horizontal integration would not be appropriate
if competitors are doing poorly, because in that case overall industry sales are declining.

2) Intensive Strategies
Market penetration, market development, and product development are sometimes referred to as
intensive strategies because they require intensive efforts if a firm’s competitive position with
existing products is to improve.
a) Market Penetration
A market-penetration strategy seeks to increase market share for present products or services in
present markets through greater marketing efforts. This strategy is widely used alone and in
combination with other strategies. Market penetration includes increasing the number of
salespersons, increasing advertising expenditures, offering extensive sales promotion items, or
increasing publicity efforts. For example, Toyota is rapidly increasing its market share in North
America, where the firm now makes 75 percent of its worldwide profit and has increased its market
share from 7 percent in 2002 to 9 percent in 2003.

Five guidelines for when market penetration may be an especially effective strategy are:
 When current markets are not saturated with a particular product or service.
 When the usage rate of present customers could be increased significantly.
 When the market shares of major competitors have been declining while total industry sales
have been increasing.
 When the correlation between dollar sales and dollar marketing expenditures historically
has been high ,and
 When increased economies of scale provide major competitive advantages.

b) Market Development
Market development involves introducing present products or services into new geographic areas.
McDonald’s plans to open 100 new stores in China in 2004 and another 100 in China in 2005. By
mid-2003, McDonald’s had 566 restaurants in 94 cities in China, representing the company’s
seventh-largest market. McDonald’s serves about 2 million customers in China every day and plans
to aggressively boost that number.
Six guidelines for when market development may be an especially effective strategy are:

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 When new channels of distribution are available that are reliable, inexpensive, and of good quality.
 When an organization is very successful at what it does.
 When new untapped or unsaturated markets exist.
 When an organization has the needed capital and human resources to manage expanded operations.
 When an organization has excess production capacity and
 When an organization’s basic industry is becoming rapidly global in scope.
c) Product Development
Product development is a strategy that seeks increased sales by improving or modifying present
products or services. Product development usually entails large research and development
expenditures.
Banks are expanding geographically by adding branches aggressively. Dashen Bank, for example, is
opening various new branches throughout Ethiopia by integrating innovative financial services.
Five guidelines for when product development may be an especially effective strategy to pursue are:
 When an organization has successful products that are in the maturity stage of the product life
cycle; the idea here is to attract satisfied customers to try new (improved) products as a result of
their positive experience with the organization’s present products or services.
 When an organization competes in an industry that is characterized by rapid technological
developments.
 When major competitors offer better-quality products at comparable prices.
 When an organization competes in a high-growth industry and
 When an organization has especially strong research and development capabilities.
3) Diversification Strategies
There are three general types of diversification strategies: concentric, horizontal, and conglomerate.
Overall, diversification strategies are becoming less popular as organizations are finding it more
difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify so as
not to be dependent on any single industry, but the 1980s saw a general reversal of that thinking.
Diversification is now on the retreat. There are, however, a few companies today that pride themselves
on being conglomerates. Samsung, for example, now has global market share leadership in many
diverse areas, including cell-phones (10%), big-screen televisions (32%), MP3 players (13%), DVD
players (11%), and microwave ovens (25%).’ Similarly, Conglomerates prove that focus and diversity
are not always mutually exclusive. However, diversification is still an appropriate strategy sometimes,
especially when the company is competing in an unattractive industry.
a) Concentric Diversification
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Adding new, but related, products or services is widely called concentric diversification. An example
of this strategy is Dell Computer is pursuing concentric diversification by manufacturing and marketing
consumer electronics products such as flat-panel televisions and MP3 players. Also, Dell has recently
opened an online music-downloading store. These are examples of concentric diversification strategies
for Dell, as the company sees the personal computer business becoming more aligned with the
entertainment business because both are becoming more and more digital. Simply put, computing and
consumer electronics are converging into one industry. Dell as well as Hewlett-Packard and Gateway
are among the computer firms that now compete with Sony, Matsushita, and Samsung in consumer
electronics.
Six guidelines for when concentric diversification may be an effective strategy are provided below:
 When an organization competes in a no-growth or a slow-growth industry.
 When adding new, but related, products would significantly enhance the sales of current products.
 When new, but related, products could be offered at highly competitive prices.
 When new, but related, products have seasonal sales levels that counterbalance an organization’s
existing peaks and valleys.
 When an organization’s products are currently in the declining stage of the product’s life cycle
and
 When an organization has a strong management team.
b) Horizontal Diversification
Adding new, unrelated products or services for present customers is called horizontal diversification.
This strategy is not as risky as conglomerate diversification because a firm already should be familiar
with its present customers. For example, consider the increasing number of hospitals that are creating
miniature malls or shopping centers by offering banks, bookstores, coffee shops, restaurants,
drugstores, and other retail stores within their buildings. Many hospitals previously had only cafeterias,
gift shops, and maybe a pharmacy, but the movement into malls and retail stores is aimed at improving
the ambiance for patients and their visitors.
Four guidelines for when horizontal diversification may be an especially effective strategy are:
 When revenues derived from an organization’s current products or services would increase
significantly by adding the new, unrelated products.
 When an organization competes in a highly competitive and/or a no-growth industry, as indicated
by low industry profit margins and returns.
 When an organization’s present channels of distribution can be used to market the new products to
current customers.
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 When the new products have countercyclical sales patterns compared to an organization’s present
products.
c) Conglomerate Diversification
Adding new, unrelated products or services is called conglomerate diversification. For example, in
2003, the huge battery company Energizer Holdings, acquired the Schick-Wilkinson Sword razor
business from Pfizer for $930 million. Schick was the nation’s second-largest shaving products
company, with 18 percent global market share in the wet-shaving business. This conglomerate
diversification strategy puts Energizer in direct competition with industry leader Gillette, which,
interestingly, owns the Duracell battery brand and has 70 percent global market share in the wet-
shaving business. So Gillette and Energizer are examples of highly diversified firms competing
aggressively against each other in both batteries and razors.
Six guidelines for when conglomerate diversification may be an especially effective strategy to pursue
are listed below:
 When an organization’s basic industry is experiencing declining annual sales and profits.
 When an organization has the capital and managerial talent needed to compete successfully in a
new industry.
 When an organization has the opportunity to purchase an unrelated business that is an attractive
investment opportunity.
 When there exists financial synergy between the acquired and acquiring firm (note that a key
difference between concentric and conglomerate diversification is that the former should be
based on some commonality in markets, products, or technology, whereas the latter should be
based more on profit considerations).
 When existing markets for an organization’s present products are saturated.
 When antitrust action could be charged against an organization that historically has concentrated on
a single industry.
4) Defensive Strategies
In addition to integrative, intensive, and diversification strategies, organizations also could pursue
retrenchment, divestiture, or liquidation.
a) Retrenchment
Retrenchment occurs when an organization regroups through cost and asset reduction to reverse
declining sales and profits. Sometimes called a turnaround or reorganizational strategy,
retrenchment is designed to fortify or strengthen an organization’s basic distinctive competence.
During retrenchment, strategists work with limited resources and face pressure from shareholders,
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employees, and the media. Retrenchment can entail selling off land and buildings to raise needed cash,
pruning product lines, closing marginal businesses, closing obsolete factories, automating processes,
reducing the number of employees, and instituting expense control systems.
Five guidelines for when retrenchment maybe an especially effective strategy to pursue are as follows:
 When an organization has a clearly distinctive competence but has failed to meet its objectives and
goals consistently over time.
 When an organization is one of the weaker competitors in a given industry.
 When an organization is plagued by inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
 When an organization has failed to capitalize on external opportunities, minimize external threats,
take advantage of internal strengths, and overcome internal weaknesses over time; that is, when the
organization’s strategic managers have failed (and possibly will be replaced by more competent
individuals).
 When an organization has grown so large so quickly that major internal reorganization is needed.

b) Divestiture
Selling a division or part of an organization is called divestiture. Divestiture often is used to raise
capital for further strategic acquisitions or investments. Divestiture can be part of an overall
retrenchment strategy to rid or liberate an organization of businesses that are unprofitable, that require
too much capital, or that do not fit well with the firm’s other activities. For example, Walt Disney
Company recently divested its Anaheim Angels baseball team, which ended Disney’s financially
disappointing ownership of the team that won the World Series in 2002. Disney is also trying to divest
its only other sports team, the Mighty Ducks of Anaheim of the National Hockey League, which is
unprofitable. Disney has had trouble merging professional sports teams into its entertainment empire.
Six guidelines for when divestiture may be an especially effective strategy to pursue are listed below:
 When an organization has pursued a retrenchment strategy and failed to accomplish needed
improvements.
 When a division needs more resources to be competitive than the company can provide.
 When a division is responsible for an organization’s overall poor performance.
 When a division is a misfit with the rest of an organization; this can result from radically different
markets, customers, managers, employees, values, or needs.
 When a large amount of cash is needed quickly and cannot be obtained reasonably from other
sources and

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 When government antitrust action threatens an organization.
c) Liquidation
Selling all of a company’s assets, in parts, for their tangible worth is called liquidation. Liquidation is
recognition of defeat and consequently can be an emotionally difficult strategy. However, it may be
better to cease operating than to continue losing large sums of money. For example, National Century
Financial Enterprises, Inc., based in Dublin, Ohio, liquidated in 2003 after operating under bankruptcy
for less than a year. National Century specialized in providing financing for healthcare companies,
several of which declared bankruptcy themselves soon after National Century ceased operations.
Thousands of small businesses in our country Ethiopia also liquidate annually without ever making the
news. It is tough to start and successfully operate a small business.
Three guidelines for when liquidation may be an especially effective strategy to pursue are:
 When an organization has pursued both a retrenchment strategy and a divestiture strategy, and
neither has been successful.
 When an organization’s only alternative is bankruptcy; liquidation represents an orderly and
planned means of obtaining the greatest possible cash for an organization’s assets. A company can
legally declare bankruptcy first and then liquidate various divisions to raise needed capital and
 When the stockholders of a firm can minimize their losses by selling the organization’s assets.
2.2 Michael Porter’s Five Generic Strategies
Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter’s
Competitive Strategy (Free Press, 1980), Competitive Advantage (Free Press, 1985), and Competitive
Advantage of Nations (Free Press, 1989). According to Porter, strategies allow organizations to gain
competitive advantage from three different bases: cost leadership, differentiation, and focus. Porter
calls these bases generic strategies.
Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers
who are price-sensitive. Two alternative types of cost leadership strategies can be defined. Type 1 is a
low-cost strategy that offers products or services to a wide range of customers at the lowest price
available on the market. Type 2 is a best-value strategy that offers products or services to a wide range
of customers at the best price-value available on the market; the best-value strategy aims to offer
customers a range of products or services at the lowest price available compared to a rival’s products
with similar attributes. Both Type 1 and Type 2 strategies target a large market.
Porter’s Type 3 generic strategy is differentiation, a strategy aimed at producing products and services
considered unique industrywide and directed at consumers who are relatively price-insensitive. Focus

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means producing products and services that fulfill the needs of small groups of consumers. Two
alternative types of focus strategies are Type 4 and Type 5. Type 4 is a low-cost focus strategy that
offers products or services to a small range (niche group) of customers at the lowest price available on
the market. Examples of firms that use the Type 4 strategy include Jiffy Lube International and Pizza
Hut, as well as local used car dealers and hot dog restaurants. Type 5 is a best-value focus strategy that
offers products or services to a small range of customers at the best price-value available on the market.
Sometimes called “focused differentiation,” the best-value focus strategy aims to offer a niche group
Of customers products or services that meet their tastes and requirements better than rivals’ products
do. Both Type 4 and Type 5 focus strategies target a small market. However, the difference is that Type
4 strategies offer products services to a niche group at the lowest price, whereas Type 5 offers
products/services to a niche group at higher prices but loaded with features so the offerings are
perceived as the best value. Examples of firms that use the Type 5 strategy include Cannondale (top-of-
the-line mountain bikes), Maytag (washing machines), and Lone Star Restaurants (steak house), as well
as bed-and-breakfast inns and local retail boutiques.
Porter’s five strategies imply different organizational arrangements, control procedures, and incentive
systems. Larger firms with greater access to resources typically compete on a cost leadership and/or
differentiation basis, whereas smaller firms often compete on a focus basis. Porter’s five generic
strategies are illustrated in Figure 5-3. Note that a differentiation strategy (Type 3) can be pursued with
either a small target market or a large target market. However, it is not effective to pursue a cost
leadership strategy in a small market because profits margins are generally too small. Likewise, it is not
effective to pursue a focus strategy in a large market because economies of scale would generally favor
a low-cost or best-value cost leaderships strategy to gain and/or sustain competitive advantage.

Porter stresses the need for strategists to perform cost-benefit analyses to evaluate “sharing
opportunities” among a firm’s existing and potential business units. Sharing activities and resources
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enhances competitive advantage by lowering costs or increasing differentiation. In addition to
prompting sharing, Porter stresses the need for firms to effectively “transfer” skills and expertise
among autonomous business units to gain competitive advantage. Depending on factors such as type of
industry, size of firm, and nature of competition, various strategies could yield advantages in cost
leadership, differentiation, and focus.

CHAPTERTHREE:
STRATEGY FORMULATION
3.1 WHAT IS VISION?
A vision statement is sometimes called a picture of your company in the future but it’s so much more
than that. Your vision statement is your inspiration, the framework for all your strategic planning. It is
critically essential that management and executive agree on the basic vision, which the organization
endeavors to accomplish over a period of time. A lucid and clear vision lays down a foundation on
which a sound mission statement can be built. A vision statement may apply to an entire company or to
a single division of that company. Whether for all or part of an organization, the vision statement
answers the question, “Where do we want to go?” Vision statement also answers the question “What do
we want to become?” What you are doing when creating a vision statement is articulating your dreams
and hopes for your business. It reminds you of what you are trying to build.

While a vision statement doesn’t tell you how you’re going to get there, it does set the direction for
your business planning. That’s why it’s important when crafting a vision statement to let your
imagination go and dare to dream – and why it’s important that a vision statement captures your
passion. Unlike the mission statement, a vision statement is for you and the other members of your
company, not for your customers or clients. When writing a vision statement, your mission statement
and your core competencies can be a valuable starting point for articulating your values. Be sure when
you’re creating one not to fall into the trap of only thinking ahead a year or two. Once you have one,
your vision statement will have a huge influence on decision making and the way you allocate
resources. A vision usually precedes the mission statement. It is usually short, concise and preferably
limited to one sentence. Organization-wide management involvement is advisable.
Vision defines the desired or intended future state of an organization or enterprise in terms of its
fundamental objective and/or strategic direction.
In short, vision statement;
 is a statement about a company’s long-term direction;

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  hope for the reality to be;
 desired situation opposing the existing situation;
 not realized in short or one’s life time;
 keeps an organization moving forward;
 should be a description of the desired outcome of the strategic plan;
Organizations need a vision based on a set of values that everyone in share. Vision is used to set out a
'picture' of the organization in the future. Vision is what keeps an organization moving forward even
against discouraging odds. Visions are broad, but point where to go.
Vision must be compelling, inspiring and make people want to join the organization. It is the banner,
around which the organization rallies, since it is the driving force that keeps the organization move
towards a feasible by inspired future conditions. If vision is vivid and meaningful enough, people can
do outstanding things to bring to realization. However, if it is lacking, no amount of resources will
induce people to move forward.
Vision Statement is a statement of the future ideal you are working towards. It outlines what the
organization wants to be, or how it wants the world in which it operates to be. It provides inspiration
and the basis for all the organization's planning. It concentrates on the future and provides clear
decision-making criteria.
3.1.1 Purpose of Vision
 Shared vision is an initial force that brings people together.
 Clearly articulated vision can provide energy, momentum and strengths to individuals.
 It inspires stakeholders.
 It is life-blood of an organization.
 It helps to see what you are working towards.
 It provides bases for partnership and incentive to work through internal conflict.
 It binds an organization together in times of crises.
Therefore, a firm’s vision is determined by asking the following questions:
 What would the country lose if our organization ceased to exist?
 Why do we want to dedicate our creative energies to this organization’s effort?
 What does our organization do to fill basic human needs?
 What does our organization do that impact the country?
A vision is the hope for “the reality to be” to replace “the reality that is”.
3.1.2 Features of an effective vision statement include:
 Clarity and lack of ambiguity
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  Vivid and clear picture
 Description of a bright future
 Memorable and engaging wording
 Realistic aspirations
 Alignment with organizational values and culture
To become really effective, an organizational vision statement must become assimilated into the
organization's culture. Leaders have the responsibility of communicating the vision regularly; creating
narratives that illustrate the vision; acting as role-models by embodying the vision; creating short-term
objectives compatible with the vision; and encouraging others to craft their own personal vision
compatible with the organization's overall vision.
3.2 WHAT IS BUSINESS MISSION?
Historically mission is associated with Christian religious groups; indeed, for many years, a missionary
was assumed to be a person on a specifically religious mission. The word "mission" dates from 1598,
originally of Jesuits sending "missio", Latin for "act of sending" members abroad.
Mission statement: is an enduring statement of purpose distinguishes one firm from another in the
same business. It is a declaration of a firm’s reason for existence. Mission is a well convincible
statement included fundamental and unique purpose which makes it different from other organization.
It identifies scope of it operation in terms of product offered and market served. Mission also means
what we are and what we do. A survey in a North America and in Europeans corporation reveal that
60% to 75% have written or formal and remaining has no written or formal mission.

Mission Statements are also known as: Creed statement; Statement of purpose; Statement of
philosophy; and Statement of business principles. Mission Statements reveal what an organization
wants to be and whom it wants to serve and how? Mission Statements are essential for effectively
establishing objectives and formulating strategies.
Mission statement is;
 general statement about the basic purpose of the organization
 the description of an organization’s reasons for existence,
 fundamental purpose Clarifies/ declares the purpose
 defines company’s business; Product/ market; Territory/ geography
 Is the guiding principle that drives the processes of goal and action plan formulation, “a
pervasive, although general, expression of the philosophical objectives of the enterprise.”

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  Should focus on “long – range economic potentials, attitudes toward customers, product and
service quality, employee relations, and attitudes toward owners.”
 Provides identity, continuity of purpose, and overall definition, and
 Should convey the following categories of information.
1. Precisely why the organization exists, its purpose, in terms of
 its basic product or service,
 its primary markets, and
 its major production technology.
2. The moral and ethical principles that will shape the philosophy and character of the
organization.
3. The ethical climate within the organization.
Thus mission outlines the firm’s identity and provides a guide for shaping strategies as all organization
A mission statement is a statement of purpose. It will usually answer in a creative paragraph or two the
following questions: What is the organization? What are core beliefs and commitments? Who is the
service user? What is their need? What will be the benefit to them from this service? What will the
service do to provide this benefit?
Mission statements often contain the purpose and aim of the organization; the organization's primary
stakeholders: clients, stockholders, congregation, etc. responsibilities of the organization toward these
stakeholders; products and services offered.
A mission statement is like a flag the organization can hold up that gives the essence of what it is
about. Some mission statements are complex, long, and very broad; where as some mission statements
are simple and direct. According to Vern McGinis, a mission should:
 define what the company is
 define what the company aspires to be
 limited to exclude some ventures
 broad enough to allow for creative growth
 distinguish the company from all others
 serve as framework to evaluate current activities
 stated clearly so that it is understood by all
3.3 CHARACTERISTICS OF A GOOD MISSION STATEMENTS
In order to be effective, a mission statement should possess the following seven characteristics.
Mission statement should be

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  Feasible: a mission should always aim high but it should not be an impossible statement. In
addition it should be realistic and achievable. Its followers must find it to be credible. But
feasibility depends on the resources available to work towards a mission.
 Precise: should not be so narrow to restrict the organization’s activities nor should it be too broad
to make itself meaningless.
 Clear: should be clear enough to lead to action and should not be a high sounding set platitudes
meant for publicity purposes.
 Motivating: should be motivating for members of the organization or being its customers.
 Distinctive: the indiscriminate one (random, arbitrary) is likely to have little impact. If all defined
their mission in a similar fashion, there would not be much of a difference among them. if defined
as providing value for money, for years it created an important distinction in the public mind.
 Indicate major components of strategy: along with the organizational purpose should indicate
the major components of the strategy to be adopted.
 Indicate how objectives are to be accomplished: Besides indicating the broad strategies to be
adopted, it should also provide clues regarding the manner in which the objectives are to be
accomplished.
Strategic vision Vs. mission
A strategic vision concerns A mission statement focuses on
 a firms future business path  current business activity
 Where are we going?  Who we are & what we do?
 Market to be pursued  Current product & service offerings
 Future technology-product-customer focused  Customer needs being served
 Kind of company that management is trying to  Technological & business capabilities
create
3.4 COMPONENTS OF A MISSION STATEMENT
Mission statements can and do vary in length, content, format, and specificity. Most practitioners and
academicians of strategic management consider an effective statement to exhibit nine characteristics or
components. Because a mission statement is often the most visible and public part of the strategic
management process, it is important that it includes all of these essential components. Components and
corresponding questions that a mission statement should answer are given here.

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  Customer: Who are the firm’s customers?
 Products or services: What are the firm’s major products or services?
 Markets: Geographically, where does the firm compete?
 Technology: Is the firm technologically current?
 Concern for survival, growth, and profitability: Is the firm committed to growth and
financial soundness?
 Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
 Self-concept: What is the firm’s distinctive competence or major competitive advantage?
 Concern for public image: Is the firm responsive to social, community, and environmental
concerns?
 Concern for employees: Are employees a valuable asset of the firm?
Examples:
Pepsi cola mission statement: “. . . . is to increase the value of our shareholders’ investment. We do
this through sales growth, cost controls, and wise investment resources. We believe our commercial
success depends upon offering quality and value to our consumers and customers; providing
products that are safe, wholesome, economically efficient and environmentally sound; and
providing a fair return to our investors while adhering to the highest standards of integrity.”
Evaluate, using the elements of mission statement.
3.5 THE PROCESS OF DEVELOPING A MISSION STATEMENT
A clear mission is needed before alternative strategies can be formulated and implemented. Mission is
important to have as broad a range of participation as possible among managers in developing the
mission.

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As indicated in the strategic-management model, a clear mission statement is needed before alternative
strategies can be formulated and implemented. It is important to involve as many managers as possible
in the process of developing a mission statement, because through involvement, people become
committed to an organization.
A widely used approach to developing a mission statement is first to select several articles about
mission statements and ask all managers to read these as background information. Then ask managers
themselves to prepare a mission statement for the organization. A facilitator, or committee of top
managers, then should merge these statements into a single document and distribute this draft mission
statement to all managers. A request for modifications, additions, and deletions is needed next, along
with a meeting to revise the document. To the extent that all managers have input into and support the
final mission statement document, organizations can more easily obtain managers' support for other
strategy formulation, implementation, and evaluation activities. Thus the process of developing a
mission statement represents a great opportunity for strategists to obtain needed support from all
managers in the firm. During the process of developing a mission statement, some organizations use
discussion groups of managers to develop and modify the mission statement. Some organizations hire
an outside consultant or facilitator to manage the process and help draft the language. Sometimes an
outside person with expertise in developing mission statements and unbiased views can manage the
process more effectively than an internal group or committee of managers. Decisions on how best to
communicate the mission to all managers, employees, and external constituencies of an organization
are needed when the document is in final form. Some organizations even develop a videotape to
explain the mission statement and how it was developed.
Chief executive plays a major role in formulating a mission statement both formally and informally.
Mission statements could be formulated on the basis of the organizational purpose that the
entrepreneur decides in the initial stages of an organizations growth. Major strategists could also
contribute to the development of a mission statement. They do this informally by lending a hand in the
creation of a particular corporate identity or formally through discussions and the writing down of a
mission statement.
A mission statement once formulated, should serve the organizations for many years. But mission
statement changes when the external environment changes drastically; firms diversify and increase in
their scope of activities; the firm introduces new way of doing business (BPR); top management
decides to change the direction of the firm.
3.6 IMPORTANCE OF MISSION STATEMENTS
 Unanimity of purpose within the organization
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  Basis for allocating resources
 Establish organizational climate
 Focal point for direction
 Translate objectives into work structure
 Cost, time and performance parameters assessed and controlled
 Most companies are now getting used to the idea of using mission statements.
 Small, medium and large firms in Pakistan are also realizing the need and adopting mission
statements.

CHAPTER FOUR
EXTERNAL AND INTERNAL ENVIRONMENTAL ANALYSIS

4.1 THE NATURE OF AN EXTERNAL AUDIT

The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and
threats that should be avoided. As the term finite suggests, the external audit is not aimed at developing
an exhaustive list of every possible factor that could influence the business; rather, it is aimed at
identifying key variables that offer actionable responses. Firms should be able to respond either
offensively or defensively to the factors by formulating strategies that take advantage of external
opportunities or that minimize the impact of potential threats. Figure below illustrates how the external
audit fits into the strategic management process.
4.1.1.The Process of Performing an External Audit
The process of performing an external audit must involve as many managers and employees as
possible. As emphasized in earlier discussions, involvement in the strategic-management process can
lead to understanding and commitment from organizational members. Individuals appreciate having the
opportunity to contribute ideas and to gain a better understanding of their firm's industry, competitors,
and markets. To perform an external audit, a company first must gather competitive intelligence and
information about social, cultural, demographic, environmental, economic, political, legal,
governmental, and technological trends. Individuals can be asked to monitor various sources of
information such as key magazines, trade journals, and newspapers. These persons can submit periodic
scanning reports to a committee of managers charged with performing the external audit. This approach
provides a continuous stream of timely strategic information and involves many individuals in the
external-audit process. The Internet provides another source for gathering strategic information, as do
corporate, university, and public libraries. Suppliers, distributors, salespersons, customers, and
competitors represent other sources of vital information.
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Once information is gathered, it should be assimilated and evaluated. A meeting or series of meetings
of managers is needed to collectively identify the most important opportunities and threats facing the
firm. These key external factors should be listed on flip charts or a blackboard. A prioritized list of
these factors could be obtained by requesting all managers to rank the factors identified, from 1 for the
most important opportunity/threat to 20 for the least important opportunity/threat. These key external
factors can vary over time and by industry. Relationships with suppliers or distributors are often a
critical success factor. Other variables commonly used include market share, breadth of competing
products, world economies, foreign affiliates, proprietary and key account advantages, price
competitiveness, technological advancements, population shifts, interest rates, and pollution abatement.
Freund emphasized that these key external factors should be:
 Important to achieving long-term and annual objectives;
 Measurable;
 Applicable to all competing firms; and
 Hierarchical in the sense that some will pertain to the overall company and others will be more
narrowly focused on functional or divisional areas.
 A final list of the most important key external factors should be communicated and distributed
widely in the organization. Both opportunities and threats can be key external factors.
4.1.1.Key External Forces
External forces can be divided into five broad categories: Economic forces; Social,
cultural, demographic, and environmental forces; Political, governmental, and
legal forces; Technological forces; and Competitive forces. External trends and
events significantly affect all products, services, markets, and organizations in the
world. Changes in external forces translate into changes in consumer demand for
both industrial and consumer products and services. External forces affect the
types of products developed, the nature of positioning and market segmentation
strategies, the types of services offered, and the choice of businesses to acquire
or sell. In addition, external forces directly affect both suppliers and distributors.
Identifying and evaluating external opportunities and threats enables
organizations to develop a clear mission, to design strategies to achieve long-
term objectives, and to develop policies to achieve annual objectives.
1. Economic Forces:
It refers to the nature and direction of the economy in which the business operates.
Because consumption patterns are affected by the relative affluence of various market

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segments, each firm must understand economic trends in the segments that affect its
industry. Economic factors have a direct impact on the potential attractiveness of various
strategies. For example, as interest rates rise, then funds needed for capital expansion
become more costly or unavailable. Also, as interest rates rise, discretionary income
declines, and the demand for discretionary goods falls. As stock prices increase, the
desirability of equity as a source of capital for market development increases. Also, as
the market rises, consumer and business wealth expands. A summary of economic
variables that often represent opportunities and threats for organizations is provided in
Table given below. Firms that do not mobilize and empower their managers and
employees to identify, monitor, forecast, and evaluate key external forces may fail to
anticipate emerging opportunities and threats and, consequently, may pursue ineffective
strategies, miss opportunities, and invite organizational demise. Firms not taking
advantage of the Internet are falling behind technologically.
Key Economic Variables to Be Monitored
 Availability of credit  Stock market trends
 Level of disposable income  Foreign countries' economic
 Propensity of people to spend conditions
 Interest rates  Import/export factors
 Inflation rates  Demand shifts for different
 Money market rates categories of goods and services
 Federal government budget  Income differences by region and
deficits consumer groups
 Gross domestic product trend  Price fluctuations
 Consumption patterns  Exportation of labor and capital
 Unemployment trends from the United States
 Worker productivity levels  Monetary policies
 Value of the dollar in world  Fiscal policies, Tax rates
markets
They affect the economic factors and affect the customers buying behaviors. The customers are more
conscious about the economic changes and responds according to the changes in key variable factors.
So, any change in the price affects the customer buying trend directly.

As far as the exportation of capital and labor is concerned, over the last 300 years Pakistan has seen a
tremendous exportation of labor. Capital is not only left a vacuum on organization. Monetary policies
and Fiscal policies are changed every year. The person or businesses engaged in business for profit

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making or non-profit organizations always have to keep an eye on the economic structure of the
countries. As far as the tax rates are concerned, government also changes the tax rate with the passage
of time. So it affects the economic forces. ECC and OPEC policies and LDC policies have also a major
effect on the economic factors.
2. Social, Cultural, Demographic, and Environmental Forces; social forces involve the beliefs,
values, attitudes, opinions and life styles of those in firm’s external environment as developed from
ecological, demographic, religious, educational, and ethnic conditioning. Social, cultural,
demographic, and environmental changes have a major impact upon virtually all products
(Preferences change), services, markets, and customers. Small, large, for-profit and nonprofit
organizations in all industries are being staggered and challenged by the opportunities and threats
arising from changes in social, cultural, demographic, and environmental variables. In every way,
the United States is much different today than it was yesterday, and tomorrow promises even
greater changes. We may use the following analysis in understanding the Social, Cultural,
Demographic, and Environmental Forces: Consider Pakistan—
i. Population growing older
ii. Increase in younger population
iii. Ethnic balance changing
iv. Gap between rich and poor widening
Key Social, Cultural, Demographic, and Environmental Variables

 Childbearing rates  Ethical concerns

 Number of special interest groups  Attitudes toward saving
 Number of marriages  Sex roles
 Number of divorces  Attitudes toward investing
 Number of births
 Racial equality
 Number of deaths
 Immigration and emigration rates  Use of birth control
 Social security programs  Average level of education
 Life expectancy rates  Government regulation
 Per capita income
 Attitudes toward retirement
 Location of retailing, manufacturing,
and service businesses  Attitudes toward leisure time
 Attitudes toward business  Attitudes toward product quality
 Lifestyles
 Attitudes toward customer service
 Traffic congestion
 Inner-city environments  Pollution control
 Average disposable income  Attitudes toward foreign peoples
 Trust in government
 Energy conservation
 Attitudes toward government
 Attitudes toward work  Social programs
 Buying habits  Number of churches

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  Number of church members  Number of women and minority
 Social responsibility workers
 Attitudes toward careers  Number of high school and college
 Population changes by race, age, sex, graduates by geographic area
and level of affluence  Recycling
 Attitudes toward authority  Waste management
 Population changes by city, county,  Air pollution
state, region, and country  Water pollution
 Value placed on leisure time  Ozone depletion
 Regional changes in tastes and  Endangered species
preferences
Ethnic balance changes due to the migration of the people from different areas to
different areas. This affects the ethical behavior very much. As the traditions and norms
are very much different in different areas of Pakistan, therefore the behavior of the
migrated people also have a major affect on the behavior of the resident people. Due to
the increased gap between rich and the poor, there is a tremendous change in the social
behavior of the people.
3. Political forces
The direction and stability of political factors is a major consideration for managers in
formulating company strategy. Political forces define the legal and otherwise governing
parameters in which the firm must or may wish to operate. Political considerations are
placed on each company through fair-trade decisions, antitrust laws, tax programs,
minimum wage legislation, pollution and pricing policies, administrative jawboning, and
many other actions aimed at protecting the consumer and the environment. These laws,
practices, and regulations are most commonly restrictive, and as a result, they tend to
reduce a firm’s potential profits. However, other political actions are designed to benefit
and protect a company. Examples include patent laws, government subsidies, and
product research grants. Thus, political forces are both a limitation and a benefit to the
firm they influence.
The Key variables of Political forces to be monitored include;

 Government regulations or  Political action committees

deregulations  Voter participation rates
 Changes in tax laws  Number, severity, and location of
 Special tariffs government protests
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 Number of patents  Import-export regulations
 Changes in patent laws  Government fiscal and monetary
 Environmental protection laws policy changes
 Level of defense expenditures  Political conditions in foreign
 Legislation on equal employment countries
 Level of government subsidies  Special local, state, and federal laws
 Antitrust legislation  Lobbying activities
 Sino-American relationships  Size of government budgets
 Russian-American relationships  World oil, currency, and labor markets
 European-American relationships  Location and severity of terrorist
 African-American relationships activities

 Local, state, and national elections World oil situation makes a difference to us. So,
either the issues is related to currency, oil or labor they should be monitored as key
external variables.
4. Technological forces
Technology can be simply defined as the application of knowledge to practical solutions
or tasks. To avoid obsolescence and promote innovation, a firm must be aware of
technological changes that might influence its industry. Creative technological
adaptations can affect planning in that new products may be suggested or existing ones
improved; manufacturing and marketing techniques may also improved.
5. Competitive forces
By assessing its competitive position a firm can improve its chances of designing
strategies that optimize environmental opportunities. Development of competitive
profiles enables a firm to more accurately forecast its short and long-term growth and
profit potentials. Although, the exact criteria used in constructing a competitor’s profile
are largely determined by situational factors in the environment, the following are often
included: market share; breadth of product line; effectiveness of sales distribution;
proprietary and key-account advantages; price competitiveness; advertising and
promotion effectiveness; location and age of facility; capacity and productivity;
experience; raw material costs; financial position; relative product quality R&D
advantages/position; caliber of personnel; and general images.
Good competitive intelligence in business is one of the key’s to success. The more
information and knowledge a firm can obtain about its competitors, the more likely it can
formulate and implement effective strategies because major competitor’s strength may

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represent key threats and major competitor’s weakness can represent external
opportunities.
Key Questions about Competitors
 What are the major competitors' strengths?
 What are the major competitors' weaknesses?
 What are the major competitors' objectives and strategies?
 How will the major competitors most likely respond to current economic, social,
cultural, demographic, environmental, political, governmental, legal, technological,
and competitive trends affecting our industry?
 How vulnerable are the major competitors to our alternative company strategies?
 How vulnerable are our alternative strategies to successful counterattack by our
major competitors?
 How are our products or services positioned relative to major competitors?
 To what extent are new firms entering and old firms leaving this industry?
 What key factors have resulted in our present competitive position in this
Industry?
 How have the sales and profit rankings of major competitors in the industry
changed over recent years? Why have these rankings changed that way?
 What is the nature of supplier and distributor relationships in this industry?
 To what extent could substitute products or services be a threat to competitors in
this industry?
4.2. PORTER’S FIVE FORCES’ MODEL OF INDUSTRY ANALYSIS
Michael E. Porter of the Harvard School of Business Administration has developed a
framework that helps managers for analyzing the nature and extent of competition within
an industry. He says that there are five competitive forces, which determine the degree
of competition within an industry. And the framework is known as the Porter’s five forces
model. This model focuses on five forces that shape competition within an industry.
The Porter’s “Five-Force” competition Model: - A key Analytical Tool

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Porter argues that
 The stronger each of these forces, the more limited is the ability of established organizations to
raise prices and earn greater profits.
 Within porter’s framework, a strong competitive force can be regarded as a threat since it
depresses success.
 A weak competitive force can be viewed as an opportunity, for it allows an organization to get
better success. Because of factors beyond an organization direct control, such as industry
evolution, the strength of the five forces may change through time. In such circumstances, the
task facing strategic managers is to recognize opportunities and threats as they arise and to
formulate appropriate strategic responses.
 In addition, it is possible for organizations, through its strategy, to alter the strength of one or
more of the five forces to its advantages.
1. The Threat of New Entrants to the Industry
A new entrant into industry represents a competitive threat to existing firms. It adds new production
capacity and potential to erode the market share of the existing industry. New entrants into the industry
are potential competitors. Potential competitors are organizations that currently are not competing in an
industry but have the capability to do so if they choose.
Existing (established) organizations try to discourage potential competitors from entering, since the
more organizations enter an industry, the more difficult it becomes for established organizations to hold
their share of the market and to generate success. Thus a high risk of entry by potential competitors
represents a threat to the profitability of established organizations.

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On the other hand, if the risk of new entry is low, established organizations could take advantage of this
opportunity to raise prices and earn greater returns.
The strength of the competitive forces of potential rivals is largely a function of the height of barriers to
entry. The concept of barriers to entry implies that there are significant costs in joining an industry.
The greater the costs that potential competitors must bear, the greater are the barriers to entry. High
entry barriers keep potential competitors out of an industry even when industry returns are high.
The principal sources of barriers to entry are:
 Economies of scale
 Absolute cost advantage
 Brand loyalty and switching cost
 Capital requirement
 Product differentiation
 Access to distribution channels
 Government and legal barriers
 Retaliation by established producer
When this risk is low, established organizations can charge higher prices and earn greater profits than
would have been possible otherwise clearly, then, it is the interest of organizations to pursue strategies
consistent with these aims. Indeed, empirical evidence suggests that the height of barriers to entry is
the most important determinant of success rates in an industry.
2. The Threat of Substitute Products
Here, the products of industries that serves similar consumer needs as those of the industry being
analyzed.
A substitute may be regarded as something, which meets the same needs as the product in any industry.
The extent of threat from particular substitute depends on two factors.
• The extent to which price and performance of this substitute can match industries product. If the price
and performance of existing product rise above that of the substitute product, customer tends to switch
to the substitute.
• The willingness of buyers to switch to the substitute. Buyer will be more willing to change substitute
if switching costs are low

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For example:
 Organization in the coffee industry competes indirectly with those in the tea and soft-
drink industries. (All three industries serve consumer needs for drinks).
The extent to which substitutes limit price and profit depends on:
 The buyers propensity to substitute
 Relative price and performance of substitutes
The existence of close substitutes presents a strong competitive threat, limiting the price an
organization can charge and thus its success.
However, if an organization’s products have few close substitutes (that is, if substitutes are
weak competitive force), then, other things being equal the organizations has the opportunity to
raise price and earn additional profits.
3. The Bargaining Power of Buyers
Buyers of an industry product can exert bargaining power over that industry by forcing prices
down, by reducing the amount of good they purchased from the industry, and by demanding
better quality for the same price.
The strength of buying power that firms face from their customers depends on two sets of
factors;
 Buyer’s price sensitivity and
 Relative bargaining power.
The extents/ factors to which buyers are sensitive to the prices changed by the firms in an
industry depend on:
 Cost of product relative to total costs
 Product differentiation
 Competition between buyers
Some factors that influence the bargaining power of buyers relative to that of seller are:
 Size of concentration of buyers relative to producers
 Buyers’ switching cost
 Buyers’ information
 Buyers’ ability to backward integration
Buyers can be viewed as a competitive threat when they force down prices or when they demand
higher quality and better service (which increases operating costs).
Alternatively, weak buyers give an organization the opportunity to raise prices and earn greater
returns.
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An industry’s buyers tend to be powerful relative to the firms if they are buying from when the
conditions listed below apply (these factors also apply to a group of consumers and to industrial
and commercial buyers):
 Buyers are concentrated as in cooperatives, or they account for a large volume of purchases.
 Products are undifferentiated or standardized.
 The seller’s component represents a large portion of the total cost of the buyer’s finished
product. When the seller’s product has a small cost share, buyers tend to be less prices
sensitive.
 Buyers are earning low profits and are thus more price sensitive than if they were highly
profitable.
 The sellers’ product is not critical in one way or another to the buyer. If it is critical to the
quality, price, appeal, etc,, of an industrial buyer group’s finished product, for example,
then the sellers will have power over the buyers.
 There is a threat that buyers can integrate backward to make the suppliers’ product.
4. The Bargaining Power of Suppliers
Providers of goods and services to an industry have power over their customers through their
ability to set price and control quality, delivery time, and order quantity.
If these customers cannot successfully playoff one supplier against another to protect themselves,
then the industry’s profits can be drained off by suppliers.
The bargaining power of suppliers that can be viewed as a threat when they are able to force up
the price that an organization must pay for input or reduce the quality of goods supplied, thereby
depressing the organization’s success.
Alternatively, week supplies give a company the opportunity to force down prices and demand
higher quality.
The power of suppliers is high in the following situations:
 There are few suppliers who are more concentrated than their customers
 Suppliers’ product is differentiated
 Customers switching costs are high
 There is little pressure on suppliers to protect themselves from substitutes or
replacements for their product
 When suppliers have the capability to integrate forward. A supplier of engines to a
manufacturer of lawnmowers would have a strong bargaining position if the mower
company realized the engine supplier’s ability to make the whole lawnmower.
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5. Rivalry among Established/Existing Organizations
It describes the intensity of rivalry among competitors or established organizations within in the
industry. Some industries appear “sleepy” because of a low level of rivalry among competitors
(example the manufacturers of fasteners, nuts and bolts and other devices used to connect the
components of products). On the other hand, some industries are characterized by a high level of
competitive activity (example, the brewing industry has many competitors who battle fiercely
with each other over market share).
If this competitive force is weak, organizations have an opportunity to raise prices and earn
grater profits. But if it is strong, significant price competition, including price wars, may result
from the intense rivalry. Price competition limits profitability by reducing the margins that can
be earned on sales.
Factors that play important role in determining the nature and intensity of competition between
established firms are:
 Concentration
 Diversity of competitors
 Product differentiation
 Excess capacity
 Exit barriers and
 Cost conditions
Generally, the factors that tend to precipitate intense rivalries in an industry are:
 Relative equilibrium in size and power among a large number of competitors
 Slow or stagnant growth of industry demand such that expansion of one competitor
would come at the expense of others
 Undifferentiated products and low switching costs
 High fixed costs or product Perishability
 Even small capacity additions generate large volume increases which raise pressure to cut
prices
 High exit barriers causing firms to bear low or negative returns on investment
 Wide spectrum of strategies and types of firms which generates confusion and frequent
“collision” in the market. The opposite case might be an oligopoly like the automobile
industry where most actions are reactions to another competitor and rivalry is somewhat
orderly, albeit intense.

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Intense rivalry among established organizations constitutes a strong threat to success. And it is
largely a function of three factors.
 Industry competitive structure
 Demand conditions and
 The height of exit barriers in the industry
Competitive structure
Competitive structure refers to the number and size distribution of organizations in an industry.
Different competitive structures have different implications for rivalry. Structures vary from
fragmented up to consolidated.
The continuum of industry structures
Demand conditions
Industry demand conditions are another determinant of the intensity of rivalry among established
companies. Growing demand tends to moderate competition by providing greater room for
expansion.
Demand grows when the market as a whole is growing through the addition of new consumers or
when existing consumers are purchasing more of an industry’s product. When demand is
growing, companies can increase revenues without taking market share away from other
companies. Thus growing demand gives an organization a major opportunity to expand
operations.
Declining demand results in more competition as organization fight to maintain revenues and
market-share. Demand declines when consumers are leaving the market place or when each
consumer is buying less. When demand is declining, an organization can attain growth only by
taking market share away from other organization. Thus, declining demand constitutes a major
threat, for it increase the extent of rivalry between established organizations.
Exit barrier
Exit barrier are a serious competitive threat when industry demand is declining. They are
economic, strategic, and emotional factors that keep organization competing in an industry even
when returns are low.
If exit barriers are high, organization can become locked into an unfavorable industry and excess
productive capacity can result. In turn, excess capacity tends to lead to intensified price
competition, with organizations cutting prices in an attempt to obtain the orders needed to utilize
their idle capacity.
Common exit barriers include the following;
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  Investments in plant and equipment that have no alternative uses and cannot be sold off.
If the organization wishes to leave the industry, it has to write off the book value of these
assets.
 High fixed costs of exit, such as severance pay to workers who are being made
redundant.
 Emotional attachments to an industry, as when an organization is unwilling to exit from
its original industry for sentimental reasons.
 Strategic relationship between business units. For example, within a multi-industry
organization, a low-return unit may provide vital inputs from a high return unit based in
another industry. Thus the organization may be unwilling to exit from the low-return
units.
 Economic dependence on the industry, as when an organization is not diversified and so
relies on the industry for its income.
Interactions among these factors
The extent of rivalry among established organization within an industry is a function of
competitive structure, demand conditions, and exit barriers. The interaction of these factors
determines the extent of rivalry. These issues are summarized as follows: Demand conditions
and exit barriers as determinants of opportunities and threats in consolidated industry
Demand Conditions
Demand decline Demand growth
High threat of excess Opportunities to raise prices through
capacity and price wars. price leadership and to expand
operations.
Moderate threat of excess Opportunities to raise prices through
capacity and price-wars price leadership to expand operations.

When demand growth is high, the environment of consolidated industry may be favorable. When
demand is declining and exit barriers are high, the probable emergency of excess capacity is
likely to causes to price wars. Thus, depending on the interaction between these various factors,
the extent of rivalry among established organization in a consolidated industry might constitute
an opportunity or a threat.
The External Factor Evaluation (EFE) Matrix

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An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate
economic, social, cultural, demographic, environmental, political, governmental, legal,
technological, and competitive information.
Illustrated in Table 3-12, the EFE Matrix can be developed in five steps:
1. List key external factors as identified in the external-audit process. Include a total of 15 to 20
factors, including both opportunities and threats, that affect the firm and its industry. List the
opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and
comparative numbers whenever possible.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important).
The weight indicates the relative importance of that factor to being successful in the firm’s
industry. Opportunities often receive higher weights than threats, but threats can receive high
weights if they are especially severe or threatening. Appropriate weights can be determined by
comparing successful with unsuccessful competitors or by discussing the factor and reaching a
group consensus. The sum of all weights assigned to the factors must equal 1.0.
3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the
firm’s current strategies respond to the factor, where 4 = the response is superior, 3 = the
response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are
based on effectiveness of the firm’s strategies. Ratings are thus company-based, whereas the
weights in Step 2 are industry-based. It is important to note that both threats and opportunities
can receive a 1, 2, 3, or 4.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.
Regardless of the number of key opportunities and threats included in an EFE Matrix, the highest
possible total weighted score for an organization is 4.0 and the lowest possible total weighted
score is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0 indicates that
an organization is responding in an outstanding way to existing opportunities and threats in its
industry. In other words, the firm’s strategies effectively take advantage of existing opportunities
and minimize the potential adverse effects of external threats. A total score of 1.0 indicates that
the firm’s strategies are not capitalizing on opportunities or avoiding external threats. An
example of an EFE Matrix is provided in Table 3-12 for a local ten-theatre cinema complex.

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 Ch 3 -44

Note that the most important factor to being successful in this business is “Trend toward healthy
eating eroding concession sales” as indicated by the 0.12 weight. Also note that the local cinema
is doing excellent in regard to handling two factors, “TDB University is expanding 6 percent
annually” and “Trend toward healthy eating eroding concession sales.” Perhaps the cinema is
placing flyers on campus and also adding yogurt and healthy drinks to its concession menu. Note
that you may have a 1, 2, 3, or 4 anywhere down the Rating column. Note also that the factors
are stated in quantitative terms to the extent possible, rather than being stated in vague terms.
Quantify the factors as much as possible in constructing an EFE Matrix. Finally, note that the
total weighted score of 2.58 is above the average (midpoint) of 2.5, so this cinema business is
doing pretty well, taking advantage of the external opportunities and avoiding the threats facing
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the firm. There is definitely room for improvement, though, because the highest total weighted
score would be 4.0. As indicated by ratings of 1, this business needs to capitalize more on the
“two new neighborhoods nearby” opportunity and the “movies rented from Time Warner” threat.
Note also that there are many percentage-based factors among the group. Be quantitative to the
extent possible! Note also that the ratings range from 1 to 4 on both the opportunities and threats.
The Competitive Profile Matrix (CPM)
The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular
strengths and weaknesses in relation to a sample firm’s strategic position. The weights and total
weighted scores in both a CPM and an EFE have the same meaning. However, critical success
factors in a CPM include both internal and external issues; therefore, the ratings refer to strengths
and weaknesses, where 4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 =
major weakness. The critical success factors in a CPM are not grouped into opportunities and
threats as they are in an EFE.
In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample
firm. This comparative analysis provides important internal strategic information. A sample
Competitive Profile Matrix is provided in Table 3-13. In this example, the
two most important factors to being successful in the industry are “advertising” and “global
expansion,” as indicated by weights of 0.20. If there were no weight column in this analysis, note
that each factor then would be equally important. Thus, having a weight column makes for a
more robust analysis, because it enables the analyst to assign higher and lower numbers to
capture perceived or actual levels of importance. Note in Table 3-13 that Company 1 is strongest
on “product quality,” as indicated by a rating of 4, whereas Company 2 is strongest on
“advertising.” Overall, Company 1 is strongest, as indicated by the total weighted score of 3.15.

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 Ch 3 -48

Other than the critical success factors listed in the example CPM, factors often included in this
analysis include breadth of product line, effectiveness of sales distribution, proprietary or patent
advantages, location of facilities, production capacity and efficiency, experience, union relations,
technological advantages, and e-commerce expertise. A word on interpretation: Just because one
firm receives a 3.2 rating and another receives a 2.80 rating in a Competitive Profile Matrix, it
does not follow that the first firm is 20 percent better than the second. Numbers reveal the
relative strengths of firms, but their implied precision is an illusion. Numbers are not magic. The
aim is not to arrive at a single number, but rather to assimilate and evaluate information in a
meaningful way that aids in decision making.
2. INTERNAL ASSESSMENT
THE NATURE OF INTERNAL AUDIT
Involvement in performing an internal strategic-management audit provides vehicle for
understanding nature and effect of decisions in other functional business areas of the firm. All
organizations have strengths and weaknesses in the functional areas of business. No enterprise is
equally strong or weak in all areas. Internal strengths/weaknesses, coupled with external
opportunities/threats and a clear statement of mission, provide the basis for establishing
objectives and strategies. Objectives and strategies are established with the intention of
capitalizing upon internal strengths and overcoming weaknesses.

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 Internal audit creates an environment of coordination and understanding among managers from
all functional areas. Internal audit is parallels process of external audit. It gathers & assimilates
information from:
 Management, Marketing, Finance/accounting, Production/operations, Research &
development and Management information systems(MIS)
1.1. KEY INTERNAL FORCES;
It is not possible in a business policy text to review in depth all the material presented in courses
such as marketing, finance, accounting, management, computer information systems, and
production/operations; there are many sub areas within these functions, such as customer service,
warranties, advertising, packaging, and pricing under marketing. For different types of
organizations, such as hospitals, universities, and government agencies, the functional business
areas, of course, differ. In a hospital, for example, functional areas may include cardiology,
hematology, nursing, maintenance, physician support, and receivables. Functional areas of a
university can include athletic programs, placement services, housing, fund raising, academic
research, counseling, and intramural programs. Within large organizations, each division has
certain strengths and weaknesses.
A firm's strengths that cannot be easily matched or imitated by competitors are called distinctive
competencies. Building competitive advantages involves taking advantage of distinctive
competencies. Strategies are designed in part to improve on a firm's weaknesses, turning them
into strengths, and may be even into distinctive competencies. Some researchers emphasize the
importance of the internal audit part of the strategic-management process by comparing it to the
external audit.
1.2. THE PROCESS OF PERFORMING AN INTERNAL AUDIT
The process of performing an internal audit closely parallels the process of performing an
external audit. Representative Managers and employees from throughout the firm need to be
involved in determining a firm's strengths and weaknesses. The internal audit requires gathering
and assimilating information about the firm's management, marketing, finance/accounting,
production/operations, research and development (R&D), and computer information systems
operations.
Compared to the external audit, the process of performing an internal audit provides more
opportunity for participants to understand how their jobs, departments, and divisions fit into the
whole organization. This is a great benefit because managers and employees perform better when
they understand how their work affects other areas and activities of the firm. For example, when
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marketing and manufacturing managers jointly discuss issues related to internal strengths and
weaknesses, they gain a better appreciation of issues, problems, concerns, and needs in all the
functional areas. In organizations that do not use strategic management, marketing, finance, and
manufacturing managers often do not interact with each other in significant ways. Performing an
internal audit, thus, is an excellent vehicle or forum for improving the process of communication in
the organization. Communication may be the most important word in management. Performing an
internal audit requires gathering, assimilating, and evaluating information about the firm's
operations. Critical success factors, consisting of both strengths and weaknesses, can be identified
and prioritized in the manner discussed later chapters.
The development of conclusions on the 10 to 20 most important organizational strengths and
weaknesses can be, as any experienced manager knows, a difficult task, when it involves managers
representing various organizational interests and points of view. Developing a 20-page list of
strengths and weaknesses could be accomplished relatively easily, but a list of the 10 to 15 most
important ones involves significant analysis and negotiation. This is true because of the judgments
that are required and the impact which such a list will inevitably have as it is used in the
formulation, implementation, and evaluation of strategies.
Strategic management is a highly interactive process that requires effective coordination among
management, marketing, finance/accounting, production/operations, R&D, and computer
information systems managers. Although the strategic-management process is overseen by
strategists, success requires that managers and employees from all functional areas work together to
provide ideas and information. Financial managers, for example, may need to restrict the number of
feasible options available to operations managers, or R&D managers may develop such good
products that marketing managers need to set higher objectives. A key to organizational success is
effective coordination and understanding among managers from all functional business areas.
Through involvement in performing an internal strategic-management audit, managers from
different departments and divisions of the firm come to understand the nature and effect of
decisions in other functional business areas in their firm. Knowledge of these relationships is
critical for effectively establishing objectives and strategies. A failure to recognize and understand
relationships among the functional areas of business can be detrimental to strategic management,
and the number of those relationships that must be managed increases dramatically with a firm's
size, diversity, geographic dispersion, and the number of products or services offered.
Governmental and nonprofit enterprises traditionally have not placed sufficient emphasis on
relationships among the business functions. For example, some state governments, utilities,
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universities, and hospitals only recently have begun to establish marketing objectives and policies
that are consistent with their financial capabilities and limitations. Some firms place too great an
emphasis on one function at the expense of others.
1) MANAGEMENT
The functions of management consist of five basic activities: planning, organizing, motivating,
staffing, and controlling.
Planning- Planning consists of all those managerial activities related to preparing for the future.
Specific tasks include forecasting, establishing objectives, devising strategies, developing
policies, and setting goals. Strategy Formulation
Organizing- Organizing includes all those managerial activities that result in a structure of task
and authority relationships. Specific areas include organizational design, job specialization, job
descriptions, job specifications, span of the control, unity of command, coordination, job design,
and job analysis.
Motivating- Motivating involves efforts directed toward shaping human behavior. Specific
topics include leadership, communication, work groups, behavior modification, and delegation of
authority, job enrichment, job satisfaction, needs fulfillment, organizational change, employee
morale, and managerial morale. Strategy Implementation
Staffing- Staffing activities are centered on personnel or human resource management. Included
are wage and salary administration, employee benefits, interviewing, hiring, firing, training,
management development, employee safety, affirmative action, equal employment opportunity,
union relations, career development, personnel research, discipline policies, grievance
procedures, and public relations. Strategy
Controlling- Controlling refers to all those managerial activities directed toward ensuring that
actual results are consistent with planned results. Key areas of concern include quality control,
financial control, sales control, inventory control, and expense control, analysis of variances,
rewards, and sanctions. Strategy Evaluation
Management Audit Checklist of Questions
The checklists of questions provided below can help determine specific strengths and
weaknesses in the functional area of business. An answer of no to any question could indicate a
potential weakness, although the strategic significance and implications of negative answers, of
course, will vary by organization, industry, and severity of the weakness. Positive or yes answers
to the checklist questions suggest potential areas of strength.
1. Does the firm use strategic-management concepts?
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2. Are company objectives and goals measurable and well communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization's structure appropriate?
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms effective?
2) MARKETING
Marketing can be described as the process of defining, anticipating, creating, and fulfilling
customers' needs and wants for products and services.
There are seven basic functions of marketing:
(1) Customer analysis, (5) Distribution,
(2) Selling products/services, (6) Marketing research, and
(3) Product and service planning, (7) Opportunity analysis.
(4) Pricing,
Understanding these functions helps strategists identify and evaluate marketing strengths and
weaknesses.
Customer Analysis
Customer analysis—the examination and evaluation of consumer needs, desires, and wants—
involves administering customer surveys, analyzing consumer information, evaluating market
positioning strategies, developing customer profiles, and determining optimal market
segmentation strategies. The information generated by customer analysis can be essential in
developing an effective mission statement. Customer profiles can reveal the demographic
characteristics of an organization's customers. Buyers, sellers, distributors, salespeople,
managers, wholesalers, retailers, suppliers, and creditors can all participate in gathering
information to identify customers' needs and wants successfully. Successful organizations
continually monitor present and potential customers' buying patterns.
Selling Products/Services Successful strategy implementation generally rests upon the ability of
an organization to sell some product or service. Selling includes many marketing activities such
as advertising, sales promotion, publicity, personal selling, sales force management, customer
relations, and dealer relations. These activities are especially critical when a firm pursues a
market penetration strategy. The effectiveness of various selling tools for consumer and
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industrial products varies. Personal selling is most important for industrial goods companies, and
advertising is most important for consumer goods companies. Determining organizational
strengths and weaknesses in the selling function of marketing is an important part of performing
an internal strategic management audit. With regard to advertising products and services on the
Internet, a new trend is to base advertising rates exclusively on sale rates. This new
accountability contrasts sharply with traditional broadcast and print advertising that bases rates
on the number of persons expected to see a given advertisement. The new costper- sale online
advertising rates are possible because any Web site can monitor which user clicks on which
advertisement and then can record whether that consumer actually buys the product. If there are
no sales, then the advertisement is free. The most popular type of Internet advertisement is the
banner. However, many people just ignore online banner advertisements.
Product and Service Planning Product and service planning includes activities such as test
marketing; product and brand positioning; devising warranties; packaging; determining product
options, product features, product style, and product quality; deleting old products; and providing
for customer service. Product and service planning is particularly important when a company is
pursuing product development or diversification. One of the most effective product and service
planning techniques is test marketing. Test markets allow an organization to test alternative
marketing plans and to forecast future sales of new products. In conducting a test market project,
an organization must decide how many cities to include, which cities to include, how long to run
the test, what information to collect during the test, and what action to take after the test has been
completed. Test marketing is used more frequently by consumer goods companies than by
industrial goods companies. Test marketing can allow an organization to avoid substantial losses
by revealing weak products and ineffective marketing approaches before large-scale production
begins.

Pricing
Five major stakeholders affect pricing decisions:

 Consumers  Competitors
 Governments
 Suppliers
 Distributors

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Sometimes an organization will pursue a forward integration strategy primarily to gain better
control over prices charged to consumers. Governments can impose constraints on price
fixing, price discrimination, minimum prices, unit pricing, price advertising, and price
controls. Competing organizations must be careful not to coordinate discounts, credit terms,
or condition of sale; not to discuss prices, markups, and costs at trade association meetings;
and not to arrange to issue new price lists on the same date, to rotate low bids on contracts, or
to uniformly restrict production to maintain high prices. Strategists should view price from
both a short-run and a long-run perspective, because competitors can copy price changes with
relative ease. Often a dominant firm will aggressively match all price cuts by competitors.
Distribution
Distribution includes warehousing, distribution channels, distribution coverage, retail site
locations, sales territories, inventory levels and location, transportation carriers, wholesaling,
and retailing. Most producers today do not sell their goods directly to consumers. Various
marketing entities act as intermediaries; they bear a variety of names such as wholesalers,
retailers, brokers, facilitators, agents, middlemen, vendors, or simply distributors.
Distribution becomes especially important when a firm is striving to implement a market
development or forward integration strategy. Some of the most complex and challenging
decisions facing a firm concern product distribution. Intermediaries flourish in our economy
because many producers lack the financial resources and expertise to carry out direct
marketing. Manufacturers who could afford to sell directly to the public often can gain
greater returns by expanding and improving their manufacturing operations. Even General
Motors would find it very difficult to buy out its more than eighteen thousand independent
dealers. Successful organizations identify and evaluate alternative ways to reach their
ultimate market. Possible approaches vary from direct selling to using just one or many
wholesalers and retailers. Strengths and weaknesses of each channel alternative should be
determined according to economic, control, and adaptive criteria. Organizations should
consider the costs and benefits of various wholesaling and retailing options. They must
consider the need to motivate and control channel members and the need to adapt to changes
in the future. Once a marketing channel is chosen, an organization usually must adhere to it
for an extended period of time.
Marketing Research Marketing research is the systematic gathering, recording, and
analyzing of data about problems relating to the marketing of goods and services. Marketing
research can uncover critical strengths and weaknesses, and marketing researchers employ
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numerous scales, instruments, procedures, concepts, and techniques to gather information.
Marketing research activities support all of the major business functions of an organization.
Organizations that possess excellent marketing research skills have a definite strength in
pursuing generic strategies.
Opportunity Analysis
The eighth function of marketing is opportunity analysis, which involves assessing the costs,
benefits, and risks associated with marketing decisions. Three steps are required to perform a
cost/benefit analysis:
 Compute the total costs associated with a decision,
 Estimate the total benefits from the decision, and
 Compare the total costs with the total benefits. As expected benefits exceed total
costs, an opportunity becomes more attractive. Sometimes the variables included in a
cost/benefit analysis cannot be quantified or even measured, but usually reasonable
estimates can be made to allow the analysis to be performed. One key factor to be
considered is risk. Cost/benefit analyses should also be performed when a company is
evaluating alternative ways to be socially responsible.
Marketing Audit Checklist of Questions
Similarly as provided earlier for management, the following questions about marketing are
pertinent:
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm's market share been increasing?
4. Are present channels of distribution reliable and cost-effective?
5. Does the firm have an effective sales organization?
6. Does the firm conduct market research?
7. Are product quality and customer service good?
8. Are the firm's products and services priced appropriately?
9. Does the firm have an effective promotion, advertising, and publicity strategy?
10. Are marketing planning and budgeting effective?
11. Do the firm's marketing managers have adequate experience and training?
3) ACCOUNTING / FINANCE
Financial condition is often considered the single best measure of a firm's competitive
position and overall attractiveness to investors. Determining an organization's financial
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strengths and weaknesses is essential to formulating strategies effectively. A firm's liquidity,
leverage, working capital, profitability, asset utilization, cash flow, and equity can eliminate
some strategies as being feasible alternatives. Financial factors often alter existing strategies
and change implementation plans.
Finance/Accounting Functions
 Determining financial strengths and weaknesses key to strategy formulation
 Investment decision (Capital budgeting)
 Financing decision
 Dividend decision
According to James Van Horne, the functions of finance/accounting comprise three
decisions: the investment decision, the financing decision, and the dividend decision.
Financial ratio analysis is the most widely used method for determining an organization's
strengths and weaknesses in the investment, financing, and dividend areas. Because, the
functional areas of business are so closely related, financial ratios can signal strengths or
weaknesses in management, marketing, production, research and development, and computer
information systems activities.
The investment decision, also called capital budgeting, is the allocation and reallocation of
capital and resources to projects, products, assets, and divisions of an organization. Once
strategies are formulated, capital budgeting decisions are required to implement strategies
successfully.
The financing decision concerns determining the best capital structure for the firm and
includes examining various methods by which the firm can raise capital (for example, by
issuing stock, increasing debt, selling assets, or using a combination of these approaches).
The financing decision must consider both short-term and long-term needs for working
capital. Two key financial ratios that indicate whether a firm's financing decisions have been
effective are the debt-to-equity ratio and the debt-to-total-assets ratio.
Dividend decisions; concern issues such as the percentage of earnings paid to stockholders,
the stability of dividends paid over time, and the repurchase or issuance of stock. Dividend
decisions determine the amount of funds that are retained in a firm compared to the amount
paid out to stockholders.
Finance/Accounting Audit Checklist of Questions
Similarly as provided earlier, the following finance/accounting questions should be
examined:
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 Where is the firm financially strong and weak as indicated by financial ratio analyses?
 Can the firm raise needed short-term capital?
 Can the firm raise needed long-term capital through debt and/or equity?
 Does the firm have sufficient working capital?
 Are capital budgeting procedures effective?
 Are dividend payout policies reasonable?
 Does the firm have good relations with its investors and stockholders?
 Are the firm's financial managers experienced and well trained?
4) PRODUCTION/OPERATIONS
The production/operations function of a business consists of all those activities that transform
inputs into goods and services. Production/operations management deals with inputs,
transformations, and outputs that vary across industries and markets. A manufacturing
operation transforms or converts inputs such as raw materials, labor, capital, machines, and
facilities into finished goods and services. Production/Operations Audit Checklist of
Questions
Questions such as the following should be examined:
 Are suppliers of raw materials, parts, and subassemblies reliable and reasonable?
 Are facilities, equipment, machinery, and offices in good condition?
 Are inventory-control policies and procedures effective?
 Are quality-control policies and procedures effective?
 Are facilities, resources, and markets strategically located?
 Does the firm have technological competencies?
5) RESEARCH AND DEVELOPMENT
The fifth major area of internal operations that should be examined for specific strengths and
weaknesses is research and development (R&D). Many firms today conduct no R&D, and yet
many other companies depend on successful R&D activities for survival. Firms pursuing a
product development strategy especially need to have a strong R&D orientation. The purpose
of research and development are as follows:
 Development of new products before competition
 Improving product quality
 Improving manufacturing processes to reduce costs. Organizations invest in R&D
because they believe that such investment will lead to superior product or services and
give them competitive advantages. Research and development expenditures are
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 directed at developing new products before competitors do, improving product
quality, or improving manufacturing processes to reduce costs.
Research and Development Audit Checklist of Questions
Questions such as follows should be asked in performing an R&D audit:
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization's R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems adequate?
6. Is communication between R&D and other organizational units effective?
7. Are present products technologically competitive?
6) MANAGEMENT INFORMATION SYSTEMS
MIS is a general name for the academic discipline covering the application of information
technology to business problems. As an area of study it is also referred to as information
technology management. The study of information systems is usually a commerce and
business administration discipline, and frequently involves software engineering, but also
distinguishes itself by concentrating on the integration of computer systems with the aims of
the organization. The area of study should not be confused with computer science which is
more theoretical in nature and deals mainly with software creation, or computer engineering,
which focuses more on the design of computer hardware. IT service management is a
practitioner-focused discipline centering on the same general domain. In business,
information systems support business processes and operations, decision-making, and
competitive strategies.
Management Information Systems Audit checklist Questions
 Do all managers in the firm use the information system to make decisions?
 Is there a chief information officer or director of information systems position in
the firm?
 Are data in the information system updated regularly?
 Do managers from all functional areas of the firm contribute input to the
information system?
 Are there effective passwords for entry into the firm’s information system?
 Are strategists of the firm familiar with the information systems of rival firms?
 Is the information system user-friendly?
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  Are computer training workshops provided for users?
 Is the firm’s system being improved?
THE INTERNAL FACTOR EVALUATION (IFE) MATRIX
In multidivisional firms, each autonomous division or strategic business unit should construct
an IFE Matrix. Divisional matrices then can be integrated to develop an overall corporate IFE
Matrix.
Both external and internal evaluation together called SWOT analysis for any business firm.
After reading this lecture you will be able to prepare IFE and EFE matrixes for any business
planning.
A summary step in conducting an internal strategic-management audit is to construct an
Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and
evaluates the major strengths and weaknesses in the functional areas of a business, and it
also provides a basis for identifying and evaluating relationships among those areas. Intuitive
judgments are required in developing an IFE Matrix, so the appearance of a scientific
approach should not be interpreted to mean this is an all powerful technique. A thorough
understanding of the factors included is more important than the actual numbers. Similar to
the EFE Matrix and Competitive Profile Matrix, an IFE Matrix can be developed in five
steps:
 List key internal factors as identified in the internal-audit process. Use a total of from ten
to twenty internal factors, including both strengths and weaknesses. Always list strengths
first and then weaknesses. Be as specific as possible, using percentages, ratios, and
comparative numbers. The list of all strength and weaknesses should consist of 10-20
factors.
 Assign a weight (either in %age or in numerical value) that ranges from 0.0 (not
important) to 1.0 (all-important) to each factor. The weight assigned to a given factor
indicates the relative importance of the factor to being successful in the firm's industry.
Regardless of whether a key factor is an internal strength or weakness, factors considered
to have the greatest effect on organizational performance should be assigned the highest
weights. The sum of all weights must equal 1.0.
 Assign a 1-to-4 rating (rating means what is the capability of the firm to meet its strength
and weaknesses) to each factor to indicate whether that factor represents a major
weakness (rating 1), a minor weakness (rating 2), a minor strength (rating 3), or a major
strength (rating 4). Note that strengths must receive a 4 or 3 rating and weaknesses must
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 receive a 1 or 2 rating. Ratings are, thus, company based, whereas the weights in Step 2
are industry based.
 Multiply each factor's weight by its rating to determine a weighted score for each
variable.
 Sum the weighted scores for each variable to determine the total weighted score for the
organization.
Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5.
Regardless of how many factors are included in an IFE Matrix, the total weighted score can
range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted
scores well below 2.5 characterize organizations that are weak internally, whereas scores
significantly above 2.5 indicate a strong internal position.

Like the EFE Matrix, an IFE Matrix should include from 10 to 20 key factors.
The number of factors has no effect upon the range of total weighted scores because the
weights always sum to 1.0. An example of an IFE Matrix for XYZ Casino Enterprises is
provided in Table. Note that the firm’s major strengths are its size, occupancy rates, property,
and long-range planning as indicated by the rating of 4. The major weaknesses are locations
and recent joint venture. The total weighted score of 2.75 indicates that the firm is above
average in its overall internal strength.
A Sample Internal Factor Evaluation Matrix for XYZ Casino
Key Internal Factors Weight Rating Weighted

Score
Internal Strengths
1. Largest casino company in the United States .05 4 .20
2. Room occupancy rates over 95% in Las Vegas .10 4 .40
3. Increasing free cash flows .05 3 .15
4. Owns one mile on Las Vegas Strip .15 4 .60
5. Strong management team .05 3 .15
6. Buffets at most facilities .05 3 .15
7. Minimal comps provided .05 3 .15
8. Long-range planning .05 4 .20
9. Reputation as family-friendly .05 3 .15

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 10.Financial ratios .05 3 .15
Internal Weaknesses
1. Most properties are located in Las Vegas .05 1 .05
2. Little diversification .05 2 .10
3. Family reputation, not high rollers .05 2 .10
4. Laughlin properties .10 1 .10
5. Recent loss of joint ventures .10 1 .10
TOTAL 1.00 2.75

XYZ Casino has a total weighted score of 2.7 5indicating that the firm is above average in its
overall internal strength. .
CHAPTER Five
STRATEGY IMPLEMENTATION
 Strategy Implementation is the process by which strategies and policies are put to action
through the development of programs, budgets and procedures
 Strategy Implementation is the secondary function of the organization
 It is an administration task which ensures that the strategy formulated is executed in the
right direction to achieve the stated objectives
 It determines the success of an organization
5.1 Developing programs, budgets and procedures
Strategy implementation is composed of establishing Programs (to create a series of new
organizational activities), Budgets (to allocate funds to the new activities), and Procedures (to
handle the day-to-day activities)
The different aspects of strategy implementation are:
1. Strategies:
 It consists of the combination of competitive moves and business approaches that
managers employ to please customers, compete successfully, and achieve organizational
objectives
 A strategy provides a central purpose and direction to the activities of the organization
2. Policies:
 A policy is a verbal, written, or implied overall guide setting up boundaries that supply
the general limits and directions in which managerial actions will take place
 Policies provide the framework within which, decision makers will operate while making
decisions relating to the organization
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3. Procedures:
 Procedures are a guide to action and represent how a particular activity is to be carried out
 They establish the time sequence for the work to be done
4. Programs:
 Programs details out every small aspect of an activity i.e., when will a particular thing be
done, how it will be done, within that time frame, where it will be done, and the like.
 Programs are actually POAs (Plans of Action) that provide clear-cut guidelines and
specifications
5. Rules:
 Rules specify what can be done and what cannot be done.
 Rules demand strict compliance and are very rigid
 Violation of rules attracts disciplinary action
6. Methods:
 Methods specify the way in which a particular step is to be formed
 Its scope is limited as compared to a procedure as it addresses only one step of procedure
 However, it is more detailed than procedure as it explains the concerned step in detail
7. Budgets:
 Budgets essentially give information on the quantum of money available for a particular
activity
 Budgets have to be developed to steer ample resources into those value chain activities
critical to strategic success
How is strategy to be implemented?
1) Allocation of monetary and non-monetary resources
2) Fixing key tasks and priorities
3) Task assignment
4) Delegation of authority
5) Policies, goals, evaluation and feedback
6) Rewards and incentives for behavior reinforcement
7) Training and development
8) Implementation
9) Strategy restructuring
3.2 Strategy Implementation tools
Tools puts strategy in to actions includes:

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 Leadership (Persuasion, Motivation and culture/values)
 HR (Recruitment/ selection, Transfers/promotion, Training and Layoffs/recalls)
 Structural design (Organization chart, Teams, Centralization/decentralization and
Facilities, task design)
 Information and control system (Pay, reward system, Budget allocations, Information
systems, Rules/procedures)
3.3 Organizational Structure
 The job of strategy execution is to convert strategic plans into actions and good results.
For this, a suitable organizational structure is required:
1. Entrepreneurial structure:
 Suitable for very small organizations (where Owner and the Manager are one and the
same)
 Facilitates quick decision making
 The owner-manager can completely devote his time and knowledge for the absolute
development of the organization
 However, it is one man show
2. Functional structure:
 A team of managers who have functional specializations
 The chief officer must learn to delegate
 It works well where strategy critical activities closely match discipline specific activities
and minimal inter-departmental cooperation is needed
 Drawbacks: Functional myopia, empire building, interdepartmental rivalries, excessive
process fragmentation, and vertically layered management hierarchies
3. Product based structure:
 All the functions important for the production of a product or service are grouped together
 The organization is split into product division
 Suitable for an organization manufacturing multiple products and having distinct
manufacturing and marketing facilities
 Performance evaluation of each unit is simple and easy, quicker decision making is
possible and responsibility for profit can be fixed at divisional levels
4. SBU (small business units) organizational structure:
 Each SBU operates as a separate organization
 Each SBU has the responsibility of achieving the best results in their business units
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 Advantage of in-depth business planning and easy accountability
 However, too many SBUs may cause difficulty in efficient management, and may create
unhealthy competition for corporate resources
5. Geographical organization structure:
 Adopted by organizations that operate in various geographical regions
 Each geographical division performs all the functions required to produce and market the
products
 Advantage of serving the needs of the customers in different regions
 Products can be designed to suit each geographical region and responsibility for profit can
be fixed for each region
6. Matrix structure:
 It operates on a dual channel of authority, performance, responsibility, evaluation and
control
 Subordinates report to functional area managers as well as product/project managers
 It is a conflict resolution system through which strategic and operating priorities are
negotiated, power is shared and resources are allocated internally
 It has the capacity of accomplishing a wide variety of project oriented business activity
 It helps in optimum utilization of resources
 It makes an organization more dynamic and result oriented.
 However, dual authority system leads to confusion and greater administrative cost
3.4 Reengineering and strategy implementation
 Reengineering is the radical redesign of business processes to achieve major gains in cost,
service, or time
 It is an effective way to implement a turn-around strategy
 It strives to break away from the old rules and procedures that develop and become
ingrained in every organization over the years
 These may be combination of policies, procedures and rules
Principles for reengineering
 Organize individual’s/department’s job around outcomes, instead of a single task
 With computer-based IS, processes can now be reengineered so that the people who
need the result of the process can do it themselves
 People or departments that produce information can also process it for use instead of
just sending raw data to others in the organization to interpret
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  Companies with modern IS, can provide flexible service locally by keeping the
resources in a centralized location
 Link parallel activities instead of integrating their results
 Put the decision point where the work is performed, and build control into the process
 Capture information once and at the source
3.5 Major organizational components to be concerned when strategy implementation
A) Production/Operations Concerns When Implementing Strategies
Production/operations department mainly concern with the achievement of organization goals
and targets. Production department plays a crucial role for implementing organization
strategy. Production-concerned decisions on plant location, plant size, , product design,
choice of equipment, size of inventory, inventory control, quality control, cost control, use of
standards, shipping and packaging, and technological innovation, job specialization,
employee training, equipment and resource utilization. All these factors place an important
impact on success and failure of the strategy.
B) Human Resource Concerns When Implementing Strategies
The other important concern while implementing the strategy is human resource. Human
resource is the backbone of any organization without efficient human resource organization
cannot perform well and fail to achieve the organizational strategy. Staffing need of the
organization and its cost is an important function of the human resource manager. The other
main concerns include health, safety and security of the workers. The plan must also include
how to motivate employees and managers during a time when layoffs are common and
workloads are high.
The human resource department must develop performance incentives that clearly link
performance and pay to strategies. The process of empowering managers and employees
through involvement in strategic management activities yields the greatest benefits when all
organizational members understand clearly how they will benefit personally if the firm does
well. Linking company and personal benefits is a major new strategic responsibility of human
resource managers. Other new responsibilities for human resource managers may include
establishing and administering an employee stock ownership plan (ESOP), are corporations
owned in whole or in part by their employees. Employees are usually given a share of the
corporation after a certain length of employment or they can buy shares at any time. A
corporation owned entirely by its employees (a worker cooperative) will not, therefore, have
its shares sold on public stock markets. Employee-owned corporations often adopt profit

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sharing where the profits of the corporation are shared with the employees. These types of
corporations also often have boards of directors elected directly by the employees.
C) Marketing Concerns When Implementing Strategies
Countless marketing variables affect the success or failure of strategy implementation, and
the scope of this text does not allow us to address all those issues. Some examples of
marketing decisions that may require policies are as follows:
 To use exclusive dealerships or multiple channels of distribution
 To use heavy, light, or no TV advertising
 To limit (or not) the share of business done with a single customer
 To be a price leader or a price follower
 To offer a complete or limited warranty
 To advertise online or not
A marketing issue of increasing concern to consumers today is the extent to which companies
can track individuals’ movements on the Internet and even be able to identify an individual
by name and e-mail address. Individuals’ wanderings on the Internet are no longer
anonymous, as many persons still believe. Marketing of late has become more about building
a two-way relationship with consumers than just informing consumers about a product or
service. Marketers today must get their customers involved in their company Web site and
solicit suggestions from customers in terms of product development, customer service, and
ideas. The online community is much quicker, cheaper, and effective than traditional focus
groups and surveys.
D) FINANCE/ACCOUNTING ISSUES
Like operation, marketing and human resource concern while implementing strategy the other
important issue is accounting and finance. Several issue that concern with accounting and
finance to strategy implementation: obtaining desired amount of needed capital, developing
pro forma financial statements, preparing financial budgets, and evaluating the worth of a
business. Some examples of decisions that may require finance/accounting policies are:
 To raise the amount of capital by issuing shares or obtaining a debt from external parties.
 To enhance the inventory turnover level
 To make or buy fixed assets.
 To extend the time of accounts receivable.
 To establish a certain percentage discount on accounts within a specified period of time.
 To determine the amount of cash that should be kept on hand

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 To determine an appropriate dividend payout ratio.
E) Research and Development (R&D) Issues: It can plays part in strategy implementation.
“New products and improvement of existing products that allow for effective strategy
implementation”
These individuals are generally charged with developing new products and improving old
products in a way that will allow effective strategy implementation. R&D employees and
managers perform tasks that include
 Transferring complex technology,
 Adjusting processes to local raw materials,
 Adapting processes to local markets,
 Altering products to particular tastes and specifications.
Strategies such as product development, market penetration, and concentric diversification
require that new products be successfully developed and that old products be significantly
improved. But the level of management support for R&D is often constrained by resource
availability:
Research and Development (R&D) policies can enhance strategy-implementation efforts to:
 Develop robotics or manual-type processes.
 Spend a high, average, or low amount of money on R&D.
 Perform R&D within the firm or to contract R&D to outside firms.
 Use university researchers or private sector researchers.
 Emphasize product or process improvements.
 Stress basic or applied research.
 Be leaders or followers in R&D.
F) Management Information Systems (MIS) Issues
Firms that gather, assimilate, and evaluate external and internal information most effectively
are gaining competitive advantages over other firms. Having an effective management
information system (MIS) may be the most important factor in differentiating successful from
unsuccessful firms. The process of strategic management is facilitated immensely in firms
that have an effective information system.
Information collection, retrieval, and storage can be used to create competitive advantages in
ways such as cross-selling to customers, monitoring suppliers, keeping managers and
employees informed, coordinating activities among divisions, and managing funds. Like
inventory and human resources, information is now recognized as a valuable organizational
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asset that can be controlled and managed. Firms that implement strategies using the best
information will reap competitive advantages in the twenty-first century.
A good information system can allow a firm to reduce costs. For example, online orders from
salespersons to production facilities can shorten materials ordering time and reduce inventory
costs. Direct communications between suppliers, manufacturers, marketers, and customers
can link together elements of the value chain as though they were one organization. Improved
quality and service often result from an improved information system.
CHAPTER SIX
THE NATURE OF STRATEGY EVALUATION & CONTROL
The strategic-management process results in decisions that can have significant, long-lasting
consequences. Erroneous strategic decisions can inflict severe penalties and can be
exceedingly difficult, if not impossible, to reverse. Most strategists agree, therefore, that
strategy evaluation is vital to an organization’s well-being; timely evaluations can alert
management to problems or potential problems before a situation becomes critical.
Strategy evaluation includes three basic activities:
(1) examining the underlying bases of a firm’s strategy, (2) comparing expected results with
actual results, and (3) taking corrective actions to ensure that performance conforms to plans.
Adequate and timely feedback is the cornerstone of effective strategy evaluation.
Strategy evaluation can be no better than the information on which it is based. Too much
pressure from top managers may result in lower managers contriving numbers they think will
be satisfactory.
Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis on
evaluating strategies may be expensive and counterproductive.
Strategy evaluation is essential to ensure that stated objectives are being achieved. In many
organizations, strategy evaluation is simply an appraisal of how well an organization has
performed. Have the firm’s assets increased? Has there been an increase in profitability?
Have sales increased? Have productivity levels increased? Have profit margin, return on
investment, and earnings-per-share ratios increased? Some firms argue that their strategy
must have been correct if the answers to these types of questions are affirmative. Well, the
strategy or strategies may have been correct, but this type of reasoning can be misleading
because strategy evaluation must have both a long-run and short-run focus. Strategies often
do not affect short-term operating results until it is too late to make needed changes. It is

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impossible to demonstrate conclusively that a particular strategy is optimal or even to
guarantee that it will work. One can, however, evaluate it for critical flaws.
Richard Rumelt offered four criteria that could be used to evaluate a strategy: consistency,
consonance, feasibility, and advantage. Consonance and advantage are mostly based on a
firm’s external assessment, whereas consistency and feasibility are largely based on an
internal assessment. Strategy evaluation is important because organizations face dynamic
environments in which key external and internal factors often change quickly and
dramatically. Success today is no guarantee of success tomorrow! An organization should
never be lulled into complacency with success.
5.1 Rumelt’s Criteria for Evaluating Strategies
Consistency
A strategy should not present inconsistent goals and policies. Organizational conflict and
interdepartmental bickering are often symptoms of managerial disorder, but these problems
may also be a sign of strategic inconsistency. Three guidelines help determine if
organizational problems are due to inconsistencies in strategy:
 If managerial problems continue despite changes in personnel and if they tend to be
issue-based rather than people-based, then strategies may be inconsistent.
 If success for one organizational department means, or is interpreted to mean, failure for
another department, then strategies may be inconsistent.
 If policy problems and issues continue to be brought to the top for resolution, then
strategies may be inconsistent.
Consonance
Consonance refers to the need for strategists to examine sets of trends, as well as individual
trends, in evaluating strategies. A strategy must represent an adaptive response to the external
environment and to the critical changes occurring within it. One difficulty in matching a
firm’s key internal and external factors in the formulation of strategy is that most trends are
the result of interactions among other trends. For example, the day-care explosion came about
as a combined result of many trends that included a rise in the average level of education,
increased inflation, and an increase in women in the workforce. Although single economic or
demographic trends might appear steady for many years, there are waves of change going on
at the interaction level.
Feasibility

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A strategy must neither overtax available resources nor create unsolvable sub problems. The
final broad test of strategy is its feasibility; that is, can the strategy be attempted within the
physical, human, and financial resources of the enterprise? The financial resources of a
business are the easiest to quantify and are normally the first limitation against which strategy
is evaluated. In evaluating a strategy, it is important to examine whether an organization has
demonstrated in the past that it possesses the abilities, competencies, skills, and talents
needed to carry out a given strategy.

Advantage
A strategy must provide for the creation and/or maintenance of a competitive advantage in a
selected area of activity. Competitive advantages normally are the result of superiority in one
of three areas: (1) resources, (2) skills, or (3) position
Positional advantage tends to be self-sustaining as long as the key internal and environmental
factors that underlie it remain stable. This is why entrenched firms can be almost impossible
to unseat, even if their raw skill levels are only average. Although not all positional
advantages are associated with size, it is true that larger organizations tend to operate in
markets and use procedures that turn their size into advantage, while smaller firms seek
product/market positions that exploit other types of advantage. The principal characteristic of
good position is that it permits the firm to obtain advantage from policies that would not
similarly benefit rivals without the same position. Therefore, in evaluating strategy,
organizations should examine the nature of positional advantages associated with a given
strategy.
Why strategy evaluation is more difficult today? The reasons are
 A dramatic increase in the environment’s complexity
 The increasing difficulty of predicting the future with accuracy
 The increasing number of variables
 The rapid rate of obsolescence of even the best plans
 The increase in the number of both domestic and world events affecting organizations
 The decreasing time span for which planning can be done with any degree of certainty
5.2 A Strategy-Evaluation Framework
Corrective actions are almost always needed except when (1) external and internal factors
have not significantly changed and (2) the firm is progressing satisfactorily toward achieving
stated objectives.
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5.2.1 Reviewing Bases of Strategy
Reviewing the underlying bases of an organization’s strategy could be approached by
developing matrix table. A Matrix should focus on changes in the organization’s
management, marketing, finance/accounting, production/operations, R&D, and management
information systems strengths and weaknesses. And also Matrix should indicate how
effective a firm’s strategies have been in response to key opportunities and threats.
This analysis could also address such questions as the following:
 How have competitors reacted to our strategies?
 How have competitors’ strategies changed?
 Have major competitors’ strengths and weaknesses changed?
 Why are competitors making certain strategic changes?
 Why are some competitors’ strategies more successful than others?
 How satisfied are our competitors with their present market positions and profitability?
 How far can our major competitors be pushed before retaliating?
 How could we more effectively cooperate with our competitors?
External opportunities and threats and internal strengths and weaknesses that represent the
bases of current strategies should continually be monitored for change. It is not really a
question of whether these factors will change but rather when they will change and in what
ways. Here are some key questions to address in evaluating strategies:
 Are our internal strengths still strengths?
 Have we added other internal strengths? If so, what are they?
 Are our internal weaknesses still weaknesses?
 Do we now have other internal weaknesses? If so, what are they?
 Are our external opportunities still opportunities?
 Are there now other external opportunities? If so, what are they?
 Are our external threats still threats?
 Are there now other external threats? If so, what are they?
 Are we vulnerable to a hostile takeover?
5.2.2 Measuring Organizational Performance
Another important strategy-evaluation activity is measuring organizational performance. This
activity includes comparing expected results to actual results, investigating deviations from
plans, evaluating individual performance, and examining progress being made toward
meeting stated objectives. Both long-term and annual objectives are commonly used in this
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process. Criteria for evaluating strategies should be measurable and easily verifiable. Criteria
that predict results may be more important than those that reveal what already has happened.
Failure to make satisfactory progress toward accomplishing long-term or annual objectives
signals a need for corrective actions. Many factors, such as unreasonable policies, unexpected
turns in the economy, unreliable suppliers or distributors, or ineffective strategies, can result
in unsatisfactory progress toward meeting objectives. Problems can result from
ineffectiveness (not doing the right things) or inefficiency (poorly doing the right things).
Determining which objectives are most important in the evaluation of strategies can be
difficult. Strategy evaluation is based on both quantitative and qualitative criteria.
Selecting the exact set of criteria for evaluating strategies depends on a particular
organization’s size, industry, strategies, and management philosophy. An organization
pursuing a retrenchment strategy, for example, could have an entirely different set of
evaluative criteria from an organization pursuing a market-development strategy.
Quantitative criteria commonly used to evaluate strategies are financial ratios, which
strategists use to make three critical comparisons:
 Comparing the firm’s performance over different time periods,
 Comparing the firm’s performance to competitors’, and

 Comparing the firm’s performance to industry averages.

Some key financial ratios that are particularly useful as criteria for strategy evaluation are as
follows:
 Return on investment (ROI), Return on equity (ROE), Profit margin, Market share, Debt
to equity, Earnings per share, Sales growth, and Asset growth
But some potential problems are associated with using quantitative criteria for evaluating
strategies. First, most quantitative criteria are geared to annual objectives rather than long-
term objectives. Also, different accounting methods can provide different results on many
quantitative criteria. Human factors such as high absenteeism and turnover rates, poor
production quality and quantity rates, or low employee satisfaction can be underlying causes
of declining performance. Marketing, finance/accounting, R&D, or management information
systems factors can also cause financial problems.
5.2.3 Taking Corrective Actions
The final strategy-evaluation activity, taking corrective actions, requires making changes to
competitively reposition a firm for the future.
Corrective Actions Possibly Needed to Correct Unfavorable Variances
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  Alter the firm’s structure, Replace one or more key individuals, Divest a division, Alter
the firm’s vision and/or mission, Revise objectives, Alter strategies, Devise new
policies, Install new performance incentives, Raise capital with stock or debt, Add or
terminate salespersons, employees, or managers, Allocate resources differently,
Outsource (or rein in) business functions
5.3 Characteristics of an Effective Evaluation System
Strategy evaluation must meet several basic requirements to be effective. First, strategy
evaluation activities must be economical; too much information can be just as bad as too little
information; and too many controls can do more harm than good. Strategy-evaluation
activities also should be meaningful; they should specifically relate to a firm’s objectives.
They should provide managers with useful information about tasks over which they have
control and influence. Strategy-evaluation activities should provide timely information; on
occasion and in some areas, managers may daily need information.
Frequent measurement and rapid reporting may frustrate control rather than give better
control. The time dimension of control must coincide with the time span of the event being
measured. Strategy evaluation should be designed to provide a true picture of what is
happening.
5.4 Contingency Planning
A basic premise of good strategic management is that firms plan ways to deal with
unfavorable and favorable events before they occur. Too many organizations prepare
contingency plans just for unfavorable events; this is a mistake, because both minimizing
threats and capitalizing on opportunities can improve a firm’s competitive position.
Regardless of how carefully strategies are formulated, implemented, and evaluated,
unforeseen events, such as strikes, boycotts, natural disasters, arrival of foreign competitors,
and government actions, can make a strategy obsolete. To minimize the impact of potential
threats, organizations should develop contingency plans as part of their strategy-evaluation
process.
Contingency plans can be defined as alternative plans that can be put into effect if certain key
events do not occur as expected. Only high-priority areas require the insurance of
contingency plans. Strategists cannot and should not try to cover all bases by planning for all
possible contingencies. But in any case, contingency plans should be as simple as possible.
Some contingency plans commonly established by firms include the following:

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 If a major competitor withdraws from particular markets as intelligence reports indicate,
what actions should our firm take?
 If our sales objectives are not reached, what actions should our firm take to avoid profit
losses?
 If demand for our new product exceeds plans, what actions should our firm take to meet
the higher demand?
 If certain disasters occur—such as loss of computer capabilities; a hostile takeover
attempt; loss of patent protection; or destruction of manufacturing facilities because of
earthquakes, tornadoes or hurricanes—what actions should our firm take?
 If a new technological advancement makes our new product obsolete sooner than
expected, what actions should our firm take?
Strategic Planning gave users three major benefits:
 It permitted quick response to change,
 It prevented panic in crisis situations, and
 It made managers more adaptable by encouraging them to appreciate just how variable
the future can be.
5.5 Strategic Control
Control of strategy can be characterized as a form of .steering control.. Ordinarily, a
significant time span occurs between initial implementation of a strategy and achievements of
its intended results. During that time, numerous projects are undertaken, investments are
made, and actions are undertaken to implement the new strategy. Also during that time, both
the environmental situation and the firms internal situation are developing and evolving.
Strategic controls are necessary to steer the firm through these events. They must provide the
basis for correcting the actions and directions of the firm in implementing its strategy as
developments and changes in its environmental and internal situations take place.
The four basic types of strategic controls are:
 Premise control
 Implementation control
 Strategic surveillance
 Special alert control.
1. Premise Control

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Every strategy is based on assumed or predicted conditions. These assumptions or predictions
are planning premises; a firms strategy is designed around these predicted conditions.
Premise control is designed to check systematically and continuously whether or not the
premises set during the planning and implementation process are still valid. If a vital premise
is no longer valid, then the strategy may have to be changed. The sooner an invalid premise
can be recognized and revised, the better the chances that an acceptable shift in the strategy
can be devised.
2. Implementation Control
The action phase of strategic management is located in the series of steps, programs,
investments, and moves undertaken over a period of time to implement the strategy. Special
programs are undertaken. Functional areas initiate several strategy-related activities. Key
people are added or reassigned. Resources are mobilized. In other words, managers convert
broad strategic plans into concrete actions and results for specific units and individuals as
they go about implementing strategy. And these actions take place incrementally over an
extended period of time designed ultimately to enact the planned strategy and achieve long-
term objectives.
Strategic control can be undertaken within this context. We refer to this type of strategic
control as implementation control. Implementation control is designed to assess whether the
overall strategy should be changed in light of unfolding events and results associated with
incremental steps and actions that implement the overall strategy.
3. Strategic Surveillance
Strategic surveillance is designed to monitor a broad range of events inside and outside the
company that are likely to threaten the course or the firms strategy. The basic idea behind
strategic surveillance is that some form of general monitoring of multiple information sources
should be encouraged, with the specific intent being the opportunity to uncover important yet
unanticipated information.
4. Special Alert Control
Another type of strategic control, really a subset of the other three, is special alert control. A
special alert control is the need to thoroughly, and often rapidly reconsider the firms basic
strategy based on a sudden, unexpected event.

Course Title: Urban Governance and Administration

Course Code: PADM 3082
260
Cr. Hrs: 3
Introduction
The focus of this course is on the origins and development of urban centers and their governance. The
course deals with examination and analysis of how cities have evolved through the understanding of
their structures and powers of government and regulatory interventions that have been implemented in
response to decline or the need to improve the quality of life in cities. It also introduces to the
principles of urban governance and administration and examines the political, social, and economic
environment in which decisions pertaining to urban centers occur.

Besides, this course will examine urban space both historically and cross-culturally. In this context,
the course discusses the importance of cities to the economic, cultural, and political well-being of
modern societies and examines how forces such as industrialization, decentralization, and
suburbanization affect the structure, size, finance and function of cities. We will discuss classic
theories and recent models of urban governance discourse in urban studies as we look to answer
questions like, “how and why cities develop and change, and who lives in cities and why?” By the
end of the course, it is hoped that students gain a new understanding of the significant role that cities
play in the vitality of urban centers of the world in general and Ethiopian cases in particular.
Moreover, this course provides an overall understanding of the key aspects pertaining to urbanization
patterns, good urban governance, devolution of powers, development urban planning, poverty,
community participation in city development and innovative illustrations through case studies.

Objectives of the course

At the end of this course, students will be able to:

 Develop awareness of concepts, origins and development of urban centers and issues
of urbanization and urban management.
 Identify Historical Perspective and Pattern of Urbanization
 Appreciate urban sector policies and development of urban institutions, laws, rules
and regulations
 Examine interagency co-ordination with particular reference to the urban local bodies
 Analyze the typology of urban governance and their applications the critical issues of
municipal management in developing countries.
 Discuss contemporary problems facing cities of the third world.
 Understand the administrative, physical, social, economic, demographic, political and
environmental implications of urbanization.
 Review the situations of urbanization and urban management in Ethiopia
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 Course Content
Chapter One: Introduction
Chapter Two: Causes and Consequences of Urbanization
Chapter Three: Urban Management and Governance
Chapter Four: Urban Functions and Finance
Chapter Five: Urban Governance in Ethiopia and in selected LDC’s

Chapter One
The Historical and Institutional Foundations of urban centers
Urbanization is increasing in both the developed and developing countries. However, rapid
urbanization, particularly the growth of large cities, and the associated problems of
unemployment, poverty, inadequate health, poor sanitation, urban slums and environmental
degradation pose a formidable challenge in many developing countries.
Why we study cities and their management?
There are at least 5 reasons why we study cities and their management:
(a) Nearly 50% of the world’s population lives in cities. Some statistical reports show the
%age of urban population as follows: In 1800, about 3% live in city, in 1900, about 13% live
in city, in 2000, about 50% live in city. This increment is not only the product of natural
population growth, but also augmented by increased migration from rural to urban.
(b) Cities are centers of development and innovation
New ideas originate in cities because cities are centers of education, industrialization and
cultural Revolution. The larger proportion of economic activities and innovation take place in
major cities such as capital cities, commercial cities and port cities. Hence, many people say
that economic development is directly related to urbanization. The reasons given for
urbanization to enhance development are that:
 It results in modern means of communication
 It results in Financial institutions and
 A concentration of trade, industry, skilled manpower and decision makers in cities make
them more important.
(c). Cities are hallmark of civilization especially where Cultural Revolution takes place.
Change in attitude quickly takes place in cities and spreads over to rural areas and small
urban centers.
(d) Cities provide the advantages of economies of scale i.e. they lead to efficient allocation
and utilization of resources. Moreover, cities reduce the cost of producing services and make
easier the provision of those services.

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(e) Cities are also the concentration of poverty, crime, and congestion and environmental
degradation. This is specifically true for cities in developing countries which attracted the
attention of researchers, politicians, managers and the public at large.
Role of Cities
Cities are formed because they provide cost advantages to producers and consumers on the
basis of agglomeration economies (urbanization + localization) through backward linkage
(factors availability) and forward linkage (sale markets). Cities play the role of industrial
districts; provide opportunities for joint ventures, research, marketing, training and
infrastructures. Traditional township specializations have evolved into clusters with division
of labour and selling products throughout a country. Thus, under normal conditions cities and
towns make vital contribution to economic and technological development by providing
public services and infrastructures.
What are infrastructures?? There are two types of infrastructure:
a) Physical Infrastructure: includes communication, transportation facilities like road,
telephone, power supplies, and potable water.
b) Social Infrastructure: includes health care, education, recreation, social and cultural
facilities.
 In many places, cities account for2/3 of GNP and host large commercial and industrial
activities
 The modernization of agricultural sector largely depends on the emergences of cities
because they provide markets, financial processing and distribution activities.
 These towns serve as market places for the rural community both to sale products and
purchase agricultural and non-agricultural inputs.
 Cities also provide economies of scale by bringing buyers and sellers in close proximity.
By doing so, cities reduce the cost of transportation and communication. Moreover, cities
make easy and less expensive the provision of services such as power supply, road
network, water supply, and drainage and sewerage facilities.
 According to economists like Lewis Arthur, higher productivity of city allows higher
wage which in turn leads to saving and investment then capital accumulation which leads
to industrialization and finally it generates high employment.
 As indicated earlier, it means that cities provide advantages because they provide cost
advantages to producers and consumers on the basis of agglomeration economies
(urbanization + localization) through backward linkage (factors availability) and forward
linkage (sale markets).
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Historical Development of Cities
The origin of urban center is not exactly well known. However, there are literature myths and
speculations in archaeology that indicate cities emerged during recorded history. The first
important step in urban development is the emergence of settled agriculture (when people
started to live in a group of community and begun to cultivate land in commune). Gradually
those communities were able to produce surplus products i.e. excess surplus over and above
house hold consumptions. These surplus products should have been sold in the market. This
necessitated middle men who communicate between the producers and the buyers. The
emergence of middle men created a group of people who are detached from agriculture.
Moreover, some special working groups emerged who provide services to the community.
These include craftsmen, black smith, potters and others who specialized in non-agricultural
occupations. Historically, cities emerge if and only if there is a group of community who are
engaged in the provision of services. Thus, surplus product was an important condition for
the emergence of cities. Documents indicate that, at least by the mid 5500 B.C mixed farming
communities were living in villages in Southeast Asia. This was followed by the
development of technology like ox-drawn plough, the wheel cart, sailing boat and the art of
metallurgy.
Preconditions for urban Emergence
The causes for the emergence of cities were the function of many factors. These include:
1. The need for stationary mode of life
 transition from hunting to settled agriculture
 moving from animal like life to human life
2. Increase in the number of settlers of population.
 The increase in population raises the questions of permanent ownerships people
started to create the pattern of land ownership
3. Favorable ecological Environment
 Conducive climate, fertile soil and hydraulic resources
4. Technological development
 As technology advances, people are also able to produce goods in quantities and qualities.
As these goods are produced in abundance, they must be marketed to other communities.
The diversity of products sparks off new demands and create group of middlemen who

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 make their living outside agriculture. Thus, the emergence of non-agricultural
communities is important step in the development of cities
 The emergence of special groups which led to social classification or social classes, such
as the rulers and the ruled, nobilities, princes leading on the creation of headquarters for
the rulers.
5. Administrative Reasons.
 Settlements are also selected on the bases of administrative reasons to provide equal
administrative services at national, regional, zonal and woreda levels, e.g. the recent
example in Ethiopia is the establishment of Samara as a regional capital of Afar Region.
Defining Urban and urbanization
A city
 A city is the hub of a metropolitan area. Present-day cities are products of the
industrial revolution and are generally distinguished by land area and population.
Large, industrialized cities generally have advanced organizational systems for
sanitation, utilities, land distribution, housing, and transportation.
Urban center
It refers to a settlement where by the majority of population is engaged in non-agricultural
occupations such as trade (wholesale), profession, services and other non-agricultural
activities( manufacturing, handicrafts, small scale business). In urban centers at least 50% of
the population should engage in non-agricultural activities, in some areas 75% is required.
Municipality
It is originated from ancient Roma “Municipium” which means administrative office.
In modern context, how can we define municipality?
 A primary political unit usually with the power of self-government and defined authority
to rule the settlements.
 In other words municipalities are distinguished legal entities incorporated in to the laws
of their respective state or regions. They are expected to perform some basic
administrative and political activities in the interest of the residents.
 Thus, they have established boundaries, governing laws, elected /appointed leaders,
prepare budget and implement the same.
County: It is the largest territorial and political subdivision of a state. This term is used both
in USA and UK. The original term is “Comitates” means count, which refers to imperial
officials.
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Metropolis: Have two meanings: (1) capital city of a state or nation (2) surrounding areas of
a big city, (Peripheral areas). It originated from a Greek word polis which means the ability to
lead a community.
Hamlets: small villages which are not incorporated as a town or city. They are similar to our
urban kebeles.
Boroughs: are small urban settlements in early British local government systems. Boroughs
are the lowest in the urban hierarchy both in the USA and UK.
The criteria used to distinguish between rural and urban is sometimes vague. There are
two reasons for this:
 There are no universally used yardsticks
 The classification is highly variable from place to place.
Thus, the classification is simply contextual depending on different conditions such as
political, administrative and other factors. However, there are loosely used criteria used as
some general factors.
Conditions for an area (settlement) to be urban:
Population
It is the first issue in studying urban settlement. Certain number of population should be there
for an area to be considered urban. For example, in Ethiopia a population of 2000 is required
where as in Ghana 6000, Uganda 10,000, Japan, 50,000, USA 2500, Canada, 1000 Ireland
1500.
The range is 49000 (NB).This is because it is dictated by their country’s specific conditions.
Thus, one can easily understand that demographic and economic criteria on which definitions
of urban and rural areas are based can vary widely between different nations, making
generalizations problematic.
 Exceptions to rules, however, include Senegal’s main religious centre, Touba, which is
effectively a "sacred site" ruled by the religious hierarchy and where Islamic legislation
prevails over state legislation. Indeed, Touba is still classed as a village despite an
estimated population of over 300,000 which makes it the country’s second largest
settlement (Gueye, 1997).
1. Density: Measures population residing in a sq km (Km2). For instance, in Philippines,
urban areas are defined by the national census as all settlements with a population
density of at least 500 persons per square kilometre. Still there is no universally
accepted number of populations to calculate density.
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 2. Occupation, certain number of population must engage in non-agricultural activities
3. Infrastructure:- it can be physical or social infrastructure
 Physical: - communication, road networks, power, water, sanitation, sewerage and
facilities.
 Social: - health care facilities and Education. For instance in Philippines, the urban
status applies to centres with the following infrastructure:
 A parallel or right-angled street pattern;
 At least six commercial, manufacturing or similar establishments;
 At least three of the following: a town hall, church or chapel; a public plaza, park or
cemetery; a market place or building where trading activities are carried out at least once
a week; and a public building such as a school, a hospital or a library. Barangays
(administrative units) with at least 1,000 inhabitants where the majority are not occupied
in farming and/or fishing are also considered urban centres (Philippine National Statistics
Office, 1992).
 In Benin, the National Institute of Statistics and Economic Analysis considers as town
any headtown of a district with a population of 10,000 inhabitants or more, and with at
least four of the following: Post office, tax office, public treasury, bank,
running water supplies, electricity, health centre and secondary school.
Population density and the proportion of non-agricultural activities
are not considered (Tingbé-Azalou, 1997).
 This is often the case in sub-Saharan Africa, where small towns are
defined on the basis of administrative, demographic and infrastructural
characteristics even when the majority of the population engages in
agricultural activities (see Gado and Guitart, 1996, on Niger).
 Asia remains a predominantly rural continent, with two-thirds of its
population living in rural areas in 1990.
 However, if both India and China were to change their definition of
urban centres to one based on a relatively low population threshold as
used by many Latin American and European nations a large proportion
of their population would change from rural to urban. In many nations,
all settlements above a certain threshold, often 2,000 or 2,500

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 inhabitants and, in some countries, only a few hundred inhabitants, are
considered urban.
 A large proportion of India’s and China’s rural population live in
settlements which under such definitions would be reclassified as
urban. Since India and China have a high share of Asia’s population
this, in turn, would significantly change Asia’s level of urbanization and
even change the world’s level of urbanization by a few percentage
points (Hardoy and Satterthwaite, 1989; UNCHS, 1996).
 Infrastructures are more necessary for cities than rural areas because urban people rely
specially on these infrastructures for survival. There are also other manifestations of
urban centers. Cities exhibit man-made environment unlike rural settlement which in
most cases is surrounded by natural environment.
Greatest isolation from nature
Cities are dominated by man-made environment as reflections of urban settlement or
reflection of urbanization such as high rise buildings, machinery, road network, power
supply, telephone services etc.

System of Interaction
In cities there are: more numerous contacts, impersonal relations, causal relationship, short
lived relations, standardized and formal relations as compared to rural relationships which is
based on expanded family and kinship
 In cites there is more independence and self-reliance.
The Case of Ethiopian towns and cities
 In Ethiopia, cities emerged spontaneously i.e. there has not been systematic urban policy
that should guide the pattern of urban development.
 In the face of such situations, urban centers were established for different reasons. It
includes administrative and political/military reasons. They were established by ruling
classes, nobility and gentry. Thus, some of the original cities were garrisons and
headquarters of the ruling class. Therefore, they are mostly dictated by political and
administrative decisions.

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 Before 1887 (when AA was established) there were no permanent cities for the kings.
Therefore, they were roving here and there in search of such centres. The establishment
of Addis Ababa as a capital seems to be the first political and administrative decision to
have permanent capital. The urban centers which existed before and after 1887 were the
product of arbitrary decisions of central and regional governors. Example, Jimma was
established by Aba Jifar. The original part of the city, Jiren, was established for military
purpose.
 Hawasa was developed as garrison town from where provisions and logistics were
supplied to the army.
Urban development in other countries is based on a well thought policy and strategy. There
are different approaches in this regard.
1. Growth centre approach. It is a system where by few places are carefully selected
for their potential in developing the surrounding areas and beyond in terms of
triggering development,(Agricultural or industrial). Urban centers should be
propellers of new ideas and innovation for other parts of a country.
2. Agro-politan approach
Developing small urban centers with industries that are highly linked to the surrounding
agricultural and natural resources
3. Administrative suitability
Establishing centers which are accessible and efficient in their administrative services.
But Ethiopia lacks these approaches:
 In Ethiopia urban centres and urbanization as a concept, space and management object
was given a very little attention. This can be justified by looking at some of the official
documents.
In 1968 E.C. a report published by Central Statically Authority lists the following criteria to
identify urban from Rural in Ethiopia:
 Buildings and houses must be established in continuous alignment
 There must be at least one public bar in which beverages are sold
 There must be one permanent shop which sells different goods
 There must be at least one weekly market
 There must be at least one hotel where strangers spend nights by paying bed charges.
Urbanization

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No universally accepted definition is available for urbanization like other concepts in social
sciences.
 Urbanization simply means the growing population living in cities or it is a place of
concentration of nation’s population in urban centers.
 Alternatively urbanization can be defined as a continuous process from being rural to
being urban. This is described in the engagement of population from primary operation
to secondary and tertiary operation reflecting the change in product and specialization
 A more elaborated definition of urbanization refers to the “process which rises to the
concentration of the population economic activities such as manufacturing, services,
commerce, profession and informal sector”.
 Urbanization is the outcome of social, economic and political developments that lead to
urban concentration and growth of large cities, changes in land use and transformation
from rural to metropolitan pattern of organization and governance . But these criteria may
not be fulfilled in non-western urbanization. In non-western countries, urbanization is the
function of demographic changes but in the west it is the function of industrialization
Comparative view of the influence of the level of development on the urbanization
process:
We have now crossed the threshold of 50% of the world population living in cities and it is
forecast that two thirds of the population will live in cities by 2025. In developed countries
the following situations are either going on or are intended to happen in the near future:
 A modest level of quantitative urban development: zero growth in the population flow to
big urban areas.
 An undergoing considerable qualitative development: an increase in the number of
square meters required by each temporary or permanent inhabitant or worker,
 Obsolete infrastructure is undergoing renewal,
 A relative impoverishment of the center
What is happening in developing countries?
 a sharp drop in incomes in city centers resulting in inner city urban decay,
 a steep rise in city populations b/c of migration and natural population growth,
 there are 70 million new urban-dwellers each year,
 major disparities from one country to the next,

CHAPTER TWO
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 Causes and Consequences of Urbanization
Samers (2010: 55-56) points out that Ravenstein’s laws are, in actuality, empirical
generalisations based on his calculations from the British and other censuses of his time.
They referred more to internal than international migration. These laws (or generalizations)
are presented in a condensed form:
 Migrants move mainly over short distances; those travelling longer distances head for
the great centers of industry and commerce.
 Most migration is from agricultural to industrial areas.
 Large towns grow more by migration than by natural increase.
 Migration increases with the development of industry, commerce, and transport.
 Each migration stream produces a counter-stream.
 Females are more migratory than males, at least over shorter distances. Males are
dominant in international migration.
 The major causes of migration are economic.
The first law (item number 1) proposes a gravity model of migration, which runs parallel to
Newton’s second law of motion , that the volume of movement between two places is directly
proportional to the product of their masses (i.e. populations) and inversely proportional to the
square of the distance between them (White and Woods 1980: 39).
Laws 2 and 3 concern rural-urban migration and urbanization are, historically, the main
forms of population change in most countries of the world, even today. The fourth Law,
related to migration for development, anticipated Zelinsky’s (1971) famous ‘hypothesis of the
mobility transition’ by nearly a century to which we will return. The fifth law established
the basis for the study of two-way migration dynamics, net migration, and return migration.
Return migration became the subject of detailed study in the 1970s and 1980s.It remains an
under-researched component of migration. Law 6 was even more pioneering: it introduced
the gender element, which was ignored for nearly a hundred years since. The seventh law
states a fundamental truism of most forms of migration.
In fact, Ravenstein’s laws of Migration led to studies of the various influencing factors in
migration: industrialization, sex, race, distance, education, the labour force, etc. However,
most studies, which focused on the characteristics of migrants, were conducted with little
reference to the volume of migration, the reasons for migration or the assimilation of the
migrant at the destination. Regardless of the forms of migration or its duration, or how easy

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or how difficult it is, all acts of migration involve an origin, a destination, and an intervening
set of obstacles. Of these obstacles, Lee(1966) included distance of the move as one that is
always present.
We will examine the motivation for migration by considering how the relationship between
origin and destination are affected by Push and Pull factors. Push factors exist at the point of
origin and act to motivate out migration (a lack of economic opportunities, education, etc.,
which are mentioned earlier). On the other hand, pull factors are present at the destination,
which attract migrants (work opportunities and availability of jobs, conducive educational
facilities, religious or political freedom.
Push and pull factors are paired, that is, migration can occur if the reason of emigrating (the
push) has a solution in the pull by destination. In the context of labor migration, the push
factors are often characterized by the lack of job opportunities in sending areas or countries;
and the pull factors are the economic opportunities available in the receiving areas.
Migration flow between two places—origin and destination—also depends on the intervening
obstacles. These are the distance between the two places, lack of transport facilities,
inaccessibility because of the topography (rugged mountains and physical barriers), and
restrictive immigration laws.
The flow may not be strong in the presence of such intervening obstacles. The number of
migrants is directly proportional to the extent of opportunities (the pull factors) available at
the destination and inversely proportional to the intervening obstacles. The potential migrant
may also consider the intervening obstacles as intervening opportunities, that is, the presence
of other places between an origin and destination point to which one could migrate.
Therefore, the volume of migration from one place to another is associated not only with the
distance between places and number of people in the two places but also with the number of
opportunities or obstacles between each place.
Causes of Urbanization
1 Migration
Migration is one of the distinguishing features of human beings that has been occurring since
it started from the very beginning of man’s appearance in this universe. Human mobility was
even present in the primitive times and people used to migrate in search of abundant food and
in search of a safe living environment and protection from physical dangers. In modern age,
migration has gained importance with the ushering of the era of industrialization and
urbanization. The factors like development of modern means of transport and
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 communication, intermingling and interaction of different cultures, globalization, etc. has led
thousands of people to migrate in search of better opportunities related to education,
employment and living standard among other factors. Migration is one of the causes of social
change and it is one of the three basic components of demographic change, the other two
being birth and death. Migration is a complex phenomenon affected by many factors and
attempts have been made from time to time to understand the various factors influencing the
process.
Some writers define migration as:
 Population mobility from one place to another or it is simply a change of residence. It
involves a complete change and adjustment to the new environment. This definition
assumes migration as a permanent change of residence.
Others define migration as:
 A casual, cyclical change of residence for temporary reasons. Such as seasonal job search,
job transfer and family movement cases. This definition assumes migration as a short
range change of residence. For our purpose, we use the fist definition for it is relevant to
rural urban migration as a complete change of residence.
Migration can take in different forms:
1. Rural- Urban migration
2. Urban- urban migration
3. Rural-rural migration
4. Urban- rural migration,
The urban rural migration is the least practiced form of migration in Ethiopian context.

Why people migrate?

There are two general factors as the causes of migration.
 Push and Pull Factors
Migration is broadly understood as a permanent or semi-permanent change of residence. In
other words, migration may be defined as a form of relocation diffusion (the spread of
people, ideas, innovations, behaviors, from one place to another), involving permanent moves
to new locations.
The reasons that people migrate are determined by push and pull factors, which are forces
that either induces people to move to a new location, or oblige them to leave old residences.
These could be economic, political, cultural, and environmental.

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 Push factors are conditions that can force people to leave their homes and are related to
the country from which a person migrates. Push factors include non-availability of
enough livelihood opportunities, poverty, rapid population growth that surpasses
available resources ,"Primitive" or “poor” living conditions, desertification,
famines/droughts, fear of political persecution, poor healthcare, loss of wealth, and
natural disasters.
 Pull factors are exactly the opposite of push factors; they attract people to a certain
location. Typical examples of pull factors of a place are more job opportunities and better
living conditions; easy availability of land for settling and agriculture, political and/or
religious freedom, superior education and welfare systems, better transportation and
communication facilities, better healthcare system and stress-free environment attractive,
and security
 While international migration has attracted increasing attention in
recent years (often because of its political implications in
destination countries), little is known about internal migration
despite the fact that its scale, direction and demographic
characteristics (such as sex and age composition) are fundamental
to an understanding of urbanization processes.
 Traditional approaches to migration have relied on the notion of
"push-pull" factors as the main explanatory elements. In the neo-
classical perspective, decisions to move are made at the individual
level in response to hardships in source areas (the "push" factors)
and to perceived comparative advantages in destination areas (the
"pull" factors).
 Individuals rationally decide to migrate because they are attracted
by the bright lights of the city which promise, in the long-term, to
offer better economic opportunities than the countryside.
 The structuralist approach to migration, on the other hand, tends to
portray migrants as victims rather than rational decision makers,
since movement is determined by macro-social, historical and
dialectic processes such as the socio-spatial restructuring of
production at the national and global levels. Push-pull factors are

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 seen here as a process of polarization with respect to access to
resources, and migration as one of few options available to the most
vulnerable population strata.
2.2 Consequences of Rural Urban Migration and natural Growth
 Rural-urban migration was once viewed favourable in the literature of economic
development. Internal migration was thought to be natural process in which surplus
labour was gradually withdrawn from the rural sector to provide needed manpower
for urban industrial growth.
 The process was deemed socially beneficial because human resources were being
shifted from lower to higher marginal product (Lewis theory of development).
 In contrast to this view it is now clear that rates of rural-urban migration continue to
exceed rates of urban job creation and to surpass the absorption capacity of urban
industry and services.
Migration exacerbates rural-urban structural imbalance in two direct ways. First, on the
supply side, internal migration disproportionately increases the growth rate of urban job
seekers relative to urban population growth. Second, on the demand side, urban job creation
is generally more difficult and costly to accomplish than rural job creation. Migration in
excess of job opportunities is both a symptom of and a contributor to underdevelopment.
Thus, the process of urbanization presents enormous challenges to governments, social and
environmental planners, architects, engineers and the inhabitants of the world’s cities. Natural
population growth and migration has brought severe consequences which include increased
poverty, in adequate housing, inadequate access to basic services, and proliferation of
squatter settlements, urban environment degradation and increase in the informal sector.
We can generally classify these consequences into four categories:
 Squatter Settlements:
 Poverty
 Informal sector
 Environment Degradation
1. Squatter Settlements
Squatter settlements tend to be unplanned and are often illegal. Houses are self-built using
basic materials. Squatter settlements have few services. Thus, squatter Settlement is illegal
occupation of public land. There are at least 3 characteristics of squatter settlements

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The physical Characteristics: - Squatter settlements have infrastructure and service below
minimum level. It may not be connected to water supply, electricity, road, drainage and
sewerage facilities. The squatter settlements are also built in marginal lands at peripheries,
river sides and dumpsites.
The Social Characteristics: - Squatter settlements belong to low income groups or informal
workers. On average most residents earn a very low income and many of them are part-time
workers/daily laborers. Most squatters are predominantly migrants from rural to urban or
from small urban to large urban centers. They may be also second or third generations of
squatters.
Legal Characteristics:- Squatter settlements are inherently illegal because the squatters
occupy public land without any legal permission. They do not have authorized permits,
ownership certificate, not backed by legal provisions. They are against the master plans of a
city which shows residential, commercial, industrial and other plots (zones).
Squatter Settlements, Slums and sprawls: What is the difference?
 Slums are decayed areas, shanty areas, and rotten areas of a city. The difference between
slums and squatters is that slums are legal but squatters are illegal. But they both share
physical characteristics.
 Slum housing is basically associated with bad housing: For instance slum housings are
dwellings that have inadequate light, air, toilet and facilities are in bad repair and
improperly heated. Moreover, slum houses do not afford an opportunity for family
privacy. It is subject to hazard, overcrowded and no space for recreation.
 Slums are highly congested urban areas marked by deteriorated, unsanitary buildings,
poverty, and social disorganization.
 On the other hand, squatters settle on land, especially public or unoccupied land,
without a right or title. Squatters include those who settle on public land under regulation
by the government, in order to get title to it.
 Simply, slums refer to the environmental aspects of the area where a community resides,
while squatters refer to the legality of the land ownership and other infrastructure
provision.
The residents of slums face many problems on a daily basis.
 Overcrowding-high population density
 Fire hazards: fire can spread quickly

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  Overpopulation: the area does not have enough resource to support the growing
population, lack of space
 Disease: poor sanitation and limited healthcare can lead to spread of disease
 Services such as buses are overcrowded.
In Addis Ababa most kebele houses are examples of slums.
Causes of Urban Sprawl
The process of urbanisation is fairly contributed by population growth, migration and
infrastructure initiatives resulting in the growth of villages into towns, towns into cities and
cities into mega cities.
In this case for ecologically feasible development, planning requires an understanding of the
growth dynamics. Nevertheless, in most cases there are lots of inadequacies to ascertain the
nature of uncontrolled progression of urban sprawls.
Sprawl is considered to be an unplanned outgrowth of urban centres along the periphery of
the cities, along highways, along the road connecting a city, etc. Due to lack of prior planning
these outgrowths are devoid of basic amenities like water, electricity, sanitation, etc. The fact
that cities in LEDCs are growing rapidly means that conditions in towns and cities are poor.
There are often great inequalities within urban areas. The gap between rich and poor is even
greater
2. Urban Poverty
In World Bank’s report of 1988, 550 million poor people were living in cities. Now (2000)
the number is increased to 700 million, 50% of which are chronically poor.
Urban poverty is a multi-dimensional phenomenon. It is a deprivation of access to basic
necessities that sustain life. These include limit of access to employment opportunities and
income, inadequate and insecure housing and service, violent and unhealthy environment,
little or no social protection mechanisms, limited access to health and educational
opportunities.
Urban poverty is often characterized by cumulative deprivation i.e. one dimension of poverty
is often the cause of another dimension. Urban poverty is characterized by significant and
multiple deficiencies whose main dimensions include:
 Insufficient or unstable income, which leads to inadequate consumption;
 Risks caused by deficient access to basic goods and services;
 Low-quality housing that leaves residents more vulnerable to critical sanitary problems,
contamination, crime and natural disasters
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 Features of Urban poverty
It is also useful to analyze urban poverty with reference to vulnerability. i.e. susceptibility to
risk and venerability is closely link to asset ownership. The more assets people have the less
vulnerable they are. The greater erosion of people’s asset, the greater their insecurity. These
assets include: Labour, Human capital, Social capital, Productive Assets, House hold relation.
Human capital includes: health, education, skills, ability to work but the poor has no this
asset. Productive Assets: Means of production, housing, infrastructure, Social capital:
acceptance by the society, status, and dignity. Poverty means lack of the above essentials.
Dimensions of Cause or contributing factors
Poverty
employment insecurity/casual work, unskilled wage labor, inability to
Income
hold job due to bad health, lack of qualification
Health Unhygienic environment, congestion and traffic pollution, settlement on
marginal lands which are prone to hazards such as floods , landslide,
exposure to disease due to poor air, water and lack of sanitation, injury
and health rising from traffic, industrial accidents especially for those in
the informal sectors .

Education Constrained access to education due to insufficient school size, inability

to afford school fees
Security Tenure insecurity, lack of access to houses, personal in security, due to
drug/alcohol abuse, family breakdown, reduced support for children,
income inequality in cities which increase tensions.

Causes of urban poverty

 Warfare, drought, natural disaster, social inequality, corruption, high population growth,
Large families, Improper training, Slow job growth and Poor work culture
Who should involve in the fight against poverty?
Government, NGOs, private sector, the public individually and jointly via CBOs must be the
main actors in fighting poverty. Usually, the government comes first for the following reasons:
 it has better institutions to mobilize the public
 It has better infrastructure
 It can design good policy instruments

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After the government, private sector, the public and NGOs follows in the order of
importance. NGOs come at last because NGOs are temporary actors. Though private
organizations have major aim of profit maximization, they play crucial role by creating
employment and contributing to national development through taxation and other
contributions. The assumption is that NGOs will cease to exist because assistance cannot be
life time undertaking. This is for development NGOs which are engaged in the direct or
indirect production of goods and services.
There are also other generation of NGOs with the aim of crating awareness to the public
about advocacy and human rights rather than relief and food provision. Poverty is not only
lack of money or facilities, it is also the result of poverty of spirit i.e. attitude of hopelessness,
ignorance of available resources and dependence on others, lack of confidence, lack of skills,
lack of integrity, lack of trust. Hence, it is a combination of multidimensional factors such as
Disease, Ignorance, Apathy,Dishonesty and Dependency.
Disease- If there is disease; there will be high absenteeism and subsequent declining of
production and wealth. Ignorance -Lack of information and knowledge and it is different
from stupidity which is lack of intelligence, different form foolishness which is lack of
wisdom. “Knowledge” is power is an old English saying which describes the importance of
knowledge.
NB: Information is a raw data, unless we interpret it in to practice or meaningful analysis, it
is useless.
The following saying shows a comparison between information and knowledge, “we are
drowned in a pool of information but we are starved of knowledge”
Apathy-lack of interest (people do not care when they feel powerless). When they do not try
to change things, it goes with a mentality of accepting existing problems and lives with it
because they believe that God has decided their fate. Russians say “Pray to God but sail to the
shore “
Dishonesty - when there is no respect for humanity and its resources. It takes place
especially when resources are abused; facilities are diverted for individual purposes.
 Dishonesty leads to morale decline
 Dishonesty leads to temptation of abusing resources
Dependency - If a person is devoid of health, self-control, he will be dependent mainly on
aid.
3. Informal Sector
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Large cites attract migrants despite all their problems. People migrate to cities either in search
of jobs or to escape the agony of rural poverty. But cites do not have available jobs in the
formal sector. When the migrants fail to be employed in the formal sector, they shift to the
informal sector.
WHAT IS THE INFORMAL SECTOR?
The existence of an unorganized, unregulated and mostly legal but unregistered informal
sector in developing countries was recognized in the early 1970s. But there is no universally
accepted definition of Informal Sector so far despite that studies reveal the share of the urban
labour force engaged in informal activities is growing and ranges from 30 to 70%, the
average being 50% in developing countries. Despite large number of research as a concept it
remains elusive. The reasons are that the sector is heterogeneous in terms of activities and
scales. Sometimes it includes workers operating in their own business, employees in small
business, wage laborers and apprentices. In other cases it includes small activities like
shoeshine, petty trading and socially useless jobs (begging, prostitutions), service people
(gardeners, house cleaners, servants in house, street scavengers).
Lubanga (1992) defines informal sector as follows:
“Informal sector consists of small scale self-employment activities with or without hired
workers typically operating with a low-level of the organized form and technology to
generate income for the participants. These activities are carried out without formal approval
from authorities” The existence of an unorganized, unregulated and t unregistered informal
sector in developing countries was recognized in the early 1970s. The bulk of new entrants to
the urban labour force seemed to create their own employment or to work for small-scale
family-owned enterprises. The self-employed were engaged in hawking, street vending, letter
writing, knife sharpening, junk collecting, selling fireworks, prostitution, drug peddling, etc.
Other found jobs as mechanics, carpenters, small artisans, barbers and personal servants.
Studies reveal that the share of the urban labour force engaged in informal activities is
growing and ranges from 30 to 80%, the average being 55%: The self-employed workers in
informal sector have little formal education, are generally unskilled, and lack access to
financial capital. Therefore, workers’ productivity and income in this sector tend to be lower
than in the formal sector. Generating activities including women and children and they often
work very long hours. They usually live in slums, which generally lack public services like
electricity, water, drainage, transportation, educational and health services.
Major Features of the Informal Sector:
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  Small scale operation
 Self or family employed
 Not licensed
 easy entry and exit
 reliance on indigenous resource
 Labor intensive
 Skill acquired outside formal school
In the Ethiopian context the informal sector is viewed as sectors:
 Not registered as companies or cooperatives
 They have less than 10 personnel employees
 They have no written book of accounts
 They have no license and hence do not pay tax
Causes/Reasons for the Emergence of Informal Sector
 Economic crisis, failure of formal sector to absorb labor, low skill and education, Lack of
capital, failure of agricultural sector to create employment
The informal sector: legalization or laissez-faire?
It is an undisputed fact that the informal sector is a growing and increasingly complex
phenomenon in the economic, social and political life of many developing countries. In Latin
America, this sector accounted for 80 per cent of the 10.1 million jobs created between 1990
and 1993; (1) in Africa, two out of three city-dwellers already earn their living in this
"survival sector", which is expected to generate 93 per cent of additional urban jobs in the
1990s.(2) The promotion of this sector is one of the main issues in development policy today.
With the adoption of structural adjustment policies and the revival of neo-liberal doctrines in
the 1980s, two opposite and controversial positions emerged with respect to this sector. On
the one hand, there were the advocates of stricter control over the conditions for engaging in
informal activities in order to guarantee a return on investment in modern enterprises, given
the threat of unfair competition from the informal sector (this view was very widespread in
Africa, as a result of the decline of the regulatory role of the State).
On the other hand, there were those who believed that the legislative and administrative
system must be thoroughly reformed in order to free the initiative and economic potential of
microenterprises (the approach adopted by the neo-liberal reform movement in Latin
America). Both of these perspectives are reflected in the ILO's Employment Policy
(Supplementary Provisions) Recommendation, 1984 (No. 169), which calls for recognition of
the importance of the informal sector as a source of jobs (27 (1)). The legal status of
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informal establishments, their relationship to the State and the role of public institutions are
therefore of major importance.
4. Environmental Problems/degradation/crisis
The most serious problem of environmental degradation is its implication on health, urban
sanitation and beauty. Health concerns include air and water pollution, water supply and
sanitation. Waste disposal; chemical and food safety and other waste related problems:
Generally environmental problems are classified into two: indoor and outdoor problems.
I. Indoor problems (Domestic Problems) these have many dimensions such as:
 Waste water (liquid waste) and Sewage; Many even large cities of 3 rd world nations have
no sewerage systems and adequate waste water treatment facilities. This had consequent
health problems on the poor with water born problems.
 Inadequate drainage facilities: in many cities of 3 rd world cities poor drainage system led
to regular flooding
 Indoor Air pollution:- rises from smoke, dust and other sources which lead to chromic
lung problems and Asthmatic Diseases
 Noise: in some cites the use of high-fi equipment and other instruments of entertainment
damage the hearing of those constantly exposed to that noise. Noise becomes a constant
source of disturbance and leads to poor attention and poor health
II. Outdoor (Non-Domestic) Problems this includes:
 Hazardous industrial solid waste. Countries in the 3rd world are finding it difficult to
control industrial wastes and release them to the nearby surrounding without recycling
their toxic content
 Hazardous Hospital wastes: in many cities clinical wastes from hospitals and other
medical facilities are in adequately treated and often find their way to residential
environments such as open dumps, where waste pickers are exposed to serious health
problems.
 Industrial Air Pollution: Lack of adequate control of smoke and dust from industry
results in air pollution. Industries release acid to the environment and to the air that
affects human health. These acids also come down in the form of rain with subsequent
environmental implication.

Major outdoor problems

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 Industrial liquid and solid wastes, Hazardous hospital wastes, Noise from Industries,
Industrial accidents, Industrial air pollution, Traffic Congestion and poor traffic
management
2.3 Policy for better managing migration to urban centers
Cities have always have been playing a very crucial role in economic, political and social
activities, that is why cities become more attractive for most people who live in rural
territories and they try to leave their hometowns mostly in attempt to benefit from economic
opportunities available in cities. Hence, the trend of migration to urban centres has regularly
been growing. As graph of the world-wide, rural-urban migration is upward and push and
pull factors consistently induce people for settling in urban centres particularly in developing
countries. Concerning the ministries and organizations of the gov’t as part of their tasks have
adapted series of policies to address the problem of rural areas and improve agriculture
production. Eg: The Ministry of Rural Rehabilitation and Development, Ministry of
Agriculture and Irrigation, etc is established to develop and promote programs for reducing
poverty amongst the people who live in rural areas.
Policy recommendation
Rural-urban migration is not simply an issue of settlement of residents from one area to
another. It associates with various social, economic, env’tal and political consequences w/c
impact both on migrants themselves as well as host cities. The gov’t has to draw a policy to
make balance b/n the expansion of cities’ infrastructures and the flow of rural-urban
migration. Therefore, the policy recommendation here mainly concentrates on those
intervention tools w/c enable the gov’t to mitigate the current excessive rural migrant to the
major cities. In doing so, gov’t gain opportunity to re-balance b/n rural-urban migrant and the
cities dev’t and to deal with those unplanned areas that have recently been developed in the
major cities. These policies include the following:
1. Adapting appropriate policy to narrow the gap b/n rural area and cities
It is believed that most policies are designed in the favour of urban areas rather than rural
areas. There is a huge gap between urban and rural areas in various aspects such as job
opportunity, health, education and other primary services. The gov’t has to reduce urban bias
policies and focused resident in rural areas, as more poverty is concentrated there. eg: Stop
Rural-Urban Migration in Ethiopia, Agricultural Led Industrialization, Rural Youth
Employment Policy, Rural health protection policy, etc.
2. Promoting rural development
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The gov’t has to establish ministry like Ministry of Rural Rehabilitation and Dev’t to
develop and promote programs for reducing poverty amongst the people who live in rural
areas. There is need for a comprehensive poverty eradication strategy in rural areas with
involvement and collaboration all relevant ministries to generate employment opportunity in
non-agriculture sector, as well as short and medium term financial support. And the financial
incentives are also given to the rural educated unemployed youth for starting self-
employment ventures.
3 Promoting agriculture production and providing market
Since agriculture production makes one of the significant sources of livelihood in rural areas
and its share in the GDP is relatively high. It can be used as influential intervention tool in
managing rural-urban migration. As long as rural residents gain sufficient income from their
agriculture products, they are mostly likely prefer to stay in their hometown and continue to
work and promote their already income sources, rather thinking on new source income in
cities. The gov’t, especially the Ministry of agriculture, Irrigation and Livestock has to
provide formers with the technical support and other necessary cooperation for better
cultivation, as well as for marketing so that they can sell their products at good price.
Enhance technology-based agriculture by providing (subsidizing) necessary equipments
and machines for agricultural production like for irrigation (motor pump), tractors, etc.
The agricultural production was sought to be increased through introducing high technology
in agriculture which is popularly known as green revolution. The purpose is to achieve self-
sufficiency in food grains.
4 Promoting secondary cities
In most countries, there are a number of primary cities where most of the rural migrants try
to get settled. Each of these major cities which located at the various geographical zones, to
a different extend has recently been experiencing an excessive urbanization and
overpopulation.
That is why promoting secondary cities are going to provide alternative attraction place
for migrants to settle. The gov’t has to be a potential for upgrading centres of provinces in to
secondary cities.
5 Addressing the problem of unplanned areas in the major cities
Most part of the migrants already settled around and or in the major cities lives in the
informal areas with no access to the primary services and land ownership document. The
gov’t has to pay attention to the matter and provide them with official mechanism for land
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tenure so that the gov’t can deliver the primary services and collect tax in return. In
addition, the gov’t should provide a low cost housing and housing loan schemes for the
poor so that they can provide house for themselves.
7.6 Other policy options to control the expansion of urban centres (Migration)
A) Master Plan- It refers to a compressive document which contains physical designs of
cities for certain period of time. They are usually prepared for 10-20 years to guide the
physical expansion of a city. Master Plans contain plots for residence, commerce,
industries/manufacturing and plots for other purposes.
B) Closed City Policy- under this policy migrants are required to show residence permits
otherwise they must return back to their origin. In the 1960s closed city policy measures were
taken in Kenya, Zaire, Ivory Coast and Ghana. These countries deployed police force to
check whether migrants qualify to reside in the city otherwise migrants are sent back to their
original land. But today it is difficult to apply this kind of policy considering the reality on
the ground.
C) Satellite City Policy- When there is a concentration of population in few bigger cities,
regional and central governments peruse satellite city approach to divert the direction of
migration from big cities to smaller nearby cities. These smaller nearby cities are called
Satellite cities. They have to grow in terms of investment, education, health and other
fundamental services. Otherwise concentration of population and resources in few towns
leads to polarization. Polarization refers to unidirectional which results in primate city
Primate City: is a city which is many times bigger than the second city in a nation or region.
Primacy is a situation where by population and resources are concentrated in few cities.
Addis Ababa is a primate city in Ethiopia
D) Rustication City Policy- this policy is an approach where government resettles urban
population into rural settlements, where the ecology is appropriate for living like farming
land, health and education services. It has some financial implications to provide social
services.
E) Integrated Rural Development- is the system where by a range of services are provided
to rural population to minimize migration and to improve their life. The policy is considered
to be a lasting policy both for push and pull factors.
F) Demolition Policy/ Bulldozing Illegal Settlements

2.5 Control of Natural Population Growth

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Two important measures that are used to reduce birth rate/child bearing (population growth)
are; Economic Development and Family planning
 Economic development usually leads to the reduction of population growth rate. This
reduction results from different factors that linked to economic prosperity. This is indirect
policy intervention in population control. In general a higher standard of living reduces
the desire to have children because:
 Both sexes are usually actively engaged in work force;
 Advanced economies offer pension income at retirement;
 The cost of raising a children is higher;
 Children are not considered as part of family labor force;
 Education and employment training delays time for marriage or have a child;
 Family Planning- is a direct policy intervention in population control. Therefore, it
involves any program that provides educational and technological services that help
individuals to plan the birth of their children. The nature of family planning varies from
country to country because of differences in economic development, cultural values and
religion. Family planning has been effective in developed countries.
 Among the African countries, the following countries have been effective in family
planning; Botswana, Mauritius and Tunisia
 In the DCs China, Indonesia, Brazil, Hong Kong, Mexico are effective in family
planning.
 India is not successful in family planning because of: poor planning, lack of social
security, gender inequalities, lack of commitment both from the government and public
and under funding
In the remaining LDCs, family planning programs have not been successful because of low
economic status, religious and cultural reasons. China has used one child policy which gives
couples economic rewards for having fewer children. The reward includes salary bonuses,
extra food, high pension, improved housing, increased medical care and school tuition for the
child. Family planning needs commitment both from the government, and the public. The
objective of family planning is to have good and healthy citizens who contribute to the
national economic development.
 Family planning program requires: Creating awareness to the public, Large investment
(education, health care), Staff and Infrastructure
CHAPTER THREE
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 8 Urban Management and Governance
Meaning of Urban Management
The concept urban management is a recent, but, widely used concept as the urbanization is
growing very fast. A few definition of urban management given by various exponents are
described below.
According S K Sharma the Urban Management can be described “as the set of activities
which together shape and guide the social, physical and economic development of urban
areas. The main concern of urban management, then, would be intervention in these areas to
promote economic development and wellbeing and to ensure necessary provision of essential
services.
According to Amos “Urban Management is the responsibility of municipal government and
urban management is concerned with all aspects of urban development, both public and
private. According to Rakodi “urban management aims to ensure that the components of the
system are managed so that they make possible the daily functioning of a city which will both
facilitate and encourage economic activity of all kind and enable residents to meet their basic
needs for shelter, access to utilities and services and income generating opportunities.”
According to Cheema “urban management is a hostic concept. It aimed at strengthening the
capacity of government and non-government organizations (NGOs) to identify policy and
programme alternatives and to implement them with optimal results.”
What is urban governance?
Urban governance refers to how government (local, regional and national) and stakeholders
decide how to plan, finance and manage urban areas. It involves a continuous process of
negotiation and contestation over the allocation of social and material resources and political
power. It is, therefore, profoundly political, influenced by the creation and operation of
political institutions, government capacity to make and implement decisions and the extent to
which these decisions recognise and respond to the interests of the poor. It encompasses a
host of economic and social forces, institutions and relationships.
Urban governance involves a range of actors and institutions; the relationships among them
determine what happens in the city. In managing urban transformations, government (at all
levels) need to play a strategic role in forging partnerships with and among key stakeholders
(UNESCAP & UN-Habitat, 2010: 211–12; 2015).
According to Slack and Côté (2014:7), urban governance:
 Plays a critical role in shaping the physical and social character of urban regions;
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  Influences the quantity and quality of local services and efficiency of delivery;
 Determines the sharing of costs and distribution of resources among different groups;
and
 Affects residents’ ability to access local government and engage in decision-making,
influencing local government accountability and responsiveness to citizen demands.
Changing views in Urban Governance
If there is any change at national level there will usually be simultaneous change at local
level. These days change in government calls for good governance, demanding for more
accountability, fairness and responsiveness. Sustainable development is that which meets
the needs of the present without compromising the ability of the future generation to meet
their own needs. This means sustainable development programs aim at achieving:
 Social progress
 Effective protection of environment
 Prudent use of natural resources
 Maintenance of high, stable and series economic growth. The ultimate goal of good
governance is to bring sustainable development.
 Accountability in Urban Government
The urban governments under many circumstances are accountable to the electorate. Urban
government is complex set of institutions and groups with various lines of accountability.
Some are directly accountable to the electorate or to the national government, whereas others
are accountable to state government or can be controlled by a unit which is at a remote
distance. In theory the extent to which urban governments are accountable to the public has a
major impact on the effectiveness of the municipal government.
Under this circumstance any local government is expected to fulfill the following factors.
1. it must be responsive to the needs and circumstances of the residents
2. it must be efficient and honest in the use of public resources
3. it must be fair and economic in providing public services.
Accordingly, the representative nature of urban government assumes that local government is
effectively controlled by local electoral choices or through ballots.
However, there are a number of factors that affect the realization of these assumptions. These
include: National political climate, Civil liberty, the level of public awareness and
educational level. These are external factors. On the other hand, internal factors which

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affect the representative nature of urban government are: the constitution of local
government, the extent of voter’s choice, the regularity of election and the electoral system.
External Factors
National political climate refers to whether there is a tendency to centralization or
decentralization.
Civil liberty: Individuals right whether they have the right to association, freedom of speech.
The nature of internal factors affecting the choices and preferences of the local
government are:
(1) The constitution of local government
The mode of local accountability rests on the ideas and issues contained in the constitutions
of local government. Though almost all local constitutions give ultimate powers to the
residents, and there are many instances when the central or the state governments intervene in
the affairs of municipal governments. The central/state governments have the right to appoint
and remove councilors and mayors. This has happened in Malaysia and Indonesia in the
1970s. For instance, in Indonesia ¼ of the municipal council/government must constitute
national army. The implied reason is to manipulate the council and the urban government.
That is one-fourth of municipal space goes to the army.

2. The Extent of Voters Choice

Elections are the only meaningful instruments of accountability if and only if voters have
genuine choice. Elections must be free and fair. There must be fair representation of
minorities and local voices. However, against this background, some of the time elections are
manipulated; vote rigging and intimidation take place. If these things happen, elections
couldn’t be fair, and there cannot be fair representation as well.

3. Regularity of Elections
Many constitutions define that elections take place regularly. However, regular elections are
undermined, when higher level government suspends elections, and even dissolve councils.
This happened in Tanzania, in Chile, Malaysia in diffident times. The legitimate reason of
delaying elections is usually only when the government is in state of emergency. Many cities
are a center of elites, economic establishments etc. hence, many governments do not want to
let urban centers free.

4. Electoral System
There are two broad systems that are practiced in many places. These include
(a) Geographic/spatial systems
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 (b) Party systems
 In Anglophone countries such as India, Nigeria, Zimbabwe and Pakistan election is
carried out on geographic basis.The municipal government is divided along zonal
territories known as wards. Each ward elects its representatives according to the number
of population in the locality.
 In other countries party system is used to secure seats in the local council in proportion to
the parties share. Individuals take these seats according to their numerical positions on the
pasty list. Under moral conditions each party contested in the election will have a
proportional representation in the local council. However, this representation is possible if
and only if elections are free and air.

How to elect a mayor??? There are 3 ways of electing a mayor

1. Appointment by central/ state governments. This can take place either through direct
appointment from above or the local council may present a list of nominees to the higher
government and the higher government chooses from the list.
Eg. China and former Soviet Union
2. Election by council
Urban council elects a mayor among it ranks. The election takes place in consensus or
through majority vote.
3. City-wide electionwhen the mayor is elected independently of the council’s election. A
separate mayoral election takes place.
Towards a Set of Urban Governance Indicators
Decentralization - Financial:
 Autonomy of financial resources, Can local government decide on the use of local
resources? Predictability of inter-governmental transfer, Principles of financial
devolution, Level of adoption of the budget, Sources of local government funding ((taxes,
user charges, borrowing, central government, international aid), Can local government
raise resources from capital markets without approval of from higher levels of
government? Percent of funds devolved from higher levels of government
Decentralization - Political:
 Dismissal of mayors, councilors and officials, Progress of deciding political agenda,
Legislation on de-centralization (yes/no), Number of gender equity oriented initiatives
undertaken by local organization or institutions, Percentage of elected and nominated

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 members by sex/ethnic group, Control by higher level of government, Access to
government positions by all groups
Local government:
 Process of selecting mayor, Regulatory framework that governs promotion of civil
servants, Career prospects of civil servants, Pay scale of civil servants, Tacit knowledge
about the power structure

Planning and predictability:

 Openness of procedures for contracts/tenders for municipal services, Appointments by
higher government, Annual budgeting, Percent recurrent resources for Private
Sector/CBO, who supplies and regulates various services, independent decisions,
regulation/taxes, auditing, removal from office, Sources of income, Transparency of local
taxation, Consistency/regularity of local mayor election
Responsiveness:
 Percentage of population served, Access of public to stages of policy cycle (planning,
budgeting, monitoring, etc) delegation of public service, Integration of planning and
budgeting, No of public hearings and participants from different income/ethnic groups,
are data collected and used by gender and district? Existence of conflict mediation at local
level (budgeted)
Empowerment:
 Existing participatory processes, Group equity in participatory planning and decision
making, Equal access to education and information, Existence or not of information on
differential situation and needs of women and men, Legal entitlement to different assets
to all categories of people, Self -determination of groups in relation to resource
management, Civil freedoms - press, association, justice, Social group and watch dog for
program implementation, Number of CBO’s and specific organizations addressing
gender issues, Access to basic needs.
Effectiveness:
 Consumer satisfaction (survey/complaints), Capacity for delivery of services ( including
spatial coverage), Income/expenditure of local government/capital, Legislated local
government functions, Targets, program, financial, Economic development ( city
Product), Environmental quality
Freedom, justice, fairness and equity (concentrated on equity first):
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 Equity in tax system, Incorporation of excluded groups in the consultation process,
Resource allocation to services benefiting the poor/ the rich, Access to basic services for
disadvantaged groups Eg spatial distribution of services, Quintile distribution of city
product, Ratio of price of water in formal informal settlements, Existence of public
hearings, Existence of local media, Resource allocation towards formal/informal
settlement, Rental; to income ratio in formal and informal settlement
Accountability and transparency:
 Fairness in enforcing laws, Clarity of procedures and regulations and responsibilities,
Existence of sanction, performance standards and disclosure laws, Codes of conduct for
professional associations
Forward Looking:
 Social development plan, Vision/mission statements, Forward/strategic Plans,
Communication strategy, Gender perspective, Revenue growth ( total and own), Funds
known in advance, Setting budgets/targets, Existence of planning department
Participation:
 Role of key groups in planning , decision making, implementation, monitoring and
evaluation, Freedom of media and existence of local media, Percentage of people voting
by sex and social groups, Process of public discussion on key issues, Use of referendum
on key issues, Right of establishing association
Private sector:
 Extent of civil society organization ( monitoring ), Predictability of enforcement, Integrity
of auditing and monitoring, Existence of enabling city legislative environment,
Predictability of institutional change, Credibility of rules, Existence of an official admin
structure
Security:
 Percentage of unsafe city areas-crime rates (murder, rape), Police corruption- feeling of
safety, Efficiency, Per capita revenue, Cost of various services, Percentage economic
Growth, Recycling/re-treatment/sustainability, Percentage on salaries, Employees per
delivery service, General administration share, Number of local government employees/
1000 population
Civil society:

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 Resource requirements to organized groups, Status of local leadership ( formal, informal,
legitimate, non-legitimate, respected, non-respected, independent, Existence of
emergency laws against public meetings, tradition of public action, No of NGO’s, No of
procedures need e to register NGO’s
Planning and management:
 Functional responsibilities for service provision (sewerage, water, education, health,
social services, green space etc.). Possibility that the mayor is good!!!!

Top 12 Urban Governance issues/indicators:

1. Consumer satisfaction (survey/complaints)

2. Openness of procedures for contracts/tenders for municipal services
3. Equity in tax system
4. Sources of local government funding ((taxes, user charges, borrowing, central
government, international aid)
5. Percentage of population served by services
6. Access of public to stages of policy cycle
7. Fairness in enforcing laws
8. Incorporation of excluded groups in the consultation process
9. Clarity of procedures and regulations and responsibilities
10. Existing participatory processes
11. Freedom of media and existence of local media
12. Autonomy of financial resources

Transparency Reform Scorecard

Data suggest that transparency helps improve governance and reduce corruption — essential
ingredients for better development and faster economic growth. But there is a need to pay
more attention to the issue. For that reason, the World Bank Institute has begun to construct
an index to help make transparency more transparent. Further, in terms of reforms, a basic
checklist, which countries may use for self-assessment, includes:
 Public disclosure of assets and incomes of candidates running for public office, public
officials, politicians, legislators, judges, and their dependents;
 Public disclosure of political campaign contributions by individuals and firms, and of
campaign expenditures;
 Public disclosure of all parliamentary votes, draft legislation, and parliamentary debates;
 Effective implementation of conflict of interest laws, separating business, politics,
legislation, and public service, and adoption of a law governing lobbying;

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 Publicly blacklisting firms that have been shown to bribe in public procurement (as done
by the World Bank); and "publish-what-you-pay" by multinationals working in extractive
industries;
 Effective implementation of freedom of information laws, with easy access for all to
government information;
 Freedom of the media (including the Internet);
 Fiscal and public financial transparency of central and local budgets, adoption of the
IMF’s Reports on Standards and Codes framework for fiscal transparency, detailed
government reporting of payments from multinationals in extractive industries, and open
meetings involving the country’s citizens;
 Disclosure of actual ownership structure and financial status of domestic banks;
 Transparent (web-based) competitive procurement;
 Country governance and anticorruption diagnostics and public expenditure tracking
surveys (such as those supported by the World Bank); and
 Transparency programs at the city (and subnational) levels, including budgetary
disclosure and open meetings. Source: Finance & Development, September 2005, P. 43
Defining good governance
Good Governance is an approach to government that is committed to creating a system
founded in justice and peace that protects individual’s human rights and civil liberties. Good
governance implies that the exercise of the vested authority is accountable, transparent,
predictable, participative and dynamic.
Elements of good urban governance
 Participation requires that all groups, particularly those most vulnerable, have direct or
representative access to the systems of government.
 Rule of Law is exemplified by impartial legal systems that protect the human rights and
civil liberties of all citizens, particularly minorities. This is indicated by an independent
judicial branch and a police force free from corruption.
 Transparency means that citizens understand and have access to the means and manner
in which decisions are made, especially if they are directly affected by such decisions.
 Responsiveness simply involves that institutions respond to their stakeholders within a
reasonable time frame.

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 Consensus Oriented is demonstrated by an agenda that seeks to mediate between the
many different needs, perspectives, and expectations of a diverse citizenry. It is a decision
needs to be made in a manner that reflects a deep understanding of the historical, cultural,
and social context of the community.
 Equity and Inclusiveness depends on ensuring that all the members of a community feel
included and empowered to improve or maintain their wellbeing, especially those
individuals and groups that are the most vulnerable.
 Effectiveness and Efficiency is developed through the sustainable use of resources to
meet the needs of a society. Sustainability refers to both ensuring social investments carry
through and natural resources are maintained for future generations.
 Accountability refers to institutions being ultimately accountable to the people and one
another.
Urban Management Models
There are four managerial models in managing urban centers
1. The Bureaucratic Model
2. The patronage Model
3. The Public Enterprise Model
4. The Public Management Model

The Bureaucratic Model:

This model was developed by Max-Weber. It was established in response to the disorganized
way or rule of thumb in managing organizations before its inception. This model presents
itself as a rational method of organizing resources to achieve best results. The underlined
principle in this model is highly centralized, rule bound management system. Authority
concentrates at the top and rules and regulations prevail at all corners of an organization.
Advantages: Promotes consistency, stability and uniformity as opposed to rule of thumb.
Disadvantage: - high concentration of power without delegation stifles the moral and
innovation of workers and subordinates. It is elitist (selective, exclusive) by nature.
- The monopoly and secrecy of information at the top leads to rigidity and inflexibility.
2. The Patronage Model:
It is a system whereby the winning party takes all power. Since this model is a partisan
(fan/follower) approach, the winning party appoints its own people in the position of top
management. The appointment is made considering that the party will do better if offices are
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headed by its own people. However, it is impossible to fill all positions by party supporters.
Hence, in many cases lower level positions are filled by professionals, careerists or civil
servants. Unless it is applied carefully, it leads to abuse of the public office. It is dangerous
when appointments are made based on purely political basis by ignoring professional
competence which leads to inefficiency and ineffectiveness. Moreover, patronage system
leads to rotation or frequent turnover at every election. This leads to /administrative
instability.
3. The public Enterprises model
This was born in response to the failure of the preceding models. The model emerged as the
demands of voters for effective service delivery increased. The guiding principle is value for
money. Hence, the idea of value for money is used to measure the effectiveness of urban
activities in terms of effective and efficient service delivery. This model tries to inject the
private sector principles into urban management.
Priority is given to customers and quality. Therefore, it suggests that the urban functions
need to be organized and managed by autonomous and semiautonomous enterprises
directed by board of directors and executives. These enterprises compete with other
enterprises in the market both with the public and private agencies involved in the same
activities
4. The Public Management Model
This model views the role of government not as doer but as enabler i.e. the government
should create enabling environment than involving in service provision. The government
should serve as a facilitator, organizer and coordinator of activities performed by different
actors. These actors include the central government agencies, local institutions, private
sectors, the public and others. The model conveys a message that there is no one best away
of doing things unlike the traditional public administration concepts. Success depends on the
interaction of different actors.

CHAPTER 4
URBAN FUNCTION/FINANCE
Urban government is nexus of agencies which provide, finance, plans and executes a range of
urban services and functions. Some functions are performed by central government, others
are performed by state governments and others are still performed by municipal government.

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Central and state governments accomplish urban functions through their public agencies,
enterprise and corporations.
Urban functions are generally classified into 3 groups.
1. The provision of public services.
2. Regulation of public behavior and
3. Coordination and planning of economic development
1. Provision of public services; urban services include the following:
 Construction of roads (feeder roads, or access roads); street lighting, drainage facilities
 Provision of clean water at individual or community level.
 Disposal of liquid waste, solid waste and human waste
 Provision of educational services at nursery, primary, secondary, and tertiary levels.
 Provision of health care services including hospitals, clinics and health centers; and
provision of hygiene services to the community.
 Provision of housing services, rental and accommodation services.
 Recreational services such as parks, museums, galleries, sporting services
 Fire protection services.
 Public transport services including train and public buses.
 Social welfare services, protection of the elderlies, children, the handicapped and
generally the disadvantaged part of the community.
2. Regulation of Public Behavior
Urban centers are responsible to ensure law and order in their jurisdiction. To this effect they
establish laws and law enforcing institutions e.g. police, court, codes and ordinances such as
building codes, traffic codes, road patterns are all mechanisms to enforce laws to ensure
peace and stability. Some of the details of these services include:
a. Housing and land control, including the application of rules on land use, occupation,
densities, architectural and building standards.
b. Licensing of commercial and industrial activities, pollution control, including
regulation of car movements, industrial emissions/ effluents and restriction on noise.
c. Environmental protection and health including prevention of communicable disease,
inspection of restaurants and hotels, control of pests and pesticides, public hygiene.
d. Traffic management including parking sites, routing, and restrictions on vehicular
movements.
e. Vehicle licensing and safety inspection
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 f. Consumer protection including the enforcement of accurate weight, measures,
description of goods and services, their qualities and prices.
3. Coordination and Planning
This includes expansion and allocation of investment for capital projects that will ensure
sustainable urban development, Employment creation and infrastructure development. To this
effect, urban centers must establish a range of economic enterprises either jointly or through
joint ventures or on their own. These enterprises must fulfill among other things the creation
of values and promotion of efficiency in resource utilization and in the realization of
sustainable economic and social development. This includes investment in strategic
infrastructure such as roads, telecommunications, commercial centers, industries and
crevices. It also includes technical supports for enterprises that need credit facilities, training,
business advice, accounting and finance. It also includes incentives to investors such as tax
concessions, preferential access to public utilities and promotional services.
How can urban centers realize these services?
They need a significant amount of finance.
Urban Finance
Urban finance is concerned with the identification of revenue, its mobilization, allocation and
utilization. The utilization includes disbursements, accounting and auditing.
Sources of Revenues
There are two broad sources of revenues for urban governments. These include;
 Locally raised revenues and externally obtained sources. Local revenues include
taxes, user charges, fees, and penalties.
 Taxes are again of two types; direct taxes and indirect taxes.
Direct taxes
They are taxes which are directly imposed on individual income and include payroll taxes on
monthly and annual basis. Taxes on professional services, vocational and occupational
services are also direct taxes. Generally direct taxes are collected from commercial activities,
personal income tax, land use tax, property tax and sometimes taxes on natural resources
which are called royalties (like taxes on mining).
Indirect taxes:
These are imposed not on a seller or producer but on the consumer. These are sales taxes and
excise taxes.

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Sales taxes: A tax imposed by the government at the point of sale on retail goods and
services. It is collected by the retailer and passed on to the state. Tax based on a percentage of
the selling price of goods and services. State and local governments assess sales tax and
decide what percentage to charge. The buyer pays the sales tax to the retailer, who passes it
on to the sales tax collection agency of the government.
Excise taxes: A taxes on the manufacture, sale, or consumption of goods, or upon licenses to
pursue certain occupations, or upon corporate privileges. .
External source: include loans, grants and shared revenues. Regarding loan, municipalities
can borrow money from a bank as any individual enterprise; however municipalities must
fulfill requirements such as legal personality and credit worthiness to get the loan.
Grant is all transfer of financial resources from higher level to lower level of government.
Grants can be provided as lump sum (block grant) or can be attached to special projects.
When grants are in lump sums they are not attached to any projects and it is called general
grant (block grant). When grants are attached to specific projects they are called special
grants. Special grants are accompanied by specific restrictions/conditions. E.g. capacity of
urban center to utilize the prospects of the urban center to grow
The Problems of Urban Finance
1. Growing population
A growing number of populations in almost all urban centers impose high pressure on
urban services and infrastructure. Unfortunately the majority of urban population is
unproductive and dependent, most of whom are migrants, jobless or involve in socially
useless jobs.
2. The nature of the intergovernmental relations.
In a highly centralized political condition, the relation between the higher level of
government and municipality is a kind of boss subordinate relation instead of partnership.
Rules are highly centralized and they do not take into account local realities, as a result
municipalities highly depend on the consent of higher government. This has an important
implication on tax rate, charge rate; budgeting and control.
3. Institutional inefficiency: Lack of institutional capacity to raise revenues, to prepare
budgets and execute them (lack of technical knowledge, lack of manpower).
4. Subjective tax assessment: In the absence of accurate books of account, tax
collectors are forced to impose tax rates and amounts on business establishments
subjectively. The reasons of not maintaining books of accounts are:
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  There are some businesses which are exempted from maintaining books of accounts
 Those who are legally required to maintain books of accounts deliberately avoid
maintaining books of accounts. Even if they do, they prepare two accounts, one is
distorted and the other is accurate. They show the former to tax authorities.
5. Legal backing: Lack of legal backing for municipalities when there is tax litigations.
Municipalities do not have internal legal mechanisms to handle tax related disputes.
6. Lack of loan: Lack of loan provision: this is due to lack of legal personality because
many cities are under the tutor of higher level government.
7. Lack of grants: Grant is not mandatory for higher level governments to give to urban
centers. But their provision is important to supplement the financial capacity of cities.
8. Weak financial planning: Weak budgeting is reflected in the discrepancy between
budgeting revenue and expenditure. The gap between financial planning and actual
performance must be narrow. Planning must be proactive; make things happen than
let things happen
CHAPTER FIVE
Urbanization and Urban Management in Ethiopia
Historical evidences show that the origin of urban centers traces back to the time of Axunite
Kingdom (about 1000 BC). Following Axum: Gondar, Lalibela and a number of other towns
emerged. However, this was marked by discontinuity because of the absence of fixed urban
centers resulting from the political nomadism that prevailed until Addis Ababa was built as
the permanent seat of King Minlik II at the end of 19th century (Akalu, 1966 and Horvath
1969).
A combination of factors including physical, socio economic and political situations have
hampered the emergence, growth and development of urban centers in Ethiopia until the last
quarter of the 19th century. Rugged topography hampered easy communication and led to
regional isolation, under-development of occupations such as craftsmanship which could
have triggered large-scale industrial development and specializations. Moreover, internal
conflicts and external aggressions had all contributed to the slow emergence and development
of urban centers in Ethiopia. Hence, Ethiopia entered the 20th century with a poorly
developed urban system. At the end of the 19th century only three urban centers, namely,
Addis Ababa, Harar and Mekele had a population of more than 10,000 inhabitants (see table
below)
Table 1: Population estimates of selected urban centers (1850-1899)
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 Urban Center Population
Assab 5,000
Debremarkos 2,000
Gondar 6,000
Debretabor 5,000
Harar 35,000
Debre Birhan 2,500
Ankober 6,000
Addis Ababa 30,000
Axum 3,000
Adwa 8,000
Mekele 15,000
Source: (CSA, 1984)
Despite the smallness and poor development of urban centers, some factors had contributed
to the emergence and expansion of many more towns in the country in the same century.
These include:
 The establishment of central government that insured national unity and political stability.
 The introduction of modernity such as transport and communication networks, schools,
hospitals, roads and modern business. The emergence and development of towns such as
Dire Dawa, Nazareth and Mieso were the immediate result of Addis Ababa- Djibouti
railway line.
 Ethiopia's exposure to the outside world which for centuries closed to its own traditional
system. Urbanization was further accelerated during the Italian occupation of 1936 -
1941. The Italians built new urban centers. They also built road networks that stimulated
the emergence of new towns and the expansion of old ones. After the 19 th century,
urbanization had been the product of three historical events.
(1) Expansion of Menelik II to the south
(2) Italian occupation, which took place between 1936-1941.
(3) Establishment of Ethio-Djibouti rail way.
 Menlik’s Expansion: With the expansion of Menlik’s army to the south, a number of
stations were established which were gradually changed into urban centers. These stations
essentially served as military centers, known as garrisons to control the surrounding
indigenous people during those attempts of territorial expansion. For instance, towns like
Awasa and many other centers in the south were garrisons. This period is marked with the

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 establishment of Addis Ababa in 1887. The idea and practice of central government
started during this period.
 Italian Occupation: Italians further accelerated the rate of urbanization and at the same
time established new centers. Towns which were directly associated with Italian
expansion were kombolcha, Sndafa ,Jimma, Bonga, Azezo. Concerning Jimma
townItalian occupation accelerated the urbanization of Jimma as it was the seat of Aba
Jifar. Italians designed the master plan for Jiren in 1935. Before the Italian occupation,
Jimma was confined to Jiren. After the occupation they created two quarters namely
Hermata and Mendera.
 The Opening of Ethio-djipouti railway 1887-1917: Following the opening of the Ethio-
Djibouti railway, a number of nodal settlements were established along the line between
A.A and Djibouti. These settlements served as commercial centres and as transits to other
parts of the country. These towns include Debrezeit, Mojo, Adama, Metahara, Awash,
Miesso, Dengego, Diredawa. Mojo and Adama serve as transits to the south and south
east of the country. Now Diredawa and Adama are the two largest urban centres in
Ethiopia. Diredawa is the 2 nd largest and Adama is the 3 rd largest. There after the rate of
urbanization and the number of urban centers has kept on increasing.
Year % No of Urban Centers
1938 5.4 63
1950 6.1 108
1967 7.6 158
1975 11.8 183
1984 10.3 297
1994 15.3 540
Source: CSA 1994.
Now it is estimated that the rate is 17% and the number of urban centers are 927. The reason
for the increase in the rate of urbanization is migration. In some urban centers the proportion
of migrant population is 50% and in other areas it is less.
Addis Ababa 49%
Dire Dawa 47%
Dessie 45%
Gondar 46%
D. zeit 44.8
D. Berhan 42
Source: CSA 1994.

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The national urban population growth rate is estimated at 5.5 % with substantial difference-
across urban centers. As a result there are large numbers of population based relatively in few
urban centers. Addis Ababa is said to be a primate city, this means that it is characterized by
primacy. The share of Addis Ababa in the national urban population is 30%. The reason for
uneven concentration of urban centers is that there is no planned intervention. In urban
administration there is optimum level, where the urban center stop growing in population.
After reaching the optimum level the population and investment is directed to other urban
centers. Otherwise, it will lead to mismatch between the economy and population. It also
results in social evils such as crime, decline in urban services, increasing pollution and
congestion. The solution is to establish satellite cities to attract population to these cities.
Some adopt tax incentives and investment incentive others used forceful direction of
population to solve the problem.
The Current Urban Setting
Ethiopia, with a total population of 77 million, is the second largest populous country in sub-
Saharan Africa following Nigeria. Out of its total population, about 17% is urban. The urban
population is growing at 5% per annum while the growth rate of the country's population is
3% annum. The Ethiopian urban structure is dominated by small size towns with the
population of 2000-10,000. Consequently, there has been uneven pattern of urban
development. Resource allocation frequently focused on few urban centers resulting in
polarized urbanization and increased regional disparity between urban and rural on the one
hand and among urban centers on the other. Hence, the contribution of most small and
medium urban centers has been very low.
In fact, most urban centers are without definite socio economic functions and there have been
minimal linkages among different urban hierarchies. This is because past policies and
institutional arrangements failed to integrate spatial policies. In fact, it can be argued that
Ethiopia never had stable, long term and coherent national and spatial policies because of
changing political situations. At the top of urban hierarchy, is one city, Addis Ababa, whose
population was estimated to reach 3 million in 2000. Hence, Addis Ababa, the primate city,
accounts for nearly a third of the country's urban population.
In general, the urban scene of Ethiopia is dominated by primacy. Addis Ababa, the national
capital, has strong influence in administrative, political and economic aspects on the rest of
the towns in the country. Therefore, Addis Ababa has been the locus of increased

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concentration of population, which created a wide gap between itself and the rest of the urban
areas.
Functions of Ethiopian urban Centers
Major municipalities in Ethiopia have the following responsibilities.
(1) Preparation and implementation of development plans
(2) Collection of municipal revenues
(3) Provision of services such as slaughterhouses, waste collection, housing basic education,
basic health care services, drainage facilities.
(4) Construction of access road, bridges, and parks, recreational centers.
(5) Delivery of miscellaneous services such as fire protection, street lighting libraries,
public toilets, etc.
 However, the degree and services provided in urban centers varies from place to
place; the bigger the city the higher the provision of urban services. For example,
waste services and feeder road construction are rendered in A.A and Baherdar, but
they are absent in Gambela and Assossa. The major reason for low urban service or
absence is because of lack of financial resources.
Urban centers in Ethiopia face the following financial problems.
 Tax bases are very narrow (number of tax payers is low), Tax rates are out dated and un
revised, Collection efficiency is very poor, Enforcement of law is very poor, Capacity to
run urban affairs is poor, technical and administrative capacity, Regarding the level of
per-capita income, urban centers earn very low income (total revenue of municipalities
over population)
Discretion Per Capita Income
Bahr Dar 7
Awassa 5
Gambela 2
Ethiopia (average) 7
Africa 15
Pacifica 249
Asia 252
Industrial Counters 2,763
Sources: WB- 2001.
Problems of Urbanization in Ethiopia
As discussed above, rural urban migration has often been explained in terms of the lure of
‘bright lights’ and the tales of ‘city streets paved with gold’ contrasting with the meager
conditions in rural areas. Expanded family, shortage of land and decline in the agricultural
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productivity has forced many people to seek alternative livelihoods in cities. It is now
generally acknowledged that ‘bright light ‘theories do not really explain migration.
For one thing, most migrants are so poor to take advantage of urban facilities. Since there is
generally a serious shortage of jobs in the formal sector, many migrants end up searching a
living from casual labour or in the informal sector. On the other hand, urban facilities could
not keep pace with number of new comers. Hence with the increasing urbanization due to
migration and natural growth, mounting pressure is exerted on urban infrastructure posing
financial and managerial problems on urban governments. Thus, the economic model that
argues in favor of urbanization did not prove true in the Ethiopian context. Instead of
benefiting urban residents and migrants; the rapid rate of urban population has reached a level
where it poses serious problems to urban development. Experience has proved that as urban
areas grow in population, government and the community face increasing pressures in
providing services and infrastructure facilities and effectively manage urban centers.
Urban problems in Ethiopia have increased in recent years as the provision of socio-
economic services such as housing, employment and sanitation are found to be not only
inadequate but also deteriorating overtime. Statistical evidences reveal that 90% of the
country's urban population lives in sub-standard houses (Mamo Kebede, 1992). Analytical
reports of the 1984 census results for various regions also show the severity of the problem of
housing. For instance, out of the total housing units in urban areas of Shewa (central region)
57.7% have no toilet facilities at all, 39.4% have no kitchen, 92.5% have no bathing facilities
and 34% are overcrowded.
In addition to this, urban centers lack efficient, responsive and effective governance. They are
governed by political patrons and are not accountable to the public. Moreover, they lack
managerial autonomy to decide on their own affairs and raise local revenue and spend on
development projects. Municipalities were appended to the central offices and perform
sectorial functions, which have overshadowed their traditional role of providing basic urban
services. .
Course Title: Governance and Management of Public Enterprises
Course Code: PADM 4123, Cr. Hrs.: 3
Introduction
Although public ownership is as old as the history of the state itself, public enterprises have
got increasing importance following the independency of developing countries that resulted
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in changes in the in the philosophy and functions of the state; the shift from administration of
law and order alone to the administration of development as well. There were objective
reasons for the roles assumed by new governments to tackle the multi-faced problems
entrenched over the years of the colonial times. With the views of ensuring speedy economic
growth, equitable distribution of wealth, and social transformation, governments have
launched expansive industrialization and commercialization programs through the ownership
of productive industries and service rendering ventures. Accordingly, despite apparent
counter debates, public enterprises have witnessed in such countries veritable contributions in
terms of realizing the envisaged objectives. Yet, public enterprises have been facing serious
operational bottlenecks, goal dilemmas and policy challenges, management/ownership
debates, and so forth.
In this course, therefore, students will be familiarized with the various issues involved in the
management of public enterprises such as the meaning, rationales, objectives, dimensions,
performance yardsticks, organizational arrangements and inter-linkages, management forms,
corporate autonomies and public accountabilities, both from the theoretical/conceptual and
pragmatic perspectives. The course will also address the role of public enterprises under
different ideological and political settings vis-à-vis their private counterparts, how they are
affected by global political and economic trends by examining the experiences of different
countries. As a major administrative and development concern of the discipline, these issues
will be discussed in different chapters of the course.
Learning Objective
By the end of the course students should:
The general objective of the course is to enable students be acquainted with the theories,
concepts and practices that relate to public enterprises and increase their analytical ability of
public concern and policy matters through class lectures, discussions, term papers and case
studies.
 Critically compare and analyze the multidimensional roles and objectives of public
enterprises under different socio-political and economic settings,
 Appreciate the level of skill and proficiency required to manage public enterprises and
evaluate themselves whether they are capable of facing the complex and challenging
tasks of managing the entities,
 Find out the various factors determining the success or failure of public enterprises and
visualize their roles as future managers,
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 Identify the various organizational, management and ownership forms of public
enterprises and their scope of operations,
 Undertake researches on the problems, prospects and institutional arrangements of
public enterprises in Ethiopia and make relevant policy recommendations
Course Content
Chapter One: Introduction
Chapter Two: Meaning, Characteristics and Rationales
Chapter Three: Organization and Management Forms
Chapter Four: The Interface of Government and Public Enterprises
Chapter Five: The Structures and Roles of Boards
Chapter Six: Comparisons of Public and Private Enterprises
Chapter Seven: Issues in the Performances of Public Enterprises
Chapter Eight: Problems and Remedial Measures of Public Enterprises

Chapter One:
Introduction
Many countries have turned over substantial and even predominant responsibility for
developing and managing their economy to new kinds of public agencies. These new kinds
of agencies constitute the public enterprise sector. Particularly, one of the most significant
features of the Post World War is the exponential growth of public enterprises. The trend
of such growth is more pronounced in developing countries where organized private sector
is limited and consequently the major burden of industrialization has fallen on the
shoulders of the public sector. While this is the general scenario, the share of public
enterprises varies from country to country depending upon ideological preferences,
historical, social and economic circumstances. However, it is clear that even in the most
"liberal" and private enterprise-oriented systems, public enterprises not only exist but also
play crucial roles (Fernandes, 1986:2).
Although the instruments and techniques of government owning property is not new and
rather is as old as human civilization itself, the increasing importance of public enterprises
has been related with the steady increases in the philosophy and functions of the state (a
shift from laissez fair to social welfare activities). It has generally become an accepted
notion in modern states, especially the developing ones that ownership of most of the
natural resources and capital heavy industries should increasingly rest in the hands of the

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state. In this regard, public enterprises came to play an important role in terms of making
major contribution to GDP as well as providing a large amount of employment. Public
enterprises have been considered as key operational instruments to achieve economic and
social development and bring technological innovation in a number of developing
countries. Government intervention through public enterprises has been also intended to
encourage and strengthen economic development in the private sector. More commonly,
governments considered public enterprises to play crucial roles and fill the gaps when the
private sector demonstrated itself to be too weak or disinterested to undertake economic
activities, but deemed important to the objectives of the development programs of the
government.
Therefore, regardless of ideology and policy, public enterprises are being used today all
over the world as an instrument of state intervention in national development. Almost
every country has found it desirable and even necessary to establish public enterprises in
order to meet the requirements of its development programs. In addition to the creation of
new public enterprises, intense nationalist feelings of pride for self-sufficiency have led
many nations, shortly after independence, to nationalize foreign-owned enterprises, even
when the goal in the long run has been to sell them to indigenous investors. Such mutually
supportive types of public enterprises may include among others banking, transportation,
communication, credit and marketing, water and power agencies or institutions, applied
research institutions and so on. For the purpose of easier understanding of our discussions,
the pattern of public enterprises can be viewed with reference to three comparative
periods; i.e. Pre-War Period, Post War Period until mid of the 1980s, and a Period after the
mid of the 1980s.
The first period covers those years before the end of the Second World War or
contextually known as the period of colonization. Prior to the end of the Second World
War, public enterprises were not known or were not directed towards serving the interests
of the public in most developing countries. The colonial administrations have created
simple and small-scale enterprises in developing countries aimed at extracting and
evacuating raw materials and natural resources that would serve as inputs for huge
factories in their respective home countries. There were no serious commitments on the
part of those administrations for the development of colonized countries and for the well-
being of the indigenous people.

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The second period refers to those post-war years (equally known as the period of
independence) that range to the mid of the 1980s. Following the attainment of the
independence of most colonized countries, national governments have tried to adopt
rational development administration to redress previous situations and ensure rapid
economic growth. Consequently, the newly independent states determined themselves to
intervene in major industry, mining and other expansive and profitable ventures. One of
the strategies adopted by governments of developing countries, notably Africa, in the
development effort is the use of public enterprises. They incorporated the establishment,
expansion, and operation of public enterprises in their medium and long-term development
plans assigned with diverse objectives. As a result, there has been a proliferation of public
enterprises in all African countries in terms of number, scope variety and complexity of
operation as well as in terms of the amount of resources allocated to them. Indeed the
economic development through the process of industrialization and commercialization had
been of tremendous appeal to many developing countries during this period.
The third period was marked as the period of "economic stabilization" or "economic
recovery" measures, a proposition made by developed countries and multilateral donor
agencies to developing countries that took place since the mid-1980s. Notwithstanding the
vigorous measures of many developing countries in terms of nationalizing foreign and
private-owned enterprises, establishing new ones, and expanding nationalized and newly
created public enterprises, most of them didn't secure the level of development they
aspired. They rather got even worse than the pre-independence situations. In other words,
the realities after independence exhibited not only highly vulnerable and dependent
economies but also increased financial indebtedness and persistence of mass poverty,
which gave rise to political instability, social unrest and civil wars in a number of
developing, notably African, countries.
Donor countries and agencies associated the developmental problems and exacerbating
poverty situations envisaged in most developing countries to wrong policies and strategic
myopias employed by governments of developing countries. With such belief, donors
propose the economic stabilization and recovery programs notably the "Structural
Adjustment Program- SAP" to be implemented. Donors set these propositions as a
prerequisite or precondition for developing countries to fulfill in order to obtain loan or
any form of assistance. Part of the SAP is privatization and reforming of public

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enterprises. As a result, many developing countries have been implementing massive
privatization and various reform measures regarding public enterprises since the 1980s.
Definition of Public Enterprises
The multiplicity and diversity of the perspectives from which individual scholars and
practitioners can often tend to view public enterprise have naturally resulted in excess of
definitions. Happily however, this has not prevented, at least not significantly, the
convergence of opinion on what key elements 'universally' constitute the central concern
and focus of public enterprises.
A Public Enterprise can be defined as “financially semi-autonomous body created by an
Act of Parliament to provide goods and services on a commercial basis and is ultimately
responsible to the minister through the parliament and the general public.”
It is an organization that is set up as a corporate body and as a part of the governmental
apparatus for entrepreneurial or entrepreneurial-like objectives. Public enterprises are
organizations which merged as a result of government acting in the capacity of an
entrepreneur. Public enterprises also known as public corporation can also be defined as
publicly-owned enterprise that has been chartered under Federal, State or Local
Government law for a particular business or financial purpose. It is a body framed for the
purpose of enabling a number of persons to act as a single person.
In an expert group meeting at the International Centre for Public Enterprises (ICPE) in
Yugoslavia, a conceptual definition of public enterprises was formulated as follows:-
"A public enterprise is an organization which is owned by public authorities including
central, state or local authorities, to the extent of 50 per cent or more ; is under the top
managerial control of the owning public authorities, such control, including, inter alia, the
right to appoint top management and to formulate critical policy decisions; is established
for the achievement of a defined set of public purposes which may be multi- dimensional
in character; and is consequently placed under a system of public accountability; is
engaged in activities of a business character; involves the basic idea of investment and
returns; and which markets its output in the shape of goods and services".
This definition reflects the complex nature of the organization described as public
enterprises. The idea of investment and returns could be interpreted either as financial
returns in the commercial sense or as social returns.
Companies Act 1956 has defined a public enterprise as follows: "A government company
is one in which not less than 51% of the paid up share capital is held by the central
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government or by any state government or governments or partly by the central
government and partly by state government or governments".
As state earlier, the business units owned, managed and controlled by the central, state or
local government are termed as public sector enterprises or public enterprises. These are
also known as public sector undertakings.
A public sector enterprise may be defined as any commercial or industrial undertaking
owned and managed by the government with a view to maximize social welfare and
uphold the public interest.
“By public enterprise is meant economic undertakings, especially industries, agricultural
or commercial concerns, which are owned (wholly or in part) and controlled by the state” -
U.N. Publication
“A public enterprise means state ownership and operation of industrial, agricultural,
financial and commercial undertakings.” -A.H. Henson
Oshisani and Dean (l984) define public enterprises as “semi-autonomous bodies, subject to
the "overall control of the government, but having their own management responsible for
policies and decision within statutory defined field, they went further to say that' because
of the increasing popularity in Nigeria of the term, parastatals the two terms can be used
interchangeably. As organizations created by partly or wholly owned and largely
controlled by a public authority (federal, state or local government)„ and which -are
supposed or expected to operate along industrial, commercial or profit-making lines (even
if they also have social objectives) Aire 1986.
As economic undertaking, especially industrial, agricultural or commercial concerns which
are own (wholly or in part) and controlled by the state. It includes those mixed enterprises,
which are controlled by the state. A mixed enterprise is one jointly owned by private
persons. If the state contributes over half of its capital, it automatically has a controlling
interest. In some cases, the state even has control over a mixed enterprise for which it
provides less than half of its capital. United Nations: 1975
From all the different definitions given above, it can be concluded at this juncture that
there is no authoritative and universally accepted definition of a public enterprise.
As a working definition, public enterprise are (usually) government investment
undertakings, managed outside the regular ministry (or civil service) and accorded
autonomy to enable the enterprise to operate along commercial or business line, as it‟s the
case in private sector.
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 Classification of Public Enterprise
A public enterprise is a particular kind of statutory authority: one that sells goods and
services to the public on a large scale, with the financial returns accruing in the first
instance to the authority itself. Most public enterprises are in the non-budget sector, and
operate with substantial independence. Public enterprises provide many services including,
in some countries, utilities such as telecommunications, electricity, gas supplies, water and
sewerage; transport, such as rail, airlines, shipping services and urban public transport;
financial services, notably banks and insurance companies; and agricultural marketing.
Some countries have government-owned oil companies, motor vehicle companies, and
tobacco and alcohol companies. Indeed, it is hard to imagine a particular product or
service that has not been government-owned in at least one country at one time. The only
point in common of all these is their government ownership. As they differ widely from
each other, and face quite different environments, some kind of classification needs to be
developed.
Public Corporations are classified into three:
 Public/Statutory Corporations: These are enterprises which arise when the
government assumes responsibility for the management of an economic or social pursuit
through a special entity that has its own legal personality and still keeps some of the
special prerogatives or privileges associated with a governmental organization. The
blend of these features is aimed at enabling the organization to function effectively as an
autonomous body while it remains an instrument of government policy.
 State-Owned Companies: These are companies created by the government under the
provisions of ordinary company law, though they belong entirely to the government.
They are registered in the registry of companies, with the government as the sole
proprietor. Government, therefore, appoints the Board of Directors as is customary in
private companies,
 Public/Private Partnership: These are enterprises where the government is the
majority shareholder in a partnership with private entrepreneurs. In such companies
government usually dominates the board since it is the major shareholder.

Chapter Two
Meaning, Characteristics and Rationales

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Meaning of Public Enterprises:
A public enterprise is viewed as an artificial person who is authorized by law to carry on
particular activities and functions. It essentially has the features of several individuals who
act as one. It is described as a corporate body created by the legislature with defined
powers and functions and independently having a clear-cut jurisdiction over a specified
area or over a particular type of commercial activity. It is a part of government apparatus
and three implications are hereby highlighted. Public Enterprise, by virtue of its complex
relationship with government, is an instrument of public policy and its primary mission is
in connection with governmental objectives and programs.
It is, therefore, naturally under governmental control. Second, a public enterprise by its
nature mostly manages public resources, especially public money and this means that
attention must be paid to mechanisms for enforcing accountability. Third, the combination
of financial and economic objectives with social and political arms invariably makes it
difficult to devise appropriate performance measurement instrument.
A public enterprise is an agency of the government through which the government
manages its commercial and economic activities. Government owned commercial or
industrial organization where the government may hold either majority shares or all the
shares.
THE CHARACTERISTICS OF PUBLIC ENTERPRISES
Primarily, public enterprises manifest direct involvement of the government in the
economic sphere, and assume special responsibilities to the government. In other words,
they represent government's active intervention in economic development by engaging
themselves in business activities, which are beyond the provision of guidelines and the
creation of an encouraging environment to the private sector. Hence, they are
distinguished from other conventional government organizations by their functions of
conducting economic and commercial activities.
The characteristics of public enterprises are highly influenced by several factors like
ideology, politics, history, level of economic development etc. For instance, in countries
that operate socialist type economies, the general characteristic of public enterprises is to
stand against the private sector and the trend appears to elimination or substantial
reduction of the private sector.
In some of these countries, governments have embarked on nationalization or public
ownership of vital areas of production. On the other hand, in countries, which operate a
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mixed economy, public enterprises appear to be concentrated in the traditional and well-
established fields of public utilities as well as the so-called "commanding heights" of the
economy, leaving a substantial proportion of activities in other fields to private
entrepreneurs.
The core of the concept "public enterprise" suggests an organization, which has two
dimensions or characteristics: the enterprise dimension and the public dimension. If one
of these dimensions is missing, the body cannot be described as a "public enterprise". The
implications of each dimension will be examined in the following manner.
I. The Public Dimension
There are four basic elements in this dimension; i.e. public ownership, public purpose,
public control, and public accountability.
(a) Public Ownership: the assumption is that ownership vests in a public authority, which
could be central government, state government, or municipal government. While there is
no ambiguity when 100 percent of the ownership is vested in a public authority, it has got
also an increasing acceptance that if the public authority owns the majority shares (51 or
above percent) the enterprise would be classified as public.
(b) Public Purpose: in establishing a public enterprise, the government has in mind the
attainment of some public policy goals. The aim and purpose of the organization should be
fulfillment of public interest, it should be meant for achieving public interest. In addition
to the corporate objectives implicit in its enterprise dimension, the nature and content of
the public goals, which the enterprise is presumed to achieve, should be identified. The net
benefits of the activities undertaken by the enterprise do not go to the enrichment of a
private group of individuals, rather are directed toward fulfilling public purposes. But, it is
clear that private groups and individuals will have their own shares from the net benefits of
a public enterprise being part of the general public.
(c) Public Control: the government as the owner is likely to exercise managerial controls
over the enterprise it created or over which it has the majority share. The substance and
scope of control, however, has to be free from ambiguity. The specific areas of control for
which an enterprise will require government approval and the legitimate body that will
exercise control on behalf of the government need to be clearly stipulated.
(d) Public Accountability: a public enterprise has to be accountable in some way to a
legitimate organ representing the public. The question that entails on what matters and to
whom the public enterprise is accountable will depend on the precision of goals which
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 have been set for the enterprise, the agreed upon criteria of evaluation, and clarity of who
the evaluators are or to which agency is an enterprise reporting. All proceedings and
records of activities of the organization must be available for public (government) scrutiny
when demanded. Indeed, it is customary that performance reports of public enterprises are
regularly submitted to the government.
II. The Enterprise Dimension
The enterprise dimension implies the notion of a business firm. The following points
determine the enterprise character in general:
(a) The organization is engaged in the production of goods or provision of services
(b) The goods and services so produced are marketed at a price
(c) The revenues so earned are adequate at least to cover costs
(d) The activity is based on the entrepreneurial idea of investment and return,

 These being the general characteristics that describe the enterprise dimension, it also
suggests three concepts or manifestations, which are core so to speak as "enterprise":
 Financial viability:
This implies conscious effort on the part of an enterprise to operate in entrepreneurship idea
to raise net revenue. To do so, the organization must continually engage itself in innovative
endeavors as contrary to being complacent with routine operations and regular level of
returns. It must continually explore opportunities for the benefit of both the organization and
its stakeholders. In theory this would imply net revenue maximization, but in practice several
qualifications do exist and revenue maximization may not happen true. In other words, such
net revenue is sought only when it doesn't encourage powerful competitive threats, doesn't
provoke labor unrest, doesn't cause consumer protests, and doesn't arouse public antipathy
(opposition) towards the enterprise. Thus, a public enterprise aims at "optimum satisfaction
return" as distinct from a private enterprise that invariably has a tendency for net revenue
maximization.
 The cost-price equation:
The enterprise concept goes strictly beyond financial viability though concerned with the way
financial viability is achieved. Financial viability is realized from sales activity, but the
concept attaches significance to the relationship between prices and costs. Therefore, extreme
caution is needed before a disproportionate excess of price over cost in the case of a given
output is practiced, as it is open to be challenged by consumers.

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 Commercial accounting:
The organization regularly maintains a set of commercial accounts that indicate its financial
progress or status, but basically two major accounting documents are needed; i.e. a balance
sheet, which shows at a given time, the assets and liabilities of the enterprise; and a profit and
loss account, which defines or indicates the inflow of income and the outflow of expenditure
resulted from surplus or from deficit of a defined period respectively.
It is the public dimension, which differentiates public enterprises from private enterprises,
and it is the enterprise dimension, which differentiates it from other governmental agencies.
In other words, if there is no public dimension, there seems little rationale for creating public
enterprises, and if there is no enterprise dimension there would be little or no rationale to give
it the name of "enterprise".
REASONS FOR PUBLIC OWNERSHIP OF ENTERPRISES
As Gant (1979) pointed out, the principal reason for the emergence of the public enterprise
sector in a country is the government's decision to intervene directly and actively in the
economy in order to achieve the objectives of its development plan. Most frequently, decision
on the creation of public enterprises is based on the analysis and findings that show the
institutional needs for development, which the government believes the private sector, will
not meet, at least by itself. In other words, the rationale for setting up public enterprises is
that they are better instruments for promoting developmental goals.
Nevertheless, it would be difficult to generalize the motives for the creation of public
enterprises in precise terms since the reasons may practically vary to encompass political,
economic or social drives, whilst others have mixed and even conflicting objectives
combining social welfare and economic motives. The degree and extent of government
involvement in economic ventures through public enterprises is generally determined by
ideological considerations, historical factors and the state of economic development.
Some countries, notably socialist countries, visualize a new role of the state as an agent for
change, for social transformation and economic development. Hence, they believed that the
economic functions of production and distribution should substantially be managed in the
public sector. In contrast, other countries prefer to remain away from engaging, or are loath
(reluctant) to engage, in any direct economic activity unless they are compelled to do so by
some temporary weaknesses or shortcomings envisaged in the private sector (Mathur,
1999:8).

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The justifications for state intervention in industrial and commercial activities and the use of
public enterprises as a model of planned development strategy could be summarized as
follows:
(i) The inability or unwillingness of the private enterprise to be involved in the production of
certain goods and service that are not rewarding in view of financial profitability, but which
are considered socially desirable in view of the state; or the inability of the private enterprise
to engage in ventures with long term gestation periods, expecting long-term benefits over
investment,
(ii) Strong need of the government to intervene in those sectors that have decisive influence
on the structure of the economy, and are considered to be basic and strategic to national
development. In view of the fact that there is a need to guide economic development in the
light of national priorities, the private sector alone should not be allowed to venture in sectors
that are found to be crucial to over-all development.
(iii) The pressure of international competition in the home or external market that would
inevitably yield negative consequences like closure of infant private industries, monopolistic
trends by big companies or industries, and the resultant prices escalation upon consumers.
Motives of Public enterprise
The motives for public ownership of enterprises were categorized under three headings:
economic, social and political/ideological (Barber, 1983).
(A). Economic motive
In many countries, mainly the developing ones, the inspiration for public enterprises
emanated from the desire to achieve rapid economic development and to make frontal attack
on poverty (Mathur, 1999:10). The desire to achieve success in the economic sphere would
be possible through public ownership, and this model of economic development is backed by
practical and imaginative reasons such as:
 The "commanding heights" argument postulates that certain key industries, especially
those connected with the processing of natural resources, are so vital to the operation of
the national economy and are of strategic importance. To leave such economically key
industries in private hands might jeopardize the system. Therefore, the "commanding
heights" idea has been a major justification for public sector investment in many
countries.
 Control of monopoly power- it is accepted that monopoly firms are able to exert
undesirable pressure on the society, thus they need to be controlled. So, public ownership
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 may be considered as the ultimate form of control. It has become extremely important
today that essential infrastructural services such as public and road transport, railways,
electricity, water, etc. are state-owned even in industrialized countries.
So, whatever the reasons and motivations are, government intervention in the economy is a
general practice today all over the world, with in fact varying degrees.
(B) Social motive
Public enterprises are also established with social objectives and the decision criterion for
establishment is social cost-benefit consideration, not simply economic cost-profitability like
that of the private sector. For example, a state railway company may operate
"uneconomically", but continue to exist because closure would impose many other "social
costs" on the communities such as shortage in the means of transportation and associated cost
escalation. Another social motive of the government in creating public enterprises is social
security or social welfare. Many governments have regarded employment generation as a
motive for establishing public enterprises. Developing countries, in particular have entrusted
public industries with special responsibilities in terms of contribution to improve income
distribution. Employment generation is one aspect of the equity measure of the government
besides to other direct forms of social welfare or income distributions schemes assured
through the means of public enterprises.
(C) Political/ideological
An important motive for the creation of public enterprises in this regard is the ideology of
socialism, born largely out of the inadequacy of the capitalist system. The Great Depression
of 1929 had seriously exposed the deficiencies of the capitalist system, which assumes free
play of the market forces. Keynesian economics had also provided a sound theoretical basis
for state intervention in creating effective demand and generating employment.
However, the failure of socialist economies in almost all countries and the success of the
privatization drive have led many commentators to question the very reason of existence of
public enterprises today. The issue has got blurred with the ideological debate since the
retreat from the socialist ideology is beyond propensity, and rather is a real practice this time.
Galbraith (1990) commented in that "while socialism in economic terms worked well in the
initial stage, it has failed in today's context because of its inability to adjust to the new world
of the consumer society". This entails that the ideological motive of public ownership has
become an issue of contest and the thing of the past for many commentators.

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On the other hand, regardless of the ideological consideration, the essentials of public
ownership are still valid and justifiable. In an era of globalization and liberalization,
although state-owned enterprises may not provide the commanding heights of the economy,
their importance in national economic activity cannot be underrated. For this reason,
economies of a number of countries such as China, Korea and Taiwan opted not to give top
priority to privatization, but to allow the private sector to develop around the public sector
(Mathur, 1999:15). In summary, most developing countries suffer from acute lack of capital,
entrepreneurial skills and regional imbalances. The immensity of the socioeconomic
problems of these countries makes state intervention inevitable and in fact desirable.
Therefore, the state becomes a vital partner in the promotion of industrial enterprises to
ensure public control over certain sectors of the economy.
2.5 OBJECTIVES AND ROLES OF PUBLIC ENTERPRISESS
There are immense objectives, which lead governments to engage actively in the economy
through the means of public enterprises such as; to gain control of the economic monopoly, to
ensure equitable distribution of wealth, to capture profits for investments or development
programs, to manage foreign trade, to create yardstick of performance for the private sector
and so on. Some of the explicit objectives of public enterprises assigned by the government
as a means of achieving macro-level objectives may fall under those three major reasons for
public ownership (economic, social, and political) mentioned above, and may include among
others, the following:
 To generate revenue to the government through various means such as dividends, interest
on loans, taxes etc.
 To save scarce foreign exchange or broaden foreign exchange base either by exporting
foreign exchange earning goods and services or by substituting imported products.
 To reduce dependence of the economy on a narrow range of activities domestically, and
on foreign importation
 To create an even distribution of income and wealth among individuals and groups by
preventing the concentration of economic wealth in the hands of the few
 To develop and provide infrastructure services that will foster the proliferation of the
private sector and accelerate the pace of national economic development.
 To ensure balanced development among different sectors of the economy and reduce
regional disparities through a fair dispersal of industries in various geographical areas of a
given country
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 To create job opportunities for citizens or to reduce the level of unemployment, and
provide various welfare benefits such as housing, medical services, transport, and other
social services in order to serve as a model for private entrepreneurs in the sphere of
labor- management relations and thereby maintain stable social security system
 To safeguard the interest of consumers by offering a basket of essential goods and
services at a fairly low prices to low-income groups.
 To stimulate research and development, this may lead to the building of indigenous
technology and optimum self-reliance
 To capture the advantages of increased participation by citizens in the ownership and
management of the productive enterprises
 To serve as a regulatory agent of the government in ensuring compliance to law by
organizations within its area of jurisdiction. Examples include the National Bank of
Ethiopia that monitors and controls the activities of private banks;
These are, inter alia, the national/macro level objectives that the government intends to
achieve through the means of public enterprises, which fall under the economic, social and
political motives. In addition to macro/national objectives, public enterprises do have also
corporate/micro objectives that would contribute for the accomplishment of such macro-level
objectives. Hence, corporate objectives may be classified into as many as at least four types;
(A) Financial and commercial objectives
As Fernandez (1986:52) noted, the early history of public enterprises in developing countries
reveals a cloud of uncertainty and ambiguity about their financial goals. The idea of "profit"
was associated with private enterprises. The goals of public enterprises were mainly seen in
terms of the nation-building posture or attitude. Profitability in purely financial accounting
terms seemed an irrelevant thing. Public enterprises were considered to be pioneers of social
and economic changes and the engines of growth. Although this has been the initial intent
behind the establishment of public enterprises, financial and commercial soundness became
an important consideration eventually. The case for financial stability, commercial viability
and adequate return on investment rests on the following compulsions.
 Public enterprise's investment is generally based on feasibility studies and project reports.
 Since one of the sources of funding of public enterprises could be from borrowing, they
will obviously be required for debt-servicing, and this in turn is possible only if they are
financially viable by generating surplus.

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Therefore, the creation of public enterprises should be associated with the declaration of
intent that they are expected to be financially viable, appraised in terms of their capacity to
yield a reasonable rate of return on total capital employed.
(B) Production and productivity objectives
Production planning is an integrated managerial discipline, which takes into account
productive capability or installed capacity, availability of inputs and market situations. What
is suggested in line with this is that the determination of production goals and strategies of
production should be essentially an integral managerial exercise. The focus should be on
productivity goals rather than production targets, a shift from a static concept of absolute
levels of production to a more dynamic concept of productive use of assets and resources.
This in turn implies "capacity utilization", to mean, the major productivity goal should be to
step up the utilization of capacity (for example machine) until it reaches the optimum level.
Another and equally important aspect of productivity is "consumption coefficients"- the
ratio of usage of raw materials to outputs. "Labor productivity" is a far more sensitive area
of setting productivity goals, which will depend on many other factors such as training, work
norm, and so on. "Total factor productivity" is the most rational and sensible measure of
productivity. The productivity of machines, materials, workforce, and money is a highly
integrated network-each of which influencing the other. Because of this, sophisticated
methodologies have been designed to calculate "total factor productivity". Multiple inputs
and outputs can be weighed at factor costs so as to determine whether a public enterprise has
met its productivity objectives or not.
(C) Marketing and service objectives
The real effectiveness of the enterprise can also be assessed in light of its performance vis-à-
vis its main constituency- customers, consumers or clients. Designing marketing and service
goals can be better understood by determining the marketing position of each enterprise.
(D) Developmental and social objectives
Achievement of financial viability and generation of surplus and thereby contributing to
resource mobilization is by itself a major developmental responsibility. Besides, the
productive use of assets and the optimized use of resources is a matter of both economic and
social concern of public enterprises. However, the accomplishment of social objectives is an
obscure (unclear) and often misunderstood subject. Public enterprises are expected to be, for
example, model employers, to take long-term developmental views of research by investing

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in such areas, to support the environment, and so on. Consumer satisfaction is also considered
as the discharge of an important social obligation.
The conclusion one might arrive at could be that public enterprises, which are financially
successful, are good performers in terms of achieving development and social objectives.

CHAPTER THREE
3. ORGANIZATIONAL AND MANAGEMENT FORMS OF PUBLIC ENTERPRISES
3.1 Major Management Forms of Public Enterprises
Besides to its economic functions, the public enterprise sector is distinguished prominently
and importantly by its management characteristics. In other words, the public enterprise
sector exists as an identifiable and separate segment of the public establishment because of its
special management features. It is this aspect that makes it especially significant in the study
of public and development administration.
The administrative systems devised to satisfy the requirements of traditional government
activities are not adequate to the requirements of industrial and commercial enterprises. They
were not set up to serve the needs of business (flexibility and economic efficiency), but to
serve expectations of political responsiveness and bureaucratic conformity. Whatever
improvement of efficiency might exist in the conventional public administration system, it
wouldn't meet the requirements of business management since the needs of such efficiency
improvement are justifiably different and tailor-made. Public enterprises cannot be dependent
upon annual appropriations for the continuity or flexibility of its operations. The accounting,
audit and personnel systems needed in traditional government do not satisfy the management
system of commerce. Hence, public enterprises need a different form of management, which
is flexible, adaptable and autonomous.
On the basis of this logic, public enterprises have been established separate and different
from the existing public bureaucracy and are endowed with the management systems
uniquely necessary to their success. There are, however, very few public enterprises still
remain in the administrative system of the older government departments. There are different
kinds of public enterprises, which can be classified according to the source and nature of their
legal authority and management.
Three types of public enterprises; i.e. Government Departments or Department management,

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Government Companies, and Public Corporations, can be identified in terms of their
categorization according to their legal bases and major forms of management, the major
features of which will be discussed separately below.
Department Management
Under this pattern, public enterprises are owned and managed just like government
departments that are staffed by career personnel and headed by ministers. Notable examples
of which could be railways, Ports, Harbors, Electricity & Water systems, ETC, Ethiopian
electric Power Corporation, Addis Ababa Water & Sewerage Authority, posts and telegraphs
though these could also transform to a public corporation type. Department undertakings
display the following characteristics:
 It is financed by annual appropriations from the treasury and all or a major share of its
revenue is paid to the treasury
 It is required to work out financial results, determined through accounts maintained on
commercial principles
 It is subject to the budget, accounting and audit controls applicable to other government
departments
 The permanent staff comprises civil servants recruited under terms and conditions
similar to those other civil servants. In this case, the minister is directly responsible for
all aspects of policy and administration.
 It possesses the sovereign immunity of the state and cannot sue and be sued without the
consent of the government
The departmental system of management has generally been adopted in the following cases:
(i). Where the need for security or strategic importance makes them difficult to be operated
by other forms of management, e.g., defense industry
(ii). In administration of national services, for instance postal, telegraph and telephone
services and railways.
The main advantages of this system are that it assures maximum government control in
vital public services. Secondly, it helps in bringing about greater coordination by
establishing a clear relationship between a public enterprise and concerned government
departments.
This form of management, however, suffers from obvious disadvantages. The bureaucratic
form of administration is likely to lead to inevitable inefficiency, red tape, and delay. The
danger is that the administration may be subjected to excessive fiscal and personnel
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 restrictions and interferences leading to inadequate departmental autonomy in vital matters
such as capital expansion, finance, technical improvement, and purchasing and personnel
administration.
B) Government Company
It is a registered joint stock company form of management, which has been increasingly used
by most governments in respect of manufacturing industries.
This type is also known as mixed ownership company. The company form amounts to
running purely commercial and industrial enterprises. Its capital is contributed by the
government and shareholders, and the management is headed by the board of directors
appointed by government either from amongst its own officials or from outside. This form
includes various joint enterprises, shared between the state and private interests. E.g. Addis
Mojo Edible Oils Co
Its principal features (characteristics) are:
 The whole of the capital stock or 51 per cent or over is owned by the government,
 It is a corporate body created under the general provisions of the Company Law of the
country
 It can sue and be sued, enter into contract and acquire property in its own name,
 The majority of the directors are appointed by the government, depending on the share of
private capital in the enterprise
 Unlike public corporations, it is created by an executive order of the government without
parliament's specific approval
 Its funds are obtained from the government and in some cases from private shareholders
and through revenue derived from the sale of its goods and services
 It has almost the feature of a private limited company
 It is generally exempted from the personnel, budget accounting, and audit laws and
procedures applicable to government departments
 Its employees are not civil servants
The company form of public enterprise is chiefly used by the government in industries where
it has to rely on foreign (financial and technical) aid and assistance.
C) PUBLIC CORPORATION:
Public corporation is a relatively new concept of administrative organization. Although it has
been occasionally employed in earlier periods, it is essentially the twentieth-century creation
to meet certain emergencies as a result of the Great Economic Depression. The public
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corporation method is a sort of compromise between the policy of laissez fair and strict
bureaucratic control in public administration and is generally adopted in the revenue
producing enterprises. Public corporation has become an important area of study in public
administration as it represents a conscious attempt to unite the advantages of public and
private administration in one enterprise.
It has been also described in the following manner;
Public corporation is a corporate body created by public authority with defined powers and
functions and is financially independent. It is administered by a board appointed by public
authority to which it is answerable. Its capital structure and financial operations are similar
to that of a government company."
The emergence of the public corporation is a phenomenon of great importance to modern
administrative organization. It is run and administered by the board responsible for overall
policy, but not for day-to-day administration. Public corporations were meant to combine
democratic control over major policy with commercial freedom in organization and
management. In other words, the method is based on the desirability of combining
commercial freedom with public accountability, and to protect such freedom of operation
from an excessive centralized ministerial control. Examples:
 Finfinne Forest Marketing & Development Enterprise,
 National Bank of Ethiopia
 Commercial Bank of Ethiopia
Some of the important characteristics of public corporations are described as follows:
 It is wholly owned by the state
 It is a separate legal entity and is distinct from the government, which created it. It has a
corporate character or franchise, which confers power upon it. It can do only what the
charter authorizes.
 It is incorporated under a special statute of the parliament (statutorily created by a
special law) outside the ambit of an ordinary company law, which lays down public
purpose and defines its powers, duties, and immunities and prescribes the form of
management and its relationship with ministers.
 It is managed by a board, which has a self-contained financial structure. It is, at least in
theory, independently financed through its revenue and capital borrowing.

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  It is a corporation in the sense that it has flexibility and initiative of a private enterprise,
has freedom of administration and finance, accounting and purchasing, and has power to
recruit its own personnel.
 It is a legal person entering into contracts, which can sue and be sued and acquire and
own property in its own name.
 Though the primary objective of a corporation is not profit, but public service, it is run
on business lines and not in accordance with bureaucratic procedures and practices.
 It holds funds in its own name, and is generally exempted from most regulatory and
prohibitory statutes and enjoys “complete” autonomy in the management of funds.
 It operates within the broad outline of government policy, while the day-to-day
administration is the exclusive responsibility of the managing directors of the
corporation.
 The personnel (employees) of public corporations are not civil servants, and recruited
independently in the pattern of business executives under terms and conditions
determined by the corporation itself.
The major advantage of this type of organization is that it has the flexibility and initiative of a
private enterprise combined with minimum public regulation of its major policies. However,
there are major operational problems in this type of organization. Difficulties arise in
reconciling autonomy of the corporation with public accountability. The theory of corporate
autonomy demands the largest measure of operational freedom, which however, may be
abused by administrative elite in the organization. On the other hand, too much government
interference defeats the very purpose for which they are established. Reconciling
"democracy" with "efficiency" is, therefore, the crux (core) of the problem of public
corporations.
The second way to categorize public enterprises is according to the nature of their
functions. One group of such categorization may include production and trading companies,
industrial and commercial enterprises that are expected to operate at profit such as mines,
wholesale and retail stores, rubber and tea estates, and steel and pharmaceutical plants. Other
groups of enterprises in accordance to the nature of functions are composed of public
utilities and services, which are supportive infrastructure types such as power, water
communication, railways, and ports. There are also other groups of enterprises in this
categorization, which are created explicitly for the purpose of development that is for the
purpose of giving encouragement, credit assistance under special terms, and support to other
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institutions both public and private. Such enterprises may include industrial development
authorities, river basin development agencies, etc.
A third way to categorize public enterprises is according to their location and position in the
governmental structure. In many countries, central and state (regional) governments have
established more or less systematic networks of public enterprises. Such enterprises are
created to develop a particular region or location. Another growing trend in the third
categorization is the emergence of a hierarchical relationship among public enterprises, such
as trading companies that often have branches in districts and towns.
3.2. ORGANIZATION STRUCTURE OF PUBLIC ENTERPRISES
In countries where the public enterprise sector is very large, public enterprises are shaped or
organized into a hierarchical form similar to the conventional government bureaucracy. This
trend, together with its distinctive management characteristics, is converting the public
enterprise sector into a "third bureaucracy" form, approaching the dimensions and importance
of those of traditional public administration and the private sector (Gant 1979:125).
Grouping of public companies operating in a particular field under a central holding company
is a more or less typical pattern. Holding companies or corporations have been consciously
adopted in many countries for management functions of different public enterprises. They are
established to provide for more expert and rational management and for better co-ordination
of public sector companies as well as to enhance the autonomy of management. In Ghana, for
example, there are separate holding companies for industrial, mining, trading, and financial
enterprises.
This pattern obviously forms hierarchical relationships between subsidiary and holding
companies. In other countries also, large holding companies notably trading companies, have
set up operating branches to serve regions and districts. Generally, public enterprises are
related or organized horizontally and vertically in a bureaucratic hierarchy. The holding
company concept is often suggested as a desirable option for public enterprises for its notable
advantages, such as:
 The subsidiaries pursue common policies, and helps for uniform information and
reporting systems. Government policies are more effectively communicated and
implemented by subsidiary companies through the holding company
 Cross subsidization or inter-transfer of funds: In the event of financial distress or severe
economic downturn, the holding company may provide financial assistance to
subsidiary companies or vice versa. By the same token, subsidiary companies may help
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 one another or among each other in the case of emergencies through the mediation of
the holding company.
 It helps for interchange of experiences when facing common problems
Nevertheless, holding companies of monopolistic nature may pose demerits of the following
sorts:
 It is likely to curb operational freedom of the subsidiaries in matters of major policy-
making decisions
 The subsidiaries, even though belonging to the same line of activities, may have
differences which require discrete handling
 The holding companies involve costs of establishment, personnel and functions,
which may duplicate the work of subsidiaries
 For successful operation, the holding company may need to delegate powers, which
would deviate from the necessity of its establishment in the first place.
 Monopoly and centralization: They foster monopoly in particular sphere of activity.
 Create time-consuming bureaucratic procedure: Holding companies create another
organizational layer in already inappropriate and time consuming bureaucratic
procedures. Thus, it hinders efficient and prompt decision-making.
Like any government agency, public enterprises have formal organizational structures
depicting their intra and inter-relationships and their internal functional arrangements.
Broadly speaking, organizational structure can be described as a pattern of
responsibilities, that is, a framework within which the process of management can be
effectively carried out. The organizational structure of a public enterprise is, therefore, the
framework for carrying out the responsibilities for the co-ordination of activities or
operations and for the motivation of members.
Although the framework varies from enterprise to enterprise depending on the aims and
objectives of the individual bodies, general observation shows that a pattern is common to
most of them, i.e. the public enterprise is so structured in a manner that the Head of
Government/Cabinet is on the top followed by the Supervisory Ministry, the Board of
Directors, and the Management (Chief Executive) in order of their presentation. The
holding corporation is adjacent to the board. All public enterprises adopt this structure,
which is aimed at achieving an effective policy formulation and execution in line with
government policy directives. All the bodies that feature in the structure are supposed to
see themselves as parts of an organism and not as competitors for power.
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 Regarding their internal arrangement or organization, all public enterprises, regardless of
their size or mission, establish various segments or units that make up the organization
structure. This is done by dividing the overall operations into sub-activities and then by
combining these sub- activities into specialized functional units. This process of grouping
specialized activities in a logical manner is called "departmentation". Public enterprises
do have different bases for departmentation since they are different in their activities,
objectives and areas in which they operate. The most common bases of
departmentation are function, territory, product, customer, and process.
 Departmentation by Function
It is the grouping together of activities in accordance with the functions of an enterprise - on
the basis of similarities of expertise, skills or work activities. In other words, jobs that call for
certain skills or the use of similar working methods will be put together. It is probably the
most common base for departmentation and is present in almost every enterprise at some
level in the organization structure. It asks the question “what does or what kind of activities
typically the enterprises do”? Examples of which a single enterprise would have different
departments arranged on the bases of function are Engineering, production, marketing,
Finance, etc.
 Departmentation by Territory/ Geography:
Departmentation in this consideration implies arranging a group of business activities on the
basis of geographic location or territory. It is common in enterprises that operate over wide
geographic areas; i.e. it is attractive to large- scale firms or other enterprises whose activities
are physically or geographically dispersed. The logic is that all activities in a particular area
or region should be assigned to a manager who will be in charge of operations in that
geographic area. Geographic departmentalization works best also when different languages
and traditions exist that have a direct impact on the ways in which business activities must be
conducted.
 Departmentation by Product (Product Line)
It is the grouping and arrangement of activities around products or product groups.
Departmentation by product is considered when attention, energy, and efforts are needed to
be directed to an organization’s particular products. This can be better used if each product
requires a unique strategy, production process, distribution system, or capital sources. This
approach works well for an enterprise, which is engaged in very different types of products.
For example:
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  Textile products - Nylon products, woolen products, silk products, cotton products
 Petroleum refining - kerosene, diesel,
 Electronics - Radios, TVs, Computers
 Departmentation by Customer:
It is a grouping of activities around customers, in response to the primary interests of
customers. This makes economic sense when the customers of a given enterprise are distinct
enough in their demands, preferences, and needs. It helps organizations to meet the special
and widely varying needs of customers. It can be used, for example, in retail stores
segregated in departments based on customers as men's clothing, women's clothing, children's
clothing.
 Departmentation by Process
Manufacturing firms often group activities around a process or type of equipment they use.
The final product of a single enterprise may be obtained after passing through several
processes and stages. In this case, the output of a given process or department may be used as
an input for the other until the final product is produced.
III.3. MANAGING THE INTER-LINKAGES
The idea of inter-linkages lies at the heart of all development planning. Viewed from the
perspectives of the public enterprise, inter-linkages take on a managerial face. Managers are
consistently faced with external influences, pressures and demands-from the government,
consumers, suppliers, trade unions, the physical environment, the private sector, and other
public enterprises. The fundamental premise is that inter-linkages are not mere phenomenon
to be analyzed and recorded as they occur, but to be planned and managed. The "constraints"
must be converted into managerial challenges. Indeed there is an organic connection between
the manner in which the inter-linkages are managed and the scope and intensity of influences
of those intervening organs or elements.
The first task is to identify the inter-linkages, to locate all the points of external contact,
which an enterprise has as part of managing the situation. While managers are actually
conscious of their external relations, there is rarely an attempt to draw up a planned network
and to view the interrelationships as a system at work. Since the character of enterprises
differ considerably, the framework of inter-linkages and the intensity of the contact will
equally differ. In designing its corporate plan, each enterprise will have to draw up its own
model of inter-linkages, depicting the scenario of its external relationships and the nature and

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content of contacts. The following are the inter-linkages that a public enterprise would have
for its success.
(i) Inter-linkage with the Government
The most powerful influence affecting public enterprises comes from the government.
Indeed, public enterprises' managers are so pre-occupied with the task of establishing an
adequate relationship with the public authorities that control, monitor, and evaluate them.
Hence, mangers tend to view the inter-linkage with government as the only one that matters.
The relationship between governments and their enterprises create immense problems of
adjustment and could even develop into a situation of tension. As it was mentioned earlier,
although there are common areas for government interventions, the specific nature of this
relationship differs widely from country to country and even from enterprise to enterprise.
(ii) Other Public Enterprises
There are empirical reasons for the existence of interdependencies among various public
enterprises. The activity of one public enterprise will be determined or significantly affected
by the activity of the other. The horizontal linkages among the family of public enterprises
are as crucial as the vertical linkage with the government. In a free market economy where
enterprises have choices of clients and suppliers, problems of interdependence may not
perhaps be quite serious. However, the situation in developing countries calls for the
management of horizontal inter-linkages among public enterprises. There are at least four sets
of inter-linkages namely, investment, production, pricing, and marketing.
(iii) The Private Sector
Most of the developing countries have adopted a "mixed economy" pattern. This creates inter
linkages between private and public enterprises. The private- public enterprises inter-linkages
are conditioned by the rules established by the government. The various inter-linkages could
be established for designed mutual benefits or may happen as a result of the natural courses
of activities, both as collaborators and competitors.
(iv). The Workers
These days, most workers are organizing themselves into associations to protect their
interests. A fundamental aspect of the enterprises' inter-linkages is, therefore, the relationship
established with the organized labor. The objective is clear enough; i.e. to create industrial
peace and tranquility, involvement and motivation, and thereby high productivity.
(v) The Consumers

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Marketing establishes a relationship between the producer and the purchaser of the goods and
services. The technique of marketing has been developed in order to understand and satisfy
consumer demand and taste. What is special with the situations of public enterprises is that
they assume heavy responsibility to provide protections to the consumer, which the market
place doesn't offer. Consumers have their own ways of evaluating the performance of public
enterprises. Their criteria are related to their own benefits, including price, quality, service,
and after-sales facilities. Public enterprises would have to make a major effort to understand
consumers' needs through market research. This can be possible by maintaining effective
inter-linkage with consumers.
(vi) The Physical Environment
Public enterprises assumed to take appropriate steps to prevent ill effects of their respective
operations and such effects caused by other family enterprises and enterprises of the private
sector on the environment. This concern of the physical environment is expressed in many
ways such as sponsoring and funding research projects aimed at studying the causes and
effects of environmental problems, as well as by employing appropriate devices to protect the
environment from possible hazards. Viewing the relationship more constructively, one can
say that public enterprises should not only prevent social dislocations on the environment, but
also should make active contributions to the healthy growth of the environment. This
shouldn't rest only with the cosmetics of parks and gardens created around industrial units,
rather of great importance is the infrastructure support that public enterprises can provide to
local communities and the environment. The problem of public enterprises with regard to
their inter-linkages with environment is that the contributions they make are not adequately
reflected in their profit-loss accounts.
(vii) Foreign Contacts
Public enterprises develop contacts abroad; arising from imports of technology, equipment
and machinery, raw materials, spare parts and components; export of goods and consulting,
contracting and other services; hiring of expatriate managers and consulting firms,
international shipping and insurances etc. Since most public enterprises are exposed to such
foreign influences, they are supposed to develop their own "foreign policy" which defines
their inter- linkages within the provisions of the government in this regard. Foreign Inter-
linkages of public enterprises may focus, among others, in developing information networks
on the availability of goods and services from each other's side, skill and technology
transfers, understanding and exploration of market situation and possibilities, assessing the
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availability and comparative advantages of establishing joint ventures and selection of the
right partners.
CHAPTER FOUR
4. THE INTERFACE OF GOVERNMENT AND PUBLIC ENTERPRISES
Once the government created a public enterprise, there is a pressing need to specify its
relationship and define the interface. Nevertheless, the government often has a problem in
determining such relationship in definite terms. One of the most difficult questions in the
field of public enterprise is, therefore, to determine the degree and character of its
relationship with the government. In developing countries in particular, the relationship is not
formal and definite. Actually, public enterprises in these countries are not treated very
differently from government departments and they are tightly controlled. On the other end,
one may find some instances in developing countries where public enterprises are enjoying
almost total independence and where government monitoring and control is not effective
enough. Neither of the two extremes is justifiable or consistent with the rationale of creating
public enterprises.
Too much or total control denies the corporate status of the enterprise, defeating the very
purpose for which they were created. To the contrary, too little control will place public
enterprises outside the democratic regime; hence the demand for complete autonomy of
enterprises is not fully acceptable. Whatever the government is willing to provide autonomy
of public enterprises, it still holds, and should do so, certain prerogative and power over
enterprises. What is required is therefore to maintain the right balance between the level of
interventions and control of the government in the affairs of public enterprises and the
operational autonomy or freedom of such enterprises. Although fixing the extent and aspects
of the relationship is the problem that lies at the heart of public enterprises' management,
optimization of the linkage can provide a sound foundation for the success of an enterprise.
4.1 PUBLIC ENTERPRISE-REGULATORY AGENCIES RELATIONSHIPS
We can use an elementary model of governmental structure to depict the various points of
contacts between the public enterprise and different government constituents. Unlike the
traditional hierarchical model, the government and the enterprise are not placed only in a
vertical juxtaposition (arrangement), but also in a more constructive horizontal relationship.
Public enterprises do have relations with one or more constituents of the government in
different aspects. Some of the relationships between each government organization

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represented in the chart and the public enterprise could simply be expressed in the following
exemplary stakes:
A) Supervisory (Technical and Sectorial Ministry)
The increasing complexity of modern governments has led to the creation of a number of
ministries, which are industry-specific, technology specific, sectorial in character and
specialized in certain areas. These technical ministries make policies for the sector, design
sectorial plans, study markets and prices and guide public enterprises functioning in the
sector. The involvement of public enterprises with the technical ministries is quite simple. It
is these ministries, which perform supervisory function over public enterprises.
B) Ministry of Finance
Behaviorally, the attitude of the Ministry of Finance flows out of its national responsibilities.
Since it is vitally responsible for national financial stability and solvency, it is natural that its
prime is that public enterprises should be financially viable, should provide returns from
invested capital, should pay dividends to government, and should be a major means of
resource mobilization. The voice of the ministry of finance is that of government as a
shareholder. So far as public enterprises are concerned, the ministry of finance exercises
interventionist power in areas such as:
 It has a major say in public enterprises' investment decisions
 It provides capital funds and long-term loans
 It determines the expected rate of return on investments
 It may intervene in pricing, wage and salary policies with the view of monitoring their
national impacts
C) Ministry of Planning
The Ministry of planning, sometimes organized as "Planning Commission" or "National
Planning Board", has the overall responsibility of designing the national development plan;
preparing a gigantic national input-output table, and a national matrix of economic activity.
Therefore, the role and performance of public enterprises is a matter of great concern to the
ministry of planning as they are the major, perhaps the dominant, sources and instruments for
the successful execution of the national plan. In practical terms, the influence of the ministry
of planning over public enterprises would be the following:
 Inclusion of public sector projects in the national plan
 Resource allocations for this purpose (in collaboration with the ministry of finance)

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  Monitoring of project implementation/production to ensure successful implementation
of the plan and the validity of the national input-output table
Behaviorally, the ministry of planning wouldn't see public enterprises as autonomous
business firms. Rather, it views them as the building blocks of the national plan, and looks at
their investments with frame of reference of social or economic profitability at the national
level, instead of a single enterprise level.
D) Ministry of Industry
The responsibility of this ministry is to promote industrialization in the country. Since the
substantive numbers of public enterprises are in the industrial sector, the ministry is deeply
concerned about them as factors of industrialization. It affects public enterprises in the
following areas:
 Determines areas suitable for public sector investment
 It encourages or opposes new investments on public enterprises on the basis of its
assessment of domestic and international demand-supply conditions
 It approves foreign technical collaboration and importation of technology
 It protects public enterprises against the encroachments of large-scale foreign industries
Behaviorally, the ministry of industry may not differentiate between the public and domestic
private enterprises, rather threats both of them as instruments of industrialization.
E) Ministry of Labor
The main concern of the ministry of labor is the welfare of workers. Hence it promotes
legislation for the protection of workers' rights covering issues like job protection, working
hours, hazardous employment conditions, labor disputes and labor unions. While this
ministry has no direct control over public enterprises, its policies have major impacts on
enterprises in matters such as:
 Wage negotiations and determinations
 Welfare measures, bonuses and incentives
 Disciplinary procedures and industrial disputes
Behaviorally, as champion of workers' rights, the ministry doesn't differentiate between
public and private enterprises, rather threats both as employers. But it has a legitimate
expectation that public enterprises should be a good example by being "model employers".
F) Ministry of Commerce
This ministry, sometimes called "Ministry of Foreign Trade", is responsible to preside over
the country's foreign commercial transactions, to stabilize the balance of payments position
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by promoting exports and controlling imports. Although policies of the ministry of commerce
do not distinguish between the public and private sectors, public enterprises are generally
affected by the ministry's control over:
 Import licensing
 Foreign exchange releases
 Export promotion and quotas
 Tariff protection
In other words, a public enterprise could have relations with one or more of the ministries in
addition to the supervising agency. Each organ has its own stake with public enterprises and
demands certain requirements from its own perspectives. Now, one can be able to see the
complex situations that public enterprises are facing with in terms of responding to this
multiplicity of demands, in terms of interpreting what the government really wants, and in
terms of striving to survive in this maze (confusion). Although relations with such agencies
could have their own effects on the success or failure of public enterprise, the most decisive
influence comes from supervising agencies. Therefore, it would be more important to explain
the roles and functions of the supervising agencies and the aspects of interventions in the
affairs of public enterprises.
4.2. THE ROLE OF THE SUPERVISORY MINISTRY (AGENCY)
What are supervisory ministries or agencies, and why do we need them vis-à-vis the activities
of public enterprises in the first place? What are the fundamental functions of these agencies?
What are the major areas of supervision? These questions need genuine answers free from
any unfair bias, but with reference to the effectiveness of public enterprises. A supervisory
ministry or agency is a controlling body or as it is sometimes described, a parent ministry.
Decisions involving government interest over public enterprises such as those of financial,
personnel, operational, and procedural policies are expressed through the supervisory agency.
This ministry or agency is commonly called upon to give formal approval to certain kinds of
decisions such as new investments or expansion projects, prices, dividends, personnel
recruitments, wages and salaries, labor relations, and so on.
The administrative or supervisory ministry has the responsibility for monitoring and
coordinating the public enterprise attached to it. A supervisory ministry or agency is expected
to make decisions, not only to express the government's supervisory responsibility but also to
assure the consonance and harmony of the public enterprise's activities with those of the
development plans and the overall public purpose for which it is created. Two models of the
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supervisory ministry have emerged in the developing world (Praxy Fernandes 1986:41).
Some countries have attempted to establish one or a single ministry to supervise the functions
of all public enterprises like The Ministry of Production in Pakistan, The Ministry of Public
Enterprises in Malaysia, The Ministry of Industry in Egypt, and Public Enterprises'
Controlling Authority in Ethiopia. However, this model is criticized as being impractical or
ineffective to place all public enterprise under the control of a single agency.
The other model, which is more commonly found, is to entrust the affairs of public
enterprises to different technical or sectoral ministries. This pattern has three major
advantages:
First, it is managerially containable. The number of enterprises to be supervised is small
enough to satisfy the management concept of "span of control"
Second, since the ministries are "technical", they are familiar with the technological,
production, marketing and management problems of the enterprises they control.
Thirdly, since the ministry sets government policy for the sector, it is in a position to guide
far more effectively the corporate strategies of the enterprises under its control.
The effectiveness of the system will of course depend on the nature of the relationship
between the supervisory ministry and the enterprise, the demarcation of the roles of the two
parties, the nature and content of the inter-linkage, and above all, the ability of the
supervisory ministry to function as the enterprises' intermediary with the rest of the system.
The following are generally recommended as the guiding principles for ministerial powers in
relation to public enterprises (Mathur, 1999):
 The authority of the minister or officer of the government who exercises power over
public enterprises should be clearly defined. It is generally agreed that day-to-day
operations should be protected against political interrogations and interferences.
 Ministers should be concerned with securing that enterprises operate in the public
interest.
 Ministers should seek to ensure the efficiency of enterprises by exercising a board
oversight of them, but should not involve in management.
 The methods of ministerial control or supervision should be mainly strategic rather than
tactical; the industries can have clear idea of what the government requires of them if they
are not subject to frequent tactical control. In other words, the supervisory ministry
should be responsible for the formulation of policy and the management should be for the
implementation of that policy, and the interaction between them should be to facilitate the
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 overall governmental supervision without impairing the efficiency of the operations of an
enterprise and promote decentralized decision-making within the enterprise.
 The proper and fruitful supervisory control depends on the attitude and ability of both
ministers and members of the board.
This being the general guiding principles, a straightforward proposition regarding the roles
and functions of the supervisory ministry is the management of government's reserved
powers in decision-making. The range of duties or principal functions, the scope of
intervention and the points of contact of the supervisory ministry with the public enterprise
would, among others, normally include:
 Sponsoring the creation of a public enterprise through new investment proposals
 Screening and piloting investment proposals for expansion and diversification made by
an existing public enterprise, foreign exchange expenditure, borrowing, and distribution
of profits
 Approving major foreign technology contracts and joint venture proposals
 Appointing the board of directors and the chief executive
 Approving the salary and wage structure and the system of recruitment
 Defining the corporate objectives, screening and approving corporate plans of the
enterprise, ratifying the deployment of surpluses
 Conveying directives on matters of public policy or public interest
 Approving, in sensitive cases and particularly in monopoly situations, pricing policy
 Monitoring periodically the progress of enterprises
The execution of some of these functions may be beyond the competence and authority of the
supervisory ministry and may involve the jurisdiction of other ministries or government
agencies. In this case, the supervisory ministry is called upon to play an intermediary role.
Managers of public enterprises are well aware of the limitations and competence problems of
supervisory agencies. Unfortunately, even the theoretical concept of the autonomy of public
enterprises doesn't seem to have been followed in spirit in developing countries. The
supervising or controlling agency normally issues numerous instructions on matters, which
could be considered "unimportant" or even "trivial" and should legitimately fall within the
domain of the enterprise's decision-making jurisdictions.
4.3. AREAS OF GOVERNMENT INTERVENTION

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Despite differences in the magnitude of the relationship between public enterprises and the
government from one environment to another, the hardcore of government's involvement will
be found in the following rightful areas or matters (Fernandes, 1986:23-29).
 Defining Corporate Objectives
The starting point of the relationship between the government and the enterprise lies in the
formulation of goals. An agreement on objectives is multi-purpose in character. For example:
 It indicates to the enterprise why it has been established and what it is expected to
achieve
 It provides a sense of direction and a base on which corporate strategies and operational
approaches can be designed
 It gives notice to the enterprise about the focus of public control
 It provides yardsticks for the evaluation of performances
 Approval of Investments
Since part of the funds required for investments of public enterprises come from the public
Exchequer (treasury), it is reasonable to assume that the government will determine how and
where the investment will be made. Indeed many of the investment decisions are taken even
before the enterprise comes into existence. The prudence (carefulness) with which public
investments are made has a determining influence on the subsequent viability and
performance of public enterprises. The failure of many public enterprises is often traceable to
a disastrous investment decisions, and the trouble with such mistakes is that they are not
remediable in most cases.
The existing practices of developing countries reveal that while some of them tend to make
public investment decisions unwisely without critically and thoughtfully assessing the
existing reality and the possible consequences, many others do so such decisions astutely,
practice high degree of sophistication in investment planning, prioritization and analysis.
 Approval of corporate Plans
The practice of corporate planning has been gaining ground among large public enterprises in
many countries. A corporate plan starts on the premise that it is made for an organization,
which has a corporate status and personality. It implies that the enterprise, though linked to
the state, has a life of its own. Generally, two propositions can be made in this regard.
 Corporate planning provides an instrument for promoting the effectiveness and
efficiency of public enterprises and upgrading their performance levels

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  Corporate planning is the most pragmatic way of establishing a bridge between the
government and the enterprise
Corporate planning sometimes described as strategic planning, is viewed as a prime
instrument for the survival, growth and profitability of mainly large enterprises. It has been
designed previously for public enterprises in the business environment of highly
industrialized countries, not in developing countries and expressly for the private sector. The
fundamental approaches of corporate planning can be effectively transferred to the public
sector. Corporate strategies constitute a bridge between enterprise goals and performance.
The discipline of corporate planning involves the following elements:
 Defining the mission: seeking for answers for the classical questions such as "what
business are we in?" and "what do we want to achieve in the long-run?"
 Designing long-term strategies: in developing a cohesive corporate strategy, we need to
determine first the life cycle of the activity and the timeframe of our thinking. When we
make investments and take decisions with long-term implications, we make assumptions
about prices, markets, technology, world trade, and government policies. The timeframe
of corporate plans is related to the nature of the investments and their natural life cycle.
Within the timeframe, the enterprise has to develop the political and economic scenarios.
 Developing functional plans: for practical purposes corporate strategies are designed on a
functional basis with different perspectives in mind. A series of plans are thus created in
the main functional areas including investment, finance, production, marketing, materials
and human resources, each of which is critical to the enterprise. For example, investment
planning is the heart of corporate planning that determines the profile of the enterprise,
while financial plan is a corporate goal to produce financial surpluses and provide a return
on invested capital. To achieve this desirable result, the enterprise would need to look into
the elements such as capital structure, planned levels of profitability, pricing policy, cost-
effectiveness, and utilization of surplus when making financial planning.
 Dealing with inter-linkages: the enterprise has relationships and inter-linkages with
external organizations, agencies and interests although corporate plan is mainly internal to
the enterprise. Indeed the health, success, and image of the enterprise will largely depend
on the optimization of these external relationships, managing the inter-linkages.
 Articulating the performance evaluation criteria: perhaps one of the unresolved questions
in the organization and management of public enterprises is how to fairly evaluate their
performances. Therefore, the widely acceptable proposition is that the designing of
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 corporate plans is the most effective way of resolving the question of performance
evaluation of public enterprises. Embodied in the plan are the needs to develop evaluation
criteria. However, performance evaluation is so complex, which entails the need to
analyze them in detail in a separate operational exercise.
 Nomination of Board of Directors
As it will be discussed in Chapter Four in detail, nomination or appointment of board
members of public enterprises is the prerogative of the government as one of the intervention
areas. Perhaps, the whole issue of public enterprises' success will largely depend on the
manner of the appointment of the board of directors. Studies show that the composition of
boards of public enterprises in developing countries reflects that political compulsion
outweighs managerial necessities. The success or failure of a public enterprise may rest on
the strengths or weaknesses of the board of directors. In other words, the commitment and
capacity of the board of directors will determine principally the fate of public enterprises.
 Appointment of Chief Executive
As important as, and perhaps even more critical than selection of board members, is the
appointment of the chief executive of the enterprise. For this reason, the government is very
curious designating individuals to the post of chief executive. If the prerogative of the
government in appointing the chief executive is not exercised with due care and professional
integrity, the sad state of affairs in public enterprises will be imminent.
 Directives on Security Matters
Directives on security matters are one of the areas of reserved for government decision-
making; the right to issue directives on matters relating to national security and the right to
issue instructions on matters affecting public interest is unquestionably left to the
government. Government may instruct a public enterprise, for example, to produce certain
goods vital to the country's security.
Directives or instructions could take in both formal and informal or unofficial manner. For
example, directive to a public enterprise may come from the government not to retrench
surplus staff, not to fire a particular individual, to purchase machinery from a particular
country, to make contract with a particular company, and so on.
 Directives on Public Interest
The most ambiguous area is the right to issue directives on matters of public interest. The
term "public interest" is so elastic that in practice it could mean anything, enabling the
government to intervene continuously and comprehensively in the affairs of public
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enterprises. No matter, however, how much directives in the name of public interest might be
unnecessarily flexible; government does it often and it still affects public enterprises
significantly.
 Obtaining Information, Monitoring and Audit
The persistent cry of public enterprises' managers that they are unable to function because
of constant inquisitions and interrogations by the government may perhaps point to a
situation of over-control and inadequate managerial autonomy. Whatever managers of
public enterprises might say, the government needs to obtain adequate information from
them, monitors their operations and performance, and undertakes different types of audits
upon them such as statutory audit, transaction audit, propriety audit, and performance
audit.
 Performance Evaluation
Government always wants to make sure that public enterprises are doing right by
evaluating their performances, and this is in fact the ultimate concern that lies at the very
objectives and motives of creating them. As it will be discussed in Chapter six latter,
performance evaluation of public enterprises is another problematic area of government's
involvement. In other words, although governments do have common practices in terms of
evaluating the performance of public enterprises, the problem of how to assess such
performances seems to defy solutions. There are very few countries, which set yardsticks
by which performance of public enterprises would be measured, develop criteria of
evaluation, and employ methodologies and mechanisms. Hence, public enterprises are
hemmed in by a multiplicity of judgments. Furthermore, regardless of the universal
interest and practice of the government in evaluating the performance of public
enterprises, there can be little hope of improving their performances unless there is an
agreement on what constitutes "good performance".
5.4. MAJOR ISSUES IN GOVERNMENT AND PUBLIC ENTERPRISE
RELATIONSHIPS
The core issues, which concern the government and a public enterprise, may include
policy, financial and personnel management issues. These issues are determinant in many
respects for which reasons require government decisions and complete understanding on
the public enterprise's side.
A) Policy Issues

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There are, for example, policy issues of "purpose", which should be decided by the
government for each of its enterprise and which then become the basis for evaluation.
There are also other important policy issues with respect to the conditions and methods of
the operations of public enterprises, which influence their performances as well as issues
of setting standards by which it should be judged. Policy determinations about privileges
or advantages not available to comparable private enterprises affect the operation of a
public enterprise and are factors in judging its relative success.
Moreover, a typical policy issue is that, governments impose special obligations upon
public enterprises to prescribe standards of operation, which have implications on their
efficiency and effectiveness measured in terms of profitability as practiced by the private
sector, although those standards are perhaps well justified in public purpose. The
enterprise might be expected for example to serve as a model employer by providing
comparatively high standard housing, healthcare, educational facilities and services to its
employees. It might be also required to give priority of employment for selected groups, to
establish worker's unions having weights in management and program decisions, to follow
ponderous procedures in the termination of employment, to operate plants and branches at
sites not feasible from the production and distribution points of views, etc.
Often, these policy issues do affect the productivity and efficiency of public enterprises,
but need to be clearly indicated in government decisions and communicated to the
respective enterprises. It is important that these major policy issues of public enterprise
purpose and operating method be resolved because they are crucial to the efficiency and
effectiveness of each enterprise and are basic to the judgment of relative success. It is
imperative that the establishing instrument (charter) be clear as to the purposes and
operating conditions of enterprises. However, any founding charter must necessarily be
relatively general in its terms so as to allow desirable flexibility in the conduct of
designated activities, which permit adjustment to changing circumstances as time goes on.
Unfortunately, it has been evidently seen that the bureaucratic and political involvement in
the affairs of public enterprises is not limited to the major policy issues but extends to
authorized program activities of management. For the successful conduct of public
enterprises, therefore, the sound resolution of major management issues (financial and
personnel management) are in the same category of importance as the solution of major
program policy issues.
B) Financial Management Issues
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One of the fundamental needs of public enterprises is the issue of financial management,
access to funds and freedom to expend, as they are required in operation, maintenance,
expansion and investment. The annual appropriation procedures and the tight financial
controls of the traditional bureaucracy make it virtually incapable of performing
effectively in the business world. It is, therefore, important that public enterprises be
authorized to use their revenues and to borrow money from different sources, which is a
major decision issue on the part of the government.
Nevertheless, public enterprises cannot be left out of government sight and control in
absolute terms. Even for those enterprises, which earn profit it would be reasonable for the
government to put a limit on both borrowing and the use of revenues and on the size of the
debt, either by amount or by purpose or both as long as financial capability to discharge
the enterprise's basic responsibility is preserves. Limits can also be placed on public
corporations in terms of length of amortization and rate of new investment, as distinct
from normal operations, maintenance, and replacement.
In a large number of cases, public enterprises operate at loss because they are required to
perform services, which are uneconomic even though in the public interest, or to sell
products or provide services at a price below their cost. In such circumstances government
subsidies are inevitable; the government must make periodic appropriations or grants to
sustain the enterprise. These processes involve the treasury/budget and planning agencies
because of their concerns with the size and justifications of subsidies, though they are not
directly related to the operations of public enterprises.
The underlying assumption of public enterprises is that they will use money effectively
and efficiently to achieve stated purposes provided that they have autonomy of financial
management.
The realization of this assumption requires the kind of accounting system that will show
not only cash expenditures but also allowances for interest, depreciation, and all other
elements of cost assignable to each function. The kind of accounting system, which is not
usually found in traditional bureaucracies but in public enterprises, is often called "cost" or
"management" accounting. Public enterprises are, therefore, usually exempted from the
requirements of government accounting but are required to install a commercial type of
system. In addition, public enterprises are most commonly exempted from the regular
government audit system including pre- audit.

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All these reflect financial management issues in public enterprises, which in most cases
require government blessing or decision. Generally, adoption of an appropriate financial
management system is a very critical decisional issue and will largely determine the
success or failure of public enterprises. In other words, good financial management system
including optimal use of financial autonomy on the part of enterprises and appropriate
level of control on the part of the government, adoption of relevant accounting and audit
systems are critical financial management issues.
C) Personnel Management Issues
Control of its own personnel system is another distinguishing administrative feature of
public enterprises from other customary government agencies, which goes along with the
relative financial independence. The primary purpose or reason of putting a public
enterprise in charge of its own personnel; i.e. to give it the right to hire and fire, promote
and demote, and to exercises all other personnel management/administration activities is to
give it the capacity to perform the functions for which it is to be held accountable. There
are additional reasons for granting autonomy in personnel matters to public enterprises.
One of such reasons is to permit the establishment of salary scales and other conditions of
employment competitive to the scale and amenities in private industries, and higher than
those usually prevailing in government services. Such conditions are particularly relevant
because public enterprises typically require specialized personnel, industrial engineers, and
business managers, which are not often found in significant numbers in traditional
government employment.
In practice, however, only few public enterprises have been able to sustain their
independence in personnel matters. The public enterprise sector, by and large in
developing countries, has not acted as vigorously, imaginatively, or effectively as it might
have done in setting up personnel systems justifiable by public standards. The main
reasons for most of them to fail in exercising autonomy in personnel matters are abuses,
which are both internal and external such as:
 Internal weakness to create their own distinctive systems having personnel
standards and procedures, not only sufficient to their needs but also that can be
explained and justified to the skeptical public,
 An apparently inevitable external bureaucratic and political pressures,
 Poor judgment in making appointments,

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Such abuses in the personnel systems of public enterprises have brought about external
intervention in their personnel policies and actions. These external interventions in personnel
autonomy are a threat for enterprises from the beginning. For this reason, some countries
have made to establish central industrial management pools to serve the public enterprise
sector. It is common now to find countries setting up "public enterprise commissions",
comparable to "public service commission" of the civil service, to regulate the personnel
practice of public enterprises, and even to pass upon personnel appointments.
Another kind of government intrusion into the personnel independence of its public
enterprises is the imposition upon them certain standards or conditions of employment, such
as provision of housing and health services, and allowing the participation of workers'
councils. These impositions have social, doctrinal, political, and exemplary objectives, which
all have a direct bearing not only in the autonomy but also in the performance of public
enterprises. In general, those three major issues discussed above represent the points of
relationships of the public enterprise with a number of government agencies, which
distinguish their management characteristics.
4.5. ACCOUNTABILITY AND CONTROL OF PUBLIC ENTERPRISES
A distinction has to be made between control and accountability in order to understand well
what they imply in the context of public enterprises management and operation.
Accountability and control in public enterprises have conceptual and practical differences and
have their own purposes, and they involve a number of issues that will be discussed as
follows.
A) CONTROL
"Control" is an active function, a purposeful activity that involve directing, restraining, and
stimulating a person or an organization to a certain action or end (Prakash et al 1997:367). In
short, control over management encompasses certain activities undertaken with a view of
compelling to conform to pre-arranged plans. It is thus, the measurement and correction of
activities of subordinates to ensure the accomplishment of plans. Since one element of the
"public dimension" of a public enterprise, which was discussed in chapter one earlier, is
"public control", the government exercises control over its entities. The question that needs
clear answer is that, how tight or loose should be the degree or extent of control? Too much
control will reduce public enterprises to the status of a government department, defeating the
very purpose for which they were created, and too little control will place the state-owned
industries outside the democratic regime.
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 The United Nations identified the following as the purposes of control over public
enterprises.
 Promotion of efficiency: Control is geared towards promoting and maximizing the
efficiency of public enterprises.
 Implementation of government policies and targets: It enables the government to
ascertain that its development policies and targets as regards to output, profit or rewards
have been achieved or implemented.
 To ensure financial responsibility: To ensure whether scarce public funds have been
utilized in accordance with the intended purpose and in the best interest of the enterprise
and the public. Thus control facilitates accountability of management to some higher
public authority so that the misuse of funds may be precluded and appeased, if not totally
avoided.
 To ensure achievement of social objectives: On top of the commercial objectives,
public enterprises are expected to achieve or facilitate achievement of social goals as
defined by the government. Hence, control enables the government to ensure the
achievement of social objectives assigned to public enterprises.
 To restrain undue power of management: Most of the public enterprises are big both
physically and financially. Consequently, mangers in the public sector have more powers
and influence in their respective organizations. Thus, if uncontrolled, they may misuse
such power to unnecessarily advance their personal interests.
 To take corrective measures before things get worse: effective control enables to take
an up-to-date corrective measures before mistakes could cause an irreversible or adverse
effects in the operation of public enterprises.
There are various agencies that are empowered to exercise control over the public enterprises.
Their nature, composition and functions differ from country to country on account of political
and ideological orientations. Besides, the extent of power vested in each agency also differs
substantially by virtue of political and ideological differences and legal tradition prevailing in
different countries. Therefore, there is no uniformity as regards to the ways of exercising such
controls. Nevertheless, the international experiences suggest the following as the common
and main agencies of control over public enterprises in different aspects.
(i) Parliament: Basically, in any democratic society, the function of control and ensuring the
accountability of public enterprises has been assigned to parliament, which is the legal
representative of the public. The parliament uses different methods so as to exercise control
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over public enterprises such as: parliamentary questions, discussions, debates regarding
related matters, and through parliamentary committee for in-depth examination of the
working of the public enterprises.
Minister: The minister refers to the supervisory body whose roles and areas of interventions
on the affairs of public enterprises are discussed in Chapter Three. This is the common way
of controlling the operation of public enterprises. In general, a minister can exercise control
through a number of combination methods.
Auditor General: In many countries audit control is vested in an auditor general. The power
of auditor general varies from country to country depending on the legal frameworks.
Basically, the audit control by Auditor-General covers the following: Audit against provision
of funds, audit against regularity, audit against sanctions to expenditure, audit against
propriety, efficiency Audit
Special agencies of control: Countries may form special agencies to perform control over
their enterprises, directly or indirectly. These special agencies could be consumers' councils,
advisory committees, public relation, press, published information, and experts' committees
and review etc.
B) Accountability
"Accountability" means to give an account of one's action and to report on the achievements
and failures together with explanations on their declared objectives. According to Dele
Olowu (1993), accountability is the requirement that those who hold public trust should
account for the use of that trust to citizens or their representatives. Accountability signifies
the superiority of the public desire (choice) over private interests, and indicates a state of
being obliged to render full and truthful reports to a superior level of authority concerning
one's activities and actions. In other words, accountability in the case of our subject is the
provision of genuine reports of actions to the people or legally authorized body by public
enterprises. Finally, accountability suggests answerability and requires clarity about on what
matters and for whom an organization is supposed to be accountable.
Therefore, for accountability to be effective there must be an enforcing mechanism, to have a
watchdog organization responsible for carrying out conformance and performance auditing.
The autonomy given, or suggested to be given as a matter of principle, to public enterprises
immediately raises the question of accountability. Since a public enterprise is established as
an instrument to execute government policy and program, it must be accountable and thus
subject to some kind of monitoring and some degree of control. It is the tug of war between
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the degrees of autonomy on the one hand, and accountability and degree of control or
supervision on the other that creates the major management issues regarding the public
enterprise sector. The pulling and hauling in this conflict between autonomy and
accountability produces a variety of solutions in the balance of management. Report
requirement from public enterprises is one aspect of exercising accountability. A complete
report provides the parliament and the public with information to use their political
judgments about the success and relative value of the enterprise. Such reports avoid the
suspicion aroused by the mystery of secrecy and silence.
It is generally recognized that when the government gives power to a public enterprise to
operate outside its minute legislative, financial and executive control, it should have certain
safeguards. A study conducted by the United Nations recommends the following guiding
principles of government and public enterprise regarding the practice of control and
accountability:
 The field of activity and functions of public corporations should be clearly defined for
any act of acceptable level of control and accountability to exist
 The government should retain powers of supervision, including the right to audit, inspect
and criticize, the right to appoint, and with good reasons, remove directors
 Government's power should be broad but relevant to its function; though informality has
its own dangers, the nature of government control need not be wholly formal and
informal relationship cannot be completely avoided and is even beneficial.
The enterprises should be held strictly accountable for their performance in relation to the
goals set by the government, and there should be an appropriate mechanism for evaluation of
their performance. In view of this, enterprises are required to make complete annual reports
accessible to the government, the press and the public.

Chapter Five
The Structures and Roles of Boards
The principal governing authority of an enterprise is its board of directors. The board is the
top management organ responsible for implementing the objectives of an enterprise. One
aspect of the managerial and operational autonomy of a public enterprise is its insulation
from political and bureaucratic interference in its day-to-day activities and administration.
The governing board is the body typically entrusted with the function of protecting its

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enterprise from such interference, as well as with the function of representing the government
in the management of that enterprise.
Governing boards differ in their ability both to preserve the integrity of the enterprise and to
give administrative leadership according to the length and conditions of appointment. They
do vary widely in their structure, appointment/selection, character, role, powers and
responsibilities.
Boards also have numerous problems in many respects like: uncertainty of tenure,
inadequacy in power and authority definition, lack of confidence and innovativeness. As a
result of these, boards may find themselves helpless, sandwiched between the political power
of the state and the managerial power of the enterprise's professionals.
For these and many other reasons, they remain weak and inefficient in most instances. This in
turn has an implication and reflection in the performance of public enterprises. The principal
proposition is that effective boards make effective enterprises and weak boards will produce
weak enterprises. In general, boards are in effect trustees, and the effectiveness with which
the trust is fulfilled will depend on the standing and credibility of the board vis-à-vis the
professional managers and the confidence placed in it by the government.
1.1. TYPES AND STRUCTURES OF THE BOARD OF DIRECTORS
The first issue, which needs careful examination, is the type of board to be set up- its
structure and composition. There are five possible options in the set up of a board; namely no
board, a wholly external board, a wholly internal board, a two-tier board, and a composite
board.
A) No Board
In this option, the top management of the enterprise is entrusted to a single individual.
Although this option may suit more to the needs of a parastatal, which has a regulatory or
promotional function of a non-public enterprise character, there are some instances of public
enterprises functioning under such arrangement. Prima facie, this option may appear
attractive. Its advantages are:
 It allows for speedy decisions, unhindered by laborious discussions and delays involved
in board meetings,
 It pinpoints responsibility and eases accountability
This option has also several disadvantages such as:
 It has the danger of placing too much authority and responsibility in one person

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  It leaves the fate of the enterprise entirely dependent in that person's competence and
integrity
 It doesn't allow for participation of top management
 It makes the sole controller vulnerable to illegitimate pressure……
Therefore, this option doesn't commend itself as a long-term arrangement. It can at best be
employed in a transitional basis.
B) A Wholly External Board
Many developing countries have adopted this pattern. Under this pattern, all members of the
board, except the managing director of the enterprise, are "outsiders". They are not
employees of the enterprise, nor are directly responsible for specific management functions.
It has some obvious plus points or advantages such as:
 It provides for the nomination of external professionals with mature experiences who
can provide a "second option" and who can guide professional managers within the
enterprise
 It allows for the nomination of interest groups such as consumer councils, trade unions,
environmental groups and academicians
 It provides rooms for representatives of relevant government ministries and agencies
 Such external groups are unbiased by day to day problems of management, hence
provides an objective assessment of performance
The major drawbacks of this model are:
 The board members bear no direct responsibility for management
 It is possible that board members can be "manipulated" by an aggressive and skilful
chief executive
 Even worse is that the model excludes the top management from the highest
policymaking body
 It doesn't consequently provide for participative management and cadre building
C) A Wholly Internal Board
This is the obverse situation - the setting up of a board composed entirely of fulltime
directors, who are holding senior staff positions in the enterprise. Generally, they include
the major department heads such as the finance, production, marketing, and personnel
managers. The chief executive who holds the posts of chairperson and managing director
preside. The advantages of this option (model) are:
 It ensures professional competence
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 It establishes a direct linkage between authority and responsibility
 It provides room for participative management
 It provides an atmosphere of incentive, involvement and motivation
 It opens up opportunities for senior managers to reach the top in terms of management
and career development and planning. It creates, for example, a pool of top management
capability from which the chief executive of public enterprises can be drawn
The major drawbacks of this option are:
 It is too "inbred", and doesn't provide exposure to a second opinion
 It makes no room for representation of relevant interest groups
 It shuts out the participation of the concerned government agencies
This pattern is seldom applied in the public sector and it may not be desirable, in the long
run, to encourage its emergence.
D) A Two-Tier Board
This model is an attempt to combine option "B" and "C" above. It has got a growing
popularity in many countries like Germany and USA. In effect two boards are set up:
(1) At the higher policy-making level, a supervisory board composed of outsiders
(2) At the operational level, a management board composed of the enterprise managers
The chief executive presides over the management board and is a member of the
supervisory board, thus providing a link between the two bodies. This option is attractive in
that it has advantages such as:
 It combines the advantages of options "B" and "C" and avoids the drawbacks.
 It provides a balance between participative management and the rigors of external
control
 It has a particular validity in the case of public corporations servicing the general
public such as public transportation, electricity, and water supply systems .
Problems do, however, arise when this model is put into operation such as:
 Difficulty in the demarcation of the authority and responsibility between the two
boards
 The filtration of decisions through two levels might also create bureaucratic delays
 In practice, it is likely that one of the boards will "usurp" power making the other
board only a nominal body
 The possibility of the management board to run the enterprise, converting the
supervisory board into a sort of advisory or auditing council
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E) A composite Board
This pattern would appear to provide most of the answers and perhaps for this reason it is
being increasingly adopted in many developing countries. The board is composed of a
judicious blend of "insiders" and "outsiders". From within the enterprise, the board includes
the chief executive and the senior managers controlling various operations. From the
outside, the board includes experts chosen for their professional experience and familiarity
with the problems of the enterprise, selected representatives of interest groups and
concerned government ministries or agencies. This model has all the advantages of option
"D" with the additional merit that it secures cohesion and unity of command.
1.2. SELECTION AND TENURE OF BOARD MEMBERS
Once the structure of the board is decided, the government will be faced with the question
of selecting appropriate board members. In the case of the internal members of the board, no
particular problem arises since they secure their seats in an ex-officio capacity as heads of
various management functions in the enterprise. The board of directors of a public
enterprise is nominated by the government as part of those areas proposed for state
intervention in the affairs of public enterprises. The manner in which this prerogative is
exercised by the state could well determine the health and performance of the enterprise.
For example, as studies reveal in developing countries, political compulsion often outweigh
managerial necessities in the assignment of board members to an enterprise.
Many boards, perhaps most of them, are appointed by the minister of the administrative
ministry, and include some ex-officio members such as representatives of relevant bureaus.
Boards are typically composed of government officials, at least in the majority. Sometimes
the ministers themselves are also members of the governing boards of major public
enterprises such as those, which are in the holding companies of large number of
development operations. Moreover, in some countries like Zambia and South Korea, the
presidents themselves were the board chairmen of the paramount public enterprises.
Governments need to be careful in deciding on the status of their nominees. The real issue
of selectivity arises in the nomination of non-officials. It would be wise to keep the
following guidelines in mind:
 They must have an awareness of government policies and development strategies,
 They must have adequate familiarity with the problems of the enterprise,
 Their credibility as professional experts must be recognized and respected by the in-
house professionals,
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  They should have the time and interest to devote to regular attendance at and
preparation for board meetings…
Some countries are building data banks of suitable candidates for appointment to the board
of public enterprises. The most common available source is the group of retired government
officials and public enterprise managers who have had proven success during their careers.
With regard to their tenures, their members may serve sometimes full-time and in other
cases part-time, they sometimes tenures of specified time and in other instances may have
none at all, serving at will.
The life of the board is entirely at the will of the government, a prerogative derived from the
right to appoint. Available evidences appear to reveal a high state of fluidity and uncertainty
in the tenure of office. There is no universal rule concerning the optimum tenure. There are
two considerations to bear in mind:
 The tenure should be long enough to provide the board members adequate time and
opportunity to familiarize themselves with the problems of the enterprise and to
develop and implement medium-term strategies,
 The tenure should not be so long as to create a state of stagnation of ideas or vested
interest. Fresh blood brings in fresh idea.
These two factors or considerations seem to point the tenure of the board members to be a
minimum of four and maximum of six years.
1.3. POWERS AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS
Finally, one needs to determine the precise role of the board and the range of its authority.
The board's function may be generally said to be "trusteeship" and "entrepreneurial" as
distinguished from the "executive". The board acts as a trustee for efficient operation of the
enterprise. The entrepreneurial role of the board implies innovation in a constantly changing
environment. Thus, the most important function of the board is risk assessment and risk
bearing, and an enterprise cannot be successful if entrepreneurial skill doesn't provide
innovative efficiency (Mathur, 1999:95). Theoretically, all powers of the enterprise, subject
to the reservations of authority made by the government would vest in the board, while in
practice this has been little possible.
The board has interface relationships with the government for what needs government
approval and with the operating management for what needs board approval. In other
words, the board's function is to support the enterprise for which it is responsible and to
determine its policy within the limits of the controlling statute and guidelines from
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government. It would be impractical to draw up a standard list of items to be reserved for
board decisions and items to be delegated to the management. However some examples will
clarify the point:
Enterprises in sensitive areas exposed to public opinion such as utilities, public transport,
water supply, electricity, telephones will require strong board guidance,
 Labor intensive enterprises may require greater board attention than capital intensive
enterprises,
 Monopolies need more intensive supervision than competitive enterprises, since the
market takes over many of the board's responsibilities in the latter case,
 The degree of board control over the managers is likely to be in direct control
proportion to the degree of government control over the enterprise.
Given these variables, which give rise to different patterns of control, a list of common
items that would normally come to the board for decision are suggested as follows
(Fernandes, 1986:129-130):
 Establishment of basic policies and general strategy of operation
 Decision on major financial matters
 Selection of key personnel and approval of wage and salary structure as well as
other benefits
 Monitoring performance and passing judgment on them
These being the general and detail functions of the board, all other powers should be
delegated to the chief executive and operating managers.
CHAPTER SIX
6. COMPARISON OF PUBLIC AND PRIVATE ENTERPRISES
MANAGEMENT
The coexistence of public and private enterprises is evident in countries that adopt a "mixed
economy" pattern with quite visible comparative roles in the national economy. Though
mixed economy pattern involves policy questions, which can be decided at the country
level, the comparative roles of public and private enterprises may be defined by law or
public policy in some countries, while in others may evolve out of convention. In addition,
the two sectors are viewed differently in various countries as competitors and collaborators.
Whichever form is the case, they coexist by maintaining meaningful relationships in various
spheres of operations. More significantly, public and private enterprises differ in many

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 respects such as in their respective purposes, structures, orientations, scopes, responsibilities
and so forth.
6.1 DIFFERENCES AND SIMILARITIES
The major feature of public enterprise that distinguishes it from a private firm is the
multidimensionality of its objectives. The objectives of public enterprises are always
complex and even conflicting as compared to private sector enterprises. Criteria of
performance are correspondingly more complex and less clear-cut in the case of public
enterprises. They have special responsibilities to the government than the private ones. They
are expected to set standards in all their activities.
A far-reaching distinguishing characteristic of a public enterprise from that of a private one
is the managerial environment, in that a public enterprise is not a self-contained decision-
making entity.
In a private enterprise, all management decisions are taken internally within the firm by its
own board of directors. Subject to the state's laws and regulations in general terms, there is
no authority outside the firm to make decisions in the case of private enterprises. This is not
the case in the public enterprise. Critical management decisions, particularly those of a
strategic kind, are not within the competence of the enterprise, and rather are taken at the
government level. Whatever may be pronounced about the "autonomy" of the enterprise,
certain decisions will be taken, and by their very nature, must be taken by the government in
its capacity as the owner or shareholder (Fernandes, 1986:4-5).
Public and private enterprises also vary in their investment considerations; i.e. private
entrepreneurs invest their funds in ventures only where there will be maximum possible
gains in terms of financial returns, while investment in the public sector takes other
considerations in addition to financial profitability. Hence, the performance of private
enterprises will be measured purely on financial returns, while that of a public enterprise
will include the achievement of social goals in addition to their economic returns or
profitability. Generally, public and private enterprises differ at many points-vary in form
and purposes, which can simply be summarized in terms of the following factors:
 The Political environment
Public enterprises are generally working with the intent of implementing political decisions
since their very establishment is the result of political decisions system. Therefore, public
enterprises operate within the general framework of the political system and are much
influenced by the system. Activities of public enterprises take place against the background
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of public criticism-supposedly to balance conflicting social interests. On the other hand,
private industry is essentially guided by the principles of profit maximization and doesn't act
as an arbitrator or intermediary between conflicting social interests. Moreover, unlike public
enterprises, the private sector is not within the direct political seen or public criticism in most
of its affairs.
 Social costs
Public administration decision-making varies from that of private business in that where
private business is primarily concerned with questions of financial (economic) costs and
benefits, public administration is intimately concerned with the concepts of social costs and
benefits in addition to those of a mere financial nature.
 Public interest
The performance of public administration is often evaluated by its ability to operate in a
manner so as to maximize and integrate public interest, whereas private business is
evaluated on the basis of profit maximization. In other words, although efficiency is axiom
number one in the value scale of both public and private enterprises, in private business it
has to do with the minimization of cost and maximization of profits, while in the context of
public enterprises the aims are more complex to include other concepts like public service,
public accountability, and social responsibility. Therefore, the multidimensionality of
objectives requires efficiency to be redefined in connection to public enterprises.
As far as similarities of the public and private enterprises are concerned, all of them are
controlled by their owners; i.e. the shareholders. Public enterprises do have a natural
similarity of characteristics with private enterprises in basic patterns of operations,
management techniques, and motives in their "enterprise dimension". The principal
governing authority of both public and private enterprises is their board of directors. In both
cases, it is the shareholders who exercise the right of nominating or appointing board
members.
RELATIONSHIPS AND PARTNERSHIPS
The relationships and partnerships between public and private enterprises are revealed in
many ways, but the following aspects may hold interest of paramount importance:
 As suppliers and purchasers of inputs and of outputs
The outputs of one of these two sectors may be used as the inputs for the production of the
other and the vice versa. This transaction often takes place both with intentional arrangements

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and in the normal market operation. In the economic sense, these transactions are not
different from those, which could exist among public enterprises themselves.
 Private enterprises as competitors of public enterprises
In some developing countries the pattern of the mixed economy permits and even encourages
the entry of the private and public enterprises in the same field of endeavor on a competitive
basis.
 Public enterprises as promoters of small-scale private industries or enterprises
One of the frequently declared national objectives of developing countries is the widening
of the entrepreneurial base and the promotion of the small-scale. In many countries large
public enterprises act as catalysts for the development of small-scale industries in the
private sector. They provide small-scale private enterprises with technical guidance and
specifications, install quality control systems, and development finance.
 Other forms of collaborations
There are various other relationships established between the public and private enterprises
such as consultancy, contracting/sub-contracting and joint ventures.
CHAPTER SEVEN
7. ISSUES IN THE PERFORMANCE OF PUBLIC ENTERPRISES
The efficiency and effectiveness of the public enterprise sector will determine the efficiency
and effectiveness of the national economy. This conclusion is irresistible and still valid. The
question, however, is "how efficient and effective are public enterprises?" A candid analysis
may show, and even most ardent supporters of the public enterprise sector recognize, that
most of them have not been doing well. Political leaders, policy-makers and planners began
to view with dismay that they have created an "unmanageable" monster and observed huge
underutilized capacities, low levels of productivity, inflated inventories, non-optimum input-
output ratios, overstaffing- all resulting in heavy losses and deficits. On the other hand, quite
a number of public enterprises have shown excellent performances and entrepreneurial skills
and have thus proved that, given the right attitude, systems, and people, they can do even
better. Therefore, there is a strong awareness that there is a genuine desire to do something
away to correct their shortcomings.
The question that is seemingly naive is that, why do we need to evaluate the performances of
public enterprises? But the answer for this question will determine the style and content of

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the evaluation. The traditional view is that government has entrusted certain responsibilities
to the enterprises.
The enterprise, therefore, should be held accountable for the discharge of these
responsibilities. A judgment of performance will reveal how well or how poorly the
enterprise has done, which in turn can be used for a variety of purposes such as for reward
and punishment systems. It can signal whether an enterprise deserves additional investment
and additional responsibilities. This traditional approach or view is essentially judgmental in
character. Another functionally positive approach to the need for undertaking performance
evaluation is the view as an ongoing diagnostic instrument of performance improvement.
This view is managerial, not judgmental. The important implication resulting from this
approach is that the most effective evaluation is not by outside agency, but is an internal
matter of self-evaluation.
While these are the reasons and approaches for performance evaluation, the questions that
follow again are "what are the criteria used for performance evaluation or appraisal and who
are and how capable are the evaluators to determine the success or failure of a public
enterprise?" "What are the factors that affect the performances of public enterprises?" These
are the most imperative and debatable issues that need careful analysis so as to speak
something about the performance of public enterprises.
CRITERIA AND THE COMPETENCE DEBATES IN THE EVALUATION OF
PERFORMANCES
The problem of how to assess the performance of a public enterprise fairly seems to defy
solutions. There are very few countries, which set the criteria of evaluation, which define the
yardsticks by which the performances of public enterprises could be measured, and which
indicate the methodologies and mechanisms that will be employed. In general there is what is
known as the "evaluation dilemma". Public enterprises are hemmed by a multiplicity of
judgments. If they are profitable, they may be questioned about their social relevance and
may even be asked at whose cost they made their profits. If they make losses, they may be
condemned as parasites on the nations.
The trouble is that everybody sits in judgment on the performance of enterprises and each
interest group has its own expectations, and consequently its own criteria of what good
performance means. This is where public enterprises pay the price for the
multidimensionality of their responsibilities. Yet, whatever the problems may be, government
must be clear about the fact that there can be little hope of improving the performance of
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public enterprises unless there is an agreement on what constitutes good performance.
Further, whatever criteria are considered to be valid, they must be known and accepted in
advance by both parties; i.e. the government and the enterprise.
It is obvious that since public enterprises represent government's intervention in the economy,
the first question usually asked about its performance is whether it is making a profit or
whether it is operating at loss, particularly in comparison with private enterprises in the field.
It would be equally important to note here that this question is legitimate only if the market is
free and competitive, and if no constraints or advantages are given to the public enterprise
that are not also given to private enterprises. Such privileges and constraints or obligations
may appear also in the process, although might not be stated in the establishment provision of
the enterprise. Therefore, consideration of these implicitly or explicitly stated situations
should be the general and governing criteria upon which particular tools of performance
measurement could safely be based.
As it has been touched upon in the previous chapters, public enterprises are often created with
multi-purposes, which make difficult evaluation of performance in precise terms. Even in
those enterprises for which government has no purpose other than financial success in the
form of profit, questions arise as to the size of profit. Once again the empirical questions that
would come into picture in this connection may include: if the enterprise enjoys a monopoly,
what measures of economic viability will be applied? Should prices and rates be related to
investment and operation costs plus a larger or smaller margin, or should prices be related to
the costs of hypothetical market prices of comparable imported goods, or both?
Hence, the size of the profit of a public enterprise and the form of its measurement is not a
fully satisfactory base of evaluating the success even for those enterprises, which have no
other stipulated goals or intentions than to be economically viable. Nigeria's marketing
boards, for example, buy farm products such as cocoa from farmers at a fixed price low
enough to assure a handsome of profit from sales of the same product on the international
market. This profit is not however generated from the operation in a free and competitive
market. Thus, judgment about the performance and effectiveness of the enterprises should be
made from this wider view.
A larger number of enterprises have been given stipulations of purpose and method of
operation, which make evaluation on the basis of overall profit and loss difficult and
misleading-even irrelevant. There are public enterprises, like water, electric, public transport,
and other utility services, whose motives are conceived as public service first and
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moneymaking operation only second. Malaysia's Mara Bus Transport Service, for instance, is
required to serve routes and to operate on schedules to serve some special social or
development purpose, even though it is known that the Company will lose money.
Development authorities and development banks are another kind of public enterprises where
the purposes are not making the highest possible profit in comparison with the private
enterprise. The development authority, for example, is often created to assist a depressed
region where the opportunity for large economic return is low but the need for poverty
alleviation is high. Likewise, development banks are created to give loans with lower rates of
interest for longer periods of time and often for higher risk investments (like agriculture) than
the commercial banks. Such enterprises are required to serve a particular sector of the
economy or segment of population, which are deemed significant to the national purpose but
not best investment of money from the limited view of profit and loss. It is not, therefore,
easy to measure the success or failure of such enterprises simply by referring to their
financial contributions alone, and an attempt to do so on the basis of profit and loss
statements alone would be unfair and inaccurate.
A straightforward proposition in this regard is that evaluation criteria should be related with
the predetermined corporate objectives. The yardsticks for assessing performance should be
necessarily derived from the goals, which have been set for the enterprise. It is indefensible
position to ask an enterprise to achieve one set of objectives and then at a later stage to judge
its performance by a different set of considerations. And yet this frequently happens. The
success or failure of any particular public enterprise must be judged in terms of the purposes
for, which it was created to serve and the special privileges (like grants or loans, low
depreciation rate, tax exemption) or, otherwise, the special obligations (like standard
procedures, operational methods etc) stipulated in its founding charter or by any legitimate
governing authority. The corporate objectives that have been discussed in Chapter one when
used as criteria of performance measurement can be technically applied, and we can see this
application by using few examples in the following manner.
 Measuring Financial and Commercial Performance
A generally accepted proposal to measure the financial performance of the enterprise is "pre-
tax returns on total capital employed". It might also be desirable to examine some
intermediate financial ratios such as: gross profits to sales, sales to capital employed stocks to
sales, and debtors to sales. The ratio of sales to capital employed reveals the turnover of
capital and its "productivity". Likewise, the stock to sales ratio turns the spotlight on
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inventory management and might reveal distressingly inflated stocks held for "safety"
reasons, while the debtors to sales ratio reveals the state of the receivables and may show that
some of the principal debtors are other public enterprises or the government itself.
These ratios are "intermediary" in the sense that they provide an explanation for the final
result, the returns on capital employed. They are of importance particularly as an internal
managerial tool for locating weak spots, diagnosing the causes of profitability or loss and
taking corrective actions.
 Measuring Production and Productivity Performance
Productivity performance, as a measure of efficiency, is unaffected by market imperfections
or artificial pricing policies and other factors, which make profitability unreliable measure.
The criterion is physical in nature and measures the efficiency with which resources are used,
the productivity of the operations and the efficiency of the input-output ratios. A starting
point of this exercise is the assessment of performance-based on the levels of production
achieved. These can be compared to targets and to previous years' production. The
optimization of the operation is reflected in the efficient use of all resource inputs, machines,
materials, human resources and money, and the ratio between these inputs and the outputs.
 Measuring Market and Service Performance
If a public enterprise operates in a truly competitive environment, the assessment of its
market performance is not difficult to make. It is related to the enterprise's share of the
market and whether this share has remained steady, has increased or has declined. Market
share is a reflection of consumer satisfaction where the consumer has a range of choices or
preferences. The problem of evaluating the market performance of public enterprises in
developing countries arises because they generally do not operate in such a competitive
environment. The great majority of them are in monopoly or semi-monopoly positions and
even where there is a semblance (appearance) of domestic competition, there is likely to be
protection from foreign competition.
In general, as it was stated earlier in Chapter Five, public enterprises are required to use a
commercial type of accounting system known as "cost" or "management" accounting, that
will adequately show not only cash expenditures and position, but also other elements of cost
assignable to each function of an enterprise. Therefore, management accounting is largely
used as a major tool to evaluate and measure the performance of public enterprises. The
excellence of management accounting is of great importance to determine the success or
failure of a public enterprise. In the first place, it is a tool of good internal management
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because by any analysis of costs, it shows the efficiency and inefficiency in the organization
and the success or failure of a program. In the second place, management accounting is the
basis for accurate analysis and reporting on actual costs, so that the components of
uneconomic programs, services or methods or standards imposed by the government can be
shown and separated from the financial success or failure of the central operation. This would
help not only to show the financial status of the enterprise, but also provides reliable and
informative reports to the government for further decisions it will make in the future.
7.2. FACTORS AFFECTING THE PERFORMANCE OF PUBLIC ENTERPRISES
All over Sub-Saharan Africa, public enterprises have not lived up to expectations of
governments or the public. Public enterprises have not generated the anticipated rates of
return on equity invested, nor have they attained their non-commercial objectives with regard
to employment generation, technology transfers or regional development. The question that
arises is why has this been so? This legitimate question leads to an examination of the
problems the public enterprises are facing. The following could be considered as the main
factors that affect the performance of public enterprises, particularly with reference to the
poor conditions envisaged in Sub-Saharan African Countries.
 DISTORTED PRICE REGIME (POLICY)
In almost all African Countries, public enterprises operate under regimes of price control.
The pricing policies of public enterprises were not guided solely by the principle of profit
maximization, but under the regulation and control of governments. Most of the public
enterprises produced products, which served as inputs for other sectors of the economy. It is
important to remember that the prices were kept low even below costs. Such a faulty pricing
regime exerted a negative effect on their performance.
 PAST MISTAKES (INAPPROPRIATE INVESTMENT DECISION)
This was perhaps one of the main causes of the current problems faced by the public
enterprise sector in Africa. African countries are known for their over-investment, planning
too far ahead of the reality or the demand, wrong technical decisions or inadequate feasibility
studies by experts.
The feasibility repots of public enterprises are often defective. Thus many Sub-Saharan
African public enterprises were established without sufficient reflection, with unclear
objectives and few linkages to the rest of the economy. Consequently a good number of Sub-
Saharan African public enterprises are engaged in projects or activities not sufficiently
appraised in terms of technical, economic and financial viability due to the absence of
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rigorous pre-investment studies. A good illustrative example is the case of Ethiopian States
Farms. The Ethiopian Socialist Government was notorious for making important decisions
without sound economic and technical feasibility studies. Accordingly, there were many state
farms, for example, Bebeka, Shekena, Wajiro and Wama State Farms, which were created
without prior proper economic and technical analysis. These defective investment decisions
led to wastage of scarce resources, without any commensurate economic and social returns.
 HEAVY BURDEN OF SOCIAL OVERHEADS
Heavy expenditures were incurred on social overheads, such as building of townships,
schools, hospitals and theatres. The prevalence of social objectives greatly complicated the
operation of the public enterprise in Sub-Saharan Africa by making commercial criteria
almost inapplicable. In Ethiopia for example, public enterprises were expected to provide
many social infrastructure services. For instance, State Farms were expected to provide
clinics, health centers, transportation, in-farm and off-farm roads, community centers,
schools, sport facilities etc. Obviously, provision of social benefits created other financial
burden, which in two Ethiopian State Farms (Bebeka and Limmu) alone the cost exceeded
Birr 20 million and Birr 7 million respectively (Itana, 1993).
 UNDER CAPITALIATION
In present time, many Sub-Saharan African public enterprises are found to be under-
capitalized in terms of insufficient equity capital, either because of erosion of the capital base
by chronic losses or inflation. To sustain their operation, public enterprises have had to resort
to heavy short and long term borrowing and thereby boosting up interest expenses. This was
especially true for farms in Ethiopia that devoted 60% of their financial resources to cover
overhead and administrative costs. A drastic cut in government transfers to the public
enterprises as part of fulfilling the requirements of the Structural Adjustment Programs and
increasing accounts receivable worsened the problems of under-capitalization. The attendant
under capitalization led public enterprises to rely increasingly on commercial borrowing to
finance new investments and current operations, and thereby building up huge arrears.
 POLITICAL INTERFERENCE
Notwithstanding other external factors, it is the political pitfalls that played a central role in
aggravating the economic crises for public enterprises in Sub-Saharan Africa. The argument
is that it is the overarching role or the self-interest of politically powerful leaders that created
a situation where the whole economy and the public enterprises in particular were run as if
they were personal properties of the leaders and their immediate circles. The tradition is still
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persisting. In many instance, it has been found that political interference had influenced the
decisions concerning location of projects. In many African Countries, the appetite for
political intervention is particularly high in crucial areas. Therefore, the economic and
negative effects of undue political intervention on performance should be treated as one of
the important problems.
 EXCESSIVE CONTROL AND INSUFFICIENCY OF AUTONOMY
Excessive control (formal and in-formal) over public enterprises also thwarted the initiative
of management and it affected their efficiency adversely. There are a large number of
agencies wielding control over them. There is the ministry concerned, the secretariat officials,
the parliament, the committee on public enterprise supervising agency, the audit board, the
consumer council; and other committees, appointed to look into the affairs of some of these
enterprises (Prakash et al, 1997:271). Besides, there are local politicians who also interfere in
the day to day working of these enterprises. The point is that all such controls stifle the
initiative and make the autonomy of the management of public enterprises nonsense in
relation to performance and efficiency considerably.
On the other hand, the organizational structures of public enterprises are highly centralized
and prone to excessive control. Consequently, important decisions influencing the
performances of public enterprises such as new investment, pricing, employment, wages and
location are made at top levels, leaving little or no room for micro level managers. Such low
leverage by the management in dealing with important issues like redundant workers, stifling
bureaucracy, cumbersome labor laws, wage determination, placement, promotion and transfer
of workers, only result in increased cost, low morale and low productivity.
 WORLD ECONOMIC PRESSURES
Extra national economic forces prevailing outside Africa usually affect public enterprises in
Sub-Saharan Africa. The increasing volatility of the international economy and commodity
prices that make the management of African economies particularly difficult in the 1980s
have severely affected the performance of public enterprises in Sub-Saharan Africa. Prices of
inputs, such as spare parts, oil and capital equipment on do fluctuate from time to time.
Oscillations in foreign exchange affect the price of capital equipment and raw materials.
Therefore, since public enterprises in Sub-Saharan Africa are highly dependent on foreign
imported inputs, such heavy dependency poses considerable implications on their
performance.
 ABSENCE OF CLEAR-CUT OBJECTIVES
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Another important problem of public enterprises in Africa and perhaps all developing
countries is the fact that the political leadership in these countries is unclear as to what their
publicly run enterprises should accomplish. Thus in case of public enterprises their objectives
are quite ambiguous. This problem becomes complicated due to the multiplicity of objectives,
which are quite conflicting in nature. Moreover, fulfillment of social objectives or
safeguarding 'public interest' is a vague term that is difficult to measure its attainment. Under
such disarray, the public enterprises of a country fail to capture neither the economic nor the
non-economic objectives.

CHAPTER EIGHT
8. PROBLEMS AND REMEDIAL MEASURES OF PUBLIC
ENTERPRISES
8.1 MAJOR PROBLEMS
Many empirical studies regarding the managerial and economic performance of public
enterprises showed that their failures outweighed their achievements. This is especially
holding true for almost all African countries. The overall indication is that African public
enterprises are making persistent losses, producing insufficient quantity or poor quality of
products, while draining the scarce financial and human resources. In this connection, we will
ponder (consider) over the main organizational and managerial problems that explain the
daunting performance records of public enterprises. A few central problems in this sphere are
discussed below:
 Lack of Initiative and Operational Autonomy
In almost all the forms of organizations, initiative and organizational autonomy are very
important for effective operations of private and public enterprises alike. Successive conduct
of public enterprises requires sufficient autonomy and a great deal of initiative. This was
hardly achieved for those enterprises under the government ownership because of many
factors such as reluctance of the government to give sufficient autonomy and rather
preferring to adopt close monitoring and giving frequent guidance, lack of confidence and
uncertainty of tenure in managerial positions, absence or little recognition and encouragement
to enterprises' managers and employees for whatever achieved, etc.
 Low Productivity

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It has been argued that labor productivity is generally weak in the public sector. Public sector
enterprises are not in a position to provide all fringe benefits, fat salary and benefit packages,
welfare amenities that are provided by their private counterparts. Thus, employees' morale
had been low and therefore could not fully concentrate on their jobs.
 Overstaffing
This is especially acute in Sub-Sahara Africa. Almost every Sub-Saharan African country
has serious problem of overstaffing in public enterprises, Ethiopia being cited as one of
those countries having this typical problem. In the Ethiopian case, the public enterprise
sector has been said to employ more than 200,000 workers. Nevertheless, almost half of
them are redundant or surplus, which are beyond what the jobs reasonably require
(Meshesha 1997). The cost of overstaffing is immense. According to Robinson (1990:15),
although the wage bill for government employees of developing countries has descended
from 20.3% to 18.7% of the GDP during 1980 and 1987 respectively, this share in Sub-
Saharan Africa has been growing instead drastically. Most public enterprises in Sub-
Saharan Africa seem to be overstaffed with administrators and clerical workers. The main
reasons for the overstaffing problems are, inter alia, the following:
 Lack of manpower planning on a scientific basis in the initial stages,
 Failure to lay down appropriate working standards and adoption of traditional and
uneconomic practices,
 The tendency on the part of managers and officers to use "safe play" principles, and the
motive of the government to use public enterprises as a substitute for social security
system
 Unlawful practices to favor people in getting employing on the basis of kinship, blood
relation, friendship, political/party membership, ethnicity, and so on in excess of the
tasks to be performed in the enterprise,
 Lack of Skilled Managers and Problems of Training:
The most striking issue in connection with overstaffing is the composition of the workforce in
the public enterprise sector. Trained manpower is a critical factor in economic development.
With rapid expansion of the public enterprise sector, getting skilled and well educated
managers has been the biggest challenge for many developing countries especially those in
Sub-Saharan Africa. There are many reasons for lack of qualified and experienced managers
in developing countries while the following may disserve worth mentioning in particular
(Meshesha 1997:77-78):
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  Hastily implemented localization or Africanization manpower policy that led to the
appointment of uneducated and inexperienced managers,
 Inappropriate recruitment policies, i.e. favoritism and nepotism in the selection and
appointment process,
 Lack of training institutes that would provide formal training in important disciplines
such as business administration, development administration, accounting, marketing,
corporate finance and economics
 Low Morale of Managers and Employees:
Public enterprises have another critical problem- low morale of managers and employees.
They have serious problems of motivation in their managers and employees when compared
with their private counterparts. The main contention is that since managers do not have
financial stakes in the public enterprises, it is unlikely that they devote their time and energy
to bring about radical turn around with respect to the performance of the enterprises they
manage. They know that there is absolutely no mechanism for rewarding them if their efforts
bring good results for the enterprise. Even if there are some forms of reward systems, they are
not commensurate with the level of performance. In this managerial culture, successes are
taken for granted and are treated as part of the normal function of management.
 Chronic Brain Drain or Flight of Scarce Talent:
Many recent studies, for example, Meshesha (1997) and Prakash et al (1997) revealed that
chronic exodus of scarce talent have posed serious challenge for developing countries.
Migration of qualified personnel to Europe and North America has been generally more
significant and being felt acute alarming in the public enterprises sector than the private
sector. Lack of proper incentive systems (low remuneration packages), dissatisfaction with
the political systems and unfair governmental practices in their home countries, lack of
opportunity for further education and training are the major factors for the braindrain of the
"cream" individuals.
 Bad Labor Union Tradition:
In many Sub-Saharan African countries, many labor union leaders have received little or no
formal training in their vocation. Workers are still without clear idea of the privileges and
obligations of organized labor. The overall pattern of trade union behavior in Sub Saharan
Africa is a pronounced emphasis on what employees can get from the enterprise and little on
what the employees can give to their employers. Very few unions take the concern to assess
the efficiency and productivity of the workforce as a basis for demanding higher pay and
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better working conditions. This has not only led to financial loses but also sometimes
threatened industrial peace.
 Weak Overseeing (Supervising) Capacity:
This has to do with the issue of boards. In Sub-Saharan Africa, it is a common experience to
see politically appointed boards. The implication is that politically appointed board members
could feel too much freedom or too much constraint to take bold decisions on important
matters. The complicated picture that emerges out of the analysis of the hitherto experience
of board activities in public enterprises especially those of Africa is twofold. The most often
exhibited pattern is, the situation where the management of public enterprises had been
antagonized or frustrated by a board that tended towards too much complacency or ignorance
of entrepreneurial management. On the other extreme, there existed a situation where, board
members were very weak or had very little knowledge of management and tended to rely too
heavily on management guidance, and this weakness was exploited by management to pursue
parochial interest. Board members were very weak or had very little knowledge of
management and tended to rely too heavily on management guidance, and this weakness was
exploited by management to pursue parochial interest.
8.2. REMEDIAL MEASURES
8.2.1 ORGANIZATION AND MANAGEMENT REFORM
No country in the world has invented a perfect way of managing its public enterprises. Even
if there were an "invention", the multitude of differences concerning social heritage, culture
and the level of economic development of countries would make its blind replication utterly
fruitless.
Therefore, any suggestion to solve the management and personnel related problems should
necessarily be adapted to the social, cultural and economic characteristics of the country
concerned. It is in line with this premise that the following suggestions are made.
 Radical change in management approach in the public enterprises: To that end, three
approaches need special attention. These are efficiency-oriented approach, market-
oriented approach, and future-oriented approach in the conduct of managerial
practices in the public enterprise sector.
 Clear demarcation of authorities of the three main actors in the operations of public
enterprises, namely, government (supervising agency), the governing board, and the
chief executive.

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  Holding managers accountable for the performance of the enterprises they are
managing through contractual mechanism such as through performance contract.
 Basic wages of employees should be linked with productivity.
 Institutionalization of training programs to improve managerial competence.
Managers should be exposed to further and periodic training tailored to sharpen their
knowledge and skills in keeping with new developments. Training should be
institutionalized by creating a human resource development and career-planning unit.
 Mobility of management personnel between public enterprises should not be
discouraged.
 Political interference in industrial disputes and the leadership of trade unions should
be avoided
1.3. PRIVATIZATION (OWNERSHIP REFORM)
According to Meier (1995), privatization can be defined as "the sale of government owned
corporations to private investors and the contracting out of formerly governmental functions
to private agents". Similarly, Hanke (1987) defined privatization as "…the transfer of assets
and service functions from the public to the private hands".
The transfer of public ownership to private ownership takes direct and indirect forms; i.e.
direct transfer refers to a complete transfer of public ownership (both assets and the
management) to the private sector, while the indirect one is privatization of the management
aspect, most appropriately known as "management contracting", the assets remaining under
the ownership of the public. "Management contracting" is often made mainly with two
objectives: to relieve administrative burdens of the government, and to ensure administrative
efficiency. In the developing countries, transfer of ownership of public enterprises and
government functions to private investors and agents began in the mid-1980s.
This has been made as a result of the widely adopted structural adjustment program in
response to the problem of the generally poor financial and economic performance of such
public enterprises as well as to that of inefficient public services. The widely articulated
rationales for the movement toward privatization have largely focused on the perception of
waste, lethargy (sluggishness), inefficiency, misappropriation, and poor quality of products of
public enterprises as compared to the privately owned ones. Public enterprises also suffer
from bureaucratic bottlenecks and rigidly applied procedures. Thus, privatization is a sine qua
non (an outcome) of such problems associated to public enterprises.

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The privatization literature is confusing, especially when the term privatization is defined to
mean contracting for services. Ducker (1968) defines it as the reconstitution of the affected
organizations from erstwhile (previous) fund dependence to fund self-sufficiency. Others
restrict the use of the word to mean denationalization. Similarly, commercialization is used to
mean the application of private sector management philosophy to public sector organizations
without involving transfer of ownership. The terminologies are so confusing and
interchangeable. Thus, what we call privatization goes by other names in different countries
because privatization is deemed to be politically too delicate or controversial. What can be
understood from all the above, is that privatization and/or commercialization refer to the
reorganization of the public enterprise sector so that they become less dependent on
government funding while striving to raise their efficiency levels.
The point is that "is privatization the 'necessary condition' or 'sufficient condition' to break or
eliminate bureaucratic controls?" The answer is certainly that privatization is not a sufficient
condition to overwhelm (overcome) the archaic bureaucracy, rather is a necessary condition.
It is a means to an end, not an end by itself. Therefore, in order to achieve the end objectives,
privatization requires active encouragement and strong support from the government. The
support could be through formulating integrated policies that address systematically the range
of constraints inhibiting the operations of privatized enterprises.
There are, however, important questions that need careful analysis and genuine answers; are
there contradictions between the ultimate goals of the government (ensuring social welfare)
and the implementation of privatization? There are counter arguments in this regard. Among
the frequently mentioned reasons that deny the positive relationship between the ultimate
goals of the government in this regard and the privatization act, the following seem sensible.
1. As it has been discussed earlier, public enterprises are established with mixed (commercial
and non-commercial) objectives. While the commercial objective is obviously about profit
making, the diverse non-commercial objectives may include income redistribution,
subsidizing particular regions or sectors, earning foreign exchange, generating employment,
correcting market failures and imperfections, as well as maintaining public support (or
increasing the probability that the party in power will be reelected). From these lists of non-
commercial objectives, we can single out the welfare and equity motives like income
redistribution, employment generation, and subsidization or protection of the disadvantaged
sections, market stabilization and inflationary control. These will not be achieved once public
enterprises are sold out and transferred into the private hands. This in turn implies that we
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cannot talk about the fulfillment of the "goals and objectives of public enterprises in terms of
their public dimension" in the absence social welfare and equity.
2. Privatization in most developing countries has been implemented under forced conditions,
or under external pressures by international agencies as part of their structural adjustment and
economic reform agenda. For this reason, governments of developing countries are still
reluctant to let privatized enterprises to operate with full autonomy, to free them from any
kind of control and suppression. This entails that governments tend to privatize public
enterprises unconvincingly and without full commitment, rather to meet the preconditions
imposed by donors. Besides, indirect control of the government over privatized enterprises
through regulatory mechanisms and consequential mal-practices like corruption are apparent
cases in developing countries.
Since the underlying principles behind selling public enterprises are to ensure economic
efficiency, to increase productivity, and to relieve administrative burdens from the
government side, then the government will end up being growth-oriented rather than being
development-oriented, irresponsible and unsympathetic to citizens' well-being. Thus, has no
relevance to the motives and intentions of welfare governments.
Pros and Cons of Privatization Proponents
ARGUMENT IN SUPPORT ARGUMENT OPPOSING
 Reduction in public sector spending (in form
 Instantaneous price hike for goods and
of subsidy, loan arrears or default of loans,
services (consumers will now pay
and unpaid taxes)
fully for goods & services)
 Promotion of macro - economic efficiency
 Break up of public sector influenced
(competition, innovation and quality
networking and cross subsidization
management methods)
 The emergence of money bags who
 Promotion of consumer satisfaction (value
may be difficult to control by the
for money and freedom of choice on
government.
purchases)
 Reduced job opportunities.
 Appropriate pricing mechanism

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