Categories for Business Strategy

Netflix Disruptive Innovation

 Executive Summary

The purpose of this report is to explain a disruptive innovation using an ICT-enabled technology, which in this case is Netflix. Netflix is a platform that revolutionised the way people would watch series and Movies and rent a DVD on the same. With subscription plans, applications on different platforms and their exclusive content, made it harder for people not to have piece of it. Netflix started off as a video on demand and DVD by mail kind of a platform and then later expanded its services to even online video streaming which was the spotlight of its developments. Netflix is a disruptive innovation because it revolutionised how people get their daily dose of entertainment. By the introduction of cheap prices, HD quality and a new perspective of TV shows everybody wanted to move on from their usual TV channels and DVD movies. A part of Netflix’s in house production, called “Netflix Originals” produces and directs their own set of series, which have been shot and directed in a different never- seen- before perspective. A unique set of series made its customers stick to it rather than just providing them with same old movies and usual TV shows. It’s also ironic that Netflix put the good old Blockbuster out of business, by providing a more convenient way to rent movies, but only to later on start focusing on original media instead.

The author then moves onto exploring the various adoption categories for this Innovation which are the innovators, early adopters, early majority, late majority and laggards and also based on the study suggests relevant innovation characteristics for each adopter category. Wherein the author says that the Innovators are the people who have a mind-set of “trying anything new in the market first”. The Early Adopters are the people who want to adopt an innovation because the Innovators went for it. And then come the Early Majority, the Late majority and the Laggards who adopt to such innovations based on their ease of access, usage, and reviews. The report then proceeds to paint a picture on the ex-ante and ex-post phases of evaluation and two evaluation methods in each of these phases. The author then moves onto analysing the selected innovation in terms of its entrepreneurship and start-up potential, and talks about how a start-up company aiming to bring a disruptive Innovation like Netflix can use the Crowd sourcing, Open source software’s and Online cloud computing providers to start the development of the Innovation in the early stages. The author then talks about the most important aspect of any innovation company which is the use of Business Analytics to maintain its current customer relationship using predictive analysis, customer service and management, also on how to use Descriptive Analysis to understand the Designing part of the Innovation. These are the key factors of any Innovation which lead to its success and it being Disruptive amongst the others. In this case Netflix was able to accomplish all of these, which lead to it being the favourite online platform for its users in terms of entertainment.

This paper helps understand the various aspects that involve in the development, its start-up potential and the Business analytics of the innovation Netflix. The results for Netflix were very positive since Netflix looked at every aspect during its rise and hence is a favourite amongst its users until now.

The business social value for Netflix is currently on the rise, since Netflix has its own production house that makes its own TV shows and Movies, users have found their interest in the same. These TV shows and Movies are not found anywhere else and hence Netflix’s users have stayed with it for a pretty long time now.

1.0   Describing Netflix

1.1       Introduction to Netflix

Netflix is an American entertainment company founded by Reed Hastings and Marc Randolph on August 29, 1997, in Scotts Valley, California. It specializes in and provides streaming media and video-on-demand online and DVD by mail. In 2013, Netflix expanded into film and television production, as well as online distribution. As of 2017, the company has its headquarters in Los Gatos, California. Netflix’s initial business model included DVD sales and rental, although Hastings jettisoned DVD sales about a year after Netflix’s founding to focus on the DVD rental by mail business. In 2007, Netflix expanded its business with the introduction of streaming media, while retaining the DVD and Blu-ray rental service. The company expanded internationally, with streaming made available to Canada in 2010 and continued growing its streaming service from there by January 2016, Netflix services operated in over 190 countries. Netflix entered the content-production industry in 2013, debuting its first series, House of Cards. It has greatly expanded the production of both film and television series since then, offering “Netflix Original” content through its online library of films and television. Netflix released an estimated 126 original series or films in 2016, more than any other network or cable channel. As of July 2017, Netflix had 103.95 million subscribers worldwide, including 51.92 million in the United States. (Netflix. (2017). En.wikipedia.org.) [1]

Netflix changed the way TV Shows and Movies were brought to the user. By implementing a subscription plan Netflix gave content to its users more than any other Cable provider or DTH. Hence this brought upon a change in the way we watch entertainment. “Netflix was able to appeal to Blockbuster’s core audience by providing, a wider selection of content with an all-you-can-watch, on demand, low-price, high-quality, highly convenient approach,” as Business Insider Australia puts it. The reason for Netflix being disruptive is for when it launched its mail-in subscription service, it did not go after the core customers of competitors like Blockbuster. The customers who rented new releases “on demand”, which initially Netflix didn’t provide its users.  Christensen has also claimed that, initially, Netflix only appealed to a few customer groups: “movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers.”  Hence according to Christensen, Netflix is a trademark of disruption, since a disruptive company targets segments of the population that have not been unnoticed by its competitors, delivering a substandard but more custom-made alternative and apparently at a lower price. By this eventually a disruptive company like Netflix starts moving upmarket. It keeps the advantages it had at the beginning, and adds the things mainstream customers want, and all of a sudden there no reason to have Blockbuster anymore. But Netflix knew that wouldn’t cut it to keep them high up in the market, and they moved onto introducing the ability to stream videos online. This was the huge shift that came. This is how Netflix was able to appeal to Blockbuster’s audience by providing, “a wider selection of content with an all-you-can-watch, on-demand, low-price, high-quality, high-convenient approach”. This is how the unimaginable happened, Blockbuster collapsed. The users who Blockbuster had at hold with their content had now moved onto Netflix for better content and on-demand experience. Hence it can be said in conclusion to the above statements that the reason disruptive companies are often able to rise so quickly is that their larger competitors fail to notice them, they are not initially competing for the same customers, so that the big boys can shoot them off- and in Blockbuster’s case, they even refused to acquire them for a mere US $50 million. (McAlone, N. 2015, Business Insider Australia) [2]

1.2 Exploration of Adoption Categories

 The 5 adopter categories for Netflix in general (in order of priority) are as follows:

1) Innovators:  These They are always curious to try new products or innovations in the market and generally have an obsession for the same. They are generally not averse to taking risks so, if in case, Netflix ends up not being how it claimed to be, they would not face any kinds of losses.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • Relative Advantage: Since the innovators are the very first ones to get hold of the newly launched Netflix platform they can test and review the same, this is the very first characteristic that would be taken into consideration from their viewpoint.
  • Observability: Since an innovator would be dying to try out the features of Netflix and its various categories of entertainment that it has to offer, they would want the same to be less complex and easy to use and explore. Having too many menus and options would frustrate these users and test their patience.
  • Compatibility: If Netflix has features and is based on a platform that someone is already using, then is would be perfect for the Innovators. For example, if this user has an Xbox 360 and wants to use Netflix on the same device, (which Netflix allows its users to) then it would not be an issue to them.

2) Early Adopters: This section comprises people who are willing to subscribe to Netflix when it is in the initial stages of its lifecycle. Like the innovators, they know about every new product launching in the market and are enthusiasts in trying what’s new. They would take advice from the Innovators, on how their experience has been and then would decide on subscribing to the service. However, the Innovator’s word would be anything to them as they would still go onto purchasing the plan.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following: –

  • Relative Advantage – Early adopters would like a hassle-free experience when subscribing to this new platform. They would also have a look upon the various benefits of using Netflix and not Cable TV or DTH.
  • Complexity: They would want to have an easy-to-use application or a web platform. They wouldn’t want things to be very complicated.
  • Compatibility: The early adopters would also look for the service to be compatible on their existing devices, which would help them start using the service and its features immediately.

3) Early Majority: These take thesuggestions of the early adopters and are ready to buy a subscription plan only once the early adopters have approved of the same. This category of adopters usually has an average financial income, average social status and hence think twice before spending. Therefore, it usually will take some time (3 to 6 months) for these adopters to decide if they have to move top Netflix or stick to their old classic TV shows and DVD cinema.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • This category would want Netflix to have their categories of cinema or TV shows to be similar more or less to their previous way of entertainment.
  • The people in this category would only buy a subscription, after being confirmed that it was verified fine by the above adopters over a period.
  • The early majority would want to be confirmed that the platform, Netflix is worth the shift since they would be moving from their usual TV shows and DVD cinema, they would want all the reviews and knowledge they could get on Netflix to be able to make that shift.

4) Late Majority: – These are the sceptical ones who are willing to purchase a plan only after confirming that the above 3 adopters have bought the same. They would only purchase a plan if or when they get major offers or discounts on the plan they are interested in. They usually have a below-average social status and less knowledge upon the latest innovations or tech in the market.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • Trialability: The people in this category would only buy a subscription, after being confirmed that it was verified fine by the above adopters over a period.
  • Complexity:  The late majority category is usually hesitant in learning or moving to new forms of technology and hence would only want to move to Netflix for their entertainment purposes only if it is simple to use and is cost effective compared to their ongoing TV subscription and DVD costs.
  • Compatibility: The late majority would want the service to run on the device they currently have in hand. Since they do not have the latest technology in the market, chances are they would still be using something that is 2-3 years old. Hence they would look at if the Netflix application and the web platform would run on their existing machines.

 5) Laggards: They are the very last adopters of an innovation. This category would usually wait years before even knowing what Netflix is and what services it has to offer. They usually end up using the subscription of their family or friends who are one from the above categories and already have a subscription plan. They have lowest money potential and usually are averse to changes in the market. They are usually comprised of aged people.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • Complexity: Since laggards are considered slow learners and adapt to new technology very slowly, they would want Netflix to be as less complex as possible for their ease of understanding and usage.
  • Trialability: The people in this category would only buy a subscription, after being confirmed that it was verified fine by the above adopters over a period.
  • Compatibility: The Laggards would want the service to run on the device they currently have in hand. Since they do not have the latest technology in the market, chances are they would still be using something that is 3-4 years old. Hence they would look at the Netflix application and the web platform would run on their existing machines. (The 5 Customer Segments of Technology Adoption) [3]

2.0 Retrospective Analysis of the Selected Innovation

2.1 Evaluation of their Design

There are two evaluation phases in the design of an IT artefact which, in this case, is Netflix.

Ex Ante: For the Ex Ante phase of evaluation, since it is the phase which is happening before the launch of Netflix, it involves the development of the website, the Applications for various platforms such as PlayStation, Xbox, PC, Android and iOS etc., the best evaluation method would be Artificial, since the features of the various applications and web platform developed have to be tested before releasing the official Product to the market. The method of evaluation that could be used are as follows:

  1. Computer Simulation: Evaluation can be done with the help of various devices based on the platforms Netflix would run on. The website could be tested on a PC of a mid-configuration and satisfactory Internet speed. The Netflix Application for various platforms such as iOS, Android, PlayStation and Xbox could be tested on the respective devices, to ensure there are no bugs or errors within the app and the streaming service. This is most important for any Innovation before going live in the market, to be working with less bugs, glitches or errors. Also, if there is a failure during this process, there would not be much losses associated, and could be rectified easily and quickly.
  2. Alpha & Beta Testing: Evaluation can then be continued in this phase where now the developers, the people within the Organisation can have Netflix on their respective devices/platforms and make sure that everything is working as expected. This is just after the development phase and finished and closing towards the testing phase. The employees under Netflix can have their subscription and check whether every category has the right information, and everything is working smooth and sound. Once the Alpha and Beta testing is done, the people at Netflix can prepare for the release of their product.

Ex Post: For the Ex Post phase of evaluation, which is the phase after the launch of Netflix and it being in the market, it involves the recording of the reviews from various users, their complaints, and request to changes, request to add features and more. Hence the best method of evaluation would be Naturalistic. This is also an important part of an Innovation in terms of its development by the addition of new features and become better and better in the coming years of its life cycle. The method of evaluation that could be used are as follows:

  1. Surveys: By conducting surveys amongst the people who are already using Netflix and have subscribed to the same, and noting down their feedbacks to the questions in the survey, the company would be able to understand the mind-set of their customers even better. This would also help identify the weaknesses in their design and work towards rectifying the same in the future update.
  2. Participant Observations: Developers involved in the development of Netflix could sit with a few of the people who used Netflix instead of their usual TV channels and DVD’s, and get insights on what could be added or removed, any changes to the design and how the user moves around the Netflix website/application can be implemented. Similarly what more categories of TV shows or Movies people would want can also be added. This would help the platform have more data and release better updates which better features.

2.2 Evaluation of original Entrepreneurship and Start-Up Potential:

The Strategies that can be used in the case of a start-up for bringing up a disruptive innovation like Netflix are as follows: (Rogers. Lecture 5) [8]

  • Crowd sourcing of operations/tasks and ideas: Outsourcing would be one of the huge benefits for a start-up, building something as disruptive as Netflix, since it wouldn’t have the funds and financial support at the early stages and nor the manpower. A start-up building an innovation like Netflix could use this very effectively to cut down on budgets, and hence concentrate on the core developments for the future. If thee budget of a start-up goes south then there would be very few chances of it surviving. Hence this would be a relevant category in terms of a start-up making something like Netflix. And as and when the start-up would reach a upright stage, it can attract investors who would look for potential, and this would solve the financial side of the start-up making it use better resources and technologies for development in the later stages. (Handsontable – Why Outsourcing is Important for Your Startup.) [5]
  • Free, open-source and cheaper software and applications: By using Free and open source software’s for development and other functions, the startup can again save a lot on the financial side at the early stages. This also allows the startup to use the full potential of its investments and again concentrate on the major development of the product. There are also huge benefits of using OSS (open source software’s) such as,
    • The ability to get the source code without a licence fee and the ability to modify the same in the product offering or service, which would allow the start-up to cross the development phase faster.
    • There is a community supporting the code, so anywhere the start-up gets stuck with an issues during the development, a community of people are always there for help. This would help the start-up especially when it has limited resources and employees. Developing the code for a product like Netflix is important, hence the algorithm would be the backbone for any future decisions to be taken.
    • A few examples of (OSS) include – Trex for planning, OrangeHRM for human resources planning, SugarCRM for customer relationship management, SQL database systems for database development and sorting/storing. These could be well utilised by the start-up in the early stages for Human Resource, Customer relationship management and to build a database since a platform like Netflix has a database of what people like to watch and how to produce them the same.
    • Cloud-based solutions: Start-ups can use the application’s services or resources made available for the users on demand via the Internet from a cloud computing provider’s servers. These are essential for a start-up who would be developing something like Netflix, which is based completely on the cloud. By using such providers, start-ups can save time and investment by not having to set-up their own Servers, Database systems and more. This would also require specific employees to handle the servers and make sure that there are no errors present, and hence would be a tedious job for the start-up in the early days. By using such Cloud Computing Provider’s start-up have virtualized IT resources, able to rent computing capacity, and also eliminate the capital costs associated with buying their own server. Cloud computing is a fundamental for a platform like Netflix which itself is an online video streaming service, and works on numerous devices of different platforms. Cloud computing providers are not tad expensive as well and would be helpful for that jump start to get the start-up going. (Sweeney, D., Alton, L., Resnick, N., Oracles, T., Resnick, N., & Mehta, D. et al. (2016). How Cloud Computing Can Help Your Start-up Company – StartupNation) [6]

    2.3 Evaluation of their Application of Business Analytics:

    Netflix, being a video streaming and on demand provider of entertainment has used Big Data analytics in the best way possible. This is to understand and help Netflix achieve the right content for its users. Ever since its days of being a DVD-by-mail service Netflix placed prime importance on collecting user data and building a recommendation system. After launching their streaming service in 2007, it took Netflix 6years to collect enough data to predict the sure-shot success of their first original production “House of Cards”. This was how Netflix set the biggest example onto how analytics used in the right direction can literally spell success for a business, in a domain as unpredictable as content production. (Success, H. (2017). How Netflix uses Big Data Analytics to ensure success – UpX Academy) [7]

    1. Designing the Innovation: Business Analytics is mainly used for data-driven decision making. It includes Descriptive analytics. While designing and developing Netflix all of this will play an important role. The descriptive analysis benefits the UI and the content aspect of Netflix, for this the present state of business trend is important while designing so that some of the key factors can be common throughout the Netflix applications on various platforms. The way users move around the user interface, the content on the website and the various applications etc. This would also help Netflix fix any of the issues within their applications an make it even better for the upcoming update releases. (Lecture. 05) [9]
    2. Supporting the Efficient Management of the Innovation: This requires looking at 3 issues for any Innovation, they are – efficient customer relationship, management and customer service.
    3. Efficient customer relationship: This could be achieved using Predictive analysis, since the company has to have customer data to enable an efficient relationship between the both. By analysing customer data, in the case of Netflix, their favourite actors, the type of series or movies they like watching, the types of plan rates they would be willing to take up and more will help the company understand its users better and predict their behaviours over the same. This would help Netflix in building their own Recommendation’s for various users depending on their likes and interests. Which in turn helps maintain and widen customer relationship.
      • Management: Here Predictive analysis would help the company manage its developments for the future, without which Netflix wouldn’t stick around for a long time, especially when a similar disruptive innovation rises, people would tend to move to that, similarly how they moved from Blockbuster to Netflix. By understanding the needs of its users, and making the required changes in terms of plans, content and UI, Netflix would be refreshing its platform and this would result in users being used to it. One move that Netflix has already made in this respective category is by the introduction of their “Netflix Originals” which contains TV shows and now movies that cannot be found anywhere else, hence the users would stay with Netflix for the unique category of shows and others.
      • Customer Service: One of the key factors for a company to keep its existing users/customers is to provide them with hassle free service. Any Innovation is blameless until it cannot handle the issues and problems faced by its customers at a point of time. In the case of Netflix issues such as subscription, payments, in app bugs and other things play a factor. By using Predictive analysis, a company like Netflix can understand its customers better and deal with their issues quicker and in a less amount of time. In an example where a customer calls the customer care and is not able to put through his issues  on the table with the call centre executive can lead to them withdrawing their subscription no matter how good it was, just because the executives couldn’t solve or put his/her issues through the table. By using such cases and being ready for the worst, Netflix can provide better solutions to its customers and maintain its relationship and honesty with them at the same. A company not achieving this particular category would lead to it affecting its Customer Relationship which in turn would lead to fewer users by the fall. (Lecture. 05) [9]

    Conclusion:

    The case study has explored a disruptive innovation, Netflix by reviewing its adoption categories, analyzing its design in the phases before and after its release, evaluating its entrepreneurship and start-up potential and using analytics to understand and predict consumer behavior towards the same. Companies should always try to satisfy all adopter categories for an innovation to boost revenue and should never overlook any specific category. Significant research should be done both before and after design phases based on simulations, alpha and beta testing, surveys and participant observation to know what customers want in their products and how to implement the same. The introduction of cheap prices, exclusive content, the “Netflix Originals” category and by maintaining good customer relationship and service, Netflix was doing better than any of its competitors back then and now. The unique content and design of how information was given to the users made Netflix none like the others. The paper helps understand the various aspects that have to be looked upon for any Innovation to be Disruptive in terms of its developments, analytics and the start-up potential for a similar Innovation. Companies should utilize analytics to understand customer behavior in relation to past and current trends of an innovation and predict downtimes to enable smart management of customers and resources.

    Bibliography:

    1. Netflix. (2017). En.wikipedia.org. Retrieved 21 September 2017, from https://en.wikipedia.org/wiki/Netflix

    2. McAlone, N. (2015). The father of ‘disruption’ theory explains why Netflix is the perfect example — and Uber isn’t. Business Insider Australia. Retrieved 23 September 2017, from https://www.businessinsider.com.au/the-father-of-disruption-theory-explains-why-netflix-is-the-perfect-example-and-uber-isnt-2015-11

    3. The 5 Customer Segments of Technology Adoption. Retrieved from https://ondigitalmarketing.com/learn/odm/foundations/5-customer-segments-technology-adoption/

    4. Disruptive Innovation: How Netflix revolutionised the video market – SEIER CAPITAL Retrieved 25 September 2017, from http://www.seiercapital.com/disruptive-innovation-how-netflix-revolutionised-the-video-market/

    5. Handsontable – Why Outsourcing is Important for Your Startup. (2017). Handsontable.com. Retrieved 25 September 2017, from https://handsontable.com/blog/articles/why-outsourcing-is-important-for-your-startup

    6. Sweeney, D., Alton, L., Resnick, N., Oracles, T., Resnick, N., & Mehta, D. et al. (2016). How Cloud Computing Can Help Your Startup Company – StartupNation. StartupNation. Retrieved 26 September 2017, from https://startupnation.com/grow-your-business/cloud-computing-can-help-startup-company/

    7. success, H. (2017). How Netflix uses Big Data Analytics to ensure success – UpX Academy. UpX Academy. Retrieved 26 September 2017, from https://upxacademy.com/netflix-data-analytics/

    8. Rogers. Lecture 5.   Retrieved from https://blackboard.qut.edu.au/bbcswebdav/pid-6948457-dt-content-rid-9264135_1/courses/IFN502_17se2/502wk05_17%281%29.pdf

    9. Lecture.   Retrieved from https://blackboard.qut.edu.au/bbcswebdav/pid-6948457-dt-content-rid-9435480_1/courses/IFN502_17se2/502wk08_17.pdf

    Appendix 1: Infographic

Literature Review on Entrepreneurship and Risk

CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

The aim of this chapter is to develop the knowledge and understanding on the subject matter as well as providing the theoretical background for the study. Therefore, it is essential that a desk review be made on previous studies focusing on the topic of the risk taking propensity among entrepreneur. The literature reviewed will include some relevant studies that were done in the past particularly those related to the issue of study. In addition, studies related to the general issue of entrepreneurship will also be reviewed to shed additional insight on the subject matter.

The chapter starts with the discussion on the concept of entrepreneurship with special reference to the entrepreneurial process and how entrepreneurs play their role in the process. It is then followed by discussion on the micro and small business sector in Malaysia in terms of the working definition and its importance to the national economy. Next, the definition of risk and its variants are discussed in greater detail. The chapter ends with the discussion of the literature related to risk taking propensity.

2.2 What is Entrepreneurship?

Entrepreneurship is a process universally connected with the founding of business ventures, acquiring or expanding an existing business. Entrepreneurs have been considered as bearers for risks and uncertainties in making business choices (Knight, 1921), and make innovations for new goods, new methods of production, new markets, and new types of industrial organization (Schumpeter, 1934). Hull, Bosley, and Udell (1980) concurred that entrepreneurs assumed risk with the intention to expand the business. Meanwhile, Brockhaus (1980) recognized entrepreneur as a manager or owner of a business who is not employed elsewhere. However, Cooper and Dundleberg (1987) defined entrepreneur as a person who either own or manage a business. While McClelland (1961) described an entrepreneur as a business manager who has the responsibility as a decision maker and takes responsibility for the decision made. From the above definitions, it can be concluded that an entrepreneur as the owner/manager of an MSME, in which he or she may not be a founder but not only has a responsibility to make decision and but also takes the risk and responsibility for the decision made.

Entrepreneurship endeavours involve gathering of productive resources in an attempt to begin a business enterprise with the expectation of providing a reasonable income to the entrepreneur or small business operators. These resources include manpower, equipment and tools, money, time and basic raw materials which may entail some risks in procuring it. For example, the risk of not getting basic raw materials as needed to produce the product or damage to the equipment and tools means losses to the entrepreneur. These resources, along with its associated risk, should be recognized and managed to minimize losses and to increase profits. The entrepreneurial process remains the same and the roles and nature of the entrepreneur are universal, regardless of industries. Hereditary risk exists in all the processes starting from the ideation, conceptualization, enterprise creation, commercialization and ending with the growth of the enterprise.

Moreover, all businesses in the world face risk regardless of its size, thus they have to identify, assess, manage and monitor the organization’s business opportunities and risks. The current business disappointments are usually caused by entrepreneur’s misjudgements, mismanagement of risk and changes in corporate governance requirements. There are also increasing stakeholder expectations for entrepreneurs to effectively manage all risks exist within an organization.

2.3 Micro, Small and Medium Enterprises (MSMEs)

Micro, small and medium enterprises (MSMEs) are and will continue to be the backbone of Malaysian economic growth. Undoubtedly, MSMEs contributes greatly to the economic strength in Malaysia. With the New Economic Policy introduced by government in 1971, Malaysian MSMEs were given the important task of hoisting new breed of Bumiputra entrepreneurs who would eventually grow into large business community in accordance with the social restructuring objectives of the policy. Definitely, the policy has been able to create MSMEs whereby 30% of the businesses are owned by bumiputras. As of Mac 2005, a total of 518,996 MSMEs were registered in Malaysia (Census of Establishments and Enterprises, 2005, Department of Statistics Malaysia). Most of the MSMEs are found in the service sector, accounting for 86.5%. They contribute 27.3 percent of total manufacturing output, 25.8 percent to value-added production, own 27.6 percent of fixed assets and employ 38.9 percent of the country workforce (SMIDEC, 2002). There are 192,527 establishments in the services sector and 186,728 (96.7%) of these are made up of MSMEs in Malaysia. Yusoff (2004) noted higher consumer spending and a record level of tourist arrival caused the services sector grew by 6.8% in 2004. Strong expansion in all sub-sectors with transport and communication emanated the growth in the lead at 8.4% followed by wholesale and retail trade, hotels and restaurants (7.1%) and finance, insurance, real estate and business services (6.5%). MSMEs have become one of the main drivers of economic growth as the industries contribute 32% to Malaysia’s gross domestic product (GDP), account for 56% of total employment and 19% of total exports of the nation in 2007 (SME Annual Report, 2007).

The definition of micro, small and medium-sized enterprises needs to be classified within the context of the country in which they operate, as typically, the concept varies according to country (Gunasekaran, Forker and Kobu, 2000). The criteria should include paid-up capital, shareholders’ funds, turnover, and number of employees or a combination of these. In Malaysia, National Small and Medium Enterprise Development Council (NSDC), (2005), defined micro, small and medium enterprises as firms employing 150 full-time employees with sales turnover less than RM 25 million. This definition covers the manufacturing including agro-based, services, primary agriculture and ICT.

In the past, there is no common definition of micro, small and medium enterprises (MSMEs) in Malaysia. Many agencies defined MSMEs differently according to their own criteria based on annual sales turnover, number of employees or shareholder. However, National Small and Medium Enterprise Development Council (NSDC) 2005, defines MSMEs across economic sectors. Bank Negara Malaysia defined MSMEs as enterprises with shareholders funds of less than RM10 million. Meanwhile, the Small and Medium Industries Development Corporation (SMECorp) defined MSMEs as enterprises based on the annual sales turnover not exceeding RM25 million and number of full-time employees not exceeding 150. The criteria used in defining MSMEs are based on annual sales turnover and number of the MSMEs as postulated in Table 2.1 below.

Table 2.1: Definitions of MSMEs in Malaysia

Category

Micro-enterprise

Small enterprise

Medium enterprise

Manufacturing (including agro-based) and MRS

No. of full-time employees:

Less than 5

Annual Sales Turnover: Less than RM250,000

No. of full-time employees:

Between 5 and 50

Annual Sales Turnover: Between RM250,000 and less than RM10 million

No. of full-time employees:

Between 51 and 150

Annual Sales Turnover: Between RM10 million and RM25 million.

Services, primary agriculture and information and communication Technology (ICT)

No. of full-time employees:

Less than 5

Annual Sales Turnover: Less than RM200,000

No. of full-time employees:

Between 5 and 19

Annual Sales Turnover: Between RM200,000 and less than RM1 million

No. of full-time employees:

Between 20 and 50

Annual Sales Turnover: Between RM1 million and RM5 million

Sources: National Small and Medium Enterprise Development Council (NSDC), (2005)

2.4 Risk

Risk become popular in the economics field in the 1920s and started to be the main focused in the academic discipline. Thus, the definition of risk has been extended within the area of decision making by various field of literature in management, environmental, insurance and psychology. Risk and its elements’ definition is complicated and multifaceted which is viewed and considered differently depending upon the taxonomy that an individual utilizing it. Generally, risk refers to uncertainty concerning the occurrence of a loss (Redja 2005). Yates and Stone (1992) defined risk as the degree of uncertainty and potential loss which may follow from a given behaviour. Risk is also defined by Greene (1962) as the “uncertainty as to the occurrence of an economic loss” and, “measurable uncertainty” (Knight, 1921) or “objectified uncertainty regarding the occurrence of an undesirable event” (Willett, 1951).

Apart from the dissimilarities in defining risk, two common themes are about uncertainty and loss. According to Crowe & Horn, (1957), the term probability may have the connotation of likelihood to specific persons as compared to probability to others. This feel of unpredictability of the actual results of a method contrary the possible expected outcomes introduces objectives suspicion about the outcome in a given circumstances (Williams & Heins, 1964). Once the event occurred, the differences can be measured in the actual versus expected outcome of an action but differs from the incidence of an unwelcome contingency (Althearn, 1962). Consequently, there is variability in the connotative definitions of risk between persons, society and ethos despite several general academic accords concerning the fundamental of risk.

In addition to the facets of uncertainty and loss, there is the constituent of the future time component in the likelihood, predictive, possibility of risk. The multitude of descriptions of risk is due to the lack of agreement by scholars and the nature of risk itself. The word of uncertainty may be unique to a particular actor if the word of uncertainty refers to the component of risk and uncertainty as a state of mind of the individual processing the risk. Besides uncertainty, risk involves loss, or something that is undesirable. Loss may be more than financial or economic. Crowe and Horn (1957) defined loss as an involuntary reduction in the capacity of an entity to satisfy its wants. Therefore, it looks that scholars have disagreements in separating an individual’s awareness, perception and attitude from the general concept of risk.

Entrepreneurial Risk

The entrepreneur is a risk taker and is prone to assume business risks. Any error in making business decision is a probable source of threat or opportunity in assuring the success of the business. The distinctiveness of entrepreneurs businesses, rivalries and the tight economic situations has obligated the entrepreneurs’ capability on predicting the business risks. Busenitz (1999) noted the basis of risk is that …“the dominant theme running throughout the entrepreneurship literature is risk and how entrepreneurs are predisposed towards risky alternatives or how the should manage risk” (p. 325). However, this statement contradicts with McCarthy (2000) statement on the risk that “…the risk construct dominates the literature on entrepreneurship and the ability to bear risk has been identified as the primary challenge facing entrepreneurs” (p.563).

Furthermore, Klein (1977) has summarized that the capacity to take risk as being an inherent attribute of the entrepreneurial venture as stated that if an entrepreneur is to profit from an unexploited potential, he must also inevitably deal with a greater degree of uncertainty.

Business risks occur from uncertainty about the future and the effect of current judgements, therefore business choices need to consist of an assessment of their outcomes and the possibility that the outcome may differ from expectation. Entrepreneurs confront the problem that the sum of tolerable risk is based on likelihood of unconstructive outcomes and reward is often comparative to the amount of risk taken. Bird (1989) differentiates risks to five types which four of them are clearly pertinent to any potential entrepreneurs such as economic risk, risk in social relations, risks in career development, psychological and health risk. The general concept of “risk” has been broken into several dimensions by several authors (see for example, Assael, 1981; MacCrimmon and Wehrung, 1986; Minkowick, 1964; Mowen, 1987; and Robertson, Zielinski and Ward, 1984). These include financial risk, physical risk, social risk, professional risk, performance risk, opportunity cost risk and time risk. Meanwhile, Carroll, Siridhara and Finchman (1986) used the Atkinson’s model (consumer model of risk perception) which resulted in a six dimensions to define risk among entrepreneurs as the decision to become an entrepreneur involves consumer risk. The dimensions included in the model are financial risk, social risk, psychological risk, performance risk, safety risk and convenience risk.

However, Harrington and Niehaus, (2004) noted that in business several types of risks are present and can be applied to entrepreneur business decision making such as price risks, credit risks and pure risks. Price risks include market risks associated to the victory of the business plan, demand for the product, and issues of cost and price which include output price and input price risks. Romano et al, (2001), includes price risk to business-related financial risks involving credit, cash flow, foreign currency and working capital. Every business risks are not monetary, yet, a good deal of risk is inherent in companies and operations itself. It can be concluded that many of these risks resulted from pressures related to company growth, company culture and information management.

Other type of business risks is credit risks. Credit risk is a chance and magnitude of financial loss involved in the spending of money. To quote Harrington and Niehaus, (2004), on the credit risk of the business risk:

“The risk that a firm’s customers and the parties to which it has lent money will delay or fail to make promised payments is known as credit risk. Most firms face some credit risk for account receivables. The exposure to credit risk is particularly large for financial institutions, such as commercial banks, that routinely make loans that are subject to risk of default by the borrower. When firms borrow money, they in turn expose lenders to credit risk (i.e., the risk that the firm will default on its promised payments). As a consequence, borrowing exposes the firm’s owners to the risk that the firm will be unable to pay its debt and thus be forced into bankruptcy, and the firm generally will have to pay more to borrow money as credit risk increases” (p.5).

Raghavan, (2005) noted that Probability Default (PD) and Loss Given Default (LGD) were used to measured credit risk and default percentage is quite high in SME sectors as compared to the large corporate or entity.

Finally, pure risk is another type of business risks. These risks affect business due to reduction in value of business assets such as wreck or demolition of construction, equipment, inventory, business records, or other property; recovery and replacement costs after fires, flooding, typhoon or other disaster; and loss of income during recovery. Pure risks also involve company losses due to shipping damages or losses occurring because of crimes such as misappropriation or robbery. Entrepreneurs face a range of pure risks that must be controlled and managed lest they endanger the future of the firms. This pure risk also includes legal liability for damages for harm to customers, suppliers, shareholders and also injury to employees resulting from accidents, harm product, professional malpractice, inappropriate business practices and mistakes or omission. Another type of pure risk is the risk which associated with paying benefits to injured workers under workers’ compensation laws including the risk of legal liability for injuries or other harms to employees that are not governed by workers’ compensation laws. Finally, the risk that the businesses agreed to make payments under employee benefits plans due to death, illness and disability to employees (Harrington and Niehaus, 2004). The figure below shows the major types of business risk.

Figure 1: The Major Types of Business Risk

Source: Harrington and Niehaus, 2004

Liles, (1974) recommended that new venture entrepreneurs, involved financial status, career opportunities and psychosocial health. The new venture also will face strain and loss of family and social relations. The private monetary risk that the entrepreneur perpetrates from a failed business can affect the major losses to the entrepreneurs, resulting in a lower standard of living. Liles (1974) also suggested that the potential entrepreneur is well counselled to analyze carefully the risks associated with his specific business proposal and then make a decision to undertake them because the financial and emotional consequences of failure could be devastating. Liles then concluded that the decision depends to a great extent upon the potential entrepreneur’s perception of the risk involved.

Raghvan, (2005), specify the risks to SME sectors include the following:

  1. Constitution of business entity involves the constitution to be risky due to lack of professionalism and overdependence on one or two key person in deciding the important part in running the business. The decisions made will affect the success or failure in establishment and advancement of the business.
  2. Leverage on financial structure occurs when the business entity limits the funds mobilisation efforts that a small and medium business enterprise can raise capital and borrow.
  3. Tough competition and inadequate margin resulted from competition with bigger business, whereby a small and medium business enterprise face the pressure on the margin as they have to absorb according to bigger enterprise price as they cannot raise their price.
  4. Low collection in account receivable gives effects to the strain on the liquidity position of the SME sector and may be the result of bank restricted their exposure to the sector.
  5. Incapacity to go for technology advancement to help the sector optimized their available resources in the best way is because of little financial resources and poor ability for leveraging the financial structure.
  6. High employee turnover in the small and medium business enterprise because of limited of growth prospects includes the possible loss of manpower and additional costs in the form of training and knowledge update that will results the operation continuity and lowering the productivity.
  7. Micro finance which provided credits to small enterprise as to improve the standard of living will covered them under social entrepreneurial activities. Doubtfully, the risk of the lenders will be spreading under the sector. The approach of micro enterprise finance is through repayment incentive structure, streamlined administration and market based pricing adopting profit which leads to great transform in a cumulative causation triggered by credit to MSMEs.
  8. Collateral Security exists when dealing with lenders and borrower particularly to banks. Banks would not on detailed investigation and analysis of borrower’s business as they already have the protection which will reflect of credit-worthiness to lenders.
  9. Bank lending to MSMEs is considered as the primary source of external finance to support the sector’s growth in the country. Business owners have knowledge on the prospects of venture and risk facing their business than lenders that will set in the information asymmetry. The existence of information asymmetry makes the lenders respond by increasing lending margins to levels in excess of that which the inherent risks would require. Besides, banks also curtail the extent of lending and resort to what is known as Credit Rationing, notwithstanding the fact that MSMEs would be willing to pay a fair Risk Adjusted Cost of Capital.

2.6 Risk Taking Propensity

The study of decision making behaviour categorized the risk into three elements: risk perception, risk propensity and preparedness to take risk (Brindley, 2005). Brockhaus (1980) defined risk propensity:

“The perceived probability of receiving the rewards associated with success of a proposed situation, which is required by an individual before he will subject himself to consequence associated with failure, the alternative situation providing less reward as well as less severe consequences than the proposed situation.” (p. 513)

Risk taking also can be defined as one of the three dimensions of entrepreneurial orientation of a company and refers to the readiness of the organization to consign significant resources to opportunities that might be uncertain (Junehed and Davidsson 1998). Sitkin and Weingart (1995) defined risk perception as a subjective interpretation of expected loss which affected by individual’s view of the uncertainty of the decision and the consequence of the decision. Meanwhile, risk propensity is usually defined as an individual’s general tendency toward either taking or avoiding risk within a particular kind of decision context (Sitkin and Pablo, 1992). Risk propensity is a common tendency to accept or avert risks (Sitkin and Weigart, 1995). Summary of past trend of the selected research in risk propensity have produced mixed conclusions is tabulated in Table 2.1 (p. 23). Some studies have indicated no significant differences in risk taking propensities among entrepreneurs.

Risk propensity and risk perception influence risk taking. Risky decisions will be made when the situations of high risk propensity and low risk perception. Therefore, risk-taking initiatives should be more necessary in order to achieve good results in hostile markets. Or, in other words, business owners or managers who dare to take more risks take actions that are more suitable and perform better.

Abby and Slater (1989) noted that organization which has an international vision, favorable perception and attitudes toward international business, is willing to take risk and has the capacity to engage positively in international business activities is likely to lead a company to business success. In line to minimize risks, entrepreneurs are required to identify which variables influence their business performance. If they have a higher risk-taking propensity, they positively affect the business performance.

Begley, (1995) defined risk-taking propensity as the willingness to take moderate risks. This means that when entrepreneurs faced with different situations, they will probably show different risk propensities. At the same time, different entrepreneurs faced with the same situation may present different risk propensities. Entrepreneurs are willing to accept the unknown. They are distinctively able to start and orchestrate events that have risk consequences (Mitton. 1989). Entrepreneurial study, yet, propose that successful entrepreneurs are moderate risk-takers (Bridge, O’Neil, Cromie, 1998). Douglas and Shepherd (2002) found that those with a greater risk acceptance had stronger levels of entrepreneurial intention.

McClelland (1961) found that individuals would have moderate propensities to take risk if they have high achievement needs. However, Liles (1974) argued that entrepreneurs frequently have to adopt uncertainty with respect to financial well-being, psychic well-being, career security and family relations. Group’s risk propensity could be influenced by various variables. Among them was characteristic of the group as suggested by Sitkin and Pablo (1992) that outcomes associated with prior risky decisions can influence risk propensity, with more positive outcomes leading to greater risk propensity. Prediction by people that groups with higher levels of collective efficacy (Gibson, McKeon and Ostrom, 2000) could have greater risk propensity because they feel more capable of handling problems that arise. Also, groups with more ambitious goals or groups that compete closely with other groups may have greater risk propensity because risk taking is necessary for their success. The environment was another variable that may also play a role in the risk propensity of groups. For example, the group may have greater risk propensity if risk is valued in a group’s social environment (Stine-Cheyne, 2002). According to Moreland & Levine, (1992), the group may have a greater risk propensity because it has less fear of failure if a group expects outsiders to provide help when it is needed. And when the consequences of failure are smaller, a group may be more willing to take more risks. This relationship may be moderated, however, by the availability and value of outside help.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

Researcher(s)

Sample

Place

Instrument(s)

Results

Brockhaus and Nord(1979)

New founders (N=31), newly promoted managers (N=31), and newly hired managers (N=31)

United States

Choice Dilemmas Questionnaire (CDQ)

No significant differences in risk taking propensity of the three groups.

Brockhaus (1980a)

New founders (N=31), newly promoted managers (N=31), and newly hired managers (N=31)

United States

CDQ

No significant differences in risk taking propensity of the three groups.

Sexton and Bowman (1983)

Entrepreneurship majors (N=61) and non business majors (N= 113)

United States

Jackson Personality Inventory

(JPI)

Personality Research Form E

(PRF-E)

CDQ

Entrepreneurship majors higher in risk taking

Sexton and Bowman (1984)

Entrepreneurship majors (N=45) , business majors (N=75) and non business majors (N= 98)

United States

JPI

PRF-E

Entrepreneurship majors higher in risk taking

Schwer and Yucelt (1984)

Owners and small business managers (N=71)

CDQ

No differences in personal risk; other risks mitigated by age and education

Masters & Meier (1988)

Male and Female owners/owner-managers and managers (N=50)

United States

CDQ

No significant differences in risk taking propensity neither between owners and managers nor between males and females owners.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Instrument(s)

Results

MacCrimmon and Wehrung (1990)

Business owners and Executives

Canada

CDQ

-The greater success was related to greater risk taking.

-Education was also found to be related to risk taking.

-Age, seniority, number of dependents was inversely related to risk taking.

Carland, J.W., III, Carland, J.W., Carland, J.A & Pearce, J.W. (1995)

Entrepreneurs (N=114), Small Business Owners (N=347) and Managers (N=387)

South Eastern United States

JPI

– Older respondents explained a lower of risk taking propensity than the younger.

– Respondents with higher level of education had higher propensities for risk taking,

– Female exhibited a lower level of risk taking propensity compared to male.

Begley (1995),

Business executive (N=239)

New England

JPI

failed to identify whether the level of entrepreneurial risk taking was

low, moderate, or high.

Koiranen, Hyrsky and Tuunanen (1997)

Entrepreneurs, Small business owners and managers (N=1000)

India, Turkey and United States

JPI

-Americans were more inclined to assume risks.

-Finnish entrepreneurs, small business owners and managers were more risk averse than Americans.

-Americans males have a higher scores than Finnish males

-No significant difference between female US entrepreneurs, small business owners and managers and their Finnish female counterparts

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Place

Instrument(s)

Results

Stewart, Watson, Carland and Carland (1998),

Students (N=206)

United States and Rusia

JPI and CDQ

– CDQ failed to measure the construct of risk taking in the investigation.

– JPI was more successful; however, it has components which may not be well matched for measuring entrepreneurial risk taking.

Hyrsky and Tuunanen (1999)

Entrepreneurs, Small business owners and managers (N=1000)

Finland and United States

Carland Entrepreneurship index (CEI)

American had greater risk taking propensity.

Forlani and Mullins (2000)

CEO of the firms (N=540)

United States

Risk Style Scale

Differences in risk propensities among entrepreneurs on their new venture choices.

Petrakis (2005),

Small Businessmen of SMEs (N=120)

Greek

13 risk measures by author.

Risk propensity affects the way entrepreneurs decide to finance their venture and also affects the first performance principal component which includes the risk undertaken and the profit rate.

Leko-Simic and Horvat (2006),

Croatian exporters (N=300)

Croatia

5 point Likert scale

There is significant difference between ‘risk taking’ and ‘non-risk taking’ but do not have a very high risk-taking propensity when doing business internationally.

Shivani, Mukherjee and Sharan (2006)

Small Entrepreneurs (N=200)

India

Risk Attitudes Inventory designed by Gene Calvert (1993)

-A substantial proportion of respondents have low level of risk taking propensity.

-No differences between male and female respondents.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Place

Instrument(s)

Results

Ozturk and Hancer (2006)

Middle level hotel managers (N=106)

Turkey

Zalaskiewicz (2001) risk scale

There was no significant relationship between the risk items and corporate entrepreneurship.

Walker, Geddes and Webster (2006)

Small business owners (N=1600)

Western Australia

Measures by author

-Some gender differences with women being more emotionally risk averse than their male counterparts.

-Younger people, irrespective of gender were more emotionally and financially risk averse compared to older people.

– There were differences between gender and age cohorts in regard to initial business start-up motivation.

Nieuwenhuizen and Groenewald (2006),

Owners of SMEs (N=50)

South Africa

Neethling Brain Instrument (NBI)

-The majority of the identified successful, established entrepreneurs did have a strong tendency towards creativity and propensity for calculated risk taking.

Naldi, Nordqvist, Sjoberg, Wiklund, (2007)

CEOs of the SMEs firms (N=2455)

Sweden

Entrepreneurial Orientation.

-Risk taking is a distinct dimension of entrepreneurial orientation in family firms and that is positively associated with proactive ness a

Improving Profits at Kinky Boots Co

Introduction

The present paper discusses the actual needs for developing the kinky boots company, here the innovations and ideas of the 4th generation Steve Pateman’s Kinky Boots story based on the WJ Brooks of Earls Barton’s family business. The kinky boots company previously known as W J Brooks and Co is a shoemaking firm in the village of Earls Barton, near Northampton. This company has been making shoes for over 100 years. It was founded in the year 1889 with 80 people but in the meanwhile due to economic (cheap) foreign imports, and the strong pound value, sales have been collapsed and the company lost money. They used to pay the money but had no work for the employees (David Gritten, 2005). In the year 1998 the work force was almost halved and Steve felt heavy responsibility for the remaining 30 people and so he has taken his drastic steps towards his family business. The desperate and reluctant owner inspired by an outrageous drag queen to change his product to fetish footwear for transvestites. The present paper mainly discuss about the analysis made on which strategy will yield better profits for the kinky boots company.

Literature review:

Organizational issues:

For a new emerging organization which is of exposed firm, fluid units retrain comparatively employees and few managers as well as non-central functions contracted exterior to the organization. Such a rising organizations will be definitely focus on improving their significant competencies as well as designing techniques and innovative process which are considered as a part of the organization with the exception from its competition. Further the growth in the manufacturing industry has been motivated by improvement in technology and degree of difference in wage scales. These areas have made the organizations like kinky boots consider them as an element of the incorporated global economy.

Organization has to address (solve) some organizational issues to operate organization effectively. There are four target issues to be focused to solve the problems associated with the kinky boots.

Strategic issues: The organizations have to decide what services or products they will provide in the markets and in which they will compete as well as how to relate (or communicate) with their environment and how to transform them to keep pace with changing conditions. These issues are crucial among the various organizations in today’s changing and highly competitive market environments (Thomas& Christopher, 2008).

Structural and technological issues: organizations have to make proper decisions on dividing the work into departments and proper guidance to the coordination among the departments to give support for the strategic directions. They should also make some suggestions on how to deliver their services and products to link customers to the tasks.

Human process issues: These particular issues will deal with the social processes taking place among the organizational members. These issues may include decision making, communications, group dynamics and leadership etc.

HR (Human Resource) issues: These HR issues are concerned with the attracting the competent (or capable) people to the organization including rewarding and appraising their performance levels, setting goals for them and ensuring that they manage stress and develop their careers to achieve success (Thomas& Christopher, 2008).

1. Strategic changes:

These strategic interventions will alter the internal functioning of the industry to the larger environment and converts the firm to keep pace with the changing competitive conditions. These changing conditions should be brought to the industry to achieve a fit between the business strategies.

Integrated strategic change: it describes about the changing plans required to make a value added contributions to the strategic management. This strategic change also argues that the organizational system and the business strategies should be changed together in response to internal and external interruptions. The best strategic change plan may help the team workers/ members to transition between the organization design and the current strategy towards the strategic directions.

Organization learning and KM (knowledge management): organization learning will explore the organization capacity to develop and to acquire the new knowledge. Whereas the knowledge management evolutes how knowledge can be used and organized to develop the performance of an organization. These strategies will solve the existing problems to become capable of maintaining the improvement.

2. Techno structural changes:

The changes could be done based on the technology (ex: job design, task methods) and the structure (ex: hierarchy, division of the labor). These changing methods will spread its lights on current concern on organization effectiveness and productivity.

Structural design:

This changing process deals with the firms division of labor and the traditional ways to divide the organizational overall work in between the appropriate organizational structures, conditions and technologies.

Downsizing:

This approach will minimize the number of the employees to reduce the costs and bureaucracy through outsourcing, redesign and personal layoffs. Each and every method for this downsizing should be planned with the clear estimations and understandings of the organization strategies.

Reengineering: This recent phenomenon redesigns the organization core work procedures to create best coordination among the various tasks. This process of workflow will yield more responsive task with higher performance. It is also accomplished with the new IT (information technology) that allows employees to coordinate and control the work process more effectively.

3. HR management changes:

These changes may include employee selection, placements, career developments, performance appraisals; focus on people in organization for incorporating the employees into an organization.

Goal setting: this approach involves with the setting challenging and clear goals to develop business efficiency by setting up the best fit in between the organizational and personal objectives. To inculcate this change process the subordinates and the managers should make certain plans to solve the existing problem in achieving the organization success.

Performance appraisal: This is the primary human resource management for the performance feedback to evaluate individuals or workgroups with the systematic approach of assessing the work related achievements, weakness and strengths of an employee.

Reward systems: This process of reward system will enhance the employee performance and satisfaction. It may include promotions, incentives, fringe benefits etc.

4. Human process changes:

Human process changes particularly deals with the group decisions, problem solving, leadership qualities and communication. These sorts of approaches should be applied in an organization to expect the enhanced functioning of the people and organization process.

Process consultation:

It assists the group members to analyze the appropriate solutions to solve the problems associated with the organization. Problems may include poor communication, dysfunctional conflicts and ineffective norms. It also helps the team members to acquire the knowledge and skills to process the problems.

Third party interventions:

This intervention changes may come from substantive issues like interpersonal issues (miscommunication), disputes over the work etc. hence the third party may interrupt and helps them to resolve their problems through probing, conciliation and by bargaining.

Team building: This team building may include strategies and member roles for performing tasks. In addition to this inter group relations, large group interventions and organization confrontation meetings will also address the problems.

Manufacturing organizational issues:

According to the Skinner (1969), the manufacturing strategy issues should pay its attention towards the operations, productions and even in the strategic management fields. Schroeder et al., (1986) have given their definitions on manufacturing strategy as a long-standing plan of manufacturing function to go with the overall strategy of the firm. Some other studies considered that the manufacturing strategy as diversify perspectives of strategic planning. Sweeney (1991) treated manufacturing strategy as a specific field of strategic management. However, Cerwin (1993) summarized that the defined manufacturing strategy and diversify disciplines as a decision-making procedure whereby an organization can lead its mechanized activities based on a strategic perspective. Hence the manufacturing (production) strategy has become an innovative topic in the strategic management field.

Khandwalla (1974), in his research on the 79 American manufacturing companies originated that the most profitable firms are those which adjusted their structures according to their mass output orientation of the technology.

According to Adam et al., (1989), the main 4 priorities for the manufacturing organizations are flexibility, reliability, cost and quality. These are the key elements for the manufacturing strategy with the four types namely Marketer, care taker, Reorganizer and innovator.

Marketer: this strategy has to mainly focus on the customer needs and their satisfaction about the product produced.

Caretaker: it includes employee efforts and hard work to decrease the manufacturing costs.

Reorganizer: this strategy mainly concerns with the rethinking capability to fit their manufacturing strategy with the present market environment.

Innovator: this aspect deals with enhancement of employee or authority to improve their technological capacity to innovate their new products into the competitive environment.

W J Brooks and Co current situation:

The Kinky Boot Factory by the Richard manufactures the Divine varieties of erotic shoes for both Women and Men. This shoe company has been manufacturing the best and high quality products for the four generation in Northampton. In the year 1642, records illustrate that the Northampton’s staple industry made 600 boots, 4000 shoes for the army and further it continued to Oliver Cromwell’s army in the year 1648. Later in the year 1831 a third of all the men in the Northampton (England) were shoe makers which are mostly home workers. Aftermath commercial shoe manufactures were started with receiving finished shoes, and with packages and dispatches to the stores (Robin Wood, 2009).

Later the kinky boots is based on the family shoe business with 4th generation managing director Steve Pateman founded in the year 1889. Steve employed about 80 people. He had very well known most of his employers since Steve Pateman began efforts on its factory floor as a 17-year-old school-leaver. Steve continued to manufacture quality men’s brogues but suddenly like all the Northampton shoe production were in terrible straights due to heavy competition from strong pound hitting the export market and cheap imports. By the end of the year 1998, Steve had been enforced to cut his staff from 80 to 30 people but they were still in a struggling position. In addition to this problem he also faced another problem, rival boots and shoes from China (Eastern Europe) manufactured “with little craftsmanship, but at a fraction of his labor costs” (David Gritten, 2005, p.1).

A visit to kinky boots largest customers exposed that its “traditional market had been taken over by cheaper, lower quality, imported shoes” (Jim Stewart, 2010, p.1).

Gloomily Steve maintained the reduced workforce but then suddenly one phone call changed his life. In Folkestone, there was a shop containing boots and sexy lingerie, which is run by a lady. The boots are the favorites for cross dressers and drag queens, which are made thigh-high, colored red or black leather or PVC and the shoes should be of women with men’s sizes. Pateman recalled past as they did a lot of high heals as well as Beatle boots; for that he purchased a machine worth £12,000 which helps to put a 4 1/2 inch heal (David Gritten, 2005).

Sensing that there might be a productive niche market, Steve explore his potential customer base and created own designs. The main problem raised with other manufacturers were, they simply manufactured bigger size shoes to fit for the men. Based on the customer voices Steve simply made boots and shoes wide enough to men. Initially the interest of the customers as well as sales was good and hence Pateman determined to turn his entire shoe factory into manufacturing this particular specialized fetish footwear. From this point of time, W J Brooks would be well known for the Kinky Boot Factory. This peculiar smart move in the business changed the entire firm and kept the shoe factory workers employed (David Gritten, 2005).

Analysis on the issues faced by kinky boots:

This kinky boots company gives best example of how to develop a winning marketing strategy. The problems faced by the company are the fast changing and demanding world in which we operate. For example: attaining the best quality standards is different from “traditional business demands more of workers than has ever been done in the past” (Jim Stewart, 2010, p.1).

From the above literature kinky boots faced technological and structural issues, human resource issues, strategic issues and human process issues.

Technological and structural issues: Kinky boots downsized the employees working in the manufacturing unit from 80-30 people to cut back their costs.

Human resource management issues: the effective management and leadership qualities and good decision making strategies for the organization change made to learn the importance of the competencies required to lead the organization to achieve its aims and objectives.

Strategic issues: the drastic integrated strategic change from the management of kinky boots described, how planned change could make a best value added contribution to strategic management. This issue also illustrates about the organization learning (capability to develop a new knowledge) and knowledge management (application of the knowledge to improve organization productivity).

Human process issue: kinky boots did not face any disputes in between the employees but the change process and innovation from the Steve improved the functioning of the people and organizational processes.

Nowadays there is a drastic change in the business and economic environment, by which the firms are forced to be innovative in the way they perform their business and to fail or learn more. The key factors for the firms for their survival are Innovation and innovativeness. Relationships between Research and Development, marketing activities and a firm’s manufacturing strategy are made as the part of organization strategy, in order to examine the innovation-related issues by linking them with the firms. The innovation issues from the point of organizational perspectives have been clarified recently. For example, as per Senge (1990), one of the best ways to create competitive advantages is to build an organization which is based on continuous learning and enhancement. According to him, many aspects of an organization including, which includes even the manufacturing activities are also influenced by organizational learning. Some of the organizational factors like organizational structure, scale, and member of organizations are related to manufacturing strategy by Adam et al., (1989).

Kinky boots paid its attention towards the marketing activities by knowing the customer requirements and based on that he selected their manufacturing strategy and relatively it also focused on the development activities through innovation.

Pateman first taste of fame was from the BBC2 series which made a documentary about his foray into the world of kinky boots. It nearly attracted 4.3 million viewers and was repeated and publicized world-wide (BBC, 2000).

Nowadays kinky boots is well known for many countries and different countries are showing their interest especially in Steve’s product. Here the major problem he faced was getting the order of the sales so he prepared a mail-order catalogues to get the order of the samples into massive sales. Hence he could sell kinky boots directly to the customers.

Support of Information Systems to improve the organization’s future strategy:

Presently kinky boots is depending on their exclusive technical expertise with strong heel design and dramatic change in the manufacturing thought of kinky boots successfully created a new niche market by saving the Steve’s factory and the jobs of the employees. The company created out unique capabilities and the real strength in materials knowledge rather than their efficiently and ability to operate sewing machines (Paul Calver, 2009).

Information systems:

The major growth in the current economy is coming from the “information” industry. The success of the firms like kinky boots (knowledge based organizations) depends on the IS (Information systems). This IS requisite globalization of the market and some technological changes. Hence many of the manufacturing industries are placing their importance on the information systems. However this information system is playing a pivot role in the information and communication technologies in meeting the firm’s information needs (international graduate, 2010).

According to Kroenke, D M. (2008), this information system is a combination of people’s activity and information technology using the management, support operations and decision making. This term is broadly used to refer data and technology, people, process, and it also focus on the way in which people (employee) interact with this technology in support of business processes.

Information systems may be unsuccessful for a number of reasons. Some of the failure reasons of the information systems of the organization include complexity, communication, organization, leadership and technology. Failure can be summarized in four major categories: project management shortcomings, technical shortcomings, continuing information explosion and the organizational issues. Change management is the process of supporting different organizations as well as individuals in passing from an “old way of doing things to a new way of doing things” (Int J Med Inform, 2003, p.1). This sort of Change management created its innovations early in a technical process, and it necessitate for making major alteration starts at the conceptual level.

The result of many corporate decisions is that the shoes tend to be more expensive than its competitors. To offset this pricing difference, New Balance differentiates should be included in their products with blend of gel inserts, technical innovations, heel counters, and the best selection of sizes, particularly for very narrow and/or very wide widths.

Kinky Boots Company should launch the internet based order systems rather than mail catalogues. It would be the better option to globalize their market with the secured password site. This new order system should be available for 24 hours a day, 7 days a week. The management simply has to have a Personal Computer or laptop with the Internet access with Internet Explorer 3.0 (or above) version or Netscape and AOL 3.0 (or above).

Kinky boots can also continue its growth by following the latest designs to make ordering footwear from the different company’s major women’s brands than ever before.

For the good profits the kinky boots company can also engage in the provision of various branded, private-label casual, licensed, athletic, and dress footwear products to men, women and children.

It can be said that for an organization like kinky boots that using the information systems as a routine and commodity, the auxiliary functionalities are better managed by employing the skilled and shoe designers. Such a practice has always offered a positive result with enhanced performances, time saving and returning cost cutting in their activities because of having a combination of inadequate proficiency and considering the related costs (DiRomualdo, A., & Gurbaxani, V. 1998). As mentioned in the literature, it is true that for a newly emerging organization like kinky boots has to be exposed and as it contains newly employed graduates and small skilled team and the organization has to get contracted with other exterior organizations. Acting as a virtual company, kinky boots has to concentrate on how to improve its competitive edge. In these conditions practicing innovation and innovativeness is one among the competitive factor of the company, since growth in the local market will motivate the company to enhance its information systems along with the differential incoming scales. Such a footstep will make the business to believe them as a part of the global economy (Mullin, R. 1996). Hence inventing new designs for manufacturing, good decision making process and leadership qualities in an organization will definitely assist the business to enhance in all aspects (local market as well as in the global market).

Globalization aspect:

Kinky boots can also find its niche both in the local market as well as in overseas. For the globalization the kinky boots company should search for the vendor with same culture and values since will set up common interest and mutual understanding to make a successful relationship but this practice may not be possible all times because of the cost cutting and availability of employees over options based on the connections of culture (Gurung, A., & Prater, E. 2006). However, globalization is required for development of this kinky boots company as in the past they were not able to handle both work and life. So Patemen decided to downsize his employees and starts the work but as it is concerned with the financial aspect he went for globalizing the company requires both employers as well as machinery for the stitching.

There are also some benefits in globalizing the industry for its development. The main benefits for globalizing are as follows. The coordination and control of the marketing and promotional programs must be simplified. The kinky boots company initially has to concentrate on marketing for making expanding the business in UK. Exploring the great ideas, innovations for expansion in worldwide can result minimizing the planning and control cost for advertising. Globalization saves their money as well as the cost for advertising will be reduced. For making the company universal it must have good company image and brand name.

Importance of value chain for the kinky boots:

Kinky boots may get a good position in the market place by establishing a market based cost structure. Many manufacturing units will look at their products or final deliverable services but they are failing to notice real opportunities which could be a unique or strengthen capabilities embedded within their business processes, knowledge base or value chain. Recognizing these strengths is an important task while looking at the local market in terms of protecting the business position in the market. (IFM) The Cambridge University Institute for Manufacturing has developed different tools to assist companies in identifying the manufacturing opportunities in the manufacturing value chain. This report also suggests that the total value chain has to be considered while proposing the business. According to the Paul Calver, (2009), many of the UK companies considered this to increase their global competitiveness and they are also following the PETS approach Purchase, Establish Then Sell for their market entry. Hence the organization like kinky boots should follow the PETS approach as well as the tools from IFM to minimize its costs and to make progress on the productivity improvement tools.

IP protection plan (intellectual property)

This protection plan will give the business a real strength to create new opportunities and the new directions for the business. One of the main uncertainties of the companies emerging into the new markets will generally lose their IP. Hence the manufacturing business like kinky boots should support the improvement of IP protection plans to be taken as a part of their market entry strategy.

Recommendations

According to the above literature and analysis of the organizational issues of kinky boots, researcher found that those people are willing to change as per the requirements of the industry. Where as the issues they are facing are regarding high production cost due to pound value hitting export chances and cheap imported products from the global market. To overcome the above specified obstacles, they have to optimally utilize the man power and the resources where as to increase the productivity of the company. The kinky boots people should minimize the wastage of the goods at the time of production. They should make various sizes of kinky boots in order to reduce the wastage for men and women. By this, they will produce maximum merchandise with minimum production cost. They should use the Information systems (IS) in an organized way; in such a way that the product publicity should reach the targeted customers with less cost. They should employ a team of innovative people in order to design and produce new model shoes in such a way that they are affordable to the common people. Another responsibility of the innovative team should be designing high end shoes targeting right people, who care more about the design and quality but not about money. For every new model of shoes they made, they should have patent rights, which will help the company a lot. They should collect information from the public regarding the expectations of the people, feedback of their products from time to time. They need to consider all these issues in releasing the new model of shoes. They need to be globally competent i.e. they should think of expanding their business as they are well-known for kinky boots. They should use the foot wear exhibitions, expos for this purpose. Another aspect they need to think of is their marketing strategies. The marketing strategy should be in such a way that should increase the sales in an organized manner. They need to think of directly selling to customers by opening outlets. By that they can sell customers to a reduced price which will enhance the sales of the company.

Conclusion:

Kinky boots is the shoe making business firm run by a family’s fourth generation, which is formerly known as W J Brooks and Co. Steve Pateman is the present owner of the firm, 4th generation successor of the family of WJ Brooks. He worked in the firm from the age of 17 years as a school-leaver. He had good relations with the 80 people working for the company. Due to the less export orders hit by pound value and cheap global imports, he downsized his employees to 30. Once the phone call from a lady shop owner in Folkestone changed his life by placing orders for the kinky boots, a high heal shoes with men sizes. By that he completely changed as per the situation and made kinky boots as his firm’s key product. The present paper analyzed the organizational issues in detail for choosing a better strategy for the existing company. Distinguishing these strategies for the survival, expansion and growth of the company different strategies are required and recommended. It necessitate to employee a new team of innovative people by which the company’s productivity will be enhanced.

Netflix Disruptive Innovation

 Executive Summary

The purpose of this report is to explain a disruptive innovation using an ICT-enabled technology, which in this case is Netflix. Netflix is a platform that revolutionised the way people would watch series and Movies and rent a DVD on the same. With subscription plans, applications on different platforms and their exclusive content, made it harder for people not to have piece of it. Netflix started off as a video on demand and DVD by mail kind of a platform and then later expanded its services to even online video streaming which was the spotlight of its developments. Netflix is a disruptive innovation because it revolutionised how people get their daily dose of entertainment. By the introduction of cheap prices, HD quality and a new perspective of TV shows everybody wanted to move on from their usual TV channels and DVD movies. A part of Netflix’s in house production, called “Netflix Originals” produces and directs their own set of series, which have been shot and directed in a different never- seen- before perspective. A unique set of series made its customers stick to it rather than just providing them with same old movies and usual TV shows. It’s also ironic that Netflix put the good old Blockbuster out of business, by providing a more convenient way to rent movies, but only to later on start focusing on original media instead.

The author then moves onto exploring the various adoption categories for this Innovation which are the innovators, early adopters, early majority, late majority and laggards and also based on the study suggests relevant innovation characteristics for each adopter category. Wherein the author says that the Innovators are the people who have a mind-set of “trying anything new in the market first”. The Early Adopters are the people who want to adopt an innovation because the Innovators went for it. And then come the Early Majority, the Late majority and the Laggards who adopt to such innovations based on their ease of access, usage, and reviews. The report then proceeds to paint a picture on the ex-ante and ex-post phases of evaluation and two evaluation methods in each of these phases. The author then moves onto analysing the selected innovation in terms of its entrepreneurship and start-up potential, and talks about how a start-up company aiming to bring a disruptive Innovation like Netflix can use the Crowd sourcing, Open source software’s and Online cloud computing providers to start the development of the Innovation in the early stages. The author then talks about the most important aspect of any innovation company which is the use of Business Analytics to maintain its current customer relationship using predictive analysis, customer service and management, also on how to use Descriptive Analysis to understand the Designing part of the Innovation. These are the key factors of any Innovation which lead to its success and it being Disruptive amongst the others. In this case Netflix was able to accomplish all of these, which lead to it being the favourite online platform for its users in terms of entertainment.

This paper helps understand the various aspects that involve in the development, its start-up potential and the Business analytics of the innovation Netflix. The results for Netflix were very positive since Netflix looked at every aspect during its rise and hence is a favourite amongst its users until now.

The business social value for Netflix is currently on the rise, since Netflix has its own production house that makes its own TV shows and Movies, users have found their interest in the same. These TV shows and Movies are not found anywhere else and hence Netflix’s users have stayed with it for a pretty long time now.

1.0   Describing Netflix

1.1       Introduction to Netflix

Netflix is an American entertainment company founded by Reed Hastings and Marc Randolph on August 29, 1997, in Scotts Valley, California. It specializes in and provides streaming media and video-on-demand online and DVD by mail. In 2013, Netflix expanded into film and television production, as well as online distribution. As of 2017, the company has its headquarters in Los Gatos, California. Netflix’s initial business model included DVD sales and rental, although Hastings jettisoned DVD sales about a year after Netflix’s founding to focus on the DVD rental by mail business. In 2007, Netflix expanded its business with the introduction of streaming media, while retaining the DVD and Blu-ray rental service. The company expanded internationally, with streaming made available to Canada in 2010 and continued growing its streaming service from there by January 2016, Netflix services operated in over 190 countries. Netflix entered the content-production industry in 2013, debuting its first series, House of Cards. It has greatly expanded the production of both film and television series since then, offering “Netflix Original” content through its online library of films and television. Netflix released an estimated 126 original series or films in 2016, more than any other network or cable channel. As of July 2017, Netflix had 103.95 million subscribers worldwide, including 51.92 million in the United States. (Netflix. (2017). En.wikipedia.org.) [1]

Netflix changed the way TV Shows and Movies were brought to the user. By implementing a subscription plan Netflix gave content to its users more than any other Cable provider or DTH. Hence this brought upon a change in the way we watch entertainment. “Netflix was able to appeal to Blockbuster’s core audience by providing, a wider selection of content with an all-you-can-watch, on demand, low-price, high-quality, highly convenient approach,” as Business Insider Australia puts it. The reason for Netflix being disruptive is for when it launched its mail-in subscription service, it did not go after the core customers of competitors like Blockbuster. The customers who rented new releases “on demand”, which initially Netflix didn’t provide its users.  Christensen has also claimed that, initially, Netflix only appealed to a few customer groups: “movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers.”  Hence according to Christensen, Netflix is a trademark of disruption, since a disruptive company targets segments of the population that have not been unnoticed by its competitors, delivering a substandard but more custom-made alternative and apparently at a lower price. By this eventually a disruptive company like Netflix starts moving upmarket. It keeps the advantages it had at the beginning, and adds the things mainstream customers want, and all of a sudden there no reason to have Blockbuster anymore. But Netflix knew that wouldn’t cut it to keep them high up in the market, and they moved onto introducing the ability to stream videos online. This was the huge shift that came. This is how Netflix was able to appeal to Blockbuster’s audience by providing, “a wider selection of content with an all-you-can-watch, on-demand, low-price, high-quality, high-convenient approach”. This is how the unimaginable happened, Blockbuster collapsed. The users who Blockbuster had at hold with their content had now moved onto Netflix for better content and on-demand experience. Hence it can be said in conclusion to the above statements that the reason disruptive companies are often able to rise so quickly is that their larger competitors fail to notice them, they are not initially competing for the same customers, so that the big boys can shoot them off- and in Blockbuster’s case, they even refused to acquire them for a mere US $50 million. (McAlone, N. 2015, Business Insider Australia) [2]

1.2 Exploration of Adoption Categories

 The 5 adopter categories for Netflix in general (in order of priority) are as follows:

1) Innovators:  These They are always curious to try new products or innovations in the market and generally have an obsession for the same. They are generally not averse to taking risks so, if in case, Netflix ends up not being how it claimed to be, they would not face any kinds of losses.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • Relative Advantage: Since the innovators are the very first ones to get hold of the newly launched Netflix platform they can test and review the same, this is the very first characteristic that would be taken into consideration from their viewpoint.
  • Observability: Since an innovator would be dying to try out the features of Netflix and its various categories of entertainment that it has to offer, they would want the same to be less complex and easy to use and explore. Having too many menus and options would frustrate these users and test their patience.
  • Compatibility: If Netflix has features and is based on a platform that someone is already using, then is would be perfect for the Innovators. For example, if this user has an Xbox 360 and wants to use Netflix on the same device, (which Netflix allows its users to) then it would not be an issue to them.

2) Early Adopters: This section comprises people who are willing to subscribe to Netflix when it is in the initial stages of its lifecycle. Like the innovators, they know about every new product launching in the market and are enthusiasts in trying what’s new. They would take advice from the Innovators, on how their experience has been and then would decide on subscribing to the service. However, the Innovator’s word would be anything to them as they would still go onto purchasing the plan.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following: –

  • Relative Advantage – Early adopters would like a hassle-free experience when subscribing to this new platform. They would also have a look upon the various benefits of using Netflix and not Cable TV or DTH.
  • Complexity: They would want to have an easy-to-use application or a web platform. They wouldn’t want things to be very complicated.
  • Compatibility: The early adopters would also look for the service to be compatible on their existing devices, which would help them start using the service and its features immediately.

3) Early Majority: These take thesuggestions of the early adopters and are ready to buy a subscription plan only once the early adopters have approved of the same. This category of adopters usually has an average financial income, average social status and hence think twice before spending. Therefore, it usually will take some time (3 to 6 months) for these adopters to decide if they have to move top Netflix or stick to their old classic TV shows and DVD cinema.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • This category would want Netflix to have their categories of cinema or TV shows to be similar more or less to their previous way of entertainment.
  • The people in this category would only buy a subscription, after being confirmed that it was verified fine by the above adopters over a period.
  • The early majority would want to be confirmed that the platform, Netflix is worth the shift since they would be moving from their usual TV shows and DVD cinema, they would want all the reviews and knowledge they could get on Netflix to be able to make that shift.

4) Late Majority: – These are the sceptical ones who are willing to purchase a plan only after confirming that the above 3 adopters have bought the same. They would only purchase a plan if or when they get major offers or discounts on the plan they are interested in. They usually have a below-average social status and less knowledge upon the latest innovations or tech in the market.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • Trialability: The people in this category would only buy a subscription, after being confirmed that it was verified fine by the above adopters over a period.
  • Complexity:  The late majority category is usually hesitant in learning or moving to new forms of technology and hence would only want to move to Netflix for their entertainment purposes only if it is simple to use and is cost effective compared to their ongoing TV subscription and DVD costs.
  • Compatibility: The late majority would want the service to run on the device they currently have in hand. Since they do not have the latest technology in the market, chances are they would still be using something that is 2-3 years old. Hence they would look at if the Netflix application and the web platform would run on their existing machines.

 5) Laggards: They are the very last adopters of an innovation. This category would usually wait years before even knowing what Netflix is and what services it has to offer. They usually end up using the subscription of their family or friends who are one from the above categories and already have a subscription plan. They have lowest money potential and usually are averse to changes in the market. They are usually comprised of aged people.

The 3 most relevant characteristics (in order of priority) for this category of adopters are the following:

  • Complexity: Since laggards are considered slow learners and adapt to new technology very slowly, they would want Netflix to be as less complex as possible for their ease of understanding and usage.
  • Trialability: The people in this category would only buy a subscription, after being confirmed that it was verified fine by the above adopters over a period.
  • Compatibility: The Laggards would want the service to run on the device they currently have in hand. Since they do not have the latest technology in the market, chances are they would still be using something that is 3-4 years old. Hence they would look at the Netflix application and the web platform would run on their existing machines. (The 5 Customer Segments of Technology Adoption) [3]

2.0 Retrospective Analysis of the Selected Innovation

2.1 Evaluation of their Design

There are two evaluation phases in the design of an IT artefact which, in this case, is Netflix.

Ex Ante: For the Ex Ante phase of evaluation, since it is the phase which is happening before the launch of Netflix, it involves the development of the website, the Applications for various platforms such as PlayStation, Xbox, PC, Android and iOS etc., the best evaluation method would be Artificial, since the features of the various applications and web platform developed have to be tested before releasing the official Product to the market. The method of evaluation that could be used are as follows:

  1. Computer Simulation: Evaluation can be done with the help of various devices based on the platforms Netflix would run on. The website could be tested on a PC of a mid-configuration and satisfactory Internet speed. The Netflix Application for various platforms such as iOS, Android, PlayStation and Xbox could be tested on the respective devices, to ensure there are no bugs or errors within the app and the streaming service. This is most important for any Innovation before going live in the market, to be working with less bugs, glitches or errors. Also, if there is a failure during this process, there would not be much losses associated, and could be rectified easily and quickly.
  2. Alpha & Beta Testing: Evaluation can then be continued in this phase where now the developers, the people within the Organisation can have Netflix on their respective devices/platforms and make sure that everything is working as expected. This is just after the development phase and finished and closing towards the testing phase. The employees under Netflix can have their subscription and check whether every category has the right information, and everything is working smooth and sound. Once the Alpha and Beta testing is done, the people at Netflix can prepare for the release of their product.

Ex Post: For the Ex Post phase of evaluation, which is the phase after the launch of Netflix and it being in the market, it involves the recording of the reviews from various users, their complaints, and request to changes, request to add features and more. Hence the best method of evaluation would be Naturalistic. This is also an important part of an Innovation in terms of its development by the addition of new features and become better and better in the coming years of its life cycle. The method of evaluation that could be used are as follows:

  1. Surveys: By conducting surveys amongst the people who are already using Netflix and have subscribed to the same, and noting down their feedbacks to the questions in the survey, the company would be able to understand the mind-set of their customers even better. This would also help identify the weaknesses in their design and work towards rectifying the same in the future update.
  2. Participant Observations: Developers involved in the development of Netflix could sit with a few of the people who used Netflix instead of their usual TV channels and DVD’s, and get insights on what could be added or removed, any changes to the design and how the user moves around the Netflix website/application can be implemented. Similarly what more categories of TV shows or Movies people would want can also be added. This would help the platform have more data and release better updates which better features.

2.2 Evaluation of original Entrepreneurship and Start-Up Potential:

The Strategies that can be used in the case of a start-up for bringing up a disruptive innovation like Netflix are as follows: (Rogers. Lecture 5) [8]

  • Crowd sourcing of operations/tasks and ideas: Outsourcing would be one of the huge benefits for a start-up, building something as disruptive as Netflix, since it wouldn’t have the funds and financial support at the early stages and nor the manpower. A start-up building an innovation like Netflix could use this very effectively to cut down on budgets, and hence concentrate on the core developments for the future. If thee budget of a start-up goes south then there would be very few chances of it surviving. Hence this would be a relevant category in terms of a start-up making something like Netflix. And as and when the start-up would reach a upright stage, it can attract investors who would look for potential, and this would solve the financial side of the start-up making it use better resources and technologies for development in the later stages. (Handsontable – Why Outsourcing is Important for Your Startup.) [5]
  • Free, open-source and cheaper software and applications: By using Free and open source software’s for development and other functions, the startup can again save a lot on the financial side at the early stages. This also allows the startup to use the full potential of its investments and again concentrate on the major development of the product. There are also huge benefits of using OSS (open source software’s) such as,
    • The ability to get the source code without a licence fee and the ability to modify the same in the product offering or service, which would allow the start-up to cross the development phase faster.
    • There is a community supporting the code, so anywhere the start-up gets stuck with an issues during the development, a community of people are always there for help. This would help the start-up especially when it has limited resources and employees. Developing the code for a product like Netflix is important, hence the algorithm would be the backbone for any future decisions to be taken.
    • A few examples of (OSS) include – Trex for planning, OrangeHRM for human resources planning, SugarCRM for customer relationship management, SQL database systems for database development and sorting/storing. These could be well utilised by the start-up in the early stages for Human Resource, Customer relationship management and to build a database since a platform like Netflix has a database of what people like to watch and how to produce them the same.
    • Cloud-based solutions: Start-ups can use the application’s services or resources made available for the users on demand via the Internet from a cloud computing provider’s servers. These are essential for a start-up who would be developing something like Netflix, which is based completely on the cloud. By using such providers, start-ups can save time and investment by not having to set-up their own Servers, Database systems and more. This would also require specific employees to handle the servers and make sure that there are no errors present, and hence would be a tedious job for the start-up in the early days. By using such Cloud Computing Provider’s start-up have virtualized IT resources, able to rent computing capacity, and also eliminate the capital costs associated with buying their own server. Cloud computing is a fundamental for a platform like Netflix which itself is an online video streaming service, and works on numerous devices of different platforms. Cloud computing providers are not tad expensive as well and would be helpful for that jump start to get the start-up going. (Sweeney, D., Alton, L., Resnick, N., Oracles, T., Resnick, N., & Mehta, D. et al. (2016). How Cloud Computing Can Help Your Start-up Company – StartupNation) [6]

    2.3 Evaluation of their Application of Business Analytics:

    Netflix, being a video streaming and on demand provider of entertainment has used Big Data analytics in the best way possible. This is to understand and help Netflix achieve the right content for its users. Ever since its days of being a DVD-by-mail service Netflix placed prime importance on collecting user data and building a recommendation system. After launching their streaming service in 2007, it took Netflix 6years to collect enough data to predict the sure-shot success of their first original production “House of Cards”. This was how Netflix set the biggest example onto how analytics used in the right direction can literally spell success for a business, in a domain as unpredictable as content production. (Success, H. (2017). How Netflix uses Big Data Analytics to ensure success – UpX Academy) [7]

    1. Designing the Innovation: Business Analytics is mainly used for data-driven decision making. It includes Descriptive analytics. While designing and developing Netflix all of this will play an important role. The descriptive analysis benefits the UI and the content aspect of Netflix, for this the present state of business trend is important while designing so that some of the key factors can be common throughout the Netflix applications on various platforms. The way users move around the user interface, the content on the website and the various applications etc. This would also help Netflix fix any of the issues within their applications an make it even better for the upcoming update releases. (Lecture. 05) [9]
    2. Supporting the Efficient Management of the Innovation: This requires looking at 3 issues for any Innovation, they are – efficient customer relationship, management and customer service.
    3. Efficient customer relationship: This could be achieved using Predictive analysis, since the company has to have customer data to enable an efficient relationship between the both. By analysing customer data, in the case of Netflix, their favourite actors, the type of series or movies they like watching, the types of plan rates they would be willing to take up and more will help the company understand its users better and predict their behaviours over the same. This would help Netflix in building their own Recommendation’s for various users depending on their likes and interests. Which in turn helps maintain and widen customer relationship.
      • Management: Here Predictive analysis would help the company manage its developments for the future, without which Netflix wouldn’t stick around for a long time, especially when a similar disruptive innovation rises, people would tend to move to that, similarly how they moved from Blockbuster to Netflix. By understanding the needs of its users, and making the required changes in terms of plans, content and UI, Netflix would be refreshing its platform and this would result in users being used to it. One move that Netflix has already made in this respective category is by the introduction of their “Netflix Originals” which contains TV shows and now movies that cannot be found anywhere else, hence the users would stay with Netflix for the unique category of shows and others.
      • Customer Service: One of the key factors for a company to keep its existing users/customers is to provide them with hassle free service. Any Innovation is blameless until it cannot handle the issues and problems faced by its customers at a point of time. In the case of Netflix issues such as subscription, payments, in app bugs and other things play a factor. By using Predictive analysis, a company like Netflix can understand its customers better and deal with their issues quicker and in a less amount of time. In an example where a customer calls the customer care and is not able to put through his issues  on the table with the call centre executive can lead to them withdrawing their subscription no matter how good it was, just because the executives couldn’t solve or put his/her issues through the table. By using such cases and being ready for the worst, Netflix can provide better solutions to its customers and maintain its relationship and honesty with them at the same. A company not achieving this particular category would lead to it affecting its Customer Relationship which in turn would lead to fewer users by the fall. (Lecture. 05) [9]

    Conclusion:

    The case study has explored a disruptive innovation, Netflix by reviewing its adoption categories, analyzing its design in the phases before and after its release, evaluating its entrepreneurship and start-up potential and using analytics to understand and predict consumer behavior towards the same. Companies should always try to satisfy all adopter categories for an innovation to boost revenue and should never overlook any specific category. Significant research should be done both before and after design phases based on simulations, alpha and beta testing, surveys and participant observation to know what customers want in their products and how to implement the same. The introduction of cheap prices, exclusive content, the “Netflix Originals” category and by maintaining good customer relationship and service, Netflix was doing better than any of its competitors back then and now. The unique content and design of how information was given to the users made Netflix none like the others. The paper helps understand the various aspects that have to be looked upon for any Innovation to be Disruptive in terms of its developments, analytics and the start-up potential for a similar Innovation. Companies should utilize analytics to understand customer behavior in relation to past and current trends of an innovation and predict downtimes to enable smart management of customers and resources.

    Bibliography:

    1. Netflix. (2017). En.wikipedia.org. Retrieved 21 September 2017, from https://en.wikipedia.org/wiki/Netflix

    2. McAlone, N. (2015). The father of ‘disruption’ theory explains why Netflix is the perfect example — and Uber isn’t. Business Insider Australia. Retrieved 23 September 2017, from https://www.businessinsider.com.au/the-father-of-disruption-theory-explains-why-netflix-is-the-perfect-example-and-uber-isnt-2015-11

    3. The 5 Customer Segments of Technology Adoption. Retrieved from https://ondigitalmarketing.com/learn/odm/foundations/5-customer-segments-technology-adoption/

    4. Disruptive Innovation: How Netflix revolutionised the video market – SEIER CAPITAL Retrieved 25 September 2017, from http://www.seiercapital.com/disruptive-innovation-how-netflix-revolutionised-the-video-market/

    5. Handsontable – Why Outsourcing is Important for Your Startup. (2017). Handsontable.com. Retrieved 25 September 2017, from https://handsontable.com/blog/articles/why-outsourcing-is-important-for-your-startup

    6. Sweeney, D., Alton, L., Resnick, N., Oracles, T., Resnick, N., & Mehta, D. et al. (2016). How Cloud Computing Can Help Your Startup Company – StartupNation. StartupNation. Retrieved 26 September 2017, from https://startupnation.com/grow-your-business/cloud-computing-can-help-startup-company/

    7. success, H. (2017). How Netflix uses Big Data Analytics to ensure success – UpX Academy. UpX Academy. Retrieved 26 September 2017, from https://upxacademy.com/netflix-data-analytics/

    8. Rogers. Lecture 5.   Retrieved from https://blackboard.qut.edu.au/bbcswebdav/pid-6948457-dt-content-rid-9264135_1/courses/IFN502_17se2/502wk05_17%281%29.pdf

    9. Lecture.   Retrieved from https://blackboard.qut.edu.au/bbcswebdav/pid-6948457-dt-content-rid-9435480_1/courses/IFN502_17se2/502wk08_17.pdf

    Appendix 1: Infographic

Literature Review on Entrepreneurship and Risk

CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

The aim of this chapter is to develop the knowledge and understanding on the subject matter as well as providing the theoretical background for the study. Therefore, it is essential that a desk review be made on previous studies focusing on the topic of the risk taking propensity among entrepreneur. The literature reviewed will include some relevant studies that were done in the past particularly those related to the issue of study. In addition, studies related to the general issue of entrepreneurship will also be reviewed to shed additional insight on the subject matter.

The chapter starts with the discussion on the concept of entrepreneurship with special reference to the entrepreneurial process and how entrepreneurs play their role in the process. It is then followed by discussion on the micro and small business sector in Malaysia in terms of the working definition and its importance to the national economy. Next, the definition of risk and its variants are discussed in greater detail. The chapter ends with the discussion of the literature related to risk taking propensity.

2.2 What is Entrepreneurship?

Entrepreneurship is a process universally connected with the founding of business ventures, acquiring or expanding an existing business. Entrepreneurs have been considered as bearers for risks and uncertainties in making business choices (Knight, 1921), and make innovations for new goods, new methods of production, new markets, and new types of industrial organization (Schumpeter, 1934). Hull, Bosley, and Udell (1980) concurred that entrepreneurs assumed risk with the intention to expand the business. Meanwhile, Brockhaus (1980) recognized entrepreneur as a manager or owner of a business who is not employed elsewhere. However, Cooper and Dundleberg (1987) defined entrepreneur as a person who either own or manage a business. While McClelland (1961) described an entrepreneur as a business manager who has the responsibility as a decision maker and takes responsibility for the decision made. From the above definitions, it can be concluded that an entrepreneur as the owner/manager of an MSME, in which he or she may not be a founder but not only has a responsibility to make decision and but also takes the risk and responsibility for the decision made.

Entrepreneurship endeavours involve gathering of productive resources in an attempt to begin a business enterprise with the expectation of providing a reasonable income to the entrepreneur or small business operators. These resources include manpower, equipment and tools, money, time and basic raw materials which may entail some risks in procuring it. For example, the risk of not getting basic raw materials as needed to produce the product or damage to the equipment and tools means losses to the entrepreneur. These resources, along with its associated risk, should be recognized and managed to minimize losses and to increase profits. The entrepreneurial process remains the same and the roles and nature of the entrepreneur are universal, regardless of industries. Hereditary risk exists in all the processes starting from the ideation, conceptualization, enterprise creation, commercialization and ending with the growth of the enterprise.

Moreover, all businesses in the world face risk regardless of its size, thus they have to identify, assess, manage and monitor the organization’s business opportunities and risks. The current business disappointments are usually caused by entrepreneur’s misjudgements, mismanagement of risk and changes in corporate governance requirements. There are also increasing stakeholder expectations for entrepreneurs to effectively manage all risks exist within an organization.

2.3 Micro, Small and Medium Enterprises (MSMEs)

Micro, small and medium enterprises (MSMEs) are and will continue to be the backbone of Malaysian economic growth. Undoubtedly, MSMEs contributes greatly to the economic strength in Malaysia. With the New Economic Policy introduced by government in 1971, Malaysian MSMEs were given the important task of hoisting new breed of Bumiputra entrepreneurs who would eventually grow into large business community in accordance with the social restructuring objectives of the policy. Definitely, the policy has been able to create MSMEs whereby 30% of the businesses are owned by bumiputras. As of Mac 2005, a total of 518,996 MSMEs were registered in Malaysia (Census of Establishments and Enterprises, 2005, Department of Statistics Malaysia). Most of the MSMEs are found in the service sector, accounting for 86.5%. They contribute 27.3 percent of total manufacturing output, 25.8 percent to value-added production, own 27.6 percent of fixed assets and employ 38.9 percent of the country workforce (SMIDEC, 2002). There are 192,527 establishments in the services sector and 186,728 (96.7%) of these are made up of MSMEs in Malaysia. Yusoff (2004) noted higher consumer spending and a record level of tourist arrival caused the services sector grew by 6.8% in 2004. Strong expansion in all sub-sectors with transport and communication emanated the growth in the lead at 8.4% followed by wholesale and retail trade, hotels and restaurants (7.1%) and finance, insurance, real estate and business services (6.5%). MSMEs have become one of the main drivers of economic growth as the industries contribute 32% to Malaysia’s gross domestic product (GDP), account for 56% of total employment and 19% of total exports of the nation in 2007 (SME Annual Report, 2007).

The definition of micro, small and medium-sized enterprises needs to be classified within the context of the country in which they operate, as typically, the concept varies according to country (Gunasekaran, Forker and Kobu, 2000). The criteria should include paid-up capital, shareholders’ funds, turnover, and number of employees or a combination of these. In Malaysia, National Small and Medium Enterprise Development Council (NSDC), (2005), defined micro, small and medium enterprises as firms employing 150 full-time employees with sales turnover less than RM 25 million. This definition covers the manufacturing including agro-based, services, primary agriculture and ICT.

In the past, there is no common definition of micro, small and medium enterprises (MSMEs) in Malaysia. Many agencies defined MSMEs differently according to their own criteria based on annual sales turnover, number of employees or shareholder. However, National Small and Medium Enterprise Development Council (NSDC) 2005, defines MSMEs across economic sectors. Bank Negara Malaysia defined MSMEs as enterprises with shareholders funds of less than RM10 million. Meanwhile, the Small and Medium Industries Development Corporation (SMECorp) defined MSMEs as enterprises based on the annual sales turnover not exceeding RM25 million and number of full-time employees not exceeding 150. The criteria used in defining MSMEs are based on annual sales turnover and number of the MSMEs as postulated in Table 2.1 below.

Table 2.1: Definitions of MSMEs in Malaysia

Category

Micro-enterprise

Small enterprise

Medium enterprise

Manufacturing (including agro-based) and MRS

No. of full-time employees:

Less than 5

Annual Sales Turnover: Less than RM250,000

No. of full-time employees:

Between 5 and 50

Annual Sales Turnover: Between RM250,000 and less than RM10 million

No. of full-time employees:

Between 51 and 150

Annual Sales Turnover: Between RM10 million and RM25 million.

Services, primary agriculture and information and communication Technology (ICT)

No. of full-time employees:

Less than 5

Annual Sales Turnover: Less than RM200,000

No. of full-time employees:

Between 5 and 19

Annual Sales Turnover: Between RM200,000 and less than RM1 million

No. of full-time employees:

Between 20 and 50

Annual Sales Turnover: Between RM1 million and RM5 million

Sources: National Small and Medium Enterprise Development Council (NSDC), (2005)

2.4 Risk

Risk become popular in the economics field in the 1920s and started to be the main focused in the academic discipline. Thus, the definition of risk has been extended within the area of decision making by various field of literature in management, environmental, insurance and psychology. Risk and its elements’ definition is complicated and multifaceted which is viewed and considered differently depending upon the taxonomy that an individual utilizing it. Generally, risk refers to uncertainty concerning the occurrence of a loss (Redja 2005). Yates and Stone (1992) defined risk as the degree of uncertainty and potential loss which may follow from a given behaviour. Risk is also defined by Greene (1962) as the “uncertainty as to the occurrence of an economic loss” and, “measurable uncertainty” (Knight, 1921) or “objectified uncertainty regarding the occurrence of an undesirable event” (Willett, 1951).

Apart from the dissimilarities in defining risk, two common themes are about uncertainty and loss. According to Crowe & Horn, (1957), the term probability may have the connotation of likelihood to specific persons as compared to probability to others. This feel of unpredictability of the actual results of a method contrary the possible expected outcomes introduces objectives suspicion about the outcome in a given circumstances (Williams & Heins, 1964). Once the event occurred, the differences can be measured in the actual versus expected outcome of an action but differs from the incidence of an unwelcome contingency (Althearn, 1962). Consequently, there is variability in the connotative definitions of risk between persons, society and ethos despite several general academic accords concerning the fundamental of risk.

In addition to the facets of uncertainty and loss, there is the constituent of the future time component in the likelihood, predictive, possibility of risk. The multitude of descriptions of risk is due to the lack of agreement by scholars and the nature of risk itself. The word of uncertainty may be unique to a particular actor if the word of uncertainty refers to the component of risk and uncertainty as a state of mind of the individual processing the risk. Besides uncertainty, risk involves loss, or something that is undesirable. Loss may be more than financial or economic. Crowe and Horn (1957) defined loss as an involuntary reduction in the capacity of an entity to satisfy its wants. Therefore, it looks that scholars have disagreements in separating an individual’s awareness, perception and attitude from the general concept of risk.

Entrepreneurial Risk

The entrepreneur is a risk taker and is prone to assume business risks. Any error in making business decision is a probable source of threat or opportunity in assuring the success of the business. The distinctiveness of entrepreneurs businesses, rivalries and the tight economic situations has obligated the entrepreneurs’ capability on predicting the business risks. Busenitz (1999) noted the basis of risk is that …“the dominant theme running throughout the entrepreneurship literature is risk and how entrepreneurs are predisposed towards risky alternatives or how the should manage risk” (p. 325). However, this statement contradicts with McCarthy (2000) statement on the risk that “…the risk construct dominates the literature on entrepreneurship and the ability to bear risk has been identified as the primary challenge facing entrepreneurs” (p.563).

Furthermore, Klein (1977) has summarized that the capacity to take risk as being an inherent attribute of the entrepreneurial venture as stated that if an entrepreneur is to profit from an unexploited potential, he must also inevitably deal with a greater degree of uncertainty.

Business risks occur from uncertainty about the future and the effect of current judgements, therefore business choices need to consist of an assessment of their outcomes and the possibility that the outcome may differ from expectation. Entrepreneurs confront the problem that the sum of tolerable risk is based on likelihood of unconstructive outcomes and reward is often comparative to the amount of risk taken. Bird (1989) differentiates risks to five types which four of them are clearly pertinent to any potential entrepreneurs such as economic risk, risk in social relations, risks in career development, psychological and health risk. The general concept of “risk” has been broken into several dimensions by several authors (see for example, Assael, 1981; MacCrimmon and Wehrung, 1986; Minkowick, 1964; Mowen, 1987; and Robertson, Zielinski and Ward, 1984). These include financial risk, physical risk, social risk, professional risk, performance risk, opportunity cost risk and time risk. Meanwhile, Carroll, Siridhara and Finchman (1986) used the Atkinson’s model (consumer model of risk perception) which resulted in a six dimensions to define risk among entrepreneurs as the decision to become an entrepreneur involves consumer risk. The dimensions included in the model are financial risk, social risk, psychological risk, performance risk, safety risk and convenience risk.

However, Harrington and Niehaus, (2004) noted that in business several types of risks are present and can be applied to entrepreneur business decision making such as price risks, credit risks and pure risks. Price risks include market risks associated to the victory of the business plan, demand for the product, and issues of cost and price which include output price and input price risks. Romano et al, (2001), includes price risk to business-related financial risks involving credit, cash flow, foreign currency and working capital. Every business risks are not monetary, yet, a good deal of risk is inherent in companies and operations itself. It can be concluded that many of these risks resulted from pressures related to company growth, company culture and information management.

Other type of business risks is credit risks. Credit risk is a chance and magnitude of financial loss involved in the spending of money. To quote Harrington and Niehaus, (2004), on the credit risk of the business risk:

“The risk that a firm’s customers and the parties to which it has lent money will delay or fail to make promised payments is known as credit risk. Most firms face some credit risk for account receivables. The exposure to credit risk is particularly large for financial institutions, such as commercial banks, that routinely make loans that are subject to risk of default by the borrower. When firms borrow money, they in turn expose lenders to credit risk (i.e., the risk that the firm will default on its promised payments). As a consequence, borrowing exposes the firm’s owners to the risk that the firm will be unable to pay its debt and thus be forced into bankruptcy, and the firm generally will have to pay more to borrow money as credit risk increases” (p.5).

Raghavan, (2005) noted that Probability Default (PD) and Loss Given Default (LGD) were used to measured credit risk and default percentage is quite high in SME sectors as compared to the large corporate or entity.

Finally, pure risk is another type of business risks. These risks affect business due to reduction in value of business assets such as wreck or demolition of construction, equipment, inventory, business records, or other property; recovery and replacement costs after fires, flooding, typhoon or other disaster; and loss of income during recovery. Pure risks also involve company losses due to shipping damages or losses occurring because of crimes such as misappropriation or robbery. Entrepreneurs face a range of pure risks that must be controlled and managed lest they endanger the future of the firms. This pure risk also includes legal liability for damages for harm to customers, suppliers, shareholders and also injury to employees resulting from accidents, harm product, professional malpractice, inappropriate business practices and mistakes or omission. Another type of pure risk is the risk which associated with paying benefits to injured workers under workers’ compensation laws including the risk of legal liability for injuries or other harms to employees that are not governed by workers’ compensation laws. Finally, the risk that the businesses agreed to make payments under employee benefits plans due to death, illness and disability to employees (Harrington and Niehaus, 2004). The figure below shows the major types of business risk.

Figure 1: The Major Types of Business Risk

Source: Harrington and Niehaus, 2004

Liles, (1974) recommended that new venture entrepreneurs, involved financial status, career opportunities and psychosocial health. The new venture also will face strain and loss of family and social relations. The private monetary risk that the entrepreneur perpetrates from a failed business can affect the major losses to the entrepreneurs, resulting in a lower standard of living. Liles (1974) also suggested that the potential entrepreneur is well counselled to analyze carefully the risks associated with his specific business proposal and then make a decision to undertake them because the financial and emotional consequences of failure could be devastating. Liles then concluded that the decision depends to a great extent upon the potential entrepreneur’s perception of the risk involved.

Raghvan, (2005), specify the risks to SME sectors include the following:

  1. Constitution of business entity involves the constitution to be risky due to lack of professionalism and overdependence on one or two key person in deciding the important part in running the business. The decisions made will affect the success or failure in establishment and advancement of the business.
  2. Leverage on financial structure occurs when the business entity limits the funds mobilisation efforts that a small and medium business enterprise can raise capital and borrow.
  3. Tough competition and inadequate margin resulted from competition with bigger business, whereby a small and medium business enterprise face the pressure on the margin as they have to absorb according to bigger enterprise price as they cannot raise their price.
  4. Low collection in account receivable gives effects to the strain on the liquidity position of the SME sector and may be the result of bank restricted their exposure to the sector.
  5. Incapacity to go for technology advancement to help the sector optimized their available resources in the best way is because of little financial resources and poor ability for leveraging the financial structure.
  6. High employee turnover in the small and medium business enterprise because of limited of growth prospects includes the possible loss of manpower and additional costs in the form of training and knowledge update that will results the operation continuity and lowering the productivity.
  7. Micro finance which provided credits to small enterprise as to improve the standard of living will covered them under social entrepreneurial activities. Doubtfully, the risk of the lenders will be spreading under the sector. The approach of micro enterprise finance is through repayment incentive structure, streamlined administration and market based pricing adopting profit which leads to great transform in a cumulative causation triggered by credit to MSMEs.
  8. Collateral Security exists when dealing with lenders and borrower particularly to banks. Banks would not on detailed investigation and analysis of borrower’s business as they already have the protection which will reflect of credit-worthiness to lenders.
  9. Bank lending to MSMEs is considered as the primary source of external finance to support the sector’s growth in the country. Business owners have knowledge on the prospects of venture and risk facing their business than lenders that will set in the information asymmetry. The existence of information asymmetry makes the lenders respond by increasing lending margins to levels in excess of that which the inherent risks would require. Besides, banks also curtail the extent of lending and resort to what is known as Credit Rationing, notwithstanding the fact that MSMEs would be willing to pay a fair Risk Adjusted Cost of Capital.

2.6 Risk Taking Propensity

The study of decision making behaviour categorized the risk into three elements: risk perception, risk propensity and preparedness to take risk (Brindley, 2005). Brockhaus (1980) defined risk propensity:

“The perceived probability of receiving the rewards associated with success of a proposed situation, which is required by an individual before he will subject himself to consequence associated with failure, the alternative situation providing less reward as well as less severe consequences than the proposed situation.” (p. 513)

Risk taking also can be defined as one of the three dimensions of entrepreneurial orientation of a company and refers to the readiness of the organization to consign significant resources to opportunities that might be uncertain (Junehed and Davidsson 1998). Sitkin and Weingart (1995) defined risk perception as a subjective interpretation of expected loss which affected by individual’s view of the uncertainty of the decision and the consequence of the decision. Meanwhile, risk propensity is usually defined as an individual’s general tendency toward either taking or avoiding risk within a particular kind of decision context (Sitkin and Pablo, 1992). Risk propensity is a common tendency to accept or avert risks (Sitkin and Weigart, 1995). Summary of past trend of the selected research in risk propensity have produced mixed conclusions is tabulated in Table 2.1 (p. 23). Some studies have indicated no significant differences in risk taking propensities among entrepreneurs.

Risk propensity and risk perception influence risk taking. Risky decisions will be made when the situations of high risk propensity and low risk perception. Therefore, risk-taking initiatives should be more necessary in order to achieve good results in hostile markets. Or, in other words, business owners or managers who dare to take more risks take actions that are more suitable and perform better.

Abby and Slater (1989) noted that organization which has an international vision, favorable perception and attitudes toward international business, is willing to take risk and has the capacity to engage positively in international business activities is likely to lead a company to business success. In line to minimize risks, entrepreneurs are required to identify which variables influence their business performance. If they have a higher risk-taking propensity, they positively affect the business performance.

Begley, (1995) defined risk-taking propensity as the willingness to take moderate risks. This means that when entrepreneurs faced with different situations, they will probably show different risk propensities. At the same time, different entrepreneurs faced with the same situation may present different risk propensities. Entrepreneurs are willing to accept the unknown. They are distinctively able to start and orchestrate events that have risk consequences (Mitton. 1989). Entrepreneurial study, yet, propose that successful entrepreneurs are moderate risk-takers (Bridge, O’Neil, Cromie, 1998). Douglas and Shepherd (2002) found that those with a greater risk acceptance had stronger levels of entrepreneurial intention.

McClelland (1961) found that individuals would have moderate propensities to take risk if they have high achievement needs. However, Liles (1974) argued that entrepreneurs frequently have to adopt uncertainty with respect to financial well-being, psychic well-being, career security and family relations. Group’s risk propensity could be influenced by various variables. Among them was characteristic of the group as suggested by Sitkin and Pablo (1992) that outcomes associated with prior risky decisions can influence risk propensity, with more positive outcomes leading to greater risk propensity. Prediction by people that groups with higher levels of collective efficacy (Gibson, McKeon and Ostrom, 2000) could have greater risk propensity because they feel more capable of handling problems that arise. Also, groups with more ambitious goals or groups that compete closely with other groups may have greater risk propensity because risk taking is necessary for their success. The environment was another variable that may also play a role in the risk propensity of groups. For example, the group may have greater risk propensity if risk is valued in a group’s social environment (Stine-Cheyne, 2002). According to Moreland & Levine, (1992), the group may have a greater risk propensity because it has less fear of failure if a group expects outsiders to provide help when it is needed. And when the consequences of failure are smaller, a group may be more willing to take more risks. This relationship may be moderated, however, by the availability and value of outside help.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

Researcher(s)

Sample

Place

Instrument(s)

Results

Brockhaus and Nord(1979)

New founders (N=31), newly promoted managers (N=31), and newly hired managers (N=31)

United States

Choice Dilemmas Questionnaire (CDQ)

No significant differences in risk taking propensity of the three groups.

Brockhaus (1980a)

New founders (N=31), newly promoted managers (N=31), and newly hired managers (N=31)

United States

CDQ

No significant differences in risk taking propensity of the three groups.

Sexton and Bowman (1983)

Entrepreneurship majors (N=61) and non business majors (N= 113)

United States

Jackson Personality Inventory

(JPI)

Personality Research Form E

(PRF-E)

CDQ

Entrepreneurship majors higher in risk taking

Sexton and Bowman (1984)

Entrepreneurship majors (N=45) , business majors (N=75) and non business majors (N= 98)

United States

JPI

PRF-E

Entrepreneurship majors higher in risk taking

Schwer and Yucelt (1984)

Owners and small business managers (N=71)

CDQ

No differences in personal risk; other risks mitigated by age and education

Masters & Meier (1988)

Male and Female owners/owner-managers and managers (N=50)

United States

CDQ

No significant differences in risk taking propensity neither between owners and managers nor between males and females owners.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Instrument(s)

Results

MacCrimmon and Wehrung (1990)

Business owners and Executives

Canada

CDQ

-The greater success was related to greater risk taking.

-Education was also found to be related to risk taking.

-Age, seniority, number of dependents was inversely related to risk taking.

Carland, J.W., III, Carland, J.W., Carland, J.A & Pearce, J.W. (1995)

Entrepreneurs (N=114), Small Business Owners (N=347) and Managers (N=387)

South Eastern United States

JPI

– Older respondents explained a lower of risk taking propensity than the younger.

– Respondents with higher level of education had higher propensities for risk taking,

– Female exhibited a lower level of risk taking propensity compared to male.

Begley (1995),

Business executive (N=239)

New England

JPI

failed to identify whether the level of entrepreneurial risk taking was

low, moderate, or high.

Koiranen, Hyrsky and Tuunanen (1997)

Entrepreneurs, Small business owners and managers (N=1000)

India, Turkey and United States

JPI

-Americans were more inclined to assume risks.

-Finnish entrepreneurs, small business owners and managers were more risk averse than Americans.

-Americans males have a higher scores than Finnish males

-No significant difference between female US entrepreneurs, small business owners and managers and their Finnish female counterparts

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Place

Instrument(s)

Results

Stewart, Watson, Carland and Carland (1998),

Students (N=206)

United States and Rusia

JPI and CDQ

– CDQ failed to measure the construct of risk taking in the investigation.

– JPI was more successful; however, it has components which may not be well matched for measuring entrepreneurial risk taking.

Hyrsky and Tuunanen (1999)

Entrepreneurs, Small business owners and managers (N=1000)

Finland and United States

Carland Entrepreneurship index (CEI)

American had greater risk taking propensity.

Forlani and Mullins (2000)

CEO of the firms (N=540)

United States

Risk Style Scale

Differences in risk propensities among entrepreneurs on their new venture choices.

Petrakis (2005),

Small Businessmen of SMEs (N=120)

Greek

13 risk measures by author.

Risk propensity affects the way entrepreneurs decide to finance their venture and also affects the first performance principal component which includes the risk undertaken and the profit rate.

Leko-Simic and Horvat (2006),

Croatian exporters (N=300)

Croatia

5 point Likert scale

There is significant difference between ‘risk taking’ and ‘non-risk taking’ but do not have a very high risk-taking propensity when doing business internationally.

Shivani, Mukherjee and Sharan (2006)

Small Entrepreneurs (N=200)

India

Risk Attitudes Inventory designed by Gene Calvert (1993)

-A substantial proportion of respondents have low level of risk taking propensity.

-No differences between male and female respondents.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Place

Instrument(s)

Results

Ozturk and Hancer (2006)

Middle level hotel managers (N=106)

Turkey

Zalaskiewicz (2001) risk scale

There was no significant relationship between the risk items and corporate entrepreneurship.

Walker, Geddes and Webster (2006)

Small business owners (N=1600)

Western Australia

Measures by author

-Some gender differences with women being more emotionally risk averse than their male counterparts.

-Younger people, irrespective of gender were more emotionally and financially risk averse compared to older people.

– There were differences between gender and age cohorts in regard to initial business start-up motivation.

Nieuwenhuizen and Groenewald (2006),

Owners of SMEs (N=50)

South Africa

Neethling Brain Instrument (NBI)

-The majority of the identified successful, established entrepreneurs did have a strong tendency towards creativity and propensity for calculated risk taking.

Naldi, Nordqvist, Sjoberg, Wiklund, (2007)

CEOs of the SMEs firms (N=2455)

Sweden

Entrepreneurial Orientation.

-Risk taking is a distinct dimension of entrepreneurial orientation in family firms and that is positively associated with proactive ness a

Improving Profits at Kinky Boots Co

Introduction

The present paper discusses the actual needs for developing the kinky boots company, here the innovations and ideas of the 4th generation Steve Pateman’s Kinky Boots story based on the WJ Brooks of Earls Barton’s family business. The kinky boots company previously known as W J Brooks and Co is a shoemaking firm in the village of Earls Barton, near Northampton. This company has been making shoes for over 100 years. It was founded in the year 1889 with 80 people but in the meanwhile due to economic (cheap) foreign imports, and the strong pound value, sales have been collapsed and the company lost money. They used to pay the money but had no work for the employees (David Gritten, 2005). In the year 1998 the work force was almost halved and Steve felt heavy responsibility for the remaining 30 people and so he has taken his drastic steps towards his family business. The desperate and reluctant owner inspired by an outrageous drag queen to change his product to fetish footwear for transvestites. The present paper mainly discuss about the analysis made on which strategy will yield better profits for the kinky boots company.

Literature review:

Organizational issues:

For a new emerging organization which is of exposed firm, fluid units retrain comparatively employees and few managers as well as non-central functions contracted exterior to the organization. Such a rising organizations will be definitely focus on improving their significant competencies as well as designing techniques and innovative process which are considered as a part of the organization with the exception from its competition. Further the growth in the manufacturing industry has been motivated by improvement in technology and degree of difference in wage scales. These areas have made the organizations like kinky boots consider them as an element of the incorporated global economy.

Organization has to address (solve) some organizational issues to operate organization effectively. There are four target issues to be focused to solve the problems associated with the kinky boots.

Strategic issues: The organizations have to decide what services or products they will provide in the markets and in which they will compete as well as how to relate (or communicate) with their environment and how to transform them to keep pace with changing conditions. These issues are crucial among the various organizations in today’s changing and highly competitive market environments (Thomas& Christopher, 2008).

Structural and technological issues: organizations have to make proper decisions on dividing the work into departments and proper guidance to the coordination among the departments to give support for the strategic directions. They should also make some suggestions on how to deliver their services and products to link customers to the tasks.

Human process issues: These particular issues will deal with the social processes taking place among the organizational members. These issues may include decision making, communications, group dynamics and leadership etc.

HR (Human Resource) issues: These HR issues are concerned with the attracting the competent (or capable) people to the organization including rewarding and appraising their performance levels, setting goals for them and ensuring that they manage stress and develop their careers to achieve success (Thomas& Christopher, 2008).

1. Strategic changes:

These strategic interventions will alter the internal functioning of the industry to the larger environment and converts the firm to keep pace with the changing competitive conditions. These changing conditions should be brought to the industry to achieve a fit between the business strategies.

Integrated strategic change: it describes about the changing plans required to make a value added contributions to the strategic management. This strategic change also argues that the organizational system and the business strategies should be changed together in response to internal and external interruptions. The best strategic change plan may help the team workers/ members to transition between the organization design and the current strategy towards the strategic directions.

Organization learning and KM (knowledge management): organization learning will explore the organization capacity to develop and to acquire the new knowledge. Whereas the knowledge management evolutes how knowledge can be used and organized to develop the performance of an organization. These strategies will solve the existing problems to become capable of maintaining the improvement.

2. Techno structural changes:

The changes could be done based on the technology (ex: job design, task methods) and the structure (ex: hierarchy, division of the labor). These changing methods will spread its lights on current concern on organization effectiveness and productivity.

Structural design:

This changing process deals with the firms division of labor and the traditional ways to divide the organizational overall work in between the appropriate organizational structures, conditions and technologies.

Downsizing:

This approach will minimize the number of the employees to reduce the costs and bureaucracy through outsourcing, redesign and personal layoffs. Each and every method for this downsizing should be planned with the clear estimations and understandings of the organization strategies.

Reengineering: This recent phenomenon redesigns the organization core work procedures to create best coordination among the various tasks. This process of workflow will yield more responsive task with higher performance. It is also accomplished with the new IT (information technology) that allows employees to coordinate and control the work process more effectively.

3. HR management changes:

These changes may include employee selection, placements, career developments, performance appraisals; focus on people in organization for incorporating the employees into an organization.

Goal setting: this approach involves with the setting challenging and clear goals to develop business efficiency by setting up the best fit in between the organizational and personal objectives. To inculcate this change process the subordinates and the managers should make certain plans to solve the existing problem in achieving the organization success.

Performance appraisal: This is the primary human resource management for the performance feedback to evaluate individuals or workgroups with the systematic approach of assessing the work related achievements, weakness and strengths of an employee.

Reward systems: This process of reward system will enhance the employee performance and satisfaction. It may include promotions, incentives, fringe benefits etc.

4. Human process changes:

Human process changes particularly deals with the group decisions, problem solving, leadership qualities and communication. These sorts of approaches should be applied in an organization to expect the enhanced functioning of the people and organization process.

Process consultation:

It assists the group members to analyze the appropriate solutions to solve the problems associated with the organization. Problems may include poor communication, dysfunctional conflicts and ineffective norms. It also helps the team members to acquire the knowledge and skills to process the problems.

Third party interventions:

This intervention changes may come from substantive issues like interpersonal issues (miscommunication), disputes over the work etc. hence the third party may interrupt and helps them to resolve their problems through probing, conciliation and by bargaining.

Team building: This team building may include strategies and member roles for performing tasks. In addition to this inter group relations, large group interventions and organization confrontation meetings will also address the problems.

Manufacturing organizational issues:

According to the Skinner (1969), the manufacturing strategy issues should pay its attention towards the operations, productions and even in the strategic management fields. Schroeder et al., (1986) have given their definitions on manufacturing strategy as a long-standing plan of manufacturing function to go with the overall strategy of the firm. Some other studies considered that the manufacturing strategy as diversify perspectives of strategic planning. Sweeney (1991) treated manufacturing strategy as a specific field of strategic management. However, Cerwin (1993) summarized that the defined manufacturing strategy and diversify disciplines as a decision-making procedure whereby an organization can lead its mechanized activities based on a strategic perspective. Hence the manufacturing (production) strategy has become an innovative topic in the strategic management field.

Khandwalla (1974), in his research on the 79 American manufacturing companies originated that the most profitable firms are those which adjusted their structures according to their mass output orientation of the technology.

According to Adam et al., (1989), the main 4 priorities for the manufacturing organizations are flexibility, reliability, cost and quality. These are the key elements for the manufacturing strategy with the four types namely Marketer, care taker, Reorganizer and innovator.

Marketer: this strategy has to mainly focus on the customer needs and their satisfaction about the product produced.

Caretaker: it includes employee efforts and hard work to decrease the manufacturing costs.

Reorganizer: this strategy mainly concerns with the rethinking capability to fit their manufacturing strategy with the present market environment.

Innovator: this aspect deals with enhancement of employee or authority to improve their technological capacity to innovate their new products into the competitive environment.

W J Brooks and Co current situation:

The Kinky Boot Factory by the Richard manufactures the Divine varieties of erotic shoes for both Women and Men. This shoe company has been manufacturing the best and high quality products for the four generation in Northampton. In the year 1642, records illustrate that the Northampton’s staple industry made 600 boots, 4000 shoes for the army and further it continued to Oliver Cromwell’s army in the year 1648. Later in the year 1831 a third of all the men in the Northampton (England) were shoe makers which are mostly home workers. Aftermath commercial shoe manufactures were started with receiving finished shoes, and with packages and dispatches to the stores (Robin Wood, 2009).

Later the kinky boots is based on the family shoe business with 4th generation managing director Steve Pateman founded in the year 1889. Steve employed about 80 people. He had very well known most of his employers since Steve Pateman began efforts on its factory floor as a 17-year-old school-leaver. Steve continued to manufacture quality men’s brogues but suddenly like all the Northampton shoe production were in terrible straights due to heavy competition from strong pound hitting the export market and cheap imports. By the end of the year 1998, Steve had been enforced to cut his staff from 80 to 30 people but they were still in a struggling position. In addition to this problem he also faced another problem, rival boots and shoes from China (Eastern Europe) manufactured “with little craftsmanship, but at a fraction of his labor costs” (David Gritten, 2005, p.1).

A visit to kinky boots largest customers exposed that its “traditional market had been taken over by cheaper, lower quality, imported shoes” (Jim Stewart, 2010, p.1).

Gloomily Steve maintained the reduced workforce but then suddenly one phone call changed his life. In Folkestone, there was a shop containing boots and sexy lingerie, which is run by a lady. The boots are the favorites for cross dressers and drag queens, which are made thigh-high, colored red or black leather or PVC and the shoes should be of women with men’s sizes. Pateman recalled past as they did a lot of high heals as well as Beatle boots; for that he purchased a machine worth £12,000 which helps to put a 4 1/2 inch heal (David Gritten, 2005).

Sensing that there might be a productive niche market, Steve explore his potential customer base and created own designs. The main problem raised with other manufacturers were, they simply manufactured bigger size shoes to fit for the men. Based on the customer voices Steve simply made boots and shoes wide enough to men. Initially the interest of the customers as well as sales was good and hence Pateman determined to turn his entire shoe factory into manufacturing this particular specialized fetish footwear. From this point of time, W J Brooks would be well known for the Kinky Boot Factory. This peculiar smart move in the business changed the entire firm and kept the shoe factory workers employed (David Gritten, 2005).

Analysis on the issues faced by kinky boots:

This kinky boots company gives best example of how to develop a winning marketing strategy. The problems faced by the company are the fast changing and demanding world in which we operate. For example: attaining the best quality standards is different from “traditional business demands more of workers than has ever been done in the past” (Jim Stewart, 2010, p.1).

From the above literature kinky boots faced technological and structural issues, human resource issues, strategic issues and human process issues.

Technological and structural issues: Kinky boots downsized the employees working in the manufacturing unit from 80-30 people to cut back their costs.

Human resource management issues: the effective management and leadership qualities and good decision making strategies for the organization change made to learn the importance of the competencies required to lead the organization to achieve its aims and objectives.

Strategic issues: the drastic integrated strategic change from the management of kinky boots described, how planned change could make a best value added contribution to strategic management. This issue also illustrates about the organization learning (capability to develop a new knowledge) and knowledge management (application of the knowledge to improve organization productivity).

Human process issue: kinky boots did not face any disputes in between the employees but the change process and innovation from the Steve improved the functioning of the people and organizational processes.

Nowadays there is a drastic change in the business and economic environment, by which the firms are forced to be innovative in the way they perform their business and to fail or learn more. The key factors for the firms for their survival are Innovation and innovativeness. Relationships between Research and Development, marketing activities and a firm’s manufacturing strategy are made as the part of organization strategy, in order to examine the innovation-related issues by linking them with the firms. The innovation issues from the point of organizational perspectives have been clarified recently. For example, as per Senge (1990), one of the best ways to create competitive advantages is to build an organization which is based on continuous learning and enhancement. According to him, many aspects of an organization including, which includes even the manufacturing activities are also influenced by organizational learning. Some of the organizational factors like organizational structure, scale, and member of organizations are related to manufacturing strategy by Adam et al., (1989).

Kinky boots paid its attention towards the marketing activities by knowing the customer requirements and based on that he selected their manufacturing strategy and relatively it also focused on the development activities through innovation.

Pateman first taste of fame was from the BBC2 series which made a documentary about his foray into the world of kinky boots. It nearly attracted 4.3 million viewers and was repeated and publicized world-wide (BBC, 2000).

Nowadays kinky boots is well known for many countries and different countries are showing their interest especially in Steve’s product. Here the major problem he faced was getting the order of the sales so he prepared a mail-order catalogues to get the order of the samples into massive sales. Hence he could sell kinky boots directly to the customers.

Support of Information Systems to improve the organization’s future strategy:

Presently kinky boots is depending on their exclusive technical expertise with strong heel design and dramatic change in the manufacturing thought of kinky boots successfully created a new niche market by saving the Steve’s factory and the jobs of the employees. The company created out unique capabilities and the real strength in materials knowledge rather than their efficiently and ability to operate sewing machines (Paul Calver, 2009).

Information systems:

The major growth in the current economy is coming from the “information” industry. The success of the firms like kinky boots (knowledge based organizations) depends on the IS (Information systems). This IS requisite globalization of the market and some technological changes. Hence many of the manufacturing industries are placing their importance on the information systems. However this information system is playing a pivot role in the information and communication technologies in meeting the firm’s information needs (international graduate, 2010).

According to Kroenke, D M. (2008), this information system is a combination of people’s activity and information technology using the management, support operations and decision making. This term is broadly used to refer data and technology, people, process, and it also focus on the way in which people (employee) interact with this technology in support of business processes.

Information systems may be unsuccessful for a number of reasons. Some of the failure reasons of the information systems of the organization include complexity, communication, organization, leadership and technology. Failure can be summarized in four major categories: project management shortcomings, technical shortcomings, continuing information explosion and the organizational issues. Change management is the process of supporting different organizations as well as individuals in passing from an “old way of doing things to a new way of doing things” (Int J Med Inform, 2003, p.1). This sort of Change management created its innovations early in a technical process, and it necessitate for making major alteration starts at the conceptual level.

The result of many corporate decisions is that the shoes tend to be more expensive than its competitors. To offset this pricing difference, New Balance differentiates should be included in their products with blend of gel inserts, technical innovations, heel counters, and the best selection of sizes, particularly for very narrow and/or very wide widths.

Kinky Boots Company should launch the internet based order systems rather than mail catalogues. It would be the better option to globalize their market with the secured password site. This new order system should be available for 24 hours a day, 7 days a week. The management simply has to have a Personal Computer or laptop with the Internet access with Internet Explorer 3.0 (or above) version or Netscape and AOL 3.0 (or above).

Kinky boots can also continue its growth by following the latest designs to make ordering footwear from the different company’s major women’s brands than ever before.

For the good profits the kinky boots company can also engage in the provision of various branded, private-label casual, licensed, athletic, and dress footwear products to men, women and children.

It can be said that for an organization like kinky boots that using the information systems as a routine and commodity, the auxiliary functionalities are better managed by employing the skilled and shoe designers. Such a practice has always offered a positive result with enhanced performances, time saving and returning cost cutting in their activities because of having a combination of inadequate proficiency and considering the related costs (DiRomualdo, A., & Gurbaxani, V. 1998). As mentioned in the literature, it is true that for a newly emerging organization like kinky boots has to be exposed and as it contains newly employed graduates and small skilled team and the organization has to get contracted with other exterior organizations. Acting as a virtual company, kinky boots has to concentrate on how to improve its competitive edge. In these conditions practicing innovation and innovativeness is one among the competitive factor of the company, since growth in the local market will motivate the company to enhance its information systems along with the differential incoming scales. Such a footstep will make the business to believe them as a part of the global economy (Mullin, R. 1996). Hence inventing new designs for manufacturing, good decision making process and leadership qualities in an organization will definitely assist the business to enhance in all aspects (local market as well as in the global market).

Globalization aspect:

Kinky boots can also find its niche both in the local market as well as in overseas. For the globalization the kinky boots company should search for the vendor with same culture and values since will set up common interest and mutual understanding to make a successful relationship but this practice may not be possible all times because of the cost cutting and availability of employees over options based on the connections of culture (Gurung, A., & Prater, E. 2006). However, globalization is required for development of this kinky boots company as in the past they were not able to handle both work and life. So Patemen decided to downsize his employees and starts the work but as it is concerned with the financial aspect he went for globalizing the company requires both employers as well as machinery for the stitching.

There are also some benefits in globalizing the industry for its development. The main benefits for globalizing are as follows. The coordination and control of the marketing and promotional programs must be simplified. The kinky boots company initially has to concentrate on marketing for making expanding the business in UK. Exploring the great ideas, innovations for expansion in worldwide can result minimizing the planning and control cost for advertising. Globalization saves their money as well as the cost for advertising will be reduced. For making the company universal it must have good company image and brand name.

Importance of value chain for the kinky boots:

Kinky boots may get a good position in the market place by establishing a market based cost structure. Many manufacturing units will look at their products or final deliverable services but they are failing to notice real opportunities which could be a unique or strengthen capabilities embedded within their business processes, knowledge base or value chain. Recognizing these strengths is an important task while looking at the local market in terms of protecting the business position in the market. (IFM) The Cambridge University Institute for Manufacturing has developed different tools to assist companies in identifying the manufacturing opportunities in the manufacturing value chain. This report also suggests that the total value chain has to be considered while proposing the business. According to the Paul Calver, (2009), many of the UK companies considered this to increase their global competitiveness and they are also following the PETS approach Purchase, Establish Then Sell for their market entry. Hence the organization like kinky boots should follow the PETS approach as well as the tools from IFM to minimize its costs and to make progress on the productivity improvement tools.

IP protection plan (intellectual property)

This protection plan will give the business a real strength to create new opportunities and the new directions for the business. One of the main uncertainties of the companies emerging into the new markets will generally lose their IP. Hence the manufacturing business like kinky boots should support the improvement of IP protection plans to be taken as a part of their market entry strategy.

Recommendations

According to the above literature and analysis of the organizational issues of kinky boots, researcher found that those people are willing to change as per the requirements of the industry. Where as the issues they are facing are regarding high production cost due to pound value hitting export chances and cheap imported products from the global market. To overcome the above specified obstacles, they have to optimally utilize the man power and the resources where as to increase the productivity of the company. The kinky boots people should minimize the wastage of the goods at the time of production. They should make various sizes of kinky boots in order to reduce the wastage for men and women. By this, they will produce maximum merchandise with minimum production cost. They should use the Information systems (IS) in an organized way; in such a way that the product publicity should reach the targeted customers with less cost. They should employ a team of innovative people in order to design and produce new model shoes in such a way that they are affordable to the common people. Another responsibility of the innovative team should be designing high end shoes targeting right people, who care more about the design and quality but not about money. For every new model of shoes they made, they should have patent rights, which will help the company a lot. They should collect information from the public regarding the expectations of the people, feedback of their products from time to time. They need to consider all these issues in releasing the new model of shoes. They need to be globally competent i.e. they should think of expanding their business as they are well-known for kinky boots. They should use the foot wear exhibitions, expos for this purpose. Another aspect they need to think of is their marketing strategies. The marketing strategy should be in such a way that should increase the sales in an organized manner. They need to think of directly selling to customers by opening outlets. By that they can sell customers to a reduced price which will enhance the sales of the company.

Conclusion:

Kinky boots is the shoe making business firm run by a family’s fourth generation, which is formerly known as W J Brooks and Co. Steve Pateman is the present owner of the firm, 4th generation successor of the family of WJ Brooks. He worked in the firm from the age of 17 years as a school-leaver. He had good relations with the 80 people working for the company. Due to the less export orders hit by pound value and cheap global imports, he downsized his employees to 30. Once the phone call from a lady shop owner in Folkestone changed his life by placing orders for the kinky boots, a high heal shoes with men sizes. By that he completely changed as per the situation and made kinky boots as his firm’s key product. The present paper analyzed the organizational issues in detail for choosing a better strategy for the existing company. Distinguishing these strategies for the survival, expansion and growth of the company different strategies are required and recommended. It necessitate to employee a new team of innovative people by which the company’s productivity will be enhanced.

Tata Group Company Acquisitions Performance

In the current globalised economy, mergers and acquisitions are being progressively more used the world over, for increasing competitiveness of companies through gaining better market share, expansion of the portfolio to reduce business risk, to capitalize on the economies of scale and for entering new geographies, etc. This research study was intended to analyze the consequence of going global market through merger and acquisition and traders long and short term earnings. Thereby study the impact of mergers on the financials by examining some pre- merger and post-merger financial ratios, with the sample of firms chosen as three major mergers/acquisitions of TATA Group. The results put forward that there are small variations in terms of post merger financial performance of the joint firm is not considerably different from the aggregate performance of the acquirer and target companies before the merger.

Merger and acquisitions have emerged as chief forces in the contemporary financial and economic environment. They have been a source of corporate growth and in India, it has changed radically after the liberalization of Indian economy. Mergers and acquisitions came up as one of the most efficient methods of such corporate restructuring, and became an essential part of the long-term trade strategy of corporates in India.

The sole three chief objectives at the back any M&A transaction were found to be:

  • Improving Profitability
  • Rapid growth in scale and closer time to market
  • Acquirement of new technology

Many in corporate India would be jealous of the Tata Group’s strategy around mergers and acquisition. In the past 8 years, the Tata Group had made 35 overseas acquisitions, including coal and iron ore mines, adding up Rs 78,000 crore, mostly in the past 3 years.

Research problem

To examine the consequence of going global through mergers and acquisitions and the trader’s long term and short term earnings respectively. This would aid in studying the impact on companies financials past the merger or acquisition. To also determine the enterprise value of the corporation by comparing it with the peer group and studying the value of the firm

Objective of the study

  • To analyze the a thorough detailed case study of 3 companies of Tata Group who merged or acquired in the past years.
  • To evaluate the closing price of 3 companies previous to and post acquisition
  • To weigh up the key financial ratios of 3 companies pre and post acquisition
  • To do valuation of two companies through enterprise value and contrast the value with peer group and examine in detail

Review of literature

The following are the few existing studies reviewed which were conducted by researchers in the view of analyzing the financial performance during merger activity in different time periods.

The study entitled Effect of mergers on corporate performance in India, written by Vardhana Pawaskar (2001), studied the impact of mergers on corporate performance. It compared the pre- and post- merger operating performance of the corporations involved in merger between 1992 and 1995 to identify their financial characteristics. The study identified the profile of the profits. The regression analysis explained that there was no

increase in the post- merger profits. The study of a sample of firms, restructured through mergers, showed that the merging firms were at the lower end in terms of growth, tax and liquidity of the industry. The merged firms performed better than industry in terms of profitability.

Mansur.A.Mulla (2003) in his case study Forecasting the viability and operational efficiency by use of ratio analysis: A case study, assessed the financial performance of a textile unit by using ratio analysis. The study found that the financial health was never in the healthy zone during the entire study period and ratio analysis highlighted that managerial incompetence accounted for most of the problems. It also suggested toning up efficiency and effectiveness of all facets of management and put the company on a profitable footing.

Pramod Mantravadi and Vidyadhar Reddy (2007) in their research study Mergers and operating performance: Indian experience, attempted to study the impact of mergers on the operating performance of acquiring corporate in different periods in India, after the announcement of industrial reforms, by examining some pre- and post-merger financial ratios, with chosen sample firms, and all mergers involving public limited and traded

companies of nation between 1991 and 2003. The study results suggested that there are minor variations in terms of impact on operating performance following mergers in different intervals of time in India. It also indicated that for mergers between the same groups of companies in India, there has been deterioration in performance and returns on investment.

A book entitled Mergers & acquisitions in the banking sector- The Indian scenario, written by Selvam. M (2007) has analyzed the implications of stock price reactions to mergers and acquisitions activities taken place in banking industry with special reference to private and public sector banks. The author has found from the analysis that the share prices are market sensitive. From the financial analysis it was observed that majority of the banks went for branch expansion and this has affected profitability to some extent and it resulted in unhealthy competition among the players.

To sum up the review of literature, many contributions have offered different perspectives of merger in different industries worldwide and explained the valuation techniques followed by merging companies, and shareholders wealth effect due to merger. From the review of many excellent research papers analyzing the pre and post merger performance of merged companies, it is inferred that majority of the studies strongly support the concept of enhanced post merger performance due to merger and it is beneficial to the acquirer companies.

METHODOLOGY

Methodology of the study

Sample selection

There are several mergers within the TATA Group during the study period from

01.04.2006 to 31.03.2009. For the purpose of corporate analysis, it was decided to select two of the highest deals which merged within under the TATA Group during the study period. Hence, the sample size of this study is confined to 2. Besides, while selecting the sample, following points were taken into account.

  • Acquirer and target companies should belong to the same industry.
  • Availability of merger date and industry information.

The details of sample companies, (Acquirer and Target), along with the date of merger and name of the Industry concerned are given in Table 1.

Period of the study

For the purpose of selecting sample companies, the present study covers a period of one year from April 1, 2006 to March 31, 2009. But in order to evaluate the financial performance of sample companies on a comparative basis, 15-20 days before merger and after merger were considered.

Sources of data

The present study basically depends on secondary data. The required data on financial performance before and after merger were collected and they were obtained from Prowess software, Internet sources, Business Journals (ICFAI JOURNAL ON M & A)

The data were also collected from books, journals, magazines and newspapers.

Tools used

In order to study the liquidity performance of acquirer and target companies, ratios Debt-Equity Ratio, ROCE (%),net profit margin, P/E, EPS, OPM(%) and valuation.

(1) Analysis of financial performance

Empirical tests were carried out on the collected financial data with the help of ratio analysis, t-test and standard deviation. The pre-merger average performance of the acquirer and target companies were compared with the post- merger performance of the combined firm. The present study attempts to measure and analyze the pre and post merger performance of acquirer and target companies by using financial ratios in order to ascertain whether mergers resulted in shareholders wealth or not.

Accordingly, the following null hypothesis has been tested:

H0: The post merger financial performance of the combined firm is not significantly different from the aggregate performance of the acquirer and target companies prior to the merger.

(2) Ratios

Debt-Equity Ratio : A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.

ROCE : ROCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing

Net profit margin: The profit margin tells you how much profit a company makes for every1 Rupee it generates in revenue or sales. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better.

P/E: It is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.

EPS: The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.

OPM: Operating margin is a measurement of the proportion of a company’s revenue that is left over after variable costs of production such as wages, and raw materials have been paid. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Also known as operating profit margin and net profit margin.

(3) Enterprise Value

Enterprise value is a figure that, in theory, represents the entire cost of a company if someone were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market capitalization because it takes includes a number of important factors such as preferred stock, debt, and cash reserves that are excluded from the latter metric.

ANALYSIS OF DATA

TATA GROUP OF COMPANIES

One of the India’s largest business groups in the country. It has about 96 operating companies. Diverse business in 7 sectors. Revenues equivalent to 5.3% of India’s GDP. Group revenue FY 2008: Rs 251,543 Cr. / $ 62.5 b. Group profit FY 2008: Rs 21,578 Cr. / $ 5.4 b .Its 27 publicly listed companies have a combined market capitalization which is the 2nd highest among all business houses in India. Largest employer in private sector over 300,000 employees. A shareholder base of over 2.9 million. Operations in over 80 countries. Products and services exported to 85 countries

Tata is a rapidly growing business group based in India with significant international operations. Revenues in 2007-08 are estimated at $62.5 billion (around Rs251, 543 crore), of which 61 per cent is from business outside India. The group employs around 350,000 people worldwide. The Tata name has been respected in India for 140 years for its adherence to strong values and business ethics.

The business operations of the Tata group currently encompass seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals.

The group’s major companies are beginning to be counted globally.

Considering two of the largest mergers of TATA Group

-Tata Steel became the sixth largest steel maker in the world after it acquired Corus.

-Tata Communications is a leading global provider of a new world of communications. With a leadership position in emerging markets, Tata Communications leverages its advanced solutions capabilities and domain expertise across its global and pan-India network to deliver managed solutions to multi-national enterprises, service providers and Indian consumers.

TATA STEEL-CORUS

About the acquisition

Date: – 30th March 2007

Acquirer: – Tata Steel Limited

Target company: – Corus Plc.

Stake: – 100 %

Deal amount: – US$ 12201 m

Sector: – Steel sector

MERGER

On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired the Anglo Dutch steel company, Corus Group Plc (Corus) for US$ 12.20 billion. The merged entity, Tata-Corus, employed 84,000 people across 45 countries in the world. It had the capacity to produce 27 million tons of steel per annum, making it the fifth largest steel producer in the world as of early 2007.

Before the acquisition, the major market for Tata Steel was India. The Indian market accounted for sixty nine percent of the company’s total sales. Almost half of Corus’ production of steel was sold in Europe (excluding UK). The UK consumed twenty nine percent of its production.

After the acquisition, the European market (including UK) would consume 59 percent of the merged entity’s total production.

DEAL : An auction was initiated on January 31, 2007, and after nine rounds of bidding, TATA Steel could finally clinch the deal with its final bid 608 pence per share, almost 34% higher than the first bid of 455 pence per share of Corus.

Synergies

There were many likely synergies between Tata Steel, the lowest-cost producer of steel in the world, and Corus, a large player with a significant presence in value-added steel segment and a strong distribution network in Europe. Among the benefits to Tata Steel was the fact that it would be able to supply semi-finished steel to Corus for finishing at its plants, which were located closer to the high-value markets…

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated, some analysts had doubts about the outcome and effects on Tata Steel’s performance. They pointed out that Corus’ EBITDA (earnings before interest, tax, depreciation and amortization) at 8 percent was much lower than that of Tata Steel which was at 30 percent in the financial year 2006-07

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

PRE-ACQUISITION

POST-ACQUISITION

FINDINGS

As we can see from the line chart that the %cumulative abnormal return before acquisition was sharply decreasing since past month with not even a single glimpse of positive return on any single day.

But as soon as the acquisition took place, the earnings showed a marginal rise and again got back to the level where it was just before the acquisition. This happened due to very large debt generated due to overpaying by acquiring the Corus at a very high price of 608 pence per share as compared to previously valued 455 pence per share.

RATIO ANALYSIS

TATA Steel (31st Jan 2007)

Pre-acquisition

Post-acquisition

Change ( %)

Debt-Equity Ratio

0.31

0.67

116.

ROCE (%)

50.13

23.27

-53.6

net profit margin

20.46

21.36

4.4

P/E

8.72

11.35

30.2

ROE(%)

41.7

25.97

-37.7

EPS

61.51

61.06

-0.7

OPM(%)

39.79

36.11

-9.2

INTERPRETATION

Debt equity ratio on post acquisition increase because Corus debt was high it was GBP1.6b to buy Corus and so its debt is almost 116% more than in pre acquisition. ROCE shows that post acquisition is very less as compared to pre acquisition it has negative percentage because company has short term returns after one year it will improve in the long run. Net profit margin has very less change as profit is not much affected. P/E increases in post acquisition by 30.2% which show high future cash flow. ROE is decreasing by 37.7 which show that it has more debt than equity. EPS has a very minor change. Operating profit margin is reduced by 9.1% which shows that it has low profit.

TATA COMMUNICATION-NTT DOCOMO

About the acquisition

Date: – 13th November 2008

Acquirer: – Ntt-Docomo

Target company: – Tata Teleservices Ltd.

Stake: – 26 %

Deal amount: – US$ 2700 m

Sector: – Tele-communication

MERGER

Tata Teleservices has sold a stake of 26% to Japan’s NTT DoCoMo. The deal value is $2.7 bn. Tata Tele has 30 million CDMA subscribers and is rolling out its GSM services. Some say the deal is over-valued and some say its not easy to put value on the fastest growing mobile market in the world. India is the fastest growing market second only to China. It adds 10mn subscribers every month. The current subscriber base stands at 300+million and is expected to be 700 million in 2012. That is almost double to today’s numbers.

The Road ahead

Great deal it may be, but it has its risks. One reason is that telecom deals have been controversial in recent times. This goes back to late last year when the government sold pan-India licenses for $333 million apiece, amid a welter of controversy.

DoCoMo, in accordance with regulations of the Securities and Exchange Board of India, expects to make an open offer to acquire up to 20 per cent of outstanding equity shares of Tata Teleservices Maharashtra (TTML), a Tata telecommunication company, through a joint tender offer along with Tata Sons. TTSL and TTML through the Tata Indicom brand, have increased their combined share of the fast-growing Indian mobile market and their combined subscriber base now stands at over 30 million.

TTSL expects to leverage DoCoMo’s expertise in the development and delivery of value-added services, where DoCoMo is a firmly established market leader.

RATIO ANALYSIS

TATA DOCOMO (13-11-08)

Pre- acquisition

Post- acquisition

Change (%)

Debt-Equity Ratio

0.11

0.14

27.27%

ROCE (%)

7.33

7.44

1.50%

net profit margin

9.55

10.61

11.10%

P/E

0

12

0

ROE(%)

11.14

10.97

-1.53%

EPS

0.89

1.11

24.72%

OPM(%)

16.2

18.7

15.43%

FINDINGS

Debt equity ratio on post acquisition debt is increasing which shows company debt is increasing after merger. ROCE is constant it has not change much.Net profit margin increases by 11.10 as it income increases in post acquisition as compared to pre acquisition. P/E highly increases in post acquisition from 0 to 12%. ROE is decreasing by 1.53% which shows that it slightly more debt than equity. EPS is increasing drastically by 24.27% which is very profitable for investors. Operating profit margin is increased by 15.43% which shows that company profit margin is very fairly profitable.

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

PRE-ACQUISITION

POST-ACQUISITION

INTERPRETATION

The return of the target company Tata Communication has been very poor since the past 15 to 20 days before the acquisition but it almost got to break-even soon after the acquisition date. This sustained for the next 8 to 10 days but again got back into negative returns zone due to poor customer support to the newly entered Docomo brand in highly competitive communications market in India.

TATA MOTOR – JLR

About the acquisition

Date: – 27th March 2008

Acquirer: – Tata Motors Ltd

Target company: – Jaguar Land Rover

Stake: – 100 %

Deal amount: – US$ 2300m

Sector: – Automotive

Detailed Case Study

In June 2008, India-based Tata Motors Ltd. announced that it had completed the acquisition of the two iconic British brands – Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. Tata Motors stood to gain on several fronts from the deal. One, the acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. After the acquisition, Tata Motors would own the world’s cheapest car – the US$ 2,500 Nano, and luxury marquees like the Jaguar and Land Rover. Though there was initial skepticism over an Indian company owning the luxury brands, ownership was not considered a major issue at all.

According to industry analysts, some of the issues that could trouble Tata Motors were economic slowdown in European and American markets, funding risks, currency risks etc.

The Challenges

Morgan Stanley reported that JLR’s acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR including the US and Europe. Moreover, Tata Motors had to incur a huge capital expenditure as it planned to invest another US$ 1 billion in JLR. This was in addition to the US$ 2.3 billion it had spent on the acquisition. Tata Motors had also incurred huge capital expenditure on the development and launch of the small car Nano and on a joint venture with Fiat to manufacture some of the company’s vehicles in India and Thailand. This, coupled with the downturn in the global automobile industry, was expected to impact the profitability of the company in the near future

CURRENT SCENARIO

In less than three years after its acquisition, Jaguar Land Rover has metamorphosed from a millstone around Tata Motors’ neck into its crowning jewel. In the June 2010 quarter, JLR division accounted for nearly 70% of the company’s net profit and over 60% of its revenues on the consolidated basis. This was more than what the market has expected and the stock is up by nearly 150% in the past two trading sessions.

JLR benefited from an improvement in its pricing power and a favourable exchange rate in the US dollar and the euro. The two worked in tandem and resulted in a sharp 60% jump in JLR revenue per unit to around £38,000 in June 2010 quarter compared to the £23,800 a year ago. With the raw material costs remaining benign, it led to a sharp improvement in the division’s operating margin and its reported net profit of £221 million (`1,613.3 crore) in the first quarter as against a net loss of £64 million (`467 crore) a year ago.

RATIO ANALYSIS

TATA MOTORS (27- 03 2008)

Pre-acquisition

Post- acquisition

Change (%)

Debt-Equity Ratio

0.56

0.97

42.27

ROCE (%)

30.52

6.88

-343.60

net profit margin

6.88

11.47

40.02

P/E

15.45

9.59

-61.11

ROE(%)

30.98

5.34

-480.15

EPS

47.1

18.81

-150.40

OPM(%)

11.16

7.89

-41.44

FINDINGS

Debt equity ratio is increasing by 42.27% as Tata took loan of banks to acquire JLR.ROCE increases vey high by 343.60% as compared to pre acquisition as it gauges that company that generate its earnings from the total pool of capital which indicates profitability.Net profit margin increases as it income increases in post acquisition as compared to pre acquisition. P/E highly decreases in post acquisition by 60.1% which in investor point of view they will be profitable to invest to get high earning. ROE is highly increasing by 480.15% which shows that it has more equity than debt. EPS is increasing drastically by 480.15% which is very profitable for investors. Operating profit margin is reduced by 41.44% which shows that company profit margin is very less.

COMPANY’S RETURN BEFORE AND AFTER ACQUISITION

PRE-ACQUISITION

POST-ACQUISITION

INTERPRETATION

As we can see from the line chart that the cumulative return before merger was negative and the entire trend is moving in the negative direction due to poor returns of tata motors.

A soon as the acquisition took place, the highly profit generating Jaguar as well as Land Rover added to the profit and earnings of the tata motors. The brand value of JLR added to the highly reputable Tata Group and the company’s balance sheet. This can be clearly seen in the line chart above.

VALUATION AND INTERPRETATION

EV Multiples of Tata Corus

Tata Steel and Corus Group deal happened at high multiples compared to its peers. We can observe that the average multiples of the peer group company stands half compared to the deal multiples.

Sales Multiple:

The average sales multiple of its peers is 1.17x compared to the deal of 0.68x of Corus Group’s sales. This can be possible due to high sales value, reducing the multiple to 0.68x. The lowest multiple (Steel Authority of India) is at 0.73x.

EBITDA Multiple:

EBITDA multiple of its peers averages at 4.38x compared to the deal multiple of 7.02x of Corus Group’s sales. Even the highest multiple (Jindal Steel & Power) is at 4.38x. This is almost half of the deal multiple. It can be observed that Tata played very aggressively.

EBIT Multiple:

EBIT multiple of its peers averaged at 5.54x compared to the deal of 10.19x of Corus Group’s sales. Even the highest multiple (Jindal Steel & Power) is at 8.39x.

PE Multiple:

The PE multiple of the deal is very high on the account that the margins of Corus are very low compared to Tata Steel and other peers. The average PE multiples is 7.95x compared to 68.23x at which the deal haapened.

EV Multiples of Tata NTT Docomo

The deal of Tata Teleservices and NTT Docomo happened at very high multiples. We can observe that the average multiples of the peer group company stands very low compared to the deal multiples.

Sales Multiple:

The average sales multiple of its peers is 5.37x compared to the deal of 26.98x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 9.24x. Thus we can conclude that Tata Teleservices got very good price for its stake dilution for NTT Docmo.

EBITDA Multiple:

Again the average EBITDA multiple of its peers is very less, 16.35x compared to the deal of 99.81x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 26.74x. This is a huge difference. NTT Docomo paid 6 times more what it should have paid to Tata.

EBIT Multiple:

EBIT multiple of its peers is 25.5x compared to the deal of 952.96x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 41.02x.

PE Multiple:

The PE multiple for Tata Teleservices is negative as its net income is negative

Note: The multiples are high on account that Sales and the profitability of Tata Teleservices is low, inturn giving very high multiples. Its sales stands at Rs. 1,815.5 Cr. compared to the average sales of Rs. 11,490.6 Cr. of its peers.

FINDINGS FROM VALUATION OF ENTERPRISE VALUE MULTIPLE

Tata Corus

Tata Steel and Corus Group deal happened at high multiples compared to its peers. We can observe that the average multiples of the peer group company stands half compared to the deal multiples. Even the highest multiple (Jindal Steel & Power) is at 4.38x. This is almost half of the deal multiple It can be observed that Tata played very aggressively as it paid high enterprise value as compared to our analysis. A reason for Corus to be sold is chance to Bail out of Debt and Financial stress. TATA Steel Paid 7.02 Times EBITDA of Corus Enterprise Value. The PE multiple of the deal is very high on the account that the margins of Corus are very low compared to Tata Steel and other peers the only company who has high P/E is Jindal steel.

Tata NTT Docomo

The deal of Tata Teleservices and NTT Docomo happened at very high multiples. We can observe that the average multiples of the peer group company stands very low compared to the deal multiples. The average sales multiple of its peers is 5.37x compared to the deal of 26.98x (as on 31st March, 2008) of Tata Teleservices’s sales.

Even the highest multiple (Reliance Communication) is at 9.24x. Thus we can conclude that Tata Teleservices got very good price for its stake dilution for NTT Docomo. The PE multiple for Tata Teleservices is negative as its net income is negative. EBITDA multiple of its peers is very less, 16.35x compared to the deal of 99.81x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple (Reliance Communication) is at 26.74x. This is a huge difference. NTT Docomo paid 6 times more what it should have paid to Tata. The multiples are high on account that Sales and the profitability of Tata Teleservices is low, in turn giving very high multiples. Its sales stands at Rs. 1,815.5 Cr. compared to the average sales of Rs. 11,490.6 Cr. of its peers.

SUMMARY

Except Tata Steel- Corus deal, all the other 2 acquisitions was well accepted by not only well accepted by the owners of the company (the shareholders) but even made the entire Tata group come into the eyes of fortune 500 list. In-fact it ranked at 56th position at a global level in 2009

CONCLUSION

This study was undertaken to test what is the impact of mergers on the financials of acquiring corporate by examining some pre- merger and post-merger financial, in terms of impact on operating performance. The results from the analysis of pre- and post-merger operating performance ratios for the acquiring firms in the sample showed that there was a differential impact of mergers, for different industry sectors in India. Type of industry does seem to make a difference to the post-merger operating performance of acquiring firms.

Expansion through mergers and acquisition is one of the best ways for any domestic company to step outside the shores of India in an international market place and acquit itself as a global player

Company can turn into conglomerate in reasonably less time by capitalizing on its strengths of efficiency and effectiveness by acquiring relatively poor performing companies as TATA did in almost all its group of companies

Recent examples of companies which adopted similar pattern of expansion are Renuka Sugars, Arcelor Mittal, Reliance, Essar Group, Aditya Birla Group, etc.

One can study any of the above mentioned company and conclude that the key underlying decision of these companies expanding quickly and efficiently is their timely decision of merging and acquiring appropriate companies

Global Strategy for Coca Cola’s International Expansion

The growing market depends upon the foreseeable integration of markets, technologies, knowledge and nation-states among countries, it clearly demonstrates the flow of goods, capital, services and knowledge through nations and in which creating the competition on a world-wide basis creating an integrated global space is called globalization (Porter, 1986; Albrow, 1997; Friedman, 1999; Gupta, Govindarajan and Malhotra, 1999). According to Yip (2003), it’s a challenging task to move from domestic market to international market, specially for the firms which are facing fully saturated market in their home country. The process of globalization is interdependence and integration of countries exchanging different trade, culture, outsourcing, capital investment and the growth of the nation’s relationship. Business systems, knowledge and unification of culture have led to globalization (Daniels and Krug, 2007). To make more money is the main reason for companies to venture into other countries. If it’s international venture is successful then the brand name and the brand value increases for the company. The main reasons for the global venture are cheap labour, distribution and transportation, communication and information technology, cultural convergence, increasing disposable of the global middle class, extension of IP rights, reduced trade barriers, privatization programs and development of international standards ( Stonehouse et al., 2000;Denton and Al-Shamali, 2000).

This essay will focus on the global strategy adopted by Coca-Cola for its international expansion. Then it will focus on the I-R framework and the Porter’s Five Forces, finally concluding with some recommendations.

Literature Review

Many Scholars like Porter, Prahalad and Doz, Ansoff, Edward Hall, Hofstede and many others have contributed a lot in various aspects of International Business. International Business is integrally a part of the business culture. Porter’s five force analysis approach to the industry plays a very crucial role, according to him international business has lot of competition in the international arena (Porter, 1986). Porter’s Five Forces is utilized to critically evaluate the international strategy adopted by Coca-Cola.

Prahlad and Doz (1987) contribution is crucial on the study of internationalization, their IR framework created a big platform for the study on global business which helps to form an international strategy that has multi dimensional contextual setting. IR framework has limitations for the global industrial competition specified only for the first stage, vagueness in the concept that defines the bond between industry forces and finally lack of proof for supporting the framework (Rugman, Collinson and Hodgetts, 2006). Bartlett and Ghoshal (2008) further improvised IR framework and came up with 4 strategies that are international, global, transitional and multidomestic approaches to the foreign market. The Global Stratergy adopted by Coca-Cola can be critically analyzed using the IR (Integration/ Responsive) framework proposed by Bartlett, Ghoshal and Beamish (2008) and Hill(2009).

Figure 1: IR- Framework

Adapted from (Bartlett, Ghoshal and Beamish (2008) and Hill(2009))

The global standardization products and services focus on huge profit, but they compromise on their products price. The marketing research, production and research are done in precise regions with some certain standard and it is sold globally. So those type of products face a huge pressure in reducing the price according to the place where it is sold for example Intel, a chip company (Hill, 2009). According to Bartlett and Ghoshal (2002), a solution for the cross border business is Transnational, which is considered as the important approach for the international market. The transnational strategy gives a lot of pressure to the company for cost reduction and local responsiveness. This could be achieved by transferring the precise skills and expectations of the company from the home country to the needs of the foreign country, where they compete with the local market with reduced price for example Caterpillar. The internationalization of products is very flexible and profitable as there is low pressure on local responsiveness and cost production. A standard and distinct model can be sold at high cost across the world for example Xerox. The localization of products is high demand in customization and less pressure on price reduction. The company should be adapted to the cultural and taste preference of different country. The customization adds value to the product and the company can keep the price high for example MTV (Hill, 2009).

Global Strategy of Coca-Cola

A simple strategy of 3 A’s, i.e. acceptability, affordability and availability have contributed towards the success of coca cola besides the other factor. According to Gould (1995), coca-cola has become a part of people’s daily meal, a price at which anyone can buy and it is available to people in any part of the world. As per Palazzini (1989), since its launch in 1885 in Atlanta, Georgia in USA, it has become America’s most popular drink sold all over the world and Coke is most successful among the wide range of soft drink products available. Coca-cola enters all the markets rich and poor (Rodrigues, 2009). The IR framework has been used to critically analyse the global strategy of Coca-Cola.

Coca-cola has been successful in the global market because it follows the local strategies and is able to deliver as per the needs of the local people (Hill, 2009). Also coca-cola adopted the standardisation strategy to produce and sell its standardised products globally (Rodrigues, 2009). The company have an approach where in, their business does not get influenced by the area of sales. To globalise further they also created a post of Chief Learning Officer (CLO), who will be responsible for the global development of the company and acquiring the human talent, while also focusing on exploiting the knowledgebase resources that is available in the company (Rodrigues, 2009).

With Globalisation Coca-cola also learned the importance of labelling on cans, for instance when Coca-Cola was introduced in China, since it was not possible to translate Coca-Cola to Mandarin, the vendors used Mandarin characters to phonetically spell sound Coca-cola which actually meant “bite the wax tadpole”. To deal with this problem Coca-Cola selected the characters that meant “may the mouth rejoice” and added that to the title of Coca-Cola (Rodrigues, 2009). Rodrigues (2009), states that Coca-Cola pursues the global strategy of producing diverse products as per the local culture. For instance in Asian countries people prefer sweeter coke. Also Coca-Cola launched Georgia, a canned coffee specially intended for Japanese market which captured 40% of the market soon after its launch (Hill, 2009). According to Cokecce.com (2007), Coca-Cola trains their managers in their management school, to make them aware of the global perspective of their operations.

Figure 2: IR-Framework

Adapted from (Bartlett, Ghoshal and Beamish (2008) and Hill(2009))

Porters Five Forces

It’s a framework for the analysis of the industry and for the development of business strategies (Porter, 1986). According to Morrison (2006), the five forces can be applied to any industry to gauge competition between different companies. The five factors that lead to the efficient competition for any global business are:

Entrants.

Buyers.

Suppliers.

Substitutes.

Rivalry among existing competitors.

Figure 3: Five forces of Porter Competitive model

(Source: Porter, 2008)

Rodrigues (2009), states that Porter’s five forces is considered to be an analytical tool which can be used to analyse the competitive position of any industry in the market.

Threat of New Entrants:

The easier is it for other companies to enter an industry the higher the competition will be. In a situation like this the new entrant can change the major determinants of the market i.e. customer loyalty, price and market share, anytime. Coca-cola penetrated the Indian market in the early 1990’s with high focus on improving the Indian economy, generating employment and providing the best soft-drinks. As per Cokefacts (2009), Coca-cola is one of the top international investors in India, with Indian youth as their primary focus for the company’s international business by making an investment of U.S $1.1 Billion till date. Also according to Cokefacts (2009), since its first launch, total revenue of $7.33 billion has been generated from Asia, Latin America and Africa. Gould (1995), states that PepsiCo also adopted the same strategy as Coca-Cola by shifting their focus on younger generation.

The bargaining power of buyers:

The purchasing power of customers establishes how much pressure can be imposed on the price and volume. According to Wright (1987), customer’s preference for buying colas is almost the same except for the choice of flavour. To overcome this barrier Coca-Cola has adopted a marketing strategy by way of advertising and the company spends approximately U.S $2 billion in advertisements (Thomas, 2007). As per Coca-Cola India (2009), most of the rural and sub-urban areas have been covered by coke. Gould (1995), states that McDonald’s is one of the biggest customer for Coca-Cola.

The bargaining power of suppliers:

Suppliers consist of all sources of inputs that are required to provide goods and services (Porter, 1986). According to Morrison (2006), ‘suppliers exert power by being the only source of a particular product with unique characteristics which the buyers prefer’. Since Coca-Cola is dependent on the bottling partners for its packaging, they strictly monitor the bottlers, to check if they are meeting standards to make sure that bottles are manufactured consisting of PET, aluminium and glass which is recyclable and also to check if they are producing light-weight eco-friendly packaging (Cokecce.com, 2008). As per Cokefacts (2009), Coca-Cola owns 24 companies and 25 franchisees for their bottling operations in India.

Threat of Substitutes:

Threat of substitutes exists if there are alternate products with lower price and better performance available for the same purpose. According to Porter (2008), it’s a product with unique feature at lower cost. Morrison (2006), states that the buyers prefer either a product with lower cost or a product which can differentiate itself from other products. Coca-Cola achieved this by introducing products like Diet-Coke, Coke-Zero which helped them gain customer satisfaction. According to Hill (2009), Coca-Cola has achieved this through counter-differentiation focus strategy and the company has now shifted its focus to producing non-carbonated vitamin enriched drinks, which is predicted to contribute to its future growth. This strategy has also benefitted Coca-Cola in India as it met the need of the masses by offering sugar free products (Wright, 1987). According to Rodrigues (2009), Coca-Cola has been more successful as compared to the other local substitute drinks because the company have been able to understand the needs of the local people.

Figure 4: Products of Coca-Cola

(SOURCE COKECCE, 2008, P.5)

Rivalry among Existing Competitors:

It describes the intensity of competition between the existing companies in an industry (Porter, 2008). Hill (2009), states that Pepsi is one of the top rivals for Coca-Cola. Thomas (2007), pointed out with the help of a documentary “Dispatches” that people prefer Coca-Cola to Pepsi mainly because of localisation and flavour. Porter (2000, cited in Hill (2009)), specified that differentiation and low-cost are the two prime factors that help in achieving competitive advantage in the market. According to Hill (2009) Coca-Cola focuses on creating an exclusive product and approach differently in its brand-building process, which makes Coca-Cola stand out amongst its rivals.

Quantitative and Qualitative measures

Figure.5: Quantitative and Qualitative Performance

The above figure 5 shows the Coca-Cola operating framework from which the performance of qualitative and quantitative is measured.

Qualitative measures

The plants of the Coca-Cola Company and supplier meet the international standard. Every year Coca-Cola produces a report on ‘Corporate Responsibility and Sustainability’ to the customers worldwide, that it follows the reporting guidelines of the GRI (Global Reporting Initiative) and calculating the carbon footprint of certain products using World resources institute Greenhouse Gas protocol (cokecce, 2008, p.2). TCCMS (The coca-cola management system) is internationally recognized for quality standards for ‘quality (ISO 9001), environment (ISO 14001), health and safety (OHSAS 18001), and food and safety (ISO 22000)’ (cokecce, 2008, p.9). For example when there was a concern on water management practises in India, Coca-Cola agreed Michigan University enquiry for the third party assessment by TERI (The Energy and Resource Institute) in New Delhi and TERI assessed the quality checks and proved the Michigan university that Coca- Cola met their quality standards according to the Indian government rules and regulation (TERI, 2007).

Coca-Cola has given a variety of courses for their managers and employees to give new business skills, build awareness of CRS issues such as inclusivity, diversity, health and safety (cokecce, 2008, p. 39). Coca-Cola China had a management school in China for the training of their staffs (Rodrigues, 2009)

According to Coca-Cola enterprise (2008, p.11), CRS has Five Strategic focus and goals, they are

Energy conservation and Climate Change:

Coca- Cola is working to reduce carbon emissions on manufacturing, Fleet, sales, facilities and marketing equipment. And reduce the overall carbon foot prints by 15 percent in 2020 compared to 2007.

Water Stewardship:

To establish a water-sustainable operation in which they minimize the water use and have a neutral impact on the local communities by safely returning the amount of water equivalent to the usage in beverages.

Sustainable Packaging / Recycling:

Maximise the use of renewable, reusable and recyclable materials for packaging as shown in the figure 6.

Figure 6: Recycling process

s

(Source: Cokecce, 2008, p.29)

Product portfolio / well-being:

For every lifestyle and occasions providing refreshing beverage with variety of choices.

Diverse and inclusive culture:

Creating a culture where diversity is valued. Respect is given to all the employees in the team. The workforce is a reflection of the community in the company operates.

QUANTITATIVE MEASURES

Figure 7: QUANTITATIVE PERFOMANCE

(Source: cokecce, 2008, p.7)

The figure shows the manufacturing and distribution process of the quantitative performance of Coca-Cola. In eight countries there are 440 production, distribution and sales where they follow the same process and strictly operate according to the international standard. In 200 countries there are more than 300 bottling plants and from that 2 billion cases of wide range of beverages are sold in the year 2008 as shown in the figure, approximately 16% of the worldwide volume. This generated revenue of $21.8 billion with a cash flow of $655 million for the year 2008 (cokecce, 2008).

Figure 8: Comparison of North America and Europe quantitative performance

(Source: cokecce, 2008, p.6)

The above figure is the comparison of two continents North America and Europe on quantitative performance, where North America out performed Europe.

Recommendation

Coca-Cola should try to bring out new innovative products like snacks, cereals and healthy foods or try to acquire some companies.

Tucker (1964), states that Coca-Cola can also increase its brand loyalty by introducing club cards which can benefit its regular consumers.

Promoting health drinks than carbonated drinks.

Should avoid negative advertising, i.e. attacking the competitor’s brand via an advertisement.

Sponsor more events for colleges and universities.

Conclusion

The international strategy of Coca-Cola is effective and efficient across the world which has brought huge success for the company. They have done their detailed study before venturing into new countries which has brought them success after venturing into the markets, by changing the formula for their drinks and having a celebrity as brand ambassador for that country. CRS report produced every year by Coca-Cola runs a regular quality checks and meets the international standard. The diverse range of products produced by Coca-Cola has kept competitors at bay. Moreover, Coca-Cola can further improve its global business by foreseeing any future changes in culture, technology or environment globally.

Corporate Social Responsibility (CSR) at Tesco

Tesco was established in 1919 by Jack Cohen, it has started from selling daily products and has developed itself to selling mobile phones, and other electronic items in their chain stores. It is having branches in many countries around the globe. The major reason for its success is its corporate strategy that is focus on customer, providing quality products at the cheap prices etc (Tesco, 2006). Tesco is an organization which believes in contributing for the social welfare of the people. Let us discuss how it relates itself to the CSR.

Corporate Culture of an Organization

The corporate culture of an organization can be defined as the principles of the organization which are expressed in terms of their ethics. The definition itself states that the organization has to examine and understand the phenomenon of their organization firstly with corporate values which are considered to be seen in the annual reports specially given by the CEO of the organization. Secondly it also defines the terms and policies that the organization has to follow so as to hold the integrity of the organization. It even defines the practices that the organization has to follow on the public front as customer themselves consider to be the part of the organization. The culture and ethics of the organization are considered to be important aspects of the financial performance of the organization and even the performance can be maximized with the help of the some of the cultural values which will become motivation for the employees at the same time enhance the productivity of the organization (Simon A. Booth & Kristian Hamer, 2008).

Literature Review

Tesco’s corporate strategy is for extended term development and concentrates on the center purpose of generating value for customers in order to produce loyalty for the lifetime. Company is committed towards carrying business in a socially responsible and also in an ethical manner. It maintains code of conduct for its staff, suppliers for the sake of protecting environment by using commercial strength to apply its principles in practice (CSR Best Practice, 2003).

Philip Kotler and Nancy Lee (2008) in their book “Corporate Social Responsibility: Doing The Most Good for Your Company and Your Cause” says that as an initiative from corporate world is crucial aspect which needs to be undertaken by a business to support social grounds and to complete obligations with respect to CSR. Social causes like prevention of AIDS, safety, eradicating illiteracy, developing socially and economically, employment and environmental issues are some of the issues that are pulling the worlds development. Authors have included important elements that are to be made mandatory by law in order to save society from the economic and environmental issues. These kinds of activities are done by the NGO’s (Non-Governmental Organizations). Corporate houses can support these NGO’s in many forms like contributing in cash, paying grants, providing publicity, promotional sponsorships, paid advertising, donating goods kind of things like computers, providing employee volunteers, etc.

Tesco practices CSR in their business dealings taking responsibility of the society and it feels that CSR is not an additional burden on company nor it is a distraction from providing services to the customers. But in 2004 it has been rated as the worst lawbreakers on environmental and social problems and are been seriously criticized about its CSR by independent companies (Accountability / CSR Network, 2004). But I’ve observed that this criticism has been denied by the Tesco and after that it has concentrated on the welfare of its staff and the society. I believe that author has been proved wrong later as Tesco has scored highest the most responding company to the big challenges of society.

The above figure exhibits about the percentages of CSR affects on brand image, customers expectations about CSR from the organizations, organizations who are interested in implementing or using CSR, in the figure we can see that civil society organizations expectations are lowest for CSR it is just 7.1% only. But overall impact can be seen clearly.

Ethical principles are the things which are supposed to be followed in every aspect of life. In business also it is essential to follow ethics; it will enable business to run in a proper and correct manner. Organizations those who follow ethics will stand apart from other companies in market. UK supermarkets are growing and developing globally earning record breaking profits and have moved into other products than food like mobiles, electronics, etc. The author Strong, C., (1996) says that ethical consumerism includes each and every principle of ecological consumerism and others taking on panel for public related element of ethical consumerism. Author says that co-operation between government and NGO’s can make ways to solve CSR issues and can put pressure on supermarkets to integrate CSR into their company’s objectives. It is known that author is describing consumer’s also need to buy environmental harmless products in order to protect environment and to maintain green peace. This statement tells us about the importance of ethical consumerism along with CSR.

Let us discuss about the other side of CSR, which is negative effects this could effect the organizations. In the article called Fostering Corporate Social Responsibility through Public Initiative: From the EU to the Spanish Case, Moore (2001), have found that economic performance depreciated as performance in societal increased after conducting research on UK supermarket sector. Some other author Matthias Zacek (2007) says that when a company is placed as socially being responsible then involuntarily customer’s expectations will also be raised. They also have mentioned that companies will open up to a range of prospective criticisms which could not be handled by organization. Author Moore found the performance kill earlier to him other authors have found that customer expectations will increase if organizations starts using CSR. These research statements made clear that CSR will have its own negative impact on the organization. Here it is stressed that organizations inability is towards fulfilling customer’s expectations. But they have failed to prove it, like giving any examples or case studies to prove their statements. Evidence lacking has created confusion whether to consider the point are not.

Some researchers are trusting that customers have become skeptical about the organizations who involve themselves in social activities or social responsible behaviors just for the sake of doing well business rather than charitable concerns. Author like Bowen S.A., (2004) believes that Tesco and Sainsbury are two companies which consider CSR as a part of their business marketing.

This argument cannot be believed as Tesco provided a considerable support whenever world has fore gone the unseen disasters like Tsunami. It has donated about £310, 000 to the British Red Cross society. It has also offered support for education like providing computers for schools, providing support to international education etc (Tesco society, 2004).

PART B

Ethical Issues of Tesco

Ethical issues in an organization are expected to show impact on the business strategies of an organization. In an organization the impact of ethics and its issues can seen on the relationships of the employees and even the organization. At the same time it is even observed that the ethical issues of an organization are mostly influenced by the some of the practices and commercial policies. Sometimes the pressures of business performances may create some of the ethical situations and it becomes a tedious work to decide whether the practice is an ethical or not. This complication of choice even increases when it is an international organization i.e., when it is established in different countries among different cultures throughout the world. The decision of channel in an organization which may show its impact on the other channels or departments will lead to the formation of the ethical issues. The international organizations in the global market have many ethical issues if the organization confines to single country or culture (Cravens, 2009).

Tesco is considered to be one of the largest organizations of UK and at the same time it is the most profitable industry with their supermarket even in expanding their business in overseas. From many of the researches it has been observed that the Tesco will impose the risks and costs of its new business process mostly on the farmers who are considered to be major stakeholders of the organization. The main aim of the organization is to make sure that the working environment and the condition of the employees or workers has to meet the standards of the international labor. To carry out their business process they have followed some of the ethics in the organization among which ethical trading is showing its impact on the standards of the employees and as well as the organization. In order to give out good yield in their production they have followed the objectives which are considered to be the aspects of ethical trading. This process includes communication of their policies to their suppliers, auditing and evaluating the sites of the suppliers training the stakeholders on the process of resolving the ethical issues and many more.

The selected issues of CSR by Tesco are Community, Colleagues, Environment, Customers and Suppliers, Responsible use of technology, Suitable raw materials, Community programs, Ethical trading and Animal welfare. These are the considered as the important issues which mainly concentrate on places, people and products (Peter Jones and Daphne Comfort, 2005).   

Business ethics of Tesco includes to the maintenance of the standards of the international labors, ethical trading reducing the cost of production and increasing the price of the products, employing the labor on contract basis so as to reduce the cost of labor. All these ethics have become issues in the point of stakeholders of the organization. The suppliers have been complaining that they were paid less for their supplies at the same time the organization is earning good amount on their products. Tesco has declared that the suppliers has to send their products like grapes to the supermarkets in UK in the closed and sealed bags which were costing three times more than that of the normal packing. It even includes more involvement of the labor for packing these bags and also there is an increase in time to pack these bags. But Tesco is not paying for all these expenses to the farmers which is leading the dissatisfaction in the suppliers to the supply the products and even not accepting the bags with seal. Farmers are always put under pressure to meet the standards of the organization but the management is least bothered of the business and labor aspects of the farmers from which they will have their supplies. It is just up to the ethics of the farmers how they deal their workers and their liabilities (Kate Raworth and Anna Coryndon, 2004).

Framework of the relationships in the corporate culture (Simon A. Booth & Kristian Hamer, 2008, p. 714)

Tesco always tries to use temporary employees in their production instead of permanent one’s so as to reduce the cost of labor in their production. They will pay very less wages and perks to that labor that are on temporary basis and even give very less appraisals to the employees who stay permanently in the organization. This was considered to be the outcome of the high production of goods and price suppression on those goods by the retailers. One more issue which is bothering the organization is the hiring of women on contract basis for a season nearly from eight to eleven months every year. Even though if there some of the permanent contractors among these temporary employees they are paid very less wages. Women who are working on contract basis for Tesco for nearly 10 to 11 months in a year they can’t even go for other jobs in the free period as a result of which they are unable to meet both ends and even some of needs of their children. All these has become their ethical issues in terms of their productions process and paving way to the dissatisfaction of the labor and as they left with no choice they are continuing to work with Tesco (Kate Raworth and Anna Coryndon, 2004).

Corporate Social Responsibility also includes the maintenance of their employees and stakeholders. Providing some of the minimum facilities to the employees even though they are on contract base will fulfill a part of the social responsibility of the organization. Even Tesco will enforce their stakeholders to follow some of the international standards in supplies the goods to the organization which was showing a great impact on them to concentrate on the quality of the production and supply. Tesco has failed to follow some of the policies of corporate social responsibility by not providing their employees and the stakeholders with some of the minimum ethical features.

Apart from all these issues Tesco is following some of the principles of CSR by encouraging their employees to participate in the social development activities, even pay attention towards the recycling of some of the energy resources, making use of organics in their production being conscious of the environment.

Normative Theory

The attempt of normative ethics is to provide the general theory which tells us how an organization must live in the society for increasing their business. Normative ethics is not like metaethics, the normative ethics doesn’t attempt the moral properties (Normative Ethics, 2005).

A normative theory in an organization provides the descriptive image, for example, aiming them as effectiveness, representing them as rational, and also aiming them as efficiency. For clarifying the productions actual process these theories are of no use (Jan Achterbergh and Dirk Vriens, 2009). For a business ethic the normative theory is the attempt of focusing the exclusive general theory upon which the human life aspects depend on business relationships. In business ethics if Tesco the first normative theory is the stake holder theory. In this theory the arrangements are merely made through which the stockholders are the group of people where the arrangements are merely made to the other group which has the advance capital. The managers of the organization realize the particular ends through which the ventures of ownership will be received by the stockholders. In this prospect the manager acts as the stockholders agent and they are managed to empower the money before stockholders. They are bound with the relationship of agency for doing exclusively for the purposes which are delineated through their principals of stockholders. The other theory of business ethics normative theory is the social contract theory, this theory really consists of closely related family theories and in other ways they are still in different ways process formation. Although, the social contract theory in the accepted wide form the theory of social contract, these all businesses are obligated theoretically for enhancing the customer satisfaction and the interest of the employee by not violating the justice of gnarl canons (Hasnas, John, 1998). The reason for this is particular nature is the obligation which can be best appreciated in the derivation theory. The theory of social contract is mainly based on the social contracts traditional concept. The implicit agreement among artificial entity and society where in this society the existence of entity is recognized on the condition which makes the particular ways of specified interests in society. The theory of social contract for the business ethics will be on the same approach which is deriving the responsibilities of the business. The business obligations of ethical issues towards the business individual members of the society are derived from the agreements. Therefore the social contract theory that speculates the implicit contract among the business and its members where the particular specified benefits that exists. The granting business, which have the right to exist the society members who have the recognition legally as the individual agents and to authorize for using land, resources and hiring members as employees from the society (Hasnas, John, 1998).

The other theory of the normative theories is the Stakeholder theory, this theory is the business ethics of the normative theories. By default the theory of stakeholder is troublesome; the reason for this is the theory is used for referring both the normative and empirical theory of business ethics that are regularly not clearly distinguished between them. As the management of empirical theory, the theory of stakeholder holds the effective management which requires the balanced consideration and attention of the legitimate interest. The normative theory when viewed as the stakeholder theory managers must manage the business that benefits the most; even if the financial performance is not improved the business must be improved. On their return managers pay much attention to the investment which legitimates the stakeholders. Tesco doesn’t maintain the performance of the business rather it concentrates on the financial aspect. Normative theory has a clear approach and doesn’t feel that the firm is not as mechanic which increases the financial aspect it feels it as the vehicle which coordinates the interest and have the relationship management of judiciary which not only looks the stakeholders but also all the stockholders. But Tesco doesn’t give importance to the stake holders and concentrates only on the financial aspect. If Tesco considers all stakeholders and stock holders then the company will increase their performance. According to the stakeholder normative theory the management of Tesco must give consideration equally to the stakeholder’s interests and if these interests conflict, the business is managed so as to attain the minimum balance among the stakeholders. Therefore in normative form of the stakeholder theory Tesco do not have social responsibilities that imply business performance (Hasnas, John, 1998). Tesco mainly depends on the individual decisions rather than group decisions and according to the normative theory decisions that are taken from individual is time taking when comparing with the group decisions. According to this theory subordinates are committed to the decisions that were made by the group participation. Ambiguous and complex tasks need more data and consultation to reach high quality decisions. Tesco not only depends on its own decisions and also not allow the employees to give their decisions only managers in Tesco take all the responsibilities regarding decisions (Normative theory, 2009).

Part C

CSR (Corporate Social Responsibility) is considered as a new exhortation; however it is not a concept that is new for the organizations like Tesco. Provided that the business exists, there are some expectations on the responsibilities in the organization. The notion of Corporate Social Responsibility has been recognized in the mid 1920s and it took an identifiable shape in these years. Hence for acting and building the trust in shareholders the executives and business representatives have searched for the requirement of corporate directors. This can be applied for both the social claimants as well as the stockholders (Frederick, W. C., 1994). But in the 1970’s many changes are made in CSR by the society and organizations in order to lift up their society and business to a modern and more sensible sphere, by means of practicing the management and business professionals. Here the ethics reason of each company has been focused on their dependency among the society and business. Over the last half of 20th century, the CSR’s framework has been developed and the demand for growth of CSR has been increased over last 2 decades (McIntosh, M., Thomas, R., Leipziger, D., & Coleman, G., 2003). There are many objectives for the volatile demand of CSR’s framework. Following are five drivers for the CSR’s framework of Tesco:

  • Globalizing the markets of Tesco
  • Establishing the knowledge economy
  • Employing the communications technology globally
  • Coalescence of power to achieve the corporate responsibility when compared to the less number of global and international organizations

Requirement of new social partnerships among the states of corporations and other civil societies to gain solutions for problems of global local societies (McIntosh, M., Thomas, R., Leipziger, D., & Coleman, G., 2003).

The above mentioned drivers make Tesco to be more responsible in their relations with stakeholders, government and other investors. It can be said that if there is an increasing disappointment related to the share owning society then it would result in the company’s inadequate management. As a result, the empowerment of stakeholders need to contribute for the invest time of organization in conversing with the stakeholders in order to achieve a license to function (McIntosh, M., Thomas, R., Leipziger, D., & Coleman, G., 2003). The explosive development of companies like Tesco which operated all over the world will contribute for the growing demand of CSR. The global problems are regarding water, poverty, and shortage of food, violation of human rights, pollution, defected education and unemployment. Being a part of CSR the Tesco has contributed its operations to reduce some of the global problems. Enhancing their business and at the same time providing solutions for the global problems is complex so the organizations need to involve the concerns on social, political, economical, legal and ethical. They will present challenges to everybody like businesses, society and government (Zadek, S., 2001).

In a similar way, Tesco argues that the Corporate Social Responsibility has been an integral part of the overall framework of corporate governance of the organization and it has totally incorporated into existing systems and management. In Tesco, a team of cross-functional senior executives or professionals are available to provide leadership on CSR and the organization’s Corporate Responsibility Review are the important methods for communicating its performances and policies in the area of CSR. The senior professionals of Tesco argue that CSR has been their integral part and also has become its brand (Peter Jones and Daphne Comfort, 2005).

The CSR is a concept whereby Tesco incorporates environmental and social concerns in their company operations and in their relations with the stakeholders on a basis of voluntary. The contemporary developments in ethical approaches imply that the organization has to concentrate on the ethical perspectives. These current developments will focus on the ethical necessities which strengthen the relation among the society and business (Garriga, E., & Mele, D., 2004). These theories are dependent on the values to enhance and safeguard the environmental and societal health. In a similar stratum, Tesco focuses on the significance of being local and functioning locally. Tesco also highlights the commitment towards the local resources compared to its global business. It follows the approaches to have a good relationship with the local and global stakeholders. The other contemporary developments are Customer Question Time, Healthy Living Club, Behaviors and Operational Training, Regeneration and Reclamation of deprived groups, employing Key Performance Indicators and Schemes of energy saving (Peter Jones and Daphne Comfort, 2007).

For the successful performance of any organization, many of the professional believe that leading retailers need to have strong cultural values. In a similar vein, the CEO of Tesco says that the success of Tesco lies behind the values and these values of Tesco are their working ways, managing the by different ways and finally it is everything they do as well as forever will be followed (Tesco, 2000). In the 2008 annual report of Tesco it was said that the organization has been looking forward for the staff with the intention that they can take care of the clients is one among the important business values (Tesco, 2008). So Tesco implements the Steering Wheel model which illustrates the relation among the personal objectives of employees to corporate values as well as to assist the balancing of values by staff successfully in the daily organization of work. The model was implemented to highlight the facts on corporate responsibility that it is not considered as a professional function in Tesco, but it is considered as a day-to-day job of every employee. Tesco’s main purpose is to generate the business values for customers so as to earn their loyalty throughout their lifetime. Its success is totally based on people who shop with them and work with them. If customers like what they provide then would definitely come back. They main values are expressed as treating people in the way they like to be and no one aims harder for clients.

Steering Wheel (Witcher and Vinh Sum Chau, 2009, p. 84)

Conclusions

Every business personnel have to accept that business and society are inseparable. I suggest that CSR should be made a crucial part of any successful organizations business strategy. Long term commitment towards CSR can make organization to advance in social and economic progress. I think an excellent business is achieved when there is a development in the quality and standards of living for people in the place where business is carried. I completely believe in author Strong (1996) words, as it is necessary that customer and seller both contribute towards fair trade by maintaining ethics in performing one’s own jobs. Above we have seen how Tesco has achieved success and profits after implementing CSR in its organization. Researches have proved that business could run smoothly and could sustain progress only if society is in general satisfied with its whole contribution to community well-being. Now let us discuss about normative theories and let us evaluate their activities, situations etc. It can be concluded that CSR has both positive and negative points which an organization have to bear both. Tesco’s ethical issues are having great impact on their strategies of business, as the organization is considered as one of the largest organizations among UK the organization must concentrate on the issues which they are facing. Tesco is imposing the costs and risks of the business on to the farmers and other stakeholders. For improving their performance Tesco must follow some of the ethics in the organization regarding the impact on the employees and even on the organization. Tesco always tries to have good performance in the organization but doesn’t have a good social relationship with the employees as it believes in temporary hiring of employees as they can give fewer appraisals. Tesco doesn’t flow the social responsibility and failed in that situation. According to the normative theory the organization must depend on the group decisions and even the organization must give importance to the stakeholders with the financial aspect, but Tesco only relays on the production and tries to increase in the financial aspect. Corporate Social Responsibility is the new and essential concept in many of the organizations like Tesco. Theoretical frameworks were discussed as to take the corporate responsibility as this has been the integral part of the organizations corporate governance. The annual report of Tesco shows that the organization is looking forward for development. Hence the main purpose of Tesco to generate the business values for customers to earn their loyalty will succeed in future.

Internationalization As A Key Determinant Of Success

The aim of this dissertation is to determine why the proper use of the internationalization process is a key success factor for multinational enterprises in emerging economies and the necessary factors that influence this process. I would like to argue that without the process of internationalization of products of multinational firms in emerging economies, the survival of such a firm is highly unlikely. I am interested in the operations of McDonalds and Subway in China and how internationalization helped in the survival of these multinational firms.

Based on the assumption that the internationalization process is the consequence of a series of incremental decisions and the most important obstacles to internationalization are lack of knowledge and recourse, Johanson & Wiedersheim-Paul (1975) introduce the internationalization model: the Uppsala model. In this dissertation, I shall use the Uppsala model (Johanson & Wiedersheim-Paul 1975) framework as research framework for my case study. The model identified four sequential stages of the internationalization process which will be analysed further.

LITERATURE REVIEW

This section of the dissertation examines existing literatures on the research topic. This is to identify appropriate information that may be relevant and useful in answering the research questions. There has been much research on the internationalization process of a firm. The concept of internationalization has evolved in the past three decades. Johanson & Vahlne (1977) defined Internationalization as a process in which the firms gradually increase their international involvement. They claimed that internationalization is the product of a series of incremental decisions. Welch & Luostarinen (1988) discussed internationalization as a dynamic concept: the process increasing involvement in international operations, both sides of inward and outward should be involved in a broader concept of internationalization. Beamish (1990) provides another comprehensive definition: …the process by which firms both increase their awareness of the direct and indirect influences of international transactions on their future, and establish and conduct transactions with other countries. (Beamish 1990, pp. 77-92; Coviello & Munro 1997). Andersen (1997) defines Internationalization as the process of adapting exchange transaction modality to international markets. These definitions describe the concept of internationalization from a variety of dimensions. Internationalization is an essential area among international business research. Extensive theoretical and empirical studies have been conducted in regard to internationalization with the analysis of different characteristics. But this phenomenon needs constant investigation as the world economy follows constant dynamic forces making it a vital target for research. No clear definition exists as to what defines the internationalization process. Johanson and Vahlne, (1990, pp.22) believe that “the internationalization process is the result of a mixture of strategic thinking, strategic action, emergent developments, chance and necessity”. Athreye and Kapur (2009) argue that over the last two decades, firms from developing countries have regularly been at the front of internationalization. They observed that the shares of global outward foreign direct investment from developing countries have drastically increased.

Between 2006 and 2009, there has been an extraordinary growth in the number of companies into a lot of today’s newly industrializing countries such as Brazil, China, Russia and India as listed in the FT 500 list quadrupling from 15 to 62 in a two years period. These rising number of firms to emerging economies are redefining the world. This can be observed in many industry reports (BCG, 2006, 2009) and international organizations (OECD, 2006; UNCTAD, 2006; World Bank, 2007). They function in an ever more integrated global economy which is quite unlike the world economy during the ‘late’ industrialization episodes in Taiwan and South Korea (Korea hereafter) during the 1960 and 1970s. Taiwan and Korea followed a combination of the strategies of import substituting industrialization (ISI) and export oriented industrialization (EOI). Such a policy framework established a ‘carrot and stick’ incentive structure where by companies experienced both luxury of domestic protection and the strain to succeed in competitive foreign markets. In contrast, emerging MNCs today experience strong competition in their home markets, and this has made many of them to compete in markets overseas. Internationalization has become an essential means to capture ownership advantages, through acquisition of foreign knowledge. In modern industries, economies of scale and scope are not any more important than creating knowledge and enhancing learning (Chandler and Hikino, 1997).

Within a company’s internationalization efforts, identifying and selecting the most capable foreign markets is a vital success factor. Due to the impracticality of attempting to enter all the nations of the world, selecting the markets with the highest projection of success is vital, in order to use limited resources as effectively and efficiently as possible (Alon, 2004). When entering a foreign market, a firm faces a different external business environment in the targeted market, which influences the firm’s entry strategy into the precise market segment. Understanding and analyzing the external business environment is especially relevant when entering an emerging market, since markets of this category are characterized to be more complex and dynamic than mature markets (Jansson, 2007). Despite the difficulty and unsteadiness faced, emerging markets have become increasingly attractive for doing business due to the fact that growth rates in forthcoming years will be significantly higher than in mature markets (Cavusgil et al, 2002). Brazil was the latest country being affected by the worldwide financial crisis triggered in 2008, and Brazilian economists expect the country to be among the first to come out of the financial crisis (Palmeus, 2009).

When establishing business in an emerging market, understanding the external business environment is not the only critical component. The attractiveness of the targeted market segment in terms of profitability prospects is a major parameter for deciding on whether to enter the market. Analyzing and being aware of the forces driving competition in the targeted emerging market is a critical factor, since they provide opportunities and threats for growth and determine the attractiveness of the targeted market segment (Thompson & Martin, 2005). If a company lacks experiential knowledge in a volatile and unstable foreign market, accurate market segment evaluation is a challenging process. Nevertheless, being aware of the attractiveness of the targeted segment in an emerging market is a precondition for deciding on whether to enter the foreign market (Pehrsson, 2002). Furthermore, customers in emerging markets are classified to have requirements differing from Western European markets (Jansson, 2007). Therefore, it is of critical importance to evaluate the match of a company’s resources and capabilities with the prevailing requirements of customers in an emerging market (Grant, 2008).

In conclusion, evaluating the external business environment and the market segment attractiveness in an emerging market, as well as appraising the match between a firm’s resources and capabilities with the potential customers’ needs in an emerging market demonstrates a critical task for multinationals intending to further internationalize their business. These factors are of key importance for a firm’s prospects of success in an emerging market. For this reason, it is inevitably an important and current research topic. The issue might become increasingly important in future, since multinationals are more and more expanding into emerging markets in order to seize opportunities of growth (Jansson, 2007).

As seen above, a lot of research has been carried out on the subject area. The purpose of this dissertation is to increase the knowledge in the field of internationalization of business through understanding and analyzing why firms decide to internationalize their products in emerging economies and to discuss and present crucial factors for the implementation of an efficient strategy (internationalization). Secondary data will be used. To achieve the purpose, I studied multinational companies, McDonalds, which applied the internationalization strategy and SubWay, which did not; in terms of their performance and success rate i.e. their survival, employed as tools in executing their international marketing goals.

RESEARCH QUESTIONS

My research questions are as follows:

  • Why is internationalization a key success factor for MNC in emerging economies?
  • What are the main factors that influence the internationalization process of MNC? i.e. performance

RESEARCH PURPOSE

With the use of existing theories and present data available for the research, I hope to develop not only my own understanding about the internationalization process but also contribute to the field of international business literature. I will give some important comprehension into the concept of the success of internationalization and also the driving forces that decide the internationalization of organisations. It should not be ignored that the company cases can complement the business literature on internationalization of companies from emerging markets.

METHODOLOGY

My target group of focus for my dissertation is McDonalds. I have chosen this particular multinational firm because it is a global firm which has had tremendous success and growth rate in China. Access to data shall be through the use of secondary data which is easy to obtain from their website, other academic websites such as Institute of International Economics http://iie.com and The World Trade Organisation http://www.wto.org. I will also use different journals and articles written by academic scholars such as Harvard Business Review, Journal of International Business Studies and International Business Review and critics of reports from other journals. I assessed the suitability of using a case study by looking at my research questions, objectives and research situation. When a researcher is willing to answer a ‘how and or why’ questions and has the intention to examine a phenomenon occurring in real life context, his/her preference will be to conduct a case study (Yin, 2009). I realized that using a case study approach would be the best approach to answer my questions in my research. Yin (2009) and Ghauri & Gronhaug (2005) also argued that the use of a case study can be justified as a suitable method when an investigator conducts an explanatory research with the purpose to answer any ‘what’ question. Yin (1994) developed a comparative analysis between case studies and other different approaches with experiments, and he presented three scenarios in which the use of a case study is the preferred method, and one of them involves my research: if I intend to follow an academic research that has presented some findings on a particular topic, and if I discover a company that is embedded in that particular topic, using a case study method will afford me the possibility to confirm the theory.

A research approach describes a researcher’s intent with the research as well as nature of the case studies. Yin (1994) categorizes three different research approaches exploratory, explanatory and descriptive. This thesis follows mainly an explanatory research approach. Explanatory research attempts to establish various explanations for the same phenomenon. It aims at illustrating why one event leads to the other and therefore it deals with cause-effect relationships. My research questions have been constructed and aimed at finding an explanation why firms decide to take certain actions, for example, choosing a certain strategy over the other. I shall use the Causal Research Philosophy because it examines the cause-and-effect relationship among my variables which includes the internationalisation process and the success of the firm.

A deductive case study is based on “grounded theories”, i.e. developing propositions from current theory and testing them in the real world (Dubois & Gadde, 2002). In my thesis, the point of departure is test the existing theory i.e. internationalisation via the Uppsala Model, using a particular assumption. By conducting a logical deduction of the findings, the theory is either confirmed or modified in line with the new conclusion (Yin 1994).

Due to an increasing number of findings in the internationalization process, current and existing research has limited application. Internationalization of a firm is a broad topic and a complex phenomenon; it is difficult to recognize internationalization process from different firms, so in order to come up with good analysis and clear understanding I have to limit my research to two case studies to be able to make a realistic comparism. To contribute a coherent piece of research, the area of this study must be scoped to achieve the quality of research. Another important factor is time. The given time frame makes it difficult to compare many firms so I have to limit the study to two companies, instead of several companies to be able to compare differently how the strategies have been efficiently applied.