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Tuesday, October 9, 2012

Relationship Marketing in Emerging Economies: Some Lessons for the Future

Origin of Relationship Marketing

The past two decades have brought dramatic changes in the marketing environment leading to a rethinking of the marketing discipline. As markets mature and customers become scarce resources, the concept of relationship marketing has emerged as a big new idea and has become increasingly important for many Western companies. Today, relational, as opposed to transactional exchange, is the norm in the more affluent industrialized economies.
At the center of this contemporary philosophy is the notion that making the most out of existing clients is essential for long-term profitability. Retaining clients by developing relationships with them is crucial to establishing and maintaining a competitive advantage in the market. Numerous companies use structures (for instance, key account management) and instruments (databases, direct marketing, efficient consumer response, and customer relationship management) developed by relationship marketing. Certain companies implement individual or dyadic relationship marketing  based on the personalization of the offer and interpersonal interaction while certain other companies prefer a community or associative relationship marketing where emphasis is on the collective behavior of clients (feeling of belonging, level of participation, etc.). But, perceptions on what exactly constitutes relationship marketing may differ in various cultural settings. As a result, an exchange method which has worked well at home may fail in a culture with different values. Failure to adapt methods of exchange may bring about a marketing failure. This leads us to question whether the concept of relationship marketing can be transferred, especially to new markets such as emerging markets, which offer amazing opportunities to the firms.
Therefore, in spite of the considerable attention devoted to relationship marketing in the practical and academic world, far less research has been carried out in the sensitive adaptation of this concept to meet the needs of emerging economies. A search of refereed articles that combine emerging economies and marketing shows that since 1986, only 50 articles have responded to these key words (Pels and Brodie, 2003).
While being very heterogeneous, these markets are full of pitfalls even for the very experienced and successful global companies because there are specific conditions unique to emerging economies.1 Therefore, an understanding of the concept of relationship marketing in emerging economies needs to be advanced. This study attempts to improve such an understanding.
Even if the concept of relationship marketing is rather recent within the science of marketing, we must admit that the values it represents are far from new. Relationship marketing seems to be the theorization and modernization of a latent secular process present in the industrialized world. In fact, marketing has always been and still remains a science of exchange which aims to analyze and understand the relationship between supply (seller) and demand (buyer). The meeting of supply and demand of products and services involves a rather complex subject often called ‘business’— an umbrella term which covers all major areas of management such as marketing, finance, production, accounting, information systems, organizational structures, and even human resources. Creating ‘relationships’ within business is one of the oldest jobs in the world which always required exchanges.
            For instance, in the pre-industrial era, relationship development between producer and consumer was relatively easy to achieve in economies which were in an early stage of development due to small-scale production processes and relatively local markets. Buyers were able to learn through the personal experience of the abilities, consistency, and reliability of a supplier while suppliers were able to adapt simple production methods to the needs of individual customers who were known personally. Preference was judged on the basis of face-to-face contact and, from this, trust was  developed; through personal knowledge and trust, a supplier was also able to judge the creditworthiness of each customer (Palmer, 1995).
With the development of mass production methods, producers were able to achieve economies of scale in production and, through price advantage, encroach on the traditional markets of smaller, less efficient producers. Relationship building based on personal knowledge and liking based on face-to-face contact became more difficult. Consumers shifted their liking from the personal characteristics of the producer to the abstract concept of the brand. Branding emerged as a means of providing reassurance of consistent quality to spatially dispersed customers who, because of the use of intermediaries, had no direct relationship with the manufacturers of their products. In effect, brand became a substitute for personal relationship (Palmer, 1997).
But, globalization of markets, competitive pressure, brand multiplication and, above all, the ever-changing lifestyles and consumer behavior have forced companies to develop strategies to keep their clients and create consumer loyalty programmes  and thus carry out relationship marketing. One of the earliest notions of relationship marketing in the academic sphere can be traced to Levy and Zaltman’s (1975) statement that to maximize the value of exchanges, people or groups need to develop ‘patterned relationships with one another.’
But, although the origins of relationship marketing were initially in the industrial context (with the network approach as designed by the Industrial Marketing and Purchasing (IMP) Group, e.g., Häkansson and Snehota, 1995), the service industry has increasingly become focused on maintaining and enhancing customer relationships.
Most sources credit Berry (1983) with originating the term relationship marketing. Houston and Gassenheimer (1987) argued that if attention is limited to the study of single, isolated exchanges, then the heart of marketing is ignored. Other scholars state that developing relationships has now become the focal point for marketing attention replacing earlier preoccupations with service and product development (Christopher, Payne and Ballantyne, 1991). Webster (1992) argued that the relationship marketing paradigm promises to redefine marketing practice and the role of marketing in the firm.
But, if the implementation of relationship marketing at a distance is destined to dominate, it is due to the increasing power of communication and information technologies which confer on the relational view a new force and breadth. These increasingly affordable technologies integrate powerful processing capacities (data warehouses) with omnipresent means of communication (internet, call centers, and interactive terminals). Using these new capabilities, firms can treat customers as ‘scarce resources’ and optimize their customer equity through long-term relationships (Figure 1).

Figure 1: Evolution of the Marketing Concept in the 20th Century

               Relationship marketing appears clearly as a ‘new-old’ concept (Berry, 1995) for the simple reason that concern for relationship development is as old as the nature of business itself. However, even if relational exchange is not new in Western economies and has been successfully practiced by smaller firms for several hundreds of years, its present form differs from that which existed in an era of relatively simple economic development. While companies seek to exploit information technology to develop relationships with their customers, the types of relationships now enjoyed are very different compared with those that existed between customers and small-scale, local producers.

Strategic issues.
Unquestionably, relationship marketing is a subject  which has attracted the most interest, given rise to considerable debates and investments in the marketing  discipline over the last decade, and still allures the university community as well as the experts. As such, it has led to many contributions, the concept being used as a base for reflection on different themes or perspectives.
            The almost inevitable result is the obvious lack of established common ground which leads to conflict over fundamentals such as the ‘basic’ meaning of relationship marketing. In fact, much controversy  reigns over the definition of the term relationship marketing, its process, and its operational mode. The concept is not clear in literature (Brodie et al., 1997; Zineldin, 2000). It remains unclear and vague and is used and abused by many. Harker (1999), in a content analysis of 117 articles, identifies 26 different definitions. Despite the lack of consensus on exactly what relationship marketing is, most observers conceptualized relationship marketing as a core business philosophy which is fundamentally about adding value to a relationship through mutually rewarding cooperation (Han, Wilson and Dant, 1993) to the point where relational exchange is characterized by stable, friendly relationships based on reciprocated trust and commitment involving both cognitive and emotional components.
           Adopting a relationship marketing approach involves changing the traditional ways of managing marketing at the strategic and tactical level (Gronröos, 1996). Three important strategic issues in the relationship marketing approach can be distinguished:
  • redefining the business as a service business and the key competitive element as service competition
  • looking at the organization from a process management perspective and not from a functional  perspective
  • establishing partnerships and a network to be able to handle the whole service process.
At the tactical level, there are three typical elements:
        seeking direct contact with customers and other stakeholders
        building a database covering necessary information about customers and others
developing a customer-oriented service system.
            Relationship marketing stresses on the building and management of relationships in a social context 
(Grönroos, 1994). It means a change in focus from products and firms as units of analysis to people and organizations  (Webster, 1992).
The results of this extensive work allow us to confirm that relationship marketing can be positioned as a double innovation (Flambard-Ruaud, 2004): firstly as a conceptual innovation (it has evolved into an entirely new and separate concept) and secondly as an organizational innovation (it imposes transformation on the organization that is not limited to the marketing function but require the participation of all components of the firm so as to propel the customer into the heart of the firm).
The discussion so far has shown the overall importance of the relationship marketing paradigm for Western academics. However, despite its growing importance in both theory and practice, there has been little published research on the extent to which relationship marketing concepts have been  if used in emerging economies.

Business and Cultural values
From the Westerner’s point of view, a market is a market. But, the formulations of relationship marketing based on contemporary Western norms of behavior may not function well when transplanted into emerging countries where the economic, social, and cultural environments differ significantly from the country for which a relationship marketing policy was originally formulated.
Using an inter-cultural approach to explain marketing and general business practice has been supported by academics such as Hofstede (1991) who emphasized that cultural differences have a vital impact on the results of all aspects in business such as marketing management, leadership, decision-making, etc. As a result, it was felt that, in order to understand the contextual background of generating relationships with customers, cultural factors should be included (Gilbert and Tsao, 2000).
Though there are various definitions of culture, a more agreed upon definition seems to be that of Hofstede (1980): “culture is the collective programming of the mind.” In other words, culture can be defined as the deep-seated, unwritten system of shared values and norms within an organization (Peck et al., 1999). People from different cultures behave and interact differently because their minds are programmed differently. 
Thus, when relationships cross national borders, any cultural differences that exist will impact the nature of relationships, what flows through them, and how successful they are (Ambler and Styles, 2000). Consequently, there are subtle differences between the Western and the Eastern ways of doing things (Buttery and Wong, 1999).
In Western societies, the analysis of relationships has come from transaction cost theory, social exchange theory, and interaction theory. Transaction cost theory takes the view that transaction costs are associated with exchange such as research, information, and the cost of monitoring contractual performance. Such costs are generated by the exchange process and are in addition to the market price of goods and services. Transaction cost analysis has been applied to explain the behavior of a wide range of organizational activities including bureaucracy (Williamson, 1979), vertical integration of production (Williamson, 1971; Klein, Crawford and Alchian, 1978), clan-like relations among firms (Ouchi, 1980), and organizational culture. Social exchange theory is a framework for analysing different social interactions which are defined as a process in which two parties areengaged in activities directed towards one another with the expectation of the exchange of valuable resources(Dwyer, Schurr and Oh, 1987). The social exchange theory (Blau, 1964, Emmerson, 1962, and Schurr and Ozanne 1985) explains, for example, the importance of inter-firm adaptation and trust. The limitations of both the approaches
— economic and social theories — lie in their static nature when, in fact, relationship building is dynamic, and in the assumption of rational behaviour by those involved in the process of negotiation and this too does not always apply. Interaction theory has brought in a dynamic element into the analysis such as the mutual influence of, and communication in, the transactions process (Kutschler, 1985). Similarly, Häkansson (1982) and Cunningham (1980) have captured the factors leading to close relationships and exchange episodes over time in a framework in which actors adapt to one another.
This approach has also been the focus of the work of the European IMP Group (as previously mentioned). Also, such writers as Grönroos (1994) and Gummesson (1994) consider the study of relationships so important that they have called for a new theory of marketing based on relationships rather than exchange.
In contrast  the relationship dimension of business has always been integrated in the Asian and the African cultures. In these societies, it is often the success of established relationships that condition successful business transactions. The relationship is built before transactions take place and is closer to a client-seeking strategy. For example, the Chinese prefer to deal with people they know and trust. On the surface, this does not seem to be much different from doing business in the Western world. But, in reality, the heavy reliance on relationship means that Western companies would have to make themselves known to the Chinese before any business can take place. Furthermore, this relationship is not simply between companies but also between individuals at a personal level. The relationship is not just before the sales start taking place but is an ongoing process. The company has to maintain the relationship if it wants to do more business with the Chinese. In other words, in the strongly capitalist economies (Western society, for example), transaction creates and develops the relationship (transaction is the centre of the exchange) whereas in the less capitalist economies (Asia, Africa, Middle-
East), relationship creates and develops the transaction (Figure 2).
Figure 2. Two Universe, Two vision of business

Based on the work of Tsapi (1999), the comparison of the terms individualism and community enables us to better understand this difference. In the community philosophy, the most important attributes  revolve around self-awareness as a member of a community (family, working group, nation). The objectives of the group take priority over personal objectives. The norms and values of the group are more important than the personal attitudes such as behavioral determiners and the pre-eminence of the needs of group members on which an individual determines social behavior. Durkheim (1973), the French sociologist, qualifies this form of social link as mechanical solidarity dominated by the primacy
of the collective conscience, i.e., “all beliefs and feelings common to members of a same society.”
In slightly capitalist societies (i.e., traditional and less individualistic), the individuals prefer to work in teams and interdependence is a basic fact. The collective conscience is, thus, maximized and the individual conscience practically does not exist. The success of the group is more important than that of the individual and, as a result, the individual gives great importance to how his/her actions will affect the other members of the group. Conversely, the ‘individualists’ define themselves as being autonomous compared to a group, give priority to personal objectives, behave mainly according to their
attitudes, and pay attention in priority to their own needs. For Durkheim (1973), these societies are characterized by a form of organic solidarity which essentially is based on the division of labour which makes persons economically dependent on one another.
In strongly capitalist societies (modern and, therefore, highly individualistic), recognition and self- fulfillment give great satisfaction and there is competition between individuals to achieve these goals. Social functions are totally distinct and inequalities appear more difficult than in traditional societies. In these rather competitive societies, the psychological structures and the politico- economic systems reward individual contributions and encourage competition between individuals. This distinction is relevant because it is linked to the distinction made today in marketing, i.e., between
relational’ which is close to the community (traditional) society and to ‘transactional’ which is close to an individualistic (modern) society. In this logic, a system with low individualism requires greater connections in the process of exchange and the members involved respond favourably according to the degree of interpersonal dynamism.

The concept of GUANXI
While marketing theory has advised Western firms to choose rationally between a relationship marketing  approach for key customers and a transitional approach for the majority of less important customers, Eastern firms tend to prefer long-term personalized relationships and mutual cooperation as the basis for most of their business dealings (Hamzah-Sendut, Madsen and Thong, 1990).
As emerging economies are not homogenous or clearly identifiable and recognizable groups, we look at Asia, more particularly, China which is now the biggest emerging economy. Indeed, China has recently experienced a rapidly growing economy with huge market potential and is already the second largest foreign direct investment recipient in the world (Luo, 1997b). However, China’s economy is characterized by a lack of coherent business laws and strong governmental control over limited resources (Xin and Pearce, 1996). These characteristics of China’s economy demonstrate the difficulties of entering this massive market. Many studies have argued that developing close relationships is
a necessary step to succeed in China (Ambler, 1994; Hall and Hall, 1987; Johansson, 1995; Luo, 1997b). By developing personal relationships, firms can enhance their marketing effectiveness and efficiency (Sheth and Parvatiyar, 1995).
In fact, Chinese business persons prefer to work with others with whom they have empathy,  trust, and share a process that produces mutual benefits (Chen, 1996; Luo, 1997a). This special kind of relationship is called guanxi (it can be translated as ‘relationship’ or ‘connections’ or ‘networking’ or even ‘entering through the back door’) and it has been identified as a key feature of doing business in China (Abramson and Ai, 1994; Chen, 1995; Davies, 1995; Buttery and Wong, 1999).
However, only limited research is available on this complex notion of guanxi. Misunderstandings and misconceptions concerning this significant topic persist. We make an attempt here to explore the concept of guanxi, discuss its origin and ethics, and analyse its major benefits, risks, and implications for management.
In the Chinese culture, much emphasis has been placed on the teaching of Confucius and the impact it has had on the Chinese population in the past and in current times. According to this philosophy, all relationships are dictated by five major wu-lun or relationships: emperor-subject, father-son, husband-wife, elder younger brothers, and friend-friend (Ordonez de Pablos, 2002). To ensure social harmony, order, and stability, appropriate behaviors are needed. In business practice, the word used to refer to the latter is guanxi.
However, because guanxi refers to a cultural phenomenon, it is not a precise term of art and, as such, it carries several different connotations. In the most general sense, guanxi simply means relationship. The second usage refers to a sub-set of relationships that work according to norms of reciprocity. A third usage exhibits a negative connotation related to bribery and corruption: the usage of someone’s authority to obtain political or economic benefits by unethical person(s); guanxi or guanxixue represents a way to bypass regulations, laws or norms through personal connections with people who control limited resources.
In this paper, we focus on the first and the second usage of the term guanxi which essentially refers to emotional bonds, trust, and friendship that originated from previous satisfactory experiences of dealing with each other and frequent contacts.
The foundation of the process of guanxi is conceptualized as having four dimensions (Abramson and Ai, 1997). Trust was viewed as the basis for shared goals which were the basis of cooperation driven by self-interest. Under conditions of trust, one would expect disagreements to be handled using collaboration or compromise-based methods. Guanxi also seems to require extensive networking efforts. The four dimensions were combined into a single guanxi construct in an attempt to test an authentic construct. This was done despite Thompson’s (1996) concerns related to the use of multi-causal variables.
Because guanxi and relationship exchange in the West have several similarities — exchange partners have long-term perspectives; they focus on the relationship itself rather than on a single transaction, make efforts to preserve the relationship, try to resolve conflicts in harmonious ways, and engage in multi-dimensional roles  rather than simple buying and selling (Alston, 1989; Xin and Pearce, 1996; Gomez Arias, 1998) — some authors (Bjorkman and Kock, 1995; Wong and Chan, 1999, imply
this in the title, if not the discussion) have identified guanxi with a traditional form of relationship marketing.
However, guanxi has its own unique characteristics distinguishable from relational exchange in the West (Lee, Pae and Wong, 2001). For instance, although often criticized as favouritism in Western society (Anderson, 1995), the reciprocal exchange of due favors is widely accepted and used in Chinese business (Luo, 1997b; Xin and Pearce, 1996). Exchange partners in guanxi have affective and personal involvement in the relationship resulting in affective commitment (Geyskens et al., 1996). In contrast, relational exchange partners in the West tend to have economic and impersonal involvement which leads to calculative commitment (e.g., commitment based on cost and benefits). Besides, partners in
guanxi tend to have implicit role expectations which often go beyond the existing role expectations. That is, expectations in a guanxi relationship often go beyond the existing roles to include reciprocal exchange of personal favors, mutual protection, and enhancement of social status. The guiding principles of relational behaviors in guanxi are morality and social norms (Gomez Arias, 1998) and the underlying motive for reciprocal behaviors is face-saving. In other words, guanxi is an informal relationship based on personal affiliations (Alston, 1989; Hwang, 1987). Exchange partners in a Western-style close relationship will have more explicit role expectations. The guiding principles of a relational exchange in the West are legality and rules. One of the main motives for reciprocal behaviors is mutuality in the relationship.
Several empirical researchers have examined the outcomes of guanxi. Most studies focus only on the positive outcomes of developing guanxi. For example, the empirical study conducted by Davies (1995) suggests three major benefits that arise from the establishment of guanxi: key sources of information, sources of resources, and other areas (smoothing transport arrangements, smoothing collection of payments, and building up the firm’s reputation and image).
However, in a recent survey of Chinese managers (Guthrie, 1998, mentioned in Dunfee and Warren, 2001), we noticed that some perceptions about the practice of guanxi are increasing in importance while others believe that it is of less or even no importance in the emerging Chinese legal framework. Guthrie summarized the views by stating that guanxi, while still an important institutional system, is diminishing in importance due to both increasing competition and legalism. Managerial perceptions of guanxi’s importance varied according to the firm’s position in the industrial hierarchy of the former command economy. Specifically, Guthrie found that managers in the higher institutions of the Chinese industrial hierarchy perceive guanxi as less important than managers in institutions that hold lower positions in the industrial hierarchy. He interprets the difference as a reflection of the manager’s ability to access high-level officials. Those managers in higher institutions already have access to the bureaucrats who facilitate business transactions and, therefore, do not need to rely on guanxi as much as those managers in lower institutions.
In short, China is enjoying rapidly increasing foreign investment while, at the same time, it must cope with local changes influenced by Western forms and concepts. This evolution of the Chinese market is bringing about the need for a relationship marketing approach to serve more sophisticated consumers who demand better products and services. Understanding the role guanxi plays in the Chinese society and business is part of the process of learning about the Chinese market that Western companies need to be aware of and provides one of the most dramatic examples of an entrenched cultural norm under pressure from international business trends.
Besides, the practice of guanxi is not unique to China; it occurs in many societies (Li and Wright, 1999 in Wright, Szeto and Cheng, 2002). It also pervades other business cultures such as Japan (called Kankei or Toyama or Kusuri), Korea (known as Kwankye), India, Russia (called Svyazi), and other managed economies where intimacy with those in authority, be they political, military or bureaucratic,
is important (Lehtinen, 1996; Robins, 1996).

Comparison of Asian VS Western management
           An in-depth examination of Asian culture reveals the advantages of certain practices. One of the most striking characteristics of Asian societies is the remarkable stability of their civilizations. More precisely, Cova and Pras (1995) have identified four major permanent features to differentiate Asian management from Western management:
        the family rather than the firm as basic economic actor
        a long-term horizon rather than a short-term horizon
        a consensus approach to decision-making rather than a conflictual approach
        a risk reduction approach rather than a risk-creation approach.
Two hypotheses can be put forward to explain the existence of these permanent features:

Hypothesis 1 :
The traditionalist hypothesis which insists on the duration of traditional customs
and habits in Asia contrary to modern (or post-modern) Western societies which continually try to rid themselves of the matrix of traditional bonds and archaic beliefs.
Hypothesis 2 :
The cultural hypothesis which evokes the existence of the same basic culture made up of contextual specificities (values, nature of social relations, …) as opposed to the Western society which is fragmented and pluralist.
However, even if one succeeds in identifying common Asian features and finding an ethical grounding, following the image of management in Western countries, it is still possible to highlight numerous features specific to a local managerial approach (Dubinsky et al., 1991) such as:
        the rhythm and process of economic development of each country
        the role played by the state in each country
        the political orientations of each country
        the structural differences of a socio-economic issue
        the strategic choices of companies
        the societal context in which the economic activity is embedded (language, writing system, social system, etc.).
An analysis of the environmental and cultural constraints of Western countries combined with the previous reflection on the local Asia specificities enables us to draw the following conclusions:
Western societies are more differentiated and pluralist than Asian societies. A majority of the Western societies have developed other centers of authority and power than that of the family and the state. In the same way, CEOs are generally less dependent on political power than in Asia, relationships between business leaders and politicians being closer in the West. Relationships with authority are not influenced by the omnipresence of the state but by the development of legal and institutional systems which have given a legal base common or close to most Western societies.
The greater importance of the individual and the legislature in the West has led to more formalized procedures centered on individual performances within the structure and to a high level of confidence for formal contracts. The development of law in the West has reduced the authority of the business leader of the firm compared to that of Asian leaders. In the same way, the importance of the contract has reduced flexibility, given less weight to confidence in one’s partners’ word, and made easier the development of imposing hierarchical structures and impersonal networks.

Theory transgresses economies whether they are emerging or not. Marketing has always studied relationships between institutions (B2B) and relationships between institutions and customers. The basic rules of marketing, therefore, remain the same whatever the economy. What changes is the context.
In Western economies, fundamental changes in the market environment have forced marketers to reconsider marketing strategies. A transaction-oriented marketing strategy encounters more and more difficulties in finding an appropriate answer to challenges such as increasing numbers of product varieties, shortening of product life cycles, and higher customer expectations. These developments require firms to become more customer-oriented. As technological developments in data collection and data processing as well as in communicating and interacting with customers provide opportunities to meet these requirements, companies are increasingly shifting their focus from transaction-oriented to relationship-oriented strategy so as to build a competitive edge.
The recognition of the importance of establishing and maintaining long-term relationships has led both marketing theorists and practitioners to focus on an emerging framework termed relationship marketing. However, relationship marketing cannot be a universal paradigm capable of having uniform global application. The environment is and remains multi-cultural. In that sense, the dangers of ethnocentrism must be avoided and, on the contrary, the phenomena of acculturation and local appropriation need to be taken into consideration.
As seen previously, in the Chinese society, guanxi, which is based upon social activities and business activities, is significant as a basis of conducting business. As such, it is not a simple matter to transpose relationship marketing, which is based upon a different set of cultural values, into a Chinese-dominated culture.
Relationships are built on a cultural platform which means that the route to developing a good relationship can be very different in the Western and the Eastern cultures. Not only are the methods for building relationship different, but also the relative importance of the attributes which make up the relationship are valued differently in different parts of the world. In other words, cultural factors play an important role in the development of relationship marketing. It is, therefore, suggested that more cultural studies need to be carried out in order to understand what kind of cultural elements can have a positive or magnified impact on relationship marketing applications in a business context.
In essence, this exploratory study has taken a step forward towards a better understanding of the ways in which relationship marketing has emerged in the Western economy and suggests a few rules which need to be observed in order to apply it efficiently in emerging countries. It also shows how the management of guanxi can help in enhancement of sustained competitive advantage taking into consideration the idiosyncrasies of the Eastern and the Western national and organizational cultures

Tuesday, April 24, 2012

The Art of Growing a Company


While starting up, the initial emotion many entrepreneurs face is fear. For many a hopeful entrepreneur, the initial reactions are mixed, ranging from “probably it is not the right time to start-up” to “may be it is impossible for me to start-up,” primarily due to the opinions you hear from the investing community. Phrases like “we invest in only 50 million dollar companies” or “we look for a management team with track record” or “we are not funding now” send a shiver down every potential entrepreneur’s spine.
This is a reality today. The market situation is such that you may not get funding. But I want to pose the question “is there life without funding? Can you start a business without funding?” I say that it is possible and one need not lose heart. Garage start-ups were always the time-honoured method of starting up. I am not making a case for bravado. It is quite likely that most of you may not start up immediately. It might not even be the most ideal decision. But the option to start-up immediately exists, is possible, and can be done. What you have to be aware of are the logical issues arising from a decision to start-up immediately, its implications, and how you can manage them.
At the end of the day, entrepreneurship is not a cerebral kind of pursuit you can put inside management matrices and analyse—it is an intensely emotional  pursuit. You can read up on management literature, you can get the theory but it is really a gut-wrenching kind of an experience. It will take everything out of you and very rarely will you be prepared on the emotional front—which is really the most important aspect.
A typical management framework will highlight the following likely steps: you analyse the opportunity, you find out the idea, start the company, go through a ramp-up process and finally do an IPO. That is true. But what does it feel to actually go through the steps? From my experience and those of people I know, most entrepreneurs tend to go through certain stereotyped phases. I have found this out from personal experience, from other people who have started out, and from those people who wanted to start out but could not.


The first stage which I call as the stage of confusion is one where you have the intense desire to start-up. You might not be very sure how you will start-up and  thus have a very high likelihood of going through this phase of confusion. Betraying my MBA background, I have tried to divide this into the three “F”s — Fright, Flight, Fantasy.


The first phase is fright. If you have always been a performer from an academic background where failure is not tolerated and you have never failed in your life, the first question always is—will I fail? The second question is: “my colleagues are getting into a corporate job. From the first month onwards, they are going to get paid an amazing amount of money. I do not know what my future is. Will I lose out?” In our parent’s generation, all of us have heard horror stories of “uncle x” or “cousin y” who miserably failed in business. Your nightmare will be whether you will be this generation’s
example. Your fright will lead you to rationalize thus: “maybe I will start in a corporate job first and then I will actually start out.”


The second phase is what I call flight. Your idea may be good but there is no guarantee of success. Your inability to find a “guaranteed success plan” leads you to flight from idea to idea. You suddenly get a brainwave and you become extremely excited. You think that this idea seems to be good but the next day you wake up and talk to some people and suddenly realize that it may not be so great. You get depressed. You jump to a second idea and repeat the entire cycle. You keep on hunting for that perfect idea. Stories like “this friend of my friend started a business and it is doing 100 million dollars now” or a cover page on the “youngest billionaire” frustrates you no end since these people have somehow crossed the threshold and are on the fabulous shores of success. You keep on thinking, “why am I not getting the idea? Why can’t I focus on something?”


The third stage is fantasy. If you are one of those people who are not starting with a clear idea, you might start fantasizing and rationalizing that whatever idea you have is actually the killer idea. This is a dangerous stage. When people tell you that your idea will not fly, you disregard it since it is your baby and it is really the only idea you have. You mould your perception to suit the situation.


Probably 80 per cent of would-be entrepreneurs would not cross the three stages discussed above. People who manage to cross this threshold have made the first serious step. What happens after you cross the three stages? Again I use MBA speak—the three “Ps”.

Peer Pressure

The first is peer pressure. You decide to break the news to your family and loved ones. They are not likely to be thrilled. You start facing resistance and start thinking, “should I really start out?”


The second phase is procrastination. The impact of your decision slowly starts sinking in and you suddenly become aware of industry pundits who claim “entrepreneurship is at an all time low” or “corporate jobs are the best bet now.” There would be this study from a leading international management school which claims that there is a close correlation between the timing of start-ups and IPO performance which ends by saying “you should not start now, start three years later.” So lots of people postpone the decision and think about going for a second MBA in the US.


The third stage is poverty. You start planning out your financial requirements and you suddenly realize that you may not have enough money saved up. So how do you survive? You start thinking: “may be I should work for eight months and save up.”
But, when it comes to-crunch, only you can find the answer. The question is a Hamletian “to be or not to be.” Really, there is only one way to do it. Starting up is like jumping off a cliff—you close your eyes and do it. There is no other answer. If you want to start, just do it. But it does not mean that you just blindly jump. Before jumping off, we have to pack some practical baggage and what are those?
First, definitely a parachute! Carry at least six months of financial expenses. This is important when you are starting out since you will be generating clarity for yourself. When you are looking at opportunities, the last thing you want to worry about is survival money. Questions like “how do I get my food? Can I pay my rent?” should not be a drag on you.
Second, develop an activity plan for the first month. The first 30 days would be full of confusion and there will be a million things happening. So, before you actually are in that stage, try to chalk out a 30-day activity plan which will make your transition into entrepreneurship easier.
Third, carry plenty of “hope.” Ninety-nine per cent of us start out with dreams of striking success immediately. The reality is that it rarely happens. When it does not happen immediately, hope is the only thing which will help you carry on. However, there is a rider—use your “hope” wisely. When you are in the market for six months and you keep getting negative reactions, hoping against hope can be dangerous and can easily turn to “blinders.”
Finally, pack up your “ideals” and stow them away. The market is cruel and your only objective is to survive. Do not throw them—you will get the opportunity to use them later. But, do not ever confuse your ideals with your main objective. You might want to be a philanthropist, you might want to help people—but first you have to survive. I have seen enough people who try to implement their “ideals” before they survive and end up with neither ideals nor a business.


How Do You Set Up a Team?

Two important aspects are composition of the team and delineation of responsibilities. If you start out fresh, most often your team would comprise friends where everyone is equal. You tend to confuse friendship with professional equality. Everyone in an organization cannot be equal. If the line of responsibility is not clear, how does the organization take decisions? Is there one person with whom the buck finally stops? We need to realize that responsibilities can never be equally shared. You need a leader. If something is not working out, there has to be someone who will stand up and say, “I am responsible.” And, when it comes to the crunch, somebody has to say, “this is the way we will do it, may be it is wrong or may be it is right. This is the only way to go ahead.” I am not advocating autocracy but a clear understanding—not only an intellectual understanding but also an emotional understanding that when it comes to the crunch, there is one person who will take the call.
With start-up among friends, the first and foremost rule is “do not start off with clones”. Most of us are friends because we are from the same background with the same expertise. That does not work in a business setting. The whole idea of a team is to complement each other. So the first rule is to try and get variety into the team.

How Should Equity be Divided?

Let us look at a situation where four or five of you are starting up. How will you divide equity? I recommend unequal sharing of equity. The leader should have the highest equity even if it is higher by one share. A company cannot be run as a cooperative. Higher responsibilities have to be matched with larger equity. For most of us, it is an extremely difficult step to take since it is counter-intuitive and does not feel “right.” When friendship is involved, it can be quite difficult.

When and How Should You Go for Fund Raising?

A fundamental question today’s entrepreneurs face is whether to start with or without funding. As I read somewhere, the three traditional sources of money are friends, fools, and family. You can still start a company with these three options.
However, if you decide to go for fund raising, guard against unscrupulous financiers. When you are young and desperately want to see your ideas succeed, you can make a wrong choice and get eaten up. People might tell you “I will give you x amount and I will take 75 per cent of the company.” And, you might take the money rationalizing that “you still have 25 per cent of the company.” If you really require large funds for starting up, may be this is the only way to start out. But, in that situation, you should go to people with track records instead of “fly by night” operators. However, if you can generate revenues by less capital-intensive service models, why should you raise funds?

Do You Consider “Equity” as Cash?

In the initial stages, entrepreneurs need advisors, lawyers, and “contacts” for business development. One common mistake is to overuse the option to pay for service with your equity. When you are starting up, equity seems the cheapest currency. Unfortunately, as the company keeps growing and valuation changes from a notional valuation to a real valuation based on revenues and cashflows, the true value of equity becomes clear. You should conserve equity to the maximum extent possible.


Let us assume you have crossed all these hurdles and have actually started out. What happens now? Once the business starts, there is a saying that “the first 1000 days define success or failure.” It is in these first 1000 days when you really experience the emotional roller coaster associated with entrepreneurship.

Initial clients take advantage of you:

You will struggle very hard to capture clients. When you are starting out and have no track record, clients are unlikely to pay market rates. When you go to a client, he immediately thinks, “here is a bright young guy, I can get a project out of him by paying him Rs 100,000 when I am paying an existing guy Rs 1 million.” So he will tell you to do the project for him at Rs 80,000. At that point, what do you do? You have a company to run. So you go ahead and do it.
You will constantly fight this pricing war. The only way to get out of this pricing cage is to grow stronger and stronger till one day the equation changes. Obviously, this is applicable only to a garage start-up. If you have sufficient financial muscle, you will not necessarily go through the
above experience. I am narrating the worst-case scenario.

You face delays in payment: 

It is a truism that the strong crushes the weak. You do not get paid on time. They will tell you “I will give you Rs 100,000” but at the end of the day, they will not give even Rs 80,000—that too after a three month delay. What can you do? You have to face it and understand the fact that this is the name of the game. You cannot get depressed about it.

You become Jack-of-all-trades:

When you are starting out with a small team, you have to be jack-of-all-trades. Unfortunately, you cannot have a specialized finance or an operations guy. You might have to do accounting, coding or whatever the situation calls for—the bottom line is this : nothing is beneath dignity. At the same time, you necessarily have to be the master of all. There is nobody else who is going to stand up for you. If your accounting is not done properly, if you have not planned your cashflows properly, you yourself will pay the price.

Have your priorities clear:

I had this interesting experience. We went to the office of a newly funded company and we were actually amazed to see a state-of-the art “recreation room” filled with dart boards, TT tables, video games, etc. The company’s argument was “we want to keep our employees happy. They need to be motivated so that tehy can both party and work hard”. The company did not have a single product or any revenue in its books. It later faced cashflow problems and was on the verge of closing down. The moral of the story is— have your priorities clear. Dart boards can happen later. Your first priority is to succeed. Make money. All the rest flows automatically. This is obviously not to say that you cannot have employee satisfaction programmes or benefits. But you have to spend money appropriately—if you do not absolutely require a glass-fronted, four-storied corporate house—do not take it.

Change is constant : 

Everything changes constantly. You will change. Your original ideas will change once they hit the market and your business itself might change. You have to be flexible. Typically, you start off with an idea and hit the market. You might succeed or realize that probably it is not doing very well. You still keep on thinking that the market is just not “seeing” the true value of the product. You do not change. You become so wedded to your idea in its original form that you cannot do anything else. You will fight on this sinking ship and see it go down.
On the other hand, if you are intelligent enough to listen to the market signals, you might realize that your product is not what the client wants. You realize that adding two extra features can make you succeed. You change your plans and hit the market once again.

Changing relationship dynamics: 

When you start out, you tend to form a very close-knit team—almost a family. But, over time, people change and some of them might leave. It might be because you cannot pay salary on time or things are not working out as expected. A typical entrepreneurial reaction is to go into depression. You tend to think, “he/she was my friend, he/she was my family, how can he/she leave?” This is going to happen to all of us. The earlier we learn to accept this reality and be focused on our objectives, the better it is.

You are not your own master:

There is a common feeling before you start up that once you are an entrepreneur you are your own master: “I do not have a boss. I can do whatever I like.” I can guarantee you one thing—if you start coming to the office at 12 noon, your employees are likely to be there only at 11.45 am. If you take a vacation, they will also demand a vacation. Your responsibilities are going to be the sum total of the responsibilities of the organization. There is no running away from that. Your responsibilities will increase rather than decrease.



You start a company, you have a product, you have a solution. You go into the market and slowly money starts coming in. Typically, what happens now? The first flush of money makes you lose your balance—you may buy a swanky car, move into a plush office, and have an acre-wide director’s table. You think that your investor will support you even if you run out of money. You have made your first critical mistake which is not building up a war chest to tide over bad days.
You have to understand this vital point—“cash is king.” Only after you go through a cycle where you do not have cash would you actually understand the importance of this truth. Even if you cannot appreciate its importance today—hoard cash during early days. If you are one of the lucky few who built a company without going through a cash flow crisis, you will find one day that some unfortunate decisions you took have impacted your cash flow and led to a crisis. On that day, you will realize that even though you have clients, even though you have built up your reputation, even though you have employees — they are of no avail when you run out of cash—because cash is the life- blood of an organization.
If cash is king, then debt is the prince. Even if you have investments from a venture capitalist, do not blow up your investments. I am assuming that you have a product or a service that is capable of generating a cash flow. Go and raise debt. Put the investment money into a fixed deposit and raise a loan against that. Do everything possible to stretch your cash—your margins might suffer, but it will be for a worthwhile cause.


You should hit the market early. Many entrepreneurs succumb to the temptation to keep on refining their product or service instead of hitting the market early. This is especially common if you are developing a technology product. You must realize that market is the truest advisor you can get. Even if it is version 0.9, go to the market and test it out. The market might give you signals that ‘feature x’ is not right or ‘feature y’ is required or the pricing is not right or even that the entire product is of no value.  If you realize that early enough, it is better for you.
            Secondly, getting your product to speak for itself is the most efficient marketing method. If you do a good job with the first client, he will talk to five other people. You can then leverage this cycle.
Thirdly, you should not use expensive options when cheaper marketing options will suffice. You should do cross-selling, cross-subsidization, partnerships, in fact, anything that can give you reach at low cost.


Technology can be one of the most powerful weapons an entrepreneur can have to steal a march over competitors. If you build appropriate technology to reduce your costs or improve quality, you have a very powerful asset for success. However, the operative word is “appropriate.” I knew this example of a company which started off with a sizable investment. The first thing it did was to make a website with the latest technology and host it with the most advanced hardware available which cost it Rs 6-7 million. Almost 50 per cent of its investment was put into a website to which customers never came since they could not spend enough on marketing. They ran through 60 per cent of their investment in just the first three months.
Essentially, your motto should be :  if having cutting edge technology is not critical, low tech is high tech. If you can work on 486 machines, work on them. However, if technology is a core focus, by all means, go out and build technology which is better than your competitors.

Partnership and Alliances

Partnerships and alliances are theoretically very useful. However, for a start-up, when you are small,  it is quite difficult to build any kind of meaningful partnerships or alliances.
To have real partnership, you need to own something of value. Ideally, both of you also need to be of comparable sizes. In the initial stages, you are unlikely to have anything of value to a large partner — your discussions and meetings frequently come to naught. So, before you get into partnering, figure out whether you have what the other guy wants. That is a useful lesson we learnt the hard way—krills are good only as food for whales. It is much better to grow fast and then talk as equals.


In the midst of all the gloom and doom, is there happiness? Yes, there is! You slowly start seeing your dream take shape. You see clients starting to show respect, you get excited about new possibilities, and new faces join the organization. You realize that you are on a winning track. So, during your initial 1000 days,  what is your primary objective? Your objective is to grow at any cost. Grow, grow, and grow more. You should do whatever is required during the first 1000 days. You have to work very hard—that is the only way you can succeed.


Suppose you are one of those lucky few that have made it through the first 1000 days. You have actually built a company which is showing profits. You  can  see  a healthy client list, your revenues are increasing,  and your company is taking shape. Then comes the difficult part.
I have heard from people that the most difficult part in the lifecycle of a company is when growth happens and success is at hand. Even moderate success can be dangerous. In the initial stages, things are so tough that you are just trying to survive and nobody has any time to think about anything else. When money comes in and you feel the survival pressure lifting, suddenly, egos start kicking in.
Apparently, Indian entrepreneurs are happiest during tough times because this is something that really gives them moral courage and certainty. When things are bad, they will fight. But, they cannot handle success. They go to pieces at the first sign of success. The moment money comes in, they will take an extended vacation, join industry association, and will generally do everything but focus on the business. This invariably ends up in disaster as business goes down and clients suffer. The organization achieves a fraction of the potential it could have achieved if sustained focus had been generated in growing the business.
So, the first question an entrepreneur should ask himself is—“do I want to grow? What is it that I want to get out of entrepreneurship?” You really do not have to go through growth pangs if your psyche is not built for that; you have to decide whether growth is right for you and be prepared for the issues arising out of growth.
Second, if your objective is to build something substantial, something really world class, you should not lose focus. Great companies are built by continuous effort which pushes the organization from moderate success to great success.
Third, to keep growing, you have to constantly separate out the investor in you from the “entrepreneur-manager.” Your returns are going to come not from salaries but from appreciation of the equity. While your role as an employee in the initial phases of the organization is critical, in the later phases, your role as a financial investor becomes more and more important. On many occasions, your equity appreciation might happen through somebody else playing the role of a CEO or a Chief Marketing Officer. You might be most effective as a sleeping partner. You have to learn to let go and start trusting other people. Only when you separate your two roles would you realize that your potential returns could be hundred times more than what is evident today. You will then have the motivation to focus on organizational growth on a sustained basis.
The fourth issue is recruitment and retaining. You always go through a chicken and egg situation where good people would not join you because you do not have money—but to generate money, you need good employees. You have to break out of this vicious cycle by necessarily building enough money via internal accruals or by getting an investor. Only when you break this cycle can you get to the next level.
Fifth, as your company keeps on growing, your importance as an individual to the company inevitably keeps on diminishing. Your organizational evaluation and reward structure needs to reflect this reality. Initially, you would have brought in all the business but today your marketing chief is bringing all the business. So, you may not continue having the same equation you had in the initial days. If important people in your organization do not have equity, you have to give them equity. This ensures that they are aligned to a common organizational vision.

Friday, March 30, 2012


TQM has made impressive inroads in the manufacturing and service sectors. Organizations have finally realized the difference between seeking an ISO certification and launching a process to improve continuously. The shape of TQM in different organizations may be different but there are obvious similarities in terms of three basic factors:
•  demonstration of management’s commitment
•  involvement of employees across the organization
•  building of support systems to help continuous improvement.

The TQM initiative has been moving forward under different banners but, faced by competition, demanding consumers, and the needs of global customers, it has gathered momentum in the last few years.

The manufacturing sector is focusing on aspects like lean management, TQM, Quality Circles, and Kaizen. Their essential approach has been influenced significantly by the Japanese approach to TQM. The service sector has been using the Six Sigma banner to further its movement. Benchmarking is a common thread between the two sectors to drive improvement. Organizations have also been using variations of the business excellence models to drive their improvement. The Tata Group, for example, uses a variation of the Malcolm Baldridge National Quality Award (MBNQA) to rate the excellence score of its group companies.

A business excellence model like the MBNQA or the EFQM can serve as an effective guide for companies seeking to enhance their overall quality. The models focus on results and enablers. Customer satisfaction and business results are the two critical aspects of results while business processes are a key enabler to drive excellence. However, it is this component in particular that proves to be the waterloo for most companies.

Some of the managerial processes that we, at Hewlett-Packard India, followed to achieve excellence which finally resulted in winning the CII-EXIM Award for Business Excellence are as follows:

  • Personal involvement of the CEO in building an organizational culture conducive to business excellence.
  • Total, visible, and emphatic commitment from senior management to TQM.
  • Strong employee motivation.
  • Unique and successful application of tools such as policy management, measurement of customer satisfaction, and people satisfaction.
  • Integration of total quality principles in the business philosophy of the company.