my published mic-mac paper, ijssm020402 fatima[1]

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Int. J. Sustainable Strategic Management, Vol. 2, No. 4, 2010 335 Copyright © 2010 Inderscience Enterprises Ltd. Relationship between micro and macro level economic performance: a case for strategic management in Pakistan Mahnaz Fatima Institute of Business Administration, University Campus, Karachi, Pakistan E-mail: [email protected] Abstract: It is generally believed that business level performance is difficult to improve in Pakistan in view of the lacklustre macroeconomic performance. While external factors do influence business performance, it is the cumulative impact of microlevel organisational and business performance that also feeds into the macrolevel performance. So, all responsibility for dismal microlevel performance cannot be assigned to the macro economy. While the macro economy does require sound management, the micro constituents too need to be managed according to the modern principles of management that include anticipation and a response to external factors in general and economic factors in particular as an essential component of organisational management. I wish to explore the possibility of a wider application of this organisational management concept in Pakistan so that the micro and the macro aspects of economic life may eventually enter into a virtuous cycle of growth and development Keywords: strategic management; business mission; external environmental factors; micro and macro economic performance; competitiveness; applicability in Pakistan. Reference to this paper should be made as follows: Fatima, M. (2010) ‘Relationship between micro and macro level economic performance: a case for strategic management in Pakistan’, Int. J. Sustainable Strategic Management, Vol. 2, No. 4, pp.335–364. Biographical notes: Mahnaz Fatima is a Professor at the Institute of Business Administration (IBA), Karachi, Pakistan. She obtained her BE (Mech.), her MBA and her PhD in 1992 from the USA. She has written numerous research papers published in journals and books of national and international repute. She has written three books on Business Problems in Pakistan (1996), Imperatives of Globalization: Implications for Pakistan (2001) and Quality Management in Pakistan’s Export Oriented Industries (2008). She also has 12 years of field experience in business, industry and consulting. Her areas of teaching currently include corporate strategy, managerial policy and development economics. 1 Introduction This paper aims at studying the strategic role that Pakistan’s corporate sector can play in Pakistan’s economic development. A significant relationship has been found between the macro and the micro constituents of the national economy (Porter, 1999). While the micro constituents derive from the macro economy, the macro economy is, in turn,

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Page 1: My published mic-mac paper, IJSSM020402 FATIMA[1]

Int. J. Sustainable Strategic Management, Vol. 2, No. 4, 2010 335

Copyright © 2010 Inderscience Enterprises Ltd.

Relationship between micro and macro level economic performance: a case for strategic management in Pakistan

Mahnaz Fatima Institute of Business Administration, University Campus, Karachi, Pakistan E-mail: [email protected]

Abstract: It is generally believed that business level performance is difficult to improve in Pakistan in view of the lacklustre macroeconomic performance. While external factors do influence business performance, it is the cumulative impact of microlevel organisational and business performance that also feeds into the macrolevel performance. So, all responsibility for dismal microlevel performance cannot be assigned to the macro economy. While the macro economy does require sound management, the micro constituents too need to be managed according to the modern principles of management that include anticipation and a response to external factors in general and economic factors in particular as an essential component of organisational management. I wish to explore the possibility of a wider application of this organisational management concept in Pakistan so that the micro and the macro aspects of economic life may eventually enter into a virtuous cycle of growth and development

Keywords: strategic management; business mission; external environmental factors; micro and macro economic performance; competitiveness; applicability in Pakistan.

Reference to this paper should be made as follows: Fatima, M. (2010) ‘Relationship between micro and macro level economic performance: a case for strategic management in Pakistan’, Int. J. Sustainable Strategic Management, Vol. 2, No. 4, pp.335–364.

Biographical notes: Mahnaz Fatima is a Professor at the Institute of Business Administration (IBA), Karachi, Pakistan. She obtained her BE (Mech.), her MBA and her PhD in 1992 from the USA. She has written numerous research papers published in journals and books of national and international repute. She has written three books on Business Problems in Pakistan (1996), Imperatives of Globalization: Implications for Pakistan (2001) and Quality Management in Pakistan’s Export Oriented Industries (2008). She also has 12 years of field experience in business, industry and consulting. Her areas of teaching currently include corporate strategy, managerial policy and development economics.

1 Introduction

This paper aims at studying the strategic role that Pakistan’s corporate sector can play in Pakistan’s economic development. A significant relationship has been found between the macro and the micro constituents of the national economy (Porter, 1999). While the micro constituents derive from the macro economy, the macro economy is, in turn,

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strengthened or weakened by the performance of the micro constituents (ibid.). However, most Pakistani businesses blame their poor performance on the macro economy and the external environmental factors. They need to appreciate that, in Pakistan too, business performance at the micro level impacts the macro economy just like the macro economy impacts the micro level business performance. Amongst others, attempts made by the Management Association of Pakistan (MAP) to raise awareness about best international strategic management practices in Pakistan (MAP, 2001) have not shown the desired results.

There is also a general lack of appreciation of modern management practices amongst Pakistani organisations which is why problems are usually blamed on to the external environment in general and on the macro economy in particular. Managing for stakeholders (Harrison et al., 2010) and insights gained from developed countries’ experiences are summarily dismissed by Pakistan businessmen as inapplicable in Pakistan despite the above awareness raising efforts.

The issue gains salience as, according to our research, out of the top 40 listed companies in the country, 22.5% are MNCs, another 10% are government organisations, 7.5% are semi-government, and 60% are private family-owned organisations.

With such a high percentage of Pakistan owned companies, there is an urgent need to conduct research with a view to addressing the following two questions within the Pakistani context:

1 Is there a relationship between the micro and the macro performance levels of Pakistan’s economy? A correlation here would serve the purpose of convincing Pakistani businessmen that this relationship holds for Pakistan too. That is, the micro level business performance does impact the macro economy even in Pakistan and the correlation between the micro and the macro performance levels of the economy is not just a text book case imported from Western experiences. Pakistani businessmen need to appreciate that Pakistan’s macro economy does not operate in a vacuum and that it cannot improve unless there is a bottom-up effort made by the Pakistani businesses too. This is a key purpose of this study.

2 The second question is that, if a correlation is found between the micro and the macro performance levels of Pakistan’s economy, how might the micro level corporate performance be improved so that the micro and the macro levels of Pakistan’s economy enter into a virtuous cycle of growth and development in Pakistan? An empirical study will find answers to the above questions for the players in Pakistan’s business environment. Once a correlation is established between the micro and the macro levels of economic performance in Pakistan, a convincing case can be developed to impel the micro constituents towards better performance. The second question attempts to make a case for business performance improvement through the adoption of the state-of-the-art in management practices in Pakistan. A study based on Pakistan’s economic and business environment should demonstrate applicability of modern management concepts in the local setting. The findings would then sell well with the Pakistan business community. They would then find application in Pakistan. The findings of this study are intended to play that initial transformative role so essentially required in Pakistan’s business sector.

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The findings would further demonstrate that the modern strategic management concepts travel across different cultures. This would instil confidence in some of the developed countries’ researchers and management experts who remain unsure about the cross-cultural applicability of ideas developed in the West.

The study will generate further research proposals and hypotheses for testing in Pakistan.

2 Explanation of relationship between micro level performance and macro economy

In a classic study carried out by Michael Porter, Professor of Business Administration, Harvard Business School, microeconomic conditions are found to be highly important for corporate and country competitiveness and for economic development [Porter, (1999), pp.30–53]. This study presents strong empirical evidence in support of the above relationship and will, therefore, be widely cited herein. As a part of this study, bivariate relationships between the microeconomic variables and GDP per capita are tested. The variables are grouped into company operations and strategy and national business environment. Company variables measured as nature of competitive advantage, value chain presence, production processes, marketing expertise, and breadth of international markets are found to be particularly associated with GDP per capita [Porter, (1999), pp.42]. These explain 81%, 74%, 76%, 67%, and 65% of the variance respectively (ibid.). The author suggests, “Monitoring the competitive approaches of companies is a powerful indicator of progress in economic development” [Porter, (1999), pp.32].

As for the national business environment, business information availability, information infrastructure, demand conditions, domestic supplier quality, intellectual property protection, and absence of bribery all explain variations in GDP per capita more strongly than human resource and physical infrastructure do [Porter, (1999), pp.42–43]. If micro conditions feed into macroeconomic strength, some of the business environment variables above would be directly influenced by microeconomic performance. It is the trickle-up concept that remains at work too.

The author concludes, “Political stability and sound macroeconomic policies have long been considered the cornerstone for economic development. The results here suggest that they are necessary but not sufficient... Taken as a whole, the results again challenge the notion that microeconomic improvement is automatic if proper macroeconomic policies are instituted... While institutions such as the IMF have strongly pushed macro reforms, our findings suggest that micro reforms are equally if not more important. Without micro reforms, growth in GDP per capita induced by sound macro policies will be unsustainable” [Porter, (1999), pp.38]. Porter further emphasises, “Our results highlight the pressing need to better integrate microeconomic and competitive thinking into the economic reform process. If reform efforts in developing countries remain limited to IMF-style macroeconomic adjustments, we will face a continued succession of disappointments” [Porter, (1999), pp.30].

In Michael Porter’s study, survey data were obtained from 58 countries ranging from low per capita countries of Vietnam, Ukraine, and Indonesia to advanced industrial economies such as Sweden and the USA. Even in advanced countries such as Canada and UK which have appropriate macro policies, micro reform is required to distribute

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macroeconomic gains (ibid.). For this purpose, the private sector is urged to play a role in shaping that very business environment which influences its performance [Porter, (1999) pp.31].

It has been empirically established that external environmental political and economic factors have impacted macro trends in corporate profitability in Pakistan [Pasha and Fatima, (1998), pp.225–242]. The study concludes that in addition to responsible government intervention, “businesses need to learn to cope with changes in external economic and political factors...” (ibid., 240). MNCs usually follow modern management practices that are, inter alia, responsible for their effective response to external factors and global presence.

3 Strategic management of business organisations

This brings us to the state-of-the-art in business management which is known as strategic management of business organisations. Strategic management of business organisations is to make a response to the dynamic external environment with a view to striking a fit between the internal and external environments so that a firm is able to use its strengths and overcome its weaknesses with a view to exploiting the external opportunities and averting the threats so as to achieve organisational goals and accomplish the mission. Business organisations need to be driven by a sense of mission that defines their reason for being. An assimilation of the mission throughout the organisation leads to the development of shared values around which the organisation coalesces and is then geared to manage for stakeholders (Harrison et al., 2010) and to make an effective response to the external environmental factors.

However, there are firms that make a reactive response to the external factors as they encounter them. Some others anticipate the external factors and are well-equipped to brave the challenges of the external environment when confronted by them. Still, others give shape to the external environment as they lead in their respective business areas blazing new trails for others to catch up with. These are the most advanced and developed amongst the business organisations. However, the least that is now expected of business organisations is to anticipate the external challenges and be geared to respond effectively when it comes time to do so. For, the financial and non-financial benefits of strategic management have been established empirically in the field of management. Practices of high-performing firms reflect a more strategic orientation and a longer term focus [David, (2009), p.16]. A longitudinal study of 101 retail, service, and manufacturing firms over a three-year period demonstrated that businesses using strategic management concepts experienced significant improvements in sales, profitability, and productivity compared to the ones that did not use these concepts [David, (1999), p.16].

So, it is a poor organisation that blames poor performance on external factors. This appears to be the case in Pakistan barring some exceptions. Most organisations remain overwhelmed by external factors that successful organisations remain on top of.

While MNCs usually follow modern management practices which is one of the factors responsible for their global presence, it is now concluded that the same cannot be said for Pakistani organisations whether they are in the public sector or in the private sector. Even though each organisation should be driven by its mission that defines its reason for being to provide goods and services for needs and wants satisfaction, the

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factors driving our private and public organisations need to be determined. Our research shows the formulation of mission statements by the top echelons. Unless the lower levels are imbued with a sense of mission, response to external environmental factors will remain inadequate.

In majority of Pakistan’s family-owned businesses, absolute control is exercised by the family over organisational decision-making (Cheema, 2003). Out of a sample of 32 companies, in 85.8% of Pakistan’s textile companies and 55.5% of Pakistan’s non-textile companies, the family controls equal to or more than 30% of the total share capital compared to 58.7% companies in Indonesia, 20.1% in South Korea, 45.6% in Malaysia, 18.4% in Taiwan, and 54.8% companies in Thailand in which the family controls the same level of share capital (ibid., p.11). More than 40% of total share capital is controlled in 50% of Pakistan’s textile companies and in 38.9% of Pakistan’s non-textile companies as compared to 35.4% companies in Indonesia, 3.5% in South Korea, 14.7% in Malaysia, 5.0% in Taiwan, and 38.9% companies in Thailand in which the family controls more than 40% of share capital (ibid.). In terms of family control of share capital, Pakistan is closer to Indonesia and Thailand than it is to the more rapidly developing East Asian countries of South Korea, Taiwan, and Malaysia.

Family control over decision-making is further consolidated through family domination of the Board of Directors (ibid., p.14). As is generally known and concluded by Dr. Ali Cheema through his research cited herein, increased family control leads to increased private gain-maximisation at the expense of the interest of other shareholders and creditors. Family-based controllers would, therefore, oppose corporate governance reforms that would dilute their control (ibid., p.16).

Research has demonstrated that a large number of firms are family-business groups having controlling shares and indirect control exercised also through cross-shareholding and interlocked directorships with groups structured as pyramids (Ikram and Naqvi, 2005). The owners tend to divert resources between firms in the pyramid which diversion is known as ‘tunnelling’. Ikram and Naqvi (2005) have found evidence of tunnelling in Pakistani business groups (ibid.).

Zaidi and Aslam (2006) have found a great degree of concentration of family members in firms’ top echelons. They conclude that training and more democratic decision-making structures including outsiders are essential for superior performance (ibid.).

Ghani and Ashraf (2005) demonstrate that while group firms have better return on assets (ROA), they score low on market valuation measured by Tobin’s Q as it is perceived that business groups have lower transparency and weaker corporate governance mechanisms. It is further interpreted in Ghani and Ashraf (2005) that business groups are also viewed as mechanisms to expropriate minority shareholders.

Strong case is, therefore, made for improving corporate governance in Pakistan. The government of Pakistan set up the Securities and Exchange Commission of Pakistan (SECP) in 1997. SECP launched corporate governance reforms and has been trying to build a regulatory framework for better management of the corporate sector. Rais and Saeed (2005, p.13), however, conclude that “…some of the companies are still violating the laws for disclosing the material information and are manipulating the announcements of the results for the benefits of the insiders.”

The daily Dawn (2010) reports, “With the exception of five sectors, less than half of the top corporate entities in the country have filed income tax returns during the first half

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of the current financial year. Only 24% of those which have filed returns have declared income and the remaining 76% have made no contribution to the federal revenue, says the quarterly report of the Federal Board of Revenue (FBR). A majority of companies listed among the 20 major corporate entities in different sectors have either declared loss or no income.”

The state of basic management practices is as described above. And, the businesses remain sceptical about the applicability of the strategic management concept in Pakistan.

However, there is anecdotal evidence that suggests that some businesses are attempting to graduate to modern management practices. Bukhari Commercial Exporters and Group of Companies won the best FPCCI Export Performance Trophy Award 2001–2002 (Dawn, 2003b). They export textile and food products. At Bukhari Commercial, “a systematic process of strategic planning is well in place” (ibid.). For Bukhari Commercial, “Strategic planning involves the transformation of vision into reality through external and internal environmental scanning and implementation of best suitable strategies” (ibid.). Some others too are approaching these modern management concepts as discussed herein.

Corporate Excellence Awards given out annually by the MAP evaluate organisations on the basis of criteria that define best management practices internationally. The criteria used to evaluate for Corporate Excellence Awards 2001 were, however, changed further to bring them closer to the criteria used for giving international management awards. Consequently, only 30% weightage was given to financial performance and 70% to the quality of management as reflected through corporate governance, strategic direction and leadership, and strategic management of other functional areas (MAP, 2001). The survey questionnaire was revised to gauge the extent to which the concepts of strategic management were being incorporated by the responding companies. It was found that national companies competed successfully with multinationals for the Corporate Excellence Award 2001 (Dawn, 2003a). The winning companies included Al-Ghazi Tractors Limited, International General Insurance Company of Pakistan Limited, Colgate Palmolive (Pakistan) Limited, Unilever Pakistan Limited, Bolan Castings Limited, Thal Jute Mills Limited, and Orix Leasing Pakistan Limited.

If strategic planning brings success to above firms, so should it to other Pakistani organisations. And, if the above firms can get near the state-of-the-art in management in Pakistan, so should others be able to in the same country.

However, since the above is anecdotal evidence, the general tendency regarding the relationship between external environmental response and company performance in Pakistan must be determined. For, it is important to determine if improvement in business practices in Pakistan would contribute to business and economic development of the country with a view to also convincing the business community about this relationship between micro and macro level performance. This is the second major goal of this study.

Next section explains methodology and data collection followed by data analysis and findings, and conclusion.

4 Methodology and data collection

First testable relationship that follows from the preceding review is that between micro level corporate performance and macroeconomic performance. Hypothesis 1 is, therefore, stated below:

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Hypothesis 1 There is no relationship between micro level corporate performance and macroeconomic performance in Pakistan.

This relationship is not only known generally and commonsensically but has been empirically established through the afore-cited Global Competitiveness study conducted by Michael Porter (Porter, 1999). However, this hypothesis testing in the Pakistan context will be of great academic and practical significance as it will strengthen the case for micro level reform in Pakistan essentially required for its cumulative impact on the country’s macroeconomic indicators that will feed back into still better micro level performance in the country.

The relationship was, therefore, tested for Pakistan for the periods 1984–1999 and 2000–2007. The study is broken down into two time periods due to a change in the base year. Beginning from 1999–2000, Pakistan’s GDP was rebased at 1999–2000 prices from two decades old base of 1980–1981. Data were taken from the various issues of Pakistan Economic Surveys and Balance Sheet Analyses of Joint Stock Companies and are presented in Table 1.

As discussed in detail in a preceding section, since most organisations in Pakistan remain overwhelmed by external factors that successful organisations remain on top of, it is essential to test a second relationship for Pakistan with a view to first assessing and eventually developing wider business response capability to external environmental factors. This widely diffused capability is imperative for building business competitiveness in the domestic and foreign markets. Hypothesis 2 would then be framed as follows:

Hypothesis 2 There is no relationship between a proactive response from business organisations/companies to external environmental factors and company performance in Pakistan.

This relationship was tested as follows. Two postal self-completion questionnaires were sent sequentially to the selected

listed companies in each sector/sub-sector. The first questionnaire contained both closed as well as open-ended questions. Answers to eight questions were sought. These included questions about organisational mission, goals, objectives; external environmental scan and its frequency; the external environmental factors routinely studied by the organisation; and impact of external environmental factors on company performance. The questionnaire also sought answers to companies’ market performance and competitive position. The questionnaires were initially mailed and later followed up by personal visits.

The second self-completion questionnaire was also sent to the selected listed companies in each sector/sub-sector. The second questionnaire also contained both closed as well as open-ended questions. Answers to 12 questions were sought. Detailed answers were solicited on how the mission statement is prepared (Q#1), how the external environmental scan and analysis are conducted (Q#2 to 4), what the firms’ critical success factors (CSFs) are, and how the CSFs are determined (Q#5 to 7). Questions were also put up to gauge the health of the organisational hierarchy (Q#8 to 12). The questionnaires were initially mailed and later followed up by personal visits.

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4.1 The survey

The first self-completion questionnaire was sent to 110 companies listed on the Karachi Stock Exchange (KSE). These listed companies are organised into 33 groups. We grouped all the five textile related groups into one group of textiles. Groups excluded from the study are mutual funds, modaraba companies, technology and communications, and miscellaneous. Sample was then drawn from each one of the basic 25 sectors in the areas of manufacturing and banking. On the basis of share price, top four listed companies were selected from each sector as this study is about best management practices. With four sub-sectors in textiles, the total number of groups was 28. With only three companies in two of the sectors, the total sample size was 110. Out of these 81 companies are based in Karachi and 29 companies are based outside Karachi. While 67 Karachi based companies responded with a response rate of 82.7%, only three companies responded from the ones based outside Karachi. Overall, 70 companies responded with an overall response rate of 63.6%. Out of these 70 companies, financial data were available for 61 companies and not for the nine firms in banking and insurance. The survey is limited primarily to Karachi and is representative enough of the prevalent management practices as Karachi is the hub of Pakistan’s industrial and commercial activity. Karachi has 50.4% of total listed companies, 41.4% of total non-listed companies, and 32.7% of total private companies in Pakistan (SECP, 2010). Karachi also has 72.4% of total investor accounts (The Custodian Slate, 2009).

A second phase of research was conducted as follows to study more closely as to how the stated external environmental analysis was conducted by the firms under study. This helped in gauging the validity of the research findings from the first phase of the study and in finally arriving at conclusions about the second relationship (Hypothesis 2) being tested as a part of this study.

For the above purpose, a second self-completion questionnaire was sent to the 70 companies that had responded to the questionnaire administered as a part of the first phase of the study. These companies are listed on the Karachi Stock Exchange (KSE). Out of these 70 companies, 67 are based in Karachi and three are based outside Karachi. Responses were received from 51 Karachi based companies. No response was received from companies based out of Karachi during the second phase of the study. While the response rate from Karachi was over 76%, the overall response rate as a percentage of total respondents was 73%. This response rate can help us study typical trends as the response is Karachi based and is, therefore, representative enough of the prevalent management practices since Karachi is at the centre of Pakistan’s industrial and commercial activity, as explained already. Out of these 51 companies, financial data were available for 45 companies and not for the six firms in banking and insurance.

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Table 1 Corporate and macroeconomic performance in Pakistan (Rs in million)

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Table 1 Corporate and macroeconomic performance in Pakistan (Rs in million) (continued)

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5 Data analysis and findings

This part is divided into three sections. The first section presents test of Hypothesis 1. The second section presents test of Hypothesis 2, data analysis, and findings.

5.1 Test of hypothesis 1

Hypothesis 1 is formulated to test the relationship between micro level corporate performance and macroeconomic performance in Pakistan. Tables 2 to 4 present results of correlation analyses for micro level corporate performance in Pakistan for the periods 1984–1999 and 2000–2007. As mentioned earlier, the break is due to rebasing of Pakistan’s GDP at 1999–2000 prices. Table 2 Pearson’s correlation between micro level corporate performance and GDP in

Pakistan, 1984–1999

Sales Gross profit NPBT Tax provision NPAT

GDP R .942** .933** .918** .977** .871** P-value .000 .000 .000 .000 .000

Notes: **Correlation is significant at the .01 level G.P = gross profit; NPBT=net profit before tax; NPAT=net profit after tax

Table 3 Pearson’s correlation between micro level corporate performance and GDP in Pakistan, 2000–2007

Sales Gross

profit NPBT NPBT as

% of sales

Tax provision NPAT

NPAT as % of sales

GDP R .992** .985** .950** .719* .931** .954** .761* P-value .000 .000 .000 .044 .001 .000 .028

Notes: *Correlation is significant at the .05 level **Correlation is significant at the .01 level

Table 4 Pearson’s correlation between micro level corporate performance and GDP growth rate in Pakistan, 2000–2007

Gross profit (G.P)

G.P as % of sales

NPBT NPBT as

% of sales

Tax provision NPAT

NPAT as % of sales

GDP growth rate

R .765* .802* .814* .888** .793* .819* .888**

P-value .027 .017 .014 .003 .019 .013 .003

Notes: *Correlation is significant at the .05 level **Correlation is significant at the .01 level

Table 2 shows highly significant positive correlations found between GDP and corporate sales, GDP and gross profit, GDP and net profit before tax (NPBT), and GDP and net profit after tax (NPAT) for the period 1984–1999 for Pakistan too. All of these correlations are significant at the .01 level. Table 3 also indicates highly significant positive correlations found between GDP and corporate sales, GDP and gross profit, GDP

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and net profit before tax (NPBT), and GDP and net profit after tax (NPAT) for the period 2000–2007 in Pakistan. All of these correlations are significant at the .01 level. During this period significant positive correlations are also found between GDP and NPBT as percentage of sales as well as between GDP and NPAT as percentage of sales as indicated in Table 3. These correlations are significant at the .05 level. As shown in Table 4, significant positive correlations are also found between GDP growth rate and gross profit, GDP growth rate and gross profit as percentage of sales (gross profit margin), GDP growth rate and NPBT, and GDP growth rate and NPAT in Pakistan. All of these correlations are significant at the .05 level. Highly significant positive correlations are also found between GDP growth rate and NPBT as percentage of sales and between GDP growth rate and NPAT as percentage of sales in Pakistan. These relationships are highly significant at the .01 level. As stated earlier, validation of these relationships in Pakistan would serve to convince the Pakistan business community that the relationship between micro and macro level economic performance holds for Pakistan too and is not a mindless extrapolation from the West.

The above data collection and correlation analyses demonstrate that there is a relationship between micro level corporate performance and the macro economy of Pakistan too. While good macro economic performance feeds into micro level performance, sound micro level performance in Pakistan, in turn, impacts the macro level performance. This is further demonstrated by a highly significant positive correlation at the .01 level between the country’s GDP and tax provision as indicated in Tables 2 and 3. Table 4 also shows a positive significant correlation at the .05 level between GDP growth rate and tax provision in Pakistan. Good micro level performance in Pakistan would also yield high tax payments that would provide a fillip to the macro economy that would, in turn, impact the micro economy favourably. It is imperative for the two to enter into a virtuous cycle of growth and development in Pakistan so that businesses and the macro economy grow together. This should dispel the notion amongst the Pakistani business community that the correlation between the micro and the macro levels economic performance is a Western text bookish case not applicable to Pakistan.

So, while macro economy should be well-managed, micro level performance should also be steered in parallel in a manner that performance at these two levels is mutually reinforcing. As explained in a previous section, while external factors do impact organisational performance, state-of-the-art in management equips organisations to respond proactively to external environmental influences on micro organisations.

How might we enter into this virtuous cycle is the next portion of my paper? Test of already formulated Hypothesis 2 is presented in the following sections.

5.2 Test of hypothesis 2

Hypothesis 2, stated already, is that there is no relationship between a proactive response to external environmental factors and company performance in Pakistan. To test the hypothesis, a survey was conducted in two stages/phases.

The first stage/phase of the survey sought answers to questions about organisational mission statements, organisational goals and objectives, external environmental scan and the factors scanned, impact analysis of external environmental scan, and information about the firm’s market share and competitive position. Following this stage/phase, a closer view of the process of external environmental scan/analysis had to be taken as the

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first stage/phase of the study did not demonstrate a positive correlation between external environmental response and firm’s financial performance.

This second stage/phase questionnaire sought answers to the process of developing mission statements, conducting external environmental analysis, and identifying critical success factors (CSFs). Information was also sought on what the key positions for external environmental analysis were, how information was shared, whether authority was dispersed in the organisation, and what the human resource (HR) outlook was.

The companies that responded to the first stage/phase questionnaire had sales ranging from Rs. 7.2 mill to Rs. 133.64 bill and assets ranging from Rs. 68 mill to Rs. 118.67 bill. Out of 59 respondents who claimed to be studying competition regularly, 37 claimed to be market leaders and 20 claimed to be market followers. Two respondents did not respond to the question on market position. Out of the 37 who claimed to be market leaders, seven did not know their market share or did not make it available. Out of the 20 who claimed to be followers, six did not know their market share or did not make it available. That is, over 80% of those who claimed to be leaders and almost 70% of those who claimed to be followers were clear about their market position. The rest were not even though they made claims about being leaders or followers.

Only 22 of the above 59 respondents had a clearer idea about the market share of their competitors and thereby about their own competitive position. The remaining 37 were unclear on this score. Some of them could only name the competitors without knowing their competitive position specifically. So, even though almost 63% of the respondents were unclear about their competitive position, almost 97% of those who claimed to be studying competitive position made claims about being leaders or followers. That is, leadership or followership claims were mostly made in the absence of knowledge about competition and competitive position. This contradiction indicates that the leadership and followership claims are made by the majority in a vacuum of information about the competitive environment. This is an adverse reflection on the response that is made by the majority in Pakistan to the competitive environment, the claims to the contrary notwithstanding. It may, therefore, be said that market position determination is based on estimates limited to own view of the majority firms and that the same need to be backed by information and rigorous objective analysis. Pakistani business organisations need to gear themselves for conducting a professional competitive analysis as a major step towards gaining competitive advantage.

6 Current status of strategic management: data analysis and findings from the study

Strategic management requires definition of mission in the direction of which the organisation is steered strategically. This was the first question put up to the respondents. The findings are summarised in Table 5. Almost 99% of the respondents claimed that they have organisational mission statements.

Competitive analysis is linked to firm’s ability to carry out external environmental analysis. It was found that all but one respondent scanned the external environment as shown in Table 6. This is despite the fact that the one that does not scan the external environment has a mission statement. This firm is in the leather sector. And, the only one firm that does not have a mission statement does scan the external environment. This firm

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is in the power generation sector. While 48 respondents scanned the environment continuously, six did it quarterly, two did it biannually, and 18 scanned the environment annually as shown in Table 7. There were some that scanned it more than once a year and combined it with either a biannual or quarterly or even a continuous scan.

Table 5 Companies that have an organisational mission statement

Frequency Percentage Valid percentage Cumulative percent

Valid Yes 69 98.6 98.6 98.6 No 1 1.4 1.4 100.0 Total 70 100.0 100.0

Table 6 Companies that scan the external environment

Frequency Percentage Valid percentage Cumulative percent

Valid Yes 69 98.6 98.6 98.6 No 1 1.4 1.4 100.0 Total 70 100.0 100.0

Table 7 Frequency of scanning the external environment

Annually Biannually

Frequency Percentage Frequency Percentage Yes 18 25.7 2 2.9 No 52 74.3 68 97.1 Total 70 100.0 70 100.0

Quarterly Continuously

Frequency Percentage Frequency Percentage

Yes 6 8.6 48 68.6 No 64 91.4 22 31.4 Total 70 100.0 70 100.0

Table 8 External factors studied by companies

Competitive Economic Political

Frequency Percentage Frequency Percentage Frequency Percentage Yes 59 84.3 63 90.0 41 58.6 No 11 15.7 7 10.0 29 41.4 Total 70 100.0 70 100.0 70 100.0

Governmental Regulatory Frequency Percentage Frequency Percentage

Yes 50 71.4 58 82.9 No 20 28.6 12 17.1 Total 70 100.0 70 100.0

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Table 9 External factors studied by companies

Social Cultural Demographic

Frequency Percentage Frequency Percentage Frequency Percentage Yes 36 51.4 24 34.3 26 37.1 No 34 48.6 46 65.7 44 62.9 Total 70 100.0 70 100.0 70 100.0

Natural environment Technological

Frequency Percentage Frequency Percentage Yes 44 62.9 59 84.3 No 26 37.1 11 15.7 Total 70 100.0 70 100.0

As shown in Tables 8 and 9, the external factor studied by the largest number of firms is economic studied by 63 firms followed by competitive forces studied by 59 firms and technological forces also studied by 59 firms. While 58 firms studied the regulatory environment and 50 studied the governmental forces, only 44 studied the natural environment and 41 studied the political forces. The environmental factors least studied were social, cultural, and demographic studied by 36, 24, and 26 firms respectively. A total of 12 firms studied all of the above ten environmental factors. These included one commercial bank, one reinsurance firm, three firms in textiles, one in oil and gas marketing, two in chemicals, one in food and personal care products, and three in glass and ceramics. Two of these firms are MNCs and the remaining are Pakistan firms. Minimum number of external factors studied was one studied by only one firm in the cement sector. However, there was one firm in leather and tanneries that conducted no environmental scan. Other than the above-mentioned firms, one to nine external environmental factors were scanned.

Whether or not the firms conduct an external environmental study was asked again in the second phase questionnaire. The findings are summarised in Table 10 below: Table 10 Companies that analyse the external environment Q#2(a)

Frequency Percentage Valid percentage Cumulative percent Valid Yes 23 45.1 45.1 45.1 No 28 54.9 54.9 100.0 Total 51 100.0 100.0

This finding is in stark contrast with the results on a similar question asked as a part of the first questionnaire. As shown in Table 6, 98.6% of the respondents of the first phase of the study claimed to be scanning the external environment. The second phase of the study revealed that only 45.1% of the respondents from the same sample analysed the external environment as shown in Table 10. This implies that while 98.6% of the first phase respondents claimed to be scanning the external environment, only 45.1% of the second phase respondents from a sample same as that of the first phase actually conducted external environmental analysis. That is, a much smaller percentage claims to be conducting external environmental analysis essentially required by growing competitive firms.

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A further test of the same point was incorporated in Qs#3 and 4 of the second questionnaire. Results are shown in Tables 11 and 12 below:

Table 11 Companies that have chief information officer (CIO) Q#3

Frequency Percentage Valid percentage Cumulative percent Valid Yes 11 21.6 21.6 21.6 No 40 78.4 78.4 100.0 Total 51 100.0 100.0

Table 12 Companies that have chief technology officer (CTO) Q#4

Frequency Percentage Valid percentage Cumulative percent Valid Yes 20 39.2 39.2 39.2 No 31 60.8 60.8 100.0 Total 51 100.0 100.0

CIO and CTO are required to start the process of external environmental analysis in an organisation. Initially, the CIO collects external information together with a committee of senior managers who build a list of external opportunities and threats from which is developed a list of about 15/20 critical success factors (CSFs). Once the process gets going, then the process of external information collection gets diffused in the organisation and everybody is involved in information collection intuitively. However, the presence of CIO is required in the initial stages to crank the process and in later stages to coordinate the process.

The second phase research findings reveal that even though 45.1% of the respondents claim to be engaged in external environmental analysis, only 21.6% (Table 11) of the respondents have CIOs and only 39.2% (Table 12) of the respondents have CTOs which points towards the inadequacy of the external environmental analysis being undertaken currently. The adequacy of external environmental analysis was further gauged with the help of Q#2(b) and 2(c). Q#2(c) was for the ones who said that they did not conduct an external environmental analysis. They were asked in Q#2(c) as to how they scanned the external environment if they did no analysis. Most of such respondents who had answered in the negative to Q#2(a) either did not respond to Q#2(c) or said that it was not applicable to them. One respondent in this category and belonging to the textile sector stated that they asked the customers and all of their items were exported. Another respondent said that they reviewed the market requirements. Two other firms said that they did it through laboratory testing. When asked to explain again, these two respondents in sugar and leather industries explained that they tested chemicals for their impact on natural environment. That is, they used business environmental analysis and natural environmental analysis interchangeably. These respondents obviously do not appreciate the meaning and significance of external environmental factors for business organisations.

A major firm in the oil and gas sector answered in the negative to Q#2(a) and reported that the only internal and external environmental audit conducted by them was that pertaining to safety, health, and environment to comply with ISO 14000 and also with ISO 9000. An automotive sector firm, an electrical goods manufacturing firm, two packaging firms, and a ceramics firm said that they checked only the market situation

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which shows that they, at least, understood partially what was meant by external environmental analysis.

The above findings indicate that out of the 54.9% respondents of the second phase who carried out no external environmental analysis, the meaning of external environmental analysis is understood to a limited extent. That is, only 28.6% (8 out of 28) of the above category respondents understood what external environmental analysis is and they, at least, scanned the market situation. One of these respondents displayed familiarity with the term external environmental audit even though they had answered in the negative to the question on whether or not they did an external environmental analysis.

Out of the 23 companies that answered in the affirmative to the question on whether or not they did an external environmental analysis Q#2(a), varied responses were received to the follow-up question Q#2(b) on how they conducted the external environmental audit. Once again two companies in sugar industry and one in fertiliser industry said that their environmental analysis comprised laboratory testing. As determined earlier, they obviously had natural environment in mind and not business environment. Six firms viewed market study to be all there is to external environmental analysis. These firms were in commercial and investment banking, leasing, automobile parts, electrical goods, and food products’ industries. Two other firms in chemicals industry viewed environmental analysis as a combination of market analysis and laboratory testing. A major multinational automobile firm also viewed natural environment as external environment for their organisation with higher management also involved in this analysis. While another five firms mentioned various sources of information that fed into their environmental analyses, major responsibility in this context was either with the departmental heads or with the management committees. That is, the top and the second tiers were primarily involved in external environmental analysis. Another company in automobile parts industry assigned the job to their research department and yet another company in the oil refining sector assigned it to a ‘third party’. However, this firm used internal and external environmental analysis interchangeably. For instance, for human resource analysis, they referred to HR consultants and used this example in response to our question on external environmental analysis. A company in textiles assigned the job to external companies. An MNC in the oil sector used various internal and external sources including stakeholder meetings to conduct their environmental analysis. Another major company in the oil sector conducted only internal environmental analysis and thought that they did not need to do external environmental analysis as they had no market-based customers. This company also displays inadequate understanding of external environmental analysis as it was impacted by other external factors such as economic, governmental, regulatory, and technological to name a few that they did not consider important to study. There was only one respondent from engineering industry that understood the concept of external environmental analysis. However, they assigned the job primarily to the sales department.

It was found that even the firms answering yes to Q#2(a) had limited and inadequate understanding of external environmental analysis and many considered market analysis to be all there is to external environmental analysis.

Also, external environmental analysis should actually be a company-wide function that should neither be restricted to one or two departments nor to the top 2/3 tiers of the organisation. So, even though 45.1% of the respondents are of the view that they conduct

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external environmental analysis, their exercise does not conform fully to the concept as it should be practiced.

It may, therefore, be concluded that 51 of the initial 70 respondents had better understanding of the process of external environmental analysis which is why they responded to our second phase questionnaire. The remaining 19 of the 70 first phase respondents dropped out due to their inability to respond to the second phase questionnaire. This explains the lack of correlation found between responsiveness to external environmental factors and company performance, as a part of the first phase of the study.

Except for three, the remaining 67 respondents of the first phase indicated that external environmental scan had a favourable impact on company performance as shown in Table 13. Out of the three that answered in the negative, one was a textile mill, another one a leather products’ company, and the third one is a paper company. Out of these, the leather products’ company conducted no environmental analysis.

Table 13 Companies claiming favourable impact of external environmental analysis on performance

Frequency Percentage Valid percentage Cumulative percent

Valid Yes 67 95.7 95.7 95.7 No 3 4.3 4.3 100.0 Total 70 100.0 100.0

Even though 48 firms claim to be scanning the external environment continuously (Table 7) and 59 firms claimed to be studying the competitive position (Table 8), only 22 firms are clear about their competitive position as explained in a preceding section. This is a reflection on the quality of external environmental analysis that the firms say they are carrying out.

Nonetheless, the above findings do indicate a high awareness about the concept of strategic management. However, conformity to the strategic management concepts and its effectiveness is a matter that is investigated next in this paper.

As the next important step, the relationship between external environmental scan/analysis and company performance is tested for the periods 1985–2007, 1985–1999, 2000–2007. The results of correlation analysis between external environmental factors and company performance are presented in Tables 14 to 18.

Table 14 indicates that there is no correlation between firms’ response to all external environmental factors combined and average gross sales for the periods 1985–2007, 1985–1999, and 2000–2007. There was no correlation found either between firms’ response to all external environmental factors combined and average gross profit or between firms’ response to all external environmental factors combined and average net profit before tax or between firms’ response to all external environmental factors combined and average net profit after tax for the periods 1985–2007, 1985–1999, and 2000–2007, as shown in Table 14.

For the periods 1985–2007, 1985–1999, and 2000–2007; relationship between all the ten individual external factors was tested next with average gross sales (Table 15), with average gross profit (Table 16), with average net profit before tax (Table 17), and with average net profit after tax (Table 18). As mentioned before, the ten external factors are

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competitive, economic, political, governmental, regulatory, social, cultural, demographic, natural environment, and technological. As indicated in Tables 15 to 18, no significant correlation was found between any one of the above-mentioned individual external environmental factors and either with average gross sales or with average gross profit or with net profit before tax or with net profit after tax.

The above findings, however, do not refute the theory that external environmental analysis and response to stakeholders impacts company financial performance favourably (David, 2009; Harrison et al., 2010) as also discussed in an earlier section. There is a need to investigate as to why stated response to external environmental factors is not found positively correlated with firms’ financial performance. Further research into the matter, therefore, necessitates a closer view of how the stated external environmental analysis is conducted by the firms under study. This is the second part of the research whose findings are presented below.

Table 14 Pearson’s coefficient of correlation for company performance

Combined external factors

r .097 Average gross sales 1985–2007 P-value .456 r .017 Average gross sales 1985–1999 P-value .902 r .118 Average gross sales 2000–2007 P-value .365 r .060 Average gross profit 1985–2007 P-value .646 r –.118 Average gross profit 1985–1999 P-value .401 r .065 Average gross profit 2000–2007 P-value .618 r .058 Average net profit before tax

1985–2007 P-value .658 r –.009 Average net profit before tax

1985–1999 P-value .948 r .092 Average net profit before tax

2000–2007 P-value .481 r .064 Average net profit after tax

1985–2007 P-value .623 r –.017 Average net profit after tax

1985–1999 P-value .906 r .100 Average net profit after tax

2000–2007 P-value .444

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Table 15 Pearson’s coefficient of correlation for average gross sales

Average gross sales 1985–2007

Average gross sales 1985–1999

Average gross sales 2000–2007

r .033 –.090 .003 Competitive P-value .802 .520 .981 r –.032 –.201 –.061 Economic P-value .809 .149 .639 r –.051 –.072 –.011 Political P-value .694 .609 .932 r .184 .144 .182 Governmental P-value .155 .304 .160 r .152 .095 .141 Regulatory P-value .243 .498 .279 r .025 –.087 .028 Social P-value .846 .534 .833 r –.012 .032 .047 Cultural P-value .928 .818 .717 r .026 .082 .107 Demographic P-value .843 .558 ..414 r .192 .129 .194 Natural Environment P-value .138 .356 .135 r .095 –.010 .080 Technological P-value .469 .943 .539

Table 16 Pearson’s coefficient of correlation for average gross profit

Average gross profit 1985–2007

Average gross profit 1985–1999

Average gross profit 2000–2007

Competitive r .066 –.197 .069 P-value .611 .157 .597 Economic r .081 .090 .072 P-value .536 .521 .581 Political r –.030 –.089 –.033 P-value .819 .526 .800 Governmental r .130 –.089 .153 P-value .319 .525 .238 Regulatory r .123 .134 .142 P-value .345 .338 .273

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Table 16 Pearson’s coefficient of correlation for average gross profit (continued)

Average gross profit 1985–2007

Average gross profit 1985–1999

Average gross profit 2000–2007

Social r .136 –.215 .101 P-value .297 .122 .439 Cultural r –.150 –.141 –.161 P-value .250 .314 .214 Demographic r –.149 –.083 –.140 P-value .251 .555 .281 Natural environment r .113 –.190 .134 P-value .386 .172 .303 Technological r .103 .128 .125 P-value .429 .361 .338

Table 17 Pearson’s coefficient of correlation for average net profit before tax

Average net profit before

tax 1985–2007

Average net profit before

tax 1985–1999

Average net profit before

tax 2000–2007

r .094 .045 .110 Competitive P-value .471 .747 .399 r .075 .005 .089 Economic P-value .566 .970 .495 r –.088 –.153 –.065 Political P-value .502 .273 .620 r .147 .137 .176 Governmental P-value .257 .330 .176 r .116 .111 .147 Regulatory P-value .374 .427 .259 r .073 –.136 .087 Social P-value .577 .331 .503 r –.111 –.085 –.094 Cultural P-value .392 .546 .472 r –.128 –.088 –.110 Demographic P-value .324 .530 .401 r .148 .140 .176 Natural environment P-value .254 .317 .175 r .093 .043 .116 Technological P-value .474 .760 .375

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Table 18 Pearson’s coefficient of correlation for average net profit after tax

Average net profit after tax

1985–2007

Average net profit after tax

1985–1999

Average net profit after tax

2000–2007 r .101 .050 .110 Competitive

P-value .440 .724 .398 r .080 .018 .083 Economic

P-value .540 .900 .524 r –.103 –.157 –.092 Political

P-value .432 .263 .481 r .162 .125 .190 Governmental

P-value .214 .372 .142 r .129 .102 .164 Regulatory

P-value .323 .468 .206 r .073 –.139 .093 Social

P-value .576 .321 .474 r –.111 –.093 –.080 Cultural

P-value .394 .509 .541 r –.129 –.097 –.094 Demographic

P-value .323 .489 .472 r .163 .129 .191 Natural environment

P-value .209 .357 .141 r .099 .044 .113 Technological

P-value .446 .753 .384

The second phase of the study isolated the impact of those who had initially claimed (in the first phase) but were not responsive to external environmental factors. Therefore, as a part of the second phase of the study, the relationship between external environmental scan/analysis and company performance was tested again for periods 1985–2007, 1985–1999, and 2000–2007. The results of correlation analysis are presented in Tables 19 to 23 below:

Tables 19 to 23 indicate a general overall lack of correlation between response to external environmental factors and company performance in Pakistan. However, there are a few exceptions. Significant negative correlation is found between response to external factors combined and average gross profit for the period 1985–1999 (Table 19). Significant negative correlations are also found between responses to external factors of competition and economic and average gross sales for the period 1985–1999 (Table 20) as well as between these same factors of competition and economic and average gross profit for the same period (Table 21). This does not reject our hypothesis that is testing the relationship between proactive response to external environmental factors and company performance in Pakistan. Significant negative relationships indicate an inverse relationship that could imply a lack of proactive response to external environmental

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factors and thereby a significant negative relationship between response to external factors and company performance. This could be more so during the 1985–1999 period when awareness about strategic management did not exist much except that about natural environment that too was just beginning to surface at that time. Our research indicates that awareness about response to external environment factors was less than satisfactory even in the ensuing 2000–2007 period. Significant negative relationship, therefore, indicates an inadequate response to the external factors of competition and economic that had gained salience by then.

There is a significant negative relationship also between response to the factor of technology and average gross profit for the period 1985–1999 (Table 21) as well as between technology and average NPBT/NPAT for the same period (Tables 22 and 23). As explained earlier, the response could not have been strategic which is why the relationship is significantly negative. Table 19 Pearson’s coefficient of correlation for company performance

Combined external factors r –.059 Average gross sales 1985–2007

P-value .699 r –.206 Average gross sales 1985–1999

P-value .208 r –.041 Average gross sales 2000–2007

P-value .787 r –.126 Average gross profit 1985–2007

P-value .409 r –.302 Average gross profit 1985–1999

P-value .055 r –.028 Average gross profit 2000–2007

P-value .857 r .067 Average net profit before tax

1985–2007 P-value .662 r .115 Average net profit before tax

1985–1999 P-value .485 r .132 Average net profit before tax

2000–2007 P-value .388 r .082 Average net profit after tax

1985–2007 P-value .592 r .152 Average net profit after tax

1985–1999 P-value .357 r .220 Average net profit after tax

2000–2007 P-value .146

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Table 20 Pearson’s coefficient of correlation for average gross sales

Average gross sales 1985–2007

Average gross sales 1985–1999

Average gross sales 2000–2007

r –.005 –.281 –.006 Competitive

P-value .976 .083 .969

r –.053 –.424** –.051 Economic

P-value .732 .007 .737

r –.033 –.170 –.061 Political

P-value .830 .301 .688

r .096 .042 .117 Governmental

P-value .529 .798 .445

r .122 .009 .112 Regulatory

P-value .423 .955 .465

r –.245 –.253 –.210 Social

P-value .105 .120 .166

r –.191 –.139 –.169 Cultural

P-value .210 .398 .268

r –.068 –.024 –.004 Demographic

P-value .659 .887 .977

r .078 –.023 .102 Natural Environment

P-value .609 .890 .503

r –.043 –.231 –.074 Technological

P-value .777 .158 .629

Note: **Correlation significant at the .01 level

There are, however, significant positive relationships at the .1 level between response to the factor of natural environment and average NPBT for the period 1985–1999 (Table 22) as well as with average NPAT for the periods 1985–1999 and 2000–2007 (Table 23). There are moderate significant positive relationships at the .1 level between responses to the factors of politics, government and regulatory and average NPAT for the period 2000–2007 (Table 23). This shows an increase in awareness and response somewhat to some external factors by the period of 2000–2007. A moderate positive relationship at the .1 level of significance is thus found between proactive response to the political, governmental, regulatory, and natural environmental factors and company performance. We, therefore, fail to reject our hypothesis 2 that there is no relationship between a proactive response to external environmental factors and company performance in Pakistan.

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Table 21 Pearson’s coefficient of correlation for average gross profit

Average gross profit 1985–2007

Average gross profit 1985–1999

Average gross profit 2000–2007

Competitive r –.172 –.368* –.078 P-value .259 .018 .610 Economic r –.234 –.475** –.131 P-value .122 .002 .391 Political r –.010 –.124 .045 P-value .951 .440 .771 Governmental r .048 –.095 .136 P-value .756 .555 .374 Regulatory r .017 –.130 .100 P-value .912 .418 .514 Social r –.127 –.187 –.125 P-value .407 .243 .415 Cultural r –.128 –.127 –.098 P-value .403 .428 .520 Demographic r –.086 –.111 –.031 P-value .576 .491 .837 Natural environment r .029 –.098 .098 P-value .852 .541 .520 Technological r –.229 –.371* –.156 P-value .129 .017 .306

Notes: **Correlation significant at the .01 level *Correlation significant at the .05 level

Table 22 Pearson’s coefficient of correlation for average net profit before tax

Average net profit before

tax 1985–2007

Average net profit before

tax 1985–1999

Average net profit before

tax 2000–2007

r .094 .065 .156 Competitive P-value .537 .696 .307 r .086 –.045 .150 Economic P-value .575 .788 .325 r .151 .048 .194 Political P-value .321 .774 .202 r .147 .208 .207 Governmental P-value .336 .203 .172 r .135 .210 .196 Regulatory P-value .378 .199 .198

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Table 22 Pearson’s coefficient of correlation for average net profit before tax (continued)

Average net profit before

tax 1985–2007

Average net profit before

tax 1985–1999

Average net profit before

tax 2000–2007 r –.144 .105 –.121 Social P-value .345 .525 .427 r –.106 .003 –.093 Cultural P-value .487 .983 .544 r –.109 –.033 –.096 Demographic P-value .477 .842 .531 r .144 .283 .192 Natural environment P-value .344 .080 .207 r .079 –.282 .117 Technological P-value .606 .082 .442

Table 23 Pearson’s coefficient of correlation for average net profit after tax

Average net profit after tax

1985–2007

Average net profit after tax

1985–1999

Average net profit after tax

2000–2007 r .105 .107 .224 Competitive P-value .493 .516 .140 r .095 .025 .219 Economic P-value .535 .882 .149 r .160 .085 .246 Political P-value .294 .608 .104 r .162 .213 .292 Governmental P-value .287 .192 .051 r .153 .215 .291 Regulatory P-value .316 .189 .053 r –.134 .153 –.070 Social P-value .380 .351 .648 r –.099 .011 –.062 Cultural P-value .517 .947 .686 r –.103 –.032 –.066 Demographic P-value .500 .846 .666 r .162 .313 .259 Natural environment P-value .288 .052 .086 r .068 –.277 .127 Technological P-value .656 .088 .407

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However, a lot more needs to be done as is evident from a lack of correlation between very important external factors of competition, economic, social, cultural and demographic and company performance. Also, the response to the technological factor should be strategic failing which the relationship between response to technology and company performance will remain negative. The positively significant relationships between response to external factors of natural environment, political, government, and regulatory and company performance need to be strengthened and confidence interval improved so that company performance is affected more favourably through a proactive response to these external environmental factors.

The above results indicate that despite an attempt, understanding of strategic response to external factors remains limited. This is further borne out through an analysis of the responses received to Q#1. In all cases, mission and organisational goals are determined by the top management that includes the heads of the departments, the chief executive officer, and the board of directors. Process of effective strategic management requires involvement of lower levels and preferably it should be companywide. Involvement leads to understanding, ownership, commitment, and empowerment none of which can flow down through circulars and office memos. Mission not owned will not be accomplished and goals not owned will not be achieved. Concentration of thought process at the top restricts efforts towards the attainment of goals and accomplishment of the mission. This research shows that considerable distance needs to be traversed by Pakistan firms before they are able to manage themselves strategically and before they are able to make a strategic response to external environmental factors.

7 Conclusions and further research

While the above should dispel the notion of inapplicability of strategic management concepts in the country, it is important to further determine the impediments there might be towards progress in the above direction.

As discussed in the introductory section, the structure and disposition of the corporate sector in Pakistan would hinder movement towards modern management practices (Ikram and Naqvi, 2005; Ghani and Ashraf, 2005; Zaidi and Aslam, 2006). Modern management practices seek to maximise organisational gain by contributing to the interests of all stakeholders and not just to the owner managers’ (Harrison et al., 2010). The stakeholders extend beyond the shareholders and creditors to also include the customers, employees, suppliers, creditors, competitors, governments, communities, society at large, and the natural environment or the planet earth. A satisfaction-contribution equilibrium needs to be struck with all providers of inputs without which an organisation cannot sustainably add value to the outputs that the end consumers are seeking and for which the society sanctions the organisation of stakeholders into corporate entities. A corporation, therefore, comes into being with the explicit purpose of providing goods and services to the society in ways that do not generate negative externalities. Deviation from this purpose would amount to a perverse use of the societal sanction. It is, therefore, important to keep ensuring that the organisation remains on the path for which it was established. The board of directors is entrusted with this august responsibility.

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However, as discussed in the introductory section, private corporate sector in Pakistan has been generally held responsible for private gain maximisation at the expense of the interest of other stakeholders. The reason for being of business organisations is to satisfy needs and wants of customers and not profit-maximisation (Thompson and Strickland, 1998). Profit is an ‘objective’ or a ‘result’ of what a business does and not the reason why a business exists (ibid.). How profit is made and to what use it is put are questions that are addressed on the basis of why a business exists, that is, its overarching purpose. While ‘financial performance’ is essential for survival, ‘strategic performance’ is imperative for firm’s long-term growth and sustainable competitive advantage (ibid.). Through profits is generated one of the resources which is the financial resource whereas a firm requires a whole gamut of resources including human, technological, managerial amongst others to function effectively. Customers’ needs and wants satisfaction is done best by firms that manage for stakeholders as they allocate resources to satisfy needs and demands of legitimate stakeholders and develop trusting relationships that lead to win-win engagements with the stakeholders which, in turn, contribute to organisational growth, better performance, and sustainable competitive advantage (Harrison et al., 2010).

It, therefore, needs to be examined whether corporate governance reform is all there is to reform in the corporate sector. While the proclivities of the private corporate sector in Pakistan have been discussed already, those of the public sector of the country are reviewed briefly as follows.

Public sector organisations in utilities, revenue collection, law enforcement, transportation, education, health, and other public service/administration have been known for intended neglect of the purpose for which they were established. And, while in the private corporate sector, it is the family owners who have maximised their personal gain, in most of the public sector organisations, it is the entire line from top to bottom that have indulged at the expense of both the interests of the organisation and the community/society they ought to have served through diligence and sincerity of purpose with a missionary zeal. While this is a requirement of all kinds of service in general and of public service in particular, fulfilling this requirement is actually viewed as silly. Cutting corners and personal gain maximisation even if it is at the expense of others is viewed as ‘smart’. With values turned on the head, can call for ‘good governance’ deliver only by organisational structural changes unless the value system is reversed?

If majority as in the public sector or a powerful minority as in the private sector are out to make personal gain at the expense of that of the organisation and its other stakeholders that include the shareholders, employees, suppliers, creditors, competitors, government, natural environment, community, and the society at large, the moral fabric of the society stands pretty much ruptured. Pakistan is steeped into third-degree corruption which is ‘self-destructive’ having moved on from the first two stages of ‘restricted’ and ‘wide-spread’ corruption (Anwar, 1991). In the third stage of corruption, the lowest income groups too resort to deviant practices to survive. Corruption is thus institutionalised and becomes the norm as cultural goals change faster than the corresponding change in institutionalised means (ibid.) which should facilitate goal attainment. In the absence of legitimate means, deviant means are used to achieve the goals which border high materialism and greed in our case. Thus a convergence takes place between the highly materialistic goals and whatever means available and possible, as the new ends of material greed now justify all the means – legitimate or otherwise.

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Against the above backdrop, it is transformational change that our private and public sector organisations require to get on to a sustainable growth path in harmony with the goals of national development at the macro level.

Transformational change cannot, however, be brought about only through changes in structures, systems, and the composition of the board and the criteria for its membership as envisaged in Pakistan’s corporate governance reforms. A review of Mckinsey’s 7-S framework is essentially required to determine if structure, system, and staff are all there is to the transformational change required in Pakistani organisations. A sense of shared values needs to be developed around which the organisation may coalesce to achieve mutually agreed upon goals so as to accomplish the organisational mission. Herein lies the importance of the role of the board of directors [Sonnenfeld, (2002), p.111]. A future research area would, therefore, be to study how the boards function in our private and public sectors so that corporate governance solutions may be customised to the extent possible with a view to initiating a transformational reform process at the various micro-levels in the country.

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