Organizational Behavior

Analyzing Organizational Behavior

Understanding individual behavior is challenging. This makes analyzing organizational behavior complicated because large organizations have many people working individually and collectively to achieve organizational goals. Organizations are naturally complex to analyze because they comprise of different individuals and groups. Models provide the best solution to analyzing organizations. They are roadmaps to organizational behavior with regard to identifying critical factors and their relationships. It is why this research paper will utilize Nadler and Tushman’s Model to analyze an organization. This research paper contains an analysis of Walmart using Nadler and Tushman’s congruence model to identify key components, desired outputs, and issues that need addressing in the organization’s strategy.

Walmart is the largest retail store in the world operating over 11,000 retail units and employing over 2.2 million associates (Walmart, 2014). Its large nature makes it complex to manage. This is because the management has to understand the behavioral patterns of millions of people and multiple groups, including relationships that exist among them. Walmart is among the leading global companies generating high revenues consistently over the years as evident from their second and first ranking in the Fortune Global 500 list in 2012 and 2014 respectively (Walmart, 2014). The organization has achieved remarkable success in the last decade largely due to successful implementation of organizational strategy. Walmart’s success generally results from the management understanding the complex organizational behavior patterns and implementing strategies to control critical components of the organization according to Nadler and Tushman’s model. Below is a detailed analysis of Walmart’s strategy based on key components of environment, strategy, tasks, formal system, and key individuals (Walmart).

Nadler and Tushman’s Congruence Model

Analyzing Walmart using Nadler and Tushman’s Congruence Model requires categorizing organizational strategy into inputs, transformation process, and outputs. The model describes interdependence as the most critical property of organizational functioning and the same case applies to Walmart. The founder, Sam Walton, laid the foundation of Walmart based on the congruence of critical inputs, transformation processes, and major outputs when he opened the first Walmart store in 1962 (Walmart, 2014). He managed to balance the three critical components enabling his store to perform within its potential. The effectiveness of the Congruence Model of organizational behavior was evident five years after Walton opened the first Walmart store, because the business had expanded to twenty-four stores. This eventually led to official incorporation of the current Walmart Stores, Inc in 1969. Understanding Walmart’s success based on Nadler and Tushman’s Model requires further breakdown of the inputs, transformation process, and outputs as provided below.

One of the key inputs Walmart deals with on a daily basis is the environment. The retail industry is unforgiving with regard to demands by the environment and possible constraints on organizational functioning. Walmart and other retail organizations must contend with an ever-changing environment where the market demand for goods and services is high. They also face the challenge of balancing quantity and quality, which directly affects organizational functioning. Nadler and Tushman’s Congruency Model identifies environment as the first key input and consider it key to organizational functioning. Based on the Congruency Model, the key components of environment in the case of Walmart include their customers, suppliers, investors, government, and regulatory bodies, competitors, community, and global responsibilities among other groups (David Nadler and Michael Tushman).

The market is the most important key component of Walmart’s environment because their primary goal is to provide goods and services to clients in their retail stores. The entire company revolves around the customer as evident from Sam Walton’s mission to save people money so they can live better (Walmart, 2014). Suppliers are another key component of Walmart’s environment for they enable the organization to serve their customers. Walmart has thousands of suppliers globally who they enlist through application based on fulfillment of requirement standards. Walmart needs many suppliers because of the global demand for their products in local and global retail stores. Inevitably, they also put constraints on Walmart’s organizational action (Walmart).

Competition is another category of key environment components Walmart deals with. The organization may be large but it still faces stiff competition from other retail companies, such as Argos. Competition is normal especially in the highly competitive retail industry and it directly affects Walmart’s organizational action and marketing strategies. Increased competition over the years is also responsible for decisions and norms implemented by Walmart to gain competitive advantage over rivals. Investors are an equally important key environmental component considering they provide the necessary resources for Walmart. Resources are a key input in Nadler and Tushman’s Congruency Model thus making investors integral to Walmart’s organizational action. Satisfying investors is equally as important as satisfying customers. They affect Walmart directly through financial input, thus satisfy the critical feature for analysis in the Congruency Model (David Nadler and Michael Tushman).

Government and regulatory bodies are important environment components that put constraints on Walmart’s organizational action. This comes from the nature of the retail industry where safety and quality of products sold in retail stores is critical. Walmart is also a global company operating in 27 countries. This means the company has to deal with different government policies and regulations, which complicates managing organization behavior. It also operates in a modern world where organizations must fulfill their global responsibilities with regard to environmental protection and preservation. Such issues place a greater demand on Walmart and put constraints on their actions.

Generally, the inputs discussed in this paper exist outside Walmart but affect it directly. They are critical features for analyzing the organization and determining the demands and constraints environment has on Walmart. They also influence the strategy Walmart adopts and implements to overcome its constraints. Strategy is an input but it is different from others for it acts as a transition to the transformative process. The Nadler and Tushman’s Model considers strategy the most important component in organizations for it determines organizational output. Analysis of Walmart shows it has adopted key strategies to deal with key environmental components it faces as follows (David Nadler and Michael Tushman).

The first strategy in the Nadler and Tushman’s Model is defining the core mission of the organization. Walmart’s core mission is to save people money and improve their lives as is defined in their mission statement “We save people money so they can live better” (Walmart, 2014). It is the same mission Sam Walton had when opening the first Walmart store in 1962 and is still their mission up to the present day. This strategy ensures the organization reaches and positively influences a greater market than their competition. Walmart aims to achieve it through innovative thinking and leading through service to ensure they achieve their outputs (Walmart).

Walmart employs the vision of strategic globalization to enable their customers save money and enhance their lives worldwide. Competing at a global level is also a smart business strategy in terms of overcoming the constraints of competition and enhancing business growth. The company aims to become the largest global retailer by focusing on strategies and actions that increase future business success. Supporting strategies it adopts in a bid to achieve their mission include additional global expansion to access a wider market and promoting ownership of ethical culture among stakeholders through diversification programs. Walmart employs its strategies based on three core values of respect for individuals, striving for excellence and serving one’s customers (Walmart).

Generally, Walmart’s strategies focus on continuous learning and improvement as evident in their core statement “High Expectations Are Key To Everything” (H.E.A.T.K.T.E.) (Walmart, 2014). Nadler and Tushma’s Congruency Model defines strategies as determinants of tasks and the same applies to Walmart. Tasks are part of the transformation process. Walmart gears theirs towards helping customers, employees and stakeholders make right decisions in a bid to improve the reputation of the organization and ultimately gain a competitive edge in the global market (Walmart).

One of the tasks at Walmart is implementing a servant leadership policy that requires managers to be part of the team. The organization also gives its employees access to leadership at every management level, which ensures effective communication within the organization. Walmart employs employee-customer policies. They include the sundown rule of answering customer and employee queries within 24 hours and the 10-feet rule that requires employees to greet customers within ten feet of them (Walmart, 2014). Walmart is keen on interdependence and creating synergy among employees as evident in their servant leadership policy. Continuousness and reward are also crucial factors in the task component of the Congruency Model as reflected in Walmart, where employees are associates in profit sharing. Tasks at Walmart are collective and individual- based to ensure successful implementation of organizational strategies mostly through informal organization, such as their unwritten rule culture.

Any transformation process requires a formal system and individuals to perform tasks (Nadler and Tushman, 41). Walmart is no exception as it has a formal leadership structure with key individuals holding key positions. The Board of Directors is the top Leadership body at Walmart with Rob Walton playing the chairperson role (Walmart, 2014). The company has a hierarchical leadership structure starting with the president (Mike Duke) all the way to store managers at the bottom. Rob Walton adopts a servitude style of leadership that involves making decisions based on input and feedback of customers as opposed to employees or stakeholders. This leadership style creates a work environment oriented towards servitude as leaders lead by example. Such leadership transformed Walmart from a large retailer to a global business force (Davide Ravasi and Majken Schultz).

The transformation process at Walmart aims at achieving their desired output of saving their customers money and enable them live better lives. This output has mutual benefits for customers and Walmart in terms of getting value for their money, while simultaneously building Walmart’s reputation as a global force. The output at the organizational level is global expansion by reaching a wider market to guarantee sustainability. Walmart aims to achieve this goal despite the constraints of environment and other input factors, such as resources and unpredictability of the global economy. The desired output at group level is receiving quality service at cheaper cost for customers, discovering and enhancing work skills for employees, and sharing profits through return on investment for investors and stakeholders globally (Walmart).

Walmarts achieves its desired outputs judging by current and past statistics. It is the top ranked retail company globally. This is evidence of the organization achieving its desired output of global dominance over competitors. Walmart is also achieving desired outcomes at group level considering it made approximately $473 billion in sales in 2014 (Walmart, 2014). This means that management, stakeholders, employees and other groups within the organization achieved their goal of successfully implementing organizational strategies. Walmart also achieves individual level outputs with regard to employee satisfaction through promotions and bonuses. Organizational growth also means that investors gain leverage and returns while higher sales make resource utilization more efficient. Overall, Walmart has achieved and surpassed its desired outcomes (Walmart).

Nadler and Tushman’s Congruency Model describes strategy as the response to organizational inputs and constraints. The analysis of Walmart shows its strategy is in line with their environmental inputs. This is because the transformation process aligns with Walmart’s strategy of positively influencing a greater market than their competition by providing easy access to affordable goods and services. The transformation process also aligns well with the globalization strategy and striving for excellence in serving customers. For instance, the key tasks at Walmart focus on synergy, and implementing and promoting an ethical culture in the organization. Embracing culture and diversity is one of the major forces behind growth of the informal organization at Walmart. Team synergy grows because managers and employees at Walmart interact and strive for excellence in continuous improvement and learning. The interaction between key tasks and informal organization thus helps in producing desired output (Davide Ravasi and Majken Schultz).

The formal organization, chaired by Rob Walton, is largely responsible for the interaction between transformation processes. Rob transformed Walmart from a regional retailer to a global organization through his servitude leadership style. He combines this style with a visionary leadership style, initially adopted by his late father Sam Walton. The interaction between Rob’s servitude and visionary style aligns Walmart’s strategy with its transformative process perfectly and vice versa. Rob uses his visionary style to manage resources effectively by cutting labor and supply costs. He then uses the informal organization of shared responsibilities to implement organizational strategy efficiently by involving employees in decision-making. The interactions between the transformation processes at Walmart thus originate from its formal leadership. This is because it enforces the key tasks of service to customers, respect for individuals and striving for excellence that nurtured the existing informal organization responsible for producing outputs (Davide Ravasi and Majken Schultz).

Evaluating the outputs at organizational, group and individual levels reveals there might be issues that Walmart needs to address. The main concern regards individual outputs considering employees contribute the largest yet organization and group outputs are higher. This is normally the case in most organizations where the organizations and stakeholders benefit the most while employees receive meager or no share of profits in some cases. Walmart promises outputs for individuals, such as job satisfaction, favorable working conditions, and profit shares yet there are many complaints from disgruntled employees. The legitimacy of many individual complaints is difficult to verify but Walmart should address multiple complaints of understaffing and poor working conditions in some stores. The fact that Walmart employs over 2.2 million associates globally is a possible source of issues regarding employee satisfaction and rewarding mechanism. Walmart has a solid organizational framework. This is why it should address emerging issues on individual outputs to ensure collective growth and development at organizational, group and individual level.
There is overwhelming information on how Walmart works but there is little data on how it deals with competitors. It would be important for this analysis to learn the relationships between Walmart and other competitors in the market but unfortunately, no available resources provide credible information for this analysis. It requires one to get the information from Walmart, which is logistically improbable. However, critical information for this analysis was available from various electronic resources and was utilized in the research.

Overall, analyzing Walmart using Nadler and Tushman’s Congruence Model shows its former and current leaders adopted effective strategy to configure existing resources to overcome the constraints of key environment components. A combination of effective leadership and informal organization culture based on servitude and continuous improvement turned a regional company into the biggest global retail company. Walmart’s success results from Sam and Rob Walton, understanding key components of the environment and aligning them with visionary strategy. The interaction of their leadership styles, specific tasks, and a revolutionary informal organization that ultimately led Walmart to achieve it outputs at organizational, group and individual level, thus giving rise to the empire it is now.

References

David,Nadler and Michael, Tushman. Frameworks for Organizational Behavior. A model for diagnosing organizational behavior: Applying congruence perspective. Managing Organizations: Readings and Cases, pp. 3-48.

Davide, Ravasi and Majken, Schultz. Responding to Organizational Identity Threats: Exploring the Role of Organizational Culture, Academy of Management Journal, Vol 49 (3), pp. 433-458.

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E-Business

E-Business is a term used to define a business or mode of operations that have their existence on the internet or which conducts it operational tasks electronically. E-business is the ability to provide products/services on a secure domain with low costs, which allow hundreds of people to be looking at them and it also helps to make up to date changes on a regular basis. In its simplest form E-business can be taken as providing service and ease with satisfaction with the use of technology.

Ethics is a part of the study of psychology, which shows what is right and wrong, what acceptable behavior is abiding by the law, business ethics too involve such measures that needs to be taken care of in relation to communicating or dealing with other people whom being a stockholder, stakeholder or a shareholder may have influence over your business (Gauer.2000). E-business do have ethical rules associated with it, as in this case the targeted number of people is much larger and their privacy and content should be given preference while dealing.

The ethical/legal issues involve in an E-business can be of different types and genres. The internet was once taken as the source only to search for some important information, but with a gradual update of time it is getting more commercialized, now it’s seen most of the trading is done through the internet even banking has been made online, this is done not only to provide ease but it is also considered as the cheapest and fastest service to cater the needs. But E-business does not come alone without having any constraints, these issues might be considered as normal, but they do have serious impacts on the sources (Gehling and stankard, 2005).

Ethical and legal Issues

The issues involve can be:

Web spoofing

It refers to the technique used over the internet where attackers form a fake website, made on the same criteria and setup as the original one and demands from customers to give their credit card numbers and other personal information that then can be used in any of the disruptive activity which they will not be aware of.

Cyber squatting

This technique involves when a domain name of a well known business or organization is purchased, registered or used illegally for the purpose of infringement of its trademarks. This is done to wring payments from the original owners of the trademark. This is a source of manipulation done by the hackers to demand high payments for getting back the domain; otherwise their trademarks will be distorted.

Privacy invasion

This issue is mainly related to consumers, when their personal information is leaked out and used for unauthorized purpose. This involves getting personal information of consumers using different web technologies. The information provided can be used by anyone other than in authority. The malicious programs that run silently on web pages can reveal the personal data of consumers.

Email spamming

It is also referred to as unsolicited commercial email. This is done by spammers as they send fake emails representing an authorized name and get access to the personal data of the customers as if by mean of asking this for promotional purposes or other related activities.

These ethical/legal issues of E-business can be associated with hacking as becoming a serious issue with ever growing responsiveness for the online operations of the business.

Hacking is a major cyber crime, it refers to when a person or a chunk of people get access to the data with unauthorized measures and uses it for the purposes of infringement of information and dispossession of online operations a business.

The recent incident of hacking has been reported which discusses the ethical/legal issues of this activity and its effects on consumers, the further part of this paper will elaborate as how this intrusion could have been prevented and what measure could have been taken.

Recent Incidents

Sony Pictures and PlayStation 3.0 Hacking

Sony PlayStation accounts – about 1 million were hacked by hacker George Hotz. Sony took legal action against him and in retaliation, the group Lulzsec headed by founder Sabu hacked into Sony Pictures accounts. Data including user names, their passwords, addresses and email ids were stolen. Sabu ultimately pleaded guilty, turned an FBI informant and helped arrest 5 more member hackers (Caldwell, 2011).

Discuss the ethical & legal issues involved in a recent hacking case

The ethical/legal issues that we have discussed earlier can be identified with respect to this incident because this incident is related to the intrusion in accounts of consumers where they have stored their personal information and other data that can be used for unauthorized purposes.

Web spoofing can be related to this incident that the hackers from attacking the accounts of consumers have authority over their passwords and user names, what they can do is, by making a fake website they can add up all those accounts to it without knowing the customer about it and then these accounts can be used for infringement purposes. These acts will not only affect the reputation of Sony but also the trust built and the relationship between customers and the company may be distorted.

This act of web spoofing can lead to cyber squatting by the attackers as by making a fake site they are using the domain name of Sony or they have purchased or made illegal use of the name for unauthorized purposes, they can either use the domain as infringement of information as per to the operations of Sony, or they can push up several measures that will destroy the reputation of Sony in the market and in the eyes of its present and potential customers, the attackers may demand for huge amounts of money if Sony wants to prevent destruction of its reputation and operations in the market.

The other issue is about privacy invasion which has been done in this case by violating the rules and leaking the personal information of the customers by hacking their accounts and getting access to their user names and passwords. The intrusion in the case can be malicious because the personal data of the customer can be used for any purpose once it has given access, this may lead to devastating results because personal information can be comprised of names, credit card numbers, phone numbers, email address, which are quite sensitive to handle. They can be used by hackers in illegal tasks, and this will lead to furious results for the poor customer who is all unaware of the fact.

The last issue discussed is of email spamming, after getting personal information or access to the site or domain, the attackers can generate fake emails to the clients asking them for money contribution as act of promotions or other personal data that is not available on the site and make use of it for illegal tasks, making money through this act is common among the spammers and it is found to be the easiest of the technique, because customer is unaware of the fact and being a loyal consent gives information for what they are asked for.

Describe what happened and the consequences. What did the company involved do as a result of the intrusion?

Sony has been a victim of this cybercrime for twice, they have to look for prevention techniques to avoid threats that have been intruded their network. The responsibility of this spoofing has been taken by the group named LulzSec, they have stated that “they have stolen information such as names passwords user names email addresses and other private data of the clients by just breaking into the Play Station network, and to be worst for Sony and to their best they found the data that was not at all encrypted, Sony has saved about 1,000,000 passwords that were in the form of plain text which makes it easier for anyone with some polished skills of hacking to be taken away very easily”.

LulzSec has stated that the theft of data also included 75,000 music codes, and 35 million music coupons, they also have provided with a sample of data which they claim they have taken from the company’s networks and show it as their accomplishment of the mission.

As a result of this intrusion Sony has been victimized and more vulnerable to threats and losses it can generate. As a result of web-base being hacked Sony will now have to incur interconnected cost, the play station hacking instance, has caused Sony a loss of more than $170 million. Apart from the monetary cost rose from hacking theses instances will also add up as a cost for organization for putting in considerable time of the employees which otherwise can be used in their several operational tasks, which will result in a loss of more money being generated.

Computer hacking is what is called the intrusion or interruption of information, Sony Play station is a digitized client database that has names, passwords, email addresses of the clients. The loss of such information can result in a partial loss of competitive edge in the market and it will also affect the client base as they will feel hesitant to trust the source again.

The organization that has been most prudent to the threat of hacking just as in case of Sony needs to develop an organizational structure that is comprised of extensive information technology teams, (Nissanoff, 2006) which will work for the development and improvement of computer networks and safety to secure the network to stop and dissuade hackers from distorting the information available on the server. To make this effective these measures should be made part of the initial business plan so they get implemented timely.

The database being hacked can also lose consumer confidence, once their data has been manipulated, just as in the case of Sony, it’s been twice that they have been a victim of hacking, now the consumers will feel hesitant to provide sensitive information such as credit card numbers and other personal data with a nuisance of their data being stolen and misused. It is very hard to restore the trust and satisfaction of customers once they have been maltreated by a cyber-attack.

What should they have done?

According to Stephen Gates, it is not easy for hackers to manipulate into a server with quite an ease there is some backdoor holes which is helping them to knock the networks so easily, he suggested that companies like Sony should put some protection barricades to identify these persistent threats and stop them from destructive actions.

Sony must introduce tapping technology like intrusion prevention systems (Logan, 2005) which will enable the server to examine the protocols that are being parted of its network. It will also make it too easy and clear to identify protocol anamolies, which will help it to identify the threats and closing them down without facing any fierce consequences.

The security analyst of AppRiver Fred Touchette also stated that companies like Sony should be warned by this incident and should take proactive inspection measures, as most of these companies are not concerned about what is being taken out of their network. All they want is to keep track of information that is being injected into the server which is not appropriate enough. If they will give a consideration to this fact then the harm created by these persistent attacks can be minimized. Sony being hacked for twice needs to put more emphasis over the cyber security issue. The group of hackers has claimed that they have used a simple SQL injection attack to reach into their database and access all the private information which was stored unencrypted in plain text. Learning from the previous experience Sony should have moved a bit faster and should have taken measures to harden their servers company wide. Carrying personal information about people is not a small thing. It’s basically the level of trust they show to you. Companies with established names such as Sony should not have taken this measure to be a light issue, despite of knowing what vulnerable consequences they might end up facing.

The PlayStation or PSP network of Sony after being intrigued was put down for not more than 3 weeks until Sony struggled to secure the system.

What could have been done to prevent the intrusion?

There has been an extensive threat of hacking to the online business. To prevent such threats several measures have been designed that will help any business to prevent it from being captured.

Securing Ports

“Ports” are the means of access given to the user to have a right of entry to use the data but not being part of the server. Using ports, data can be easily utilized and transferred in both ways. The access of ports and utilization of these is considered as a very sensitive issue and its access has been given to professional people as to protect the vulnerability of the matter if attacked. But these ports are sometimes used as an open and close access to support programs such as FTP (File Transfer Protocol). Here comes the issue (Kemmerer, 2003) when hackers find it convenient making an attempt to use your sensitive files, it is very essential to confirm that all the unsecured ports are closed to save content.

Updated security patches

Be sure that the security patches provided to protect the latest data and their protection measures are updated regularly. There is a very popular program by the name of content management systems is being used by many hackers, who are trying hardest of efforts to hack the sensitive information on the net/servers. So release and update the security patches regularly to keep track of your plug-ins/core files.

Comments Attacks

Comments being the most extensive feature considered to get an instant mark and helps creating a good relationship between the server and the customer. But in this case, the server should be very careful, it needs to validate the form of input it is getting before its acceptance in the server, it will help to strip out the unwanted content and prevent any hideous measure to take place.

Unsolicited installation of scripts

It is better to avoid installing third party scripts on the main server of your webpage, unless knowing the fact that what are they and what function it acquires. Even if there has no need arisen to understand the program itself, what you can do is just simply read through the code and look for references and examine third party URL’s. If they are not safe it can be easily prevented.

Using correct CHMOD Permissions

CHMOD allows specific value grant to files and folders on the server, that can determine different levels of access. The permissible range in this specific program varies from 000 (no access) to 777(full access), it’s your decision to allocate permission levels to every content. Make sure that the third party software or might be intruders has to be allowed higher permissions to access if they want to be functional at a proper level. There comes a sensitive decision which has to be taken by you being the authentic party to make a balance between security features.

Prevention of harvesting your lists

Hackers often use techniques to harvest email addresses as in the case of Sony to use for malicious activities. If the domain is saving email addresses for particular reasons of requirement, then be sure they are secured in secure formats, as in most cases the preferred form of storing this type of sensitive data in MySQL database.

Hacking can be prevented through mutual collaboration of both the server and the customer, in order to be successful in the prevention of hacking activities, companies like Sony can provide guidance and manuals as how to take measures and prevent their information from being stolen as per their part.

Use of Generic user names

The clients of a website/server should be educated by the concerned parties as what type of username they should be using. Making common/ generic words as your username makes it very convenient for the hacker to be successful in completing his mission.

Strong Passwords

It is considered as the best technique which can be implemented on behalf of the customer for the protection of matters. It is considered very easy for the hacker to plow huge amounts of data in a very quick time, so generally it is advised to have longer passwords to increase the security of the content, and it is also advised to have a password which contains a combination of characters including alphabets as well as numbers. In such cases, hackers use a method called dictionary attack in which they try different user names and combination of passwords repeatedly that they think are most appropriate for the selection until they get lucky. So it is generally advised to have random strings of combination in your password, then by using a generic form of text.

Cookies

It is very essential to clear the history before you leave the computer, because the information you left behind might get to a source by an unreliable ISP and can be used for illegal unauthorized purposes. Do it often no matter, the server provides you with the claim that there is “no tracking of privacy”. Just be sure to clean the cache to maintain your safety quotient (Iec and abowd, 2005).

Conclusion

The internet today has been taken as the most convenient and easy to approach source in conducting every kind of business. The WebPages and networks/servers contain an enormous amount of data stored after it that can be viewed with a single click. The most challenging scrutiny for the service providers is about the protection of this data, which sometimes creates a big hassle, if lost it can result in fierce outcomes for a business. The measures designed to provide prevention are the most authentic sources, they can make you relax regarding protection, but as they always say there is always room for improvement. With growing networks of hackers, prevention techniques should also be improved.

References

Gaur, N. 2000 „Assessing the Security of your Web Application‟ in Linux Journal, Vol 2000, Issue 72es, Article No. 3. Specialized System Consultants Inc. Seattle

Gehling, B. & Stankard, D. 2005 eCommerce Security in Information Security Curriculum Development Conference, September 23-24 2005 pp32-38, Kenneshaw GA.

Iac hello, G. & Abowd, GD, 2005 „Privacy and proportionality: adapting legal evaluation techniques to inform design in ubiquitous computing‟ in Proceedings of the SIGCHI conference on Human factors in computing systems, Portland, Oregon, USA, pp91-100

Kemmerer, RA. 2003„Cybersecurity‟ in Proceedings of the 25th International Conference on Software Engineering Portland Oregon, pp705-715, IEEE Computer Society

Logan, PY. & Clarkson, A. 2005 „Teaching students to Hack‟ in Proceedings of SIGCSE ’05, February 23- 27, St Louis, Missouri, USA.

Nissanoff, Daniel (2006). Future Shop: How the New Auction Culture Will Revolutionize the Way We Buy, Sell and Get the Things We Really Want (Hardcover ed.) The Penguin Press. pp. 246 pages.

Caldwell, Tracey (22 July 2011). “Ethical hackers: putting on the white hat”. Network Security 2011 (7): 10–13.

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International Humanitarian Law

Is international humanitarian law an appropriate legal framework through which to fight against terrorism?

How International Humanitarian Law deals with terrorism

According to Jean Pictet, international humanitarian law constitutes a critical part of international public laws which largely focuses on the maintenance of humane ideals and protection of individuals in times of war. It is a “body of principles and norms intended to limit human suffering in times of armed conflict and to prevent atrocities” (Conte, 377). The international humanitarian law comprises of international treaty and customary law. Its main objectives involve protecting persons who are no longer taking part in the hostilities (such the sick, wounded as well as civilians) and restricting the parties the methods of warfare between parties to a conflict (Conte, 377). On the other hand, terrorism is defined as violence or threat to violence against the lives, property and wellbeing of innocent civilians (Gasser, 553).

The International humanitarian law neither provides an explicit definition of terrorism nor does it attempt to address the issue of terrorism directly. This may be due to the fact that terrorism, as a social phenomenon, has many aspects which vary from case to case (Gasser, 552). However, the law prohibits numerous acts committed in armed conflict, which would otherwise be considered as acts of terrorism if they were committed in times of peace (Conte, 378). Therefore, the international humanitarian law deals with terrorism in its capacity to deal with armed conflict.

While dealing with the issue of terrorism, the law seeks to draw a distinction between legitimate violence and acts of terrorism. According to the international humanitarian law, the right to use force or commit acts of violence in armed conflict is restricted to the armed forces, which preserve the right to choose the means of warfare (Gasser, 554). Additionally, such violence should only be directed to the armed forces of the other party and not the civilian population. In light of these provisions, the use of illegal means of warfare such as terrorism against ordinary civilians amounts to a crime which is punishable at the domestic and the international level.

When does terrorism amount to armed conflict?

The human international law, through the four Geneva conventions and two protocols identifies four categories of armed conflict; international armed conflict or occupation, wars of national liberation or self determination, non international armed conflict under common article 3, and non international armed conflict under additional protocol 2 (Conte, 378). Some people hold the view that terrorism does not amount to armed conflict because terrorism involves sudden peaks in violence with specific targets while armed conflict develops over a long period of time. In this view, terrorist actions cannot be qualified as armed conflict. However, terrorism acts can be perpetrated during war, and organized terrorists actions can initiate armed conflict.

Terrorism may amount to armed conflict as states retaliate against each other through terrorist attacks. The relationship between terrorism and armed conflict is also constantly evident in numerous warring situations. Terrorism may occur in the context of an ongoing protracted conflict, or lead to military intervention and war. Additionally, terrorism acts may result due to a reaction as a result of intervention in international armed conflict, which further intensifies an international armed conflict. In all these cases, terrorism serves to precipitate armed conflict or intensify an already existing armed conflict.

Are the rules of international or non international armed conflict applicable?

The rules of international and non international armed conflict apply to cases of terrorism in so far as such acts of terrorism occur in the context of armed conflict (Gasser, 555). Since the rules emphasize on the protection of civilian rights, it ensures that any actions that are directed towards the destruction of civilian property and lives, are not perpetrated. Since terrorism is an action that is directed towards the prohibited acts, it is deemed illegal according to the international humanitarian law, making the laws governing international and non international armed conflict relevant in cases of terrorism.

Other provisions of humanitarian law are also relevant in determining the role of international humanitarian law on terrorism. Such provisions include rules governing the protection of cultural property against hostile acts as well as legal protection often awarded to property containing dangerous forces. In the case provided, the state intends to fight against terrorism following a series of attacks on its military as well as its civilian population. However, the applicability of the law of armed conflict in the protection of the members of the armed forces is not self evident because what may appear to be a terrorist act in a civilian case may not appear to be so in the case of armed forces exchanges (Gasser, 557). However, given that the IHL law prohibits the use of weapons to cause unnecessary suffering to members of the opposing party indicates that terrorism acts against members of the military may be considered a crime (Gasser, 557)

Relevant legal rules to evaluate the question of collateral damages

According to the Merriam Webster dictionary, collateral damage refers to “an injury inflicted on something other than the intended target;” with specific reference to civilian casualties of a military operation (Catherwood & Horvitz, 87). In this case, military’s airplane attacks lead to death of civilians and the destruction of property owned by innocent civilians. Legally, collateral damage should involve unavoidable and unplanned damage to civilian personnel and property incurred while attacking a military objective. Therefore, the military is prohibited from engaging in actions for which they are entirely certain that they will result in massive collateral damages.

The international law does not prohibit collateral damage per se, since it is quite difficult to enact laws that prohibit accidents. However, international law relating to armed conflict restricts indiscriminate attacks that can potentially inflict harm to innocent civilians and their property. Indeed, the international humanitarian law dictates that an attack should be cancelled or suspended if it is expected to cause loss of civilian life or property that “would be excessive in relation to the concrete and direct military advantage” (Catherwood & Horvitz, 87). Article 51 further prohibits attacks using weapons whose impacts cannot be properly controlled.

The international humanitarian law further requires that in an international conflict, constant care should be taken to ensure that the civilian population is protected as well as their property. In this case, the military’s plane attack clearly fails to protect the civilians, who in turn lose their lives as well as their property. Consequently, on the face value, such military action may be considered as legally unjustifiable since the consequences were easily predictable. However, in order for such military action to be considered justifiable, the executors must demonstrate that the loss incurred by the civilian populations is insignificant compared to the loss that the state would have incurred if they had failed to retaliate.

Criteria for evaluating whether collateral damages are unlawful

Evaluating and assessment of collateral damages poses a number of challenges owing to the fact that both direct and indirect impacts of such actions must be weighed in order to determine their legality. The most common means of evaluation involves weighing the military necessity and the principle of proportionality against the collateral damages. The combination of the two principles gives rise to the conclusion whether such actions are legally justifiable or not. If the military action is deemed necessary in order to prevent the occurrence of a national crisis, and if the cost incurred during such actions is substantially low compared to the cost of inaction, then such military action is considered legally justifiable.

The direct and indirect impacts of such military actions should not lead to massive violation of human rights. The direct impacts refer to loss of lives and property during military actions. The indirect effects include long term medical trauma, illnesses and impact on the affected families. Military actions should be designed to protect the lives of civilians and not destroy them. Consequently, military actions that lead to destruction of civilians’ lives and property are obviously questionable in a court of law. However, if in this case, the loss of lives was unavoidable, probably because the plane contained terrorist who were set to perpetrate terrorism acts that would lead to massive losses of lives in the country including those of the civilians in the aircraft, then such military attacks would be justifiable.

The principle of discrimination forbids indiscriminate attacks that are not directed at a specific military action. Based on this principle, a military action must be necessitated by the need to accomplish at a specific military objective. Additionally, the principle dictates that parties to a conflict direct their operations against combatant and military objectives rather than property, persona and places. Therefore, military actions that are not motivated by a specified objective may be viewed as illegal.

Can military operations be launched against a military objective if children are surrounding it?

International law has created provisions which ensure the protection of the most vulnerable members of the population, including women and children, and prohibits actions that are aimed inflicting suffering to such members of the population. Additionally, other international laws relating to respect for human rights in armed conflict offer important guarantees for the protection of children in such incidences. Moreover, international law clearly stipulates that states and military forces actively spare children as well as women from the ravages of war. This is done by ensuring that children are protected against persecution, torture, punitive measures, degrading treatment and violence in the event of war.

Given the emphasis that is placed on the protection of children in armed conflicts, military forces may refrain from launching military operations against a military objective that involves children. The law clearly states that children should be subjected to special respect and protection during war, and should not be involved in direct hostilities during war. Consequently, the military should not direct their actions against children in their efforts to attack the other party. In fact, children who are orphaned or separate from their families in the event of war should, with the consent of the protecting power, be evacuated to a neutral region until such a time that the war subsides. Additionally, parties to the conflict are expected to ensure that children below the age of fifteen are excluded from taking part in direct hostilities and should not be recruited in the armed forces. These regulations remain valid for both international and non international armed conflict.

Rules governing the delivery of humanitarian aid in a non international armed conflict

According to article 18 of additional protocol 2 of the international humanitarian law, individuals subjected to armed conflict have a right to humanitarian assistance, and the parties to such conflict are under obligation to accept such humanitarian relief, which is critical for the survival of the population (Stoffels, 519). The civilians’ right to humanitarian assistance thrives from the principle of inviolability. States are obligated to ensure wellbeing and demonstrate respect for life and humanity for all individuals residing within their territories (Stoffels, 517). In this light, states must refrain from violating individual rights and must embrace measures necessary to ensure that such rights are not abused. This implies that states have a duty to ensure that civilians affected by armed conflicts are adequately supplied with resources critical, for their survival during such warring periods. If the state is not in a position to do so, then it should allow third parties to provide humanitarian aid to the affected population.

The humanitarian organization also have the right to provide humanitarian assistance, which entails the right to provide victims with relief supplies needed for their survival, as well as the right that such offer of aid not to be unreasonable denied by the concerned authorities (Stoffels, 521). States and other parties to the conflict are obligated to permit entry, passage, and access of humanitarian aid in their territories. In this light, states must authorize entry and passage of humanitarian aid for the affected populations, parties to the conflict must not obstruct such humanitarian efforts and the affected parties must actively ensure that humanitarian assistance is offered effectively, and that the humanitarian actors and their supplies are safe and secure (Stoffels, 521)

Humanitarian assistance is deemed acceptable if it adheres to the basic principles of humanitarianism, impartiality and neutrality. If the humanitarian assistance does not comply with these principles, and favors one party to the conflict over the other, the parties involved are at discretion to decline or sign authorization for such assistance. In such cases, humanitarian assistance is not protected as such under International humanitarian law (Stoffels, 539).

Authorization for the delivery of humanitarian aid

Historically, a state’s involvement in internal armed conflict is viewed as an issue that the international community should not interfere with, given that each country is considered to be a sovereign state (Dungel 1). Additionally, the responsibility to ensure proper nourishment and wellbeing of the civilians rests on the hands of the state. Therefore relief societies should only play an auxiliary role in assisting state authorities in the execution of this task (Dungel 1). According to this argument therefore, State A would require authorization from State B in order to distribute relief food to the rebel held area. Indeed, the international humanitarian law, in article 18 stipulates that, humanitarian organizations “have a right of initiative in offering relief actions” and that if civilians are suffering undue hardships owing to a lack of supplies essential for survival”, relief action should be undertaken but under the consent of the relevant authority (Dungel 1). Clearly, under these provisions, the authorization by the affected state is critical in enabling humanitarian actors to effectively deliver relief.

In this case, such authorization potentially threatens the principle of neutrality given that the region in question is that which is held by the rebels. Since the IHL stipulates that such authorization be provided by “high contracting power concerned” which is the government, it may be reluctant to authorize humanitarian aid provision in such areas (Dungel 1). Therefore, since the rebel group has de facto control over the territory in question, it is rational that the party be considered as a high contracting power. Therefore, authorization by state extends to the point where such aid is transported over the territory in which it controls, while the authorization for delivery of aid to the rebel held area lies in the hands of the rebel group.

Principals governing humanitarian aid

Humanitarian principles, in their broadest sense are based on international humanitarian law, and are designed to guide the work of humanitarian actors. The four key principles are; humanity, neutrality and impartiality.

Humanitarianism is founded on the basic principle of humanity, which according to the Red Cross is the desire “to prevent and alleviate human suffering wherever it may be found…to protect life and health and to ensure respect to the human being” (Volberg, 51). Under this principle, organizations, governments, military force s, among other institutions may feel obligated to provide aid to civilians affected by an emergency, and have a moral responsibility towards other members of humanity. Their main aim is to alleviate human suffering and contribute towards protection of life, health, wellbeing, and respect for human life. In this case, the military decision to provide humanitarian aid while at the same time providing military assistance may be driven by humanity considerations, in which the military is motivated to do so with the aim of alleviating human suffering for civilians.

According to the principle of neutrality, humanitarian actors should remain neutral in the conflict, and should not take sides with either of the conflicting parties. This ensures that organizations provide aid to all victims without any exceptions. Based on the principle of neutrality, the humanitarian actors should first and foremost focus on the material needs of the civilians while remaining distant to the political or social issues that have precipitated the armed conflict. However, in this case, State A’s military is already offering military assistance to one the parties to the non international armed conflict, which significantly compromises the neutrality of State A.

In conclusion, the principle of impartiality dictates that humanitarian actions are carried out based on the need, giving priority to the most urgent humanitarian needs. The principle of impartiality rejects discrimination and subjective distinctions in the provision of humanitarian aid. In this case, State A provides military assistance and later decides on distributing humanitarian aid , which raises the questions whether their actions are solely guided by the needs of the civilians, and whether the state has given priority to the most urgent cases of distress.

References

Catherwood, Christopher & Horvitz, Alan Leslie, encyclopedia of wars and genocide, New York: InfoBase Publishing Group.

Conte, Alex. Human rights in the prevention and punishment of terrorism, New York: Springer. 2010. Print.

Dungel, Joakim, a right to humanitarian assistance in internal armed conflicts respecting sovereignty, neutrality and legitimacy: practical proposal to practical problems.

Gasser, Hans-Peter, Acts of terror, “terrorism” and international humanitarian law, International Review of the Red Cross, volume 84 No 847. 2002.

Stoffels, Ruth Abril. Legal regulations of humanitarian assistance in armed conflict: achievement and gaps, International Review of the Red Cross, volume 86 no 855. 2004.

Volberg, Thorsten. The politicization of humanitarian aid and its effects on the principles of humanity, impartiality and neutrality, GRIN Verlag. 2007 Print.

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Employee Satisfaction

Employee Satisfaction Levels in HRM and in CPM

To adapt to new demands and ensure business success, organizations have initiated profound processes of transformation, aiming to add value to its shareholders (stakeholders), customers, employees, suppliers, ultimately the entire value chain. The central point of this value chain lays with peoples especially employees of the organization. If technology demands change in core business processes, it also expects to change in the traditional methods of dealing organizational human resources (Dunn, 2010, pp. 02).

A contemporary vision of people management, assumes that the world is changing, people are changing and hence the organizations are in the process of change. Just as people today have more and better access to information, knowledge, new technologies, companies are also changing their old concepts or paradigms in constant learning process. The learning organizations understand the importance of their employees and for them it is often necessary to unlearn in order to learn.In the management of people, the need for change is constant and urgent. The old paradigms of the industrial era and the military model for management of people has completely transformed and the contemporary era of knowledge, cooperation, sustainability and the new information technologies has taken place in modern business organization (Pučėtaitė et al., 2008, pp. 325).

Traditional human resources practices revolve around employee motivation and satisfaction and his performance. But with the rapid changes in business environment and phenomenal growth of technological advancement, such methods become incapable to produce the results. Contemporary People Management (CPM) has provided the solution. CPM has gone ahead of merely satisfying employees to making them satisfied. An organization with contemporary vision of Personnel Management, has strategic clarity inmaking the mission, vision, values and objectives and is assimilated and practiced by all employees consciously and unconsciously creating an alignment and cooperation among the employees (Pinnington et al., 2007, pp. 267).

Employee Satisfaction Discussion

In postmodern business environment, moral values and ethical standards have become increasingly complicated. This has affected the practices of HR, where a decision by HR manager can significantly produce drastic impacts on people’s job and their future employment opportunities.

The practice and theoretical framework of Human resource management is facing several challenges and most important of them are globalization challenge, HR innovation challenge, the sustainability challenge and the challenge of attracting and retaining people. These four challenges can be transformed into a competitive strength of the organization through CPM (Bartram, 2010, pp. 26). The challenge of HR innovation itself is a course to achieve Contemporary people management. Now business organizations are moving towards knowledge management, which include the transformation of techniques, processes, structures and systems, which can lead to the creation and sharing of knowledge throughout the organization. Resultantly, Global knowledge economy starts to develop which helps to increase the knowledge about different cultures, globalization process and intensify the knowledge about production processes. Australian federal government has since 1970 supported and implemented several such schemes and proposals which help to internationalize Australian business.

Changing business practices and innovation in HR practices and policies has created different ethical dilemmas. HR does not take place in isolation. It affects the life of employees and the ethical consideration of organization as well as of HR manager hassignificant impact of the performance of the employees.As the process of internationalization has started to increase its pace, we can see the dominance of neo liberal moral and ethical standards, which are regulated by a balance between alternative ends and scarce resources. It is simply based on utilitarian approach in order to select best method for the maximum number of people. When interests of people are satisfied with the help of common good, it will produce environment of return of favour.State of common good that can be achieved through utilitarian approach, not only benefits employee but it also produce good results for organization (Klikauer, 2012, pp. 74).

Several ethical theories have elaborated the impact of ethical principles on business practices. Utilitarianism approach is rooted in consequentialism and according to it; the rightness or wrongness of our action is described best by the consequence of that action. An action is said to be morally right if it has produced satisfaction to the majority of the people. In consequentialism, there is no universal moral standard unlike virtue ethics. But it depends on the situational awareness and the will of the majority of the people. Some critics believe that it has some demerits and in extreme cases, the will of the people can be unjust and illegitimate.Despites its flaws business manager apply utilitarian approach in their organization because this propagates the goodness of the people at large (Greenwood, 2013, pp. 357).

The concept of utilitarianism has subjective matter and it is very difficult to determine accurately the level of maximum utility.It involves situational assessment and awareness and considers only available information. In this situation, it is difficult to evaluate the impact of decision based on utilitarian in long terms aspect. Similarly, it is very difficult to accurately determine the majority of people. So like other ethical and moral standards, utilitarianism has some weaknesses (Audi, 2007, pp. 596).

The objective of the management is to produce a satisfied employee so that he/she can perform better and an organization can produce profit. Well-being of the employee in this case is a mean to an end but it is not an end itself. However it does not simply mean that an organization is interested in the wellbeing of employee, but it is more interested in a productive employee. Utilitarianism approach does not simply mean that producing greatest good for the large number of people, but it motivates management to produce satisfaction among the employees. If 10 per cent annual increase in the salary fails to bring any kind of satisfaction within the organization, it simply would be rendered as increase in the cost of organization.In the context of utilitarianism, bringing satisfaction is not the total objective of the management, but satisfaction principle in ethical model is to prevent employees from any damage or problems. Power can only be exercised on employees in the situation so that harm to the majority of the people can be avoided.In this way, management creates a civilized community within the organization (Klikauer, 2010, pp. 51).

We have seen the paradigm shift in the practices and policies of traditional human resource management. In classical human resource management, employees were considered as a liability where as in contemporary people management, employees are regarded as an asset.As the organizations are moving towards learning organization and are based on knowledge, highly educated and independent employees demands cooperative attitude and no longer they are considered for granted. This trend demands in operational procedures of HR. classical HR practices cannot boost the performance of such employees and the sharp edges of traditional HR practices, in result are have been removed (Van Marrewijk et al., 2003, pp. 175).

Contemporary practices of HR has taken strategic position among the organization and is regarded the change agent and facilitator for transformation and restructuring processes. It has manifested itself as a strategic partner between the employee and organization. Modern practices of HR are based on knowledge and constant learning process. It pays individual attention on human asset management, human culture management and human potential management. Cultural diversity is no longer regarded as a problem. Contemporary human resource practice transformed cultural diversity into a strength through strong communication skill and motivating their employees to seek knowledge from different cultures (Worland &Manning, 2005, pp. 07). Traditionally, HRM works closely with the bosses and managers but contemporary people management works closely with employees. The role of HR practices has changed. Now making employee satisfied is not sufficient and efficient for business managers. Employees need to feel the real satisfaction and they all should be prevented from harm and injustice. Utilitarianism approach of satisfaction for all has become the central point of contemporary people management.

Conclusion

We can safely conclude that HR has occupied the strategic position in the organizational structure and conventional methods of HR are no longer effective to accommodate the needs of employees as well as organizational objectives.It should not be implied that the classical HR framework and practices have completely become useless and obsolete, but it has provided a basic structure for contemporary people management. Because organization itself is nothing without employees and he/she is an active agent of transferring raw material into a finished good, he/she must be satisfied and happy, so that his performance bring satisfaction to organization and its customers.

Postmodern economy is based on knowledge and learning. Organization that understand the importance of knowledge, keep on changing their HR policies.The classical concept of employee’s high performance with lowest cost of employees has failed to fulfil the business objectives. Employees are no longer regarded as liabilities. They are considered the asset and the value of the asset increase with the time. satisfaction of employees has preceded employee satisfaction. This demands changes in the ethical values of organization. It is through Utilitarianism approach that the goodness of majority of the people can be achieved.It becomes the duty of the manager to increase the total volume of satisfaction of employees. Similarly, utilitarianism approach encourages all those actions which can produce wellbeing for the majority of the people.

References

Academic Books

Bartram, T., Kramar, R., & De Cieri, H. (2010). Human resource management: strategy, people, performance. North Ryde, N.S.W., McGraw-Hill Education.

Klikauer, T. (2010). Critical management ethics.Houndmills, Basingstoke, Palgrave Macmillan.

Klikauer, T. (2012). Seven management moralities.Houndmills, Basingstoke, Hampshire, Palgrave Macmillan.

Pinnington, A. H., Macklin, R., & Campbell, T. (2007). Human resource management: Ethics and employment. Human Resource Management: Ethics and Employment, xii.

Redman, T., & Wilkinson, A. (Eds.). (2009). Contemporary human resource management: text and cases. Pearson Education.

Academic Journals

Audi, R. (2007). Can utilitarianism be distributive? Maximization and distribution as criteria in managerial decisions. Business Ethics Quarterly, 17(4), 593-611.

Dunn, B. H. (2010). Human Resource Management: The Importance of Getting It Right Employee Satisfaction. Rangelands, 32(4), 2-3.

Greenwood, M. (2013). Ethical analyses of HRM: A review and research agenda. Journal of business ethics, 114(2), 355-366.

Greenwood, M., & Freeman, R. E. (2011).Ethics and HRM. Business and Professional Ethics Journal, 30(3/4), 269-292.

Pučėtaitė, R., &Lämsä, A. M. (2008).Developing organizational trust through advancement of employees’ work ethic in a post-socialist context Employee Satisfaction. Journal of Business Ethics, 82(2), 325-337.

Simmons, J. (2008). Ethics and morality in human resource management. Employee Satisfaction Social responsibility journal, 4(1/2), 8-23.

Van Marrewijk, M., &Timmers, J. (2003). Human capital management: New possibilities in people management. Journal of Business Ethics, 44(2-3), 171-184.

Worland, D., & Manning, K. (2005). Employee Satisfaction, Strategic human resource management and performance.

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Negative Interest Rates

Discuss the macroeconomic effects of negative official interest rates. What relevance, if any, do the macroeconomic models have in explaining this phenomenon and predicting its likely consequences?

The negative interest rate is a recent phenomenon emerged from the global financial crisis in 2008. The negative official interest rate has become worldwide phenomenon and a part of policy initiatives by central banks around the world (Collignon, 2012) to deal with the problems of low rate of economic growth, massive unemployment and disinflation by injecting some easy money in search of some viable solution for economic recovery.

The interest rate is most crucial variable for financial industry as it has widespread effects on share prices, exchange rate and income distribution between exporting firms and consumers. IMF (2012) has mentioned the negative effects on insurance and savings in form of pension funds and financial stability is threatened in case of persistent negative interest rates. This policy can have negative consequences for growth and independence of central banks in the hands of irresponsible government decisions (White, 2012).

Money market suffers as important intermediaries like money market funds could be compelled out of business because of lost profitability that shift the interest of investors to more profitable market oriented business.

The consumers also suffer from negative interest rate in form of high global commodity prices. The reason behind this phenomenon is the changing interest and speculative behaviour of investors into high yielding assets like oil and food. The increased inflation rate results in lower purchasing power of consumers that hindered the economic recovery (Belke et al., 2010).

The negative interest rate dampen saving as it encourage people to spend more rather to save, this has long term negative effects for the people who are dependent on interest income. On the other hand the savings are not properly used for investment because of deteriorating investment efficiency.

The benefit of low interest rate includes the increasing capacity of banks to lend as a major problem the banks faced during the financial crisis was undercapitalization that restricted their capacity to make loans for recovery.

The negative interest rate can increase the wealth of households in form of higher asset prices and lower the capital cost for making investments but at the same time it gives rise to additional borrowing that increases the debt levels.

Negative interest rates can be explained in terms of Keynes theory of interest rate and theory of speculative demand for money. According to Keynes the equilibrium interest rate is the rate that equates money supply and money demand. Keynes began by asking “why an individual would hold any money above the needed for transaction and precautionary motives when bonds pay interest and money does not.” Keynes believed that such an additional demand for money exists because of uncertainty about future interest rates and the relationship between changes in the interest rate and the price of bonds. As there is an inverse relation between bond price and interest rate, Keynes speculative demand for money is the money held in anticipation of a fall in bond prices and a rise in interest rates (Froyen, 2005).

Here we observe a phenomenon of liquidity trap. It is the situation at a very low interest rate where the speculative demand for money schedule becomes nearly horizontal as shown in figure.

One implication of negative interest rates could be the liquidity trap which can lead to deep recession with deflation. It can be explained with the help of an example. In the 1990s, the interest rate in Japan was the lowest in the world and in 1998 the interest rate on Japanese six month treasury bills turned slightly negative. In such a situation Japan experienced prolonged recession accompanied by deflation which is the negative inflation rate (Mishkin, 2007). Usually it is believed that the low interest rates are a good thing because they make borrowing cheaper. But the case of Japan shows that low and negative interest rates were a sign that Japanese economy was in real trouble with falling prices and contracting economy.

Secondly, it is not attractive for the lenders to lend below 0%, as that will guarantee a loss, and a bank offering a negative deposit rate will find few takers, as savers will instead hold cash.

Countries like Denmark and Sweden introduced negative interest rates in recent years on temporary basis. In Denmark the purpose of adopting negative interest rate was to limit an unwanted rise in its currency. For this they moved to negative deposit rates. It did not cause any financial meltdown nor did it cause any noticeable change in the interest rate charged by banks for bank loans. Recently, European Central Bank has adopted the negative interest rates of -0.1% on Eurozone banks to encourage them to lend to small firms rather than to hoard cash. It is meant to boost the economy by increasing the lending to consumers and businesses.

Consequences of adopting Negative Interest Rates

This development can have unpredictable consequences. Those consequences may include the possibility that banks will pass on to customers the costs for depositing money with the ECB.
Also the negative return on keeping funds with the central bank might encourage banks to invest in riskier assets to secure a return.
As an alternative investment, banks may increase their purchases of government bonds and it would have potentially serious consequences if banks are holding bonds to such an extent that government borrowing costs are artificially low. If a financial shock occurs, the banks and governments could find themselves so intertwined and interdependent that they drag each other and the economy down.

References

Belke, A., Bordon, I. G., & Hendricks, T. W. (2010) ‘Global Liquidity and Commodity Prices–a Co-integrated VAR Approach for OECD Countries’. Applied Financial Economics, 20(3), 227-242.

Collignon, S. (2012) ‘Fiscal policy Rules and the Sustainability of Public Debt in Europe’. International Economic Review, 53(2), 539-567.

Froyen, R.T. (2005) Macroeconomics: Theories and Policies (8th ed.). Prentice Hall: Upper Saddle River.

International Monetary Fund Staff (2011) ‘Global Financial Stability Report: Durable Financial Stability: Getting There from Here’. International Monetary Fund.

Mishkin, F. S. (2007) The Economics of Money, Banking, and Financial Market. (sixth ed.). Pearson Education.

White, W.R. (2012) ‘Ultra Easy Monetary Policy and the Law of Unintended Consequences; Federal Reserve Bank of Dallas’. Globalization and Monetary Policy Institute.