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Attempt Any Four Case Study

 

Case 1: Zip Zap Zoom Car Company

          

Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment.  It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability.  Its financial statements are shown in Exhibits 1 and 2 respectively.

The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year.  Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector.  The company has never defaulted on its loan payments and enjoys a favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.

The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries.  The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer.  The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.

Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures.   The industry indicators predict that the economy is gradually slipping into recession.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

 

Source of Funds

Share capital                                        350

Reserves and surplus                           250                              600

Loans :

Debentures (@ 14%)               50

Institutional borrowing (@ 10%)        100

Commercial loans (@ 12%)    250

Total debt                                                                                            400

Current liabilities                                                                                 200

1,200

 

Application of Funds

Fixed Assets

Gross block                                                     1,000

Less : Depreciation                                            250

Net block                                                           750

Capital WIP                                                       190

Total Fixed Assets                                                                              940

Current assets :

Inventory                                                           200

Sundry debtors                                                    40

Cash and bank balance                                        10

Other current assets                                 10

Total current assets                                                                 260

-1200

 

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x

(Amount in Rs. Crore)

Sales revenue (80,000 units x Rs. 2,50,000)                                       2,000.0

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses    1,300.0

Variable overheads                                                        100.0

Total                                                                                                                1,400.0

Fixed cost :

R & D                                                                                          20.0

Marketing and advertising                                               25.0

Depreciation                                                                   250.0

 

Personnel                                                                          70.0

Total                                                                                                                   365.0

 

Total operating expenditure                                                                1,765.0

Operating profits (EBIT)                                                                                   235.0

Financial expense :

Interest on debentures                                                            7.7

Interest on institutional borrowings                        11.0

Interest on commercial loan                                    33.0                     51.7

Earnings before tax (EBT)                                                                                          183.3

Tax (@ 35%)                                                                                                                 64.2

Earnings after tax (EAT)                                                                                            119.1

Dividends                                                                                                                     70.0

Debt redemption (sinking fund obligation)**                                                              40.0

Contribution to reserves and surplus                                                                  9.1

*          Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).

**        The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.

The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology.  Capital investment up to a maximum of Rs. 100

crore is required.  The problem areas are three-fold.

  • The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
  • The company does not want to issue new equity shares and its retained earning are not enough for such a large investment.  Thus, the only option is raising debt.
  • The company wants to limit its additional debt to a level that it can service without taking undue risks.  With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise.  He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession.  The company can raise debt at 15 per cent from a financial institution.  While working out the debt capacity.  Mr. Shortsighted takes the following assumptions for the recession years.

  1. A maximum of 10 percent reduction in sales volume will take place.
  2. A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.  While doing so, he determines what he thinks are the “irreducible minimum” expenditures under

 

recessionary conditions.  For him, risk of insolvency is the main concern while designing the capital structure.  To support his view, he presents the income statement as shown in Exhibit 3.

 

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

Sales revenue (72,000 units x Rs. 2,35,000)                                       1,692.0

Operating expenditure

Variable cost :

Raw material and manufacturing expenses    1,170.0

Variable overheads                                                          90.0

Total                                                                                                                1,260.0

Fixed cost :

R & D                                                                                          —

Marketing and advertising                                               15.0

Depreciation                                                                   187.5

Personnel                                                                          70.0

Total                                                                                                                   272.5

Total operating expenditure                                                                1,532.5

EBIT                                                                                                                  159.5

Financial expenses :

Interest on existing Debentures                                        7.0

Interest on existing institutional borrowings      10.0

Interest on commercial loan                                30.0

Interest on additional debt                                             15.0                  62.0

EBT                                                                                                                      97.5

Tax (@ 35%)                                                                                                        34.1

EAT                                                                                                                     63.4

Dividends                                                                                                              —

Debt redemption (sinking fund obligation)                                             50.0*

Contribution to reserves and surplus                                                       13.4

 

* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)

Assumptions of Mr. Shorsighted

  • R & D expenditure can be done away with till the economy picks up.
  • Marketing and advertising expenditure can be reduced by 40 per cent.
  • Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.

 

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment.  Mr. Arthashatra  does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.

Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm.  He points out the following :

  • Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
  • Certain management policies like those relating to dividend payout, send out important signals to the investors.  The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm.  The firm should pay at least 10 per cent dividend in the recession years.
  • Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations.  This does not give the true picture.  Net cash inflows should be used to determine the amount available for servicing the debt.
  • Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession.  It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.  Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed.  From  this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution).  This will give a true picture of how the company’s cash flows will behave in recession conditions.

 

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret.  Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis.  Information on the behaviour of cash flows during the recession periods is taken into account.

The methodology undertaken is as follows :

  • Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.

 

  • Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
  • Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

 

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions.  Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.  Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Question:

Analyse the debt capacity of the company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   GREAVES LIMITED

 

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of high technology engineering products and systems. The company’s mission is “manufacture and market a wide range of high quality products, services and systems of world class technology to the total satisfaction of customers in domestic and overseas market.”

Over the years Greaves has brought to India state of the art technologies in various engineering fields by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the company’s share has shown ups and downs during 1990 to 1997. How has the company performed? The following question need answer to fully understand the performance of the company:

 

Exhibit 1

 

GREAVES LTD.

Profit and Loss Account ending on 31 March          (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
Sales

Raw Material and Stores

Wages and Salaries

Power and fuel

Other Mfg. Expenses

Other Expenses

Depreciation

Marketing and Distribution

Change in stock

214.38

170.67

13.54

0.52

0.61

11.85

1.85

4.86

1.18

253.10

202.84

15.60

0.70

0.49

15.48

1.72

5.67

3.10

287.81

230.81

18.03

1.11

0.88

16.35

1.52

5.14

4.93

311.14

213.79

37.04

3.80

2.37

25.54

4.62

5.17

0.48

354.25

245.63

37.96

4.43

2.36

31.60

5.99

9.67

– 1.13

521.56

379.83

48.24

6.66

3.57

41.40

8.53

10.81

5.63

728.15

543.56

60.48

7.70

4.84

45.74

9.30

12.44

11.86

801.11

564.35

69.66

9.23

5.49

48.64

11.53

16.98

– 5.87

Total Op Expenses 202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75
 

Operating Profit

Other Income

Non-recurring Income

 

11.61

2.14

1.30

 

13.70

3.69

2.28

 

18.90

4.97

0.10

 

19.29

4.24

10.98

 

15.48

7.72

16.44

 

28.15

14.35

0.46

 

55.95

11.35

0.52

 

69.36

13.08

1.75

PBIT   15.10   19.67   23.97   34.51   39.64   42.98   65.67   82.64
Interest     5.56     6.77   11.92   19.62   17.17   21.48   28.25   27.54
PBT     9.54   12.90   12.05   14.89   22.47   21.50   37.42   55.10
Tax

PAT

Dividend

Retained Earnings

    3.00

6.54

1.80

4.74

    3.60

9.30

2.00

7.30

    4.90

7.15

2.30

4.85

    0.00

14.89

4.06

10.83

    4.00

18.47

7.29

11.18

    7.00

14.50

8.58

5.92

    8.60

28.82

12.85

15.97

  15.80

39.30

14.18

25.12

 

Exhibit 2

 

GREAVES LTD.

Balance Sheet                                (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
ASSETS

Land and Building

Plant and Machinery

Other Fixed Assets

Capital WIP

Gross Fixed Assets

Less: Accu. Depreciation

Net Tangible Fixed Assets

Intangible Fixed Assets

 

3.88

11.98

3.64

0.09

19.59

12.91

6.68

0.21

 

4.22

12.68

4.14

0.26

21.30

14.56

6.74

0.19

 

4.96

12.98

4.38

10.25

23.57

15.79

7.78

0.05

 

21.70

33.49

5.18

11.27

71.64

19.84

51.80

4.40

 

30.82

50.78

6.95

34.84

123.39

25.74

97.65

22.03

 

39.71

75.34

8.53

14.37

137.95

33.90

104.05

22.45

 

42.34

92.49

8.87

13.92

157.62

42.56

115.06

20.04

 

43.07

104.45

10.35

14.36

172.23

53.87

118.86

21.11

Net Fixed Assets     6.89     6.93     7.83   56.20 119.68 126.50 135.10 139.97
 

Raw Materials

Finished Goods

Inventory

Accounts Receivable

Other Receivable

Investments

Cash and Bank Balance

Current Assets

Total Assets

LIABILITIES AND CAPITAL

Equity Capital

Preference Capital

Reserves and Surplus

 

5.26

29.37

34.63

38.16

32.62

3.55

8.36

117.32

124.21

 

9.86

0.20

27.60

 

6.91

33.72

40.63

53.24

40.47

14.95

8.91

158.20

165.13

 

9.86

0.20

32.57

 

7.26

38.65

45.91

67.97

49.19

15.15

12.71

190.93

198.76

 

9.86

0.20

37.42

 

21.05

53.39

74.44

93.30

24.54

27.58

13.29

233.15

289.35

 

18.84

0.20

100.35

 

28.13

52.26

80.39

122.20

59.12

73.50

18.38

353.59

473.27

 

29.37

0.20

171.03

 

44.03

58.09

102.12

133.45

64.32

75.01

30.08

404.98

531.48

 

29.44

0.20

176.88

 

53.62

69.97

123.59

141.82

76.57

75.07

33.46

450.51

585.61

 

44.20

0.20

175.41

 

50.94

64.09

115.03

179.92

107.31

76.45

48.18

526.89

666.86

 

44.20

0.20

198.79

Net Worth   37.66   42.63   47.48 119.39 200.60 206.52 219.81 243.19
Bank Borrowings

Institutional Borrowings

Debentures

Fixed Deposits

Commercial Paper

Other Borrowings

Current Portion of LT Debt

  14.81

4.13

4.77

12.31

0.00

2.33

0.00

  19.45

3.43

16.57

14.45

0.00

3.22

0.00

  26.51

9.17

19.99

15.03

0.00

3.10

0.08

  24.82

38.09

4.56

14.08

0.00

3.18

0.12

  55.12

38.76

4.37

15.57

15.00

17.08

15.08

  64.97

69.69

4.37

17.75

0.00

1.97

0.02

  70.08

89.26

2.92

20.81

0.00

2.36

1.49

118.28

63.60

1.49

19.29

0.00

2.57

1.57

Borrowings   38.35   57.12   73.72   84.61 130.82 158.73 183.94 203.66
Sundry Creditors

Other Liabilities

Provision for tax, etc.

Proposed Dividends

Current Portion of LT Dept

  37.52

5.70

3.18

1.80

0.00

  49.40

10.16

3.82

2.00

0.00

  59.34

10.70

5.14

2.30

0.08

  77.27

3.59

0.31

4.06

0.12

113.66

1.42

4.40

7.29

15.08

148.13

1.99

7.70

8.58

0.02

153.63

1.70

12.19

12.85

1.49

179.79

3.04

21.43

14.18

1.57

Current Liabilities   48.20   65.38   77.56   85.35 141.85 166.42 181.86 220.01
TOTAL LIABILITIES

Additional information:

Share premium reserve

Revaluation reserve

Bonus equity capital

124.21

 

 

 

8.51

165.13

 

 

 

8.51

198.76

 

 

 

8.51

289.35

 

47.69

8.91

8.51

473.27

 

107.40

8.70

8.51

531.67

 

107.91

8.50

8.51

585.61

 

93.35

8.31

23.25

666.86

 

93.35

8.15

23.25

 

Exhibit 3

 

GREAVES LTD.

Share Price Data

    1990 1991 1992 1993 1994 1995 1996 1997
 Closing share price (Rs)

Yearly high share price (Rs)

Yearly low share price (Rs)

Market capitalization (Rs crore

EPS (Rs)

Book value (Rs)

  27.19

29.25

26.78

65.06

4.79

35.64

34.74

45.28

21.61

67.77

6.82

37.22

121.27

121.27

34.36

236.56

9.73

42.54

  66.67

126.33

48.34

274.84

1.93

57.75

  78.34

90.00

42.67

346.35

2.66

40.61

  71.67

100.01

68.34

316.87

7.16

64.98

  47.5

90.00

45.00

210.02

5.03

45.35

  48.25

85.00

43.75

213.34

9.01

50.73

 

 

 

 

Questions

 

  1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?
  2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?
  3. How has Greaves performed in terms of return on equity? What is the contribution of return on investment, the way of the business has been financed over the period?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   CHOOSING BETWEEN PROJECTS IN ABC COMPANY

 

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get proper advice. As a consultant, what advice you will give?

 

The cash flows are as follows. All amounts are in lakhs of Rupees.

 

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5 – 10

 

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5 – 2000.

 

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)

Yrs. 11 to 15 – Rs. 10 (For the next 5 years)

 

Question:

If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   STAR ENGINEERING COMPANY

 

Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears, and automobile accessories like taximeters and speedometers.

SEC buys the electrical components, but manufactures all mechanical parts within its factory which is divided into four production departments Machining, Fabrication, Assembly, and Painting—and three service departments—Stores, Maintenance, and Works Office.

Though the company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.

In March, the company received a trial order from a government department for a sample transformer on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April and completed all manufacturing operations before the end of the month.

Since Job No 879 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the government department asked SEC to submit a detailed cost sheet for the job giving as much details as possible regarding material, labour and overhead costs.

SEC, as part of its routine financial accounting system, had collected the actual expenses for the month of April, by 5th of May. Some of the relevant data are given in Exhibit A.

The company tried to assign directly, as many expenses as possible to the production departments. However, It was not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using some rational basis. Some of the possible bases were collected by SEC’s accountant. These are presented in Exhibit B.

He also designed a format to allocate the overhead to all the production and service departments. It was realized that the expenses of the service departments on some rational basis. The accountant thought of distributing the service departments’ costs on the following basis:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. Stores department costs on the basis of direct and indirect materials used.

The accountant who had to visit the company’s banker, passed on the papers to you for the required analysis and cost computations.

 

 

REQUIRED

 

Based on the data given in Exhibits A and B, you are required to:

 

  1. Complete the attached “overhead cost distribution sheet” (Exhibit C).
    Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
  2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
  3. Do you agree with:
    a.   The procedure adopted by the company for the distribution of overhead costs?
    b.   The choice of the base for overhead absorption, i.e. labour-hour rate?

 

 

Exhibit A

 

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

  RS RS
Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

 

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

 

Others

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

(At 2 per cent of direct labour wages and Indirect labour and supervision)

Power

(Maintenance—Rs 366; Works Office Rs 2,200, Balance to Producing Departments)

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses

 

33,000

22,000

11,000

7,000

44,000

32,700

 

 
2,200

1,100

3,300

3,400

2,800

 

 

1,68,000

44,000

2,400

19,400

 

 

68,586

 

 

1,30,260

1,190

 

 

 

 

 

 

 

1,49,700

 

 

 

 

 

 

12,800

 

 

 

 

 

 

 

 

 

 

 

 

4,33,930

 
5,96,930

 

 

 

 

 

 

 

 

 

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year

Department Area

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

 

Rs

Horse

Power

Rating

Direct

Labour

Hours

Direct

Labour

Budget

 

Rs

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Works Office

Total

 

13,000

11,000

8,800

6,400

4,400

2,200

2,200

48,000

26,40,000

13,20,000

6,60,000

2,64,000

1,32,000

1,98,000

68,000

52,80,000

62,40,000

21,60,000

 

10,80,000

 

 

 

94,80,000

20,000

10,000

1,000

2,000

 

 

 

33,000

14,40,000

5,28,000

7,20,000

3,30,000

 

 

 

30,18,000

52,80,000

25,40,000

13,20,000

6,60,000

 

 

 

99,00,000

 

Note

 

The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one month—April of the budgeted year.

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit C

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
             
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

               

 

 

1,49,700

 
A.2 Indirect materials and supplies                

12,800

 
A.3 Factory Rent               1,68,000  
A.4 Depreciation of Plant and Machinery                

44,000

 
A.5 Building Rates and Taxes

 

               

2,400

 

 
A.6 Welfare Expenses

 

               

19,494

 
    A.7 Power                 68,586  
A.8 Works Office Salaries and Expenses                

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

               

1,190

 
A. Total (A.1 to A.9)               5,96,430  
B. Reallocation of Service Departments Costs to Production Departments                  
B.1 Distribution of Works Office Costs                  
B.2 Distribution of Maintenance Department’s Costs                  
B.3 Distribution of Stores Department’s Costs                  
Total Charged to Producing

C. Departments (A+B)

               

 

5,96,430

 
D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

         
E. Overhead Rate/Per Hour (D)                  

 

 

 

 

Case 5: EASTERN MACHINES COMPANY

 

Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.

 

So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.

 

Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.

 

Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.

 

Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.

 

Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.

 

Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.

 

Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.

 

Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.

 

Namdeo: We should ask somebody from our statistics dept. to attend to this problem.

 

As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?


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ATTEMPT ANY FOUR CASE STUDY

 

Case 1:

Want to be More Efficient, Spread Risk, and Learn and Innovate at the same Time? Try Building a “World Car”

Japanese car companies like Toyota and Honda Motor Company are pioneering the auto industries truly global manufacturing system. The companies aim is to perfect a cars design and production in one place and then churn out thousands of “world” cars each year that can be made in one place and sold worldwide. In an industry where the cost of tailoring car models to different markets can run into billions of dollars, the “world car” approach of Toyota and Honda – and which Ford is hoping to emulate – is targeted at sharply curtailing development costs, maximizing the use of assembly plants, and preserving the assembly line efficiencies that are a hallmark of the Japanese “learn” production system.

As for Honda, the goal is to create a “global base of complementary supply,” says Roger Lambert, Honda’s manager of corporate communications. “Japan can supply North America and Europe, North America can supply Japan and Europe, and Europe can supply Japan and the United States. So far, the first two are true. This means that you can more profitably utilize your production bases and talents.”

The strategy of shipping components and fully assembled products from the U.S. to Europe and Japan couldn’t have come at a more opportune time for the Japanese car companies, especially when political pressures are intense to reduce the Japanese trade surplus with the United States. The task was made easier due to the strength of the Japanese yen, which has risen about 50 percent against the U.S. dollar. That has made production of cars in the United States cheaper, by some estimates, by $2500 to $3000 per car. That saving more than compensates for the transportation costs for a car overseas. For the first time, Toyota is creating a system that will give it the capability to manage the car production levels in Japan and the United States. It is moving toward a global manufacturing system that will enable it to enhance manufacturing efficiency by fine-tuning global production levels on a quarterly basis in response to economic conditions in different markets.

Questions:

  1. Discuss the strategies implemented by Toyota and Honda to achieve greater efficiency in car production.
  2. How do the automobile companies plan to simultaneously manage risk and gain efficiencies?
  3. Discuss how the car companies use national differences to gain a strategic advantage in the global car industry.

 

Case 2: Can Little Fish Swim in a Big Pond? Strategic Alliance with a Big Fish

Globalization and the Internet have created unprecedented opportunities for small and medium-sized businesses in Canada – an environment where competition is fierce. To take advantage of these opportunities, while avoiding some of the competitive obstacles often faced by the little fish in the big ocean, many of these businesses are forming partnerships or, more precisely, strategic alliances.

“There are various advantages to forming strategic alliances,” says Estelle Metayer, president of Montreal-based Competia Inc., a leading competitive intelligence and strategic planning company and publisher of Competia Online. “One is the ability to penetrate markets that would be too costly to develop on your own. For example, if you form an alliance with an America partner who can take on your products and distribute them through their network, you could save a lot of money on the marketing side.” Another big advantage comes from joining forces with a business that can provide your enterprise with access to expensive technology you might not be able to afford otherwise.

Management-based strategic alliances are also advantageous, Ms. Metayer says. “Often, smaller companies don’t have big management teams. So if they need someone who has a certain expertise, but they really can’t afford to hire such a person, then they can form an alliance with a company that has that management expertise.”

Forming an alliance with a larger company is sometimes the only way to have access to the type of capital and resources they need to be able to grow, says Gary Shiff, a partner at the Toronto-based law firm Blake, Cassels & Graydon LLP. “For example, we have a client, a very small company of two people, and the only way it could get its product into the marketplace was to establish an alliance with a large company, which it did. The large company will give them a large sum of money. In return, our client will give up a lot of its equity – it will only own 30% or 40% — but over time, if the product is successful, our client can repurchase some of that equity,” Mr. Shiff says.

Strategic alliances also benefit the big companies. “With large corporations, one of the problems often is the inability to move quickly, because of bureaucracy and more complicated internal politics. Smaller companies are able to react more quickly to changes in the marketplace. So from both parties perspectives, it serves their needs,” he says.

Although the concept of a strategic alliance can sound so appealing to a struggling small business that they might be tempted to run out and get one, experts warn businesses should not rush into partnerships, especially if another company comes courting.

“As a small company, we get five or six requests for alliances a week from companies I don’t know anything about, and suddenly they want to form an alliance. So my advice is not to rush into an alliance. You have to be proactive,” Ms. Metayer warns.

The first step is to examine your business and determine what gaps need to be filled. “Say I’m a small company that is in textile products and I’m finding that to penetrate the U.S. market, I need to be very close to a furniture manufacturer, since they are the ones who will use my textiles. I might want to build an alliance with a big player in the U.S. , and thus be able to penetrate the large distribution channels.”

Once need is determined, the search for a partner can begin. “Alliances don’t work when you don’t know each other well,” Ms. Metayer says. Thorough research of a potential partner is critical. Check out a potential partner’s current viability, look into the company’s management style to see if it is compatible with yours, contact former partners, current and past clients and suppliers. “The way a company treats its suppliers can be indicative of how they will treat their partner.”

She also suggests a small business position itself as a client of a potential partner, to experience how the candidate treats its clients. Even after thorough research, do not rush into an alliance, she says. “Do a project together, for example, work together so you can really see if it works before you go on a larger scale. You also need to make sure legally you have a very tight agreement, in particular one that allows the alliance to dissolve easily. If it doesn’t work, you need to make sure you’ve planned for that.”

Besides legal advice, businesses entering into an alliance should seek out professional accounting advice, Mr. Shiff says. “A strategic alliance will have tax implications, and those tax issues need to be addressed right at the beginning.”

While rushing into an alliance can court a nasty breakup, choosing a partner that is so similar it could be a competitor is courting disaster, Ms. Metayer and Mr. Shiff concur.

“Go back to the example of the textile business—if you build an alliance with someone who builds the frames for the chairs, you’re never going to compete. But if you form an alliance with someone in the U.S. who also makes upholstery textile, eventually one or the other is going to say, ‘hey, I can do this by myself,’” Ms. Metayer says. The last thing any company needs is a rival who has intimate knowledge of its internal operations.

 

 

 

 

Questions:

  1. Why would small companies want to form alliances with much bigger companies?
  2. What risks do small companies face in forming such alliances?
  3. Discuss how a company should approach the opportunity to form an alliance with another company.

Case 3: The new Organizational Structure of Sumitomo Mitsui Financial Group

Sumitomo Mitsui Banking Corporation [SMBC] announced its plan for the organization structure of Sumitomo Mitsui Financial Group (SMFG), the holding company, which will be established on December 2, 2002. It also announced its plan for the reorganization of SMBC’s head office, which will become effective on December 2, 2002.

SMFG will be responsible for corporate strategy and management, resource allocation, financial accounting, investor relations, IT strategy, nomination of executives, risk management and audit of the group as a whole with ten departments as follows: Public Relation Department, Corporate Planning Department, Investor Relations Department, Financial Accounting Department, Subsidiaries & Affiliates Department, IT Planning Department, General Affairs Department, Human Resources Department, Corporate Risk Management Department and Audit Department. The Risk Management Committee, Compensation Committee, and Nominating Committee will be established within the Board of Directors and be responsible for supervising the operations of the Group as a whole. Regarding the Organizational Revision of SMBC, the following changes will be instituted:

An Asset Restructuring Unit will be established and the following departments will be integrated into the Unit in order to focus further on reengineering and restructuring of SMBC’s corporate customers businesses. This realignment will accelerate the improvement in the SMBC’s loan portfolio in advance of the implementations of the New Basel Accord:

  • Credit Administration Department (Transferred from Corporate Service Unit)
  • Credit Department I and II (Transferred from Middle Market Banking Unit)
  • Credit Department II and III (Transferred from Corporate Banking Unit)

Talented staff with essential know-how for corporate revitalization, such as securization, debt-equity swaps, and DIP (Debtor in Possession) finances, and those with accounting and legal expertise from throughout SMBC will be gathered under the Planning Department of the Asset Restructuring Unit in order to strengthen SMBC’s commitment to rengineering and restructuring of its corporate customers’ businesses.

Regarding the reorganization of Existing Departments, in the Corporate Staff Unit, the Investor Relations Department of SMBC will be abolished and the Investor Relations Department of SMFG will have a comprehensive responsibility for the Group’s investor relations activities. The Portfolio Management Department, Market Risk Management Department, and Kobe General Affairs Department will be abolished and functions of these departments will be transferred and consolidated into their related departments. The Equity Portfolio Management Department will be placed under the Financial Accounting Department. In the Corporate Service Unit, the Operations Planning Department will be reorganized to reflect the completion of adjustment and integration of operational processes after the merger.  The International Market Operations Department and Settlement & Clearing Services Department within the Operating Planning Department will be abolished and a new department, Operations and Administration Department, will be responsible for managing the Group’s operational subsidiaries.

The E-Business Planning Department will be integrated into the Electronic Commerce Banking Department along with the Investment Banking Unit’s e-Business, Media and Telecom Department, and the e-Business Patent Department will be abolished and some of its functions will be transferred to the Corporate Staff Unit’s Legal Department. In the Internal Audit Unit, the Audit Department and Inspection Department will be merged and become Audit Department, and the planning function of the Group’s entire Audit Department will be transferred to SMFG. The Audit Departments for the Americas and for Europe will be integrated as part of the Internal Audit Department and Credit Review Department, strengthening their functions.

In the Consumer Banking Unit, the Products & Marketing Department will be reorganized into the following three departments: Financial Consulting Department (responsible for advisory businesses for investment products such as mutual funds, foreign currencies deposit; and insurance); Consumer Loan Department (responsible for businesses such as housing loans); and Consumer Finance Department (responsible for business such as personal loans, personal short-term deposits, and settlement).

In the Middle Market Banking Unit, the Kobe Public Institutions Banking Department will be integrated into the Public Institutions Banking Department in order to unify and fortify the promotion of business to the public institution market. The Credit Department I and Credit Department II, in charge of credit monitoring in the eastern region of Japan, will be merged to form a new Credit Department I, and  the Credit Department III, in charge of the western region, will be renamed Credit Department. The Operations & Systems Department will be abolished and certain functions will be transferred to the Branch Operations Department of the Consumer Banking Unit. The Business Reengineering Department and New Business Promotion Department within the Business Promotion Department will be abolished and the Business Promotion Department will become directly responsible for their functions.

In the International Banking Unit, the Asia Pacific Department will be abolished and its planning and administrative functions concerning office operations in Asia will be transferred to the Planning Department. The Operations & Systems Department will be reorganized and become Systems Department. In the Investment Banking Unit, the Syndications Department will be integrated into the Securitization & Syndication Department. Certain functions of the Securitization & Syndication Department will be transferred to a new department. Structured Finance Department, which will be established to promote business such as project finance, real estate finance, lease finance, insurance finance, and management/ leverage-buy-out finance. The Asset Management Planning Department will be abolished  and its functions for defined contribution pension funds will be transferred to the Corporate Employees Promotion Department of the Consumer Banking Unit.

Questions:

  1. Why is Sumitomo Mitsui Banking Corporation changing its organization structure?
  2. What type of structure is Sumitomo Mitsui Banking Corporation implementing? What are the main characteristics of the design?
  3. In your opinion, does the proposed structure fit with the global environment in which the company is operating? Why or why not?

 

Case 4    conflict Resolution for Contrasting Cultures

An American sales manager of a large Japanese manufacturing firm in the United States sold a multi-million-dollar order to an American customer. The order was to be filled by headquarters in Tokyo. The customer requested some changes to the product’s standard specifications and a specified dead-line for delivery.

Because the firm had never made a sale to this American customer before, the sales manager was eager to provide good service and on-time delivery. To ensure a coordinated response, she organized a strategic planning session of the key division managers, that would be involve in processing the order. She sent a copy of the meeting agenda to each participant. In attendance were the sales manager, for other Americans, three Japanese managers, the Japanese heads of finance and customer support, and the Japanese liaison to Tokyo headquarters. The three Japanese managers had been in the United States for less than two years.

The hour meeting included a brainstorming session to discuss strategies for dealing with the customer’s requests, a discussion of possible timelines, and the next steps each manager would take.  The American managers dominated, participating actively in the session and discussion. They proposed a timeline and an action plan. In contrast, the Japanese managers said little, except to talk among themselves in Japanese. When the sales manager asked for their opinion about the Americans’ proposed plan, two of the Japanese managers said they needed more time to think about it. The other one looked down, sucked air through his teeth, and said, “It may be difficult in Japan.”

Concerned about the lack of participation from the Japanese but eager to process the customer’s order, the sales manager sent all meeting participants an e-mail with the American managers’ proposal and a request for feedback. She said frankly that she felt some of the managers hadn’t participated much in the meeting, and she was clear about the need for timely action. She said if she didn’t hear from them within a week, she’d assume consensus and follow the recommended actions of the Americans.

A week passed without any input from the Japanese managers. Satisfied that she had consensus, she proceeded. She faxed the specifications and deadline to headquarters in Tokyo and requested that the order to be given priority attention. After a week without any response, she sent another fax asking headquarters to confirm that it could fill the order. The reply came the next day: “Thank you for the proposal. We are currently considering your request.”

Time passed, while the customer asked repeatedly about the order’s status. The only response she could give was that there wasn’t any information yet. Concerned, she sent another fax to Tokyo in which she outlined the specifications and timeline as requested by the customer. She reminded the headquarters liaison of the order’s size and said the deal might fall through if she didn’t receive confirmation immediately. In addition, she asked the liaison to see whether he could determine what was causing the delay. Three days later, he told her that there was some resistance to the proposal and that it would be difficult to meet the deadline.

When informed, the customer gave the sales manager a one-week extension but said that another supplier was being considered. Frantic, she again asked the Japanese liaison to intercede. Her bonus and division’s profit margin rested on the success of this sale. As before, the reply from Tokyo was that it would be “difficult” to meet the customer’s demands so quickly and that the sales manager should please ask the customer to be patient.

They lost the contract. Infuriated, the sales manager went to the subsidiary’s Japanese president, explained what happened, and complained about the lack of commitment from headquarters and Japanese colleagues in the United States. The president said he shared her disappointment but that there were things she didn’t understand about the subsidiary’s relationship with headquarters. The liaison had informed the president that headquarters refused her order because it had committed most of its output for the next few months to a customer in Japan.

Enraged, the sales manager asked the president how she was supposed to attract customers when the Americans in the subsidiary were getting no support from the Japanese and were being treated like second-class citizens by headquarters. Why, she asked, wasn’t she told that Tokyo was committed to other customers?

She said: “The Japanese are too slow in making decisions. By the time they get everyone on board in Japan, the U.S. customer has gone elsewhere. This whole mess started because the Japanese don’t participate in meetings. We invite and they just sit and talk to each other in Japanese. Are they hiding something? I never know what they’re thinking, and it drives me crazy when they say things like ‘It is difficult’ or when they suck air through their teeth.

“It doesn’t help that they never respond to my written messages. Don’t these guys ever read their e-mail? I sent that e-mail out immediately after the meeting so they would have plenty of time to react. I wonder whether they are really committed to our sales mission or putting me off. They seem more concerned about how we interact than about actually solving the problem. There’s clearly some sort of Japanese information network that I’m not part of. I feel as if I work in a vacuum, and it makes me look foolish to customers. The Japanese are too confident in the superiority of their product over the competition and too conservative to react swiftly to the needs of the market. I know that headquarters react more quickly to similar request from their big customers in Japan, so it makes me and our customers feel as if we aren’t an important market.”

Said the U.S.-based Japanese: “The American salespeople are impatient. They treat everything as though it is an emergency and never plan ahead. They call meetings at the last minute and expect people to come ready to solve a problem about which they know nothing in advance. It seems the Americans don’t want our feedback; they talk so fast and use too much slang.

“By the time we understood what they are taking about in the meeting, they were off on a different subject. So, we gave up trying to participate. The meeting leader said something about time-lines, but we weren’t sure what she wanted. So, we just agreed so as not to hold up the meeting. How can they expect us to be serious about participating in their brainstorming session? It is nothing more than guessing in public; it is irresponsible.

“The Americans also rely too much on written communication. They sent us too many memos and too much e-mail. They seem content to sit in their offices creating a lot of paperwork without knowing how people will react. They are so cut-and-dried about business and do not care what others think. They talk a lot about making fast decisions, but they do not seem to be concerned if it is the right decision. That is not responsible, nor does it show consideration for the whole group.

“They have the same inconsiderate attitude toward headquarters. They send faxes demanding swift action, without knowing the obstacles headquarters has to overcome, such as request from many customers around the world that have to be analyzed. The real problem is that there is no loyalty from our U.S. customers. They leave one supplier for another based solely on price and turnaround time. Why should we commit to them if they aren’t ready to commit to us? Also, we are concerned that the sales force has not worked hard enough to make customers understand our commitment to them.”

 

Questions:

 

  1. How are the managers of the Japanese manufacturing firm different from the American managers in the way they approach conflict resolution and decision making?
  2. Why do the Japanese consider the Americans managers impatient?
  3. What would you do to increase the amount of cooperation between the two parties?
  4. Why did the Japanese not respond to the e-mails and written messages from the Americans?

 

Case 5        All Eyes On the Corner Office

After more than a decade at the head of Siemens, the icon of German industry, Chief Executive Heinrich von Pierer is something of an icon himself.

In 2003, his name was floated briefly as a candidate for the German presidency. After years of investor criticism that he moved too slowly to transform the $93 billion electronics conglomerate into a global competitor, von Pierer is getting the last laugh. While competitors such as Netherlands-based Philips Group suffered losses during the recent economic downturn, Siemens remained profitable. The share price had doubled over the past year, to almost $87 on the New York Stock Exchange. “He has done good work,” allows shareholder advocate Daniela Bergdolt, a Munich lawyer who once told von Pierer at a stockholders’ meeting that he should leave the company.

Now Bergdolt is worried about what will happen when von Pierer does just that. The 63-year-od executive’s contract expires in September. He is widely expected to accept a two-year extension, but the question of who will succeed one of Germany’s most important executives is fast becoming a hot topic in Germany—and elsewhere in Europe, where a new generation of CEOs is fast taking over. The race to succeed von Pierer, in fact, has already started in earnest. Von Pierer and Siemens supervisory board members are now closely watching a handful of candidates. Front-runners include former U.S. division chief Klaus Kleinfeld and Thomas Ganswindt, who runs the fixed-line telecom equipment business.

The oddmakers currently favor 46-year-old Kleinfeld. Last November, he was promoted to the seven-member central committee of the management board in recognition for his work as CEO of Siemens’ $20 billion U.S. operations from January, 2002, until December, a post seen as good training for the top slot. Like Siemens worldwide, the U.S. operations are a collection of fiefdoms that often need to be strong-armed into cooperating. But there are other credible candidates, including 47-year-old Johannes Feldmayer, another central committee member.

Whoever prevails, a new generation of managers is already moving into Siemens’ top echelons. In just a year, the average age of top management has fallen from 58 to 53, J.P. Morgan Chase & Co. calculates. While rising fortysomethings won’t foment revolution at consensus-driven Siemens, they are likely to speed the company’s shift away from its conservative German roots. The new managers will focus more intensely on profit, move faster to unload underperforming units, and shift more production to cheaper locations abroad. “Obviously, von Pierer will be a tough act to follow,” says Henning Gebhardt, head of German equities at DWS, the fund management arm at Deutsche Bank. “But after 10 years, sometimes a change at the top is good.” von Pierer wrought mighty changes, even if his slow-but-steady pace didn’t always satisfy investors. When he took over in 1992, Siemens relied heavily on government contracts, rarely disciplined managers who delivered poor results, and employed 61% of its workforce in high-wage Germany. Transparency? The company published no profit figures for its divisions, and often even employees didn’t know if their units were making money.

POLITICIAN’S TOUCH.  Now Siemens gives detailed company and divisional results quarterly and has sacked numerous underperforming managers. Net return on sales has risen from 2.4% in 1993, the year after von Pierer took charge, to 4% in the latest quarter. Von Pierer responded to criticism that Siemens, which makes everything from locomotives to X-ray machines, had too many moving parts. He spun off dozens of units, including chipmaker Infineon Technologies and the electronic components unit known as Epcos. Now, 60% of employees work outside Germany and the domestic workforce has been cut by a third, to 167,000. Von Pierer, an engineer with a politician’s touch, managed that without provoking extensive labor unrest—no small feat in a land where layoffs are deemed unpatriotic.

The new generation of managers, though, is likely to be more willing to bust heads. Consider the way Ganswindt turned around the company’s $8.9 billion Information & Communication Networks division. He cut the workforce by nearly 40%, or 20,000 workers, to reduce costs by $4.4 billion. He shifted production to Brazil and China. From a loss of nearly $865 million in the fiscal year that ended Sept. 30, 2002, ICN returned to a profit of $64 million in the last quarter.

Despite the improvements, Siemens still gets heat for mediocre margins. Ganswindt and the other young managers are sensitive to the criticism. “You can’t innovate if you don’t have money to invest,” he says.

Rising managers will also continue pushing the engineer-dominated company to focus more on customer’s needs. They will maintain Siemens’ steady drive to globalize—not only by investing in Asia and the Americas but also by importing non-German ways of doing business back to Munich.

There is no question, however, of Siemens transforming itself into something other than a German company. “A new CEO will mean change, but I don’t expect a radical departure from the existing philosophy and strategy,” says analyst Roland Pitz of HVB Group in Munich. The fear is that some company directors will try to keep things too German. The supervisory board could name a lower-profile candidate such as Kurt-Ludwig Gutberlet, head of BSH Bosch & Siemens Household Appliances, a profitable joint venture with Stuttgart-based Robert Bosch. “It could be someone who is not the strongest but has the strongest consensus among the gray heads,” says a source who works closely with Siemens. Still, it’s clear that at Siemens, gray heads are becoming ever more scarce.

 

 

 

 

Questions:

  1. What leadership skills have contributed to the success of the incumbent CEO, Heinrich Von Pierer? Describe his leadership style.
  2. Siemens faces challenges in the global marketplace. The company will likely require a different leadership style than Von Pierer’s to face these challenges. What style would you recommend to Siemens?
  3. Why would the age of the leader be an important consideration in a global company? Would it be important in your consideration of the candidates for CEO of Siemens? Why?

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BUSINESS STRATEGY IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED WHATSAPP 91 9924764558

BUSINESS STRATEGY
Marks: 100
NOTE:
I. Answer ANY FIVE questions.
II. All questions carry 20 marks each.
III. Total numbers of questions are EIGHT.

———————————————————————-

Q.1. Write short notes on ANY TWO of the following
a. Globalization
b. Task and processes in formulating business strategy
c. TQM Philosophy
d. Characteristics of well formulated corporate objectives

Q.2. Describe Vision and Mission statements with suitable illustrations. What is the difference between vision and mission? How does business definition help in articulating the Mission statement?

Q.3. Describe Porter’s five forces model to analyse competition with reference to light commercial vehicle industry.

Q.4. Describe the GE multifactor portfolio matrix and state how the GE matrix is superior tool Vis a Vis the BCG matrix.

Q.5. a) Describe Ansoff’s matrix
b) What is the difference between market penetration and market development? Illustrate with suitable examples.

Q.6. What is “Best cost provider” strategy? What are the risks in pursuing this strategy?

Q.7. What strategic options a firm could follow when the firm is operating in a maturing industry?

Q.8. Describe the role of strategy supportive reward system with suitable illustrations.
 

                N.B.: 1 Attempt any Twelve Questions

                          2) Last two Questions are compulsory

Q.1. In the following statements only one is correct statement.  Explain         Briefly?                                                                                                 (5 Marks)

  1. i) An invitation to negotiate is a good offer.
  2. ii) A quasi-contract is not a contract at all.

iii)   An agreement to agree is a valid contract.

 

Q.2. A ship-owner agreed to carry to cargo of sugar belonging to A from Constanza to Busrah.  He knew that there was a sugar market in Busrah and that A was a sugar merchant, but did not know that he intended to sell the cargo, immediately on its arrival.  Owning to Shipment’s default, the voyage was delayed and sugar fetched a lower price than it would have done had it arrived on time.  A claimed compensation for the full loss suffered by him because of the delay.  Give your decision.  Explain Briefly?                                                                                               (5 Marks)

 

Q.3. The proprietors of a medical preparation called the “Carbolic Smoke Ball” published in several newspapers the following advertisement:-

“£ 1000 reward will be paid by the Carbolic Smoke Ball Co. to any person who contracts the increasing epidemic influenza after having used the Smoke Ball three times daily for two weeks according to printed directions supplied with each ball. £ 1000 is deposited with the Alliance Bank showing our sincerity in the matter.

On the faith in this advertisement, the plaintiff bought a Smoke Ball and used it as directed. She was attacked by influenza.  She sued the company for the reward.  Will she succeed?  Explain Briefly               (5 Marks)

Q.4. Fazal consigned four cases of Chinese crackers at Kanpur to be carried to Allahabad on the 30th May, 1987.  He intended to sell them at the Shabarat festival of 5th June 1987.  The railway discovered that the consignment could not be sent by passenger train and asked Fazal either to remove them or authorize their dispatch by goods train.  He took no action and the goods arrived at Allahabad a month after they were booked.

Fazal filed a suit against Railways for damages due to late delivery of the goods which deprived him of the special profits at the festival sale.  Decide & explain briefly ?                                                              (5 Marks)

 

Q.5. ‘Lifeoy’ Soap company advertised that it would give a reward of Rs. 2000 who contracted skin disease after using the ‘Lifeoy’ soap of the company for a certain period according to the printed directions.  Mrs. Jacob purchased the advertised ‘Lifeboy’ and contracted skin disease inspite of using this soap according to the printed instructions.  She claimed reward of Rs. 2000. The claim is resisted by the company on the ground that offer was not made to her and that in any case she had not communicated her acceptance of the offer.  Decide whether Mrs. Jacob can claim the reward or not.  Give reasons. Explain briefly?                                         (5 Marks)

 

Q.6. In each set of statements, only one is correct.  State the correct statements & Explain briefly?

  1. a) i) A bailee has a general lien on the goods bailed.
  2. ii) The ownership of goods pawned passes to the pawnee.
  • A gratuitous bailment can be terminated by the bailor even

before the stated time.

  1. b) i) A substituted agent is as good an agent of the agent as a sub-

agent.

  1. An ostensible agency is as effective as an express agency.
  • A principal can always revoke an agent’s authority.    (5 Marks)

Q.7. A, an unpaid seller, sends goods to B by railway.  B becomes insolvent

And A sends a telegram to Railway authorities not to deliver the goods to B. B. goes to the Parcel office of Railway Yard and by presenting R. R.  (Railway Receipt) takes delivery of the goods and starts putting them in the cart.  Meanwhile the Station Master comes running with the telegram in hand and takes possession of the goods from B.  Discuss the rights of A and B to the goods in possession of Railway authorities.                      (5 Marks)

 

Q.8. X needs Rs. 10,000 but cannot raise this amount because his credit is not good enough.  Y whose credit is good accommodates.  X by giving him a pronote made out in favour of X, though Y owes no money to X.  X endorses the pronote to Z for value received.    Z who is holder in due course demands payment from Y.  Can Y refuse and plead the arrangement between him and X Explain briefly?                                                                        (5 Marks)

 

Q.9. Will C has the right of further negotiation in the following cases: (B signs the endorsements)        Explain briefly?                                              (5 Marks)

  1. i) ‘Pay C for my use’
  2. ii) ‘Pay C’)

 

  • ‘Pay C or order for the account of B’

 

Q.10.       A promissory note was made without mentioning any time for payment.  The holder added the words’ on demand on the face of the instrument.  State whether it amounted to material alteration and explain the effect of such alteration.  Explain briefly?                                               (5 Marks)

Q.11.       State whether the following instruments are valid promissory notes:

  1. i) I promise to pay Rs. 5000 to B on the dearth of ‘B’s uncle provided that D in his will gives me a legacy sufficient for the promise of payment of the said sum.
  2. ii) I hereby acknowledge that I owe X Rs. 5,000 on account of rent due and I agree that the said sum will be paid be me in regular installments.
  • I acknowledge myself indebted to B in Rs. 5000 to be paid on demand for value received.                         (5 Marks)

 

Q.12.       A Payee holder of a bill of exchange.  He endorses it in blank and delivers it to B.  B endorses in full to C or order.  C without endorsement transfers the bill to D.  State giving reasons whether D as bearer of the bill of exchange is entitled to recover the payment from A or B or C.  Explain briefly?                                                                                            (5 Marks)

 

Q.13.       Write a short note on the Doctrine of Indoor Management? Explain briefly?                                                                                            (5 Marks)

 

Q.14.       The shareholders at an annual general meeting passed a resolution for the payment of dividend at a rate higher than that recommended by the Board of Directors.  Examine the validity of the resolution. Explain briefly?                                                                                                       (5 Marks)

 

Q.15.       In a prospectus issued by a company the Managing Director stated that the company had paid dividend every year during 1921 – 27, which was a fact.  However, the company had sustained losses during the relevant period and had paid dividends out of secret reserves accumulated in the past.  Examine the consequences of the observation made by the Managing Director. Explain briefly?                                                           (5 Marks)

 

Q.16.       In a prospectus issued by a company the Managing Director stated that the company had paid dividend every year during 1921-27, which was a fact.  However, the company had sustained losses during the relevant period and had dividends out of secret reserves accumulated in the past.  Examine the consequences of the observation made by the Managing Director.  Explain briefly?                                                                                 (5 Marks)

 

Q.17.   A buys from B 400 shares in a company on the faith of a share certificate issued by the company.  A tender to the company a transfer deed duly executed together with B’s share certificate.  The company discovers that the certificate in the name of B has been fraudulently obtained and refuses to register the transfer. Advise A. Explain briefly?                        (5 Marks)

 

Q.18.       A insured his house against fire.  Later while insure, A killed his wife, severely injured his only son, set fire to the house and died in the fire.  The son survived and sued the insurer for the fire loss, advice the insurer.  Explain briefly?                                                                                    (5 Marks)

 

Q.19. a) Satrang Singh admitted his only infant son in a private nursing home.  As a result of strong dose of medicine administered by the nursing attendant, the child has become mentally retarded. Satrang Singh wants to make a complaint to the District Forum under the Consumer Protection Act, 1986 seeking relief by way of compensation on the ground that there was deficiency in service by the nursing home.  Does his complaint give rise to a consumer dispute?  Who is the consumer in the instant case? Explain briefly?

  1. b) Smart booked a motor vehicle through one of the dealers. He was informed subsequently that the procedure for purchasing the motor vehicle had changed and was called upon to make further payment to continue the booking before delivery.  On being aggrieved, Smart filed a complaint with the State Commission under the Consumer Protection Act, 1986.  Will he succeed? Explain briefly?
  2. c) Brittle and Company, a small-scale industry, sought nursing and financing facilities from its bankers by means of grant of further advances and adequate margin money in anticipation of good demand for its products. In failing to obtain this and having become sick, it proceeds against its bankers under the Consumer Protection Act, 1986, Will it succeed?  Explain briefly?                                                                                     (5 Marks)

 

Q.20.       X who was working as a truck driver had taken a general insurance policy to cover the risk of injuries for a period from 1.11.1998 to 30.11.1999.  He renewed the policy for a further period of one year on 10.11.1999.  On the same day, he met with an accident and suffered multiple injuries including fractures.  X submitted the claim along with documents to the insurance company. The insurance company repudiated the claim on the ground that the premium for the renewed policy was received in the office only at 2.30 p.m. on 10.11.1999, while the accident had taken place at 10.00 a.m. on that day and hence there was no policy at the time of accident.  Will X succeed if he files a complaint against the insurance company for this claim? Explain briefly?                                                                           (5 Marks)

 

Q.21.       Avinash booked his goods with Superfast Freight Carriers at Delhi for being carried to Ferozabad.  The goods receipt note mentioned that all the disputes would be subject to jurisdiction of the Mumbai Court.  Avinash lodged a complaint for certain deficiency in service against the transporter in the District Forum at Delhi.  Superfast Carriers contested that District Forum at Delhi had no jurisdiction to entertain the complaint as the head office of the transporter was at Mumbai and the jurisdiction has been clearly stated in the goods receipt not.  Is the contention of the transporter tenable? Explain briefly?                                                               (5 Marks)

 

Q.22.       With reference to the provisions of the Consumer Protection Act, 1986, decide the following giving reasons in support of your answer.

  1. i) Sukh Dukh Ltd. dispatched certain consignments of goods by road through Fastrack Roadways Ltd. The goods were unloaded and stored in a godown enroute on the suggestion of consignee. A fire broke out in the neighbouring godown spread to the godown and goods were destroyed.  The Fastrack Roadways Ltd. claimed that there was neither negligence nor deficiency in service on their part and goods were being carried at “Owner risk” and since no special premium was paid, they were not responsible for the loss caused by fire.  Whether Fastrack Roadways Ltd. is liable to pay damages to consignor?
  2. ii) Life Insurance Corporation (LIC) formulated a scheme called ‘salary saving scheme’ under which employees of an organisation could buy an insurance policy. Premium due on each policy was collected by the employer from the salary of the employees nor did it issue any premium notice.  When the widow of the deceased employee made a claim to LIC on the death of her husband, the LIC repudiated the claim on the ground that four installments of premium had not been paid.  The widow was approached the consumer forum for redressal. Is the LIC liable for deficiency in service? Explain?

iii)   Raman booked a ticket from Delhi to New York by Lufthansa Airlines.  The airport authorities in New Delhi did not find any fault in his visa and other documents.  However, at Frankfurt airport authorities instituted proceedings of verification because of which Raman missed his flight to New York.  After necessary verification, Raman was able to reach New York by the next flight.  The airline authorities’ tendered apology to Raman for the inconvenience caused to him and also paid as goodwill gesture a sum of Rs. 5,000.  Raman intends to institute proceedings under the Consumer Protection Act, 1986 against Lufthansa Airlines for deficiency in service.  Will he succeed?                                                         (10 Marks )

 

Q.23.       With reference to the provisions of the Consumer Protection Act, 1986, decide the following giving reasons in support of your answer.

  1. i) Sohn sent all relevant documents in an envelope regarding consignment of goods to a buyer in the USA through Fast Service Couriers. The documents did not reach the buyer as a consequence of which the buyer could not take delivery of the goods.  By the time the duplicate copies of the document had been received by the buyer, the season of the goods was over.  He claimed that he had suffered a loss of US $ 5,000 as a result of the negligence of the courier.  The State Commission ordered the payment to be made by the Fast Service Couriers, but the National Commission in appeal reversed the order and ordered payment of US $ 100 only as per the receipt issued by the Fast Service Courier to the consignor at the time of the dispatch of the latter.  Advise Sohan.
  2. ii) Mahesh purchased a machine from Astute Ltd. to operate it himself for earning his liverhood. He took the assistance of a person to assist him in operating the machine.  The machine developed fault during the warranty period. He filed a claim in the consumer forum against the company for deficiency in service.  Astute Ltd. alleged that Mahesh did not operate the machine himself but had appointed a person exclusively to operate the machine.  Will Mahesh succeed?

iii)   Pillai purchased a car by taking a loan from Kerala cooperative Bank Ltd. and gave post-dated cheques to the bank not only in respect of repayment of loan instalments but also of premium of insurance policy for two succeeding years. On the expiry of the policy.  Pillai’s car met with an accident.  Will Pillai succeed in getting a claim against the

Bank       ?                                                                       (10 Marks)

 

 


BUSINESS ETHICS IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

BUSINESS ETHICS IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED WHATSAPP 91 9924764558

 

 
                                                    BUSINESS ETHICS

Marks – 80

SECTON-A

ANSWER ALL QUESTIONS (5X3=15)

1. Define business ethics?
2. What is kick-back in business?
3. What is unfair discrimination?
4. What is acid rain?
5. Define the term social responsibility in business?

SECTION-B

ANSWER any 5 QUESTIONS (5X5=25)

6. Difference between transactional & transformational leadership?
7. Business & ethics are contradictory?
8. Explain the term ‘stealing trade secrets’
9. Explain whistle blowing
10. Mention 3 unethical practices in marketing?
11. What are the primary reasons for resources depletion?
12. Explain the objectives of social audit?

SECTION-C

ANSWER any 4 questions (10 X 4=40)

13.discuss the role & import of ethics in business
14.explain the types of ethical issues in business
15.discuss about the qualities & features of CEO in business
16.analyses the various causes of pollution in developing countries
explain the principle obligations of a business firm
17.discuss in detail about unfair trade discrimination?

 

 

 

 

BUSINESS ENVIRONMENT

 

 

Note: Attempt any five questions. All questions carry equal marks

  1. Discuss the changing scenario of business environment in India and its principal implications for the business.
  2. (a) Explain the dualistic character of Indian economy and the problem of uneven income distribution.

(b) Outline the development of consumer movement in India.

  1. (a) Write notes on (i) adjudication machinery for settlement of disputes, and (ii) Employees Pension Scheme, 1995.

(b) Enumerate the powers of the Central Government to control production, supply and distribution of essential commodities under the Essential Commodities Act, 1955.

  1. Describe the important amendments proposed under the Companies (Amendment) Bill, 2003 and the additions proposed thereto by lrani Panel.
  2. (a) Can SEBI compel a public company to get its securities listed on the stock exchanges while making a public issue? On what grounds can the listed securities be delisted by a stock exchange? State the rules in this regard.

(b) “The role of stock exchanges in India need not be over – emphasized”. Comment.

  1. Describe the evolution of the concept of corporate governance and outline the various measures adopted in India to ensure good corporate governance.
  2. Make a critical assessment of New Economic Policy keeping in view the long term objectives of economic development.
  3. (a) What are the objectives of EXIM policy 2002 – 07? Explain its main provisions.

(b) Write an explanatory note on functions and coverage of WTO.

  1. Distinguish between the following:

(a) Micro Environment and Macro Environment

(b) Economic Growth and Economic Development

(c) Money Market and Capital Market

(d) Entrepreneurship, Role and Promotional Role of Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


HUMAN RESOURCE MANAGEMENT IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

           HUMAN RESOURCE MANAGEMENT IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED WHATSAPP 91 9924764558

 

CONTACT:

DR. PRASANTH BE BBA MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521 EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com

 

 

   Human Resource Management

                                 Marks – 100

 

 

Note: Solve any 4 Cases Study’s

 

CASE: I    Enterprise Builds On People

 

When most people think of car-rental firms, the names of Hertz and Avis usually come to mind. But in the last few years, Enterprise Rent-A-Car has overtaken both of these industry giants, and today it stands as both the largest and the most profitable business in the car-rental industry. In 2001, for instance, the firm had sales in excess of $6.3 billion and employed over 50,000 people.

Jack Taylor started Enterprise in St. Louis in 1957. Taylor had a unique strategy in mind for Enterprise, and that strategy played a key role in the firm’s initial success. Most car-rental firms like Hertz and Avis base most of their locations in or near airports, train stations, and other transportation hubs. These firms see their customers as business travellers and people who fly for vacation and then need transportation at the end of their flight. But Enterprise went after a different customer. It sought to rent cars to individuals whose own cars are being repaired or who are taking a driving vacation.

The firm got its start by working with insurance companies. A standard feature in many automobile insurance policies is the provision of a rental car when one’s personal car has been in an accident or has been stolen. Firms like Hertz and Avis charge relatively high daily rates because their customers need the convenience of being near an airport and/or they are having their expenses paid by their employer. These rates are often higher than insurance companies are willing to pay, so customers who these firms end up paying part of the rental bills themselves. In addition, their locations are also often inconvenient for people seeking a replacement car while theirs is in the shop.

But Enterprise located stores in downtown and suburban areas, where local residents actually live. The firm also provides local pickup and delivery service in most areas. It also negotiates exclusive contract arrangements with local insurance agents. They get the agent’s referral business while guaranteeing lower rates that are more in line with what insurance covers.

In recent years, Enterprise has started to expand its market base by pursuing a two-pronged growth strategy. First, the firm has started opening  airport locations to compete with Hertz and Avis more directly. But their target is still the occasional renter than the frequent business traveller. Second, the firm also began to expand into international markets and today has rental offices in the United Kingdom, Ireland and Germany.

Another key to Enterprise’s success has been its human resource strategy. The firm targets a certain kind of individual to hire; its preferred new employee is a college graduate from bottom half of graduating class, and preferably one who was an athlete or who was otherwise actively involved in campus social activities. The rationale for this unusual academic standard is actually quite simple. Enterprise managers do not believe that especially high levels of achievements are necessary to perform well in the car-rental industry, but having a college degree nevertheless demonstrates intelligence and motivation. In addition, since interpersonal relations are important to its business, Enterprise wants people who were social directors or high-ranking officers of social organisations such as fraternities or sororities. Athletes are also desirable because of their competitiveness.

Once hired, new employees at Enterprise are often shocked at the performance expectations placed on them by the firm. They generally work long, grueling hours for relatively low pay.

 

And all Enterprise managers are expected to jump in and help wash or vacuum cars when a rental agency gets backed up. All Enterprise managers must wear coordinated dress shirts and ties and can have facial hair only when “medically necessary”. And women must wear skirts no shorter than two inches above their knees or creased pants.

 

So what are the incentives for working at Enterprise? For one thing, it’s an unfortunate fact of life that college graduates with low grades often struggle to find work. Thus, a job at Enterprise is still better than no job at all. The firm does not hire outsiders—every position is filled by promoting someone already inside the company. Thus, Enterprise employees know that if they work hard and do their best, they may very well succeed in moving higher up the corporate ladder at a growing and successful firm.

 

 

Question:

 

  1. Would Enterprise’s approach human resource management work in other industries?
  2. Does Enterprise face any risks from its human resource strategy?
  3. Would you want to work for Enterprise? Why or why not?

 

 

 

 

 

 

 

 

CASE: II    Doing the Dirty Work

 

Business magazines and newspapers regularly publish articles about the changing nature of work in the United States and about how many jobs are being changed. Indeed, because so much has been made of the shift toward service-sector and professional jobs, many people assumed that the number of unpleasant an undesirable jobs has declined.

In fact, nothing could be further from the truth. Millions of Americans work in gleaming air-conditioned facilities, but many others work in dirty, grimy, and unsafe settings. For example, many jobs in the recycling industry require workers to sort through moving conveyors of trash, pulling out those items that can be recycled. Other relatively unattractive jobs include cleaning hospital restrooms, washing dishes in a restaurant, and handling toxic waste.

Consider the jobs in a chicken-processing facility. Much like a manufacturing assembly line, a chicken-processing facility is organised around a moving conveyor system. Workers call it the chain. In reality, it’s a steel cable with large clips that carries dead chickens down what might be called a “disassembly line.” Standing along this line are dozens of workers who do, in fact, take the birds apart as they pass.

Even the titles of the jobs are unsavory. Among the first set of jobs along the chain is the skinner. Skinners use sharp instruments to cut and pull the skin off the dead chicken. Towards the middle of the line are the gut pullers. These workers reach inside the chicken carcasses and remove the intestines and other organs. At the end of the line are the gizzard cutters, who tackle the more difficult organs attached to the inside of the chicken’s carcass. These organs have to be individually cut and removed for disposal.

The work is obviously distasteful, and the pace of the work is unrelenting. On a good day the chain moves an average of ninety chickens a minute for nine hours. And the workers are essentially held captive by the moving chain. For example, no one can vacate a post to use the bathroom or for other reasons without the permission of the supervisor. In some plants, taking an unauthorised bathroom break can result in suspension without pay. But the noise in a typical chicken-processing plant is so loud that the supervisor can’t hear someone calling for relief unless the person happens to be standing close by.

Jobs such as these on the chicken-processing line are actually becoming increasingly common. Fuelled by Americans’ growing appetites for lean, easy-to-cook meat, the number of poultry workers has almost doubled since 1980, and today they constitute a work force of around a quarter of a million people. Indeed, the chicken-processing industry has become a major component of the state economies of Georgia, North Carolina, Mississippi, Arkansas, and Alabama.

Besides being unpleasant and dirty, many jobs in a chicken-processing plant are dangerous and unhealthy. Some workers, for example, have to fight the live birds when they are first hung on the chains. These workers are routinely scratched and pecked by the chickens. And the air inside a typical chicken-processing plant is difficult to breathe. Workers are usually supplied with paper masks, but most don’t use them because they are hot and confining.

And the work space itself is so tight that the workers often cut themselves—and sometimes their coworkers—with the knives, scissors, and other instruments they use to perform their jobs. Indeed, poultry processing ranks third among industries in the United States for cumulative trauma injuries such as carpet tunnel syndrome. The inevitable chicken feathers, faeces, and blood also contribute to the hazardous and unpleasant work environment.

Question:

 

  1. How relevant are the concepts of competencies to the jobs in a chicken-processing plant?

 

  1. How might you try to improve the jobs in a chicken-processing plant?

 

  1. Are dirty, dangerous, and unpleasant jobs an inevitable part of any economy?

 

 

CASE: III    On Pegging Pay to Performance

 

“As you are aware, the Government of India has removed the capping on salaries of directors and has left the matter of their compensation to be decided by shareholders. This is indeed a welcome step,” said Samuel Menezes, president Abhayankar, Ltd., opening the meeting of the managing committee convened to discuss the elements of the company’s new plan for middle managers.

Abhayankar was am engineering firm with a turnover of Rs 600 crore last year and an employee strength of 18,00. Two years ago, as a sequel to liberalisation at the macroeconomic level, the company had restructured its operations from functional teams to product teams. The change had helped speed up transactional times and reduce systemic inefficiencies, leading to a healthy drive towards performance.

“I think it is only logical that performance should hereafter be linked to pay,” continued Menezes. “A scheme in which over 40 per cent of salary will be related to annual profits has been evolved for executives above the vice-president’s level and it will be implemented after getting shareholders approval. As far as the shopfloor staff is concerned, a system of incentive-linked monthly productivity bonus has been in place for years and it serves the purpose of rewarding good work at the assembly line. In any case, a bulk of its salary will have to continue to be governed by good old values like hierarchy, rank, seniority and attendance. But it is the middle management which poses a real dilemma. How does one evaluate its performance? More importantly, how can one ensure that managers are not shortchanged but get what they truly deserve?”

“Our vice-president (HRD), Ravi Narayanan, has now a plan ready in this regard. He has had personal discussions with all the 125 middle managers individually over the last few weeks and the plan is based on their feedback. If there are no major disagreements on the plan, we can put it into effect from next month. Ravi, may I now ask you to take the floor and make your presentation?”

The lights in the conference room dimmed and the screen on the podium lit up. “The plan I am going to unfold,” said Narayanan, pointing to the data that surfaced on the screen, “is designed to enhance team-work and provide incentives for constant improvement and excellence among middle-level managers. Briefly, the pay will be split into two components. The first consists of 75 per cent of the original salary and will be determined, as before, by factors of internal equity comprising what Sam referred to as good old values. It will be a fixed component.”

“The second component of 25 per cent,” he went on, “will be flexible. It will depend on the ability of each product team as a whole to show a minimum of 5 per cent improvement in five areas every month—product quality, cost control, speed of delivery, financial performance of the division to which the product belongs and, finally, compliance with safety and environmental norms. The five areas will have rating of 30, 25, 20, 15, and 10 per cent respectively.

“This, gentlemen, is the broad premise. The rest is a matter of detail which will be worked out after some finetuning. Any questions?”

As the lights reappeared, Gautam Ghosh, vice-president (R&D), said, “I don’t like it. And I will tell you why. Teamwork as a criterion is okay but it also has its pitfalls. The people I take on and develop are good at what they do. Their research skills are individualistic. Why should their pay depend on the performance of other members of the product team? The new pay plan makes them team players first and scientists next. It does not seem right.”

“That is a good one, Gautam,” said Narayanan. “Any other questions? I think I will take them all together.”

“I have no problems with the scheme and I think it is fine. But just for the sake of argument, let me take Gautam’s point further without meaning to pick holes in the plan,” said Avinash Sarin, vice-president (sales). “Look at my dispatch division. My people there have reduced the shipping time from four hours to one over the last six months. But what have they got? Nothing. Why? Because the other members of the team are not measuring up.”

“I think that is a situation which is bound to prevail until everyone falls in line,” intervened Vipul Desai, vice president (finance). “There would always be temporary problems in implementing anything new. The question is whether our long term objectives is right. To the extend that we are trying to promote teamwork, I think we are on the right track. However, I wish to raise a point. There are many external factors which impinge on both individual and collective performance. For instance, the cost of a raw material may suddenly go up in the market affecting product profitability. Why should the concerned product team be penalised for something beyond its control?”

“I have an observation to make too, Ravi,” said Menezes, “You would recall the survey conducted by a business fortnightly on ‘The ten companies Indian managers fancy most as a working place’. Abhayankar got top billings there. We have been the trendsetters in executive compensation in Indian industry. We have been paying the best. Will your plan ensure that it remains that way?”

As he took the floor again, the dominant thought in Narayanan’s mind was that if his plan were to be put into place, Abhayankar would set another new trend in executive compensation.

 

Question:

 

But how should he see it through?

 

 

 
CASE: IV Crisis Blown Over

 

November 30, 1997 goes down in the history of a Bangalore-based electric company as the day nobody wanting it to recur but everyone recollecting it with sense of pride.

It was a festive day for all the 700-plus employees. Festoons were strung all over, banners were put up; banana trunks and leaves adorned the factory gate, instead of the usual red flags; and loud speakers were blaring Kannada songs. It was day the employees chose to celebrate Kannada Rajyothsava, annual feature of all Karnataka-based organisations. The function was to start at 4 p.m. and everybody was eagerly waiting for the big event to take place.

But the event, budgeted at Rs 1,00,000 did not take place. At around 2 p.m., there was a ghastly accident in the machine shop. Murthy was caught in the vertical turret lathe and was wounded fatally. His end came in the ambulance on the way to hospital.

The management sought union help, and the union leaders did respond with a positive attitude. They did not want to fish in troubled waters.

Series of meetings were held between the union leaders and the management. The discussions centred around two major issues—(i) restoring normalcy, and (ii) determining the amount of compensation to be paid to the dependants of Murthy.

Luckily for the management, the accident took place on a Saturday. The next day was a weekly holiday and this helped the tension to diffuse to a large extent. The funeral of the deceased took place on Sunday without any hitch. The management hoped that things would be normal on Monday morning.

But the hope was belied. The workers refused to resume work. Again the management approached the union for help. Union leaders advised the workers to resume work in al departments except in the machine shop, and the suggestions was accepted by all.

Two weeks went by, nobody entered the machine shop, though work in other places resumed. Union leaders came with a new idea to the management—to perform a pooja to ward off any evil that had befallen on the lathe. The management accepted the idea and homa was performed in the machine shop for about five hours commencing early in the morning. This helped to some extent. The workers started operations on all other machines in the machine shop except on the fateful lathe. It took two full months and a lot of persuasion from the union leaders for the workers to switch on the lathe.

The crisis was blown over, thanks to the responsible role played by the union leaders and their fellow workers. Neither the management nor the workers wish that such an incident should recur.

As the wages of the deceased grossed Rs 6,500 per month, Murthy was not covered under the ESI Act. Management had to pay compensation. Age and experience of the victim were taken into account to arrive at Rs 1,87,000 which  was the amount to be payable to the wife of the deceased. To this was added Rs 2,50,000 at the intervention of the union leaders. In addition, the widow was paid a gratuity and a monthly pension of Rs 4,300. And nobody’s wages were cut for the days not worked.

Murthy’s death witnessed an unusual behavior on the part of the workers and their leaders, and magnanimous gesture from the management. It is a pride moment in the life of the factory.

 

 

 

 

Question:

 

  1. Do you think that the Bangalore-based company had practised participative management?

 

  1. If your answer is yes, with what method of participation (you have read in this chapter) do you relate the above case?

 

  1. If you were the union leader, would your behaviour have been different? If yes, what would it be?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE: V    A Case of Burnout

 

When Mahesh joined XYZ Bank (private sector) in 1985, he had one clear goal—to prove his mettle. He did prove himself and has been promoted five times since his entry into the bank. Compared to others, his progress has been fastest. Currently, his job demands that Mahesh should work 10 hours a day with practically no holidays. At least two day in a week, Mahesh is required to travel.

Peers and subordinates at the bank have appreciation for Mahesh. They don’t grudge the ascension achieved by Mahesh, though there are some who wish they too had been promoted as well.

The post of General Manager fell vacant. One should work as GM for a couple of years if he were to climb up to the top of the ladder, Mahesh applied for the post along with others in the bank. The Chairman assured Mahesh that the post would be his.

A sudden development took place which almost wrecked Mahesh’s chances. The bank has the practice of subjecting all its executives to medical check-up once in a year. The medical reports go straight to the Chairman who would initiate remedials where necessary. Though Mahesh was only 35, he too, was required to undergo the test.

The Chairman of the bank received a copy of Mahesh’s physical examination results, along with a note from the doctor. The note explained that Mahesh was seriously overworked, and recommended that he be given an immediate four-week vacation. The doctor also recommended that Mahesh’s workload must be reduced and he must take physical exercise every day. The note warned that if Mahesh did not care for advice, he would be in for heart trouble in another six months.

After reading the doctor’s note, the Chairman sat back in his chair, and started brooding over. Three issues were uppermost in his mind—(i) How would Mahesh take this news? (ii) How many others do have similar fitness problems? (iii) Since the environment in the bank helps create the problem, what could he do to alleviate it? The idea of holding a stress-management programme flashed in his mind and suddenly he instructed his secretary to set up a meeting with the doctor and some key staff members, at the earliest.

 

Question:

 

  1. If the news is broken to Mahesh, how would he react?

 

  1. If you were giving advice to the Chairman on this matter, what would you recommend?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE: VI    “Whose Side are you on, Anyway?”

 

It was past 4 pm and Purushottam Mahesh was still at his shopfloor office. The small but elegant office was a perk he was entitled to after he had been nominated to the board of Horizon Industries (P) Ltd., as workman-director six months ago. His shift generally ended at 3 pm and he would be home by late evening. But that day, he still had long hours ahead of him.

Kshirsagar had been with Horizon for over twenty years. Starting off as a substitute mill-hand in the paint shop at one of the company’s manufacturing facilities, he had been made permanent on the job five years later. He had no formal education. He felt this was a handicap, but he made up for it with a willingness to learn and a certain enthusiasm on the job. He was soon marked by the works manager as someone to watch out for. Simultaneously, Kshirsagar also came to the attention of the president of the Horizon Employees’ Union who drafted him into union activities.

Even while he got promoted twice during the period to become the head colour mixer last year, Kshirsagar had gradually moved up the union hierarchy and had been thrice elected secretary of the union. Labour-management relations at Horizon were not always cordial. This was largely because the company had not been recording a consistently good performance. There were frequent cuts in production every year because of go-slows and strikes by workmen—most of them related to wage hikes and bonus payments. With a view to ensuring a better understanding on the part of labour, the problems of company management, the Horizon board, led by chairman and managing director Aninash Chaturvedi, began to toy with idea of taking on a workman on the board. What started off as a hesitant move snowballed, after a series of brainstorming sessions with executives and meetings with the union leaders, into a situation in which Kshirsagar found himself catapulted to the Horizon board as work-man-director.

It was an untested ground for the company. But the novelty of it all excited both the management and the labour force. The board members—all functional heads went out of their way to make Kshirsagar comfortable and the latter also responded quite well. He got used to the ambience of the boardroom and the sense of power it conveyed. Significantly, he was soon at home with the perspectives of top management and began to see each issue from both sides.

It was smooth going until the union presented a week before the monthly board meeting, its charter of demands, one of which was a 30 per cent across-the board hike in wages. The matter was taken up at the board meeting as part of a special agenda.

“Look at what your people are asking for,” said Chaturvedi, addressing Kshirsagar with a sarcasm that no one in the board missed. “You know the precarious finances of the company. How could you be a party to a demand that can’t be met? You better explain to them how ridiculous the demands are,” he said.

“I don’t think they can all be dismissed as ridiculous,” said Kshirsagar. “And the board can surely consider the alternatives. We owe at least that much to the union.” But Chaturvedi adjourned the meeting in a huff, mentioning, once to Kshirsagar that he should “advise the union properly”.

When Kshirsagar told the executive committee members of the union that the board was simply not prepared to even consider the demands, he immediately sensed the hostility in the room. “You are a sell out,” one of them said. “Who do you really represent—us or them?” asked another.

“Here comes the crunch,” thought Kshirsagar. And however hard he tried to explain, he felt he was talking to a wall.

A victim of divided loyalities, he himself was unable to understand whose side he was on. Perhaps the best course would be to resign from the board. Perhaps he should resign both from the board and

the union. Or may be resign from Horizon itself and seek a job elsewhere. But, he felt, sitting in his office a little later, “none of it could solve the problem.”

 

Question:

  1. What should he do?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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  General Management

                                 Marks – 100

 

 

Attempt Any Four Case Study

 

CASE – 1   Your Job and Your Passion—You Can Pursue Both!

 

The 21st century offers many challenges to every one of us. As more firms go global, as more economies interconnect, and as the Web blasts away boundaries to communication, we become more informed citizens. This interconnectedness means that the organizations you work for will require you to develop both general and specialized knowledge—such as speaking multiple languages, using various software applications, or understanding details of financial transactions. You will have to develop general management skills to foster your ability to be self-reliant and thrive in a changing market-place. And here’s the exciting part: As you build both types of knowledge, you may be able to integrate your growing expertise with the causes or activities you care most about. Or, your career adventure may lead you to a new passion.

Former presidents George H. W. Bush and Bill Clinton are well known for combining their management skills—running a country—with their passion for helping people around the world. Together they have raised funds to assist disaster victims, those with HIV/AIDS, and others in need. Jake Burton turned his love of snow sports into an entire industry when he founded Burton Snowboards. Annie Withey poured her business and marketing knowledge into her two famous business ventures: Smartfood and Annie’s Homegrown. Both products were the result of her passion for healthful foods made from organic ingredients.

As you enter the workforce, you may have no idea where your career path will lead. You may be asking yourself, “How will I fit in?” “Where will I live?” “How much will I earn?” “Where will my business and personal careers evolve as the world continuous to change at such a fast pace?” If you are feeling nervous because you don’t know the answers to these questions yet, relax. A career is a journey, not a single destination. You may have one type of career or several. It is likely you will work for several organisations, or you may run one or more businesses of your own.

As you ask yourself what you want to do and where you want to be, take a few minutes to review the chapter and its main topics. Think about your personality, what you like and dislike, what you know and what you want to learn, what you fear and what you dream. Then try the following exercise.

 

 

 

Questions

 

  1. Create a three-column chart in which the first column lists nonmanagement skills you have. Are you good at travel? Do you know how to build furniture? Are you a whiz at sports statistics? Are you an innovative cook? Do you play video games for hours? In the second column, list the causes or activities about which you are passionate. These may dovetail with the first list, but they might not.
  2. Once you have you two columns complete, draw lines between entries that seem compatible. If you are good at building furniture, you might have also listed a concern about families who are homeless. Remember that not all entries will find a match—the idea is to begin finding some connections.
  3. In the third column, generate a list of firms or organizations you know about that reflect your interests. If you are good at building furniture, you might be interested working for the Habitat for Humanity organization, or you might find yourself gravitating towards a furniture retailer like Ikea or Ethan Allen. You can do further research on organizations via Internet or business publications.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   Biyani – Pioneering a Retailing Revolution in India

 

“I use people as hands and legs. I prefer to do thinking around here.”

 

─ Kishore Biyani, CEO & MD, Pantaloon Retail (India) Ltd.

 

Kishore Biyani (Biyani), CEO& MD of Pantaloon Retail (India) Ltd., planned to have 30 Food Bazaar outlets, 22 outlets in Big Bazaar, 21 Pantaloons outlets, and four seamless malls under the Central logo, by the end of 2005. He also planned to launch at least three businesses every year and had already selected music, footwear and car accessories as his next areas of investments. He was already the top retailer in India followed by Raghu Pillai of RPG. As of 2004, Biyani headed a company that had a turnover of Rs 6,500 million and operated 13 Pantaloon apparel stores, 9 Big Bazaars, 13 Food Bazaars, and 3 seamless malls (Central), one each located in Bangalore, Hyderabad, and Pune.

Biyani’s journey from a person who looked after his family business to India’s top retailer in 1987, when he launched Manz Wear Pvt. Ltd. The company launched one of the first readymade trousers brands – ‘Pantaloon’ – in the country. The company also launched its first jeans brand called ‘Bare’ in 1989. On September 20, 1991, Manz Wear Pvt. Ltd. went public and on September 25, 1992, it changed its name to Pantaloon Fashions (India) Limited (PFIL). ‘John Miller’ was the first formal shirt brand from PFIL.

The company opened its first apparel stores, called ‘Pantaloons’ at Kolkata in August 1997. The stores generated Rs 70 million. Biyani then realized the potential of the Indian market and started to aggressively tap it. Accordingly, Biyani decided to expand into other segments of retailing besides apparel. To reflect this change in focus, the company changed its name to Pantaloon Retail (India) Limited (PRIL) in July 1999 and set itself a target of achieving Rs 10 billion in sales by June 2005. In course of time he launched three other retail formats — Big Bazaar, Food Bazaar, and Central.

Biyani didn’t believe in copying ideas from western retailers. He was critical of his peers who felt just copied ideas form the west without making any effort to mold them to Indian conditions. He ensured that his store formats such as Big Bazaar, Food Bazaar, and Pantaloons were all suited to the purchasing style of Indian consumers.

Biyani was a huge risk taker and his planning was always different from the conventional way of doing business. This was also one of the factors that had prompted Biyani to move away from his father’s conventional way of doing business. During the initial stages of his success, his risk-taking attitude sometimes had the effect of turning away financiers. The biggest risk that Biyani took was in opening Big Bazaar in Mumbai in 2001. The company needed money to expand Big Bazaar’s operations. However, it had profits of only Rs 40 million with a low share price at eighteen rupees. Therefore, Biyani could not raise money through equity. In light of this situation, Biyani took a loan of Rs 1,200 million from ICICI for launching the operations of Big Bazaar, which increased his debt exposure. However, Big Bazaar proved to be a resounding success with 100,000 customer visits in its first week of operations. According to analysts, if Big Bazaar had failed, Biyani would have landed in a severe debt crisis. The success of Big Bazaar not only increased the company profits, it also changed the perception of investors.

Many people criticized Biyani for not delegating authority and Biyani himself accepted the criticism. He said, “I use people as hands and legs. I prefer to do the thinking around here.” He preferred taking individual decision on activities like strategic planning, ideas for other ventures, and other important issues. It was because of this that managers like Kush Medhora of Westside were initially apprehensive about joining Biyani’s business. However, Biyani changed his attitude gradually with the launch of Big Bazaar, Food Bazaar, and Central and appointed different people for managing different business units.

Biyani believed in leading a simple life and in being simply dressed. His vision came from his diverse reading connected to retailing and other areas. He made it a point to visit each of his stores across the country. He aimed to spend at least seven hours a week at the stores. In the stores, he would stand at a corner and observe people. He also walked on streets, met common people, and talked to local leaders to plan and put up new products in his stores. Each of his stores was set with a weekly target, which was reviewed every Monday. Whenever a new store was opened, the details of its operations during the first 45 days were to be sent to him. Sometimes, he suggested remedies to some problems. Biyani believed in extensive advertising to make more people know about the product. His decision making was quick and devoid of unnecessary delays. Biyani was also a good learner and learned quickly from his mistakes. He planned to improve inventory management through responding effectively to the demands of the customers rather than forecasting them, as he felt that forecasting would pile up the inventory in this dynamic market.

 

 

 

 

 

Questions

 

  1. The tremendous success of the ‘Pantaloons’, ‘Big Bazaar’ and ‘Food Bazaar’ retailing formats, easily made PRIL the number one retailer in India by early 2004, in terms of turnover and retail area occupied by its outlets. Explain how Biyani is further planning to consolidate his businesses.
  2. “Our striving toward looking at the Indian market differently and strategizing with the evolving customer helped us perform better.” What other qualities of Kishore Biyani do you think were instrumental in making him top retailer of India?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   The New Frontier for Fresh Foods Supermarkets

 

Fresh Foods Supermarket is a grocery store chain that was established in the Southeast 20 years ago. The company is now beginning to expand to other regions of the United States. First, the firm opened new stores along the eastern seaboard, gradually working its way up through Maryland and Washington, DC, then through New York and New jersey, and on into Connecticut and Massachusetts. It has yet to reach the northern New England states, but executives have decided to turn their attention to the Southwest, particularly because of the growth of population there.

Vivian Noble, the manager of one of the chain’s most successful stores in the Atlanta area, has been asked to relocate to Phoenix, Arizona, to open and run a new Fresh Foods Supermarket. She has decided to accept the job, but she knows it will be a challenge. As an African American woman, she has faced some prejudice during her career, but she refuses to be stopped by a glass ceiling or any other barrier. She understands that she will be living and working in an area where several cultures combine and collide, and she will be hiring and managing a diverse workforce. Noble has the support of top management at Fresh Foods, which wants the store to reflect the surrounding community—in both staff makeup and product selection. So she will be looking to hire employees with Hispanic and Native American roots, as well as older workers who can relate to the many retired residents in the area. And she will be seeking their inputs on the selection of certain food products, including ethnic brands, so that customers know they can buy what they need and want a Fresh Foods.

In addition, Noble wants to make sure that Fresh Foods provides services above and beyond those of a standard supermarket to attract local consumers. For instance, she wants the store to offer free delivery of groceries to home-bound customers who are either senior citizens or physically disabled. She wants to be sure that the store has enough bilingual employees to translate for and otherwise assist customers who speak little or no English. Noble believes that she is a pioneer of sorts, guiding Fresh Foods Supermarkets into a new frontier. “The sky is almost blue here,” she says of her new home state. “And there’s no glass ceiling between me and the sky.”

 

 

 

Questions

 

  1. What steps can Vivian Noble take to recruit and develop her new workforce?
  2. What other ways can Noble help her company reach out to the community?
  3. How will Fresh Foods Supermarkets as whole benefit from successfully moving into this new region of the country?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   The Law Offices of Jeter, Jackson, Guidry, and Boyer

 

THE EVOLUTION OF THE FIRM

 

David Jeter and Nate Jackson started a small general law practice in 1992 near Sacramento, California. Prior to that, the two had spent five years in the district attorney’s office after completing their formal schooling. What began as a small partnership—just the two attorneys and a paralegal/assistant—had now grown into a practice that employed more than 27 people in three separated towns. The current staff included 18 attorneys (three of whom have become partners), three paralegals, and six secretaries.

For the first time in the firm’s existence, the partners felt that they were losing control of their overall operation. The firm’s current caseload, number of employees, number of clients, travel requirements, and facilities management needs had grown far beyond anything that the original partners had ever imagined.

Attorney Jeter called a meeting of the partners to discuss the matter. Before the meeting, opinions about the pressing problems of the day and proposed solutions were sought from the entire staff. The meeting resulted in a formal decision to create a new position, general manager of operations. The partners proceeded to compose a job description and job announcement for recruiting purposes.

Highlights and responsibilities of the job description include:

  • Supervising day-to-day office personnel and operations (phones, meetings, word processing, mail, billings, payroll, general overhead, and maintenance).
  • Improving customer relations (more expeditious processing of cases and clients).
  • Expanding the customer base.
  • Enhancing relations with the local communities.
  • Managing the annual budget and related incentive programs.
  • Maintaining annual growth in sales of 10 percent while maintaining or exceeding the current profit margin.

 

The general manager will provide an annual executive summary to the partners, along with specific action plans for improvement and change. A search committee was formed, and two months later the new position was offered to Brad Howser, a longtime administrator from the insurance industry seeking a final career change and a return to his California roots. Howser made it clear that he was willing to make a five-year commitment to the position and would then likely retire.

Things got off to a quiet and uneventful start as Howser spent few months just getting to know the staff, observing day-today operations; and reviewing and analyzing assorted client and attorney data and history, financial spreadsheets, and so on.

About six months into the position, Howser became more outspoken and assertive with the staff and established several new operational rules and procedures. He began by changing the regular working hours. The firm previously had a flex schedule in place that allowed employees to begin and end the workday at their choosing within given parameters. Howser did not care for such a “loose schedule” and now required that all office personnel work from 9:00 to 5:00 each day. A few staff member were unhappy about this and complained to Howser, who matter-of-factly informed them that “this is the new rule that everyone is expected to follow, and anyone who could or would not comply should probably look for another job.” Sylvia Bronson, an administrative assistant who had been with the firm for several years, was particularly unhappy about this change. She arranged for a private meeting with Howser to discuss her child care circumstances and the difficulty that the new schedule presented. Howser seemed to listen half-heartedly and at one point told Bronson that “assistance are essentially a-dime-a-dozen and are readily available.” Bronson was seen leaving the office in tears that day.

Howser was not happy with the average length of time that it took to receive payments for services rendered to the firm’s clients (accounts receivable). A closer look showed that 30 percent of the clients paid their bills in 30 days or less, 60 percent paid in 30 to 60 days, and the remaining 10 percent stretched it out to as  many as 120 days. Howser composed a letter that was sent to all clients whose outstanding invoices exceeded 30 days. The strongly worded letter demanded immediate payment in full and went on to indicate that legal action might be taken against anyone who did not respond in timely fashion. While a small number of “late” payments were received soon after the mailing, the firm received an even larger number of letters and phone calls from angry clients, some of whom had been with the firm since its inception.

Howser was given an advertising and promotion budget for purposes of expanding the client base. One of the paralegals suggested that those expenditures should be carefully planned and that the firm had several attorneys who knew the local markets quite well and could probably offer some insights and ideas on the subject. Howser thought about this briefly and then decided to go it alone, reasoning that most attorneys know little or nothing about marketing.

In an attempt to “bring all of the people together to form a team,” Howser established weekly staff meetings. These mandatory, hour-long sessions were run by Howser, who presented a series of overhead slides, handouts, and lectures about “some of the proven management techniques that were successful in the insurance industry.” The meetings typically ran past the allotted time frame and rarely if ever covered all of the agenda items.

Howser spent some of his time “enhancing community relations.” He was very generous with many local groups such as the historical society, the garden clubs, the recreational sports programs, the middle-and high-school band programs, and others. In less than six months he had written checks and authorized donations totaling more than $25,000. He was delighted about all this and was certain that such gestures of goodwill would pay off handsomely in the future.

As for the budget, Howser carefully reviewed each line item in search of ways to increase revenues and cut expenses. He then proceeded to increase the expected base or quota for attorney’s monthly billable hours, thus directly affecting their profit sharing and bonus program. On the other side, he significantly reduced the attorneys’ annual budget for travel, meals, and entertainment. He considered these to be frivolous and unnecessary. Howser decided that one of the two full-time administrative assistant positions in each office should be reduced to part-time with no benefits. He saw no reason why the current workload could not be completed within this model. Howser wrapped up his initial financial review and action plan by posting notices throughout each office with new rules regarding the use of copy machines, phones, and supplies.

Howser completed the first year of his tenure with the required executive summary report to the partners that included his analysis of the current status of each department and his action plan. The partners were initially impressed with both Howser’s approach to the new job and with the changes that he made. They all seemed to make sense and were directly in line with the key components of his job description. At the same time, “the office rumor mill and grape vine” had “heated up” considerably. Company morale, which had been quite high, was now clearly waning. The water coolers and hallways became the frequent meeting places of disgruntled employees.

As for the marketplace, while the partner did not expect to see an immediate influx of new clients, they certainly did not expect to see shrinkage in their existing client base. A number of individual and corporate clients took their business elsewhere, still fuming over the letter they had received.

The partners met with Howser to discuss the situation. Howser urged them to “sit tight and ride out the storm.” He had seen this happen before and had no doubt that in the long run the firm would achieve all of its goals. Howser pointed out that people in general are resistant to change. The partners met for drinks later that day and looked at each other with a great sense of uncertainty. Should they ride out the storm as Howser suggested? Had they done the right thing in creating the position and hiring Howser? What had started as a seemingly, wise, logical, and smooth sequence of events had now become a crisis.

 

Questions

 

  1. Do you agree with Howser’s suggestion to “sit tight and ride out the storm,” or should the partners take some action immediately? If so, what actions specifically?
  2. Assume that the creation of the GM—Operation position was a good decision. What leadership style and type of individual would you try to place in this position?
  3. Consider your own leadership style. What types of positions and situations should you seek? What types of positions and situation should you seek to avoid? Why?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 5   The Grizzly Bear Lodge

 

Diane and Rudy Conrad own a small lodge outside Yellowstone National Park. Their lodge has 15 rooms that can accommodate up to 40 guests, with some rooms set up for families. Diane and Rudy serve a continental breakfast on weekdays and a full breakfast on weekends, included in the room they charge. Their busy season runs from May through September, but they remain open until Thanksgiving and reopen in April for a short spring season. They currently employ one cook and two waitpersons for the breakfasts on weekends, handling the other breakfasts themselves. They also have several housekeeping staff members, a groundkeeper, and a front-desk employee. The Conrads take pride in the efficiency of their operation, including the loyalty of their employees, which they attribute to their own form of clan control. If a guest needs something—whether it’s a breakfast catered to a special diet or an extra set of towels—Grizzly Bear workers are empowered to supply it.

The Conrads are considering expanding their business. They have been offered the opportunity to buy the property next door, which would give them the space to build an annex containing an additional 20 rooms. Currently, their annual sales total $300,000. With expenses running $230,000—including mortgage, payroll, maintenance, and so forth—the Conrads’ annual income is $70,000. They want to expand and make improvements without cutting back on the personal service they offer to their guests. In fact, in addition to hiring more staff to handle the larger facility, they are considering collaborating with more local business to offer guided rafting, fishing, hiking, and horseback riding trips. They also want to expand their food service to include dinner during the high season, which means renovating the restaurant area of the lodge and hiring more kitchen and wait staff. Ultimately, the Conrads would like the lodge to open year-round, offering guests opportunities to cross-country ski, ride snow-mobiles, or hike in winter. They hope to offer holiday packages for Thanksgiving, Christmas, and New Year’s celebrations in the great outdoors. The Conrads report that their employees are enthusiastic about their plans and want to stay with them through the expansion process. “This is our dream business,” says Rudy. “We’re only at the beginning.”

Questions

 

  1. Discuss how Rudy and Diane can use feedforward, concurrent, and feedback controls both now and in future at the Grizzly Bear Lodge to ensure their guests’ satisfaction.
  2. What might be some of the fundamental budgetary considerations the Conrads would have as they plan the expansion of their logic?
    Describe how the Conrads could use market controls plans and implement their expansion

 

 


FINANCE MANAGEMENT IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

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CONTACT:

DR. PRASANTH BE BBA MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521 EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com

Attempt Any Four Case Study

 

Case 1: Zip Zap Zoom Car Company

          

Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment.  It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability.  Its financial statements are shown in Exhibits 1 and 2 respectively.

The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year.  Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector.  The company has never defaulted on its loan payments and enjoys a favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.

The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries.  The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer.  The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.

Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures.   The industry indicators predict that the economy is gradually slipping into recession.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

 

Source of Funds

Share capital                                        350

Reserves and surplus                           250                              600

Loans :

Debentures (@ 14%)               50

Institutional borrowing (@ 10%)        100

Commercial loans (@ 12%)    250

Total debt                                                                                            400

Current liabilities                                                                                 200

1,200

 

Application of Funds

Fixed Assets

Gross block                                                     1,000

Less : Depreciation                                            250

Net block                                                           750

Capital WIP                                                       190

Total Fixed Assets                                                                              940

Current assets :

Inventory                                                           200

Sundry debtors                                                    40

Cash and bank balance                                        10

Other current assets                                 10

Total current assets                                                                 260

-1200

 

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x

(Amount in Rs. Crore)

Sales revenue (80,000 units x Rs. 2,50,000)                                       2,000.0

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses    1,300.0

Variable overheads                                                        100.0

Total                                                                                                                1,400.0

Fixed cost :

R & D                                                                                          20.0

Marketing and advertising                                               25.0

Depreciation                                                                   250.0

 

Personnel                                                                          70.0

Total                                                                                                                   365.0

 

Total operating expenditure                                                                1,765.0

Operating profits (EBIT)                                                                                   235.0

Financial expense :

Interest on debentures                                                            7.7

Interest on institutional borrowings                        11.0

Interest on commercial loan                                    33.0                     51.7

Earnings before tax (EBT)                                                                                          183.3

Tax (@ 35%)                                                                                                                 64.2

Earnings after tax (EAT)                                                                                            119.1

Dividends                                                                                                                     70.0

Debt redemption (sinking fund obligation)**                                                              40.0

Contribution to reserves and surplus                                                                  9.1

*          Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).

**        The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.

The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology.  Capital investment up to a maximum of Rs. 100

crore is required.  The problem areas are three-fold.

  • The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
  • The company does not want to issue new equity shares and its retained earning are not enough for such a large investment.  Thus, the only option is raising debt.
  • The company wants to limit its additional debt to a level that it can service without taking undue risks.  With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise.  He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession.  The company can raise debt at 15 per cent from a financial institution.  While working out the debt capacity.  Mr. Shortsighted takes the following assumptions for the recession years.

  1. A maximum of 10 percent reduction in sales volume will take place.
  2. A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.  While doing so, he determines what he thinks are the “irreducible minimum” expenditures under

 

recessionary conditions.  For him, risk of insolvency is the main concern while designing the capital structure.  To support his view, he presents the income statement as shown in Exhibit 3.

 

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

Sales revenue (72,000 units x Rs. 2,35,000)                                       1,692.0

Operating expenditure

Variable cost :

Raw material and manufacturing expenses    1,170.0

Variable overheads                                                          90.0

Total                                                                                                                1,260.0

Fixed cost :

R & D                                                                                          —

Marketing and advertising                                               15.0

Depreciation                                                                   187.5

Personnel                                                                          70.0

Total                                                                                                                   272.5

Total operating expenditure                                                                1,532.5

EBIT                                                                                                                  159.5

Financial expenses :

Interest on existing Debentures                                        7.0

Interest on existing institutional borrowings      10.0

Interest on commercial loan                                30.0

Interest on additional debt                                             15.0                  62.0

EBT                                                                                                                      97.5

Tax (@ 35%)                                                                                                        34.1

EAT                                                                                                                     63.4

Dividends                                                                                                              —

Debt redemption (sinking fund obligation)                                             50.0*

Contribution to reserves and surplus                                                       13.4

 

* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)

Assumptions of Mr. Shorsighted

  • R & D expenditure can be done away with till the economy picks up.
  • Marketing and advertising expenditure can be reduced by 40 per cent.
  • Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.

 

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment.  Mr. Arthashatra  does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.

Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm.  He points out the following :

  • Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
  • Certain management policies like those relating to dividend payout, send out important signals to the investors.  The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm.  The firm should pay at least 10 per cent dividend in the recession years.
  • Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations.  This does not give the true picture.  Net cash inflows should be used to determine the amount available for servicing the debt.
  • Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession.  It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.  Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed.  From  this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution).  This will give a true picture of how the company’s cash flows will behave in recession conditions.

 

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret.  Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis.  Information on the behaviour of cash flows during the recession periods is taken into account.

The methodology undertaken is as follows :

  • Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.

 

  • Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
  • Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

 

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions.  Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.  Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Question:

Analyse the debt capacity of the company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   GREAVES LIMITED

 

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of high technology engineering products and systems. The company’s mission is “manufacture and market a wide range of high quality products, services and systems of world class technology to the total satisfaction of customers in domestic and overseas market.”

Over the years Greaves has brought to India state of the art technologies in various engineering fields by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the company’s share has shown ups and downs during 1990 to 1997. How has the company performed? The following question need answer to fully understand the performance of the company:

 

Exhibit 1

 

GREAVES LTD.

Profit and Loss Account ending on 31 March          (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
Sales

Raw Material and Stores

Wages and Salaries

Power and fuel

Other Mfg. Expenses

Other Expenses

Depreciation

Marketing and Distribution

Change in stock

214.38

170.67

13.54

0.52

0.61

11.85

1.85

4.86

1.18

253.10

202.84

15.60

0.70

0.49

15.48

1.72

5.67

3.10

287.81

230.81

18.03

1.11

0.88

16.35

1.52

5.14

4.93

311.14

213.79

37.04

3.80

2.37

25.54

4.62

5.17

0.48

354.25

245.63

37.96

4.43

2.36

31.60

5.99

9.67

– 1.13

521.56

379.83

48.24

6.66

3.57

41.40

8.53

10.81

5.63

728.15

543.56

60.48

7.70

4.84

45.74

9.30

12.44

11.86

801.11

564.35

69.66

9.23

5.49

48.64

11.53

16.98

– 5.87

Total Op Expenses 202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75
 

Operating Profit

Other Income

Non-recurring Income

 

11.61

2.14

1.30

 

13.70

3.69

2.28

 

18.90

4.97

0.10

 

19.29

4.24

10.98

 

15.48

7.72

16.44

 

28.15

14.35

0.46

 

55.95

11.35

0.52

 

69.36

13.08

1.75

PBIT   15.10   19.67   23.97   34.51   39.64   42.98   65.67   82.64
Interest     5.56     6.77   11.92   19.62   17.17   21.48   28.25   27.54
PBT     9.54   12.90   12.05   14.89   22.47   21.50   37.42   55.10
Tax

PAT

Dividend

Retained Earnings

    3.00

6.54

1.80

4.74

    3.60

9.30

2.00

7.30

    4.90

7.15

2.30

4.85

    0.00

14.89

4.06

10.83

    4.00

18.47

7.29

11.18

    7.00

14.50

8.58

5.92

    8.60

28.82

12.85

15.97

  15.80

39.30

14.18

25.12

 

Exhibit 2

 

GREAVES LTD.

Balance Sheet                                (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
ASSETS

Land and Building

Plant and Machinery

Other Fixed Assets

Capital WIP

Gross Fixed Assets

Less: Accu. Depreciation

Net Tangible Fixed Assets

Intangible Fixed Assets

 

3.88

11.98

3.64

0.09

19.59

12.91

6.68

0.21

 

4.22

12.68

4.14

0.26

21.30

14.56

6.74

0.19

 

4.96

12.98

4.38

10.25

23.57

15.79

7.78

0.05

 

21.70

33.49

5.18

11.27

71.64

19.84

51.80

4.40

 

30.82

50.78

6.95

34.84

123.39

25.74

97.65

22.03

 

39.71

75.34

8.53

14.37

137.95

33.90

104.05

22.45

 

42.34

92.49

8.87

13.92

157.62

42.56

115.06

20.04

 

43.07

104.45

10.35

14.36

172.23

53.87

118.86

21.11

Net Fixed Assets     6.89     6.93     7.83   56.20 119.68 126.50 135.10 139.97
 

Raw Materials

Finished Goods

Inventory

Accounts Receivable

Other Receivable

Investments

Cash and Bank Balance

Current Assets

Total Assets

LIABILITIES AND CAPITAL

Equity Capital

Preference Capital

Reserves and Surplus

 

5.26

29.37

34.63

38.16

32.62

3.55

8.36

117.32

124.21

 

9.86

0.20

27.60

 

6.91

33.72

40.63

53.24

40.47

14.95

8.91

158.20

165.13

 

9.86

0.20

32.57

 

7.26

38.65

45.91

67.97

49.19

15.15

12.71

190.93

198.76

 

9.86

0.20

37.42

 

21.05

53.39

74.44

93.30

24.54

27.58

13.29

233.15

289.35

 

18.84

0.20

100.35

 

28.13

52.26

80.39

122.20

59.12

73.50

18.38

353.59

473.27

 

29.37

0.20

171.03

 

44.03

58.09

102.12

133.45

64.32

75.01

30.08

404.98

531.48

 

29.44

0.20

176.88

 

53.62

69.97

123.59

141.82

76.57

75.07

33.46

450.51

585.61

 

44.20

0.20

175.41

 

50.94

64.09

115.03

179.92

107.31

76.45

48.18

526.89

666.86

 

44.20

0.20

198.79

Net Worth   37.66   42.63   47.48 119.39 200.60 206.52 219.81 243.19
Bank Borrowings

Institutional Borrowings

Debentures

Fixed Deposits

Commercial Paper

Other Borrowings

Current Portion of LT Debt

  14.81

4.13

4.77

12.31

0.00

2.33

0.00

  19.45

3.43

16.57

14.45

0.00

3.22

0.00

  26.51

9.17

19.99

15.03

0.00

3.10

0.08

  24.82

38.09

4.56

14.08

0.00

3.18

0.12

  55.12

38.76

4.37

15.57

15.00

17.08

15.08

  64.97

69.69

4.37

17.75

0.00

1.97

0.02

  70.08

89.26

2.92

20.81

0.00

2.36

1.49

118.28

63.60

1.49

19.29

0.00

2.57

1.57

Borrowings   38.35   57.12   73.72   84.61 130.82 158.73 183.94 203.66
Sundry Creditors

Other Liabilities

Provision for tax, etc.

Proposed Dividends

Current Portion of LT Dept

  37.52

5.70

3.18

1.80

0.00

  49.40

10.16

3.82

2.00

0.00

  59.34

10.70

5.14

2.30

0.08

  77.27

3.59

0.31

4.06

0.12

113.66

1.42

4.40

7.29

15.08

148.13

1.99

7.70

8.58

0.02

153.63

1.70

12.19

12.85

1.49

179.79

3.04

21.43

14.18

1.57

Current Liabilities   48.20   65.38   77.56   85.35 141.85 166.42 181.86 220.01
TOTAL LIABILITIES

Additional information:

Share premium reserve

Revaluation reserve

Bonus equity capital

124.21

 

 

 

8.51

165.13

 

 

 

8.51

198.76

 

 

 

8.51

289.35

 

47.69

8.91

8.51

473.27

 

107.40

8.70

8.51

531.67

 

107.91

8.50

8.51

585.61

 

93.35

8.31

23.25

666.86

 

93.35

8.15

23.25

 

Exhibit 3

 

GREAVES LTD.

Share Price Data

    1990 1991 1992 1993 1994 1995 1996 1997
 Closing share price (Rs)

Yearly high share price (Rs)

Yearly low share price (Rs)

Market capitalization (Rs crore

EPS (Rs)

Book value (Rs)

  27.19

29.25

26.78

65.06

4.79

35.64

34.74

45.28

21.61

67.77

6.82

37.22

121.27

121.27

34.36

236.56

9.73

42.54

  66.67

126.33

48.34

274.84

1.93

57.75

  78.34

90.00

42.67

346.35

2.66

40.61

  71.67

100.01

68.34

316.87

7.16

64.98

  47.5

90.00

45.00

210.02

5.03

45.35

  48.25

85.00

43.75

213.34

9.01

50.73

 

 

 

 

Questions

 

  1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?
  2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?
  3. How has Greaves performed in terms of return on equity? What is the contribution of return on investment, the way of the business has been financed over the period?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   CHOOSING BETWEEN PROJECTS IN ABC COMPANY

 

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get proper advice. As a consultant, what advice you will give?

 

The cash flows are as follows. All amounts are in lakhs of Rupees.

 

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5 – 10

 

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5 – 2000.

 

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)

Yrs. 11 to 15 – Rs. 10 (For the next 5 years)

 

Question:

If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   STAR ENGINEERING COMPANY

 

Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears, and automobile accessories like taximeters and speedometers.

SEC buys the electrical components, but manufactures all mechanical parts within its factory which is divided into four production departments Machining, Fabrication, Assembly, and Painting—and three service departments—Stores, Maintenance, and Works Office.

Though the company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.

In March, the company received a trial order from a government department for a sample transformer on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April and completed all manufacturing operations before the end of the month.

Since Job No 879 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the government department asked SEC to submit a detailed cost sheet for the job giving as much details as possible regarding material, labour and overhead costs.

SEC, as part of its routine financial accounting system, had collected the actual expenses for the month of April, by 5th of May. Some of the relevant data are given in Exhibit A.

The company tried to assign directly, as many expenses as possible to the production departments. However, It was not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using some rational basis. Some of the possible bases were collected by SEC’s accountant. These are presented in Exhibit B.

He also designed a format to allocate the overhead to all the production and service departments. It was realized that the expenses of the service departments on some rational basis. The accountant thought of distributing the service departments’ costs on the following basis:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. Stores department costs on the basis of direct and indirect materials used.

The accountant who had to visit the company’s banker, passed on the papers to you for the required analysis and cost computations.

 

 

REQUIRED

 

Based on the data given in Exhibits A and B, you are required to:

 

  1. Complete the attached “overhead cost distribution sheet” (Exhibit C).
    Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
  2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
  3. Do you agree with:
    a.   The procedure adopted by the company for the distribution of overhead costs?
    b.   The choice of the base for overhead absorption, i.e. labour-hour rate?

 

 

Exhibit A

 

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

  RS RS
Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

 

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

 

Others

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

(At 2 per cent of direct labour wages and Indirect labour and supervision)

Power

(Maintenance—Rs 366; Works Office Rs 2,200, Balance to Producing Departments)

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses

 

33,000

22,000

11,000

7,000

44,000

32,700

 

 
2,200

1,100

3,300

3,400

2,800

 

 

1,68,000

44,000

2,400

19,400

 

 

68,586

 

 

1,30,260

1,190

 

 

 

 

 

 

 

1,49,700

 

 

 

 

 

 

12,800

 

 

 

 

 

 

 

 

 

 

 

 

4,33,930

 
5,96,930

 

 

 

 

 

 

 

 

 

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year

Department Area

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

 

Rs

Horse

Power

Rating

Direct

Labour

Hours

Direct

Labour

Budget

 

Rs

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Works Office

Total

 

13,000

11,000

8,800

6,400

4,400

2,200

2,200

48,000

26,40,000

13,20,000

6,60,000

2,64,000

1,32,000

1,98,000

68,000

52,80,000

62,40,000

21,60,000

 

10,80,000

 

 

 

94,80,000

20,000

10,000

1,000

2,000

 

 

 

33,000

14,40,000

5,28,000

7,20,000

3,30,000

 

 

 

30,18,000

52,80,000

25,40,000

13,20,000

6,60,000

 

 

 

99,00,000

 

Note

 

The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one month—April of the budgeted year.

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit C

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
             
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

               

 

 

1,49,700

 
A.2 Indirect materials and supplies                

12,800

 
A.3 Factory Rent               1,68,000  
A.4 Depreciation of Plant and Machinery                

44,000

 
A.5 Building Rates and Taxes

 

               

2,400

 

 
A.6 Welfare Expenses

 

               

19,494

 
    A.7 Power                 68,586  
A.8 Works Office Salaries and Expenses                

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

               

1,190

 
A. Total (A.1 to A.9)               5,96,430  
B. Reallocation of Service Departments Costs to Production Departments                  
B.1 Distribution of Works Office Costs                  
B.2 Distribution of Maintenance Department’s Costs                  
B.3 Distribution of Stores Department’s Costs                  
Total Charged to Producing

C. Departments (A+B)

               

 

5,96,430

 
D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

         
E. Overhead Rate/Per Hour (D)                  

 

 

 

 

Case 5: EASTERN MACHINES COMPANY

 

Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.

 

So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.

 

Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.

 

Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.

 

Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.

 

Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.

 

Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.

 

Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.

 

Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.

 

Namdeo: We should ask somebody from our statistics dept. to attend to this problem.

 

As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?


MARKETING MANAGEMENT IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

MARKETING MANAGEMENT IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED WHATSAPP 91 9924764458

CONTACT:

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Note: Solve any 4 Cases Study’s

 

CASE: I    Playing to a new beat: marketing in the music industry

 

Good old fashioned rock ‘n’ roll could be dead. If a mobile phone ringtone in the shape of the vocalizations of the animated Crazy Frog dominates the billboard charts for months on end, then it could well signal the death knell for the industry, and how it operates. If this ubiquitous amphibian’s aurally annoying song, converted from a mobile phone ringtone, outsold even mainstay acts such as Oasis and Coldplay, why should music companies invest millions in cultivating fresh musical talent, hoping for them to be the next big thing, when their efforts can be beaten by basic synthesizer music? The industry is facing a number of challenges that it has to address, such as strong competition, piracy, changing delivery formats, increasing cost pressures, demanding pri-madonnas and changing customer needs. Gone are the days when music moguls were reliant on sales from albums alone, now the industry trawls for revenue from a variety of sources, such as ringtones, merchandising, concerts, and music DVDs, leveraging extensive back catalogues, and music rights from advertising, movies and TV programming.

 

The music industry is in a state of flux at the moment. The cornerstone of the industry—the singles chart—has been facing terminal decline since the mid-1990s. Some retailers are now not even stocking singles due to this marked freefall. Some industry commentators blame the Internet as the sole cause, while others point to value differences between the price of an album and the price of a single as too much. Likewise, some commentators criticize the heavy pre-release promotion of new songs, the targeting of ever-younger markets by pop acts, and the explosion of digital television music channels as root causes of the single’s demise. The day when the typical record buyer browses through rows of shelves for a much sought-after band or song on a Saturday afternoon may be thing of the past.

 

Long-term success stories for the music industry are increasingly difficult to develop. The old tradition of A&R (which stands for ‘Artists & Repertoire’) was to sign, nurture and develop musical talent over a period of years. The industry relied on continually feeding the system with fresh talent that could prove to be the next big thing and capture the public imagination. Now corporate short-term thinking has enveloped business strategies. If an act fails to be an immediate hit, the record label drops them. The industry is now characterized by an endless succession of one-hit wonders and videogenic artist churning out classic cover songs, before vanishing off the celebrity radar. Four large music labels now dominate the industry (see Table 1), and have emerged through years of consolidation.

 

Table 1  The ‘big four’ music labels

 

Universal Music Sony BMG
The largest music label, with 26 per cent of  global music market share; artists on its roster include U2, Limp Bizkit, Mariah Carey and No Doubt Merger consolidated its position; artists on its roster include Michael Jackson, Lauryn Hill, Westlife, Dido, Outkast and Christina Aguilera
Warner Music EMI
Third biggest music group; artists on its roster include Madonna, Red Hot Chili Peppers and REM Artists on its roster include the Rolling Stones, Coldplay, Norah Jones, Radiohead, and Robbie Williams

 

The ‘big four’ labels have the marketing clout and resources to invest heavily in their acts, providing them with expensive videos, publicity tours and PR coverage. This clout allows their acts to get vital airplay and video rotation on dedicated TV music channels. Major record labels have been accused of offering cash inducements of gifts to radio stations and DJs in an effort to get their songs on playlists. This activity is known in the industry as ‘radio payola’.

 

Consumer have flocked to the Internet, to download, to stream, to ‘rip and burn’ copyrighted music material. The digital music revolution has changed the way people listen, use and obtain their favourite music. The very business model that has worked for decades, buying a single or album from a high-street store, may not survive. Music executives are left questioning whether the Internet will kill the music business model has been fundamentally altered. According to the British Phonographic Industry (BPI), it estimated that 8 million people in the UK are downloading music from the Internet—92 per cent of them doing so illegally. In 2005 alone, sales of CD singles fell by a colossal 23 per cent. To put the change into context, the sales of digital singles increased by 746.6 per cent in 2005. Consumers are buying their music through different channels and also listening to their favourate songs through digital media rather than through standard CD, cassette or vinyl. The emergence of MP3 players, particularly the immensely popular Apple iPod, has transformed the music landscape even further. Consumers are now downloading songs electronically from the Internet, and storing them on these digital devices or burning them onto rewritable CDs.

 

Glossary of online music jargon

 

Streaming: Allows the user to listen to or watch a file as it is being simultaneously downloaded. Radio channels utilize this technology to transmit their programming on the Internet.

 

Rip n burn’: Means downloading a song or audio file from the Internet and then burning them onto rewritable CDs or DVD.

 

MP3 format: MP3 is a popular digital music file format. The sound quality is similar to that of a CD. The format reduces the size of a song to one-tenth of its original size allowing for it to be transmitted quickly over computer networks.

 

Apple iPod:  The ‘digital jukebox’ that has transformed the fortunes of the pioneer PC maker. By the end of 2004 Apple is expected to have sold 5 million units of this ultra-hip gadget. It was the ‘must-have item’ for 2003. The standard 20 GB iPod player can hold around 5000 songs. Other hardware companies, such as Dell & Creative Labs, have launched competing devices. These competing brands can retail for less than £75.

 

Peer-to-peer networks (P2P): These networks allow users to share their music libraries with other net users. There is no central server, rather individual computers on the Internet communicating with one another. A P2P program allows users to search for material, such as music files, on other computers. The program lets users find their desired music files through the use of a central computer server. The system works lime this; a user sends in a request for a song; the system checks where on the Internet that song is located; that song is downloaded directly onto the computer of the user who made the request. The P2P server never actually holds the physical music files—it just facilitates the process.

 

The Internet offers a number of benefits to music shoppers, such as instant delivery, access to huge music catalogues and provision of other rich multi-media material like concerts or videos, access to samples of tracks, cheaper pricing (buying songs for 99p rather than an expensive single) and, above all, convenience. On the positive side, labels now have access to a wider global audience, possibilities of new revenue streams and leveraging their vast back catalogues. It has diminished the bargaining power of large retailers, it is a cheaper distribution medium than traditional forms and labels can now create value-laden multimedia material for consumers. However, the biggest problem is that of piracy and copyright theft. Millions of songs are being downloaded from the Internet illegally with no payment to the copyright holder. The Internet allows surfers to download songs using a format called ‘MP3’, which doesn’t have inbuilt copyright protection, thus allowing the user to copy and share with other surfers with ease. Peer to peer (P2P) networks such as Kazaa and Grokster have emerged and pose an even deadlier threat to the music industry—they are enemies that are even harder to track and contain. Consumers can easily source and download illegal copyrighted material with considerable ease using P2P networks (see accompanying box).

 

P2P Networks used for file sharing

 

Kazaa
Gnutella
Grokster
Morpheus
eDonkey
Imesh
Bearshare
WinMX

 

A large number of legal download sites have now been launched, where surfers can either stream their favourite music or download it for future use in their digital libraries. This has been due to the rapid success of small digital medial players such the Apple iPod. The legal downloading of songs has grown exponentially. A la carte download services and subscription-based services are the two main business models. Independent research reveals that the Apple’s iTunes service has over 70 per cent of the market. Highlighting this growing phenomenon of the Internet as an official channel of distribution, new music charts are now being created, such as the ‘Official Download Chart’. Industry sources suggest that out of a typical 99p download, the music label get 65p, while credit card companies get 4p, leaving the online music store with 30p per song download. These services may fundamentally eradicate the concept of an album, with customers selecting only a handful of their favourite songs rather than entire standard 12 tracks. These prices are having knock-on consequences for the pricing of physical formats. Consumers are now looking for a more value-laden music product rather than simply 12 songs with an album cover. Now they are expecting behind the scenes access to their favourite group, live concert footage and other content-rich material.

 

Big Noise Music is an example of one of the legitimate downloading sites running the OD2 system. The site is different in that for every £1 download, 10p of the revenue goes to the charity Oxfam.

 

The music industry is ferociously fighting back by issuing lawsuits for breach of copyright to people who are illegally downloading songs from the Internet using P2P software. The recording industry has started to sue thousands of people who illegally share music using P2P. They are issuing warnings to net surfers who are P2P software that their activities are being watched and monitored. Instant Internet messages are being sent to those who are suspected of offering songs illegally. In addition, they have been awarded court orders so that Internet providers must identify people who are heavily involved in such activity. The music industry is also involved heavily in issue advertising campaigns, by promoting anti-piracy websites such as www.pro-music.org to educate people on the industry and the impact of piracy on artists. These types of public awareness campaigns are designed to illustrate the implications of illegal downloading.

 

Small independent music labels view P2P networks differently, seeing them as vital in achieving publicity and distribution for their acts. These firms simply do not have the promotional resources or distribution clout of the ‘big four’ record labels. They see P2P networks as an excellent viral marketing tool, creating buzz about a song or artist that will ultimately lead to wider mainstream and commercial appeal.  The Internet is used to create communities of fans who are interested in their music, providing them access to free videos and other material. It allows independent acts the opportunity to distribute their music to a wider audience, building up their fan base through word of mouth. Savvy unsigned bands have sophisticated websites showcasing their work, and offering free downloads as well as opportunities for audio-philes to purchase their tunes. Alternatively major labels still see that to gain success one has to get a video on rotation on MTV and that this in turn encourages greater airplay on radio stations, ultimately leading to increased purchases.

 

Table 2 The major legitimate online music provider

Name Details Pricing
Apple iTunes Huge catalogue of over 750,000 songs; compatible with Apple’s very hip iPod system; offers free single of the week and other  exclusive material 79p per track, £7.99 per album
Napster The now-legitimate website offers over 1,000,000 songs; offers several streaming radio stations too Subscription based—subscribers pay £9.99 a month to stream any of the catalogue, plus another 99p to download on to a CD
Sony Connect over 300,000 songs from the major labels; excellent sound quality but compatible only with Sony products due to proprietary file formats From 80p- £1.20 per track, and £8- £10 per album
Bleep.com Small catalogue of 15,000 songs with a focus on independent music labels; high-quality downloads due to media files used 99p per track, £6.99 per album
Wippit UK-based service; 175,000 songs to download; gives a selection of free tracks every month From 30p to £1 to download; alternatively, users can subscribe to the service for £50 a year to gain access to 60,000 songs
OD2 System, used by:Mycokemusic.com HMV.com

MSN.com

TowerRecord.co.uk

Big Noise Music

These online sites use the OD2 system for music downloads; they look after encryption, hosting, royalty management and the entire e-commerce system; provides access to nearly 350,000 tracks from 12,000 recording artists Varying product bundles, typically 99p for track download, and 1p for streaming

For traditional music retailers the retailing landscape is getting more competitive, with multiple channels of distribution emerging due to the Internet and large supermarket chains now selling music CDs. Supermarkets are becoming one of the main channels of distribution through which consumers buy music. These supermarkets are stocking only a limited number of the best-selling music titles, limiting the number of distribution outlets for new and independent music. Only charts hits and greatest hits collections will make it on to the shelves of such outlets.

 

Now consumers can buy albums from traditional Internet retailers such as Amazon.com, and also on websites that utilize access to grey markets such as cdwow.co.uk, as well as through legitimate download retailers. This has left traditional music retail operations with a severe conundrum: how can they entice more shoppers into their stores? The accompanying box highlights where typical shoppers source their music at present.

 

Where do people buy their music?

 

Music stores (like HMV, Virgin Megastore) 16    per cent
Chains (like Woolworth, WHSmith) 16    per cent
Supermarkets (like Tesco, Asda) 21.6 per cent
Mail order   3.9 per cent
Internet sales (like Amazon.com)                       7   per cent
Downloads                 Not yet measured

 

The issue of online music retailers using parallel importing, such as CDWOW (www.cdwow.co.uk) is a concern. These retailers are taking advantage of worldwide price discrepancies for legitimate music CDs, sourcing them in low-cost countries like Hong Kong and exporting them into European countries. Prices for music in these markets are considerably lower than the market that they are exporting to, and they don’t even charge for international delivery. Yet technological improvements have led to revenue opportunities for the industry. Development such as online radio, digital rights management, Internet streaming, tethered downloads (locked to PC), downloads (burnable, portable), in-store kiosks, ring-tones, mobile message clips and games soundtracks are great potential revenue sources. In an effort to unlock this potential the major labels have digitized their entire back catalogues. In the wake of these dramatic environmental changes the industry has had to radically adapt. The ‘big four’ music labels are consolidating even further, developing a digital music strategy, and re-evaluating their entire traditional business model. Mobile phones are seen as the next primary channel of distribution for digital music. High penetration levels in the market for mobile phones and the inherent mobility advantages make this the next crucial battlefield for the music industry.

 

The Internet may emerge as the primary channel of distribution for music, and the music industry is going to have to adapt to these changes. The move towards the online distribution of entertainment is still in its infancy, with more investment into the telecommunications infrastructure, such as greater Internet access, increased access to broadband technology, 3G technology and changing the way people shop for music will undoubtedly take time. The digital revolution will fundamentally change the way people purchase and consume their musical preferences. In forthcoming years the digital format will become more mainstream, leading to a proliferation of channels of distribution for music. However, as with most new channels of technology, catalogue shopping, Internet shopping likewise, and ‘video never really killed the radio star’… but will the Internet kill the record store?

 

 

Questions:

  1. Discuss the micro and macro forces that are affecting the music industry.

 

  1. Based on this analysis, what strategic options would you recommend for both music publishers and music retailers in the current marketing environment?

 

  1. Discuss the advantages and disadvantages associated with online distribution from a music label’s perspective.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE: II    The Sudkurier

 

The Sudkurier is a regional daily newspaper in south-western Germany. On average 310,000 people in the area read the newspaper regularly. The great majority of those readers subscribe to its home delivery service, which puts the paper on their doorsteps early in the morning. On the market for the last 35 years, the Sudkurier contains editorial sections on politics, the economy, sports, local news, entertainment and features, as well as advertising. The newspaper is financially independent and its staff is free of any political affiliation. Management at the Sudkurier would like to bring the paper into line with the current needs of its readers. For this purpose, the management team is considering the use of market research.

 

Management would like to have information about the following.

 

  1. What newspaper or other media are the Sudkurier’s main competitors?
  2. Do most readers read the Sudkurier for the local news, sports and classified ads, and should these sections therefore be expanded at the expense of the sections on politics and the economy?
  3. Should the Sudkurier’s layout be modernized?
  4. Do mostly lower levels of society read the Sudkurier?
  5. Into what political category do readers and non-readers the Sudkurier?
  6. Which suppliers of products and services consider the Sudkurier especially appropriate for their advertising?
  7. What advertising or information dot the readers think is missing from the Sudkurier?

 

You are an employee of the Sudkurier who has been instructed to obtain the requested information and to prepare your findings for the decision-makers. You are in the fortunate position of receiving regular reports about the people’s media use from the Arbeitsgemeinschaft Media-Analyse e.V. Relevant excerpts from the most recent survey are shown here as Tables 3 and Table 4

 

Table 3   Media analysis of readership structure

 

Range in Circulation Area (1) Readers per edition of SUDKURIER National

average

in %

  RANGE Total in %
  in % Absolute
Total   53.5 310,000 100.0 100.0
Gender Men 55.5 150,000 49.0 47.2
  Women 51.6 160,000 51.0 52.8
Age Groups 14-19 years 51.8 20,000 8.0 7.2
  20-29  years 41.0 50,000 15.0 19.1
  30-39  years 52.1 50,000 16.0 16.4
  40-49  years 61.8 50,000 16.0 15.2
  50-59  years 61.1 60,000 19.0 16.5
  60-69  years 53.6 40,000 13.0 13.5
  70  years and older 57.4 40,000 13.0 12.2
Educational

Level

Secondary school without apprenticeship 49.4 60,000 18.0 17.6
  Secondary school with apprenticeship 50.8 100,000 31.0 39.6
  Continuing education without Abitur 60.8 110,000 36.0 27.0
  Abitur, university preparation, university/college 49.7 50,000 15.0 15.8
Occupation Trainee, pupil, student 44.7 40,000 11.0 11.0
  Full-time employee 54.6 160,000 50.0 51.7
  Retire, pensioner 57.3 70,000 23.0 21.8
  Unemployed 52.4 50,000 16.0 15.5
Occupation of main wage earner Self-employed, mid- to large business/Freelancer 63.8 20,000 5.0 3.1
  Self-employed, small business,/Farmer 59.9 30,000 10.0 7.1
  Managers and civil servants 58.6 30,000 9.0 8.7
  Other employees and civil servants 49.3 120,000 40.0 42.9
  Skilled staff 57.6 100,000 32.0 32.5
  Unskilled staff 38.7 10,000 4.0 5.6
Net Household Income/month 4500 and more 62.7 100,000 31.0 23.9
  3500-4500 52.7 60,000 19.0 20.8
  2500-3500 54.9 80,000 26.0 25.9
  to 2500 44.1 70,000 23.0 29.3
Number of wage earners 1 earner 45.4 100,000 33.0 40.4
  2  earner 56.5 130,000 41.0 42.6
  3  earner 62.7 80,000 25.0 16.9
Household Size 1 Person 41.8 50,000 14.0 17.9
  2 Persons 55.5 90,000 29.0 31.8
  3 Persons 59.5 70,000 22.0 22.4
  4 Persons and more 54.8 110,000 35.0 27.9
Children in Household Children less than 2 years of age 52.7 10,000 4.0 3.8
  2 to less than 4 years 38.4 10,000 4.0 5.4
  4 to less than 6 years 45.8 10,000 5.0 5.2
  6 to less than 10 years 43.8 20,000 8.0 8.5
  10 to less than 14 years 54.1 30,000 10.0 9.2
  14 to less than 18 years 57.7 50,000 16.0 13.7
  No children under 14 54.9 250,000 79.0 77.4
  No children under 18 53.6 210,000 67.0 68.1
Driving Licence yes 55.2 250,000 80.0 73.0
  no 47.3 60,000 20.0 27.0
Private Automobile   55.5 270,000 86.0 80.0
Garden own garden 60.4 240,000 76.0 57.0
  without garden 39.8 70,000 23.0 43.0
Housing own house 62.1 180,000 58.0 46.0
  own apartment 45.9 10,000 3.0 3.0
  rent house or apartment 44.7 120,000 38.0 49.0
Electrical Appliances Freezer/Deep freeze 59.6 200,000 62.0 51.0
Last Holiday Journey Within the last 12 months 55.1 190,000 62.0 n.a.
  1-2 years ago 51.0 40 ,000 14.0 n.a.
  More than two years ago 48.6 50 ,000 16.0 n.a.
  Never 55.4 30 ,000 9.0 n.a.
Last Holiday Destination Germany 57.4 70 ,000 23.0 n.a.
  Austria, Switzerland, South Tyrol 48.7 60 ,000 20.0 n.a.
  Elsewhere in Europe 53.4 130,000 42.0 n.a.
  Country outside Europe 51.4 20 ,000 5.0 n.a.
  Did not travel 56.4 30 ,000 9.0 n.a.
1) Entire circulation area 310 ,000 readers per edition

 

Example:

53.5% of people older than 14 years in the circulation of the Sudkurier daily

55.5% of all men older than 14 years and 51.6% of women older than 14 read the  Sudkurier daily; that is 150 ,000 men and 160 ,000 women.

 

 

 

 

 

 

 

 

 

Table 4  Reader behavior

 

What purchasing information is used?

Media purchasing information

for medium and long-term acquisition

(11 product areas; Basis: total population)

 

Daily newspaper                    61%

Posters on the street               9 %

Leaflets                                  36 %

Television                              24%

Radio                                     13%

Magazines                             27 %

Free newspapers                    49%

Credibility of advertising in the media

Advertising in… is generally believable and reliable

(Basis: broadest user group in each case)

 

Regional newspaper                  49%

Television                                  30%

Public radio                                20%

Privately-owned radio                14 %

Magazines                                  15%

Free newspaper                          23%

 

Advertising in… is most informative

(Basis: broadest reading group)

 

Regional newspapers (subscription)    62 %

Television                                            47%

Public Radio                                        29%

Privately-owned radio                         26%

Magazines                                           27 %

Free newspapers                                 36 %

Time spent reading daily newspaper

(Basis: broadest user group)

 

less than 15 minutes                       7 %

15-24 minutes                              21 %

25-34 minutes                              28 %

35-65 minutes                               34 %

more than 65 minutes                   10 %

I often consult/depend on advertising in…

(Basis: broadest user group in each case)

 

Regional newspapers (subscription)         27 %

Television                                                 11%

Public Radio                                             89%

Privately-owned radio                                6%

Magazines                                                   7 %

Free newspapers                                       18 %

 

 

Source: Regional Press Study, Gfk-Medienforschung Contest-Census

 

 

 

Questions:

 

  1. Explain how you will methodically go about compiling the requested information covered in the seven questions for management. Include in your explanation an estimate of the expense involved in obtaining the information.

 

  1. Develop a 10-question questionnaire for the purpose of making a survey.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE: III    Unilever in Brazil: marketing strategies for low-income customers

 

After three successful years in the Personal Care division of Unilever in Pakistan, Laercio Cardoso was contemplating attractive leadership positioning China when he received a phone call from Robert Davidson, head of Unilever’s Home Care division in Brazil, his home country. Robert was looking for someone to explore growth opportunities in the marketing of detergents to low-income consumers living in the north-east of Brazil and felt that Laercio had the seniority and skills necessary for the project. Though he had not been involved in the traditional Unilever approach to marketing detergents, his experience in Pakistan had made him acutely aware of the threat posed by local detergent brands targeted at low-income consumers.

 

At the start of the project—dubbed ‘Everyman’—Laercio assembled an interdisciplinary team and began by conducting extensive field studies to understand the lifestyle, aspirations and shopping habits of low-income consumers. Increasing detergent use by these consumers was crucial for Unilever given that the company already had 81 per cent of the detergent powder market. But some in the company felt that it should not fight in the lower cost structures struggled to break even. How could Laercio justify diverting money from a best-selling brand like Omo to invest in a lower-margin segment?

 

Consumer behavior

 

The 48 million people living in the north-east (NE) of Brazil lag behind their south-eastern (SE) counterparts on just about every development indicator. In the NE, 53 per cent of the population live on less than two minimum wages versus 21 per cent inn the SE. In  the NE, only 28 per cent of households own a washing machine versus 67 per cent in the SE. Women in the NE scrub clothes in a washbasin or sink using bars of laundry soap, a process that requires intense and sustained effort. They then add bleach to remove tough stains and only a little detergent powder in the end, primarily to make the clothes smell good. In the SE, the process is similar to European or North American standards. Women  mix powder detergent and softener in a washing machine and use laundry soap and bleach only to remove the toughest stains.

The penetration and usage of detergent powder and laundry soap is the same in the NE and the SE (97 per cent). However, north-easterners use a little less detergent (11.4 kg per years versus 12.9 kg) and a lot more soap (20 kg versus 7 kg) than south-easterners. Many women in the NE view washing clothes as one of the pleasurable routine activities of their week. This is because they often do their washing in a public laundry, river or pond where they meet and chat with their friends. In the SE, in contrast, most women wash clothes alone at home. They perceive washing laundry as a chore and are primarily interested in ways to improve the convenience of the process.

 

People in the NE and SE differ in the symbolic value they attach to cleanliness. Many poor north-easterners are proud of the fact that they keep themselves and their families clean despite their low income. Because it is so labour intensive, many women see the cleanliness of clothes as an indication of the dedication of the mother to her family, and personal and home cleanliness is a main subject of gossip. In the SE, where most women own a washing machine, it has much lower relevance for self-esteem and social status. Along with price, the primarily low-income consumers of the NE evaluate detergents on six key attributes (Figure 1 provides importance ratings, the range of consumer expectations, and the perceived positioning of key detergent brands on each attribute).

 

Competition

In 1996 Unilever was a clear leader in the detergent powder category in Brazil, with an 81 per cent market share, achieved with three brands: Omo (one of Brazil’s favourate brands across all categories) Minerva (the only brand to be sold as both detergent powder and laundry soap with a more hedonistic ‘care’ positioning) and Campeiro (Unilever’s cheapest brand). Proctor & Gamble, which had recently entered the Brazilian market, had 15 per cent of the market with three brands (Ace, Bold and the low-price brand Pop). Other competitors were smaller companies (see Figure 2).

 

The Brazilian fabric wash market consists of two categories: detergent powder and laundry soap. In 1996 detergent was a US$106 million (42,000 tons) market in the NE. In 1996 the NE market for laundry soap bars was as large as the detergent powder market (US$102 million for 81,250 tons). The NE market for laundry soap is much easier to produce than powdered laundry detergent. Laundry soap is a multi-use product that has many home and personal care uses. Table 5 provides key information on all powder and laundry soap brands (packaging, positioning, key historical facts, and financial and market data).

 

Table 5

 

Brand Packaging Positioning Key Data
OMO Cardboard pack:

1 kg & 500g.

Removes stains with low quantity of product when used in washing machines, thus reducing the need for soap or bleach. S: 55.20

WP: 3.00

FC: 1.65

PKC: 0.35

PC: 0.35

Minerva Cardboard pack:

1 kg & 500g.

  S: 17.60

WP: 2.40

FC: 1.40

PKC: 0.35

PC: 0.30

Campeiro Cardboard pack:

1 kg & 500g.

  S: 6.05

WP: 1.70

FC: 0.90

PKC: 0.35

PC: 0.20

Ace Cardboard pack:

1 kg & 500g

   
Bold Cardboard pack:

1 kg & 500g.

   
Pop Cardboard pack:

1 kg & 500g.

   
Invicto Cardboard pack:

1 kg & 500g.

   
Minerva Plastic pack with 5 bars of 200g.    
Bem-te-vi Plastic pack with 5 bars of 200g or single bar of 200g.    

Figure 1 & 2  Market Share and wholesale Price of Major Brands in the Laundry Soap and Detergent Powder Categories in the Northeast in 1996

 

 

Decisions

 

Robert Davidson, head of Unilever’s Home Care Division in Brazil, and Laercio Cardoso, head of the ‘Everyman’ research project aided at understanding the low-income consumer segment, must re-examine Unilever’s strategy for low-income consumers in the NE region of Brazil and make three important decisions.

 

  1. Go/no go. Should Unilever divert money from its premium brands to invest in a lower-margin segment of the market? Does Unilever have the right skills and structure to be profitable in a market in which even small local entrepreneurs struggle to break even? In the long run, what would Unilever gain and what would it risk losing?
  2. Marketing and branding strategy. Unilever already has three detergent brands with distinct positionings.  Does it need to develop a new brand with a new value proposition or can it reposition its existing brands or use a brand extension?
  3. Marketing mix. What price, product, promotion and distribution strategy would allow Unilever to deliver value to low-income consumers without cannibalizing its own premium brands too heavily? Is it just a matter of price?

 

Product

 

Unilever could produce a product comparable to Campeiro, its cheapest product, but would it deliver the benefits that low-income consumers wanted? Alternatively, Unilever could use Minerva’s formula but it might be too expensive for low-income consumers. If they could eliminate some ingredients, Unilever’s scientists could develop a third formula that would cost about 10 per cent more than Campeiro’s formula. The difficulty would be in determining which attributes to eliminate, which to retain and which, if any would actually need to be improved relative to both existing brands.

 

Larger packages would reduce the cost per kilo but could price the product out of the weekly budget range of the poorest consumers. Unilever could use a plastic sachet, which would cost 30 per cent of the price of traditional cardboard boxes, but market research data had shown that low-income consumers were attached to boxes and regarded anything else as good for only second-rate products. One solution might be to launch multiple types and sizes.

 

Price

 

Priced significantly above Campeiro and Minerva soap, the product would be out of reach for the target segment. Priced too low, it would increase the cost of the inevitable cannibalization of existing Unilever brands. Should Unilever use coupons or other means to reduce the cost of the product for low-income consumers? Or should it change the price of Omo, Minerva

and Campeiro?

 

Promotion

 

In the low-income segment, lower margins meant that volume had to be reached very quickly for the product to break even. It was therefore crucial to find a radical ‘story’, one that would immediately put the new brand on the map. What would be the objective of the communication? What should be the key message? Low-income consumers might be reluctant to buy a product advertised ‘for the low-income people’ especially as products with that kind of message are typically of inferior quality. On the other hand, using the classic aspirational communication of most Brazilian brands could confuse consumers and lead to unwanted cannibalization.

 

In regular detergent markets Unilever had established that the most effective allocation of communication expenditure was 70 cent above-the-line (media advertising) and 30 per cent below-the-line (trade promotions, events, point- of-purchase marketing). The advantages of using primarily media advertising are its low cost per contact and high reach because almost all Brazilians, irrespective of income, are avid television watchers. One alternative would be to use 70 per cent below-the-line communication. At US$0.05 per kg, this plan would require only one-third of the cost of a traditional Unilever communication plan. On the other hand, it would lower the reach of communication, increase the cost of per contact, and make a simultaneous launch in all north-eastern cities more difficult to organize.

 

Distribution

 

Unilever did not have the ability to distribute to the approximately 75,000 small outlets spread over the NE, yet access to these stores was key because low-income consumers rarely shopped in large supermarkets like Wal-Mart or Carrefour. Unilever could rely on its existing network of generalist wholesalers who supplied its detergents and a wide variety of products to small stores. These wholesalers had national coverage and economies of scale but did not directly serve the small stores where low-income consumers shopped, necessitating another layer of smaller wholesalers, which increased their cost to US$0.10 per kg. Alternatively, Unilever could contract with dozens of specialize distributors who would get exclusive rights to sell the new Unilever detergent. These specialized distributors would have a better ability to implement point of purchase marketing and would cost less ($0.05 per kg).

 

Question:

  1. Describe the consumer behaviour differences among laundry products’ customers in Brazil. What market segments exists?
  2. Should Unilever bring out a new brand or use one of its existing brands to target the north-eastern Brazilian market?
  3. How should the brand be positioned in the marketplace and within the Unilever family of brands?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Case 4   Ryanair: the low fares airlines

 

The year 2004 did not begin well for Ryanair. On 28 January, the airline issued its first profits warning and ended a run of 26 quarters of rising profits. On that day, when the markets opened, the company was worth €5 billion. By close of business, its value had shrunk to worth €3.6 billion, as its share price plunged from worth €6.75 to €4.86. Investors were dismayed by the airline’s admission that it was facing ‘an enormous and sudden reduction of 25 to 30 per cent in yields’ (i.e. average fare levels) in the first quarter of 2004 (the last fiscal quarter of 2004). This was on top of an earlier fall of 10 to 15 per cent in the first nine months.

 

In April 2004, Chief Executive Michael O’Leary forecast a ‘bloodbath’, an ‘awful’ 2004/2005 winter for European airlines, amid continuing fare wars, with a shakeout among the many budget airlines. ‘We will be helping to make it awful,’ warned Mr O’Leary, as he announced an 800,000 free seats giveaway. The most difficult markets were predicted to be Germany and the UK regions where many new carriers, which were ‘losing money on an heroic scale’, had entered the arena. O’Leary anticipated that the company’s 2004 profits would decline by 10 per cent, while 2005 profits would increase by up to 20 per cent with a 5 per cent drop in yields. However, if yields were to fall by as much as 20 per cent, the 2005 outcome would be break-even, at best.

 

Yet, by 31 May 2005, on Ryanair’s 20th birthday, the carrier was able to announce record results for the year ended 31 March 2005. Both passenger volumes and net profits grew year on year by 19 per cent to 27.6 million from 23.1 million and €268.9 from €226.6 million respectively. The all- important passenger yield figure (revenue per passenger) grew by 2 per cent, partially offsetting the 14 per cent yield decline in 2003/2004. Ancillary revenues were 40 per cent higher, rising faster than passenger volumes, which resulted in total revenues rising by 24 per cent to €1.337 billion. Operating costs rose 25 per cent, fractionally more than revenue growth, due principally to higher fuel costs. The 2005 results announcement was followed by a 3.4 per cent jump in the company’s share price, to close to €6.46 on the day.

 

Ryanair’s adjusted after-tax margin for the full year at 20 per cent compared very to figures for Aer Lingus, British Airways, easyJet, Lufthansa, Southwest and Virgin, with margins of 8, 1, 3, minus 5, 7, .1 per cent respectively (2003/2004 results). Despite the dire warnings and the temporary dip in fiscal 2004, Ryanair had arguably come through its crisis with flying colours. How did it manage this?

 

Overview of Ryanair

 

Ryanair, Europe’s first budget airline, with 229 routes across 20 countries at of May 2005, is one of the world’s most profitable, fastest-growing carriers. Founded in 1985 by the Ryan family as an alternative to the then state monopoly carrier Aer Lingus, Ryanair started out as a full-service airline. After accumulating severe financial losses, finally, in 1990/91, the company came up with a survival plan, spearhead by Michael O’Leary and the Ryans, to transform itself into a low-fares no-frills carrier, based on the model pioneered by Southwest Airlines, the Texas-based operator. Ryanair, first floated on the Dublin Stock Exchange in 1997, is quoted on the Dublin and London Stock exchanges and on NASDAQ, where it was admitted to the NASDAQ-100 in 2002. In June 2005, Ryanair’s market capitalization stood €5 billion, the second highest carrier in the world, next to Southwest Airlines, and ahead of airlines with vastly greater turnover—such as Lufthansa with capitalization at €4.7 billion, British Airways at €4.3 billion and Air France/KLM at €3.5 billion. Its market capitalization was nearly four times that of easyJet, its UK-based budget airline rival. This was despite easyJet’s higher turnover, similar passenger volumes and a slightly larger fleet.

 

Ryanair’s fares strategy

 

Ryanair’s core strategy entails offering the lowest fares, and the airline claims that it generally makes its lowest fares widely available by allocating a majority of seat inventory to its two lowest fare categories. In fact, was Ryanair, originally styled as the ‘low-fares airline’, actually becoming a ‘no-fares airline’? Half of Ryanair’s passenger will be flying for free by 2009, pledged Michael O’Leary in an interview with a German newspaper. He said that ticket prices would fall by an average 5 per cent a year over the next five years, as passenger numbers grew by five million annually. One analyst speculated that Ryanair pronouncement on free seats ‘is designed to put the wind up potential competitors in the hotly contested German market. Of course, a balance must be struck between low fares to attract customers and a sufficient yield to ensure viability.

 

An integral part of the low fares strategy is revenue enhancement through ancillary activities, increasingly used to subsidize airfares in order to improve Ryanair margins to compensate for falls in fare yields. These include on-board sales, charter flights, travel reservations and insurance, car rentals, in-flight television advertising, and advertising outside its air-craft, whereby a corporate sponsor pays to paint an aircraft, whereby a corporate sponsor pays to paint an aircraft with its logo. Advertising on Ryanair’s popular website also provides ancillary income. Despite the abolition of duty-free sales on intra-EU travel in 1999, Ryanair’s revenue from duty-paid sales and ancillary services has continued to rise. In 2005, ancillary revenues comprised 18.3 per cent of total operating revenue, up from 16.1 per cent the year before, and the ambition is to grow at twice the rate of increase in its passenger traffic. The company has outlined plans to continue raising ancillary revenues through further penetration of existing products and the introduction of new ones, especially on-board entertainment and gaming products/services. Ryanair is also considering entering the highly competitive mobile phone market and has been in talks with various UK operators with a view to forming a joint venture.

 

Its low fares policy notwithstanding, Ryanair was able to realize a 2 per cent growth in yields in fiscal 2005. This is attributable to a number of favourable factors in the competitive landscape. Underlying passenger growth volumes returned in the industry as a whole, reducing the intensity of competition. Mainstream European operators like British Airways, Lufthansa and Air France/KLM were increasingly abandoning the short-haul sector, preferring to concentrate their growth on more lucrative long-run haul routes. Moreover, these airlines reacted to the massive price rise in the cost of aviation fuel by introducing a fuel surcharge on their fares. For example, the surcharge levied by British Airways equated to 22 per cent of an average Ryanair fare.

 

Another favourable factor was the failure of the threat of new entrants to materialize. Michael O’Leary’s prophecy of a 2004/2005 winter bloodbath in the European airline industry had been based on the forecast of many new entrants into the budget airlines sector, thus intensifying overcapacity. While new rivals continued to enter the fray, at any one time large numbers were also dying off. Autumn 2004 saw the demise of a number of budget airlines—for example, Volare, an Italian low-fare and charter operator, and V-Bird, a Dutch-owned carrier. Yet, new entrants were still launching. However, it was agreed that the industry could not sustain the some 47low-fares airlines operating as of the end of November 2004, Michael O’Leary predicted that the anticipated shake-out would be accelerated by rising oil prices. ‘Many of our competitor airlines who were losing money heroically when fuel was US$25 a barrel are doomed the longer it stays at US$50. We anticipate there will be further airline casualties as the perfect storm of declining fares and record high oil prices force loss-making carriers out of the industry.

 

Low fares require cost savings

 

To quote Michael O’Leary, ‘Any fool can sell low air fares and lose money. The difficult bit is to sell the lowest air fares and make profits. If you don’t make profits, you can’t lower your air fares or reward your people invest in new aircraft or take on the really big airlines like BA and Lufthansa.’

 

According to the company, its no-frills service allows it to prioritize features important to its clientele, such as frequent departures, advance reservations, baggage handling and consistent on-time services. Simultaneously, it eliminates non-essential extras that interfere with the reliable, low-cost delivery of its basic flights. The eliminated extras include advance seat assignments, in-flight meals, multi-class seating, access to a frequent-flyer programme, complimentary drinks and amenities. In 1997, Ryanair dropped its cargo services, at an estimated annual cost of IR£400,000 in revenue. Without the need to load and upload cargo, the turnaround time of an aircraft was reduced from 30 to 25 minutes, according to the company. It claims that business travellers, attracted by frequency and punctuality, comprise 40 per cent of its passengers, despite often less conveniently located airports and the absence of pampering.

 

In conjunction with the elimination of non-essential extras, the organization of its operations enables the airline to minimize costs, based on five main sources.

 

  1. Fleet commonality (Boeing 737s, like Southwest Airlines): this results in lower maintenance and staff training costs. In 2005, the company negotiated a new Boeing deal that takes down its per-seat costs for all post-January 2005 deliveries to rock-bottom levels. This deal not only establishes a platform for growth; a younger fleet also enables further cost reductions through lower fuel utilization and maintenance costs.
  2. Contracting out of aircraft cleaning, ticketing, baggage handling and other services, other than at Dublin Airport; this is more economical and flexible, while it entails less aggravation in terms of employee relations.
  3. Airport charges and point-to-point route policy: Ryanair uses secondary airports that are less congested, motivated to offer better deals and have fewer delays, resulting in increased punctuality and shorter turnaround times.
  4. Staff costs and productivity: productivity-based pay schemes and non-unionized staff.
  5. Marketing costs; Ryanair was the first airline to reduce and finally eliminate travel agents’ fees. In January 2000, Ryanair launched its www.ryanair.com website. This has had the effect of saving money on staff costs, agents’ commissions and computer reservation charges, while significantly contributing to growth. In 2005, Internet sales accounted for 97 per cent of all bookings. Ryanair supplements its advertising with the use of free publicity to highlight its position as the low fares champion, by attacking various constituencies that threaten its cost structure. These include EU regulators, airport authorities, politicians and trade unions. Its per passenger marketing costs of 60c are considered to be the lowest across the European airline sector.

 

The year 2005 saw enormous volatility in the price of oil, and the global airline industry faced losses of US$6 billion. Ryanair, which had been unhedged with respect to oil prices since September 2004, announced on 1 June that it was hedging 75 per cent of its fuel needs for the October 2005 to March 2006 period, at a price of US$47 a barrel. At times, in previous weeks, the price had stood at US$53-plus per barrel. At the end of June, the price had hit US$60 and analysts were predicting it would rise to US$70-plus in the coming months.

 

Low costs contribute to a low break-even load factor of 62 per cent, so the airline can make money even if it fills fewer seats than other budget competitors with higher costs and higher break-even load factors. For example, easyJet’s break-even load factor is 73 per cent, while that of Virgin Express is 83 per cent. Table 6 shows Ryanair’s operating cost structure.

 

Table 6  Ryanair consolidated profit and loss accounts

 

 

 

 

 

Operating revenues

Scheduled revenues

Ancillary revenues

 

 

 

 

 

 

Year ended 31 March 2005

€000

 

 

 

 

 

 

 

Year ended 31 March 2004

€000

 

 

1,128,116 924,566
   208,470 149,658
Total operating revenues—continuing operations

 

 

1,336,586

 

 

 

 

1,074,224

 

 

 

Operating expenses    

 

   

 

Staff costs     140,997   123,624
Depreciation and amortization       98,703     98,130
Other operating expenses        
Fuel and oil    265,276   174,991
Maintenance, materials and repairs        37,934       43,420  
Marketing and distribution costs        19,622       16,141  
Aircraft rentals       33,471       11,541
Route charges     135,672     110,271
Airport and handling charges     178,384     147,221
other       97,038       78,034
Total operating expenses  1,007,097    803,373  
Operating profit before exceptional costs and goodwill     329,489     270,851
Profit for the year    266,741    206,611

 

Customer service

 

The airline’s claims of attention to customer service are encompassed in its Passenger Charter, which embraces a number of doctrines:

  • Sell the lowest fares at all times on all routes and match competitors’ special offers.
  • Allow flight and name changes with requisite fee
  • Strive to deliver on-time performance
  • Provide information to passengers regarding commercial and operational conditions
  • Provide complaint response within seven days
  • Provide prompt refunds
  • Eliminate overbooking and involuntary denial of boarding
  • Publish monthly service statistics
  • eliminate lost or delayed luggage
  • Ryanair will not provide refreshments or meals or accommodation to passengers facing delays; any passenger who wish to avail themselves of such services will be asked to pay for them directly to the service provider
  • Ryanair facilitates wheelchair passengers travelling in their own wheelchair; where passengers require a wheelchair, Ryanair directs those passengers to a third-party wheelchair supplier at the passenger’s own expense; Ryanair is lobbying the handful of airports that do not provide a free wheelchair service to do so.

 

The company has confirmed that it would introduce a number of cost-cutting new features on its flights. For instance, the Ryanair fleet would heretofore be devoid of reclining seats, window blinds, headrests, seat pockets and other ‘non-essentials’. Leather seats instead of cloth ones would allow faster turnaround times since leather is quicker and easier to clean. More controversially, Michael O’Leary hoped eventually to wean passengers off checked-in luggage, eliminating the need for baggage handling, suitcase holding areas and lost property. In 2004, Ryanair had one of the lowest baggage allowances of any major airline, at 15 kg a person, and charged up to €7 for every additional kilo, one of the highest surcharges in European aviation.

 

Successive Annual Reports cite-on-time performance (defined as up to 15 minutes after scheduled time in UK Civil Aviation Authority statistics) and baggage handling as of key importance to customers. On punctuality, Ryanair claims to be the most punctual airline between Dublin and London. On baggage handling, Ryanair claims less than one bag lost per 1000 carried, better than even the best US airline, Alaska Airlines, with 3.48 bags per 1000 lost, and considerably better than its role model Southwest Airlines with 5.00 per 1000 lost.

 

Tables 7and 8, and Figure 3 provide some independent comparisons of Ryanair with other airlines on punctuality and customer perceptions.

 

Reporting airport/airline Origin/ destination % early to No. of 15minutes Average delay flights
  flights late (minutes) unmatched
Birmingham—Ryanair Dublin 180  88     6 0
Birmingham—Aer Lingus Dublin 299  89     7 2
Birmingham—MyTravel Dublin    4  50   20 0
Heathrow—Aer Lingus Dublin 785  71   16 2
Heathrow—bmi British Midland Dublin 432  71   14 0
Stansted—Ryanair Dublin 727  79   11 1
Gatwick—British Airways Dublin 180  82     9 0
Gatwick—Ryanair Dublin 298  87     8 2
Heathrow— bmi British Midland Brussels 354  73   13 1
Heathrow— British Airways Brussels 452  84     9 2
Heathrow— bmi British Midland Palermo    8  25   37 0
Heathrow—Alitalia Milan(Linate) 174  63   15 0
Heathrow— British Airways Milan(Linate) 178  80   10 0
Heathrow— bmi British Midland Milan(Linate) 172  68   13 0
Heathrow—Alitalia Milan (Malpensa) 298  48   24 0
Heathrow— British Airways Milan (Malpensa) 180  80   10 0
Stansted— Ryanair Bergamo 172  76   10 0
Stansted— easyJet Bologna   60  70   14 0
Stansted— easyJet Milan(Linate)   60  42   39 0
Stansted— easyJet Rome (Ciampio) 120  76   12 0
Stansted— Ryanair Rome (Ciampio) 356  79 9 0
Stansted— easyJet Edinburgh 327  60 20 0
Stansted— easyJet Nice 120  70 24 0
Stansted— Virgin Express Nice    1    0 184 0
Stansted— Ryanair Montpellier   59  76 14 2
Stansted— Ryanair Prestwick 562  87 6 4
Stansted— easyJet Glasgow 276  87 8 0
Glasgow—Aer Lingus Dublin 176  80 9 4
Glasgow—bmi British Midland Dublin    2 100 0 0

 

 

On punctuality, it must be borne in mind that one is not necessarily comparing like with like when contrasting figures for congested Heathrow with Stansted or Luton, even if all serve London. Also not counted in the statistics were cancelled flights. Ryanair has been known to ‘consolidate’ passengers by transferring them from their original flight to later or alternative routing without any notice, if passengers were unfortunate enough to have originally been booked on a low seat occupancy flight. Ryanair has announced that it would ignore European Commission proposals stipulating that passengers whose flight has been cancelled and who have to wait for an alternative flight should be provided with care while waiting, stating ‘we do not, and never will offer refreshments’.

Clouds on the horizon?

 

Despite its winning performance in its 2005 results, a number of issues faced Ryanair

 

  • While the competitive threat of new budget carriers had not emerged, some of the mainstream carriers were becoming quasi-budget airlines on short-haul routes. An important instance of this was Aer Lingus, the national state-owned airline of Ireland, operating domestic and international services, with a fleet of 30 aircraft. The events of 11 September 2001 were particularly traumatic for Aer Lingus, as the airline teetered on the verge of bankruptcy. In late 2001, the choice was to change, or to be taken over or liquidated. Led by a determined and focused chief executive and senior management team, the company set about cutting costs. By the end of 2002, Aer Lingus had turned a 2001 €125 million loss into a €33 million profit, and it improved still further in 2003 with a net profit of €69.2 million. In essence. Aer Lingus claimed that it had transformed itself into a low-fares airline, and that it matched Ryanair fares on most routes, or that it was only very slightly higher. The airline’s chief operating officer said that “Aer Lingus no longer offers a gold-plated service to customers, but offers a more practical and appropriate service…it clearly differentiates itself from no-frills carriers. We fly to main airports and not 50 miles away. We assign seats for passengers, we beat low fares competitors on punctuality, even though we fly to more congested airports, and we always fulfil our commitment to customers—unlike no frills carrier. While Aer Lingus had been an early adopter, other mainstream airlines like British Airways and Air France/KLM were also converting short-haul intra-European routes to the value model offered by Aer Lingus.
  • Further source of pressure came from the EU. A decision from the EU Commission in February 2004 ruled that had been receiving illegal state subsidies for its base airport at publicly owned Charleroi Airport (styled ‘Brussels South’ by Ryanair). Of course, it was not only the Charleroi decision but also the precedent it could set that was of concern. Other deals with public airports would come under scrutiny, although the vast majority of the airline’s slots were at private airports. Also, it was estimated that Ryanair would have to repay €2.5 million and €7 million to Charleroi’s regional government. Ryanair appealed the decision, but also threatened to initiate state aid cases and complaints against every other airline flying into any state airports offering concessions and discounts. Airport fees comprised 19 per cent of Ryanair’s operating costs and were deemed to be an inherent part of the airline’s low-cost model. Thus, Ryanair warned that there was no mid-cost alternative model. Nevertheless, two months after the Charleroi verdict, Ryanair confirmed that it had agreed a new deal there. It would keep flying all its 11 routes from Charleroi, continuing existing airports and handling charges until the airport, which accommodated 1.8 million passengers a year at the time, reached two million passengers a year. The EU Commission was not readily convinced and initiated an investigation of the new settlement.
    On another regulatory matter, the EU had devised fresh rules to cover overbooking that results in boarding denials to passengers by air-lines. Air travellers bumped off overbooked flights by EU airlines would receive automatic compensation of between €250 and €600. Compensation might also be claimed when flights are cancelled for reasons that are the carrier’s responsibility, provided the passengers have not been given two weeks’ notice or offered alternative flights. Ryanair declared that the new rules would not impact its operations, as it did not overlook its flights, and had the fewest number of cancellations and the best punctuality record in Europe. It suggested that, it the EU is serious, it should just outlaw the practice of over-booking entirely.
    A few days prior to the EU decision on Charleroi, on 30 January 2004, at the Central London County Court, a disabled man won a landmark case against Ryanair after it charged him £18 (€25) for a wheelchair he needed at Stansted to get from the check-in desk to the aircraft. The passenger was awarded £1336 (€2400) in compensation from Ryanair, as the UK-based Disability Commission said it may launch a class action against the airline on behalf of 35 other passengers. Ryanair’s immediate reaction was to levy 70c a flight on all customers using the affected airports. In December 2004, the decision against Ryanair was upheld on appeal, although it was somewhat mitigated when the Court of Appeal decided that Stansted Airport was also answerable and had to pay half of Ryanair’s liability for damages, with interest. In response, Ryanair’s lawyer suggested that the 50:50 split in liability was unclear and unexplained, and ‘could well have been delivered by King Solomon’.
    Also in 2004, a disgruntled Ryanair passenger set up a website inviting complaints about the airline. Ryanair moved to have the website shut down in early 2005, on the grounds that it contained material that is ‘untrue, unfounded, malicious and deeply damaging to the good name and trading reputation of Ryanair’, and that the name and appearance of the site, which resembled that of Ryanair’s home website could be construed as ‘abusive registration’. However, the site has reappeared under an ISP provider in Canada, and its number of hits has increased since the incident was reported in the British satirical magazine Private Eye.

  • On another front, Ryanair was in dispute against the British Airports Authority (BAA), as it filed a writ at the High Court in London for alleged ‘monopoly abuse’ at Stansted. Michael O’Leary warned that the action was only the first skirmish in what would become ‘the mother and father of a war’. The Chief Executive of the BAA announced that he did not intend to negotiate further reductions to Ryanair’s deeply discounted deal on landing charges at Stansted, due to finish in March 2007. The average charge per passenger would rise form £3 to £5 at the airport, whose capacity utilization was now so high that it was running out of slots at peak times. Meanwhile, Michael O’Leary was scathing about ‘grandiose plans’ to build a second runway at Stansted at cost of £4 billion, ‘when the cost of a runway and even a terminal should run no more than £400 million.
  • As if these issues were not enough, a number of Dublin-based Ryanair pilots were planning to establish their own association, the Ryanair European Pilots Association with links to the British Airline Pilots Association (BALPA), the Irish Airline Pilots Association (IALPA) and the European Cockpit Association. In November 2004, these pilots, supported by IALPA, took a complaint about victimization against Ryanair to the Irish Labour Court. Ryanair could potentially face a compensation bill of £44 million if 170 victimization claims brought by its Dublin-based pilots were to be upheld. The company had out-lined various consequences to pilots if they joined a trades union: possible redundancy when the existing 737-200 fleet was phased out, no share options or pay increases, non promotions and no payment for future recurrent training. The airline declared its determination to keep out trades unions and to take a case to the High Court to prove that legislation attempting to force companies to negotiate with unions was unconstitutional. A ruling favourable to the pilots in February 2005 by the Irish Labour Relations Commission, ordering that Ryanair had to attend a hearing dealing with the pilot’ complaints, was dismissed by Michael O’Leary: ‘It is no surprise that the brothers have found in favour of the brothers. We will fight them on the beaches, in the fields, and in the valleys,’ he said. Meanwhile, the airline is also fighting a number of legal challenges, including proceedings against IALPA, accusing it of conducting an organized campaign of harassment and intimidation of Ryanair pilots through a website, warning them off flying the airline’s new aircraft. Indeed, the carrier claims that specific threats issued on the website are being investigated by the Irish police. In April 2005, Ryanair abandoned an experiment in paid-for in flight entertainment, after passengers were reluctant to rent the consoles at the £5 required to receive the service. Apparently, market research discovered passengers are unwilling to invest on such short flights, with the ideal being six-hour flights to longer-haul holiday destinations. When the experiment was launched in November 2004, Michael O’Leary hailed the move as ‘the next revolution of the low-fares industry…we expect to make enormous sums of money’.

 

Questions:

 

  1. How does Ryanair’s pricing strategy account for its successful performance to date? Would you suggest any changes to Ryanair’ pricing approach? Why/why not?
  2. Is the ‘no-fares’ strategy a useful approach for Ryanair in the short term? In the long term?
  3. Do the issues facing Ryanair threaten its low-fares model?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Case V   LEGO:   the toy industry changes

 

How times have changed for LEGO. The iconic Danish toy maker, best known for its LEGO brick, was once the must-have toy for every child. However, LEGO has been facing a number of difficulties since the late 1990: falling sales, falling market share, job losses and management reshuffles. Once vote ‘Toy of the Century’ and with a history of uninterrupted sales growth, it appears LEGO has fallen victim to changing market trends. Today’s young clued-up consume is far more likely to be seen surfing the web, texting on their mobile phone, listening to their MP3 player or playing on their Game Boy than enjoying a LEGO set. With intensifying competition in the toy market, the challenge for LEGO is to create aspirational, sophisticated, innovative toys that are relevant to today’s tweens.

 

History

 

In 1932 Ole Kirk Christiansen, a Danish carpenter, established a business making wooden toys. He named the company ‘LEGO’ in 1934, which comes from Danish words ‘leg godt’, meaning ‘play well’. Later, coincidentally, it was discovered that in Latin it means, ‘I put together’. The LEGO name was chosen to represent company philosophy, where play is seen as integral to a child’s successful growth and development. In 1947 the company began to make plastic products and in 1949 it launched its world-famous automatic building brick. Ole Kirk Christiansen was succeeded by his son Godtfred in 1950, and under this new leadership the LEGO group introduced the revolutionary ‘LEGO System of Play’, which focused on the importance of learning through play. The company began exporting in 1953 and soon developed a strong international reputation.

 

The LEGO brick, with its new interlocking system, was launched in 1958. During the 1960s LEGO began to use wheels, small motors and gears to give its products the power of motion. LEGOLAND was established in Billund in 1968, as a symbol of LEGO creativity and imagination. Later, in the 1990s, two new parks were opened in Britain and California. LEGO figures were introduced in 1974, giving the LEGO brand a personality. The 1980s saw the beginning of digital development, with LEGO forming a partnership with Media Laboratory at the Massachusetts Institute of Technology in the USA. This resulted in the launch of LEGO TECHNIC Computer and paved the way for LEGO robots. LEGO introduced a constant flow of new products in the 1990s, and placed greater focus on intelligence and behaviour. The new millennium saw LEGO crowned the ‘Toy of the Century’ by Fortune magazine and the British Association of Toy Retailers. LEGO is currently the fourth largest toy manufacturer in the world after Mattel, Hasbro and Bandai, with a presence in over 130 countries.

 

Challenges for the traditional toy market

 

A number of environmental shifts have been affecting the toy market over the past decade. Some of these are described below.

 

  • Kids getting older younger. By the time most kids reach the age of eight they have outgrown the offerings of the traditional toy market. A central factor in children abandoning toys earlier in their lack of free time to play. Children today have a lot more scheduled activities and, with greater emphasis on academic achievement, a lot more time is spent studying. Faced with more media and entertainment choices these sophisticated and technologically savvy consumers are favouring electronic, fashion, make-up and lifestyle products. The most susceptible group to this age compression are ‘tweens’—children between the ages of 8 and 12—a US$5 billion market, accounting for 20 per cent of the US$20.7 billion traditional toy industry.
  • Intensifying competition from the electronic and games market. As noted above, today’s young consumer is far more likely to be seen surfing the web, texting on their mobile phone, listening to their MP3 player or playing on their Game Boy than enjoying a LEGO set. A survey by NPD Funworld, in 2003, found that tween boys who played video game spent approximately 40 per cent less time playing with action figures when compared with the previous year. Handheld toys with a video and gaming element suit the mobile lifestyle of today’s tween. As demand for these more sophisticated toys increases, traditional toy makers are facing more direct competition with the electronic and video games market.
  • Fickleness of young consumers. The toy market today is very fashion-driven, leading to shorter product life cycles. Toy manufacturers are facing increasing pressure to develop a competency in forecasting market changes and improving their speed of response to those changes. In an effort to get a share of the huge revenues generated by the latest hot toy, many toy manufacturers have left themselves more vulnerable to greater earnings volatility.
  • Power of the retail sector. Consolidation in the retail sector and the expansion of many retail chains has placed enormous pressure on the profit margins of traditional toy makers. Major retailers can exert tremendous power over their suppliers because of the vast quantities they buy. Many retailers insert a clause in their supplier contracts that gives them a certain percentage of profit regardless of the retail price.

 

Traditional toy makers are struggling to keep up with these environmental changes. It appears no one is safe, when even the world-renowned LEGO brand can fall victim to changing market trends. The cracks first began to show in 1998, when LEGO made a loss for the first time in its history. This began a major reversal in the fortunes of a company that had become accustomed to decades of uninterrupted sales growth (see Table 9). Ironically, it is the success of LEGO that may ultimately have paved the way for its downfall.

 

Table 9 :   LEGO financial information

 

LEGO financial information (Mdkk) 2004 2003 2002 2001 2000
Income statement          
Revenue 6704 7196 10006 9475 8379
Expenses (6601) ( 8257) (9248) (8554) (9000)
Profit/(loss) before special items, financial income and expenses and tax 103 (1061) 868 921 (621)
Impairment of fixed assets ( 723) ( 172)
Restructuring expenses ( 502 ( 283) ( 122) ( 191)
Operating profit/(loss) (1122) (1516) 868 799 ( 812)
Financial income and expenses ( 115) 18 ( 251) ( 278) ( 280)
Profit/(loss) before tax (1237) (1498)  617 521 (1092)
Profit/(loss) on continuing activities (1473) (953 ) 348 420 ( 788)
Profit/(loss) discontinuing activities ( 458) 18 (22) (54) (75)
Net profit/(loss) for the year (1931) (935) 326 366 (863)
Employees:

Average number of employees (full-time), continuing activities

5569 6542 6659 6474 6570
Average number of employees (full-time), discontinuing activities 1725 1756 1657 1184 1328

 

What went wrong for LEGO

 

According to Kjeld Kirk Kristiansen, owner of the business and grandson of its founder, following many years of success the LEGO culture had become ‘inward looking’ and ‘complacent’ and had failed to keep pace with the changes taking place in the toy market. This lack of environmental sensitivity was evident in the US market in 2003, where LEGO failed to predict demand for its Bionicle figures, resulting in two of its best-selling products from this range being out of stock in the run-up to Christmas. It appeared nothing had been learned from the previous year, when also in the run-up to Christmas the much sought-after Hogwarts Castle sets were out of stock across the UK.

 

LEGO had also become over-dependent on licences in the 1990s, for products such as Star Wars and Harry Potter, as its main source of growth. This left LEGO vulnerable to the faddishness of these products: the years in which Star Wars and Harry Potter films were released coincided with profitable years for LEGO, while losses were reported in the intervening years.

 

The diversification of the brand into the manufacture of items such as clothing, bags and accessories was another mistake for LEGO. The company over-complicated its product portfolio and it ran close to over-stretching the LEGO brand. Kristiansen, resumed leadership in 2004 to guide the company out of crisis, is quoted as saying ‘LEGO was so busy chasing the fashion of the day it took its eye off its core brand.’

 

He phasing-out of its long-established pre-school Duplo brand, to be replaced by LEGO Explore, was another error. Parents were left confused, with many believing the larger-size Duplo brick had been discontinued. This error resulted in a loss of revenues from the pre-school market in 2003. Adult fans of LEGO (AFOLs) were also left disgruntled when LEGO changed the colour of its new building bricks so that they no longer matched the colour of the old bricks.

 

While other toy manufacturers have moved production to low-cost destinations such as China, LEGO has been reluctant to follow suit. Today it still manufactures the bulk of its product in Billund and Switzerland. The reasons posited for the company’s reluctance to move include a strong sense of loyalty to Billund, where one-quarter of the residents work at the LEGO factory, and concerns that a move would affect its brand image. While its loyalty to these sites is admirable, and brand image worries understandable, the question is whether its long-term future is viable without such a move.

 

A new direction for LEGO

 

In an attempt to turn around its fortunes LEGO has developed a number of new marketing strategies. These include the following.

 

  • A back-to-basics strategy is seeing LEGO refocus on its core brick-based product range and place more emphasis on its key target group—younger children. In 2003, LEGO relaunched its classic range of brick-based products and many new product lines have centred on eternal themes such as Town, Castle, Pirates and Vikings. LEGO has reinstated the Duplo brand and introduced the Quarto brand, which consists of larger bricks for children under two. Other new lines include LEGO Sports, born from strategic alliances with the National Hockey League and US National Basketball Association. While the traditional audience of LEGO has always been young boys it has introduced a new range, ‘Clikits’, a social toy developed specifically for a female audience. Clikits consists of pretty pastel-coloured bricks, which provide numerous options to create jewellery and fashion accessories.
  • LEGO has admitted to over-diversifying its brand. In response to this, LEGO has withdrawn many of its manufacturing lines, instead opting to outsource these to third parties via licensing deals. LEGO is also selling its LEGOLAND parks in a bid to refocus efforts on its core product and improve its financial situation.
  • In an attempt to create a story-based, multi-channel, LEGO has engaged in a number of licensing deals, with varying degrees of success, but more importantly it is now developing its own intellectual property. The Bionicle range, launched in 2001, was the first time LEGO has created a story from the start as the basis for a new product range. The Bionicles combine physical snap-together kits with an online virtual world. This toy brand has also been extended into entertainment in the form of comics, books and a Miramax movie: Bionicle: Mask of light. The range has proved a major success for LEGO and, building on this success, it has developed Knights Kingdom.
  • Sub-brands that LEGO has neglected, including Mindstorms and LEGO TECHNIC, both aimed at older children and enjoyed by some adults, are being given more attention. With so many adult fans of LEGO, efforts are also being made to further engage the adult market. The company is currently considering whether to market its management training tool, entitled LEGO Serious Play, to a wider adult audience.
  • LEGO has overhauled its packaging, and the style and tone of its advertising. The emphasis is now being placed on the LEGO play an educational experience as opposed to product detail. The strap-line ‘play on’ was introduced in January 2003 to accompany the change. The slogan draws its inspiration from the company’s five core values: creativity, imagination, learning, fun and quality. LEGO is also making greater use of more interactive communication tools to promote its products, which it is believed will encourage consumers to interact more with the brand. 2005 has seen LEGO invite fans on a tour of the company. Here they are given the opportunity to meet new product developers, designers and toolmakers, and learn about the company’s history, culture and values.
  • LEGO is also taking steps to reverse its insular culture. In an attempt to build a more market-driven organization, it is spending more time consulting children, parents, retailers and AFOLs. The company established the LEGO Vision Lab in 2002 to examine how the future will look to children and their families. A variety of sources are being used to make assessments of future worldwide family patterns, including anthropology, architecture, consumer patterns and awareness, culture, philosophy, sociology and technology.
  • Plagued by supply-chain inefficiencies LEGO has improved production time from concept to the retailer’s shelf. An example of this is the Duplo Castle, which was developed in nine months.

 

Conclusion

 

Having taken its eye off the ball, LEGO is fighting back with a new customer-focused strategic approach. Continuous improvement, in response to changing market trends, is now key if LEGO is to ward off the many challenges it still faces. It is still involved in many licence agreements, making it vulnerable to this cyclical market. Its back-to-basics strategy has been widely praised but it remains to be seen if LEGO can balance this with its increasing activity in software. With children’s growing appetite for video games with a more violent content, can LEGO satisfy this target group while still remaining true to its wholesome ‘play well’ brand values? Will LEGO succeed in its attempts to target young girls and its desire to target a more adult audience? Will it succeed in its attempts to reduce costs and improve efficiencies? Will CEO Jorgen Vig Knudstorp succeed where his predecessors have failed? Only in the fullness of time will these questions be answered but one thing is for sure: no brand, no matter how powerful, can afford to become complacent in an increasingly competitive business environment.

 

Questions:

 

  1. Why did LEGO encounter serious economic difficulties in the late 1990s?
  2. Conduct a SWOT analysis of LEGO and identify the company’s main sources of advantage.
  3. Critically evaluate the LEGO turnaround strategy.

 

 

 

 

 

 

 


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Attempt Any Four Case Study

 

CASE – 1   Dabur India Limited: Growing Big and Global

 

Dabur is among the top five FMCG companies in India and is positioned successfully on the specialist herbal platform. Dabur has proven its expertise in the fields of health care, personal care, homecare and foods.

The company was founded by Dr. S. K. Burman in 1884 as small pharmacy in Calcutta (now Kolkata), India. And is now led by his great grandson Vivek C. Burman, who is the Chairman of Dabur India Limited and the senior most representative of the Burman family in the company. The company headquarters are in Ghaziabad, India, near the Indian capital New Delhi, where it is registered. The company has over 12 manufacturing units in India and abroad. The international facilities are located in Nepal, Dubai, Bangladesh, Egypt and Nigeria.

S.K. Burman, the founder of Dabur, was trained as a physician. His mission was to provide effective and affordable cure for ordinary people in far-flung villages. Soon, he started preparing natural remedies based on Ayurved for diseases such as Cholera, Plague and Malaria. Due to his cheap and effective remedies, he became to be known as ‘Daktar’ (Indianised version of ‘doctor’). And that is how his venture Dabur got its name—derived from Daktar Burman.

The company faces stiff competition from many multi national and domestic companies. In the Branded and Packaged Food and Beverages segment major companies that are active include Hindustan Lever, Nestle, Cadbury and Dabur. In case of Ayurvedic medicines and products, the major competitors are Baidyanath, Vicco, Jhandu, Himani and other pharmaceutical companies.

 

Vision, Mission and Objectives

 

Vision statement of Dabur says that the company is “dedicated to the health and well being of every household”. The objective is to “significantly accelerate profitable growth by providing comfort to others”. For achieving this objective Dabur aims to:

  • Focus on growing core brands across categories, reaching out to new geographies, within and outside India, and improve operational efficiencies by leveraging technology.
  • Be the preferred company to meet the health and personal grooming needs of target consumers with safe, efficacious, natural solutions by synthesising deep knowledge of ayurveda and herbs with modern science.
  • Be a professionally managed employer of choice, attracting, developing and retaining quality personnel.
  • Be responsible citizens with a commitment to environmental protection.
  • Provide superior returns, relative to our peer group, to our shareholders.

 

Chairman of the company

 

Vivek C. Burman joined Dabur in 1954 after completing his graduation in Business Administration from the USA. In 1986 he was appointed Managing Director of Dabur and in 1998 he took over as Chairman of the Company.

Under Vivek Burman’s leadership, Dabur has grown and evolved as a multi-crore business house with a diverse product portfolio and a marketing network that traverses the whole of India and more than 50 countries across the world. As a strong and positive leader, Vivek C. Burman has motivated employees of Dabur to “do better than their best”—a credo that gives Dabur its status as India’s most trusted nature-based products company.

 

Leading brands

 

More than 300 diverse products in the FMCG, Healthcare and Ayurveda segments are in the product line of Dabur. List of products of the company include very successful brands like Vatika, Anmol, Hajmola, Dabur Amla Chyawanprash, Dabur Honey and Lal Dant Manjan with turnover of Rs.100 crores each.

Strategic positioning of Dabur Honey as food product, lead to market leadership with over 40% market share in branded honey market; Dabur Chyawanprash is the largest selling Ayurvedic medicine with over 65% market share. Dabur is a leader in herbal digestives with 90% market share. Hajmola tablets are in command with 75% market share of digestive tablets category. Dabur Lal Tail tops baby massage oil market with 35% of total share.

CHD (Consumer Health Division), dealing with classical Ayurvedic medicines has more than 250 products sold through prescription as well as over the counter. Proprietary Ayurvedic medicines developed by Dabur include Nature Care Isabgol, Madhuvaani and Trifgol.

However, some of the subsidiary units of Dabur have proved to be low margin business; like Dabur Finance Limited. The international units are also operating on low profit margin. The company also produces several “me – too” products. At the same time the company is very popular in the rural segment.

 

 

 

Questions

 

  1. What is the objective of Dabur? Is it profit maximisation or growth maximisation? Discuss.
  2. Do you think the growth of Dabur from a small pharmacy to a large multinational company is an indicator of the advantages of joint stock company against proprietorship form? Elaborate.

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   IT Industry: Checkered Growth

 

IT industry is now considered as vital for the development of any economy. Developing countries value the importance of this industry due to its capacity to provide much needed export earnings and support in the development of other industries. Especially in Indian context, this industry has assumed a significant position in the overall economy, due to its exemplary potentials in creating high value jobs, enhancing business efficiency and earning export revenues. The IT revolution has brought unexpected opportunities for India, which is emerging as an increasingly preferred location for customised software development. Experts are estimating the global IT industry to grow to US$1.6 million over the coming six years and exports to reach Rs. 2000 billion by 2008. It is envisaged that Indian IT industry, though a very small portion of the global IT pie, has tremendous growth prospects.

 

Stock Taking

 

The decade of 1970 may be taken as the stage of introduction of the Indian IT industry. The early years were marked by 75 per cent of software development taking place overseas and the rest 25 per cent in India. Exports of Indian software until the mid-1970s was mainly Eastern Europe, followed by US. Tata Consultancy Services (TCS) was among the pioneers in selling its services outside India, by working for IBM Labs in the US. The hardware segment lagged behind its software counterpart. With instances of exports worth US$ 4 million in 1980, the software segment of the industry has shown an uneven profile. It was not until 1980s that vigorous and sustained growth in software exports begun, as MNCs like Texas Instruments started to take serious interest in India as a centre of software production. Destinations of export also underwent changes, with US dominating the main export market with 75 per cent of the exports. The IT Enabled Services (ITeS) segment, however, had not emerged at this stage.

It was also during the mid to late 1980s that computer firms shifted focus from mainframe computers (the mainstay of MNCs) to Personal Computers (PCs). In March 1985, Minicomp installed the first ever PC at CSI, Delhi; this changed the entire industry for good. With the entry of networking and applications like CAD/CAM, PC sales soared in 1987-88, touching 50,000 units.

From a modest growth in the mid-1980s software exports moved up to Rs. 3.8 billion in 1991-92. Since then, it grew at an incredible rate, up to 115 per cent in 1993. The hardware could also register an annual growth of 40 per cent in this period, backed by a surging demand for PCs and networking. Growth of the industry was also driven by the emergence and rapid growth of the ITeS segment.

IT sector’s share of GDP rose steadily in this period, rate of increase being the highest at 44.91 per cent in 2000-01. It was in the same year that the size of the total IT market was the biggest in the decade, at Rs. 56,592 crore. The overall IT market was also found to increase till 2000-01. The overall IT market was also found to increase till 2000-01, with the only exception of 1998-99. The domestic market also showed an overall increase till 2000-01, registering a spectacular CAGR of 50.39 per cent. Aggregate output of software and services also increased in this period, though at an uneven rate. Of approximately $1 billion worth of sales in 1991-1992, domestic hardware sales constituted 37.2 per cent (13.4 per cent growth over the previous year), exports of hardware 6.6 per cent.

During 2000-01 the growth in the hardware segment was driven mainly by PCs, which contributed about 58 per cent of the total hardware market. This period also witnessed the phenomenon of increasing share of Tier 2 and cities in PC sales, thereby indicating PC penetration into the hinterland. PC shipments had increased by 35 per cent every year from 1997 till 2000-01 when it reached 1.8 million PCs. The commercial PC market saw a growth of 23.5 per cent mainly due to slashing of prices by major vendors.

It was in 2001-02 that the industry had a sharp fall in rate of growth of its share of GDP to 5.90 per cent, from 44.91 per cent in the previous year. The total IT market also showed a fall in growth rate from 56.42 per cent in 2000-01 to a mere 16.24 per cent in the next year, growing further at the rate of 16.25 per cent in the next year. Software export was also affected, registering a low growth of 28.74 per cent and failed to maintain its growth rate of 65.30 per cent in the previous year. It got further lowered to 26.30 per cent in 2002-03. CAGR of total output of software and services (in Rs. crore) came down to 25.61 in 2001-02 and further to 25.11 in 2002-03. The domestic market showed a steep decline in growth to 3 per cent in 2001-02 from an outstanding 50.39 per cent in 2000-01. It could, however, recover by growing at 4.11 per cent in the next year.

 

 

 

 

 

 

 

Table 1: Indian IT Industry: 1996-97 to 2002-03

 

Year A* B* C* D* E*
1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

 

 

 

 

 

1.22

 

 

1.45

 

 

1.87

 

 

2.71

 

 

2.87

 

 

3.09

 

 

 

 

 

18,641

 

 

25,307

 

 

36,179

 

 

56,592

 

 

65,788

 

 

76,482

 

3,900

 

 

 

6,530

 

 

10,940

 

 

17,150

 

 

28,350

 

 

36,500

 

 

46,100

 

6,594

 

 

 

10,899

 

 

16,879

 

 

23,980

 

 

37,350

 

 

47,532

 

 

59,472

 

9,438

 

 

 

12,055

 

 

14,227

 

 

18,837

 

 

28,330

 

 

29,181

 

 

30,382

 

 

*A: share of GDP of the Indian IT market, B: size of the Indian IT market (in Rs. crore), C: software and services exports (in Rs. crore), D: size of software and services (in Rs. crore), E: size of the domestic market (in Rs. crore)

 

 

Questions

 

1.                    Try to identify various stages of growth of IT industry on basis of information given in the case and present a scenario for the future.
2.                    Study the table given. Apply trend projection method on the figures and comment on the trend.
3.                    Compute a 3 year moving average forecast for the years 1997-98 through 2003-04.

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   Outsourcing to India: Way to Fast Track

 

By almost any measure, David Galbenski’s company Contract Counsel was a success. It was a company Galbenski and a law school buddy, Mark Adams, started in 1993; it helps companies find lawyers on a temporary contract basis. The growth over the past five years had been furious. Revenue went from less than $200,000 to some $6.5 million at the end of 2003, and the company was placing thousands of lawyers a year.

At then the revenue growth began to flatten; the company grew just 8% in 2004 despite a robust market for legal services estimated at about $250 billion in the United States alone. Frustrated and concerned, Galbenski stepped back and began taking a hard look at his business. Could he get it back on the fast track? “Most business books say that the hardest threshold to cross is that $10 million sales mark,” he says. “I knew we couldn’t afford to grow only 10% a year. We needed to blow right through that number.”

For that to happen, Galbenski knew he had to expand his customer base beyond the Midwest into large legal supermarkets such as Boston, New York, and Washington, D.C. He also knew that in doing so, he could run into stiff competition from larger publicly traded rivals. Contract Counsel’s edge has always been its low price, Clients called when dealing with large-scale litigation or complicated merger and acquisition deals, either of which can require as many as 100 lawyers to manage the discovery process and the piles of documents associated with it. Contract Counsel’s temps cost about $75 an hour, roughly half of what a law firm would charge, which allowed the company to be competitive despite its relatively small size. Galbenski was counting on using the same strategy as he expanded into new cities. But would that be enough to spur the hyper growth that he craved for?

At that time, Galbenski had been reading quite a bit about the growing use of offshore employees. He knew companies like General Electric, Microsoft and Cisco were saving bundles by setting up call and data centers in India. Could law firms offshore their work? Galbenski’s mind raced with possibilities. He imagined tapping into an army of discount-priced legal minds that would mesh with his existing talent pool in the U.S. The two work forces could collaborate over the Web and be productive on a 24-7 basis. And the cost could be massive.

Using offshore workers was a risk, but the payoff was potentially huge. Incidentally Galbenski and his eight-person management team were preparing to meet for their semiannual review meeting. The purpose of the two-day event was to decide the company’s goals for the coming year. Driving to the meeting, Galbenski struggled to figure out exactly what he was going to say. He was still undecided about whether to pursue an incremental and conservative national expansion or take a big gamble on overseas contractors.

 

The Decision

 

The next morning Galbenski kicked off the management meeting. Galbenski laid out the facts as he saw them. Rather than look at just the next five years of growth, look at the next 20, he said. He cited a Forrester Research prediction that some 79,000 legal jobs, totaling $5.8 billion in wages, would be sent offshore by 2015. He challenged his team to be pioneers in creating a new industry, rather than stragglers racing to catch up. His team applauded. Returning to the office after the meeting, Galbenski announced the change in strategy to his 20 full-timers.

Then he and his team began plotting a global action plan. The first step was to hire a company out of Indianapolis, Analysts International, to start compiling a list of the best legal services providers in countries where people had comparatively strong English skills. The next phase was vetting the companies in person. In February 2005, just three months after the meeting in Port Huron, Galbenski found himself jetting off on a three months trip to scout potential contractors in India, Dubai, and Sri Lanka. Traveling to cities like Bangalore, Chennai and Hyderabad, he interviewed executives from more than a dozen companies, investigating their day-to-day operations firsthand.

India seemed like the best bet. With more than 500 law schools and about 200,000 law students graduating each year, it had no shortage or attorneys. What amazed Galbenski, however, was that thanks to the Web, lawyers in India had access to the same research tools and case summaries as any associate in the U.S. Sure, they didn’t speak American English. “But they were highly motivated, highly intelligent, and extremely process-oriented,” he says. “They were also eager to tackle the kinds of tasks that most new associated at law firms look down upon” such as poring over and coding thousands of documents in advance of a trial. In other words, they were perfect for the kind of document-review work he had in mind.

After a return visit to India in August 2005, Galbenski signed a contract with two legal services companies: QuisLex, in Hyderabad, and Manthan Services in Bangalore. Using their lawyers and paralegals, Galbenski figured he could cut his document-review rates to $50 an hour. He also outsourced the maintenance of the database used to store the contact information for his thousands of contractors. In all, he spent about 12 months and $250,000 readying his newly global company. Convincing U.S. based clients to take a chance on the new service hasn’t been easy. In November, Galbenski lined up pilot programs with four clients (none of which are ready to publicise their use of offshore resources). To help get the word out, he launched a website (offshore-legal-services.com), which includes a cache of white papers and case studies to serve as a resource guide for companies interested in outsourcing.

 

 

 

Questions

 

1.                    As money costs will decrease due to decision to outsource human resource, some real costs and opportunity costs may surface. What could these be?
2.                    Elaborate the external and internal economies of scale as occurring to Contract Counsel.
3.                    Can you see some possibility of economies of scope from the information given in the case? Discuss.

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   Indian Stock Market: Does it Explain Perfect Competition?

 

The stock market is one of the most important sources for corporates to raise capital. A stock exchange provides a market place, whether real or virtual, to facilitate the exchange of securities between buyers and sellers. It provides a real time trading information on the listed securities, facilitating price discovery.

Participants in the stock market range from small individual investors to large traders, who can be based anywhere in the world. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor. The other type of exchange is of a virtual kind, composed of a network of computers and trades are made electronically via traders.

By design a stock exchange resembles perfect competition. Large number of rational profit maximisers actively competing with each other, trying to predict future market value of individual securities comprises the main feature of any stock market. Important current information is almost freely available to all participants. Price of individual security is determined by market forces and reflects the effect of events that have already occurred and are expected to occur. In the short run it is not easy for a market player to either exit or enter; one cannot exit and enter for few days in those stocks which are under no delivery. For example Tata Steel was in no delivery from 29/10/07 to 02/11/07. Similarly one cannot enter or exit on those stocks which are in upper or lower circuit for few regular trading sessions. Therefore a player has to depend wholly on market price for its profit maximizing output (in this case stock of securities). In the long run players may exit the market if they are not able to earn profit, but at the same time new investors are attracted by rise in market price.

As on 01/11/07 total market capital at Bombay Stock Exchange (BSE) is $1589.43 billion (source: Business Standard, 1/11/2007); out of this individual investors account for only $100bn. In spite of the fact that individual investors exist in a very large number, their capital base is less than 7% of total market capital; rest of capital is owned by foreign institutional investor and domestic institutional investors (FIIs and DIIs), which are very small in number. Average capital owned by a single large player is huge in comparison to small investor. This situation seems to have prompted Dr Dash of BSE to comment ‘The stock market activity is increasingly becoming more centralised, concentrated and non competitive, serving interest of big players only.” Table 2 shows the impact of change in FII on National Stock Exchange movement during three different time periods.

 

Table 2: Impact of FIIs’ Investment on NSE

 

 

Wave

 

 

Date

 

 

Nifty

close

 

Change    in Nifty Index

 

FLLS Net Investment

(Rs.Cr.)

 

Change in Market Capitalisation

(Rs.Cr.)

Wave 1

From

To

 

17/05/04

26/10/05

 

1388.75

2408.50

 

 

1019.75

 

 

59520

 

 

5,40,391

Wave 2

From

To

 

27/10/05

11/05/06

 

2352.90

3701.05

 

 

1348.15

 

 

38258

 

 

6,20,248

Wave 3

From

To

 

12/05/06

13/06/06

 

3650.05

2663.30

 

 

-986.75

 

 

-9709

 

 

-4,60,149

 

By design, an Indian Stock Market resembles perfect competition, not as a complete description (for no markets may satisfy all requirements of the model) but as an approximation.

 

 

 

Questions

 

  1. Is stock market a good example of perfect competition? Discuss.
  2. Identify the characteristics of perfect competition in the stock market setting.
  3. Can you find some basic aspect of perfect competition which is essentially absent in stock market?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 5   The Indian Audio Market

 

The Indian audio market pyramid is featured by the traditional radios forming its lower bulk. Besides this, there are four other distinct segments: mono recorders (ranking second in the pyramid), stereo recorders, midi systems (which offer the sound amplification of a big system, but at a far lower price and expected to grow at 25% per year) and hi-fis (minis and micros, slotted at the top end of the market).

Today the Indian audio market is abound with energy and action as both national and international majors are trying to excel themselves and elbow the others, ushering in new concepts, like CD sound, digital tuners, full logic tape deck, etc. The main players in the Indian audio market are Philips, BPL and Videocon. Of these, Philips is one of the oldest and is considered at the leading national brands. In fact it was the first company to introduce a range of international products such as CD radio cassette recorder, stand alone CD players and CD mini hi-fi systems. With the easing of the entry barriers, a number of new international players like Panasonic, Akai, Sansui, Sony, Sharp, Goldstar, Samsung and Aiwa have also entered the arena. This has led to a sea of changes in the industry and resulted in an expanded market and a happier customer, who has access to the latest international products at competitive prices. The rise in the disposable income of the average Indian, especially the upper-income section, has opened up new vistas for premium products and has provided a boost to companies to launch audio systems priced as high as Rs. 50,000 and beyond.

 

Pricing across Segments

 

Super Premium Segment: This segment of the market is largely price-insensitive, as consumers are willing to pay a premium in order to obtain products of high quality. Sonodyne has positioned itself in this segment by concentrating on products that are too small for large players to operate in profitably. It has launched a range of systems priced between Rs. 30,000 to Rs. 60,000. National Panasonic has launched its super premium range of systems by the name of Technics.

 

Premium Segment: Much of the price game is taking place in this segment, in which systems are priced around Rs. 25,000. Even the foreign players ensure that the pricing is competitive. Entry barriers of yester years compelled the demand by this segment to be partially met by the grey market. With the opening up of the market, the premium segment is witnessing a rapid growth and is currently estimated to be worth Rs. 30 crores. Growth of this segment is also being driven by consumers who want to upgrade their old music systems. Another major stimulating factor is the plethora of financing options available, bringing more and more consumers to the market.

Philips has understood the Indian listener well enough to dictate the basic principles of segmentation. It projects its products as high quality at medium price. In fact, Philips had successfully spotted an opportunity in the wide price gap between portable cassette players and hi-fi systems and pioneered the concept of a midi system (a three-in-one containing radio, tape deck and amplifier in one unit). Philips has also realised that there is a section of the rich consumer which values not just power but also clarity and is willing to pay for it. The pricing strategy of Philips was to make the most of its image as a technology leader. To this end, it used non-price variables by launching of a range of state of art machines like the FW series, and CD players. Moreover, it came up with the punch line in its advertisements as, “We Invent For You”.

BPL stands second only to Philips in the audio market and focuses on technology as its USP. Its kingpin in the marketing mix is its high technology superior quality product. It is thus at being the product-quality leader. BPL’s proposition of fidelity is translated in its punchline for its audio systems as, ‘e-fi your imagination’ (d-fi stands for digital fidelity). The company follows a market skimming strategy. When a new product was launched, it was placed in the top end of the market, and priced accordingly. The company offers a range of products in all price segments in the market without discounting the brand.

Another major player, Videocon, has managed to price its products lower even in the premium segment. The success of the Powerhouse (a 160 watt midi launched by Philips in 1990) had prompted Videocon to launch the Select Sound range of midi stereo systems at a slightly lower price. At the premium end, Videocon is making efforts to upgrade its image to being “quality-driven” by associating itself with the internationally reputed brand name of Sansui from Japan, and following a perceived value pricing method.

Sony is another brand which is positioning itself as a premium product and charges a higher price for the superior quality of sound it offers. Unlike indulging into price wars, Sony’s ad-campaigns project the message that nothing can beat Sony in the quality and intensity of sound. National Panasonic is another player that has three products in the top end of the market, priced in the Rs. 21,000 to Rs. 32,000 range.

 

Monos and Stereos: Videocon has 21% share I the overall audio market, but has been a major player only in personal stereos and two-in-ones. Its history is written with instances where it has offered products of similar quality, but at much lower prices than its competitors. In fact, Videocon launched the Sansui brand of products with a view to transform its image from that of being a manufacturer of cheap products to that of being a company that primes quality, and also to obtain a share of the hi-fi segment. Sansui is being positioned as a premium brand, targeting the higher middle, upper income groups and also the sensitive middle class Indian consumer.

The objective of Philips in this segment is to achieve higher sales volumes and hence its strategy is to expand its range and have a product in every segment of the market. The pricing method used by Philips in this segment is providing value for money.

National Panasonic offers products in the lower end of the market, apart from the top of the range. In fact, it reduced the price of one of its small two-in-ones from Rs. 3,500 to Rs. 2,400, with the logic that a forte in the lower end of the market would help in building brand reliability across a wider customer base. The company is also guided by the logic that operating in the price sensitive region of the market will help it reach optimum levels of efficiency. Panasonic has also entered the market for midis.

These apart, there also exists a sector in the Indian audio industry, with powerful regional brands in mono and stereo segments, having a market share of 59% in mono recorders and 36% in stereo recorders. This sector has a strong influence on price performance.

 

 

Questions

 

  1. What major pricing strategies have been discussed in the case? How effective these strategies have been in ensuring success of the company?
  2. Is perceived value pricing the dominant strategy of major players?
  3. Which products have reached maturity stage in audio industry? Do you think that product bundling can be effectively used for promoting sale of these products?

 

 

 

 

 


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CONTACT:

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Consumer Behavior Marks: 100

Note: Solve any 4 Cases Study’s
CASE: I Starbucks
In 2003, Starbucks accomplished something that few companies ever do: It became a Fortune 500
company—a phenomenal achievement for a company that went public only 12 years earlier. The company
had over 6,000 stores worldwide—all company owned, as Starbucks does not franchise its outlets—and
planned to expand rapidly to over 10,000 stores.
Starbucks created not only a successful business but a thriving industry. When the company started
its massive expansion in the early 1990s, the United States had about 200 coffeehouses. In 2003 there were
over 14000 coffeehouses, the majority of them not Starbucks but mom-and –pops that bloomed after the
dawn of the $3 cup of coffee. According to a Starbucks executive, “We changed the way people live their
lives, what they do when they get up in the morning, how they reward themselves, and where they meet.
That’s more important to me than just building a company.”
More than 10 million coffee lovers spend an average of $3.60 at Starbucks weekly, and 10 percent of
them come in twice a day. Starbucks has 7 percent of the U.S. coffee-drinking market and less than 1
percent abroad, suggesting ample room for growth. The coffee market is huge; coffee is the second
most consumed drink in the world (water is first).
Starbucks’ iced beverages, which offer larger profit margins than regular drip coffee, are big sellers
in the South and Southwest. After making some adjustments, such as adding outdoor seating and couches
to stores to better serve the needs of its customers, Atlanta locations have shown double-digit sales growth.
Atlanta boasts 33 successful Starbucks, and plans for expansion are in the works. Plans for further
expansion in cities with even more Starbucks stores, such as New York City and San Francisco, are also on
the drawing board. Although 70 stores operate in New York City alone, it is estimated that growth there will
continue until 200 stores are operating in the city! As for fears of market saturation, Starbucks has none. In
fact, the java giant has two highly profitable outlets that face each other on Robson Street in Vancouver,
British Columbia. Each store has more than $1 million in annual sales. International expansion is also taking
place. In fact, the number one Starbucks in the world is located in Tokyo, and a total of 500 stores are
slated to be operational in Asia in the next three years.
What is the secret of Starbucks’ phenomenal success? According to Howard Schultz, chairman and
CEO of Starbucks Corporation, the company’s success is due to the experience created within the stores
as well as the unsurpassed quality of the coffee. A steaming café au lait must be perfectly replicated,
whether the store is in Seattle or New York City. In a world filled with people leading busy, stressful lives,
Schultz believes he has created a “third place” between home and work where people can go to get their
own personal time out or to relax with friends.
Schultz also attributes his company’s success to the 40,000 employees working worldwide.
Starbucks’ employee training program churns out “baristas” by educating 300 to 400 new hires per month in
classes such as “Brewing the Perfect Cup at Home” and “Coffee Knowledge.” Here they are taught to remind
customers to purchase new beans weekly and that tap water might not be sufficient when brewing the
perfect cup of coffee. They are also encouraged to share their feelings about coffee, selling, and working for
Starbucks. Employees are also given guidelines to maintain and enhance self-esteem, to learn how to listen
and acknowledge, and to know when to ask for help. E-mail, suggestion cards, and regular forms allow
unsatisfied workers to communicate with headquarters. If the annual barista turnover of 60 percent,
compared with 140 percent for hourly workers in the fast-food industry, is any indication of quality of its
training programs, Starbucks seems to have a handle on how to gain and maintain employee loyalty. What
about the demographic makeup of the work force? About 80 percent of the employees are white, 85 percent
have some education beyond high school, and the average is 26.
The Starbucks success story is continuing into the 21st century as the company is quickly expanding
into Europe and Asia. However, one question remains regarding the success of the company in countries
already known for their coffee-making expertise: Will such Romans and Parisians care for Starbucks?
Continued expansion and visibility has been created domestically as Starbucks has formed partnerships with
companies such as United Airlines and Barnes & Noble Booksellers, both of which draw form the same type
of knowledgeable customer.
More recently, Starbucks has opened several full-service dining establishments (Café Starbucks) in
response to customers who want more at lunch and dinner. The menu offers full meals, breads, pastries,
alcohol, and of course coffee. The company has also launched an Internet site that sells not only expensive
coffee but also pricy kitchenware, home furnishings, and gourmet food. After some skepticism by analysts
and a subsequent drop in share price, Schultz emphasized that “Every company must stick to its knitting,
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
2
understand its core competency, know what the value proposition is for the customer, and do everything
possible to get close to the customer. So you won’t see us getting far afield from what we do now” As for the
present, Starbucks is not likely to fall victim to a fad-driven society any time soon. The company seems to
be doing fine.
You can learn more about Starbucks at http://www.starbucks.com.
Question:
1. Based on the case information and your personal experiences, list at least five things you know
about Starbucks. This list offers you some idea about your cognitions concerning the coffee shop
chain.
2. List at least things you like or dislike about Starbucks. This list gives you some idea of your affect for
the coffee shops.
3. List at least five behaviors involved in buying a gourmet coffee drink from Starbucks. This list gives
you an idea of the behaviors involved in a coffee purchase.
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
3
CASE: II Barnes & Noble
For decades, bookstores were simply that—places that sold books. The typical mom-and-pop bookstore on
the corner was small, quaint, sometimes a little musty, and bursting at the seams with books. It was a
wonderful place to visit now and then, look around for a bit, find a book you like, and go home. Today that
old bookstore seems like a relic of a bygone era. Barnes & Noble’s approach to book selling has
revolutionized the entire industry.
Barnes & Noble has risen from rather ordinary beginnings to become the largest bookstore chain in
the world. Founder and CEO Leonard Riggio began his empire by purchasing a struggling Manhattan
bookstore in 1971. Riggio opened his first superstore, with 100,000 square feet of selling space, in New York
in 1975. That store was so successful that he quickly opened more superstores throughout Manhattan and
downtown Boston. The formula worked and the number of stores multiplied. In the early 1990s, the
company began spreading the superstore concept throughout the United States. Today Barnes & Noble
operates around 950 bookstores and another 426 video game and entertainment software stores. The
company boasted sales of nearly $3.5 billion and operating profit of $232 million in 1999.
Riggio took a decidedly different approach to selling books. “Shopping is a form of entertainment,”
he says. “To customers, shopping is a social activity. They do it to mingle with others in a prosperous-feeling
crowd, to see what’s new, to enjoy the theatrical dazzle of the display, to treat themselves to something
interesting or unexpected.” Riggio made sure both the layout and operation of his stores provide customers
with what they want. Barnes & Noble superstores are huge, yet clubby and inviting. They typically cover
about 25,000 square feet (some are much bigger) and offer a selection of up to 150,000 titles, compared to
10,000 to 20,000 at the typical independent book seller. Books usually are discounted 20-30 percent. But a
Barnes & Noble superstore is not defined merely by size and volume. The atmosphere is friendly, even
somewhat luxurious—almost a cross between a public library and a den. There are large, overstuffed chairs;
reading tables; background music; a coffee bar; bright lighting; and even well-maintained public restrooms.
Book-store used to discourage customers from reading in the store—spend more than a few minutes with a
book and you would have expected an employee to tap you on the shoulder and suggest that you either buy
the book or put it back. But Barnes & Noble actually wants you to pull a book or magazine off the shelf, grab
a cup of coffee, flop down on a sofa, and make yourself at home. A company spokesperson explains, “The
philosophy behind this is, the more customers we attract into the store and the longer they are encouraged
to stay, the more books we sell.” Many Barnes & Noble locations also offer a music section where the same
philosophy applies. Customers are welcome to sit down with a pair of headphones and listen to a CD before
they buy it.
Barnes & Noble also works to ensure that its superstores evolve into community meeting places.
Each store or region is staffed with a public relations coordinator who works to bring events to the store.
Live performances, readings, and book signing are common. Classes of elementary school kinds are
invited to come in and browse on a regular monthly basis. Stores even offer classes, book
discussion groups, puppet shows, and story hours for children. The long store hours (9 AM to 11
PM) also provide a compelling lure. “For people who work all day, this is their leisure time,” explains
Lisa Herling, vice president for corporate communications. “Whether it’s after a movie or after
dinner, it’s a destination location.” Riggio puts it more succinctly: “If I get you for two hours, I’ve got you.”
In 1995, a competitor with an entirely different value proposition emerged. Amazon.com began
selling books over the Internet. Barnes & Noble countered two years later with BarnesandNoble.com,
which tries to replicate the superstore experience on the Web. At the site you can participate in live
chats with authors and listen to audio from one of the many archived book readings (featuring such
renowned writers as Kurt Vonnegut, Susan Sontag, and Salmon Rushdie). Now the largest bookseller in the
U.S., BarnesandNoble.com, also offers free online courses through “Barnes & Noble University,” where you
can study subjects ranging from the humor of Shakespeare to overcoming shyness. You can even purchase a
bag of Starbucks coffee and select the music you want to hear while you’re browsing the site. Oh, yes, they
do sell books on the site, too—750,000 titles—along with music, software, and posters. BarnesandNoble.com
has attracted more than 5 million customers since 1997 and has emerged as the fourth-largest e-commerce
site on the Web. Sales were up 4.5% in 2002 as were expectations that the venture would turn a positive
cash flow soon.
Barnes & Noble’s success comes not so much from what it is selling but how it is selling it. Both
the brick-and-mortar stores and the online site provide customers with an atmosphere that turns
book buying into a warm, friendly, inviting experience.
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
4
Question:
1. What affective responses do you think the Barnes & Noble environment creates? How might
consumers’ cognitive systems interpret these responses? From a marketing perspective,
which is more important to Barnes & Noble—affect or cognition?
2. Rob goes to Barnes & Noble location to hang out and meet people. Lisa goes only when she
wants to purchase a specific book or CD. Describe how their integration processes might
convince them to choose Barnes & Noble over the myriad other options they have.
3. Many of the activities that take place at Barnes & Noble stores (or at BarnesandNoble.com)
do not require a purchase. Participating in discussion groups and going to in-store
performances are free. And obviously it doesn’t cost anything to simply go in, sit in a chair,
and read a book. So why do people buy? How do these free activities (behaviors) influence
consumers’ affect and cognition?
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
5
CASE: III Rollerblade Inc.
In 2002, in-line skating ranked among the most popular sports for children ages 6 to 17, behind basketball
and soccer, according to the Sporting Goods Manufacturers Association. About 7.5 million youths skate an
average of over 25 times per year. This is quite a change from 1980, when Minneapolis-based Rollerblade
Inc. introduced its first in-line roller skate.
Rollerblade’s founder, Scott Olson, was a hockey player with the Winnipeg Jets’ farm teams who
envisioned a roller skate with the action of an ice skate that hockey players and skiers could use to train
during the off-season. At first, the plan was to use modern materials to construct a model based on an 18-
century design. However, Olson discovered a similar in-line skate already on the market and purchased the
patent from Chicago Roller Skate Company. Olson and his brother, Brennan, perfected the design using a
plastic molded ski-type boot atop a blade of polyurethane wheels. Their first sales were to Olson’s
teammates as well as a few to sporting goods stores. Thus began the sport of blading
Although they generally cost twice as much as conventional roller skates, in-line skates are
purchased for two reasons. First, they are faster and therefore more exciting to use than conventional
skates. Second, they provide skaters with a better aerobic workout, requiring the use of more muscles.
However, it is more difficult to learn how to use in-line skates because they require greater balance and their
speeds may cause more severe injuries if a skater falls.
By 1986, wholesale sales of in-line skates had risen to $3.5 million. Recognizing an opportunity to
get in on a growing market, a number of companies began producing competitive products. First Team
Sports, Inc., also based in Minneapolis, started manufacturing its Ultra-Wheels brand skates, which included
the first in-line skates for children. Roller Derby Skate Corporation in Litchfield, Illinois, a manufacturer of
standard roller skates since 1936, produced an in-line skate with a toe-stopper for those accustomed to
conventional skates (Rollerblades had a rubber stopper located on the heel). The ice skate manufacturer
Bauer entered the market with a skate that had a leather rather than plastic boot.
Rollerblade Inc.’s sales increased when it expanded its target market. At first, the product was
targeted to hockey players, who were 95 percent male and 18 to 25 years old. However, by broadening the
target to include 18-to-35-year-old males and females, the company increased sales considerably.
By 1990, industry wholesale sales of in-line roller skates topped $50 million, which almost equaled
sales in the conventional roller skate business.
Rollerblade Inc. maintained a 66 percent market share, First Team Sports had 22 percent, Bauer had 5
percent, Roller Derby had 3 percent, and other competitors combined had the remaining 4 percent.
Rollerblade could have done better, but it could not fill store orders for several months because it ran out of
inventory early in the year. By 1998 there were 30 million in-line skaters, although growth in the number of
skaters was slowing down; skate boarding was taking off as a cool alternative.
The fierce competition in the industry involved not only product features but also marketing
elements. Companies rushed to sign celebrities to promote their products. Competitors also moved into new
retail markets, including discount and departmental stores. Rollerblade expanded its market by
selling to Macy’s and Nordstrom.
Although the name of Rollerblades may become generic term for this type of skate, the
company’s management will have to work hard to maintain its market lead. “We have been
pioneers and continue to maintain an edge,” a company spokesperson said. “You only get one shot
at pioneering a new sport, and that’s exciting.”
Question:
1. What role do you think modeling could have played in the diffusion of this innovation?
2. How could you use modeling to teach a friend how to use Rollerblades?
3. If you were designing a commercial for Rollerblades to be used for an in-store videotape
demonstration, how would you design the commercial to take advantage of your knowledge
of modeling?
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
6
CASE: IV The Saturn Family
Consumers are bombarded with advertisements and marketing hype everyday. When you log onto the
Internet, watch television, listen to radio, read a newspaper, or open your mail, you are inevitably greeted
with a plea to purchase brand X or visit store Y or website Z. In any given day, you are exposed to more
information than you can realistically process. In the 1990s, marketers began to look fresh, innovative ways
to make their companies stand out from the media clutter. Few have been as successful as General Motors’
subsidiary Saturn, whose 1994 “homecoming” of car owners has been described as “the mother of all
marketing programs.”
Saturn’s mission statement emphasizes the concept of “family.” In an industry whose history is
replete with labor conflict, Saturn has tried to erase the line between labor and management are somewhat
taboo. Regardless of their positions in the company, all Saturn boasts that no one punches a time clock and
that members of labor and management even eat in the same cafeteria! Moreover, the company expects its
employees and dealers to make customers feel like a part of the Saturn family.
According to Joe Kennedy, Saturn’s corporate vice president of sales, service, and marketing,
“Everything at Saturn hinges on our retail operations being enthusiastic about serving their
customers.” Indeed, salespeople (or, as Saturn prefers to call them, “consultants”) have gone far
out of their way to make current and potential customers happy. In one legendary story, a woman in
Wyoming was interested in purchasing a Saturn only to find that the nearest dealership was hundreds of
miles away in Salt Lake City, Utah. Not to worry. A salesperson from Salt Lake City flew to Wyoming, picked
the woman up, flew back with her to the dealership in Utah, showed her the car, and made the sale. Saturn
instituted a “no-haggle” pricing policy to reduce the traditionally antagonistic relationship between
automobile salespeople and customers. Saturn’s television ads have featured employees discussing the
family feeling at the company and actual customers sharing their own Saturn stories.
The “Saturn family” concept took hold with consumers. Soon delighted customers began
calling and writing the company’s plant in Spring Hill, Tennessee (near Nashville), to learn how they
could tour the facility and maybe meet other Saturn owners from across the country. So
management decided to spend $1 million to hold its first “homecoming” of Saturn owners and their cars the
weekend of June 24-25, 1994 in Spring Hill. It mailed out 650,000 invitations to Saturn owners and also
purchased commercial time on CBS’s late Show with David Letterman.
The response was overwhelming. About 30,000 Saturns—and their owners—made the pilgrimage.
If you were on the highway that week and saw a Saturn with an orange ball on the radio antenna,
that car was probably headed home to Tennessee. Saturn owners came from as far as Taiwan and
filled most of the 24,000 hotel rooms in the Nashville area. In fact, a dealer from Taiwan brought
home the first Saturn ever sold in that country. That car was honored with its own tent. Throughout the
weekend, car owners met members of the Saturn team, toured the plant, and shared their own Saturn
stories. The homecoming had all the trappings of an old-fashioned outdoor revival with music, dancing,
testimonials from celebrities (Olympic speed skater Dan Jansen), and food (everything from “southern
Chinese egg rolls” to barbecued catfish).
Even though two Herculean thunderstorms blew over some tents, injured a few people, and
forced the cancellation of a scheduled concert by country music star Wynonna, it didn’t seem to
dampen many folks’ spirits. Mary Taylor, age 60, was part of a 22-car caravan that trekked 1,800
miles from Nevada to Tennessee to be part of the homecoming. She couldn’t stop raving about the
dealer. “I couldn’t believe how much they cared,” Taylor said. “They know us when we walk in. It’s
such a friendly atmosphere, I look forward to going to the dealership.” Another Saturn owner
compared the weekend get-together with Woodstock: “This is another gathering in a field, except
it’s about cars, not music.” Ruth Morrissey from South Dakota perhaps summed up the weekend
best as she gushed, “We love our Saturns. We are all just a bunch of walking ads.” For those who
couldn’t make it to Spring Hill, Saturn sponsored smaller-scale get-togethers at dealerships around the
United States. An estimated 100,000 additional people attended those events.
The homecoming was just a part of Saturn’s overall strategy of making customers feel like
part of a big Saturn family. Was this approach successful? Apparently it was. Company research in
1994 showed that out of the approximately 650,000 people who owned Saturns, 80 percent planned
to buy another Saturn. Furthermore, Saturn reported that during the homecoming ad campaign (which ran
from January through June 1994), sales were up 25 percent compared to a year earlier.
Other carmakers took notice and copied Saturn homecoming model. Daimler Chrysler’s Jeep
division sponsored an event called Jeep 101 in which Jeep owners—many of whom drive exclusively
on paved urban streets—took their vehicles off-road. Mercedes-Benz of North America invited
100,000 current and potential customers to Los Angeles for an unveiling of new models. The
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
7
opportunity to ogle these pricey new automobiles—plus the lure of good food and wine—apparently
was quite compelling. So many people showed up that they had to close down a highway. In
another promotion, Mercedes invited 1 million people to “fall in love” with a new Mercedes by
attending one of a variety of special customer bonding events at local dealerships.
To be sure, Saturn has had its share of problems since that first homecoming event in 1994.
Some critics have sniped at Saturn’s boring styling and limited choice of models. Others believe
Saturn has slipped compared to other carmakers in terms of performance and reliability. Sales of
the L-series mid-size car were very disappointing, which forced production slowdowns and lay-offs
in 2000. In addition, the harmonious relationship between labor and management hit a snag when
Saturn’s 7,000 unionized employees began to express dissatisfaction with their special labor
agreement with the carmaker. Seeing a problem, General Motors in 2000 pledged to invest $1.5
billion to expand the Spring Hill facility and provide Saturn with a SUV and a redesigned compact
car in time for the 2002 model year. (To check out Saturn’s current model line and other company
information, visit the company’s website at www.saturn.com.
But make no mistake, Saturn’s innovative marketing efforts have accomplished their goal.
Even with the recent problems, surveys reveal that most consumers—especially younger people—
still believe Saturn is, as its ad campaign declares, “a different kind of car company.” In 1999,
Saturn held another large, successful homecoming and many industry experts believe that with new
models in the offing, Saturn can regain the momentum it had in the mid-1990s.
Question:
1. Visit the Saturn website and try to determine the market segments the carmaker is targeting. What
should Saturn do to better serve those segments? How might Saturn tailor its offerings to address
the different stages of the family life cycle?
2. Other vehicles—such as Porsches, Mustangs, and Harley-Davidson motorcycles—also have
“cult” followings. But these products also have very strong symbolic meanings associated
with them. The Saturn is a solid and reliable, but basically unspectacular, car. Identify and
discuss three reasons that you think Saturn has such a devoted following of involved
customers.
3. An automobile is a high-involvement purchase. Discuss how the manufacturer of a lower-cost,
lower-involvement product could generate greater personal relevance and long-term
loyalty. Find and discuss an example of a company that has done so.
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
8
CASE: V Harley-Davidson, Inc.
Harley-Davidson, Inc., founded in 1903, is the only remaining American motorcycle manufacturer,
although there are some new upstart companies. During the 1950s and 1960s, Harley-Davidson has
virtual monopoly on the heavyweight motorcycle market. Japanese manufacturers entered the
market in the 1960s with lightweight motorcycles backed by huge marketing programs that
increased demand for motorcycles. These manufacturers, which included Honda, Kawasaki, Suzuki,
and Yamaha, eventually began building larger bikes that competed directly with Harley-Davidson.
Recognizing the potential for profitability in the motorcycle market, American Machine and
Foundry (AMF, Inc.) purchased Harley-Davidson in 1969. AMF almost tripled production to 75,000 units
annually over a four-year period to meet increased demand. Unfortunately, product quality deteriorated
significantly.
More than half the cycles came off the assembly line missing parts, and dealers had to fix them to
make sales. Little money was invested in improving design or engineering. The motorcycles leaked oil,
vibrated badly, and could not match the excellent performance of the Japanese products. Although hard-core
motorcycle enthusiasts were willing to fix their Harleys and modify them for better performance, new
motorcycle buyers had neither the devotion nor the skill to do so.
In late 1975, AMF put Vaughn Beals in charge of Harley-Davidson. Beals set up a quality control and
inspection program that began to eliminate the worst of the production problems. However, Beals and the
other senior managers recognized that it would take years to upgrade the quality and performance of their
products to compete with the faster, high-performance of their products to compete with the faster, highperformance
Japanese bikes.
To stay in business while the necessary changes in design and product were being
accomplished, the executives turned to William G. Davidson, Harley’s styling vice president. Known
as “Willie G.” and a grandson of one of the company founders, he frequently mingled with bikers
and, with his beard, black leather, and jeans, was accepted by them. Willie G. understood Harley
customers and noted:
They really know what they want on their bikes: the kind of instrumentation, the style of bars., the
cosmetics of the engine, the look of the exhaust pipes, and so on. Every little piece on a Harley is exposed,
and it has to look just right. A tube curve or the shape of a timing case can generate enthusiasm or be a
total turnoff. It’s almost like being in the fashion business.
Willie G. designed a number of new models by combining components form existing models.
These included the Super Glide, the Electra Glide, the Wide Glide, and the Low Rider. Although
these were successful, Harley-Davidson was still losing market share to Japanese competitors that
continued to pour new bikes into the heavyweight Market.
By 1980, AMF was losing interest in investing in the recreational market and sold the
company to 13 senior Harley executives in a leveraged buyout on June 16, 1981. Although the company
was starting to make money in the early 1980, its creditors wanted payment, and Harley-Davidson nearly
had to file for bankruptcy at the end of 1985. However, through some intense negotiations, it stayed in
business and rebounded to become a highly profitable company.
In 1996, Harley-Davidson controlled more than 47 percent of the heavyweight (651cc and larger)
motorcycle market, far more than its all-time low of 23 percent. Its products are considered to have
“bulletproof reliability” because of manufacturing and management changes that resulted in products of
excellent quality.
Owners of Harleys are highly brand loyal, and more than 94 percent of them state they would buy
another Harley. The company sponsors the Harley Owner Group (HOG), which has more than 1,200 chapters
and 750,000 members worldwide. Executives of the company frequently meet with chapters to obtain
suggestions for product improvements.
In 2002, Harley sold 215,454 motorcycles domestically and 48,199 in the global market. It also
sold 10,943 Buell motorcycles in that year. Its net revenue for 2002 was over $4 trillion, about
double its 1998 net revenue. Its net income for 2002 was $580 million compared to $213 million 5
years earlier. In 2003, its 100th anniversary product line included 7 Softail models, 7 Sportster
models, 5 Dynaglide models, and 7 Touring models. In addition, its VRSCA V-Rod, a new-style,
$17,000 Harley was selling quickly even though it was a departure for the retro look of traditional Harleys.
Harley-Davidson motorcycles are distributed worldwide by a network over 1,300 dealers. These
dealers typically have upgraded facilities that merchandise not only motorcycles and service but also a
variety of parts, clothing, and accessories. Clothing and accessories are highly profitable items that
enhance the motorcycle-owning and riding experience. For more information, visit the company’s
website at www.Harley-Davidson.com.
The Indian Institute of Business Management & Studies
SUBJECT: Consumer Behavior Marks: 100
9
Question:
1. What kind of consumer owns a Har ley?
2. What accounts for Har ley owners’ sat is fact ion and brand loyal ty?
3. What role do you think the Har ley Owner Group plays in the suc cess of the
company?


IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

IIBMS EXAM QUESTION AND ANSWERS PROVIDED WHATSAPP 91 9924764558

CONTACT:

DR. PRASANTH BE BBA MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521 EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com

 

Attempt Any Four Case Study

Case Study 1 : Structuring global companies

 

As the chapter illustrates, to carry out their activities in pursuit of their objectives, virtually all organisations adopt some form of organisational structure. One traditional method of organisation is to group individuals by function or purpose, using a departmental structure to allocate individuals to their specialist areas (e.g. Marketing, HRM and so on ). Another is to group activities by product or service, with each product group normally responsible for providing its own functional requirements. A third is to combine the two in the form of a matrix structure with its vertical and horizontal flows of responsibility and authority, a method of organisation much favoured in university Business Schools.

What of companies with a global reach: how do they usually organise them-
selves?

Writing in the Financial Times in November 2000 Julian Birkinshaw, Associate Professor of Strategic and International Management at London Business School, identifies four basic models of global company structure:

  • The International Division – an arrangement in which the company establishes a
    separate division  to  deal  with  business  outside  its  own  country.  The
    International Division would typically be concerned with tariff and trade issues,
    foreign agents/partners and other aspects involved in selling overseas. Normally
    the division does not make anything itself, it is simply responsible for interna-
    tional sales. This arrangement tends to be found in medium-sized companies
    with limited international sales.

The Global Product Division – a product-based structure with managers responsible
for their product line globally. The company is split into a number of global busi-
nesses arranged by product (or service) and usually overseen by their own
president. It has been a favoured structure among large global companies such as
BP, Siemens and 3M.

  • The Area Division – a geographically based structure in which the major line of
    authority lies with the country (e.g. Germany) or regional (e.g. Europe) manager who
    is responsible for the different product offerings within her/his geographical area.
    ● The Global Matrix – as the name suggests a hybrid of the two previous structural
    types. In the global matrix each business manager reports to two bosses, one
    responsible for the global product and one for the country/region. As we indi-
    cated in the previous edition of this book, this type of structure tends to come
    into and go out of fashion. Ford, for example, adopted a matrix structure in the
    later 1990s, while a number of other global companies were either streamlining
    or dismantling theirs (e.g. Shell, BP, IBM).

As Professor Birkinshaw indicates, ultimately there is no perfect structure and organisations tend to change their approach over time according to changing circumstances,  fads,  the  perceived  needs  of  the  senior  executives  or  the predispositions of powerful individuals. This observation is no less true of universities than it is of traditional businesses.

Case study questions

  1. Professor Birkinshaw’s article identifies the advantages and disadvantages of being a global business. What are his major arguments?

 

  1. In your opinion what are likely to be the key factors determining how a global company will organise itself?

 

Attempt Any Four Case Studies

Case I

PROVIDE ADVICE TO AN ENTREPRENEUR ABOUT INTELLECTUAL PROPERTY PROTECTION

 

Locked doors and a security system protect your equipment, inventory and payroll. But what protects your business’s most valuable possessions? IP laws can protect your trade secrets, trademarks and product design, provided you take the proper steps. Chicago attorney Kara E.F. Cenar of Welsh and Katz, an IP firm, contends that businesses should start thinking about these issues earlier than most do. “Small businesses tend to delay securing IP protection because of the expense,” Cenar says. “They tend not to see the value of IP until a competitor infringes.” But a business that hasn’t applied for copyrights or patents and actively defended tem will likely have trouble making its case in court.

 

One reason many business owners don’t protect their intellectual property is that they don’t recognize the value of the intangibles they own. Cenar advises business owners to take their business plans to an experienced IP attorney and discuss how to deal with these issues. Spending money upfront for legal help can save a great deal later by giving you strong copyright or trademark rights, which can deter competitors from infringing and avoid litigation later.

 

Once you’ve figured out what’s worth protecting, you have to decide how to protect it. That isn’t always obvious. Traditionally, patents prohibit others from copying new devices and processes, while copyrights do the same for creative endeavors such as books, music and software. In many cases, though, the categories overlap. Likewise, trademark law now extends to such distinctive elements as a product’s color and shape. Trade dress laws concerns how the product is packaged and advertised. You might be able to choose what kind of protection to seek.

For instance, one of Welsh & Katz’s clients is Ty Inc., maker of plush toys. Before launching the Beanie Baby line, Cenar explains, the owners brought in business and marketing plans to discuss IP issues. The plan was for a limited number of toys in a variety of styles, and no advertising except word-of-mouth. Getting a patent on a plush toy might have been impossible and would have taken several years, too long for easily copied toys. Trademark and trade dress protection wouldn’t help much, because the company planned a variety of styles. But copyrights are available for sculptural art, and they’re inexpensive and easy to obtain. The company chose to register copyrights and defend them vigorously. Cenar’s firm has fended off numerous knockoffs.

 

That’s the next step: monitoring the market-place for knockoffs and trademark infringement, and taking increasingly firm steps to enforce your rights. Efforts typically begin with a letter of warning and could end with a court-ordered cease-and-desist order or even an award of damages. “If you don’t take the time to enforce [your trademark], it becomes a very weak mark,” Cenar says. But a strong mark deters infringement, wins lawsuits and gets people to settle early.” Sleep on your rights, and you’’’ lose them. Be proactive, and you’ll protect them – and save money in the long run.

An inventor with a newly invented technology comes to you for advice on the following matters:

 

Questions:

 

  1. In running this new venture, I need to invest al available resources in producing the products and attracting customers. How important is it for me to divert money from those efforts to protect my intellectual property?

 

  1. I have sufficient resources to obtain intellectual property protection, but how effective is that protection without a large stock of resources to invest in going after those that infringe on my rights? If I do not have the resources to defend a patent, is it worth obtaining one in the first place?

 

  1. Are there circumstances when it is better for me not to be an innovator but rather produce “knock-offs” of other innovations?

 

 

Case II – Provide advice to an entrepreneur about firing employees

 

Firing an employee is a messy business. Just the thought of having to recruit, train and manage a new sales soul is enough to keep some sales managers from following through with the task. But holding on to a salesperson who’s not performing or who’s disruptive to the team is guaranteed to exacerbate matters down the road. But how do you know when it’s time to say “you’ve gotta go”? It’s simple, according to Tricia Timkin: “Lack of production, lack of production, lack of production,” says the president of Padigent, a Carol Stream, Illinois, human resources consulting firm for emerging companies.

 

Dave Anderson, president of Dave Anderson’s Learn to Lead, concurs that performance is one criterion for firing. Anderson, whose Los Altos, California, company offers sales, management and leadership consulting, thinks reps who are “dishonest, selfish or disrespectful” should face the axe.

 

You may fear firing a rep will cause a morale dip in the troops. After all, someone’s buddy is getting shown the door. But making a tough choice can bolster the spirits of your sales squad. Says Tamkin: “Firing can positively affect morale [because] it sends a message that the company will take strong measures to ensure the success of the organization. Poor performers lower the morale of the team, and they continually break momentum and diminish the credibility of the sales manager.

Before firing, however, steps must be taken to legally protect your business. It’s crucial that the employee has been warned in advance in writing. Coaching sessions with failing sales people will help protect you when it comes time to separate. Tamkin advises that documentation must be developed in advance of the firing, and that when it comes time for the employee to go, the manger should conduct an exit interview. Though firing will never be a savory part of a manager’s job description, it’s short – term pain for long – term gain. “Managers have to realize that when they keep the wrong person,” Anderson says, “there’s more damage to the company than just lack of production.”

 

Here are some firing guidelines from William Skip Miller’s ProActive Sales Management (AMACOM):

  1. Never in your office: if it’s your office, you can’t leave if the employee wants to stay and talk.
  2. Short and Sweet: As you walk in the door, say, “The reason I’m here is to tell this is your last day of employment with this company.” Just get it out.
  3. Never on a Friday: If fired on a Friday, the employee can’t start the process of feeling good. All he or she can do is stew about it over the weekend.
  4. Outside help: If the employee says he or she has consulted an attorney or other legal counsel, stop the conversation immediately and consult your HR department or attorney, whoever helped you draft your company policy.
  5. No hanging around: Personal effects can be retrieved, but have the person leave the building.

 

Advice to an entrepreneur:

An entrepreneur, whose business has stopped growing, has read the above article and comes to you for advice:

 

  1. Gee, these managers discussed in the article are a bit rough. Even if one particular person is not producing as expected, doesn’t this person still deserve to be treated with respect?

 

  1. It appears that the automatic assumption is that the employee is at fault for not performing and therefore should be fired. But shouldn’t the responsibility fall on me as the manager and the system that I have introduced? Maybe the person is performing as well as the situation allows?

 

  1. How am I to build team spirit within my small company when I single out one person for lack of production and fire him or her?


Case III – Provide advice to an entrepreneur about small business investment companies

 

It started out as a straightforward consulting project for Mahendra Vora and research partner Sundar Kadaya. They were analyzing software trends and perusing market research studies to assess the size of various software markets. But after spending 40 hours looking for information that should have taken 10 minutes to access, the pair concluded that more advanced tools were needed to search the internet and databases of public information. Within months, they launched Intelliseek Inc., providing software to capture, track and analyze information for use in strategic planning, market research, product development and brand marketing. Vora, 39, was no stranger to start-ups. By the time he co-founded Intelliseek in 1997, he already had three business launches under his belt. He sold all three to Fortune 500 firms, providing capital for Intelliseek. His initial investment of a few million dollars supported operations the first couple of years and through two major product launches.

 

By 1999, the Cincinnati Company was laying the groundwork for its first round of venture capital.Vora had had two years to contemplate his dream investor. Foremost, size did matter: The venture capitalist should have the wherewithal for ongoing financing, but not be so large that it shunned all but elaborate business models. Finding an investor with a broad network of investing partners also was important to the $10million company. “If you become wildly successful and plan to raise $50 million someday, then [the investor] should have access to the big investors. The network is also important because it can [introduce] you to customers,” says Vora, whose clients include CBS, Ford Motor Co. and Nokia. Finally, Vora was looking for operational experience. “A lot of VCs are phenomenal in advising you about what to do, but they’ve never done it themselves,” he observes. Vora ultimately found his venture match in Cincinnati-based River Cities Capital Funds, a small business investment company. While River Cities was not large, it was well-connected and managed by industry veterans with extensive professional experience.

 

Starting Small

Licensed and regulated by the SBA, SBICs are generally organized and operated like any other venture capital fund. But unlike traditional funds, SBICs use their own capital and long-term loans to small companies. On the whole, SBICs tend to be more risk-tolerant than banks or traditional venture capitalists….Inteliseek’s SBIC banker removed barriers to reaching larger, mainstream investors. Led by river cities capital funds, the initial $6 million investment included capital from the venture arm of Nokia; later investors included Ford Motor Co. and General Atlantic Partners LLC. “once you get a VC like River Cities, it is much easier to get access to bigger VCs,” says Vora. “They can go to VCs and say ‘One of our companies is doing so well, we’re going to put in more money, and you guys should come in’.”

Down But Not Out

SBICs invested roughly $2.8 billion in about 2,100 companies in the 12-month period ending September 30, 2002 down from $4.6 billion invested in 2,254 companies in the same period one year earlier. Like mainstream investors, they have had to adjust to deteriorating economic conditions.  “Valuations have come down on deals, and due diligence periods have increased,” says Patrick Hamner, vice resident of Capital Southwest Corp., a Dallas-based SBIC. “People are being far more discriminating in how they invest their capital.”

“The bar has been raised even more for small businesses trying to get capital,” he continues. “As opposed to the overall venture industry, which has had a very marked decline in financing activity, SBICs are down but still active.”

Nor has quality been an overriding concern, even as SBICs engage in riskier deals than their mainstream counterparts. “Part of what has happened with the bursting of the bubble is that the ideas being proposed are based on more substantive models,” says Edwin Robinson, managing director of River Cities Capital Funds. “A lot of the excess is being wrung out the system.” While the venture shakeup has impacted conventional the way some SBICs operate. “During the bubble years, there was probably more of an inclination to overfund,” says NASBICs Mercer. “I don’t mean in  the sense that money might not be justified, but to make the unconditional investment. I suspect that what you’re seeing now is a lot more investing on a milestone basis.” For instance, a company that requires $3 million over three years is likely to receive $1 million upfront, getting the rest after meeting revenue and growth targets. Fewer venture dollars, coupled with the banking industry’s reticence to lend to small businesses, has contributed to an overall capital shortage, adds Mercer. “Banks that had been out a little bit further on the risk curve than they probably normally do,” he says. “The banks’ own proclivity and the regulators kind of forced a pullback, so there has been a tremendous pullback in bank credit availability even for small businesses that have had long time banking relationships.”

 

The SBIC program, meanwhile, is attracting mainstream investors having difficulty raising capital for venture-backed investments. The increased interest bodes well for the small firms that SBICs target: companies with a net worth of less than $18 million and average after-tax earning of less than $6 million for the past two years.

 

Advice to an entrepreneur

An entrepreneur, who is an owner manager of a small business and looking to raise $4,00,000, has read the above article and comes to you for advice:

  1. What are the advantages of going to an SBIC over and above a business angle or venture capitalist?
  2. What are the disadvantages and how can they be minimized?


Case IV -Provide advice to an entrepreneur about being more innovative

 

When Neil Franklin began offering round-the-clock telephone customer service in 1998, customers loved it. The offering fit the strategic direction Franklin had in mind for Dataworkforce, his Dallas-based telecommunications – engineer staffing agency, so he invested in a phone system to route after hours calls to his 10 employees’ home and mobile phones. Today, Franklin, 38, has nearly 50 employees and continues to explore ways to improve Dataworkforce’s service. Twenty-four-hour phone service has stayed, but other trials have not. One failure was developing individual Web sites for each customer. “We took it too far and spent $30,000 then abandoned it,” Franklin recalls. A try at globally extending the brand by advertising in major world cities was also dropped. “It worked pretty well,” Franklin says, “until you added up the cost.”

Franklin’s efforts are similar to an approach called “portfolios of initiatives” strategy. The idea, according to Lowell Bryan, a principal in McKinney & Co., the NYC consulting firm that developed it, is to always have a number of efforts underway to offer new products and services, attack new markets or otherwise implement strategies, and to actively manage these experiments so you don’t miss an opportunity or over commit to an unproven idea.

 

The portfolio of initiatives approach addresses a weakness of conventional business plans-that they make assumptions about uncertain future developments, such as market and technological trends, customer responses, sales and competitor reactions. Bryan compares the portfolio of initiatives strategy to the ship convoys used in World War II to get supplies across oceans. By assembling groups of military and transport vessels and sending them in a mutually supportive group, planners could rely on at least some reaching their destination. In the same way, entrepreneurs with a portfolio of initiatives can expect some of them to pan out.

 

Making a Plan

Three steps define the portfolio of initiatives approach. First, you search for initiatives in which you have or can readily acquire a familiarity advantage – meaning you know more than competitors about a business. You can gain familiarity advantage using low-cost pilot programs and experiments, or by partnering with more knowledgeable allies. Avoid business in which you can’t acquire a familiarity advantage, Bryan says.

After you identify familiarity-advantaged initiatives, began investing in them using a disciplined, dynamic management approach. Pay attention to how initiatives relate to each other. They should be diverse enough that the failure of one wont endanger the others, but should also all fit into your overall strategic direction. Investments, represented by product development efforts, pilot programs, market tests and the like, should start small and increase only as they prove themselves. Avoid over investing before initiatives have proved themselves. The third step is to pull the plug on initiatives that aren’t working out, and step up investment in others. A portfolio of initiatives will work in any size company. Franklin pursues 20 to 30 at any time, knowing 90 percent wont pan out, “The main idea is to keep those initiatives running,” he says. “If you don’t, you’re slowing down.”

 

Advice to an entrepreneur

An entrepreneur, who wants his firm to be more innovative, has read the above article and come to you for advice:

 

  1. This whole idea of experimentation seems to make sense, but all those little failures can add up, and if there enough of them, then this could lead to one big failure-the business going down the drain. How can I best get the advantages of experimentation in terms of innovation while also reduction the costs so that I don’t run the risk of losing my business?
  2. My employees, buyers, and suppliers like working for my company because we have a lot of wins. I am not sure how they will take it when our company begins to have a lot more failures (even if those failures are small)- it is a psychological thing. How can I handle this trade-off?
  3. Even if everyone else accepts it, I am not sure how I will cope. When projects fail it hits me pretty hard emotionally. Is it just that I am not cut out for this type of approach?

 

 

 

Case V – PROVIDE ADVICE TO AN ENTREPRENEUR ABOUT NONTRADITIONAL FINANCING

 

When Lissa D’Aquanni created a gourmet chocolate business in her Albany, New York, basement in 1998, she had not only a passion for candy-making, but also a knack for spurring citizen involvement. The former nonprofit executive had worked for women’s advocacy groups, most recently promoting breast cancer awareness. If there was one thing she knew, it was how to rally community support.

 

Her ability to leverage local resources would be invaluable as she made her business a fixture of her Albany neighborhood. And in no area were those skills as critical as in financing last year, D’Aquanni wanted to move her business, the chocolate Gecko, to an abandoned building three blocks away, she needed $25,000.” Volunteers also helped renovate the building, cutting project costs form an estimated $3,00,000.

 

Check out D’Aquanni’s unorthodox and creative financing plan: An economic development group, the Albany Local Development Corp., loaned her $95,000 to buy the building. D’Aquanni obtained a $1,00,000 government guaranteed loan from a local credit union to renovate the structure. Façade improvements were funded through a matching grant program to encourage commercial development in Albany. A local community development financial institution used a state program to fund energy-efficient upgrades, including new windows, light fixtures, furnaces and siding. Says D’Aquanni, “ There were lots of different pieces of the puzzle to identify and figure out how to access.”

 

Conventional financing wasn’t an option. “I was looking at a business that did about $44,000 in sales doing a $260,000 project, and the traditional funders were apprehensive,” explains D’Aquanni, 37. They urged her to rent a storefront rather than buy the rundown building. Undeterred, D’Aquanni met with a neighborhood group to develop her expansion plan. It wasn’t the first time the community had helped out. In 1999, the cashstrapped chocolatier needed molds and a temperer for the Christmas rush. Recalling a strategy she had seen in a magazine, she sold discounted gift certificates to raise capital. D’Aquanni offered customers $25 in free chocolates for every $100 in gift certificates purchase. “A lot of folks mailed them as gifts to friends, family and co-workers,” D’Aquanni says. “ And most of those people ordered chocolates. My customer base expanded.”

 

Indeed, many entrepreneurs successfully launch a business only to encounter funding hardships as they attempt to grow. The ability to think outside the box, experts say, is critical for firms short on funding. “There are pockets of money out there, whether it be municipalities, counties, chambers of commerce,” says Bill Brigham, Director of the Small Business Development Center in Albany. “Those are the loan programs that no one seems to have information about. A lot of these programs will not require the collateral and cash that is typical of traditional [loans]. They may be a little more lenient as far as credit history goes. That’s one of the key roles we can play-what entrepreneur is going to think [he or she] can qualify for HUD money?

 

Advice to an entrepreneur

 

An entrepreneur, who is looking to expand but has limited access to traditional financing, has read the above article and comes to you for advice:

 

  1. I want to find a little pot of gold like Lissa D’Aquanni. Where should I look?
  2. I like the gift certificate idea to raise money and build my business. What other types of products do you think that approach will work for?
  3. Over the years I have paid a lot of taxes. Should I feel guilty for accessing government – subsidized monies to build my business, or should I feel justified?

 

 

CASE – 2   GREAVES LIMITED

 

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of high technology engineering products and systems. The company’s mission is “manufacture and market a wide range of high quality products, services and systems of world class technology to the total satisfaction of customers in domestic and overseas market.”

Over the years Greaves has brought to India state of the art technologies in various engineering fields by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the company’s share has shown ups and downs during 1990 to 1997. How has the company performed? The following question need answer to fully understand the performance of the company:

 

Exhibit 1

 

GREAVES LTD.

Profit and Loss Account ending on 31 March          (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
Sales

Raw Material and Stores

Wages and Salaries

Power and fuel

Other Mfg. Expenses

Other Expenses

Depreciation

Marketing and Distribution

Change in stock

214.38

170.67

13.54

0.52

0.61

11.85

1.85

4.86

1.18

253.10

202.84

15.60

0.70

0.49

15.48

1.72

5.67

3.10

287.81

230.81

18.03

1.11

0.88

16.35

1.52

5.14

4.93

311.14

213.79

37.04

3.80

2.37

25.54

4.62

5.17

0.48

354.25

245.63

37.96

4.43

2.36

31.60

5.99

9.67

– 1.13

521.56

379.83

48.24

6.66

3.57

41.40

8.53

10.81

5.63

728.15

543.56

60.48

7.70

4.84

45.74

9.30

12.44

11.86

801.11

564.35

69.66

9.23

5.49

48.64

11.53

16.98

– 5.87

Total Op Expenses 202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75
 

Operating Profit

Other Income

Non-recurring Income

 

11.61

2.14

1.30

 

13.70

3.69

2.28

 

18.90

4.97

0.10

 

19.29

4.24

10.98

 

15.48

7.72

16.44

 

28.15

14.35

0.46

 

55.95

11.35

0.52

 

69.36

13.08

1.75

PBIT   15.10   19.67   23.97   34.51   39.64   42.98   65.67   82.64
Interest     5.56     6.77   11.92   19.62   17.17   21.48   28.25   27.54
PBT     9.54   12.90   12.05   14.89   22.47   21.50   37.42   55.10
Tax

PAT

Dividend

Retained Earnings

    3.00

6.54

1.80

4.74

    3.60

9.30

2.00

7.30

    4.90

7.15

2.30

4.85

    0.00

14.89

4.06

10.83

    4.00

18.47

7.29

11.18

    7.00

14.50

8.58

5.92

    8.60

28.82

12.85

15.97

  15.80

39.30

14.18

25.12

 

Exhibit 2

 

GREAVES LTD.

Balance Sheet                                (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
ASSETS

Land and Building

Plant and Machinery

Other Fixed Assets

Capital WIP

Gross Fixed Assets

Less: Accu. Depreciation

Net Tangible Fixed Assets

Intangible Fixed Assets

 

3.88

11.98

3.64

0.09

19.59

12.91

6.68

0.21

 

4.22

12.68

4.14

0.26

21.30

14.56

6.74

0.19

 

4.96

12.98

4.38

10.25

23.57

15.79

7.78

0.05

 

21.70

33.49

5.18

11.27

71.64

19.84

51.80

4.40

 

30.82

50.78

6.95

34.84

123.39

25.74

97.65

22.03

 

39.71

75.34

8.53

14.37

137.95

33.90

104.05

22.45

 

42.34

92.49

8.87

13.92

157.62

42.56

115.06

20.04

 

43.07

104.45

10.35

14.36

172.23

53.87

118.86

21.11

Net Fixed Assets     6.89     6.93     7.83   56.20 119.68 126.50 135.10 139.97
 

Raw Materials

Finished Goods

Inventory

Accounts Receivable

Other Receivable

Investments

Cash and Bank Balance

Current Assets

Total Assets

LIABILITIES AND CAPITAL

Equity Capital

Preference Capital

Reserves and Surplus

 

5.26

29.37

34.63

38.16

32.62

3.55

8.36

117.32

124.21

 

9.86

0.20

27.60

 

6.91

33.72

40.63

53.24

40.47

14.95

8.91

158.20

165.13

 

9.86

0.20

32.57

 

7.26

38.65

45.91

67.97

49.19

15.15

12.71

190.93

198.76

 

9.86

0.20

37.42

 

21.05

53.39

74.44

93.30

24.54

27.58

13.29

233.15

289.35

 

18.84

0.20

100.35

 

28.13

52.26

80.39

122.20

59.12

73.50

18.38

353.59

473.27

 

29.37

0.20

171.03

 

44.03

58.09

102.12

133.45

64.32

75.01

30.08

404.98

531.48

 

29.44

0.20

176.88

 

53.62

69.97

123.59

141.82

76.57

75.07

33.46

450.51

585.61

 

44.20

0.20

175.41

 

50.94

64.09

115.03

179.92

107.31

76.45

48.18

526.89

666.86

 

44.20

0.20

198.79

Net Worth   37.66   42.63   47.48 119.39 200.60 206.52 219.81 243.19
Bank Borrowings

Institutional Borrowings

Debentures

Fixed Deposits

Commercial Paper

Other Borrowings

Current Portion of LT Debt

  14.81

4.13

4.77

12.31

0.00

2.33

0.00

  19.45

3.43

16.57

14.45

0.00

3.22

0.00

  26.51

9.17

19.99

15.03

0.00

3.10

0.08

  24.82

38.09

4.56

14.08

0.00

3.18

0.12

  55.12

38.76

4.37

15.57

15.00

17.08

15.08

  64.97

69.69

4.37

17.75

0.00

1.97

0.02

  70.08

89.26

2.92

20.81

0.00

2.36

1.49

118.28

63.60

1.49

19.29

0.00

2.57

1.57

Borrowings   38.35   57.12   73.72   84.61 130.82 158.73 183.94 203.66
Sundry Creditors

Other Liabilities

Provision for tax, etc.

Proposed Dividends

Current Portion of LT Dept

  37.52

5.70

3.18

1.80

0.00

  49.40

10.16

3.82

2.00

0.00

  59.34

10.70

5.14

2.30

0.08

  77.27

3.59

0.31

4.06

0.12

113.66

1.42

4.40

7.29

15.08

148.13

1.99

7.70

8.58

0.02

153.63

1.70

12.19

12.85

1.49

179.79

3.04

21.43

14.18

1.57

Current Liabilities   48.20   65.38   77.56   85.35 141.85 166.42 181.86 220.01
TOTAL LIABILITIES

Additional information:

Share premium reserve

Revaluation reserve

Bonus equity capital

124.21

 

 

 

8.51

165.13

 

 

 

8.51

198.76

 

 

 

8.51

289.35

 

47.69

8.91

8.51

473.27

 

107.40

8.70

8.51

531.67

 

107.91

8.50

8.51

585.61

 

93.35

8.31

23.25

666.86

 

93.35

8.15

23.25

 

Exhibit 3

 

GREAVES LTD.

Share Price Data

    1990 1991 1992 1993 1994 1995 1996 1997
 Closing share price (Rs)

Yearly high share price (Rs)

Yearly low share price (Rs)

Market capitalization (Rs crore

EPS (Rs)

Book value (Rs)

  27.19

29.25

26.78

65.06

4.79

35.64

34.74

45.28

21.61

67.77

6.82

37.22

121.27

121.27

34.36

236.56

9.73

42.54

  66.67

126.33

48.34

274.84

1.93

57.75

  78.34

90.00

42.67

346.35

2.66

40.61

  71.67

100.01

68.34

316.87

7.16

64.98

  47.5

90.00

45.00

210.02

5.03

45.35

  48.25

85.00

43.75

213.34

9.01

50.73

 

 

 

 

Questions

 

  1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?
  2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?
  3. How has Greaves performed in terms of return on equity? What is the contribution of return on investment, the way of the business has been financed over the period?

 

CASE – 3   The New Frontier for Fresh Foods Supermarkets

 

Fresh Foods Supermarket is a grocery store chain that was established in the Southeast 20 years ago. The company is now beginning to expand to other regions of the United States. First, the firm opened new stores along the eastern seaboard, gradually working its way up through Maryland and Washington, DC, then through New York and New jersey, and on into Connecticut and Massachusetts. It has yet to reach the northern New England states, but executives have decided to turn their attention to the Southwest, particularly because of the growth of population there.

Vivian Noble, the manager of one of the chain’s most successful stores in the Atlanta area, has been asked to relocate to Phoenix, Arizona, to open and run a new Fresh Foods Supermarket. She has decided to accept the job, but she knows it will be a challenge. As an African American woman, she has faced some prejudice during her career, but she refuses to be stopped by a glass ceiling or any other barrier. She understands that she will be living and working in an area where several cultures combine and collide, and she will be hiring and managing a diverse workforce. Noble has the support of top management at Fresh Foods, which wants the store to reflect the surrounding community—in both staff makeup and product selection. So she will be looking to hire employees with Hispanic and Native American roots, as well as older workers who can relate to the many retired residents in the area. And she will be seeking their inputs on the selection of certain food products, including ethnic brands, so that customers know they can buy what they need and want a Fresh Foods.

In addition, Noble wants to make sure that Fresh Foods provides services above and beyond those of a standard supermarket to attract local consumers. For instance, she wants the store to offer free delivery of groceries to home-bound customers who are either senior citizens or physically disabled. She wants to be sure that the store has enough bilingual employees to translate for and otherwise assist customers who speak little or no English. Noble believes that she is a pioneer of sorts, guiding Fresh Foods Supermarkets into a new frontier. “The sky is almost blue here,” she says of her new home state. “And there’s no glass ceiling between me and the sky.”

 

 

 

Questions

 

  1. What steps can Vivian Noble take to recruit and develop her new workforce?
  2. What other ways can Noble help her company reach out to the community?
  3. How will Fresh Foods Supermarkets as whole benefit from successfully moving into this new region of the country?

CASE: II    Doing The Dirty Work

 

Business magazines and newspapers regularly publish articles about the changing nature of work in the United States and about how many jobs are being changed. Indeed, because so much has been made of the shift toward service-sector and professional jobs, many people assumed that the number of unpleasant an undesirable jobs has declined.

In fact, nothing could be further from the truth. Millions of Americans work in gleaming air-conditioned facilities, but many others work in dirty, grimy, and unsafe settings. For example, many jobs in the recycling industry require workers to sort through moving conveyors of trash, pulling out those items that can be recycled. Other relatively unattractive jobs include cleaning hospital restrooms, washing dishes in a restaurant, and handling toxic waste.

Consider the jobs in a chicken-processing facility. Much like a manufacturing assembly line, a chicken-processing facility is organised around a moving conveyor system. Workers call it the chain. In reality, it’s a steel cable with large clips that carries dead chickens down what might be called a “disassembly line.” Standing along this line are dozens of workers who do, in fact, take the birds apart as they pass.

Even the titles of the jobs are unsavory. Among the first set of jobs along the chain is the skinner. Skinners use sharp instruments to cut and pull the skin off the dead chicken. Towards the middle of the line are the gut pullers. These workers reach inside the chicken carcasses and remove the intestines and other organs. At the end of the line are the gizzard cutters, who tackle the more difficult organs attached to the inside of the chicken’s carcass. These organs have to be individually cut and removed for disposal.

The work is obviously distasteful, and the pace of the work is unrelenting. On a good day the chain moves an average of ninety chickens a minute for nine hours. And the workers are essentially held captive by the moving chain. For example, no one can vacate a post to use the bathroom or for other reasons without the permission of the supervisor. In some plants, taking an unauthorised bathroom break can result in suspension without pay. But the noise in a typical chicken-processing plant is so loud that the supervisor can’t hear someone calling for relief unless the person happens to be standing close by.

Jobs such as these on the chicken-processing line are actually becoming increasingly common. Fuelled by Americans’ growing appetites for lean, easy-to-cook meat, the number of poultry workers has almost doubled since 1980, and today they constitute a work force of around a quarter of a million people. Indeed, the chicken-processing industry has become a major component of the state economies of Georgia, North Carolina, Mississippi, Arkansas, and Alabama.

Besides being unpleasant and dirty, many jobs in a chicken-processing plant are dangerous and unhealthy. Some workers, for example, have to fight the live birds when they are first hung on the chains. These workers are routinely scratched and pecked by the chickens. And the air inside a typical chicken-processing plant is difficult to breathe. Workers are usually supplied with paper masks, but most don’t use them because they are hot and confining.

And the work space itself is so tight that the workers often cut themselves—and sometimes their coworkers—with the knives, scissors, and other instruments they use to perform their jobs. Indeed, poultry processing ranks third among industries in the United States for cumulative trauma injuries such as carpet tunnel syndrome. The inevitable chicken feathers, faeces, and blood also contribute to the hazardous and unpleasant work environment.

Question:

 

  1. How relevant are the concepts of competencies to the jobs in a chicken-processing plant?

 

  1. How might you try to improve the jobs in a chicken-processing plant?

 

  1. Are dirty, dangerous, and unpleasant jobs an inevitable part of any economy?

 

 

 

CASE: III    On Pegging Pay to Performance

 

“As you are aware, the Government of India has removed the capping on salaries of directors and has left the matter of their compensation to be decided by shareholders. This is indeed a welcome step,” said Samuel Menezes, president Abhayankar, Ltd., opening the meeting of the managing committee convened to discuss the elements of the company’s new plan for middle managers.

Abhayankar was am engineering firm with a turnover of Rs 600 crore last year and an employee strength of 18,00. Two years ago, as a sequel to liberalisation at the macroeconomic level, the company had restructured its operations from functional teams to product teams. The change had helped speed up transactional times and reduce systemic inefficiencies, leading to a healthy drive towards performance.

“I think it is only logical that performance should hereafter be linked to pay,” continued Menezes. “A scheme in which over 40 per cent of salary will be related to annual profits has been evolved for executives above the vice-president’s level and it will be implemented after getting shareholders approval. As far as the shopfloor staff is concerned, a system of incentive-linked monthly productivity bonus has been in place for years and it serves the purpose of rewarding good work at the assembly line. In any case, a bulk of its salary will have to continue to be governed by good old values like hierarchy, rank, seniority and attendance. But it is the middle management which poses a real dilemma. How does one evaluate its performance? More importantly, how can one ensure that managers are not shortchanged but get what they truly deserve?”

“Our vice-president (HRD), Ravi Narayanan, has now a plan ready in this regard. He has had personal discussions with all the 125 middle managers individually over the last few weeks and the plan is based on their feedback. If there are no major disagreements on the plan, we can put it into effect from next month. Ravi, may I now ask you to take the floor and make your presentation?”

The lights in the conference room dimmed and the screen on the podium lit up. “The plan I am going to unfold,” said Narayanan, pointing to the data that surfaced on the screen, “is designed to enhance team-work and provide incentives for constant improvement and excellence among middle-level managers. Briefly, the pay will be split into two components. The first consists of 75 per cent of the original salary and will be determined, as before, by factors of internal equity comprising what Sam referred to as good old values. It will be a fixed component.”

“The second component of 25 per cent,” he went on, “will be flexible. It will depend on the ability of each product team as a whole to show a minimum of 5 per cent improvement in five areas every month—product quality, cost control, speed of delivery, financial performance of the division to which the product belongs and, finally, compliance with safety and environmental norms. The five areas will have rating of 30, 25, 20, 15, and 10 per cent respectively.

“This, gentlemen, is the broad premise. The rest is a matter of detail which will be worked out after some finetuning. Any questions?”

As the lights reappeared, Gautam Ghosh, vice-president (R&D), said, “I don’t like it. And I will tell you why. Teamwork as a criterion is okay but it also has its pitfalls. The people I take on and develop are good at what they do. Their research skills are individualistic. Why should their pay depend on the performance of other members of the product team? The new pay plan makes them team players first and scientists next. It does not seem right.”

“That is a good one, Gautam,” said Narayanan. “Any other questions? I think I will take them all together.”

“I have no problems with the scheme and I think it is fine. But just for the sake of argument, let me take Gautam’s point further without meaning to pick holes in the plan,” said Avinash Sarin, vice-president (sales). “Look at my dispatch division. My people there have reduced the shipping time from four hours to one over the last six months. But what have they got? Nothing. Why? Because the other members of the team are not measuring up.”

“I think that is a situation which is bound to prevail until everyone falls in line,” intervened Vipul Desai, vice president (finance). “There would always be temporary problems in implementing anything new. The question is whether our long term objectives is right. To the extend that we are trying to promote teamwork, I think we are on the right track. However, I wish to raise a point. There are many external factors which impinge on both individual and collective performance. For instance, the cost of a raw material may suddenly go up in the market affecting product profitability. Why should the concerned product team be penalised for something beyond its control?”

“I have an observation to make too, Ravi,” said Menezes, “You would recall the survey conducted by a business fortnightly on ‘The ten companies Indian managers fancy most as a working place’. Abhayankar got top billings there. We have been the trendsetters in executive compensation in Indian industry. We have been paying the best. Will your plan ensure that it remains that way?”

As he took the floor again, the dominant thought in Narayanan’s mind was that if his plan were to be put into place, Abhayankar would set another new trend in executive compensation.

 

Question:

 

But how should he see it through?

 


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Attempt Any Four Case Study

Case Study 1 : Structuring global companies

 

As the chapter illustrates, to carry out their activities in pursuit of their objectives, virtually all organisations adopt some form of organisational structure. One traditional method of organisation is to group individuals by function or purpose, using a departmental structure to allocate individuals to their specialist areas (e.g. Marketing, HRM and so on ). Another is to group activities by product or service, with each product group normally responsible for providing its own functional requirements. A third is to combine the two in the form of a matrix structure with its vertical and horizontal flows of responsibility and authority, a method of organisation much favoured in university Business Schools.

What of companies with a global reach: how do they usually organise them-
selves?

Writing in the Financial Times in November 2000 Julian Birkinshaw, Associate Professor of Strategic and International Management at London Business School, identifies four basic models of global company structure:

  • The International Division – an arrangement in which the company establishes a
    separate division  to  deal  with  business  outside  its  own  country.  The
    International Division would typically be concerned with tariff and trade issues,
    foreign agents/partners and other aspects involved in selling overseas. Normally
    the division does not make anything itself, it is simply responsible for interna-
    tional sales. This arrangement tends to be found in medium-sized companies
    with limited international sales.

The Global Product Division – a product-based structure with managers responsible
for their product line globally. The company is split into a number of global busi-
nesses arranged by product (or service) and usually overseen by their own
president. It has been a favoured structure among large global companies such as
BP, Siemens and 3M.

  • The Area Division – a geographically based structure in which the major line of
    authority lies with the country (e.g. Germany) or regional (e.g. Europe) manager who
    is responsible for the different product offerings within her/his geographical area.
    ● The Global Matrix – as the name suggests a hybrid of the two previous structural
    types. In the global matrix each business manager reports to two bosses, one
    responsible for the global product and one for the country/region. As we indi-
    cated in the previous edition of this book, this type of structure tends to come
    into and go out of fashion. Ford, for example, adopted a matrix structure in the
    later 1990s, while a number of other global companies were either streamlining
    or dismantling theirs (e.g. Shell, BP, IBM).

As Professor Birkinshaw indicates, ultimately there is no perfect structure and organisations tend to change their approach over time according to changing circumstances,  fads,  the  perceived  needs  of  the  senior  executives  or  the predispositions of powerful individuals. This observation is no less true of universities than it is of traditional businesses.

Case study questions

  1. Professor Birkinshaw’s article identifies the advantages and disadvantages of being a global business. What are his major arguments?

 

  1. In your opinion what are likely to be the key factors determining how a global company will organise itself?

Attempt Any Four Case Studies

Case I

PROVIDE ADVICE TO AN ENTREPRENEUR ABOUT INTELLECTUAL PROPERTY PROTECTION

 

Locked doors and a security system protect your equipment, inventory and payroll. But what protects your business’s most valuable possessions? IP laws can protect your trade secrets, trademarks and product design, provided you take the proper steps. Chicago attorney Kara E.F. Cenar of Welsh and Katz, an IP firm, contends that businesses should start thinking about these issues earlier than most do. “Small businesses tend to delay securing IP protection because of the expense,” Cenar says. “They tend not to see the value of IP until a competitor infringes.” But a business that hasn’t applied for copyrights or patents and actively defended tem will likely have trouble making its case in court.

 

One reason many business owners don’t protect their intellectual property is that they don’t recognize the value of the intangibles they own. Cenar advises business owners to take their business plans to an experienced IP attorney and discuss how to deal with these issues. Spending money upfront for legal help can save a great deal later by giving you strong copyright or trademark rights, which can deter competitors from infringing and avoid litigation later.

 

Once you’ve figured out what’s worth protecting, you have to decide how to protect it. That isn’t always obvious. Traditionally, patents prohibit others from copying new devices and processes, while copyrights do the same for creative endeavors such as books, music and software. In many cases, though, the categories overlap. Likewise, trademark law now extends to such distinctive elements as a product’s color and shape. Trade dress laws concerns how the product is packaged and advertised. You might be able to choose what kind of protection to seek.

For instance, one of Welsh & Katz’s clients is Ty Inc., maker of plush toys. Before launching the Beanie Baby line, Cenar explains, the owners brought in business and marketing plans to discuss IP issues. The plan was for a limited number of toys in a variety of styles, and no advertising except word-of-mouth. Getting a patent on a plush toy might have been impossible and would have taken several years, too long for easily copied toys. Trademark and trade dress protection wouldn’t help much, because the company planned a variety of styles. But copyrights are available for sculptural art, and they’re inexpensive and easy to obtain. The company chose to register copyrights and defend them vigorously. Cenar’s firm has fended off numerous knockoffs.

 

That’s the next step: monitoring the market-place for knockoffs and trademark infringement, and taking increasingly firm steps to enforce your rights. Efforts typically begin with a letter of warning and could end with a court-ordered cease-and-desist order or even an award of damages. “If you don’t take the time to enforce [your trademark], it becomes a very weak mark,” Cenar says. But a strong mark deters infringement, wins lawsuits and gets people to settle early.” Sleep on your rights, and you’’’ lose them. Be proactive, and you’ll protect them – and save money in the long run.

An inventor with a newly invented technology comes to you for advice on the following matters:

 

Questions:

 

  1. In running this new venture, I need to invest al available resources in producing the products and attracting customers. How important is it for me to divert money from those efforts to protect my intellectual property?

 

  1. I have sufficient resources to obtain intellectual property protection, but how effective is that protection without a large stock of resources to invest in going after those that infringe on my rights? If I do not have the resources to defend a patent, is it worth obtaining one in the first place?

 

  1. Are there circumstances when it is better for me not to be an innovator but rather produce “knock-offs” of other innovations?

Attempt Any Four Case Study

 

Case 1: Zip Zap Zoom Car Company

                      

Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment.  It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability.  Its financial statements are shown in Exhibits 1 and 2 respectively.

The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year.  Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector.  The company has never defaulted on its loan payments and enjoys a favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.

The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries.  The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer.  The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.

Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures.   The industry indicators predict that the economy is gradually slipping into recession.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

 

Source of Funds

Share capital                                        350

Reserves and surplus                           250                              600

Loans :

Debentures (@ 14%)               50

Institutional borrowing (@ 10%)        100

Commercial loans (@ 12%)    250

Total debt                                                                                            400

Current liabilities                                                                                 200

1,200

 

Application of Funds

Fixed Assets

Gross block                                                     1,000

Less : Depreciation                                            250

Net block                                                           750

Capital WIP                                                       190

Total Fixed Assets                                                                              940

Current assets :

Inventory                                                           200

Sundry debtors                                                    40

Cash and bank balance                                        10

Other current assets                                 10

Total current assets                                                                 260

-1200

 

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x

(Amount in Rs. Crore)

Sales revenue (80,000 units x Rs. 2,50,000)                                       2,000.0

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses    1,300.0

Variable overheads                                                        100.0

Total                                                                                                                1,400.0

Fixed cost :

R & D                                                                                          20.0

Marketing and advertising                                               25.0

Depreciation                                                                   250.0

 

Personnel                                                                          70.0

Total                                                                                                                   365.0

 

Total operating expenditure                                                                1,765.0

Operating profits (EBIT)                                                                                   235.0

Financial expense :

Interest on debentures                                                            7.7

Interest on institutional borrowings                        11.0

Interest on commercial loan                                    33.0                     51.7

Earnings before tax (EBT)                                                                                          183.3

Tax (@ 35%)                                                                                                                 64.2

Earnings after tax (EAT)                                                                                            119.1

Dividends                                                                                                                     70.0

Debt redemption (sinking fund obligation)**                                                              40.0

Contribution to reserves and surplus                                                                  9.1

*          Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).

**        The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.

The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology.  Capital investment up to a maximum of Rs. 100

crore is required.  The problem areas are three-fold.

  • The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
  • The company does not want to issue new equity shares and its retained earning are not enough for such a large investment.  Thus, the only option is raising debt.
  • The company wants to limit its additional debt to a level that it can service without taking undue risks.  With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise.  He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession.  The company can raise debt at 15 per cent from a financial institution.  While working out the debt capacity.  Mr. Shortsighted takes the following assumptions for the recession years.

  1. A maximum of 10 percent reduction in sales volume will take place.
  2. A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.  While doing so, he determines what he thinks are the “irreducible minimum” expenditures under

 

recessionary conditions.  For him, risk of insolvency is the main concern while designing the capital structure.  To support his view, he presents the income statement as shown in Exhibit 3.

 

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

Sales revenue (72,000 units x Rs. 2,35,000)                                       1,692.0

Operating expenditure

Variable cost :

Raw material and manufacturing expenses    1,170.0

Variable overheads                                                          90.0

Total                                                                                                                1,260.0

Fixed cost :

R & D                                                                                          —

Marketing and advertising                                               15.0

Depreciation                                                                   187.5

Personnel                                                                          70.0

Total                                                                                                                   272.5

Total operating expenditure                                                                1,532.5

EBIT                                                                                                                  159.5

Financial expenses :

Interest on existing Debentures                                        7.0

Interest on existing institutional borrowings      10.0

Interest on commercial loan                                30.0

Interest on additional debt                                             15.0                  62.0

EBT                                                                                                                      97.5

Tax (@ 35%)                                                                                                        34.1

EAT                                                                                                                     63.4

Dividends                                                                                                              —

Debt redemption (sinking fund obligation)                                             50.0*

Contribution to reserves and surplus                                                       13.4

 

 

* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)

Assumptions of Mr. Shorsighted

  • R & D expenditure can be done away with till the economy picks up.
  • Marketing and advertising expenditure can be reduced by 40 per cent.
  • Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.

 

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment.  Mr. Arthashatra  does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.

Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm.  He points out the following :

  • Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
  • Certain management policies like those relating to dividend payout, send out important signals to the investors.  The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm.  The firm should pay at least 10 per cent dividend in the recession years.
  • Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations.  This does not give the true picture.  Net cash inflows should be used to determine the amount available for servicing the debt.
  • Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession.  It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.  Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed.  From  this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution).  This will give a true picture of how the company’s cash flows will behave in recession conditions.

 

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret.  Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis.  Information on the behaviour of cash flows during the recession periods is taken into account.

The methodology undertaken is as follows :

  • Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.

 

  • Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
  • Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

 

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions.  Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.  Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Question:

Analyse the debt capacity of the company.

 

 

 

 

 

 

Attempt Any Four Case Study

 

CASE – 1   Your Job and Your Passion—You Can Pursue Both!

 

The 21st century offers many challenges to every one of us. As more firms go global, as more economies interconnect, and as the Web blasts away boundaries to communication, we become more informed citizens. This interconnectedness means that the organizations you work for will require you to develop both general and specialized knowledge—such as speaking multiple languages, using various software applications, or understanding details of financial transactions. You will have to develop general management skills to foster your ability to be self-reliant and thrive in a changing market-place. And here’s the exciting part: As you build both types of knowledge, you may be able to integrate your growing expertise with the causes or activities you care most about. Or, your career adventure may lead you to a new passion.

Former presidents George H. W. Bush and Bill Clinton are well known for combining their management skills—running a country—with their passion for helping people around the world. Together they have raised funds to assist disaster victims, those with HIV/AIDS, and others in need. Jake Burton turned his love of snow sports into an entire industry when he founded Burton Snowboards. Annie Withey poured her business and marketing knowledge into her two famous business ventures: Smartfood and Annie’s Homegrown. Both products were the result of her passion for healthful foods made from organic ingredients.

As you enter the workforce, you may have no idea where your career path will lead. You may be asking yourself, “How will I fit in?” “Where will I live?” “How much will I earn?” “Where will my business and personal careers evolve as the world continuous to change at such a fast pace?” If you are feeling nervous because you don’t know the answers to these questions yet, relax. A career is a journey, not a single destination. You may have one type of career or several. It is likely you will work for several organisations, or you may run one or more businesses of your own.

As you ask yourself what you want to do and where you want to be, take a few minutes to review the chapter and its main topics. Think about your personality, what you like and dislike, what you know and what you want to learn, what you fear and what you dream. Then try the following exercise.

 

Questions

 

  1. Create a three-column chart in which the first column lists nonmanagement skills you have. Are you good at travel? Do you know how to build furniture? Are you a whiz at sports statistics? Are you an innovative cook? Do you play video games for hours? In the second column, list the causes or activities about which you are passionate. These may dovetail with the first list, but they might not.
  2. Once you have you two columns complete, draw lines between entries that seem compatible. If you are good at building furniture, you might have also listed a concern about families who are homeless. Remember that not all entries will find a match—the idea is to begin finding some connections.
  3. In the third column, generate a list of firms or organizations you know about that reflect your interests. If you are good at building furniture, you might be interested working for the Habitat for Humanity organization, or you might find yourself gravitating towards a furniture retailer like Ikea or Ethan Allen. You can do further research on organizations via Internet or business publications.

 

 

CASE – 2   Biyani – Pioneering a Retailing Revolution in India

 

“I use people as hands and legs. I prefer to do thinking around here.”

 

─ Kishore Biyani, CEO & MD, Pantaloon Retail (India) Ltd.

 

Kishore Biyani (Biyani), CEO& MD of Pantaloon Retail (India) Ltd., planned to have 30 Food Bazaar outlets, 22 outlets in Big Bazaar, 21 Pantaloons outlets, and four seamless malls under the Central logo, by the end of 2005. He also planned to launch at least three businesses every year and had already selected music, footwear and car accessories as his next areas of investments. He was already the top retailer in India followed by Raghu Pillai of RPG. As of 2004, Biyani headed a company that had a turnover of Rs 6,500 million and operated 13 Pantaloon apparel stores, 9 Big Bazaars, 13 Food Bazaars, and 3 seamless malls (Central), one each located in Bangalore, Hyderabad, and Pune.

Biyani’s journey from a person who looked after his family business to India’s top retailer in 1987, when he launched Manz Wear Pvt. Ltd. The company launched one of the first readymade trousers brands – ‘Pantaloon’ – in the country. The company also launched its first jeans brand called ‘Bare’ in 1989. On September 20, 1991, Manz Wear Pvt. Ltd. went public and on September 25, 1992, it changed its name to Pantaloon Fashions (India) Limited (PFIL). ‘John Miller’ was the first formal shirt brand from PFIL.

The company opened its first apparel stores, called ‘Pantaloons’ at Kolkata in August 1997. The stores generated Rs 70 million. Biyani then realized the potential of the Indian market and started to aggressively tap it. Accordingly, Biyani decided to expand into other segments of retailing besides apparel. To reflect this change in focus, the company changed its name to Pantaloon Retail (India) Limited (PRIL) in July 1999 and set itself a target

 

Note: Solve any 4 Cases Study’s

 

CASE: I    Enterprise Builds On People

 

When most people think of car-rental firms, the names of Hertz and Avis usually come to mind. But in the last few years, Enterprise Rent-A-Car has overtaken both of these industry giants, and today it stands as both the largest and the most profitable business in the car-rental industry. In 2001, for instance, the firm had sales in excess of $6.3 billion and employed over 50,000 people.

Jack Taylor started Enterprise in St. Louis in 1957. Taylor had a unique strategy in mind for Enterprise, and that strategy played a key role in the firm’s initial success. Most car-rental firms like Hertz and Avis base most of their locations in or near airports, train stations, and other transportation hubs. These firms see their customers as business travellers and people who fly for vacation and then need transportation at the end of their flight. But Enterprise went after a different customer. It sought to rent cars to individuals whose own cars are being repaired or who are taking a driving vacation.

The firm got its start by working with insurance companies. A standard feature in many automobile insurance policies is the provision of a rental car when one’s personal car has been in an accident or has been stolen. Firms like Hertz and Avis charge relatively high daily rates because their customers need the convenience of being near an airport and/or they are having their expenses paid by their employer. These rates are often higher than insurance companies are willing to pay, so customers who these firms end up paying part of the rental bills themselves. In addition, their locations are also often inconvenient for people seeking a replacement car while theirs is in the shop.

But Enterprise located stores in downtown and suburban areas, where local residents actually live. The firm also provides local pickup and delivery service in most areas. It also negotiates exclusive contract arrangements with local insurance agents. They get the agent’s referral business while guaranteeing lower rates that are more in line with what insurance covers.

In recent years, Enterprise has started to expand its market base by pursuing a two-pronged growth strategy. First, the firm has started opening  airport locations to compete with Hertz and Avis more directly. But their target is still the occasional renter than the frequent business traveller. Second, the firm also began to expand into international markets and today has rental offices in the United Kingdom, Ireland and Germany.

Another key to Enterprise’s success has been its human resource strategy. The firm targets a certain kind of individual to hire; its preferred new employee is a college graduate from bottom half of graduating class, and preferably one who was an athlete or who was otherwise actively involved in campus social activities. The rationale for this unusual academic standard is actually quite simple. Enterprise managers do not believe that especially high levels of achievements are necessary to perform well in the car-rental industry, but having a college degree nevertheless demonstrates intelligence and motivation. In addition, since interpersonal relations are important to its business, Enterprise wants people who were social directors or high-ranking officers of social organisations such as fraternities or sororities. Athletes are also desirable because of their competitiveness.

Once hired, new employees at Enterprise are often shocked at the performance expectations placed on them by the firm. They generally work long, grueling hours for relatively low pay.

 

And all Enterprise managers are expected to jump in and help wash or vacuum cars when a rental agency gets backed up. All Enterprise managers must wear coordinated dress shirts and ties and can have facial hair only when “medically necessary”. And women must wear skirts no shorter than two inches above their knees or creased pants.

 

So what are the incentives for working at Enterprise? For one thing, it’s an unfortunate fact of life that college graduates with low grades often struggle to find work. Thus, a job at Enterprise is still better than no job at all. The firm does not hire outsiders—every position is filled by promoting someone already inside the company. Thus, Enterprise employees know that if they work hard and do their best, they may very well succeed in moving higher up the corporate ladder at a growing and successful firm.

 

 

Question:

 

  1. Would Enterprise’s approach human resource management work in other industries?
  2. Does Enterprise face any risks from its human resource strategy?
  3. Would you want to work for Enterprise? Why or why not?

Attempt All Case Study Case 1 – HOW GENERAL MOTORS IS COLLABORATING ONLINE The ProblemDesigning a car is a complex and lengthy task. Take, for example, General Motors (GM). Each model created needs to go through a frontal crash test. So the company builds prototypes that cost about one million dollars for each car and tests how they react to frontal crash. GM crashes these cars, makes improvements, then makes new prototypes and crashes them again. There are other tests and more crashes. Even as late as the 1990s, GM crashed as many as 70 cars for each new model. The information regarding a new design and its various tests, collected in these crashes and other tests, has to be shared among close to 20,000 designers and engineers in hundreds of divisions and departments at 14 GM design labs, some of which are located in different countries. In addition, communication and collaboration is needed with design engineers of the more than 1,000 key suppliers. All of these necessary communications slowed the design process and increased its cost. It took over four years to get a new model to the market. The SolutionGM, like its competitors, has been transforming itself into an e-business. This gradual transformation has been going on since the mid-1990s, when Internet band width increased sufficiently to allow Web collaboration. The first task was to examine over 7,000 existing legacy IT systems, reducing them to about 3,000, and making them Web-enabled. The EC system is centered on a computer-aided design (CAD) program from EDS (a large IT company, subsidiary of GM). This system, known as Unigraphics, allows 3-D design documents to be shared online by both the internal and external designers and engineers, all of whom are hooked up with the EDS software. In addition. Collaborative and Web-conferencing software tools, including Microsoft’s NetMeeting and EDS’s eVis, were added to enhance teamwork. These tools have radically changed the vehicle-review process. To see how GM now collaborates with a supplier, take as an example a needed cost reduction of a new seat frame made by Johnson Control GM electronically sends its specifications for the seat to the vendor’s product data system. Johnson Control’s collaboration systems (eMatrix) is integrated with EDS’s In graphics. This integration allows joint searching, designing. Tooling, and testing of the seat frame in real time, expediting the process and cutting costs by more than 10 percent.Another area of collaboration is that of crashing cars. Here designers need close collaboration with the test engineers. Using simulation, mathematical modeling, and a Web-based review process. GM is able now to electronically “Crash” cars rather than to do it physically. The ResultsNow it takes less than 18 months to bring a new car to market, compared to 4 or more years before, and at a much lower design cost. For example, 60 cars are now “Crashed” electronically, and only 10 are crashed physically. The shorter cycle time enables more new car models, providing GM with a competitive edge. All this has translated into profit. Despite the economic show down. GM’s revenues increased more than 6 percent in 2002. while its earnings in the second quarter of 2002 doubled that of 2001. Questions: 1. Why did it take GM over four years to design a new car?2. Who collaborated with whom to reduce the time-to-market?3. How has IT helped to cut the time-to-market? 

 

 

Attempt Any Four Case Study

 

CASE – 1   Dabur India Limited: Growing Big and Global

 

Dabur is among the top five FMCG companies in India and is positioned successfully on the specialist herbal platform. Dabur has proven its expertise in the fields of health care, personal care, homecare and foods.

The company was founded by Dr. S. K. Burman in 1884 as small pharmacy in Calcutta (now Kolkata), India. And is now led by his great grandson Vivek C. Burman, who is the Chairman of Dabur India Limited and the senior most representative of the Burman family in the company. The company headquarters are in Ghaziabad, India, near the Indian capital New Delhi, where it is registered. The company has over 12 manufacturing units in India and abroad. The international facilities are located in Nepal, Dubai, Bangladesh, Egypt and Nigeria.

S.K. Burman, the founder of Dabur, was trained as a physician. His mission was to provide effective and affordable cure for ordinary people in far-flung villages. Soon, he started preparing natural remedies based on Ayurved for diseases such as Cholera, Plague and Malaria. Due to his cheap and effective remedies, he became to be known as ‘Daktar’ (Indianised version of ‘doctor’). And that is how his venture Dabur got its name—derived from Daktar Burman.

The company faces stiff competition from many multi national and domestic companies. In the Branded and Packaged Food and Beverages segment major companies that are active include Hindustan Lever, Nestle, Cadbury and Dabur. In case of Ayurvedic medicines and products, the major competitors are Baidyanath, Vicco, Jhandu, Himani and other pharmaceutical companies.

 

Vision, Mission and Objectives

 

Vision statement of Dabur says that the company is “dedicated to the health and well being of every household”. The objective is to “significantly accelerate profitable growth by providing comfort to others”. For achieving this objective Dabur aims to:

  • Focus on growing core brands across categories, reaching out to new geographies, within and outside India, and improve operational efficiencies by leveraging technology.
  • Be the preferred company to meet the health and personal grooming needs of target consumers with safe, efficacious, natural solutions by synthesising deep knowledge of ayurveda and herbs with modern science.
  • Be a professionally managed employer of choice, attracting, developing and retaining quality personnel.
  • Be responsible citizens with a commitment to environmental protection.
  • Provide superior returns, relative to our peer group, to our shareholders.

 

Chairman of the company

 

Vivek C. Burman joined Dabur in 1954 after completing his graduation in Business Administration from the USA. In 1986 he was appointed Managing Director of Dabur and in 1998 he took over as Chairman of the Company.

Under Vivek Burman’s leadership, Dabur has grown and evolved as a multi-crore business house with a diverse product portfolio and a marketing network that traverses the whole of India and more than 50 countries across the world. As a strong and positive leader, Vivek C. Burman has motivated employees of Dabur to “do better than their best”—a credo that gives Dabur its status as India’s most trusted nature-based products company.

 

Leading brands

 

More than 300 diverse products in the FMCG, Healthcare and Ayurveda segments are in the product line of Dabur. List of products of the company include very successful brands like Vatika, Anmol, Hajmola, Dabur Amla Chyawanprash, Dabur Honey and Lal Dant Manjan with turnover of Rs.100 crores each.

Strategic positioning of Dabur Honey as food product, lead to market leadership with over 40% market share in branded honey market; Dabur Chyawanprash is the largest selling Ayurvedic medicine with over 65% market share. Dabur is a leader in herbal digestives with 90% market share. Hajmola tablets are in command with 75% market share of digestive tablets category. Dabur Lal Tail tops baby massage oil market with 35% of total share.

CHD (Consumer Health Division), dealing with classical Ayurvedic medicines has more than 250 products sold through prescription as well as over the counter. Proprietary Ayurvedic medicines developed by Dabur include Nature Care Isabgol, Madhuvaani and Trifgol.

However, some of the subsidiary units of Dabur have proved to be low margin business; like Dabur Finance Limited. The international units are also operating on low profit margin. The company also produces several “me – too” products. At the same time the company is very popular in the rural segment.

 

 

 

Questions

 

  1. What is the objective of Dabur? Is it profit maximisation or growth maximisation? Discuss.
  2. Do you think the growth of Dabur from a small pharmacy to a large multinational company is an indicator of the advantages of joint stock company against proprietorship form? Elaborate.

 

 

 

Note: Solve any 4 Cases Study’s

 

CASE: I    Managing the Guinness brand in the face of consumers’ changing tastes

 

1997 saw the US$19 billion merger of Guinness and GrandMet to form Diageo, the world’s largest drinks company. Guinness was the group’s top-selling beverage after Smirnoff vodka, and the group’s third most profitable brand, with an estimated global value of US$1.2 billion. More than 10 million glasses of the popular stout were sold every day, predominantly in Guinness’s top markets: respectively, the UK, Ireland, Nigeria, the USA and Cameroon.

 

However, the famous dark stout with the white, creamy head was causing some strategic concerns for Diageo. In 1999, for the first time in the 241-year of Guinness, sales fell. In early 2002 Diageo CEO Paul Walsh announced to the group’s concerned shareholders that global volume growth of Guinness was down 4 per cent in the last six months of 2001 and, more alarmingly, sales were also down 4 per cent in its home market, Ireland. How should Diageo address falling sales in the centuries-old brand shrouded in Irish mystique and tradition?

 

The changing face of the Irish beer market

 

The Irish were very fond of beer and even fonder of Guinness. With close to 200 litres per capita drunk each year—the equivalent of one pint per person per day—Ireland ranked top in worldwide per capita beer consumption, ahead of the Czech Republic and Germany.

 

Beer accounted for two-thirds of all alcohol bought in Ireland in 2001. Stout led the way in volume sales and accounted for 40 per cent of all beer value sales. Guinness, first brewed in 1759 in Dublin by Arthur Guinness, enjoyed legendary status in Ireland, a national symbol as respected as the green, white and gold flag. It was by far the most popular alcoholic drink in Ireland, accounting for nearly one of every two pints of beer sold. Its nearest competitors were Budweiser and Heineken, which held 13 per cent and 12 per cent of the market respectively.

 

However, the spectacular economic growth of the Irish economy since the mid-1990s had opened up the traditional drinking market to new cultures and influences, and encouraged the travel-friendly Irish to try other drinks. Beer and in particular stout were losing popularity compared with wine or the recently launched RTDs (ready-to-drinks) or FABs (flavoured alcoholic beverages), which the younger generation of drinkers considered trendier and ‘healthier’. As a Euromonitor report explained: Younger consumers consider dark beers and stout to be old fashioned drinks, with the perceived stout or ale drinker being an old, slightly overweight man and thus not in tune with image conscious youth culture.

 

Beer sales, which once accounted for 75 per cent of all alcohol bought in Ireland, were expected to drop to close to 50 per cent by 2006, while stout sales were forecast to decrease by 12 per cent between 2002 and 2006.

 

Giving Guinness a boost in its home market

 

With Guinness alone accounting for 37 per cent of Diageo’s volume in the market, Guinness/UDV Ireland was one of the first to feel the pain caused by the declining popularity of beer and in particular stout. A Euromonitor report in February 2002 explained how the profile of the Guinness drinker, typically men aged 21-plus, was affected: The average age of Guinness drinkers is rising and this is bringing about the worrying fact that the size of the Guinness target audience is falling. The rate of decline is likely to quicken as the number of less brand loyal, non-stout drinking younger consumers increases.

The report continued:

In Ireland, in particular, the consumer base for Guinness is shrinking as the majority of 18 to 24 year olds consistently reject stout as a product relevant to their generation, opting instead to consume lager or spirits.

Effectively, one-third of young Irish men and half of young Irish women had reportedly never tried Guinness. A Guinness employee provided another explanation. Guinness is similar to coffee in that when you’re young you drink it [coffee] with sugar, but when you’re older you drink it without. It’s got a similar acquired taste and once you’re over the initial hurdle, you’ll fall in love with it.

In an attempt to lure young drinkers to the somewhat ‘acquired’ Guinness taste (40 per cent of the Irish population was under the age of 24) Diageo had invested millions in developing product innovations and brand building in Ireland’s 10,000 pubs, clubs and supermarkets.

 

Product innovation

 

Until the mid-1990s most Guinness in Ireland was drunk in a pint glass in the local pub. The launch of product innovations in the form of a new cooling mechanism for draft Guinness and the ‘widget’ technology applied to cans and bottles attempted to modernize the brand’s image and respond to increasing competition from other local and imported stouts and lagers.

 

‘A perfect head’ for canned Guinness

In 1989, and at a cost of more than £10 million, Guinness developed an ingenious ‘widget’ device for its canned draft stout sold in ‘off-trade’ outlets such as supermarkets and off-licences. The widget, placed in the bottom of the can, released a gas that replicated the draft effect.

Although over 90 per cent of beer in Ireland was sold in ‘on-trade’ pubs and bars, sale of beer in the cheaper ‘off-trade’ channel were slowly gaining in importance. The Guinness brand manager at the time, John O’Keeffe, explained how home drinkers could now enjoy a smoother, creamier head similar to the one obtained in a pub thanks to the new widget technology:

When the can is opened, the pressure causes the nitrogen to be released as the widget moves through the beer, creating the classic draft Guinness surge.

 

Nearly 10 years later, in 1997, the ‘floating widget’ was introduced, which improved the effectiveness of the device.

 

A colder pint

In 1997 Guinness Draft Extra Cold was launched in Ireland. An additional chilled tap system could be added to the standard barrel in pubs, allowing the Guinness to be served at 4ºC rather than the normal 6ºC. By serving Guinness at a cooler temperature, Guinness/UDV hoped to mute the bitter taste of the stout and make it more palatable for younger adults, who were increasingly accustomed to drinking chilled lager, particularly in the summer

 

A cooler image for Guinness

In October 1999 the widget technology was applied to long-stemmed bottles of Guinness. The launch was supported by a US$2 million TV and outdoor board campaign. The packaging—with a clear, shiny plastic wrap, designed to look like a pint complete with creamy head—was quite a departure from the traditional Guinness look.

 

The objective was to reposition Guinness alongside certain similarly packaged lagers and RTDs and offer younger adults a more fashionable way to drink Guinness: straight from the bottle. It also gave Guinness easier access to the growing number of clubs and bars that were less likely to serve traditional draft Guinness easier access to the growing number of clubs and bars that were less likely to serve traditional draft Guinness, which could be kept for only six to eight weeks and took two minutes to pour. The RTDs, by contrast, had a shelf-life of more than a year and were drunk straight from the bottle.

 

However, financial analyst remained sceptical about the Guinness product innovations, which had no significant positive impact on sales or profitability:

 

The last news about the success of the recently introduced innovations suggests that they have not had a notably material impact on Guinness brand performance.

 

Brand building

 

Euromonitor estimates that, in 2000, Diageo invested between US$230 and US$250 million worldwide in Guinness advertising and promotions. However, with a cost-cutting objective, the company reduced marketing expenses in both Ireland and the UK up to 10 per cent in 2001 and the number of global Guinness agencies from six to two.

 

Nevertheless, Guinness remained one of the most advertised brands in Ireland. It was the leading cinema advertiser and, in terms of advertising, was second only to the national telecoms provider, Eircom. Guinness was also heavily promoted at leading sporting and music events, in particular those that were popular with the younger age groups.

 

The ultimate tribute to the brand was the opening of the new Guinness Storehouse in Dublin in late 2000, a sort of Mecca for all Guinness fans. The Storehouse was also a fashionable visitor centre with an art gallery and restaurants, and regularly hosted evening events. The company’s design brief highlighted another key objective:

To use an ultramodern facility to breathe life into an ageing brand, to reconnect an old company with young (sceptical) customers.

As the Storehouse’s design firm’s director, Ralph Ardill, explained:

 

Guinness Storehouse had become the top tourist destination in Ireland, attracting more than half a million people and hosting 45,000 people for special events and training.

The Storehouse also had training facilities for Guinness’s bartenders and 3000 Irish employees. The quality of the Guinness pint remained a high priority for the company, which not only developed pub-like classrooms at the Storehouse but also employed teams of draft technicians to teach barmen how to pour a proper pint. The process involved two steps—the pour and the top-up—and took a total of 119.5 seconds. Barmen also needed to learn how to check that the pressure gauges were properly set and that the proportion of nitrogen to carbon dioxide in the gas was correct.

 

 

 

 

The uncertain future of the Guinness brand in Ireland

 

Despite Guinness/DUV’s attempt to appeal to the younger generation of drinkers and boost its fading image, rumours persisted in Ireland about the brand future. The country’s leading and respected newspaper, the Irish times, reported in an article in July 2001:

The uncertainty over its future all adds to the air of crisis that is building around Guinness Ireland Group four months ago…The review is not complete and the assumption is that there is more bad news to come.

In the pubs across Ireland, the traditional Guinness drinkers looked on anxiously as the younger generation drank Bacardi Breezers, Smirnoff Ices or Californian wines. Could the goliath Guinness survive another two centuries? Was the preference for these new drinks just a fad or fashion, or did Diageo need to seriously reconsider how it marketed Guinness?

 

A quick solution?

 

In late February 2002, Diageo CEO Paul Walsh revealed that the company was testing technology to cut the waiting time for a pint of Guinness from 1 minute 59 seconds to 15-25 seconds. Ultrasound could release bubbles in the stout and form the head instantly, making a pint of Guinness that would be indistinguishable from one produced by the slower, traditional method.

‘A two-minute pour is not relevant to our customers today,’ Walsh said. A Guinness spokeswoman continued, ‘We have got to move with the times and the brand must evolve. We must take all the opportunities that we can. In outlets where it is really busy, if you walk in after nine o’clock in the evening there will be a cloth over the Guinness pump because it takes longer to pour than other drinks. Aware that some consumers might not be attracted by the innovation, she added ‘It wouldn’t be put everywhere—only where people want a quick pint with no effect on the quality.’

 

Although still being tested, the ‘quick-pour pint’ was a popular topic of conversation in Dublin pubs, among barmen and customers alike. There were rumours that it would be introduced in Britain only; others thought it would be released worldwide.

 

Some market commentators viewed the quick-pour pint as an innovative way to appeal to the younger, less patient segment in which Guinness had under-performed. Others feared that the young would be unconvinced by the introduction, and loyal customers would be turned off by what they characterized as a ‘marketing u-turn’.

 

 

Question:

 

  1. From a marketing perspective, what has Guinness done to ensure its longevity?
  2. How would you characterize the Guinness brand?
  3. What could Guinness do to attract younger drinkers? And to retain its older loyal customer base? Can both be done at the same time?

 

 

 

 


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DR. PRASANTH BE BBA MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521 EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com

 

Attempt Any Four Case Study

Case Study 1 : Structuring global companies

 

As the chapter illustrates, to carry out their activities in pursuit of their objectives, virtually all organisations adopt some form of organisational structure. One traditional method of organisation is to group individuals by function or purpose, using a departmental structure to allocate individuals to their specialist areas (e.g. Marketing, HRM and so on ). Another is to group activities by product or service, with each product group normally responsible for providing its own functional requirements. A third is to combine the two in the form of a matrix structure with its vertical and horizontal flows of responsibility and authority, a method of organisation much favoured in university Business Schools.

What of companies with a global reach: how do they usually organise them-
selves?

Writing in the Financial Times in November 2000 Julian Birkinshaw, Associate Professor of Strategic and International Management at London Business School, identifies four basic models of global company structure:

  • The International Division – an arrangement in which the company establishes a
    separate division  to  deal  with  business  outside  its  own  country.  The
    International Division would typically be concerned with tariff and trade issues,
    foreign agents/partners and other aspects involved in selling overseas. Normally
    the division does not make anything itself, it is simply responsible for interna-
    tional sales. This arrangement tends to be found in medium-sized companies
    with limited international sales.

The Global Product Division – a product-based structure with managers responsible
for their product line globally. The company is split into a number of global busi-
nesses arranged by product (or service) and usually overseen by their own
president. It has been a favoured structure among large global companies such as
BP, Siemens and 3M.

  • The Area Division – a geographically based structure in which the major line of
    authority lies with the country (e.g. Germany) or regional (e.g. Europe) manager who
    is responsible for the different product offerings within her/his geographical area.
    ● The Global Matrix – as the name suggests a hybrid of the two previous structural
    types. In the global matrix each business manager reports to two bosses, one
    responsible for the global product and one for the country/region. As we indi-
    cated in the previous edition of this book, this type of structure tends to come
    into and go out of fashion. Ford, for example, adopted a matrix structure in the
    later 1990s, while a number of other global companies were either streamlining
    or dismantling theirs (e.g. Shell, BP, IBM).

As Professor Birkinshaw indicates, ultimately there is no perfect structure and organisations tend to change their approach over time according to changing circumstances,  fads,  the  perceived  needs  of  the  senior  executives  or  the predispositions of powerful individuals. This observation is no less true of universities than it is of traditional businesses.

Case study questions

  1. Professor Birkinshaw’s article identifies the advantages and disadvantages of being a global business. What are his major arguments?

 

  1. In your opinion what are likely to be the key factors determining how a global company will organise itself?

 

Case 2 : Resource prices

 

As we saw in Chapter 1, resources such as labour, technology and raw materials
constitute inputs into the production process that are utilised by organisations to
produce outputs. Apart from concerns over the quality, quantity and availability of
the different factors of production, businesses are also interested in the issue of
input prices since these represent costs to the organisation which ultimately have
to be met from revenues if the business is to survive. As in any other market, the
prices of economic resources can change over time for a variety of reasons, most, if
not all, of which are outside the direct control of business organisations. Such fluc-
tuations in input prices can be illustrated by the following examples:

  • Rising labour costs – e.g. rises in wages or salaries and other labour-related costs
    (such as pension contributions or healthcare schemes) that are not offset by
    increases in productivity or changes in working practices. Labour costs could rise
    for a variety of reasons including skills shortages, demographic pressures, the
    introduction of a national minimum wage or workers seeking to maintain their
    living standards in an inflationary period.
  • Rising raw material costs – e.g. caused by increases in the demand for certain raw
    materials and/or shortages (or bottlenecks) in supply. It can also be the result of
    the need to switch to more expensive raw material sources because of customer
    pressure, environmental considerations or lack of availability.
  • Rising energy costs – e.g. caused by demand and/or supply problems as in the oil
    market in recent years, with growth in India and China helping to push up
    demand and coinciding with supply difficulties linked to events such as the war
    in Iraq, hurricanes in the Gulf of Mexico or decisions by OPEC.
    ● Increases in the cost of purchasing new technology/capital equipment – e.g.
    caused by the need to compete with rivals or to meet more stringent government
    regulations in areas such as health and safety or the environment.

As the above examples illustrate, rising input prices can be the result of factors operating at both the micro and macro level and these can range from events which are linked to natural causes to developments of a political, social and/or economic kind. While many of these influences in the business environment are uncontrollable, there are steps business organisations can (and do) often take to address the issue of rising input prices that may threaten their competitiveness. Examples include the following:

  • Seeking cheaper sources of labour (e.g. Dyson moved its production of vacuum
    cleaners to the Far East).
  • Abandoning salary-linked pension schemes or other fringe benefits (e.g. com-
    pany cars, healthcare provisions, paid holidays).
  • Outsourcing certain activities (e.g. using call centres to handle customer com-
    plaints, or outsourcing services such as security, catering, cleaning, payroll, etc.). ● Switching raw materials or energy suppliers (e.g. to take advantage of discounts

by entering into longer agreements to purchase).

 

  • Energy-saving measures (e.g. through better insulation, more regular servicing of
    equipment, product and/or process redesign).
  • Productivity gains (e.g. introducing incentive schemes).

In addition to measures such as these, some organisations seek cost savings through
divestment of parts of the business or alternatively through merger or takeover
activity. In the former case the aim tends to be to focus on the organisation’s core
products/services and to shed unprofitable and/or costly activities; in the latter the
objective is usually to take advantage of economies of scale, particularly those asso-
ciated with purchasing, marketing, administration and financing the business.

 

 

Case study questions

  1. If a company is considering switching production to a country where wage costs
    are lower, what other factors will it need to take into account before doing so?

 

  1. Will increased environmental standards imposed by government on businesses
    inevitably result in higher business costs?

 

Case 3 : Government and business – friend or foe?

 

As we have seen, governments intervene in the day-to-day working of the economy
in a variety of ways in the hope of improving the environment in which industrial
and commercial activity takes place. How far they are successful in achieving this
goal is open to question. Businesses, for example, frequently complain of over-
interference  by  governments  and  of  the  burdens  imposed  upon  them  by
government legislation and regulation. Ministers, in contrast, tend to stress how
they have helped to create an environment conducive to entrepreneurial activity
through the different policy initiatives and through a supportive legal and fiscal
regime. Who is right?

While there is no simple answer to this question, it is instructive to examine the
different surveys which are regularly undertaken of business attitudes and condi-
tions in different countries. One such survey by the European Commission – and
reported by Andrew Osborn in the Guardian on 20 November 2001 – claimed that
whereas countries such as Finland, Luxembourg, Portugal and the Netherlands
tended to be regarded as business-friendly, the United Kingdom was perceived as
the most difficult and complicated country to do business with in the whole of
Europe. Foreign firms evidently claimed that the UK was harder to trade with than
other countries owing to its bureaucratic procedures and its tendency to rigidly
enforce business regulations. EU officials singled out Britain’s complex tax formali-
ties, employment regulations and product conformity rules as particular problems
for foreign companies – criticisms which echo those of the CBI and other represen-
tative bodies who have been complaining of the cost of over-regulation to UK firms
over a considerable number of years.

The news, however, is not all bad. The Competitive Alternatives study (2002) by
KPMG of costs in various cities in the G7 countries, Austria and the Netherlands
indicated that Britain is the second cheapest place in which to do business in the
nine industrial countries (see www.competitivealternatives.com). The survey, which
looked at a range of business costs – especially labour costs and taxation -, placed
the UK second behind Canada world-wide and in first place within Europe. The
country’s strong showing largely reflected its competitive labour costs, with manu-
facturing costs estimated to be 12.5 per cent lower than in Germany and 20 per
cent lower than many other countries in continental Europe. Since firms frequently
use this survey to identify the best places to locate their business, the data on rela-
tive costs are likely to provide the UK with a competitive advantage in the battle for
foreign inward investment (see Mini case, above).

 

Case study questions

  1. How would you account for the difference in perspective between firms who often
    complain of government over-interference in business matters and ministers who
    claim that they have the interests of business at heart when taking decisions?

 

  1. To what extent do you think that relative costs are the critical factor in determining
    inward investment decisions?

 

 

Case 4 : The end of the block exemption

 

As we have seen in the chapter, governments frequently use laws and regulations to promote competition within the marketplace in the belief that this has significant benefits for the consumer and for the economy generally. Such interventions occur not only at national level, but also in situations where governments work together to provide mutual benefits, as in the European Union’s attempts to set up a ‘Single Market’ across the member states of the EU.

While few would deny that competitive markets have many benefits, the search
for increased competition at national level and beyond can sometimes be
restrained by the political realities of the situation, a point underlined by a previous
decision of the EU authorities to allow a block exemption from the normal rules of
competition in the EU car market. Under this system, motor manufacturers operat-
ing within the EU were permitted to create networks of selective and exclusive dealerships and to engage in certain other activities normally outlawed under the competition provisions of the single market. It was argued that the system of selective and exclusive distribution (SED) benefited consumers by providing them with a cradle-to-grave service, alongside what was said to be a highly competitive supply situation within the heavily branded global car market.

Introduced in 1995, and extended until the end of September 2002, the block
exemption was highly criticised for its impact on the operation of the car market in
Europe. Following a critical report by the UK competition authorities in April 2000,
the EU published a review (in November 2000) of the workings of the existing
arrangement for distributing and servicing cars, highlighting its adverse conse-
quences for both consumers and retailers and signalling the need for change. Despite
intensive lobbying by the major car manufacturers, and by some national govern-
ments, to maintain the current rules largely intact, the European Commission
announced its intention of replacing the block exemption regulation when it expired
in September, subject of course to consultation with interested parties.

In essence the Commission’s proposals aimed to give dealers far more independ-
ence from suppliers by allowing them to solicit for business anywhere in the EU
and to open showrooms wherever they want; they would also be able to sell cars
supplied by different manufacturers under the same roof. The plan also sought to
open up the aftersales market by breaking the tie which existed between sales and
servicing. The proposal was that independent repairers would in future be able to
get greater access to the necessary spare parts and technology, thereby encouraging
new entrants to join the market with reduced initial investment costs.

While these proposals were broadly welcomed by groups representing consumers
(e.g. the Consumer Association in the UK), some observers felt that the planned
reforms did not go far enough to weaken the power of the suppliers over the market
(see e.g. the editorial in the Financial Times, 11 January 2002). For instance it
appeared to be the case that while manufacturers would be able to supply cars to
supermarkets and other new retailers, they would not be required by law to do so,
suggesting that a market free-for-all was highly unlikely to emerge in the foreseeable
future. Equally the Commission’s plans appeared to do little to protect dealers from
threats to terminate their franchises should there be a dispute with the supplier.

In the event the old block exemption scheme expired at the end of September
2002 and the new rules began the next day. However, the majority of the provisions
under the EC rules did not come into effect until the following October (2003) and
the ban on ‘location clauses’ – which limit the geographical scope of dealer opera-
tions – only came into effect two years later. Since October 2005 dealers have been
free to set up secondary sales outlets in other areas of the EU, as well as their own
countries. This is expected to stengthen competition between dealers across the
Single Market to the advantage of consumers (e.g. greater choice and reduced prices).

 

 

Case study questions

  1. Can you suggest any reasons why the European Commission was willing to grant
    the block exemption in the first place, given that it ran counter to its proposals for
    a Single Market?

 

  1. Why might the new reforms make cars cheaper for European consumers?

 

Case 5 : The sale of goods on the Internet

 

The sale of consumer goods on the Internet (particularly those between European member states) raises a number of legal issues. First, there is the issue of trust, with-
out which the consumer will not buy; they will need assurance that the seller is genuine, and that they will get the goods that they believe they have ordered.
Second, there is the issue of consumer rights with respect to the goods in question: what rights exist and do they vary across Europe? Last, the issue of enforcement: what happens should anything go wrong?

 

Information and trust

Europe recognises the problems of doing business across the Internet or telephone
and it has attempted to address the main stumbling blocks via Directives. The
Consumer Protection (Distance Selling) Regulations 2000 attempts to address the
issues of trust in cross-border consumer sales, which may take place over the
Internet (or telephone). In short, the consumer needs to know quite a bit of infor-
mation, which they may otherwise have easy access to if they were buying face to
face. Regulation 7 requires inter alia for the seller to identify themselves and an
address must be provided if the goods are to be paid for in advance. Moreover, a
full description of the goods and the final price (inclusive of any taxes) must also
be provided. The seller must also inform the buyer of the right of cancellation available under Regulations 10-12, where the buyer has a right to cancel the contract for seven days starting on the day after the consumer receives the goods or services. Failure to inform the consumer of this right automatically extends the period to three months. The cost of returning goods is to be borne by the buyer, and the seller is entitled to deduct the costs directly flowing from recovery as a restocking fee. All of this places a considerable obligation on the seller; however, such data should stem many misunderstandings and so greatly assist consumer faith and confidence in non-face-to-face sales.

Another concern for the consumer is fraud. The consumer who has paid by
credit card will be protected by section 83 of the Consumer Credit Act 1974, under
which a consumer/purchaser is not liable for the debt incurred, if it has been run
up by a third party not acting as the agent of the buyer. The Distance Selling
Regulations extend this to debit cards, and remove the ability of the card issuer to
charge the consumer for the first £50 of loss (Regulation 21). Moreover, section 75
of the Consumer Credit Act 1974 also gives the consumer/buyer a like claim against
the credit card company for any misrepresentation or breach of contract by the
seller. This is extremely important in a distance selling transaction, where the seller
may disappear.

 

What quality and what rights?

The next issue relates to the quality that may be expected from goods bought over
the Internet. Clearly, if goods have been bought from abroad, the levels of quality
required in other jurisdictions may vary. It is for this reason that Europe has
attempted to standardise the issue of quality and consumer rights, with the
Consumer Guarantees Directive (1999/44/EC), thus continuing the push to encour-
age cross-border consumer purchases. The implementing Sale and Supply of Goods
to Consumer Regulations 2002 came into force in 2003, which not only lays down
minimum quality standards, but also provides a series of consumer remedies which
will be common across Europe. The Regulations further amend the Sale of Goods
Act 1979. The DTI, whose job it was to incorporate the Directive into domestic law
(by way of delegated legislation) ensured that the pre-existing consumer rights were
maintained, so as not to reduce the overall level of protection available to con-
sumers. The Directive requires goods to be of ‘normal’ quality, or fit for any
purpose made known by the seller. This has been taken to be the same as our pre-
existing ‘reasonable quality’ and ‘fitness for purpose’ obligations owed under
sections 14(2) and 14(3) of the Sale of Goods Act 1979. Moreover, the pre-existing
remedy of the short-term right to reject is also retained. This right provides the
buyer a short period of time to discover whether the goods are in conformity with
the contract. In practice, it is usually a matter of weeks at most. After that time has
elapsed, the consumer now has four new remedies that did not exist before, which
are provided in two pairs. These are repair or replacement, or price reduction or
rescission. The pre-existing law only gave the consumer a right to damages, which
would rarely be exercised in practice. (However, the Small Claims Court would
ensure a speedy and cheap means of redress for almost all claims brought.) Now
there is a right to a repair or a replacement, so that the consumer is not left with an
impractical action for damages over defective goods. The seller must also bear the
cost of return of the goods for repair. So such costs must now be factored into any

business sales plan. If neither of these remedies is suitable or actioned within a ‘rea-
sonable period of time’ then the consumer may rely on the second pair of
remedies. Price reduction permits the consumer to claim back a segment of the pur-
chase price if the goods are still useable. It is effectively a discount for defective
goods. Rescission permits the consumer to reject the goods, but does not get a full
refund, as they would under the short-term right to reject. Here money is knocked
off for ‘beneficial use’. This is akin to the pre-existing treatment for breaches of
durability, where goods have not lasted as long as goods of that type ought reason-
ably be expected to last. The level of compensation would take account of the use
that the consumer has (if any) been able to put the goods to and a deduction made
off the return of the purchase price. However, the issue that must be addressed is as
to the length of time that goods may be expected to last. A supplier may state the
length of the guarantee period, so a £500 television set guaranteed for one year
would have a life expectancy of one year. On the other hand, a consumer may
expect a television set to last ten years. Clearly, if the set went wrong after six
months, the consumer would only get £250 back if the retailer’s figure was used,
but would receive £475 if their own figure was used. It remains to be seen how this
provision will work in practice.

One problem with distance sales has been that of liability for goods which arrive
damaged. The pre-existing domestic law stated that risk would pass to the buyer once
the goods were handed over to a third-party carrier. This had the major problem in
practice of who would actually be liable for the damage. Carriers would blame the
supplier and vice versa. The consumer would be able to sue for the loss, if they were
able to determine which party was responsible. In practice, consumers usually went
uncompensated and such a worry has put many consumers off buying goods over the
Internet. The Sale and Supply of Goods to Consumer Regulations also modify the
transfer of risk, so that now the risk remains with the seller until actual delivery. This
will clearly lead to a slight increase in the supply of goods to consumers, with the
goods usually now being sent by insured delivery. However, this will avoid the prob-
lem of who is actually liable and should help to boost confidence.

 

Enforcement

Enforcement for domestic sales is relatively straightforward. Small-scale consumer
claims can be dealt with expeditiously and cheaply under the Small Claims Court.
Here claims under £5000 for contract-based claims are brought in a special court
intended to keep costs down by keeping the lawyers’ out of the court room, as a vic-
torious party cannot claim for their lawyers’ expenses. The judge will conduct the
case in a more ‘informal’ manner, and will seek to discover the legal issues by ques-
tioning both parties, so no formal knowledge of the law is required. The total cost of
such a case, even if it is lost, is the cost of issuing the proceedings (approximately

10 per cent of the value claimed) and the other side’s ‘reasonable expenses’. Expenses
must be kept down, and a judge will not award value which has been deliberately run
up, such first-class rail travel and stays in five star hotels. Residents of Northampton
have hosted a trial of an online claims procedure, so that claims may now be made
via the Internet. (www.courtservice.gov.uk outlines the procedure for MCOL, or
Money Claims Online.) Cases will normally be held in the defendant’s court, unless the complainant is a consumer and the defendant a business.

 

Enforcement is the weak point in the European legislation, for there is, as yet, no
European-wide Small Claims Court dealing with transnational European transac-
tions. The consumer is thus forced to contemplate expensive civil action abroad in a
foreign language, perhaps where no such small claims system exists – a pointless
measure for all but the most expensive of consumer purchases. The only redress lies
in EEJ-Net, the European Extra-Judicial Network, which puts the complainant in
touch with any applicable professional or trade body in the supplier’s home member
state. It does require the existence of such a body, which is unlikely if the transac-
tion is for electrical goods, which is one of the most popular types of Internet
purchase. Therefore, until Europe provides a Euro Small Claims Court, the consumer
cross-border buyer may have many rights, but no effective means of enforcement.
Until then it would appear that section 75 of the Consumer Credit Act 1974, which
gives the buyer the same remedies against their credit card company as against the
seller, is the only effective means of redress.

 

Case study questions

  1. Consider the checklist of data which a distance seller must provide to a consumer
    Is this putting too heavy a burden on sellers?

 

  1. Is a consumer distance buyer any better off after the European legislation?
  2. Are there any remaining issues that must be tackled to increase European cross-
    border consumer trade?b

BUSINESS ENVIRONMENT IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

BUSINESS ENVIRONMENT IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED WHATSAPP 91 9924764558

CONTACT:

DR. PRASANTH BE BBA MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521 EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com

 

Attempt Any Four Case Study

Case Study 1 : Structuring global companies

 

As the chapter illustrates, to carry out their activities in pursuit of their objectives, virtually all organisations adopt some form of organisational structure. One traditional method of organisation is to group individuals by function or purpose, using a departmental structure to allocate individuals to their specialist areas (e.g. Marketing, HRM and so on ). Another is to group activities by product or service, with each product group normally responsible for providing its own functional requirements. A third is to combine the two in the form of a matrix structure with its vertical and horizontal flows of responsibility and authority, a method of organisation much favoured in university Business Schools.

What of companies with a global reach: how do they usually organise them-
selves?

Writing in the Financial Times in November 2000 Julian Birkinshaw, Associate Professor of Strategic and International Management at London Business School, identifies four basic models of global company structure:

  • The International Division – an arrangement in which the company establishes a
    separate division  to  deal  with  business  outside  its  own  country.  The
    International Division would typically be concerned with tariff and trade issues,
    foreign agents/partners and other aspects involved in selling overseas. Normally
    the division does not make anything itself, it is simply responsible for interna-
    tional sales. This arrangement tends to be found in medium-sized companies
    with limited international sales.

The Global Product Division – a product-based structure with managers responsible
for their product line globally. The company is split into a number of global busi-
nesses arranged by product (or service) and usually overseen by their own
president. It has been a favoured structure among large global companies such as
BP, Siemens and 3M.

  • The Area Division – a geographically based structure in which the major line of
    authority lies with the country (e.g. Germany) or regional (e.g. Europe) manager who
    is responsible for the different product offerings within her/his geographical area.
    ● The Global Matrix – as the name suggests a hybrid of the two previous structural
    types. In the global matrix each business manager reports to two bosses, one
    responsible for the global product and one for the country/region. As we indi-
    cated in the previous edition of this book, this type of structure tends to come
    into and go out of fashion. Ford, for example, adopted a matrix structure in the
    later 1990s, while a number of other global companies were either streamlining
    or dismantling theirs (e.g. Shell, BP, IBM).

As Professor Birkinshaw indicates, ultimately there is no perfect structure and organisations tend to change their approach over time according to changing circumstances,  fads,  the  perceived  needs  of  the  senior  executives  or  the predispositions of powerful individuals. This observation is no less true of universities than it is of traditional businesses.

Case study questions

  1. Professor Birkinshaw’s article identifies the advantages and disadvantages of being a global business. What are his major arguments?

 

  1. In your opinion what are likely to be the key factors determining how a global company will organise itself?

 

Case 2 : Resource prices

 

As we saw in Chapter 1, resources such as labour, technology and raw materials
constitute inputs into the production process that are utilised by organisations to
produce outputs. Apart from concerns over the quality, quantity and availability of
the different factors of production, businesses are also interested in the issue of
input prices since these represent costs to the organisation which ultimately have
to be met from revenues if the business is to survive. As in any other market, the
prices of economic resources can change over time for a variety of reasons, most, if
not all, of which are outside the direct control of business organisations. Such fluc-
tuations in input prices can be illustrated by the following examples:

  • Rising labour costs – e.g. rises in wages or salaries and other labour-related costs
    (such as pension contributions or healthcare schemes) that are not offset by
    increases in productivity or changes in working practices. Labour costs could rise
    for a variety of reasons including skills shortages, demographic pressures, the
    introduction of a national minimum wage or workers seeking to maintain their
    living standards in an inflationary period.
  • Rising raw material costs – e.g. caused by increases in the demand for certain raw
    materials and/or shortages (or bottlenecks) in supply. It can also be the result of
    the need to switch to more expensive raw material sources because of customer
    pressure, environmental considerations or lack of availability.
  • Rising energy costs – e.g. caused by demand and/or supply problems as in the oil
    market in recent years, with growth in India and China helping to push up
    demand and coinciding with supply difficulties linked to events such as the war
    in Iraq, hurricanes in the Gulf of Mexico or decisions by OPEC.
    ● Increases in the cost of purchasing new technology/capital equipment – e.g.
    caused by the need to compete with rivals or to meet more stringent government
    regulations in areas such as health and safety or the environment.

As the above examples illustrate, rising input prices can be the result of factors operating at both the micro and macro level and these can range from events which are linked to natural causes to developments of a political, social and/or economic kind. While many of these influences in the business environment are uncontrollable, there are steps business organisations can (and do) often take to address the issue of rising input prices that may threaten their competitiveness. Examples include the following:

  • Seeking cheaper sources of labour (e.g. Dyson moved its production of vacuum
    cleaners to the Far East).
  • Abandoning salary-linked pension schemes or other fringe benefits (e.g. com-
    pany cars, healthcare provisions, paid holidays).
  • Outsourcing certain activities (e.g. using call centres to handle customer com-
    plaints, or outsourcing services such as security, catering, cleaning, payroll, etc.). ● Switching raw materials or energy suppliers (e.g. to take advantage of discounts

by entering into longer agreements to purchase).

 

  • Energy-saving measures (e.g. through better insulation, more regular servicing of
    equipment, product and/or process redesign).
  • Productivity gains (e.g. introducing incentive schemes).

In addition to measures such as these, some organisations seek cost savings through
divestment of parts of the business or alternatively through merger or takeover
activity. In the former case the aim tends to be to focus on the organisation’s core
products/services and to shed unprofitable and/or costly activities; in the latter the
objective is usually to take advantage of economies of scale, particularly those asso-
ciated with purchasing, marketing, administration and financing the business.

 

 

Case study questions

  1. If a company is considering switching production to a country where wage costs
    are lower, what other factors will it need to take into account before doing so?

 

  1. Will increased environmental standards imposed by government on businesses
    inevitably result in higher business costs?

 

Case 3 : Government and business – friend or foe?

 

As we have seen, governments intervene in the day-to-day working of the economy
in a variety of ways in the hope of improving the environment in which industrial
and commercial activity takes place. How far they are successful in achieving this
goal is open to question. Businesses, for example, frequently complain of over-
interference  by  governments  and  of  the  burdens  imposed  upon  them  by
government legislation and regulation. Ministers, in contrast, tend to stress how
they have helped to create an environment conducive to entrepreneurial activity
through the different policy initiatives and through a supportive legal and fiscal
regime. Who is right?

While there is no simple answer to this question, it is instructive to examine the
different surveys which are regularly undertaken of business attitudes and condi-
tions in different countries. One such survey by the European Commission – and
reported by Andrew Osborn in the Guardian on 20 November 2001 – claimed that
whereas countries such as Finland, Luxembourg, Portugal and the Netherlands
tended to be regarded as business-friendly, the United Kingdom was perceived as
the most difficult and complicated country to do business with in the whole of
Europe. Foreign firms evidently claimed that the UK was harder to trade with than
other countries owing to its bureaucratic procedures and its tendency to rigidly
enforce business regulations. EU officials singled out Britain’s complex tax formali-
ties, employment regulations and product conformity rules as particular problems
for foreign companies – criticisms which echo those of the CBI and other represen-
tative bodies who have been complaining of the cost of over-regulation to UK firms
over a considerable number of years.

The news, however, is not all bad. The Competitive Alternatives study (2002) by
KPMG of costs in various cities in the G7 countries, Austria and the Netherlands
indicated that Britain is the second cheapest place in which to do business in the
nine industrial countries (see www.competitivealternatives.com). The survey, which
looked at a range of business costs – especially labour costs and taxation -, placed
the UK second behind Canada world-wide and in first place within Europe. The
country’s strong showing largely reflected its competitive labour costs, with manu-
facturing costs estimated to be 12.5 per cent lower than in Germany and 20 per
cent lower than many other countries in continental Europe. Since firms frequently
use this survey to identify the best places to locate their business, the data on rela-
tive costs are likely to provide the UK with a competitive advantage in the battle for
foreign inward investment (see Mini case, above).

 

Case study questions

  1. How would you account for the difference in perspective between firms who often
    complain of government over-interference in business matters and ministers who
    claim that they have the interests of business at heart when taking decisions?

 

  1. To what extent do you think that relative costs are the critical factor in determining
    inward investment decisions?

 

 

Case 4 : The end of the block exemption

 

As we have seen in the chapter, governments frequently use laws and regulations to promote competition within the marketplace in the belief that this has significant benefits for the consumer and for the economy generally. Such interventions occur not only at national level, but also in situations where governments work together to provide mutual benefits, as in the European Union’s attempts to set up a ‘Single Market’ across the member states of the EU.

While few would deny that competitive markets have many benefits, the search
for increased competition at national level and beyond can sometimes be
restrained by the political realities of the situation, a point underlined by a previous
decision of the EU authorities to allow a block exemption from the normal rules of
competition in the EU car market. Under this system, motor manufacturers operat-
ing within the EU were permitted to create networks of selective and exclusive dealerships and to engage in certain other activities normally outlawed under the competition provisions of the single market. It was argued that the system of selective and exclusive distribution (SED) benefited consumers by providing them with a cradle-to-grave service, alongside what was said to be a highly competitive supply situation within the heavily branded global car market.

Introduced in 1995, and extended until the end of September 2002, the block
exemption was highly criticised for its impact on the operation of the car market in
Europe. Following a critical report by the UK competition authorities in April 2000,
the EU published a review (in November 2000) of the workings of the existing
arrangement for distributing and servicing cars, highlighting its adverse conse-
quences for both consumers and retailers and signalling the need for change. Despite
intensive lobbying by the major car manufacturers, and by some national govern-
ments, to maintain the current rules largely intact, the European Commission
announced its intention of replacing the block exemption regulation when it expired
in September, subject of course to consultation with interested parties.

In essence the Commission’s proposals aimed to give dealers far more independ-
ence from suppliers by allowing them to solicit for business anywhere in the EU
and to open showrooms wherever they want; they would also be able to sell cars
supplied by different manufacturers under the same roof. The plan also sought to
open up the aftersales market by breaking the tie which existed between sales and
servicing. The proposal was that independent repairers would in future be able to
get greater access to the necessary spare parts and technology, thereby encouraging
new entrants to join the market with reduced initial investment costs.

While these proposals were broadly welcomed by groups representing consumers
(e.g. the Consumer Association in the UK), some observers felt that the planned
reforms did not go far enough to weaken the power of the suppliers over the market
(see e.g. the editorial in the Financial Times, 11 January 2002). For instance it
appeared to be the case that while manufacturers would be able to supply cars to
supermarkets and other new retailers, they would not be required by law to do so,
suggesting that a market free-for-all was highly unlikely to emerge in the foreseeable
future. Equally the Commission’s plans appeared to do little to protect dealers from
threats to terminate their franchises should there be a dispute with the supplier.

In the event the old block exemption scheme expired at the end of September
2002 and the new rules began the next day. However, the majority of the provisions
under the EC rules did not come into effect until the following October (2003) and
the ban on ‘location clauses’ – which limit the geographical scope of dealer opera-
tions – only came into effect two years later. Since October 2005 dealers have been
free to set up secondary sales outlets in other areas of the EU, as well as their own
countries. This is expected to stengthen competition between dealers across the
Single Market to the advantage of consumers (e.g. greater choice and reduced prices).

 

 

Case study questions

  1. Can you suggest any reasons why the European Commission was willing to grant
    the block exemption in the first place, given that it ran counter to its proposals for
    a Single Market?

 

  1. Why might the new reforms make cars cheaper for European consumers?

 

Case 5 : The sale of goods on the Internet

 

The sale of consumer goods on the Internet (particularly those between European member states) raises a number of legal issues. First, there is the issue of trust, with-
out which the consumer will not buy; they will need assurance that the seller is genuine, and that they will get the goods that they believe they have ordered.
Second, there is the issue of consumer rights with respect to the goods in question: what rights exist and do they vary across Europe? Last, the issue of enforcement: what happens should anything go wrong?

 

Information and trust

Europe recognises the problems of doing business across the Internet or telephone
and it has attempted to address the main stumbling blocks via Directives. The
Consumer Protection (Distance Selling) Regulations 2000 attempts to address the
issues of trust in cross-border consumer sales, which may take place over the
Internet (or telephone). In short, the consumer needs to know quite a bit of infor-
mation, which they may otherwise have easy access to if they were buying face to
face. Regulation 7 requires inter alia for the seller to identify themselves and an
address must be provided if the goods are to be paid for in advance. Moreover, a
full description of the goods and the final price (inclusive of any taxes) must also
be provided. The seller must also inform the buyer of the right of cancellation available under Regulations 10-12, where the buyer has a right to cancel the contract for seven days starting on the day after the consumer receives the goods or services. Failure to inform the consumer of this right automatically extends the period to three months. The cost of returning goods is to be borne by the buyer, and the seller is entitled to deduct the costs directly flowing from recovery as a restocking fee. All of this places a considerable obligation on the seller; however, such data should stem many misunderstandings and so greatly assist consumer faith and confidence in non-face-to-face sales.

Another concern for the consumer is fraud. The consumer who has paid by
credit card will be protected by section 83 of the Consumer Credit Act 1974, under
which a consumer/purchaser is not liable for the debt incurred, if it has been run
up by a third party not acting as the agent of the buyer. The Distance Selling
Regulations extend this to debit cards, and remove the ability of the card issuer to
charge the consumer for the first £50 of loss (Regulation 21). Moreover, section 75
of the Consumer Credit Act 1974 also gives the consumer/buyer a like claim against
the credit card company for any misrepresentation or breach of contract by the
seller. This is extremely important in a distance selling transaction, where the seller
may disappear.

 

What quality and what rights?

The next issue relates to the quality that may be expected from goods bought over
the Internet. Clearly, if goods have been bought from abroad, the levels of quality
required in other jurisdictions may vary. It is for this reason that Europe has
attempted to standardise the issue of quality and consumer rights, with the
Consumer Guarantees Directive (1999/44/EC), thus continuing the push to encour-
age cross-border consumer purchases. The implementing Sale and Supply of Goods
to Consumer Regulations 2002 came into force in 2003, which not only lays down
minimum quality standards, but also provides a series of consumer remedies which
will be common across Europe. The Regulations further amend the Sale of Goods
Act 1979. The DTI, whose job it was to incorporate the Directive into domestic law
(by way of delegated legislation) ensured that the pre-existing consumer rights were
maintained, so as not to reduce the overall level of protection available to con-
sumers. The Directive requires goods to be of ‘normal’ quality, or fit for any
purpose made known by the seller. This has been taken to be the same as our pre-
existing ‘reasonable quality’ and ‘fitness for purpose’ obligations owed under
sections 14(2) and 14(3) of the Sale of Goods Act 1979. Moreover, the pre-existing
remedy of the short-term right to reject is also retained. This right provides the
buyer a short period of time to discover whether the goods are in conformity with
the contract. In practice, it is usually a matter of weeks at most. After that time has
elapsed, the consumer now has four new remedies that did not exist before, which
are provided in two pairs. These are repair or replacement, or price reduction or
rescission. The pre-existing law only gave the consumer a right to damages, which
would rarely be exercised in practice. (However, the Small Claims Court would
ensure a speedy and cheap means of redress for almost all claims brought.) Now
there is a right to a repair or a replacement, so that the consumer is not left with an
impractical action for damages over defective goods. The seller must also bear the
cost of return of the goods for repair. So such costs must now be factored into any

business sales plan. If neither of these remedies is suitable or actioned within a ‘rea-
sonable period of time’ then the consumer may rely on the second pair of
remedies. Price reduction permits the consumer to claim back a segment of the pur-
chase price if the goods are still useable. It is effectively a discount for defective
goods. Rescission permits the consumer to reject the goods, but does not get a full
refund, as they would under the short-term right to reject. Here money is knocked
off for ‘beneficial use’. This is akin to the pre-existing treatment for breaches of
durability, where goods have not lasted as long as goods of that type ought reason-
ably be expected to last. The level of compensation would take account of the use
that the consumer has (if any) been able to put the goods to and a deduction made
off the return of the purchase price. However, the issue that must be addressed is as
to the length of time that goods may be expected to last. A supplier may state the
length of the guarantee period, so a £500 television set guaranteed for one year
would have a life expectancy of one year. On the other hand, a consumer may
expect a television set to last ten years. Clearly, if the set went wrong after six
months, the consumer would only get £250 back if the retailer’s figure was used,
but would receive £475 if their own figure was used. It remains to be seen how this
provision will work in practice.

One problem with distance sales has been that of liability for goods which arrive
damaged. The pre-existing domestic law stated that risk would pass to the buyer once
the goods were handed over to a third-party carrier. This had the major problem in
practice of who would actually be liable for the damage. Carriers would blame the
supplier and vice versa. The consumer would be able to sue for the loss, if they were
able to determine which party was responsible. In practice, consumers usually went
uncompensated and such a worry has put many consumers off buying goods over the
Internet. The Sale and Supply of Goods to Consumer Regulations also modify the
transfer of risk, so that now the risk remains with the seller until actual delivery. This
will clearly lead to a slight increase in the supply of goods to consumers, with the
goods usually now being sent by insured delivery. However, this will avoid the prob-
lem of who is actually liable and should help to boost confidence.

 

Enforcement

Enforcement for domestic sales is relatively straightforward. Small-scale consumer
claims can be dealt with expeditiously and cheaply under the Small Claims Court.
Here claims under £5000 for contract-based claims are brought in a special court
intended to keep costs down by keeping the lawyers’ out of the court room, as a vic-
torious party cannot claim for their lawyers’ expenses. The judge will conduct the
case in a more ‘informal’ manner, and will seek to discover the legal issues by ques-
tioning both parties, so no formal knowledge of the law is required. The total cost of
such a case, even if it is lost, is the cost of issuing the proceedings (approximately

10 per cent of the value claimed) and the other side’s ‘reasonable expenses’. Expenses
must be kept down, and a judge will not award value which has been deliberately run
up, such first-class rail travel and stays in five star hotels. Residents of Northampton
have hosted a trial of an online claims procedure, so that claims may now be made
via the Internet. (www.courtservice.gov.uk outlines the procedure for MCOL, or
Money Claims Online.) Cases will normally be held in the defendant’s court, unless the complainant is a consumer and the defendant a business.

 

Enforcement is the weak point in the European legislation, for there is, as yet, no
European-wide Small Claims Court dealing with transnational European transac-
tions. The consumer is thus forced to contemplate expensive civil action abroad in a
foreign language, perhaps where no such small claims system exists – a pointless
measure for all but the most expensive of consumer purchases. The only redress lies
in EEJ-Net, the European Extra-Judicial Network, which puts the complainant in
touch with any applicable professional or trade body in the supplier’s home member
state. It does require the existence of such a body, which is unlikely if the transac-
tion is for electrical goods, which is one of the most popular types of Internet
purchase. Therefore, until Europe provides a Euro Small Claims Court, the consumer
cross-border buyer may have many rights, but no effective means of enforcement.
Until then it would appear that section 75 of the Consumer Credit Act 1974, which
gives the buyer the same remedies against their credit card company as against the
seller, is the only effective means of redress.

 

Case study questions

  1. Consider the checklist of data which a distance seller must provide to a consumer
    Is this putting too heavy a burden on sellers?

 

  1. Is a consumer distance buyer any better off after the European legislation?
  2. Are there any remaining issues that must be tackled to increase European cross-
    border consumer trade?

INTERNATIONAL BUSINESS IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

         INTERNATIONAL BUSINESS IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED WHATSAPP 91 9924764558

 

CONTACT: 

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     International Business

                                 Marks – 100

 

         Note: Solve any 4 Cases Study’s

 

CASE: I    ARROW AND THE APPAREL INDUSTRY

 

Ten years ago, Arvind Clothing Ltd., a subsidiary of Arvind Brands Ltd., a member of the Ahmedabad based Lalbhai Group, signed up with the 150- year old Arrow Company, a division of Cluett Peabody & Co. Inc., US, for licensed manufacture of Arrow shirts in India. What this brought to India was not just another premium dress shirt brand but a new manufacturing philosophy to its garment industry which combined high productivity, stringent in-line quality control, and a conducive factory ambience.

Arrow’s first plant, with a 55,000 sq. ft. area and capacity to make 3,000 to 4,000 shirts a day, was established at Bangalore in 1993 with an investment of Rs 18 crore. The conditions inside—with good lighting on the workbenches, high ceilings, ample elbow room for each worker, and plenty of ventilation, were a decided contrast to the poky, crowded, and confined sweatshops characterising the usual Indian apparel factory in those days. It employed a computer system for translating the designed shirt’s dimensions to automatically mark the master pattern for initial cutting of the fabric layers. This was installed, not to save labour but to ensure cutting accuracy and low wastage of cloth.

The over two-dozen quality checkpoints during the conversion of fabric to finished shirt was unique to the industry. It is among the very few plants in the world that makes shirts with 2 ply 140s and 3 ply 100s cotton fabrics using 16 to 18 stitches per inch. In March 2003, the Bangalore plant could produce stain-repellant shirts based on nanotechnology.

The reputation of this plant has spread far and wide and now it is loaded mostly with export orders from renowned global brands such as GAP, Next, Espiri, and the like. Recently the plant was identified by Tommy Hilfiger to make its brand of shirts for the Indian market. As a result, Arvind Brands has had to take over four other factories in Bangalore on wet lease to make the Arrow brand of garments for the domestic market.

In fact, the demand pressure from global brands which want to outsource form Arvind Brands is so great that the company has had to set up another large factory for export jobs on the outskirts of Bangalore. The new unit of 75,000 sq. ft. has cost Rs 16 crore and can turn out 8,000 to 9,000 shirts per day. The technical collaborators are the renowned C&F Italia of Italy.

Among the cutting edge technologies deployed here are a Gerber make CNC fabric cutting machine, automatic collar and cuff stitching machines, pneumatic holding for tasks like shoulder joining, threat trimming and bottom hemming, a special machine to attach and edge stitch the back yoke, foam finishers which use air and steam to remove creases in the finished garment, and many others. The stitching machines in this plant can deliver up to 25 stitches per inch. A continuous monitoring of the production process in the entire factory is done through a computerised apparel production management system, which is hooked to every machine. Because of the use of such technology, this plant will need only 800 persons for a capacity which is three times that of the first plant which employs 580 persons.

Exports of garments made for global brands fetched Arvind Brands over Rs 60 crore in 2002, and this can double in the next few years, when the new factory goes on full stream. In fact, with the lifting of the country-wise quota regime in 2005, there will be surge in demand for high quality garments from India and Arvind is already considering setting up two more such high tech export-oriented factories.

It is not just in the area of manufacture but also retailing that the Arrow brand brought a wind of change on the Indian scene. Prior to its coming, the usual Indian shirt shop used to be a clutter of racks with little by way of display. What Arvind Brands did was to set up exclusive showrooms for Arrow shirts in which the functional was combined with aesthetic. Stuffed racks and clutter eschewed. The product were displayed in such a manner the customer could spot their qualities from a distance. Of course, today this has become standard practice with many other brands in the country, but Arrow showed the way. Arrow today has the largest network of 64 exclusive outlets across India. It is also present in 30 retail chains. It branched into multi-brand outlets in 2001, and is present in over 200 select outlets.

From just formal dress shirts in the beginning, the product range of Arvind Brands has expanded in the last ten years to include casual shirts, T-shirts, and trousers. In the pipeline are light jackets and jeans engineered for the middle-aged paunch. Arrow also tied up with the renowned Italian designer, Renato Grande, who has worked with names like Versace and Marlboro, to design its Spring / Summer Collection 2003. The company has also announced its intention to license the Arrow brand for other lifestyle accessories like footwear, watches, undergarments, fragrances, and leather goods. According to Darshan Mehta, President, Arvind Brands Ltd., the current turnover at retail prices of the Arrow brand in India is about Rs 85 crore. He expects the turnover to cross Rs 100 crore in the next few years, of which about 15 per cent will be from the licensed non-clothing products.

In 2005, Arvind Brands launched a major retail initiative for all its brands. Arvind Brands licensed brands (Arrow, Lee and Wrangler) had grown at a healthy 35 per cent rate in 2004 and the company planned to sustain the growth by increasing their retail presence. Arvind Brands also widened the geographical presence of its home-grown brands, such as Newport and Ruf-n Tuf, targeting small towns across India. The company planned to increase the number of outlets where its domestic brands would be available, and draw in new customers for readymades. To improve its presence in the high-end market, the firm started negotiating with an international brand and is likely to launch the brand.

The company has plans to expand its retail presence of Newport Jeans, from 1200 outlets across 480 towns to 3000 outlets covering 800 towns.

For a company ranked as one of the world’s largest manufactures of denim cloth and owners of world famous brands, the future looks bright and certain for Arvind Brands Ltd.

 

Company profile

 

Name of the Company              :Arvind Mills

Year of Establishment              :1931

Promoters                                   : Three brothers–Katurbhai, Narottam Bhai, and Chimnabhai

Divisions                                    :Arvind Mills was split in 1993 into Units—textiles, telecom and garments. Arvind Ltd. (textile unit) is 100 per cent                          subsidiary of Arvind Mills.

Growth Strategy                             :Arvind Mills has grown through buying-up of sick units, going global and acquisition of German and US brand             names.

 

Questions

 

  1. Why did Arvind Mills choose globalization as the major route to achieve growth when the domestic market was huge?

 

  1. How does lifting of ‘Country-wise quota regime’ help Arvind Mills?
  2. What lessons can other Indian businesses learn form the experience of Arvind Mills?

 

 

 

 

CASE: II    THE ECONOMY OF KENYA

 

Kenya’ economy has been beset by high rates of unemployment and underemployment for many years. But at no time has it been more significant and more politically dangerous than in the late 1990s as an authoritarian beset by corruption, cronyism and economic plunder threatened the economic stability of this once proud nation. Yet Kenya still has great potential. Located in East Africa, it has a diverse geographic and climatic endowment. Three-fifths of the nation is semiarid desert (mostly in the north), and the resulting infertility of this land has dictated the location of 85 per cent of the population (30 million in 2000) and almost all economic activity in the southern two-fifths of the country. Kenya’s rapidly growing population is composed of many tribes and is extremely heterogeneous (including traditional herders, subsistence and commercial farmers, Arab Muslims, and cosmopolitan residents of Nairobi). The standard of living at least in major cities, is relatively high compared to the average of other sub-Saharan African countries.

However, widespread poverty (per capita US$360), high unemployment, and growing income inequality make Kenya a country of economic as well as geographic diversity. Agriculture is the most important economic activity. About three quarters of the population still lives in rural areas and about 7 million workers are employed in agriculture, accounting for over two-thirds of the total workforce.

Despite many changes in the democratic system, including the switch from a federal to a republican government, the conversion of the prime ministerial system into a presidential one, the transition to a unicameral legislature, and the creation of a one-party state, Kenya has displayed relatively high political stability (by African standards) since gaining independence from Britain in 1963. Since independence, there have been only two presidents. However, this once stable and prosperous capitalist nation has witnessed widespread ethnic violence and political upheavals since 1992 as a deteriorating economy, unpopular one-party rule, and charges of government corruption create a tense situation.

An expansionary economic policy characterised by large public investments, support of small agricultural production units, and incentives for private (domestic and foreign) industrial investment played an important role in the early 7 per cent rate of GDP growth in the first decade after independence. In the following seven years (1973-80), the oil crisis let to a lower GDP growth to an annual rate of 5 per cent. Along with the oil price shock, lack of adequate domestic saving and investment slowed the growth of the economy. Various economic policies designed to promote industrial growth led to a neglect of agriculture and a consequent decline in farm prices, farm production, and farmer incomes. As peasant farmers became poorer, more migrated to Nairobi, swelling an already overcrowded city and pushing up an existing high rate of urban unemployment. Very high birthrates along with a steady decline in death rates (mainly through lower infant mortality) led Kenya’s population growth to become the highest in the world (4.1 per cent per year) in 1988. Population growth fell to a still high rate of 2.4 per cent for the period 1990-2000.

The slowdown in GDP growth persisted in the following five years (1980-85), when the annual average was 2.6 per cent. It was a period of stabilization in which political shakiness of 1982 and the severe drought in 1984 contributed to a slowdown in industrial growth. Interest rates rose and wages fell in the public and private sectors. An improvement in the budget deficit and current account trade deficit, obtained through cuts in development expenditures and recessive policies aimed at reducing imports, contributed to lower economic growth. By 1990, Kenya’s per capita income was 9 per cent lower than it was in 1980–$370 compared to $410. It continued to decline in the 1990s. In fact, GDP per capita fell at an annual average rate of 0.3 per cent throughout the decade. At the same time, the urban unemployment rate rose to 30 per cent.

Comprising 23 per cent of 2000 GDP AND 77 per cent of merchandise exports, agricultural production is the backbone of the Kenyan economy. Because of its importance, the Kenyan government has implemented several policies to nourish the agricultural sector. Two such policies include fixing attractive producer prices and making available increasing amounts of fertilizer. Kenya’s chief agricultural exports are coffee, tea, sisal, cashew nuts, pyrethrum, and horticultural products. Traditionally, coffee has been Kenya’s chief earner in foreign exchange.

Although Kenya is chiefly agrarian, it is still the most industrialised country in eastern Africa. Public and private industry accounted for 16 per cent of GDP in 2000. Kenya’s chief manufacturing activities are food processing and the production of beverages, tobacco, footwear, textiles, cement, metal products, paper, and chemicals.

Kenya currently faces a multitude of problems. These include a stagnating economy, growing political unrest, a huge budget deficit, high unemployment, a substantial balance of payments problem, and a stubbornly high population growth rate.

With the unemployment rate already at 30 per cent and its population growing, Kenya faces the major task of employing its burgeoning labour force. Yet only 10-15 per cent of seekers land jobs in the modern industrial sector. The remainder must find jobs in the self-employment sector; in the agricultural sector, where wages are low and opportunities are scarce; or join the masses of the unemployed.

In addition to the unemployment problem, Kenya must always be concerned with how to feed its growing population. An increase in population means an increasing demand for food. Yet only 20 per cent of Kenya’s land is arable. This implies that the land must become increasingly productive. Unfortunately, several factors work to constrain Kenya’s food output, among them fragmented landholdings, increasing environmental degradation, the high cost of agricultural inputs, and burdensome governmental involvement in the purchase, sale, and pricing of agricultural output.

For the fiscal year 1995, the Kenyan budget deficit was $362 million, well above the government’s target rate. Dealing with a high budget deficit is a second problem Kenya currently faces. Following the collapse of the East African Common Market, Kenya’s industrial growth rate has declined; as a result the government’s tax base has diminished. To supplement domestic savings, Kenya has had to turn to external sources of finance, including foreign aid grants from Western governments. Its highly protected public enterprises have been turning in a poor performance, thus absorbing a large chunk of the government budget. To pay for its expenses, Kenya has had to borrow from international banks in addition to foreign aid. In recent years, government borrowing from the international banking system rose dramatically and contributed to a rapid growth in money supply. This translated into high inflation and pinched availability of credit.

Kenya has also had a chronic international balance of payments problem. Decreasing prices for its exports, combined with increasing prices for its imports, left Kenya importing almost twice as much as it exported in 2000, at $3,200 million in imports and only $1,650 million in exports. World demand for coffee, Kenya‘s predominant exports, remains below supply. In 2001-01, a dramatic surge in coffee exports from Vietnam hurt Kenya further. Hence Kenya cannot make full use of its comparative advantage in coffee production, and its stock of coffee has been increasing. Tea, another main export, has also had difficulties. In 1987, Pakistan, the second largest importer of Kenyan tea, slashed its purchases. Combined with a general oversupply in the world market, this fall in demand drove the price of tea downward. Hence Kenya experienced both a lower dollar value and quantity demanded for one of its principal exports.

Kenya faces major challenges in the years ahead as the economy tries to recover. Current is expected to be no more than 1 to 2 per cent annually. Heavy rains have spoiled crops and washed away roads, bridges, and telephone lines. Foreign exchange earnings from tourism, once promising, dropped by 40 per cent in the mid-1990s, then suffered again after the August 7, 1998, terrorist bombing of the US embassy in Nairobi. Even more frightening, however, is the prospect of growing hunger as Kenya’s maize (corn) crop has failed to meet rising internal demand and dwindling foreign exchange reserves have to be spent to import food. Corruption is perceived to be so widespread that the International Monetary Fund and World Bank suspended $292 million in loans to Kenyan in the summer of 1997 while insisting on tough new austerity measures to control public spending and weed out economic cronyism. As a result, the economy went into a tailspin, foreign investors fled the country, and inflation accelerated markedly.

Unfortunately, needed structural adjustments resulting form the World Bank—and IMF—induced austerity demands usually take a long time. Whether the Kenyan political and economic system can withstand any further deterioration in living conditions is a major question. Public protests for greater democracy and a growing incidence of ethnic violence may be harbingers of things to come.

 

Fig 1  Continuum of Economic Systems

 

 

Pure Market                                                                                   Pure Centrally Planned Economy

Economy

 

 

 

 

 

        The US                                         France                                India  China

                        Canada                                  Brazil                                                           Cuba

                                             UK                                                                                                     North Korea

 

 

 

 

 

 

Questions

 

  1. Is the economic environment of Kenya favourable to international business? Yes or no—substantiate.
  2. In the continuum of economic systems (see Fig 1), where do you place Kenya and why?

 

Case III: LATE MOVER ADVANTAGE?

 

Though a late entrant, Toyota is planning to conquer the Indian car market. The Japanese auto major wants to dispel the notion that the first mover enjoys an edge over the rivals who arrive late into a market.

Toyota entered the Indian market through the joint venture route, the partner being the Bangalore based Kirloskar Electric Co. Know as Toyota Kirloskar Motor (TKM), the plant was set up in 1998 at Bidadi near Bangalore.

To start with, TKM released its maiden offer—Qualis. Qualis is not a newly conceived, designed, and brought out vehicle. Rather it is the new avatar of Kijang under which brand the vehicle was sold in markets like Indonesia.

Qualis virtually had no competition. Telco’s Sumo was not a multi-utility vehicle like Qualis. Rather, it was mini-truck converted into a rugged all-purpose van. More importantly, Toyota proved that even its old offering, but decked up for India, could offer better quality than its competitor. Backed by a carefully thought out advertising campaign that communicated Toyota’s formidable global reputation, Qualis went on a roll and overtook Tata Sumo within two years of launch.

Sumo sold 25,706 vehicles during 2000-2001, compared to a 3 per cent growth over the previous year, compared to 25,373 of Qualis. But during 2001-2002, it was a different story. Qualis had been clocking more than 40 per cent share of the market. At the end of Sept 2001, Qualis had sold over 25,000 units, compared to Sumo’s 18000 plus.

The heady initial success has made TKM think of the future with robust confidence. By 2010, TKM wants to make and sell one million vehicles per year and garner one-third share of the Indian market.

The firm is planning to introduce a wide range of vehicle—a sub-compact, a sedan, a luxury car and a new multi-utility vehicle to replace Qualis. A significant percentage of the vehicles will be exported.

But Toyota is not as lucky in China. Its strategy of ‘late entry’ in China seems to have back fired. In 2005, it sold just 1,83,000 cars in China, the fastest growing auto market in the world. Toyota ranks ninth in the market, far behind Volkswagen, General Motors, Hyundai and Honda.

Toyota delayed producing cars in China until 2002, when it entered a joint venture with a local company, the First Auto Works Group (FAW). The first car manufactured by Toyota-FAW, the Vios, failed to attract much of a market, as, despite its unremarkable design, it was three times as expensive as most cars sold in China.

Late start was not the only problem. There were other lapses too. Toyota assumed the Chinese market would be similar to the Japanese market. But Chinese market, in reality, resembled the American market.

Sales personnel in Japan are paid salaries. They succeeded in building a loyal clientele for Toyota by providing first-class service to them. Likewise, most Japanese auto dealers sell a single brand, thereby ensuring their loyalty to it. Japan is a relatively a well-knit country with an ethnically homogeneous population. Accordingly, Toyota used nationwide advertising to market its products in its home country.

But China is different. Sales people are paid commissions and most dealers sell multiple brands. Obviously, loyalty plays little role in motivating either the sales staff or the dealers, who will ignore a slow selling product should a more profitable one turn up. Besides, China is a large, diverse country. A standardised ad campaign will not do. Luckily, Toyota is learning its lessons.

Competition in the Chinese market is tough, and Toyota’s success in reaching its goal of selling a million cars a year, by 2010, is uncertain. But, its chances are brighter as the company is able to transfer lessons learned in the American market to its operations in China.

 

 

Questions

 

  1. Why has the ‘late corner’s strategy’ of Toyota failed in China, though it succeeded in India?
  2. Why has Toyota failed to capture the Chinese market? Why is it trailing behind its rivals?

 

 

 

 

 

 

 

 

 

CASE: IV   DELVING DEEP INTO USER’S MIND

 

Whirlpool is an American brand alright, but has succeeded in empowering the Indian housewife with just the tools she would have designed for herself. A washing machine that doesn’t expect her to get ‘ready for the show’ (Videocon’s old jingle), nor adapt her plumbing, power supply, dress sense, values, attitudes and lifestyle to suit American standards.

That, in short, is the reason that Whirlpool White Magic, in just three years since its launch in 1999, has become the choice of the discerning Indian housewife. Also worth noting is how quickly the brand’s sound mnemonic, ‘Whirlpool, Whirlpool’, has established itself.

 

Whiteboard beginning

 

As a company, the US-based white goods major Whirlpool had entered India in 1989, in a joint venture with the TVS group. Videocon, which had pioneered washing machines in India, was the market leader with its range of low-priced ‘washers’ (spinning tubs) and semi-automatic machines, which required manual supervision and some labour. The brand’s TV commercial, created by Pune-based SJ Advertising, has evoked considerable interest with its jingle (‘It washes, it rinses, it even dries your clothes, in just a few minutes…and you’re ready for the show’). IFB-Bosch’s front-loading, fully automatic machines, which could be programmed and left to do their job, were the labour-free option. But they were considered expensive and unsuited to Indian conditions. So Videocon faced competition from me-too machines such as BPL-Sanyo’s. TVS Whirlpool was something of an also-ran.

The market’s sophistication started rising in the 1990s and there was a growing opportunity in the price-performance gap between expensive automatics and laborious semi-automatics. In 1995, Whirlpool gained a majority control of TVS Whirlpool, which was then renamed Whirlpool Washing Machines Ltd (WMML). Meanwhile, the parent bought Kelvinator of India, and merged the refrigerator business in 1996 with WMML to create Whirlpool of India (WOI), to market both fridges and washing machines. Whirlpool’s ‘Flexigerator’ fridge hit the market in 1997. Two years later, WOI launched its star White Magic range of washing machines.

Whitemagic was late to the market, but WOI converted this to a ‘knowledge advantage’ by using the 1990s to study the Indian market intensely, through qualitative and quantitative market research (MR) tools, with the help of IMRB and MBL India. The research team delved deep into the psyche of the Indian housewife, her habits, her attitude towards life, her schedule, her every day concerns and most importantly, her innate ‘laundry wisdom’.

If Ashok Bhasin, vice-president marketing, WOI, was keen on understanding the psychodynamics of Indian clothes washing, it was because of his belief that people’s attitudes and perceptions of categories and brands are formed against the backdrop of their bigger attitudes in life, which could be shaped by broader trends. It was intuitive, to begin with, that the housewife wanted to gain direct control over crucial household operations. It was found that clothes washing was the daily activity for the Indian housewife, whether it was done personally, by a maid, or by a machine.

The key finding, however, was the pride in self-done washing. To the CEO of the Indian household, there was no displacing the hand wash as the best on quality. And quality was to be judged in terms of ‘whiteness’. Other issues concerned water consumption, quantity of detergent used, and fabric care—also something optimized best by herself. A thorough wash, done with gentle agility, was what the magic was all about.

That was the break-through insight used by Whirlpool for the design of all its washing machines, which adopted a ‘1-2, 1-2 Hand Wash Agitator System’ to mimic the preferred handwash technique. With a consumer so particular about washing, one could expect her to be value-conscious on other aspects too. Sure enough, WOI found the housewife willing to pay a premium for a product designed the way she wanted it. Even for a fully automatic, she wanted a top-loader; this way, she doesn’t fear clothes getting trapped in if the power fails, and retains the ability to lift the shutter to take clothes out (or add to the wash) even while the machine is in the midst of its job.

The target consumer, defined psychographically as the Turning Modernist (TM), was decided upon only after the initial MR exercise was concluded. This was also the stage at which the unique selling proposition (USP)—‘whitest white’—was thrashed out.

WOI first launched a fully automatic machine, with the hand-wash agitator. Then came the deluxe model with a ‘hot wash’ function. The product took off well, but WOI felt that a large chunk of the TM segment was also budget-bound. And was quite okay with having to supervise the machine. This consumer’s identity as a ‘home-maker’ was important to her, an insight that Whirlpool was using for the brand overall, in every product category.

So WOI launched a semi-automatic washing machine, with ‘Agisoak’ as a catchword to justify a 10—15 per cent premium over other brand’s semi-automatics available in India.

The advertising, WOI was clear, had to flow from the same stream of reasoning. It had to be responsive, caring, modern, stylish, and warm, and had to portray the victory of the Homemaker. FCB-Ulka, which had bagged Whirlpool’s account in March 1997 from contract (in a global alignment shift), worked with WOI to coin the sub-brand Whitemagic, to break into consumer mindspace with the whiteness proposition.

The launch commercial on TV, in August 1999, scored a big success with its ‘Whirlpool, Whirlpool’ jingle…and a mother’s fantasy of her daughter’s clothes wowing others. A product demonstration sequence took the ‘1-2, 1-2’ message home, reassuring the consumer that the wash would be just as good as that of her own hand. The net benefit, of course, was an unharried home life.

 

Second Wave

 

Sadly, the Indian market for washing machines has been in recession for the past two years, with overall volumes declining. This makes it a fight for market share, with the odds stacked against premium players.

Even though Whirlpool has sought to nudge the market’s value perception upwards, Videocon remains the largest selling brand in volume terms with its competitively priced machines. Washers have been displaced by semi-automatics, which are now the market’s mainstay (in the Rs 7,000-12,000 price range). In fact, these account for three-fourths of the 1.2 million units the Indian market sold in 2000. With a share of 17 per cent, Whirlpool is No. 2 in this voluminous segment.

Whirlpool’s bigger success has been in the fully automatic segment (Rs 12,000-36,000 range). This is smaller with sales of 177,600 units in 2000, but is predicted to become the dominant one as Indian GDP per head reaches for the $1,000 mark. With a 26 per cent share, Whirlpool has attained leadership of this segment.

That places WOI at the appropriate juncture to plot the value curve to be ascended over the new decade.

According to IMRB data, Whirlpool finds itself in the consideration set of 54 per cent of all prospective washing machine buyers, and has an ad recall of close to 85 per cent. This indicates the medium-term potential of Whitemagic, a Rs20.5 crore on a turnover of Rs1,042.8 crore, one-fifth of which was on account of washing machines.

The innovations continue. Recently, Whirlpool has launched semi-automatic machines with ‘hot wash’. The brand’s ‘magic’ isn’t showing signs of wearing off either. The current ‘mummy’s magic’ campaign on TV is trying to sell Whitemagic as a competent machine even for heavy duty washing such as ketchup stains on a white tablecloth.

The Homemaker, of course, remains the focus of attention. And she remains as vivacious, unruffled, and in control as ever. The attitude: you can sling the muckiest of stuff on to white cloth, but sparkling white is what it remains for its her hand that’ll work the magic, with a little help from some friends… such as Whirlpool.

 

 

Questions

 

  1. What product strategy did WOI adopt? And why? Global standardisation? Local customisaton?
  2. What pricing strategy did WOI follow? What, according to you, could have been the appropriate strategy?
  3. What lessons can other white goods manufacturers learn from WOI?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE V: CONSCIENCE OR COMPETITIVE EDGE

 

The plane touched down at Mumbai airport precisely on time. Olivia Jones made her way through the usual immigration bureaucracy without incident and was finally ushered into a waiting limousine, complete with uniformed chauffeur and soft black leather seats. Her already considerable excitement at being in India for the first time was mounting. As she cruised the dark city streets, she asked her chauffeur why so few cars had their headlights on at night. The driver responded that most drivers believed that headlights use too much petrol! Finally, she arrived at her hotel, a black marble monolith, grandiose and decadent in its splendour, towering above the bay.

The goal of her four-day trip was to sample and select swatches of woven cotton from the mills in and around Mumbai, to be used in the following season’s youth-wear collection of shirts, trousers, and underwear. She was thus treated with the utmost deference by her hosts, who were invariably Indian factory owners or British agents for Indian mills. For three days she was ferried from one air-conditioned office to another, sipping iced tea or chilled lemonade, poring over leather-bound swatch catalogues, which featured every type of stripe and design possible. On the fourth day, Jones made a request that she knew would cause some anxiety in the camp. “I want to see a factory,” she declared.

After much consultation and several attempts at dissuasion, she was once again ushered into a limousine and driven through a part of the city she had not previously seen. Gradually, the hotel and the Western shops dissolved into the background and Jones entered downtown Mumbai. All around was a sprawling shantytown, constructed from sheets of corrugated iron and panels of cardboard boxes. Dust flew in spirals everywhere among the dirt roads and open drains. The car crawled along the unsealed roads behind carts hauled by man and beast alike, laden to overflowing with straw or city refuse—the treasure of the ghetto. More than once the limousine had to halt and wait while a lumbering white bull crossed the road.

Finally, in the very heart of the ghetto, the car came to a stop. “Are you sure you want to do this?” asked her host. Determined not be faint-hearted, Jones got out the car.

White-skinned, blue-eyed, and blond, clad in a city suit and stiletto-heeled shoes, and carrying a briefcase, Jones was indeed conspicuous. It was hardly surprising that the inhabitants of the area found her an interesting and amusing subject, as she teetered along the dusty street and stepped gingerly over the open sewers.

Her host led her down an alley, between the shacks and open doors and inky black interiors. Some shelters, Jones was told, were restaurants, where at lunchtime people would gather on the rush mat floors and eat rice together. In the doorway of one shack there was a table that served as a counter, laden with ancient cans of baked beans, sardines, and rusted tins of fluorescent green substance that might have been peas. The eyes of the young man behind the counter were smiling and proud as he beckoned her forward to view his wares.

As Jones turned another corner, she saw an old man in the middle of the street, clad in a waist cloth, sitting in a large bucket. He had a tin can in his hand with which he poured water from the bucket over his head and shoulders. Beside him two little girls played in brilliant white nylon dresses, bedecked with ribbons and lace. They posed for her with smiling faces, delighted at having their photograph taken in their best frocks. The men and women around her with great dignity and grace, Jones thought.

Finally, her host led her up a precarious wooden ladder to a floor above the street. At the top Jones was warned not to stand straight, as the ceiling was just five feet high. There, in a room not 20 feet by 40 feet, 20 men were sitting at treadle sewing machines, bent over yards of white cloth. Between them on the floor were rush mats, some occupied by sleeping workers awaiting their next shift. Jones learned that these men were on a 24-hour rotation, 12 hours on and 12 hours off, every day for six months of the year. For the remaining six months they returned to their families in the countryside to work the land, planting and building with the money they had earned in the city. The shirts they were working on were for an order she had placed four weeks earlier in London, an order of which she had been particularly proud because of the low price she had succeeded in negotiating. Jones reflected that this sight was the most humbling experience of her life. When she questioned her host about these conditions, she was told that they were typical for her industry—and most of the Third World, as well.

Eventually, she left the heat, dust and din to the little shirt factory and returned to the protected, air-conditioned world of the limousine.

“What I’ve experienced today and the role I’ve played in creating that living hell will stay with me forever,” she thought. Later in the day, she asked herself whether what she had seen was an inevitable consequence of pricing policies that enabled the British customer to purchase shirts at £12.99 instead of £13.99 and at the same time allowed the company to make its mandatory 56 percent profit margin. Were her negotiating skills—the result of many years of training—an indirect cause of the terrible conditions she has seen?

Once Jones returned to the United Kingdom, she considered her position and the options open to her as a buyer for a large, publicly traded, retail chain operating in a highly competitive environment. Her dilemma was twofold: Can an ambitious employee afford to exercise a social conscience in his or her career? And can career-minded individuals truly make a difference without jeopardising their future? Answer her.

 

 

 

 


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Attempt Any Four Case Study

 

Case 1: Zip Zap Zoom Car Company

          

Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment.  It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability.  Its financial statements are shown in Exhibits 1 and 2 respectively.

The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year.  Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector.  The company has never defaulted on its loan payments and enjoys a favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.

The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries.  The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer.  The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.

Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures.   The industry indicators predict that the economy is gradually slipping into recession.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

 

Source of Funds

Share capital                                        350

Reserves and surplus                           250                              600

Loans :

Debentures (@ 14%)               50

Institutional borrowing (@ 10%)        100

Commercial loans (@ 12%)    250

Total debt                                                                                            400

Current liabilities                                                                                 200

1,200

 

Application of Funds

Fixed Assets

Gross block                                                     1,000

Less : Depreciation                                            250

Net block                                                           750

Capital WIP                                                       190

Total Fixed Assets                                                                              940

Current assets :

Inventory                                                           200

Sundry debtors                                                    40

Cash and bank balance                                        10

Other current assets                                 10

Total current assets                                                                 260

-1200

 

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x

(Amount in Rs. Crore)

Sales revenue (80,000 units x Rs. 2,50,000)                                       2,000.0

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses    1,300.0

Variable overheads                                                        100.0

Total                                                                                                                1,400.0

Fixed cost :

R & D                                                                                          20.0

Marketing and advertising                                               25.0

Depreciation                                                                   250.0

 

Personnel                                                                          70.0

Total                                                                                                                   365.0

 

Total operating expenditure                                                                1,765.0

Operating profits (EBIT)                                                                                   235.0

Financial expense :

Interest on debentures                                                            7.7

Interest on institutional borrowings                        11.0

Interest on commercial loan                                    33.0                     51.7

Earnings before tax (EBT)                                                                                          183.3

Tax (@ 35%)                                                                                                                 64.2

Earnings after tax (EAT)                                                                                            119.1

Dividends                                                                                                                     70.0

Debt redemption (sinking fund obligation)**                                                              40.0

Contribution to reserves and surplus                                                                  9.1

*          Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).

**        The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.

The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology.  Capital investment up to a maximum of Rs. 100

crore is required.  The problem areas are three-fold.

  • The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
  • The company does not want to issue new equity shares and its retained earning are not enough for such a large investment.  Thus, the only option is raising debt.
  • The company wants to limit its additional debt to a level that it can service without taking undue risks.  With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise.  He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession.  The company can raise debt at 15 per cent from a financial institution.  While working out the debt capacity.  Mr. Shortsighted takes the following assumptions for the recession years.

  1. A maximum of 10 percent reduction in sales volume will take place.
  2. A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.  While doing so, he determines what he thinks are the “irreducible minimum” expenditures under

 

recessionary conditions.  For him, risk of insolvency is the main concern while designing the capital structure.  To support his view, he presents the income statement as shown in Exhibit 3.

 

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

Sales revenue (72,000 units x Rs. 2,35,000)                                       1,692.0

Operating expenditure

Variable cost :

Raw material and manufacturing expenses    1,170.0

Variable overheads                                                          90.0

Total                                                                                                                1,260.0

Fixed cost :

R & D                                                                                          —

Marketing and advertising                                               15.0

Depreciation                                                                   187.5

Personnel                                                                          70.0

Total                                                                                                                   272.5

Total operating expenditure                                                                1,532.5

EBIT                                                                                                                  159.5

Financial expenses :

Interest on existing Debentures                                        7.0

Interest on existing institutional borrowings      10.0

Interest on commercial loan                                30.0

Interest on additional debt                                             15.0                  62.0

EBT                                                                                                                      97.5

Tax (@ 35%)                                                                                                        34.1

EAT                                                                                                                     63.4

Dividends                                                                                                              —

Debt redemption (sinking fund obligation)                                             50.0*

Contribution to reserves and surplus                                                       13.4

 

* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)

Assumptions of Mr. Shorsighted

  • R & D expenditure can be done away with till the economy picks up.
  • Marketing and advertising expenditure can be reduced by 40 per cent.
  • Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.

 

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment.  Mr. Arthashatra  does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.

Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm.  He points out the following :

  • Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
  • Certain management policies like those relating to dividend payout, send out important signals to the investors.  The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm.  The firm should pay at least 10 per cent dividend in the recession years.
  • Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations.  This does not give the true picture.  Net cash inflows should be used to determine the amount available for servicing the debt.
  • Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession.  It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.  Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed.  From  this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution).  This will give a true picture of how the company’s cash flows will behave in recession conditions.

 

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret.  Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis.  Information on the behaviour of cash flows during the recession periods is taken into account.

The methodology undertaken is as follows :

  • Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.

 

  • Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
  • Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

 

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions.  Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.  Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Question:

Analyse the debt capacity of the company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   GREAVES LIMITED

 

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of high technology engineering products and systems. The company’s mission is “manufacture and market a wide range of high quality products, services and systems of world class technology to the total satisfaction of customers in domestic and overseas market.”

Over the years Greaves has brought to India state of the art technologies in various engineering fields by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the company’s share has shown ups and downs during 1990 to 1997. How has the company performed? The following question need answer to fully understand the performance of the company:

 

Exhibit 1

 

GREAVES LTD.

Profit and Loss Account ending on 31 March          (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
Sales

Raw Material and Stores

Wages and Salaries

Power and fuel

Other Mfg. Expenses

Other Expenses

Depreciation

Marketing and Distribution

Change in stock

214.38

170.67

13.54

0.52

0.61

11.85

1.85

4.86

1.18

253.10

202.84

15.60

0.70

0.49

15.48

1.72

5.67

3.10

287.81

230.81

18.03

1.11

0.88

16.35

1.52

5.14

4.93

311.14

213.79

37.04

3.80

2.37

25.54

4.62

5.17

0.48

354.25

245.63

37.96

4.43

2.36

31.60

5.99

9.67

– 1.13

521.56

379.83

48.24

6.66

3.57

41.40

8.53

10.81

5.63

728.15

543.56

60.48

7.70

4.84

45.74

9.30

12.44

11.86

801.11

564.35

69.66

9.23

5.49

48.64

11.53

16.98

– 5.87

Total Op Expenses 202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75
 

Operating Profit

Other Income

Non-recurring Income

 

11.61

2.14

1.30

 

13.70

3.69

2.28

 

18.90

4.97

0.10

 

19.29

4.24

10.98

 

15.48

7.72

16.44

 

28.15

14.35

0.46

 

55.95

11.35

0.52

 

69.36

13.08

1.75

PBIT   15.10   19.67   23.97   34.51   39.64   42.98   65.67   82.64
Interest     5.56     6.77   11.92   19.62   17.17   21.48   28.25   27.54
PBT     9.54   12.90   12.05   14.89   22.47   21.50   37.42   55.10
Tax

PAT

Dividend

Retained Earnings

    3.00

6.54

1.80

4.74

    3.60

9.30

2.00

7.30

    4.90

7.15

2.30

4.85

    0.00

14.89

4.06

10.83

    4.00

18.47

7.29

11.18

    7.00

14.50

8.58

5.92

    8.60

28.82

12.85

15.97

  15.80

39.30

14.18

25.12

 

Exhibit 2

 

GREAVES LTD.

Balance Sheet                                (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
ASSETS

Land and Building

Plant and Machinery

Other Fixed Assets

Capital WIP

Gross Fixed Assets

Less: Accu. Depreciation

Net Tangible Fixed Assets

Intangible Fixed Assets

 

3.88

11.98

3.64

0.09

19.59

12.91

6.68

0.21

 

4.22

12.68

4.14

0.26

21.30

14.56

6.74

0.19

 

4.96

12.98

4.38

10.25

23.57

15.79

7.78

0.05

 

21.70

33.49

5.18

11.27

71.64

19.84

51.80

4.40

 

30.82

50.78

6.95

34.84

123.39

25.74

97.65

22.03

 

39.71

75.34

8.53

14.37

137.95

33.90

104.05

22.45

 

42.34

92.49

8.87

13.92

157.62

42.56

115.06

20.04

 

43.07

104.45

10.35

14.36

172.23

53.87

118.86

21.11

Net Fixed Assets     6.89     6.93     7.83   56.20 119.68 126.50 135.10 139.97
 

Raw Materials

Finished Goods

Inventory

Accounts Receivable

Other Receivable

Investments

Cash and Bank Balance

Current Assets

Total Assets

LIABILITIES AND CAPITAL

Equity Capital

Preference Capital

Reserves and Surplus

 

5.26

29.37

34.63

38.16

32.62

3.55

8.36

117.32

124.21

 

9.86

0.20

27.60

 

6.91

33.72

40.63

53.24

40.47

14.95

8.91

158.20

165.13

 

9.86

0.20

32.57

 

7.26

38.65

45.91

67.97

49.19

15.15

12.71

190.93

198.76

 

9.86

0.20

37.42

 

21.05

53.39

74.44

93.30

24.54

27.58

13.29

233.15

289.35

 

18.84

0.20

100.35

 

28.13

52.26

80.39

122.20

59.12

73.50

18.38

353.59

473.27

 

29.37

0.20

171.03

 

44.03

58.09

102.12

133.45

64.32

75.01

30.08

404.98

531.48

 

29.44

0.20

176.88

 

53.62

69.97

123.59

141.82

76.57

75.07

33.46

450.51

585.61

 

44.20

0.20

175.41

 

50.94

64.09

115.03

179.92

107.31

76.45

48.18

526.89

666.86

 

44.20

0.20

198.79

Net Worth   37.66   42.63   47.48 119.39 200.60 206.52 219.81 243.19
Bank Borrowings

Institutional Borrowings

Debentures

Fixed Deposits

Commercial Paper

Other Borrowings

Current Portion of LT Debt

  14.81

4.13

4.77

12.31

0.00

2.33

0.00

  19.45

3.43

16.57

14.45

0.00

3.22

0.00

  26.51

9.17

19.99

15.03

0.00

3.10

0.08

  24.82

38.09

4.56

14.08

0.00

3.18

0.12

  55.12

38.76

4.37

15.57

15.00

17.08

15.08

  64.97

69.69

4.37

17.75

0.00

1.97

0.02

  70.08

89.26

2.92

20.81

0.00

2.36

1.49

118.28

63.60

1.49

19.29

0.00

2.57

1.57

Borrowings   38.35   57.12   73.72   84.61 130.82 158.73 183.94 203.66
Sundry Creditors

Other Liabilities

Provision for tax, etc.

Proposed Dividends

Current Portion of LT Dept

  37.52

5.70

3.18

1.80

0.00

  49.40

10.16

3.82

2.00

0.00

  59.34

10.70

5.14

2.30

0.08

  77.27

3.59

0.31

4.06

0.12

113.66

1.42

4.40

7.29

15.08

148.13

1.99

7.70

8.58

0.02

153.63

1.70

12.19

12.85

1.49

179.79

3.04

21.43

14.18

1.57

Current Liabilities   48.20   65.38   77.56   85.35 141.85 166.42 181.86 220.01
TOTAL LIABILITIES

Additional information:

Share premium reserve

Revaluation reserve

Bonus equity capital

124.21

 

 

 

8.51

165.13

 

 

 

8.51

198.76

 

 

 

8.51

289.35

 

47.69

8.91

8.51

473.27

 

107.40

8.70

8.51

531.67

 

107.91

8.50

8.51

585.61

 

93.35

8.31

23.25

666.86

 

93.35

8.15

23.25

 

Exhibit 3

 

GREAVES LTD.

Share Price Data

    1990 1991 1992 1993 1994 1995 1996 1997
 Closing share price (Rs)

Yearly high share price (Rs)

Yearly low share price (Rs)

Market capitalization (Rs crore

EPS (Rs)

Book value (Rs)

  27.19

29.25

26.78

65.06

4.79

35.64

34.74

45.28

21.61

67.77

6.82

37.22

121.27

121.27

34.36

236.56

9.73

42.54

  66.67

126.33

48.34

274.84

1.93

57.75

  78.34

90.00

42.67

346.35

2.66

40.61

  71.67

100.01

68.34

316.87

7.16

64.98

  47.5

90.00

45.00

210.02

5.03

45.35

  48.25

85.00

43.75

213.34

9.01

50.73

 

 

 

 

Questions

 

  1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?
  2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?
  3. How has Greaves performed in terms of return on equity? What is the contribution of return on investment, the way of the business has been financed over the period?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   CHOOSING BETWEEN PROJECTS IN ABC COMPANY

 

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get proper advice. As a consultant, what advice you will give?

 

The cash flows are as follows. All amounts are in lakhs of Rupees.

 

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5 – 10

 

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5 – 2000.

 

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)

Yrs. 11 to 15 – Rs. 10 (For the next 5 years)

 

Question:

If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   STAR ENGINEERING COMPANY

 

Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears, and automobile accessories like taximeters and speedometers.

SEC buys the electrical components, but manufactures all mechanical parts within its factory which is divided into four production departments Machining, Fabrication, Assembly, and Painting—and three service departments—Stores, Maintenance, and Works Office.

Though the company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.

In March, the company received a trial order from a government department for a sample transformer on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April and completed all manufacturing operations before the end of the month.

Since Job No 879 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the government department asked SEC to submit a detailed cost sheet for the job giving as much details as possible regarding material, labour and overhead costs.

SEC, as part of its routine financial accounting system, had collected the actual expenses for the month of April, by 5th of May. Some of the relevant data are given in Exhibit A.

The company tried to assign directly, as many expenses as possible to the production departments. However, It was not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using some rational basis. Some of the possible bases were collected by SEC’s accountant. These are presented in Exhibit B.

He also designed a format to allocate the overhead to all the production and service departments. It was realized that the expenses of the service departments on some rational basis. The accountant thought of distributing the service departments’ costs on the following basis:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. Stores department costs on the basis of direct and indirect materials used.

The accountant who had to visit the company’s banker, passed on the papers to you for the required analysis and cost computations.

 

 

REQUIRED

 

Based on the data given in Exhibits A and B, you are required to:

 

  1. Complete the attached “overhead cost distribution sheet” (Exhibit C).
    Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
  2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
  3. Do you agree with:
    a.   The procedure adopted by the company for the distribution of overhead costs?
    b.   The choice of the base for overhead absorption, i.e. labour-hour rate?

 

 

Exhibit A

 

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

  RS RS
Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

 

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

 

Others

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

(At 2 per cent of direct labour wages and Indirect labour and supervision)

Power

(Maintenance—Rs 366; Works Office Rs 2,200, Balance to Producing Departments)

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses

 

33,000

22,000

11,000

7,000

44,000

32,700

 

 
2,200

1,100

3,300

3,400

2,800

 

 

1,68,000

44,000

2,400

19,400

 

 

68,586

 

 

1,30,260

1,190

 

 

 

 

 

 

 

1,49,700

 

 

 

 

 

 

12,800

 

 

 

 

 

 

 

 

 

 

 

 

4,33,930

 
5,96,930

 

 

 

 

 

 

 

 

 

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year

Department Area

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

 

Rs

Horse

Power

Rating

Direct

Labour

Hours

Direct

Labour

Budget

 

Rs

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Works Office

Total

 

13,000

11,000

8,800

6,400

4,400

2,200

2,200

48,000

26,40,000

13,20,000

6,60,000

2,64,000

1,32,000

1,98,000

68,000

52,80,000

62,40,000

21,60,000

 

10,80,000

 

 

 

94,80,000

20,000

10,000

1,000

2,000

 

 

 

33,000

14,40,000

5,28,000

7,20,000

3,30,000

 

 

 

30,18,000

52,80,000

25,40,000

13,20,000

6,60,000

 

 

 

99,00,000

 

Note

 

The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one month—April of the budgeted year.

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit C

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
             
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

               

 

 

1,49,700

 
A.2 Indirect materials and supplies                

12,800

 
A.3 Factory Rent               1,68,000  
A.4 Depreciation of Plant and Machinery                

44,000

 
A.5 Building Rates and Taxes

 

               

2,400

 

 
A.6 Welfare Expenses

 

               

19,494

 
    A.7 Power                 68,586  
A.8 Works Office Salaries and Expenses                

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

               

1,190

 
A. Total (A.1 to A.9)               5,96,430  
B. Reallocation of Service Departments Costs to Production Departments                  
B.1 Distribution of Works Office Costs                  
B.2 Distribution of Maintenance Department’s Costs                  
B.3 Distribution of Stores Department’s Costs                  
Total Charged to Producing

C. Departments (A+B)

               

 

5,96,430

 
D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

         
E. Overhead Rate/Per Hour (D)                  

 

 

 

 

Case 5: EASTERN MACHINES COMPANY

 

Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.

 

So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.

 

Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.

 

Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.

 

Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.

 

Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.

 

Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.

 

Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.

 

Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.

 

Namdeo: We should ask somebody from our statistics dept. to attend to this problem.

 

As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?


BUSINESS LAW IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

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Attempt any 10 Questions

 

  1. How are right of lien and stoppage-in-transit affected by sub-sale or pledge by the buyer?
  2. Discuss the rule regarding duration of transit. When does it come of an end?
  3. Comment on the statement,”Delivery does not amount to acceptance of goods”?
  4. State the exceptions to the rule that no one can convey a better title than what he has.
  5. When are the goods said to be unascertained?  What are the rules as to the transfer of property in the unascertained goods to the buyer?
  6. Discuss the implied condition relating to sale by sample?
  7. Discuss the doctrine of caveat emptor and state its exceptions.
  8. What is the effect of perishing of goods on the contract of sale?
  9. Explain the various methods of creating agency?
  10. Pledge can be created only of movable property. Comment.
  11. Discuss the position of guarantee in respect of loans to a minor.
  12. Does the release by the creditor of one of the sureties discharge the others?
  13. Explain the provisions relating to appointment of directors in Producer Company.
  14. Two separate company wish to amalgamate. State the steps which they must take for this purpose.
  15. Does the failure of inspector to submit his or her report in time amount to an end to investigation?
  16. A, the secretary of the company is also a minority shareholder. He is removed from the post of secretary. He brings complaint on the ground of oppression? Advise
  17. A single member of a company wishes to challenge the decisions of the majority. Can he succeed?
  18. What new provisions have been made for the protection of interests of debenture holders?
  19. Write a short note on Consumer Protection Councils.
  20. Describe the powers of SEBI relating to the working of the depository system.

 

GENERAL MANAGEMENT

Attempt Any Four Case Study

 

CASE – 1   Your Job and Your Passion—You Can Pursue Both!

 

The 21st century offers many challenges to every one of us. As more firms go global, as more economies interconnect, and as the Web blasts away boundaries to communication, we become more informed citizens. This interconnectedness means that the organizations you work for will require you to develop both general and specialized knowledge—such as speaking multiple languages, using various software applications, or understanding details of financial transactions. You will have to develop general management skills to foster your ability to be self-reliant and thrive in a changing market-place. And here’s the exciting part: As you build both types of knowledge, you may be able to integrate your growing expertise with the causes or activities you care most about. Or, your career adventure may lead you to a new passion.

Former presidents George H. W. Bush and Bill Clinton are well known for combining their management skills—running a country—with their passion for helping people around the world. Together they have raised funds to assist disaster victims, those with HIV/AIDS, and others in need. Jake Burton turned his love of snow sports into an entire industry when he founded Burton Snowboards. Annie Withey poured her business and marketing knowledge into her two famous business ventures: Smartfood and Annie’s Homegrown. Both products were the result of her passion for healthful foods made from organic ingredients.

As you enter the workforce, you may have no idea where your career path will lead. You may be asking yourself, “How will I fit in?” “Where will I live?” “How much will I earn?” “Where will my business and personal careers evolve as the world continuous to change at such a fast pace?” If you are feeling nervous because you don’t know the answers to these questions yet, relax. A career is a journey, not a single destination. You may have one type of career or several. It is likely you will work for several organisations, or you may run one or more businesses of your own.

As you ask yourself what you want to do and where you want to be, take a few minutes to review the chapter and its main topics. Think about your personality, what you like and dislike, what you know and what you want to learn, what you fear and what you dream. Then try the following exercise.

 

Questions

 

  1. Create a three-column chart in which the first column lists nonmanagement skills you have. Are you good at travel? Do you know how to build furniture? Are you a whiz at sports statistics? Are you an innovative cook? Do you play video games for hours? In the second column, list the causes or activities about which you are passionate. These may dovetail with the first list, but they might not.
  2. Once you have you two columns complete, draw lines between entries that seem compatible. If you are good at building furniture, you might have also listed a concern about families who are homeless. Remember that not all entries will find a match—the idea is to begin finding some connections.
  3. In the third column, generate a list of firms or organizations you know about that reflect your interests. If you are good at building furniture, you might be interested working for the Habitat for Humanity organization, or you might find yourself gravitating towards a furniture retailer like Ikea or Ethan Allen. You can do further research on organizations via Internet or business publications.

 

 

CASE – 2   Biyani – Pioneering a Retailing Revolution in India

 

“I use people as hands and legs. I prefer to do thinking around here.”

 

─ Kishore Biyani, CEO & MD, Pantaloon Retail (India) Ltd.

 

Kishore Biyani (Biyani), CEO& MD of Pantaloon Retail (India) Ltd., planned to have 30 Food Bazaar outlets, 22 outlets in Big Bazaar, 21 Pantaloons outlets, and four seamless malls under the Central logo, by the end of 2005. He also planned to launch at least three businesses every year and had already selected music, footwear and car accessories as his next areas of investments. He was already the top retailer in India followed by Raghu Pillai of RPG. As of 2004, Biyani headed a company that had a turnover of Rs 6,500 million and operated 13 Pantaloon apparel stores, 9 Big Bazaars, 13 Food Bazaars, and 3 seamless malls (Central), one each located in Bangalore, Hyderabad, and Pune.

Biyani’s journey from a person who looked after his family business to India’s top retailer in 1987, when he launched Manz Wear Pvt. Ltd. The company launched one of the first readymade trousers brands – ‘Pantaloon’ – in the country. The company also launched its first jeans brand called ‘Bare’ in 1989. On September 20, 1991, Manz Wear Pvt. Ltd. went public and on September 25, 1992, it changed its name to Pantaloon Fashions (India) Limited (PFIL). ‘John Miller’ was the first formal shirt brand from PFIL.

The company opened its first apparel stores, called ‘Pantaloons’ at Kolkata in August 1997. The stores generated Rs 70 million. Biyani then realized the potential of the Indian market and started to aggressively tap it. Accordingly, Biyani decided to expand into other segments of retailing besides apparel. To reflect this change in focus, the company changed its name to Pantaloon Retail (India) Limited (PRIL) in July 1999 and set itself a target of achieving Rs 10 billion in sales by June 2005. In course of time he launched three other retail formats — Big Bazaar, Food Bazaar, and Central.

Biyani didn’t believe in copying ideas from western retailers. He was critical of his peers who felt just copied ideas form the west without making any effort to mold them to Indian conditions. He ensured that his store formats such as Big Bazaar, Food Bazaar, and Pantaloons were all suited to the purchasing style of Indian consumers.

Biyani was a huge risk taker and his planning was always different from the conventional way of doing business. This was also one of the factors that had prompted Biyani to move away from his father’s conventional way of doing business. During the initial stages of his success, his risk-taking attitude sometimes had the effect of turning away financiers. The biggest risk that Biyani took was in opening Big Bazaar in Mumbai in 2001. The company needed money to expand Big Bazaar’s operations. However, it had profits of only Rs 40 million with a low share price at eighteen rupees. Therefore, Biyani could not raise money through equity. In light of this situation, Biyani took a loan of Rs 1,200 million from ICICI for launching the operations of Big Bazaar, which increased his debt exposure. However, Big Bazaar proved to be a resounding success with 100,000 customer visits in its first week of operations. According to analysts, if Big Bazaar had failed, Biyani would have landed in a severe debt crisis. The success of Big Bazaar not only increased the company profits, it also changed the perception of investors.

Many people criticized Biyani for not delegating authority and Biyani himself accepted the criticism. He said, “I use people as hands and legs. I prefer to do the thinking around here.” He preferred taking individual decision on activities like strategic planning, ideas for other ventures, and other important issues. It was because of this that managers like Kush Medhora of Westside were initially apprehensive about joining Biyani’s business. However, Biyani changed his attitude gradually with the launch of Big Bazaar, Food Bazaar, and Central and appointed different people for managing different business units.

Biyani believed in leading a simple life and in being simply dressed. His vision came from his diverse reading connected to retailing and other areas. He made it a point to visit each of his stores across the country. He aimed to spend at least seven hours a week at the stores. In the stores, he would stand at a corner and observe people. He also walked on streets, met common people, and talked to local leaders to plan and put up new products in his stores. Each of his stores was set with a weekly target, which was reviewed every Monday. Whenever a new store was opened, the details of its operations during the first 45 days were to be sent to him. Sometimes, he suggested remedies to some problems. Biyani believed in extensive advertising to make more people know about the product. His decision making was quick and devoid of unnecessary delays. Biyani was also a good learner and learned quickly from his mistakes. He planned to improve inventory management through responding effectively to the demands of the customers rather than forecasting them, as he felt that forecasting would pile up the inventory in this dynamic market.

 

Questions

 

  1. The tremendous success of the ‘Pantaloons’, ‘Big Bazaar’ and ‘Food Bazaar’ retailing formats, easily made PRIL the number one retailer in India by early 2004, in terms of turnover and retail area occupied by its outlets. Explain how Biyani is further planning to consolidate his businesses.
  2. “Our striving toward looking at the Indian market differently and strategizing with the evolving customer helped us perform better.” What other qualities of Kishore Biyani do you think were instrumental in making him top retailer of India?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   The New Frontier for Fresh Foods Supermarkets

 

Fresh Foods Supermarket is a grocery store chain that was established in the Southeast 20 years ago. The company is now beginning to expand to other regions of the United States. First, the firm opened new stores along the eastern seaboard, gradually working its way up through Maryland and Washington, DC, then through New York and New jersey, and on into Connecticut and Massachusetts. It has yet to reach the northern New England states, but executives have decided to turn their attention to the Southwest, particularly because of the growth of population there.

Vivian Noble, the manager of one of the chain’s most successful stores in the Atlanta area, has been asked to relocate to Phoenix, Arizona, to open and run a new Fresh Foods Supermarket. She has decided to accept the job, but she knows it will be a challenge. As an African American woman, she has faced some prejudice during her career, but she refuses to be stopped by a glass ceiling or any other barrier. She understands that she will be living and working in an area where several cultures combine and collide, and she will be hiring and managing a diverse workforce. Noble has the support of top management at Fresh Foods, which wants the store to reflect the surrounding community—in both staff makeup and product selection. So she will be looking to hire employees with Hispanic and Native American roots, as well as older workers who can relate to the many retired residents in the area. And she will be seeking their inputs on the selection of certain food products, including ethnic brands, so that customers know they can buy what they need and want a Fresh Foods.

In addition, Noble wants to make sure that Fresh Foods provides services above and beyond those of a standard supermarket to attract local consumers. For instance, she wants the store to offer free delivery of groceries to home-bound customers who are either senior citizens or physically disabled. She wants to be sure that the store has enough bilingual employees to translate for and otherwise assist customers who speak little or no English. Noble believes that she is a pioneer of sorts, guiding Fresh Foods Supermarkets into a new frontier. “The sky is almost blue here,” she says of her new home state. “And there’s no glass ceiling between me and the sky.”

 

 

 

Questions

 

  1. What steps can Vivian Noble take to recruit and develop her new workforce?
  2. What other ways can Noble help her company reach out to the community?
  3. How will Fresh Foods Supermarkets as whole benefit from successfully moving into this new region of the country?

 

 

 

 

 

 

 

 

 

 

CASE – 4   The Law Offices of Jeter, Jackson, Guidry, and Boyer

 

THE EVOLUTION OF THE FIRM

 

David Jeter and Nate Jackson started a small general law practice in 1992 near Sacramento, California. Prior to that, the two had spent five years in the district attorney’s office after completing their formal schooling. What began as a small partnership—just the two attorneys and a paralegal/assistant—had now grown into a practice that employed more than 27 people in three separated towns. The current staff included 18 attorneys (three of whom have become partners), three paralegals, and six secretaries.

For the first time in the firm’s existence, the partners felt that they were losing control of their overall operation. The firm’s current caseload, number of employees, number of clients, travel requirements, and facilities management needs had grown far beyond anything that the original partners had ever imagined.

Attorney Jeter called a meeting of the partners to discuss the matter. Before the meeting, opinions about the pressing problems of the day and proposed solutions were sought from the entire staff. The meeting resulted in a formal decision to create a new position, general manager of operations. The partners proceeded to compose a job description and job announcement for recruiting purposes.

Highlights and responsibilities of the job description include:

  • Supervising day-to-day office personnel and operations (phones, meetings, word processing, mail, billings, payroll, general overhead, and maintenance).
  • Improving customer relations (more expeditious processing of cases and clients).
  • Expanding the customer base.
  • Enhancing relations with the local communities.
  • Managing the annual budget and related incentive programs.
  • Maintaining annual growth in sales of 10 percent while maintaining or exceeding the current profit margin.

 

The general manager will provide an annual executive summary to the partners, along with specific action plans for improvement and change. A search committee was formed, and two months later the new position was offered to Brad Howser, a longtime administrator from the insurance industry seeking a final career change and a return to his California roots. Howser made it clear that he was willing to make a five-year commitment to the position and would then likely retire.

Things got off to a quiet and uneventful start as Howser spent few months just getting to know the staff, observing day-today operations; and reviewing and analyzing assorted client and attorney data and history, financial spreadsheets, and so on.

About six months into the position, Howser became more outspoken and assertive with the staff and established several new operational rules and procedures. He began by changing the regular working hours. The firm previously had a flex schedule in place that allowed employees to begin and end the workday at their choosing within given parameters. Howser did not care for such a “loose schedule” and now required that all office personnel work from 9:00 to 5:00 each day. A few staff member were unhappy about this and complained to Howser, who matter-of-factly informed them that “this is the new rule that everyone is expected to follow, and anyone who could or would not comply should probably look for another job.” Sylvia Bronson, an administrative assistant who had been with the firm for several years, was particularly unhappy about this change. She arranged for a private meeting with Howser to discuss her child care circumstances and the difficulty that the new schedule presented. Howser seemed to listen half-heartedly and at one point told Bronson that “assistance are essentially a-dime-a-dozen and are readily available.” Bronson was seen leaving the office in tears that day.

Howser was not happy with the average length of time that it took to receive payments for services rendered to the firm’s clients (accounts receivable). A closer look showed that 30 percent of the clients paid their bills in 30 days or less, 60 percent paid in 30 to 60 days, and the remaining 10 percent stretched it out to as  many as 120 days. Howser composed a letter that was sent to all clients whose outstanding invoices exceeded 30 days. The strongly worded letter demanded immediate payment in full and went on to indicate that legal action might be taken against anyone who did not respond in timely fashion. While a small number of “late” payments were received soon after the mailing, the firm received an even larger number of letters and phone calls from angry clients, some of whom had been with the firm since its inception.

Howser was given an advertising and promotion budget for purposes of expanding the client base. One of the paralegals suggested that those expenditures should be carefully planned and that the firm had several attorneys who knew the local markets quite well and could probably offer some insights and ideas on the subject. Howser thought about this briefly and then decided to go it alone, reasoning that most attorneys know little or nothing about marketing.

In an attempt to “bring all of the people together to form a team,” Howser established weekly staff meetings. These mandatory, hour-long sessions were run by Howser, who presented a series of overhead slides, handouts, and lectures about “some of the proven management techniques that were successful in the insurance industry.” The meetings typically ran past the allotted time frame and rarely if ever covered all of the agenda items.

Howser spent some of his time “enhancing community relations.” He was very generous with many local groups such as the historical society, the garden clubs, the recreational sports programs, the middle-and high-school band programs, and others. In less than six months he had written checks and authorized donations totaling more than $25,000. He was delighted about all this and was certain that such gestures of goodwill would pay off handsomely in the future.

As for the budget, Howser carefully reviewed each line item in search of ways to increase revenues and cut expenses. He then proceeded to increase the expected base or quota for attorney’s monthly billable hours, thus directly affecting their profit sharing and bonus program. On the other side, he significantly reduced the attorneys’ annual budget for travel, meals, and entertainment. He considered these to be frivolous and unnecessary. Howser decided that one of the two full-time administrative assistant positions in each office should be reduced to part-time with no benefits. He saw no reason why the current workload could not be completed within this model. Howser wrapped up his initial financial review and action plan by posting notices throughout each office with new rules regarding the use of copy machines, phones, and supplies.

Howser completed the first year of his tenure with the required executive summary report to the partners that included his analysis of the current status of each department and his action plan. The partners were initially impressed with both Howser’s approach to the new job and with the changes that he made. They all seemed to make sense and were directly in line with the key components of his job description. At the same time, “the office rumor mill and grape vine” had “heated up” considerably. Company morale, which had been quite high, was now clearly waning. The water coolers and hallways became the frequent meeting places of disgruntled employees.

As for the marketplace, while the partner did not expect to see an immediate influx of new clients, they certainly did not expect to see shrinkage in their existing client base. A number of individual and corporate clients took their business elsewhere, still fuming over the letter they had received.

The partners met with Howser to discuss the situation. Howser urged them to “sit tight and ride out the storm.” He had seen this happen before and had no doubt that in the long run the firm would achieve all of its goals. Howser pointed out that people in general are resistant to change. The partners met for drinks later that day and looked at each other with a great sense of uncertainty. Should they ride out the storm as Howser suggested? Had they done the right thing in creating the position and hiring Howser? What had started as a seemingly, wise, logical, and smooth sequence of events had now become a crisis.

 

Questions

 

  1. Do you agree with Howser’s suggestion to “sit tight and ride out the storm,” or should the partners take some action immediately? If so, what actions specifically?
  2. Assume that the creation of the GM—Operation position was a good decision. What leadership style and type of individual would you try to place in this position?
  3. Consider your own leadership style. What types of positions and situations should you seek? What types of positions and situation should you seek to avoid? Why?

 

 

 

 

 

CASE – 5   The Grizzly Bear Lodge

 

Diane and Rudy Conrad own a small lodge outside Yellowstone National Park. Their lodge has 15 rooms that can accommodate up to 40 guests, with some rooms set up for families. Diane and Rudy serve a continental breakfast on weekdays and a full breakfast on weekends, included in the room they charge. Their busy season runs from May through September, but they remain open until Thanksgiving and reopen in April for a short spring season. They currently employ one cook and two waitpersons for the breakfasts on weekends, handling the other breakfasts themselves. They also have several housekeeping staff members, a groundkeeper, and a front-desk employee. The Conrads take pride in the efficiency of their operation, including the loyalty of their employees, which they attribute to their own form of clan control. If a guest needs something—whether it’s a breakfast catered to a special diet or an extra set of towels—Grizzly Bear workers are empowered to supply it.

The Conrads are considering expanding their business. They have been offered the opportunity to buy the property next door, which would give them the space to build an annex containing an additional 20 rooms. Currently, their annual sales total $300,000. With expenses running $230,000—including mortgage, payroll, maintenance, and so forth—the Conrads’ annual income is $70,000. They want to expand and make improvements without cutting back on the personal service they offer to their guests. In fact, in addition to hiring more staff to handle the larger facility, they are considering collaborating with more local business to offer guided rafting, fishing, hiking, and horseback riding trips. They also want to expand their food service to include dinner during the high season, which means renovating the restaurant area of the lodge and hiring more kitchen and wait staff. Ultimately, the Conrads would like the lodge to open year-round, offering guests opportunities to cross-country ski, ride snow-mobiles, or hike in winter. They hope to offer holiday packages for Thanksgiving, Christmas, and New Year’s celebrations in the great outdoors. The Conrads report that their employees are enthusiastic about their plans and want to stay with them through the expansion process. “This is our dream business,” says Rudy. “We’re only at the beginning.”

 

 

 

Questions

 

  1. Discuss how Rudy and Diane can use feedforward, concurrent, and feedback controls both now and in future at the Grizzly Bear Lodge to ensure their guests’ satisfaction.
  2. What might be some of the fundamental budgetary considerations the Conrads would have as they plan the expansion of their logic?
  3. Describe how the Conrads could use market controls plans and implement their expansion.

 


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CONTACT:

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Note: Answer any ten questions

Each question carries ten marks

 

  1. The Engineering Department to twelve persons in a small corporation is on a regular 10 Base-T Ethernet Lan hub with 16 ports. The busy group started complaining because of the slow network performance. The network was operating at 50% utilization, whereas 30% utilization is acceptable. If you are the corporation’s Information Technology Engineer and have to resolve the problem technically,

    Describe four choices for resolving the problem, maintaining the LAN as an Ethernet LAN.

    b. State the advantages and disadvantages of each approach.

  2. Two virtual LANs, 145.50.50.1 belonging to NM lab, and 145.50.60.1 belonging to Networking lab, each have three workstations. The former has workstations 145.50.50.11-13, and the latter 145.50.60.21.-23. They are connected to a switched hub on ports 2 through 7. the NICs (network interface cards) associated with ports are made by Cabletron and their MAC addresses start with the vendor’s global prefix 00-00-1D (hexadecimal notation) and end with 11,12,13,21,22, and 23 (same as the fourth decimal position of IP addresses).

    Create a conceptual matrix table, as shown below, that would be
    generated by the hub that relates the IP address, MAC address,
    and port number.

3.                  IP Address 4.                  MAC Address 5.                  Port Number
6. 7. 8.

 

  1. The workstation 23 is moved from networking lab to NM lab.

The appropriate parameter changes in the hub and the workstation.

  1. Design a client/server network with two servers operating at 100Base-T Fast Ethernet speed and the clients operating at regular 10Base-T Ethernet speed using a 10/100 Mbps NIC. The hub is located in a wiring closet, but the servers and clients are not. Assume that a satisfactory performance is achieved at 30% utilization of the LAN.

 

  1. Customer network management is used to look at the QoS classes associated with VCIs across an ATM link interface. What three MIB group and objects are used to collect the information? Describe the relationships among them.

 

  1. A new LEC is added to an ATM LAN containing other LECs, LES, LECS, a BUS, and a ATM switch. Starting from the initial conditions, six steps (or phases) are required to make the new LEC part of the ELAN network: (1) LEC connection, (2) configurations, (3) join, (4) initial registration, (5) BUS connection, and (6) operation. Describe these steps.

 

  1. Switched virtual circuit transmission overhead could be high for sending small amounts of information. Calculate the minimum time required to transmit one ATM cell from Miami to San Francisco on a basic SONET network (OC-3) for the following cases. Assume that the distance is 4500 km and that the propagation speed is 300 meters per microsecond.
  2. datagram service
  3.    switched virtual circuit service
  4.    permanent virtual circuit service

 

  1. A network manager discovers that a network component is performing poorly and issues on order to the technician to replace it. Which MIB group contains this information for the technician to find out the physical location of the component?

 

  1. An IT manager gets complaints from the users that there is excessive delay in response over the Ethernet LAN. The manager suspects the cause of the problem is excessive collisions on the LAN. She gathers statistics on the collisions using the dot3Stats Table and localizes the problem to a single faulty interface card. Explain how she localized the problem. You may use RFC 2358 to answer this exercise.

 

  1. You have been assigned the responsibility of adding a new vendor’s components with its own NMS to an existing network managed by a different NMS. Identify the three sets of functions that you need to do to fulfill your task.

 

  1. In a ballroom dance class, the instructor asks the guests to form couples made up of a male and a female order (order does not matter) for a dance. Write an ASN.1 module for dance Group with data type Dance Group that is composed of data type couple; couple is constructed using male and female.

 

  1. A high school class consists of four boys and four girls. The names of the boys with their heights are Adam (65”), Chang (63”), Eduardo (72”), and Gopal (62”). The names of the girls are Beth (68”), Dipa (59”), Faye (61”), and Keisha (64”). For each of the following cases, write an ASN.1 description for the structure and record values by selecting appropriate data types. Start with data type Student info, listing information on each student.

 

  1. You are asked to do a study of the use pattern of 24,000 workstations in an academic institution. Make the following assumptions. You ping each station periodically. The message size in both directions is 128 bytes long. The NMS that you using to do the study is on a 10-Mbps LAN, which functions at 30 percent efficiency. What would be the frequency of your ping if you were not to exceed 5 percent overhead?

 

  1. Imagine that you are working for a company (maybe you are) that has decided to move from an SNMP-based to a Web-based management system. You are asked to prepare an executive summary on the two approaches, WBEM and JMX, and make a recommendation. Present your report, which is not to exceed two pages (executives don’t have the time or patience to read longer reports).

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CONTACT:

DR. PRASANTH BE BBA MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521 EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com

 

Note: Solve ANY THREE case studies.

 

CASE I

A CASE OF ALPHA TELENET LIMITED

 

Alpha Telecom Ltd., a part of Alpha Group was established in 1976 by its visionary Chairman and Managing Director, A. S. Verma. The company started with manufacturing of Electronic Push Button Telephones (EPBT) and Cordless phones in 1985 in Allahabad. On July 7, 1995 Alpha Tele-Ventures Limited was incorporated. A mobile service called ‘Web-Tel’ was launched in Kochin, which eventually expanded its operations in Andhra Pradesh in 1996.

 

Till 1994, fixed telephone services were provided by Department of Telecommunications (DoT) which had a monopoly in this business. This was regarded as self-defeating because DoT was a regulator as well as a competitor. With increasing pressure for privatisation, the government agreed to give license to private operators. Finally in December 1996, the bill of privatisation of fixed telephone services was passed. The New Telecom Policy (NTP) with its targets for improving tele-density was an ambitious policy. The NTP planned to achieve a tele-density (number of telephones per 100 people) of 7 by the year 2005 and 15 by the year 2010, which translated into 130 mn lines. The policy also planned an investment of Rs. 4000 billion by the year 2010. The above factors combined with the fact that the domestic long distance telephony was open to private players, led to considerable demand for the company’s products. But to get the tenders from Ministry of Telecommunication, Government of India, a license fee was to be paid over a period of 15 years and the viability of telecom projects was also affected by the guidelines that required private operators to earmark at least 10% of their telephone lines for villages. The operating companies did not like the idea of having to pay for the maintenance of lines that might not be used most of the times. The license fee of Maharashtra state was minimum at Rs.643 crores. Thus, Alpha Telenet, a pioneer in every field wanted to avail this opportunity and started the survey for extending the services in Pune. Their marketing survey team provided the statistics of existing customers of DoT, the waiting list of DoT, potential of users for successive years and so on.

 

Alpha Telenet Ltd. (ATL) decided to start their fixed line telephone operations in technical collaboration with Telecom Italia at Pune in Maharashtra. Initially, they received permission for installing their exchanges covering 0.5 km. of radius which was too small with respect to the cost involved and thus difficult to achieve lucrative returns. After struggling for a year, they finally got permission to set up exchanges covering 1 km. of radius. They set up their exchanges in potential areas in the city. Another problem was that the consumer’s mindset fixated was with DoT and they were not ready to accept the services of Alpha Telenet Ltd. This was due to opposite tariff rates for household consumers. Consumers did not rely on ATL as they were private players. ATL initially had attracted the customers from the areas where the waiting line for DoT connections was high. Further, they had provided the connections with wireless CDMA receivers for only Rs. 3000 (movable within the area of 5 km radius) though its actual cost was Rs.15,000. The connection between exchanges by optical fibre ensured high quality of voice and data transmission, which was later to be shifted to the conventional copper wires for consumer connections. The company made the connection using Ring Topology stay connected even in case of line disturbances.

They also installed a Submarine Optical Fibre Cable to Singapore with an 8.4 Tbps (terabits per second) capacity providing high-class worldwide connectivity. Alpha Telenet installed the latest Digital Switches from Tiemens and other devices, which were fully compatible with the equipment of other telecom providers in India. The company installed a digital Geographical Information System (GIS) for network surveillance. A 24-hr Internal Network Management System for technical support and infrastructure maintenance were also installed with a dedicated round-the-clock toll-free call centre to ensure prompt services.

In 1997, Alpha Telenet Ltd. obtained a license for providing fixed-line services in Maharashtra state circle and formed a joint venture with Behrin Telecom, Alpha BT, for providing VSAT services. On June 4, 1998 they started the first private fixed-line services launched in Pune in the Maharashtra circle and thereby ending fixed-:-line services monopoly of DoT (now TSNL). Alpha entered into a license agreement with DoT in 2002 to provide international long distance services in India and became the first private telecommunications service provider. The company also launched fixed line services in the states of Goa, Uttar Pradesh, Gujarat and Delhi.

With the start of basic telephony services in the .state of Maharashtra, residents of the area and others felt a great sense of breaking away from the old and traditional government monopoly. The kind of ill-treatment of customers and also the red-tapism and bureaucracy which prevailed earlier, was about to end. It was observed that no private telecom company wanted to start their operations in less profitable areas like Bihar and other eastern states .

. The tariff plans of the TSNL and Alpha Telenet Ltd. were opposite to each other. TSNLS tariff structure was upwards i.e., price per unit increase with number of calls and vice versa for Alpha Telenet. This was the beginning of the entry of private players in the sector.

 

Questions:

  1. Give a critical analysis of the privatisation of telecom sector in India.?
  2. Highlight the secrets of success of Alpha Telenet Ltd. in terms of technological advancements and service provided?


CASE II

GEARING· FOR GROWTH

Premier Differential Gears Pvt. Ltd. (PDGL) was formed in the year 1991 near Noida in the state of Uttar Pradesh (India). The company was established to cater to the ever­growing needs of the differential gear market for cars, jeeps, trucks, and tractors. It was established under the aegis of the parent company called Premier Gears Pvt. Ltd. which in turn was established in the year 1962 at Noida. The parent company was engaged in the manufacturing of automobile transmission gears. With a modest start in 1961, it had never looked back and by 2006, it became the largest manufacturer of automobile transmission gears in the country. The parent company had employee strength of 2,500 trained and dedicated employees and was producing a range of over 1,000 gears. Premier Gears Pvt. Ltd. was making gears for virtually every major brand of truck, car, jeep and tractor. In 2006, the group company comprised of three firms namely, Premier Gears Pvt. Ltd. (manufacturing Transmission gears, Gearbox assemblies, Laser marking machines, and Material handling equipments), Premier Differential Gears Pvt. Ltd. (manufacturing differential gears) and Elve Corporation (a government recognized export house).

PDGL was manufacturing a wide range of Crown Wheel and Pinions, Bevel Gears, Bevel Pinions, and Spider Kit Assemblies. The installed capacity was 20,000 sets per month. PDGLs focus on quality, fast product development and customer service had enabled it to become an OEM supplier to many car and tractor companies in India, the EU, and Asia. Almost 75% of the total production was exported to a number of countries like Germany, Russia, USA, China, Japan, South Mrica, etc. The domestic OEM and replacement market accounted for the remaining 25% of the company’s sales and in a short span of time, the company had become one of the major players in the Indian replacement market. The use of latest technology and comprehensive quality control systems at PDGL go a long way to ensure that customers get exactly what they want.

 

PDGL was using world class Gleason machines in its manufacturing programme. The raw material for manufacturing gears was in the form of forgings, which were procured from various parts of the country for manufacturing crown wheels and pinions. These forgings were subjected to turning followed by drilling. The drilled crowns and pinions were taken for tapping, which were then rimmed. After this, the teeth cutting procedure was applied which was called broaching. The broached units were then heat-treated. Heat treatment was very critical in producing gears having short tolerance levels. To meet this end, the company had two rotary furnaces and one state-of-the-art Continuous Gas Carburizing Furnace (CGCF) from Aichelin ALD of Austria to heat-treat its products. After the heat treatment, a number of intermediate processes like short blasting, phosphating, lapping were performed which resulted into the finished product, ready for putting company marks to avoid imitation/forgery. The company had developed a state-of-the-art 70-watt ND­YAG laser-marking machine in collaboration with Quantum Laser (UK), which was used for marking on its produces. Laser marking was environment-friendly and was applied without any force or contact and thus the material was not subjected to any stress. The marked products were” manually pushed onto a conveyer for packing and dispatching. All the above have enabled the company to meet international standards and to produce world­class gears with the highest performance standards.

The upstream portion of the supply chain at PDGL included a number of forgers located at “geographically dispersed locations in various parts of the country. These forgers were supplying the forgings to PDGL, which were then used in manufacturing the differential gears. All of the raw material was routed to the POGL works through road transport and”” due to large distances, transportation costs were a major issue in increasing the efficiency of this upstream portion of the supply chain. The forgings were supplied according to the drawings and dimensions set by design engineers at the company. The company indeed tried some local suppliers to cope up with the increasing transportation costs but the results on quality front wet satisfactory. To serve this end, the company was planning to develop some local suppliers. It had planned to provide them support in the areas of procuring good material for producing forgings, procuring good quality machines and” training their workforce in the required technical know-how. This was considered as an investment by the company to reduce its inbound transportation costs. To meet the small lot requirements of the forgings, the company was also contemplating to share the truckloads with the parent company. This was feasible because of the geographical proximity of the parent company, which was situated at a distance of less than 15 kms, the similar nature of raw material and same suppliers supplying to both the units.

The internal supply chain at PDGL comprised of various processing stations/lines” through which the forgings were transformed into finished differential gears. The movement of the work-in-progress between various stations was semi-automatic in which the workers manually placed the goods on trolleys/carts. Even the finished units were manually placed on a conveyer; which needed to be pushed to send the units to the packing section. There was a risk of units being damaged in this process. To minimize this risk, the company was planning to have automatic systems for moving the material from one place to another. It was decided to have hydraulic lifts, cranes, electronic escalators and the likes for progression of material from forging to packing. The packing material was stored on first floor as and when it arrived, with the help of casual laborers, which was inefficient and also involved a: risk of some· casualty.

The downstream portion of the supply chain at PDGL included around 10 distributors located evenly in various parts of the country. These distributors were supplying the products of PDGL to number of car, truck, jeep and tractor manufacturers. This portion of the supply chain also included a large replacement market, which accounted for almost half of the company’s domestic sales. To meet its distribution needs the company had a panel of transporters, who used to distribute the finished goods. At times, the consignments scheduled for distributors were delayed because of lack of full truckload. One possible solution to this problem was sharing of truckload with the parent company. This was feasible because both the companies shared the same distribution network. The distribution of export consignments was through an intermediary who helped the company in exporting its products to the US, UK, Germany, China, Italy, Turkey, Saudi Arabia, Singapore, Malaysia, Thailand, Indonesia, and Nigeria, amongst other countries. The company’s wide export range included replacement gears for internationally renowned automotive manufacturers like Mercedes­Benz, Mitsubishi, Toyota, Nissan, Clark, Eaton, Fuller, New Process, ZP, Hino, Fuso, Tong Feng, Tata, Leyland, Massey Ferguson, Magirus – Deutz and various others.

There was a shortage of skilled employees. Therefore, the company has recently started training input for all their 400 employees. These training programmes are being conducted in the organization to enhance the skills of the employees and the duration of these programmes were 20 hours per month. On the financial front, the company is continuously moving on the growth track showing better financial results year after year. It has embarked on an ambitious plan to double its turnover by the end of this financial year and to become the world’s numero-uno in the automotive gear-manufacturing segment. The current capacity utilization was at a meager 6000 sets against a total installed capacity of 20,000 sets per month.

 

Questions:

 

  1. Comment on the upstream and downstream supply chain portions operating in the company.
  2. How far are the plans to improve the supply chain efficiency in the company feasible?
  3. “Internal supply chain at the company can be characterized by the lack of it”. Comment.

 

CASE III

INTELLIGENT MOVEMENTS: ANYWHERE ANYTIME

 

Deepak Pai, an engineering graduate and a postgraduate in management from United States, was working in Transport Corporation of India (TCI), the market leader in conventional transportation. He established Speed Cargo as an express cargo distribution company after leaving TCI. Speed Cargo, started with its head office at Hyderabad, as a small cargo specialist in 1989, upgrading itself to desk-to-desk cargo in 1992, cargo management services in 1995 and became a public limited company when it was listed in Bombay Stock Exchange in 1999. The company was maintaining a strong customer base of prestigious companies like Acer, Cadilla, Sony, Panasonic, Titan, Dabur and Hitachi to name a few.

 

Speed Cargo Limited (SCL), a leader in the express cargo movement pioneered in distribution and supply chain management solutions in India. It differentiated the concept of cargo, from conventional transport industry by offering door pickup, door delivery, assured delivery date and containerized movement. It had a turnover of Rs.3600 million in 2005-06. The company had a strong team of 6400 employees with the fleet of 2000 vehicles on road and an extensive network covering 3,20,000 kilometers per day and a reach of 594 out of 602 districts in India. In addition to this, it was having a well-structured multimodal connectivity and 6lakh square feet mechanized warehousing facility. Warehousing facilities were comprised of the most modern storied system and material handling equipment offering very high level of operational efficiency. The four modes of transport – Road, Air, Sea and Rail were seamlessly integrated, enabling SCL to effortlessly reach anytime anywhere.

 

The international wing of SCL took care of the SAARC countries and Asia Pacific region covering 220 countries with a specialized India-centric perspective. The company had gone online by connecting 90 percent of its offices to provide web-centric solutions to its customers.

 

The company also offered money back guarantee to express cargo services. The services offered were customized for corporate, small and medium enterprises, cluster markets, wholesale markets and individuals. The state-of-the-art technology made things easier for the customers whose cargo could be tracked and traced in the simplest manner, because SCL had an effective tracking system. SCL believed that best of technology enabled best of service, and its outlays on providing the IT edge had always resulted in innovative services and solutions. SCL, in its day-to-day operations, used technologically advanced equipments like Fork Lifters, Hydraulic Trucks, Hand Trolly, Drum Trolly, Rubber Pads cushioning, Taper Rollers to move big crates, color codes for identification to delivery what it promised.

 

Between 1989, when company was born, and 1995, SCL started a unique value added service called Cash-On-Delivery for the advantage of its customers. SCL introduced Call Free Number for the first time in the logistics industry in India. To establish largest network in air and to facilitate faster delivery of shipments, SCL entered into a tie-up with Indian Airlines in 1996; The Company introduced the concept of 3rd party logistics and later started offering complete logistics and supply chain solutions in 1997. The courier service Suvidha later rechristened as Zipp was launched in 1998. The company entered into a tie­up with Bhutan and Maldives Postal Departments to expand its operations to SAARC countries in 1999. The Speed Cargo Development Center was set up at Pune in India for training of its employees in the same year.

 

An exclusive cargo train in association with Indian Railways between Mumbai and Kolkata was launched in 2001. Based on a survey conducted by Frost and Sullivan, SCL was conferred the Voice of Customer Award for being the best logistics company in 2003. After simplifying the internal process for faster and better communication, and a smarter way to work, SCL set up its corporate office at Singapore in 2003 to create an international hub with an aim to reach out to the world. The company introduced a mechanized racking system in the automated warehouse at Panvel (Maharastra) in 2004.

 

SCL was sensitive to the avenues where it could contribute to building a better society. Displaying continuous social responsibility, SCL associated itself with several community development programs and contributed generously to many social causes. SCL was the first to build makeshift houses for 400 families who were affected during a massive earthquake in Bhuj district of Gujarat in India during January 2001. They reached the devastated village the same day to provide food, clothes, medication and water to the affected people.

 

In 2003, SCL accepted to develop one of the government schools located at Banjara Hills in Hyderabad, and built a building with basic facilities like classrooms, staff rooms and toilets, and provided furniture for students and staff. The housekeeping and security of the school, which was now having 1100 students, was also taken care of by the company. After Tsunami, one of the worst natural disasters that struck South East Asia in December 2004 leaving over 10 lakh people dead and over 4 million displaced, SCL was on the rescue scene as it brought in food, water, clothing, medication, a team of doctors and cooks, and provided the affected people with essential utensils. After rehabilitating the people in Nagapattnam and Cuddalore, it took up the development of a high school in Nagore where 500 students came in from the Tsunami affected families. SCL also actively participated in Kargil contributions and other rescue and rehabilitation works in India.

 

LOOKING AHEAD

 

SCL believed that in the age of convergence, it had kept pace with time with its infrastructure, people and technological capabilities for moving cargo to its destination on time, by making intelligent movements in air and sea, as well as on road and rail. The company had experience of handling wide range of materials including confidential papers related to University examination and sensitive goods like polio drops and life-saving medicines. In view of the strengths of its competitors such as DHL, Safexpress and Blue Dart, the company had enhanced services with a greater focus on cargo management and customer satisfaction with the new operations backed by better strategic planning. To achieve its aim, SCL had strategically tied-up with Jubli Commercials, an lATA accredited freight forwarder, which started its operations as Air Cargo Agent.

The company was confident that it was set to become 24 x 7 one-stop solution provider for all freight forwarding services including customs clearance for international cargo. SCL having 40 percent share in express distribution business was developing a huge centralized warehouse on 22 acres of land at Nagpur in India. The centralized warehouse, which was about to be commissioned, was designed as a major hub or express distribution center for 200 smaller hubs as its spokes catering to the needs of its customers across India. SCL believed that it is a concept, a vision and an idea ahead of its time, which looked at a global perspective and was constantly reinventing itself in delivering the future of logistics.

 

 

Questions:

 

  1. What made SCL a leader in the logistics industry?
  2. Discuss the strategies adopted by SCL for its survival in the competitive scenario.
  3. Comment on the contributions of SCL to society.
  4. What steps the company should take to globalize its network reach?

Discuss the strategies adopted by SCL for expansion.

 

 

CASE IV

 

LOGISTICS OUTSOURCING

 

Company Profile

Indian Steels Limited (ISL) is a Rs. 6000 crore company established in the year 1986. The company envisaged being a continuously growing top class company to deliver superior quality and cost effective products for infrastructure development. With major customers being from Public Sector Undertakings, the company has established itself well and is said to be considering its expansion plan and proposed merger with another steel making giant in the country.

 

In 1996, owing to the cut throat competition in the emerging dynamic global markets, ISL emphasized on both effectiveness and efficiency. The company strongly believed in focusing on its core competency (i.e. manufacturing of steel) and outsourcing the rest to its reliable partners. Outsourcing of its outbound logistics was one such move in this direction. ISL out sourced its stockyards and other warehousing services to a third party called Consignment Agent, who was selected on an annual basis through a process of competitive bidding. The CA was responsible for the entire distribution of the products within the geographical limits of the allotted market segment and was paid by the company according to the loads of transaction (measured in metric tonnes) dealt by him. The company also believed in maintaining long-term relationships with the suppliers as well as the buyers. It always prioritized the needs of its regular and important customers over others and this worked out to be a win-win strategy. The case brings out the model of outsourcing logistics the company has adapted for the enhancement of its supply chain competency and thus leveraging more on its core competency which led to increased productivity.

 

Indian Steels Limited (ISL) is a Rs. 6000 crore company established in the’ year 1986. The company envisaged being a continuously growing top class company to deliver superior quality and cost effective products for infrastructure development. The company performed with a mission to attain 7 million ton liquid steel capacity through technological up-gradation, operational efficiency arid expansion; to produce steel with international standards of cost and quality; and to meet the aspirations of the stakeholders. The production started in the year 1988 and initially, it manufactured Angles, Pig Irons) Beams and Wire Rods that were mainly used for constructing roads) dams and bridges. These products were mainly supplied to Public Sector Undertakings such as Railways, Public Works Department (PWD) Central Public Works Department (CPWD) Rashtriya Setu Nigam Limited, Audyogik Kendra Vikas Nigam Ltd. and various foundry units. The company had its headquarters at Raipur with three stockyards (a kind of warehouse with a huge land to store the products).

 

The company has established itself well and is said to be considering its expansion plan and proposed merger with another steel making giant in the country. The company was awarded ISO 9001, ISO 14001 and ISO 18001 certifications. The temperature in the plant premises is reportedly about 6°C lesser than that of the township, thanks to the greenery being maintained therein.

 

Logistics Outsourcing

 

Outbound logistics which basically connects the source of supply with the sources of demand with an objective of bridging the gap between the market demand and capabilities of the supply sources was always a problem for companies operating in this industry. Consisting of components like warehousing network, transportation network) inventory control system and supporting information systems outbound logistics was always playing a key role in making the right product available at the right place, at the right time at the least possible cost. In 1996 owing to the cut throat competition in the emerging dynamic global markets, ISL emphasized on both effectiveness and efficiency. The company strongly believed in focusing on its core competency (Le. manufacturing of steel) and outsourcing the rest to its reliable partners. Outsourcing of its outbound logistics was one such move in this direction.

 

Recognizing the growing demand for its products from the big, diversified and geographically­dispersed customers, the company started expanding the number of warehousing stockyards. From a humble beginning, the company today has 26 stockyards; most of them are outsourced. Each of the outsourced stockyards was managed by a third party, which the company referred to as Consignment Agent (hereafter referred to as CA) in the area. The CA was selected on an annual basis through competitive bidding process. The performance of CA was closely monitored by a company representative (full time employee of ISL working in the site of CA). The CA was responsible for the entire distribution of the products within the geographical limits of the allotted market segment and Was paid by the company according to the loads of transaction (measured in metric tonnes) dealt by him. Based on their sales turnover CAs were trifurcated into A, Band C categories. The CAs with a monthly turnover of Rs. 150-200 crore fell under A category) whereas those with Rs. 100 – 150 crore were B and less than Rs. 100 \ crore were C category.

 

In addition to the company representative) a team of marketing division operated in the town where, the site of CA was located. This department was responsible or estimating the future demand, translating it into orders and sending to the manufacturing plant. Material dispatch was done using either one or a combination of the two modes: Rail, Road. While using rail as the mode of transportation, the company had a choice to book a Normal Rake (a full train with about 35 wagons, each wagon with an approximate capacity of 60 tonnes) or a Jumbo Rake (a full train of about 52 wagons, each wagon with an approximate capacity of 60 tonnes). At times, the company was engaging the services of the CONCOR (Container Corporation of India) where a train of 62 to 70 wagons, each wagon with about 26 tonnes capacity was used for transportation. Instead, if the company decided to send the material by road, the company had a choice between Trailor (25-30 tonnes} and Truck (15-20 tonnes). The choice of transportation mode was based on the quantity of dispatch.

As soon as the material was dispatched from the manufacturing plant, the respective CA used to get a Stock Transfer Chalaan electronically through Virtual Private Network, which was developed by a professional software service provider. In-transit, monitoring was generally done with the help of Indian Railways, if the mode was Rail. Otherwise, truck/trailor drivers were contacted through mobile phone. Transit generally took five to six days, providing time for CA to plan for receiving materials. The CA used to utilize this time for arranging material handling devices like heavy cranes and required labour. The material thus unloaded was reaching the warehousing stockyard where CA was responsible for arranging the materials as per the warehousing norms of ISL.

The company broadly classified materials into Long Products and Rounds. Products falling into each category were further classified by their size, shape and utility and the company used a distinct colour code for this purpose. Each subcategory of material had a specific place for downloading. The company used Bin System for this purpose. While downloading the material in stockyard, the company norms insisted that CA arrange for providing Dunnagt Material. This enabled the CA to store material without 1 direct contact with the land surface and thus reduced the probability of material deterioration. Material was stored in the stockyard until an authorized representative of the customer used to come and collect it. While dispatching material to the customer, a Loading Slip was generated against the Delivery Order. The company” also believed in maintaining long-term relationships with the suppliers as well as the buyers. It always prioritized the needs of its regular and important customers over others and this worked out to be a win-win strategy.

Operational problems were majorly because of uncertainties in transportation, fluctuation in supply of electricity and the load bearing capacity of the soil in the stockyard. Some: more problems were encountered whenever there was a change in CA and these were overcome by training the employees of the new CA and keeping the old CA responsible for the: material in his stockyard for six months after the contract as well. Observations reveal that, at times there were situations wherein CAs had to do those things which they were not legally supposed to do (like subcontracting) because of the pressures mounted by political leaders with selfish interests.

Despite these problems, this model of outsourcing logistics was working out very well for the company. The practices, which were started in the year 1996 have sustained major changes in the environment and are being practiced even in 2006. It has enhanced the supply chain competency of the company by enabling it leverage more on its core competency, which leads to increased productivity.

Questions:

  1. Analyze the case in view of the logistics outsourcing practices of the ISL.
  2. Discuss the importance of logistics outsourcing with reference to supply chain management.
  3. Suggest strategies for further strengthening the supply chain of ISL.
  4. The participants/students are expected to have a clear understanding of Supply Chain and Logistics Management concepts.
  5. The issues involved in the case are Sales Forecasting, Strategic Sourcing, Selection of Warehousing Service Provider, Transportation Mode and other nuances in Logistics Management.

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Attempt Any Five Case Study

 

Case 1  – Disaster Recovery at Marshall Field’s (Another Chicago River Story)

 

 

Early in the morning on April 13, 1992, basements in Chicago’s downtown central business district began to flood. A hole the size of an automobile had developed between the river and an adjacent abandoned tunnel. The tunnel, built in the early 1900s for transporting coal, runs throughout the downtown area. When the tunnel flooded, so did the basements connected to it, some 272 in all, including that of major retailer Marshall Field’s.

The problem was first noted at 5:30 A.M. by a member of the Marshall Field’s trouble desk who saw water pouring into the basement. The manager of maintenance was notified and immediately took charge. His first actions were to contact the Chicago Fire and Water Departments, and Marshall Field’s parent company, Dayton Hudson in Minneapolis. Electricity—and with it all elevator, computer, communication, and security services for the 15-story building—would soon be lost. The building was evacuated and elevators were moved above basement levels. A command post was quickly established and a team formed from various departments such as facilities, security, human resources, public relations, and financial, legal, insurance, and support services. Later that day, members of Dayton Hudson’s risk management group arrived from Minneapolis to take over coordinating the team’s efforts. The team initially met twice a week to evaluate progress as the store recovered. The goal of the team was to ensure the safety of employees and customers, minimize flood damage, and resume normal operations as soon as possible. The team hoped to open the store to customers 1 week after the flood began.

An attempt was made to pump out the water; however, as long as the tunnel hole remained unrepaired, the Chicago River continued to pour into the basements. Thus, the basements remained flooded until the tunnel was sealed and the Army Corps of Engineers could give approval to start pumping. Everything in the second-level basement was a loss, including equipment for security, heating, ventilation, air-conditioning, fire sprinkling, and mechanical services. Most merchandise in the first-level basement stockrooms also was lost.

Electricians worked around the clock to install emergency generators and restore lighting and elevator service. Additional security officers were hired. An emergency pumping system and new piping to the water sprinkling tank were installed so the sprinkler system could be reactivated. Measures were taken to monitor ventilation and air quality and dehumidifiers and fans were installed to improve air quality. Within the week, inspectors from the City of Chicago and OSHA gave approval to reopen the store.

During this time, engineers had repaired the hole in the tunnel. After water was drained from the Marshall Field’s basements, damaged merchandise was removed and sold to a salvager. The second basement had to be gutted to assure removal of contaminants. Salvageable machinery had to be disassembled and sanitized.

The extent of the damage was assessed and insurance claims filed. A construction company was hired to manage restoration of the damaged areas. Throughout the ordeal, the public relations department dealt with the media, being candid yet showing confidence in the recovery effort. Customers had to be assured that the store was safe and employees kept apprised of the recovery effort.

This case illustrates crisis management, an important aspect of which is having a team that moves fast to minimize losses and quickly recover damages. At the beginning of a disaster there is little time to plan, though companies and public agencies often have crisis guidelines for responding to emergency situations. Afterwards they then develop more specific, detailed plans to guide longer-term recovery efforts.

 

QUESTIONS

 

  1. In what ways are the Marshall Field’s flood disaster recovery effort a project? Why are large-scale disaster response and recovery efforts projects?
  2. In what ways do the characteristics of crisis management as described in this case correspond to those of project management?

 

  1. Who was (were) the project manager(s) and what was his or her (their) responsibility? Who was assigned to the project team and why were they on the team?

 

  1. Comment on the appropriateness of using disaster recovery efforts such as this.

 

  1. What form of project management (basic, program, and so on) does this case most closely resemble?

 

 

 

Case 2 -Flexible Benefits System Implementation at Quick Medical Center

 

The management committee of Quick Medical Center wanted to reduce the cost and improve the value and service of its employee benefits coverage. To accomplish this it decided to procure and implement a new benefits system. The new system would have no meet four goal; improved responsiveness to employee needs, added benefits flexibility, better cost management, and greater coordination of human resource objectives with business strategies. A multifunctional team of 13 members was formed by selecting representatives of departments at Quick that would rely most on the new system—Human Resources (HR), Financial Systems (FS), and Information Services (IS). Representation from each department was important to assuring all departmental needs would be met. The team also included six technical experts from the software consulting firm of Hun and Bar Software (HBS).

 

Early in the project a workshop was held with team members from Quick and HBS to clarify and finalize project objectives and develop a project plan, milestones, and schedules. Project completion was set at 10 months. In that time HBS had to develop and supply all hardware and software for the new system; the system had to be brought on-line, tested, and approved; HR workers had to be trained how to operate the system and load existing employee data; all Quick employees had to be educated about and enrolled in the new benefits process; and the enrollment data had to be entered in the system.

 

The director of FS was chosen to oversee the project. She had a technical background and, prior to serving as director, had worked in the IS group where she assisted in implementing Quick’s patient care information system. Everyone on the team approved of her appointment as project leader, and many team members had worked with her previously. Two team members had worked with her previously. Two team leaders were also selected, one each from HR and IS. The HR leader’s task was to ensure that the new system met HR requirements and the needs of Quick employees, and the IS leader’s task was to ensure that the new software interfaced with other Quick systems.

 

Members of the Quick team were committed to the project on a part-time basis. Roughly 50 percent of the time they worked on the project; the rest of the time they performed their normal daily duties. The project manager and team leaders also worked on the project part-time. When conflicts arose, the project took priority. Given specific performance requirements and time deadlines, the Quick top management committee made it clear that successful project completion was imperative. The project manager was given authority over functional managers and project team members regarding all project related decisions.

 

QUESTIONS

 

  1. What form of project management (basic, program, and so on) does this case most closely resemble?

 

  1. The project manager is also the director of FS, only one of the departments that will be affected by the new benefits system. Does this seem like a good idea? What are the pros and cons of her selection?

 

  1. Comment on the team members’ part time assignment to the project and the expectation that they give the project top priority.

 

  1. Much of the success of this project depends on the performance of team members who are not employed by Quick, namely the HBS consultants. They must develop the entire hardware/software benefits system. Why was an outside firm likely chosen for such an important part of the project manager in meeting project goals?

 

 

 

Case 3   Glades County Sanitary District

 

Glades Country is a region on the Gulf Coast with a population of 600,000. About 90 percent of the population is located in and near the city of Sitkus. The main attractions of the area are its clean, sandy beaches and nearby fishing. Resorts, restaurants, hotels, retailers, and the Sitkus/Glades County economy in general rely on these attractions for tourist dollars.

 

In the last decade, Glades Country has experienced a near doubling of population and industry. One result has been the noticeable increase in the level of water pollution along the coast due primarily to the increased raw sewage dumped by Glades County into the Gulf. Ordinarily, the Glades County sewer system directs effluent waste through filtration plants before pumping it into the Gulf. Although the Glades County Sanitary District (GCSD) usually is able to handle the county’s sewage, during heavy rains the runoff from paved surfaces exceeds sewer capacity and must be diverted past filtration plants, directly in to the Gulf. Following heavy rains, the beaches are cluttered with dead fish and debris. The Gulf fishing trade also is affected; pollution drives away desirable fish. Recently, the water pollution level has become high enough to damage both the tourist and fishing trade. Besides coastal pollution, there is also concern that as the population continues to increase, the county’s primary fresh water source, Glades River, will also become polluted.

 

The GCSD has been mandated to prepare a comprehensive water waste management program that will reverse the trend in pollution along the Gulf Coast as well as handle the expected increase in effluent wastes over the next 20 years. Although not yet specified, it is known that the program will include new sewers, filtration plants, and stricter anti-pollution laws. As a first step, GCSD must establish the overall direction and mission of the program.

 

Wherever possible, answer the following questions (given the limited information, it is okay to advance some logical guesses; if you are not able to answer a question for lack of information, indicate how and where, as a systems analyst, you would get it):

 

Questions:

  1. What is the system? What are its key elements and subsystems? What are the boundaries and how are they determined? What is the environment?

 

  1. Who are the decision makers?

 

  1. What is the problem? Carefully formulate it.

 

  1. Define the overall objective of the water waste management program. Because the program is wide-ranging in scope, you should break this down into several sub- objectives.

 

  1. Define the criteria or measures of performance to be used to determine whether the objectives of the program are being met. Specify several criteria for each sub-objective. As much as possible, the criteria should be quantitative, although some qualitative measures should also be included. How will you know if the criteria that you define are the appropriate ones to use?

 

  1. What are the resources and constraints?

 

  1. Elaborate on the kinds of alternatives and range of solutions to solving the problem.

 

  1. Discuss some techniques that could be used to help evaluate which alternatives are best.

 

 

 

 

 

 

 

 

Case 4 – West Coast University Medical center

 

(This is a true story.) West Coast University Medical Center (Pseudonym) is a large university teaching and research hospital with a national reputation for excellence in health care practice, education, and research. Always seeking to sustain that reputation, the senior executive board at the Medical Center (WCMC) decided to install a comprehensive medical diagnostic system. The system would be linked to WCMC’s computer servers and be available to physicians via the computer network. Because every physician’s office at WCMC has a PC, doctors and staff could access the system from these offices as well as from their homes or private-practice offices. By simply clicking icons to access a medical specialty area, then keying in answers to queries about a patient’s symptoms, medical history, and so on, a physician could get a list of diagnostics with associated statistics.

 

The senior board sent a questionnaire to manager in every department about needs in their areas and how they felt the system might improve doctor’s performances. Most managers felt it would save the doctor’s time and improve their performances. The hospital computing and information systems (CIS) group was assigned to investigate the cost and feasibility of implementing the system. CIS staff interviewed medical-center managers and software vendors specializing in diagnostic systems. The study showed high enthusiasm among the respondents and a long list of potential benefits. Based on the study report, the senior board approved the system.

 

The CIS manager contacted three well-known consulting firms that specialized in medical diagnostic systems and invited each to give a presentation. Based on the presentations, he chose one firm to assist the CIS group in identifying, selecting, and integrating several software packages into a single, complete diagnostic system.

 

One year and several million dollars later the project was completed. However, within a year of its completion it was clear that the system had failed. Although it did everything the consultants and software vendors had promised, the few doctors that did access it complained that many of the system “benefits” were irrelevant, and that certain features they desired were lacking.

 

QUESTIONS

 

  1. Why was the system a failure?

 

  1. What was the likely cause of its lack of use?

 

  1. What steps or procedures were absent or poorly handled in the project conception phase?

 

 

 

Case 5 – X-philes Data Management Corporation

 

 

X-philes Data Management Corporation (XDM) requires assistance in tow large projects it is about to undertake: Agentfox and Mulder. Although the projects are comparable in terms of size, technical requirements, and estimated completion time, they are independent and will have their own project managers and teams. Work for both projects is to be contracted to outside consultants.

 

Two managers at XDM, one assigned each to Agentfox and Mulder, prepare RFPs and send them to several contractors. The RFP for Agentfox includes a statement of work that specifies system performance and quality requirements, a desired completion deadline, and contract conditions. As an incentive, the contractor will receive a bonus for exceeding minimal quality measures and completing the project early, and will be charged a penalty for poor quality and late completion. The project will be tracked using precise quality measures, and the contractor will have to submit detailed monthly status reports. The REP for Mulder simply includes a statement of the type of work to be done, an expected budget limit, and the desired completion date.

 

Based on proposals received in response to the REPs, the managers responsible for Mulder and Agentfox each select a contractor. Unknown to either manager is that they select the same contractor, Yrisket Systems. Yrisket is selected for the Mulder project because its specified price is somewhat less than the budget limit in the REP, and Yrisket has a good reputation in the business. Yrisket is chosen for the Agentfox contract for similar reasons—good price and good reputation. In responding to the Agentfox REP, Yrisket managers had to work hard to get the price down to the amount specified, but they felt that by doing quality work on the project they could make a tidy profit through the incentive offered.

 

A few months after the projects are underway, some of Yrisket’s key employees quit their jobs. Thus, to meet their commitments to both projects, Yrisket workers have to work long hours and weekends. It is apparent, however, that these extra efforts might not be enough, especially because Yrisket has a contract with another customer and will have to start a third project in the near future.

 

QUESTIONS

 

  1. What do you think will happen?

 

  1. How do you think the crisis facing Yrisket will affect the Mulder project? The Agentfox project?

 

 

 

Case 6 – Star-Board Construction/West-Starr Associates

 

Star-Board Construction (SBC) is the prime contractor for Gargantuan Project, a large skyscraper project in downtown Manhattan. SBC is working directly from drawings received from the architect, West-Starr Associates (WSA). Robert Starr, owner and chief architect of WSA, had designed similar buildings and viewed this one as similar to the others. However, one difference between this building and the others is in its facing, which consists of very large granite slabs—slabs much larger than traditionally used and larger than anything with which either WSA or SBC has had prior experience.

 

Halfway into project, Kent Star, owner and project manager for SBC, started to receive reports from his site superintendent about recurring problems with window installation. The windows are factory units, premanufactured according to WSA’s specifications. Plans are to install the granite facing on the building according to specifications that allow for dimensional variations in the window units. The architect provided the specification  that a ½-inch tolerance for each window space be made (that is, the window space between granite slabs could vary as much as ¼ inch larger or smaller than the specified value). This created a problem for the construction crew that found the granite slabs too huge to install with such precision. As a result, the spacing between slabs is often too small, making it difficult or impossible to install window units. Most of the 2,000 window units for the building have already been manufactured so it is too late to change their specifications, and most of the granite slabs have been hung on the building. The only recourse for making window units fit into tight spaces would be to grind away or reinstall the granite. It is going to be very expensive and will certainly delay completion of the building.

 

QUESTION

 

  1. What steps or actions should the architect and contractor have taken before committing to the specifications on the window units and spacing between granite slabs the would have reduced or eliminated this problem?

 

 


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     Mangerial Economics

                                 Marks – 100

 

 

Attempt Any Four Case Study

 

CASE – 1   Dabur India Limited: Growing Big and Global

 

Dabur is among the top five FMCG companies in India and is positioned successfully on the specialist herbal platform. Dabur has proven its expertise in the fields of health care, personal care, homecare and foods.

The company was founded by Dr. S. K. Burman in 1884 as small pharmacy in Calcutta (now Kolkata), India. And is now led by his great grandson Vivek C. Burman, who is the Chairman of Dabur India Limited and the senior most representative of the Burman family in the company. The company headquarters are in Ghaziabad, India, near the Indian capital New Delhi, where it is registered. The company has over 12 manufacturing units in India and abroad. The international facilities are located in Nepal, Dubai, Bangladesh, Egypt and Nigeria.

S.K. Burman, the founder of Dabur, was trained as a physician. His mission was to provide effective and affordable cure for ordinary people in far-flung villages. Soon, he started preparing natural remedies based on Ayurved for diseases such as Cholera, Plague and Malaria. Due to his cheap and effective remedies, he became to be known as ‘Daktar’ (Indianised version of ‘doctor’). And that is how his venture Dabur got its name—derived from Daktar Burman.

The company faces stiff competition from many multi national and domestic companies. In the Branded and Packaged Food and Beverages segment major companies that are active include Hindustan Lever, Nestle, Cadbury and Dabur. In case of Ayurvedic medicines and products, the major competitors are Baidyanath, Vicco, Jhandu, Himani and other pharmaceutical companies.

 

Vision, Mission and Objectives

 

Vision statement of Dabur says that the company is “dedicated to the health and well being of every household”. The objective is to “significantly accelerate profitable growth by providing comfort to others”. For achieving this objective Dabur aims to:

  • Focus on growing core brands across categories, reaching out to new geographies, within and outside India, and improve operational efficiencies by leveraging technology.
  • Be the preferred company to meet the health and personal grooming needs of target consumers with safe, efficacious, natural solutions by synthesising deep knowledge of ayurveda and herbs with modern science.
  • Be a professionally managed employer of choice, attracting, developing and retaining quality personnel.
  • Be responsible citizens with a commitment to environmental protection.
  • Provide superior returns, relative to our peer group, to our shareholders.

 

Chairman of the company

 

Vivek C. Burman joined Dabur in 1954 after completing his graduation in Business Administration from the USA. In 1986 he was appointed Managing Director of Dabur and in 1998 he took over as Chairman of the Company.

Under Vivek Burman’s leadership, Dabur has grown and evolved as a multi-crore business house with a diverse product portfolio and a marketing network that traverses the whole of India and more than 50 countries across the world. As a strong and positive leader, Vivek C. Burman has motivated employees of Dabur to “do better than their best”—a credo that gives Dabur its status as India’s most trusted nature-based products company.

 

Leading brands

 

More than 300 diverse products in the FMCG, Healthcare and Ayurveda segments are in the product line of Dabur. List of products of the company include very successful brands like Vatika, Anmol, Hajmola, Dabur Amla Chyawanprash, Dabur Honey and Lal Dant Manjan with turnover of Rs.100 crores each.

Strategic positioning of Dabur Honey as food product, lead to market leadership with over 40% market share in branded honey market; Dabur Chyawanprash is the largest selling Ayurvedic medicine with over 65% market share. Dabur is a leader in herbal digestives with 90% market share. Hajmola tablets are in command with 75% market share of digestive tablets category. Dabur Lal Tail tops baby massage oil market with 35% of total share.

CHD (Consumer Health Division), dealing with classical Ayurvedic medicines has more than 250 products sold through prescription as well as over the counter. Proprietary Ayurvedic medicines developed by Dabur include Nature Care Isabgol, Madhuvaani and Trifgol.

However, some of the subsidiary units of Dabur have proved to be low margin business; like Dabur Finance Limited. The international units are also operating on low profit margin. The company also produces several “me – too” products. At the same time the company is very popular in the rural segment.

 

 

 

Questions

 

  1. What is the objective of Dabur? Is it profit maximisation or growth maximisation? Discuss.
  2. Do you think the growth of Dabur from a small pharmacy to a large multinational company is an indicator of the advantages of joint stock company against proprietorship form? Elaborate.

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   IT Industry: Checkered Growth

 

IT industry is now considered as vital for the development of any economy. Developing countries value the importance of this industry due to its capacity to provide much needed export earnings and support in the development of other industries. Especially in Indian context, this industry has assumed a significant position in the overall economy, due to its exemplary potentials in creating high value jobs, enhancing business efficiency and earning export revenues. The IT revolution has brought unexpected opportunities for India, which is emerging as an increasingly preferred location for customised software development. Experts are estimating the global IT industry to grow to US$1.6 million over the coming six years and exports to reach Rs. 2000 billion by 2008. It is envisaged that Indian IT industry, though a very small portion of the global IT pie, has tremendous growth prospects.

 

Stock Taking

 

The decade of 1970 may be taken as the stage of introduction of the Indian IT industry. The early years were marked by 75 per cent of software development taking place overseas and the rest 25 per cent in India. Exports of Indian software until the mid-1970s was mainly Eastern Europe, followed by US. Tata Consultancy Services (TCS) was among the pioneers in selling its services outside India, by working for IBM Labs in the US. The hardware segment lagged behind its software counterpart. With instances of exports worth US$ 4 million in 1980, the software segment of the industry has shown an uneven profile. It was not until 1980s that vigorous and sustained growth in software exports begun, as MNCs like Texas Instruments started to take serious interest in India as a centre of software production. Destinations of export also underwent changes, with US dominating the main export market with 75 per cent of the exports. The IT Enabled Services (ITeS) segment, however, had not emerged at this stage.

It was also during the mid to late 1980s that computer firms shifted focus from mainframe computers (the mainstay of MNCs) to Personal Computers (PCs). In March 1985, Minicomp installed the first ever PC at CSI, Delhi; this changed the entire industry for good. With the entry of networking and applications like CAD/CAM, PC sales soared in 1987-88, touching 50,000 units.

From a modest growth in the mid-1980s software exports moved up to Rs. 3.8 billion in 1991-92. Since then, it grew at an incredible rate, up to 115 per cent in 1993. The hardware could also register an annual growth of 40 per cent in this period, backed by a surging demand for PCs and networking. Growth of the industry was also driven by the emergence and rapid growth of the ITeS segment.

IT sector’s share of GDP rose steadily in this period, rate of increase being the highest at 44.91 per cent in 2000-01. It was in the same year that the size of the total IT market was the biggest in the decade, at Rs. 56,592 crore. The overall IT market was also found to increase till 2000-01. The overall IT market was also found to increase till 2000-01, with the only exception of 1998-99. The domestic market also showed an overall increase till 2000-01, registering a spectacular CAGR of 50.39 per cent. Aggregate output of software and services also increased in this period, though at an uneven rate. Of approximately $1 billion worth of sales in 1991-1992, domestic hardware sales constituted 37.2 per cent (13.4 per cent growth over the previous year), exports of hardware 6.6 per cent.

During 2000-01 the growth in the hardware segment was driven mainly by PCs, which contributed about 58 per cent of the total hardware market. This period also witnessed the phenomenon of increasing share of Tier 2 and cities in PC sales, thereby indicating PC penetration into the hinterland. PC shipments had increased by 35 per cent every year from 1997 till 2000-01 when it reached 1.8 million PCs. The commercial PC market saw a growth of 23.5 per cent mainly due to slashing of prices by major vendors.

It was in 2001-02 that the industry had a sharp fall in rate of growth of its share of GDP to 5.90 per cent, from 44.91 per cent in the previous year. The total IT market also showed a fall in growth rate from 56.42 per cent in 2000-01 to a mere 16.24 per cent in the next year, growing further at the rate of 16.25 per cent in the next year. Software export was also affected, registering a low growth of 28.74 per cent and failed to maintain its growth rate of 65.30 per cent in the previous year. It got further lowered to 26.30 per cent in 2002-03. CAGR of total output of software and services (in Rs. crore) came down to 25.61 in 2001-02 and further to 25.11 in 2002-03. The domestic market showed a steep decline in growth to 3 per cent in 2001-02 from an outstanding 50.39 per cent in 2000-01. It could, however, recover by growing at 4.11 per cent in the next year.

 

 

 

 

 

 

 

Table 1: Indian IT Industry: 1996-97 to 2002-03

 

Year A* B* C* D* E*
1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

 

 

 

 

 

1.22

 

 

1.45

 

 

1.87

 

 

2.71

 

 

2.87

 

 

3.09

 

 

 

 

 

18,641

 

 

25,307

 

 

36,179

 

 

56,592

 

 

65,788

 

 

76,482

 

3,900

 

 

 

6,530

 

 

10,940

 

 

17,150

 

 

28,350

 

 

36,500

 

 

46,100

 

6,594

 

 

 

10,899

 

 

16,879

 

 

23,980

 

 

37,350

 

 

47,532

 

 

59,472

 

9,438

 

 

 

12,055

 

 

14,227

 

 

18,837

 

 

28,330

 

 

29,181

 

 

30,382

 

 

*A: share of GDP of the Indian IT market, B: size of the Indian IT market (in Rs. crore), C: software and services exports (in Rs. crore), D: size of software and services (in Rs. crore), E: size of the domestic market (in Rs. crore)

 

 

Questions

 

1.                    Try to identify various stages of growth of IT industry on basis of information given in the case and present a scenario for the future.
2.                    Study the table given. Apply trend projection method on the figures and comment on the trend.
3.                    Compute a 3 year moving average forecast for the years 1997-98 through 2003-04.

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   Outsourcing to India: Way to Fast Track

 

By almost any measure, David Galbenski’s company Contract Counsel was a success. It was a company Galbenski and a law school buddy, Mark Adams, started in 1993; it helps companies find lawyers on a temporary contract basis. The growth over the past five years had been furious. Revenue went from less than $200,000 to some $6.5 million at the end of 2003, and the company was placing thousands of lawyers a year.

At then the revenue growth began to flatten; the company grew just 8% in 2004 despite a robust market for legal services estimated at about $250 billion in the United States alone. Frustrated and concerned, Galbenski stepped back and began taking a hard look at his business. Could he get it back on the fast track? “Most business books say that the hardest threshold to cross is that $10 million sales mark,” he says. “I knew we couldn’t afford to grow only 10% a year. We needed to blow right through that number.”

For that to happen, Galbenski knew he had to expand his customer base beyond the Midwest into large legal supermarkets such as Boston, New York, and Washington, D.C. He also knew that in doing so, he could run into stiff competition from larger publicly traded rivals. Contract Counsel’s edge has always been its low price, Clients called when dealing with large-scale litigation or complicated merger and acquisition deals, either of which can require as many as 100 lawyers to manage the discovery process and the piles of documents associated with it. Contract Counsel’s temps cost about $75 an hour, roughly half of what a law firm would charge, which allowed the company to be competitive despite its relatively small size. Galbenski was counting on using the same strategy as he expanded into new cities. But would that be enough to spur the hyper growth that he craved for?

At that time, Galbenski had been reading quite a bit about the growing use of offshore employees. He knew companies like General Electric, Microsoft and Cisco were saving bundles by setting up call and data centers in India. Could law firms offshore their work? Galbenski’s mind raced with possibilities. He imagined tapping into an army of discount-priced legal minds that would mesh with his existing talent pool in the U.S. The two work forces could collaborate over the Web and be productive on a 24-7 basis. And the cost could be massive.

Using offshore workers was a risk, but the payoff was potentially huge. Incidentally Galbenski and his eight-person management team were preparing to meet for their semiannual review meeting. The purpose of the two-day event was to decide the company’s goals for the coming year. Driving to the meeting, Galbenski struggled to figure out exactly what he was going to say. He was still undecided about whether to pursue an incremental and conservative national expansion or take a big gamble on overseas contractors.

 

The Decision

 

The next morning Galbenski kicked off the management meeting. Galbenski laid out the facts as he saw them. Rather than look at just the next five years of growth, look at the next 20, he said. He cited a Forrester Research prediction that some 79,000 legal jobs, totaling $5.8 billion in wages, would be sent offshore by 2015. He challenged his team to be pioneers in creating a new industry, rather than stragglers racing to catch up. His team applauded. Returning to the office after the meeting, Galbenski announced the change in strategy to his 20 full-timers.

Then he and his team began plotting a global action plan. The first step was to hire a company out of Indianapolis, Analysts International, to start compiling a list of the best legal services providers in countries where people had comparatively strong English skills. The next phase was vetting the companies in person. In February 2005, just three months after the meeting in Port Huron, Galbenski found himself jetting off on a three months trip to scout potential contractors in India, Dubai, and Sri Lanka. Traveling to cities like Bangalore, Chennai and Hyderabad, he interviewed executives from more than a dozen companies, investigating their day-to-day operations firsthand.

India seemed like the best bet. With more than 500 law schools and about 200,000 law students graduating each year, it had no shortage or attorneys. What amazed Galbenski, however, was that thanks to the Web, lawyers in India had access to the same research tools and case summaries as any associate in the U.S. Sure, they didn’t speak American English. “But they were highly motivated, highly intelligent, and extremely process-oriented,” he says. “They were also eager to tackle the kinds of tasks that most new associated at law firms look down upon” such as poring over and coding thousands of documents in advance of a trial. In other words, they were perfect for the kind of document-review work he had in mind.

After a return visit to India in August 2005, Galbenski signed a contract with two legal services companies: QuisLex, in Hyderabad, and Manthan Services in Bangalore. Using their lawyers and paralegals, Galbenski figured he could cut his document-review rates to $50 an hour. He also outsourced the maintenance of the database used to store the contact information for his thousands of contractors. In all, he spent about 12 months and $250,000 readying his newly global company. Convincing U.S. based clients to take a chance on the new service hasn’t been easy. In November, Galbenski lined up pilot programs with four clients (none of which are ready to publicise their use of offshore resources). To help get the word out, he launched a website (offshore-legal-services.com), which includes a cache of white papers and case studies to serve as a resource guide for companies interested in outsourcing.

 

 

 

Questions

 

1.                    As money costs will decrease due to decision to outsource human resource, some real costs and opportunity costs may surface. What could these be?
2.                    Elaborate the external and internal economies of scale as occurring to Contract Counsel.
3.                    Can you see some possibility of economies of scope from the information given in the case? Discuss.

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   Indian Stock Market: Does it Explain Perfect Competition?

 

The stock market is one of the most important sources for corporates to raise capital. A stock exchange provides a market place, whether real or virtual, to facilitate the exchange of securities between buyers and sellers. It provides a real time trading information on the listed securities, facilitating price discovery.

Participants in the stock market range from small individual investors to large traders, who can be based anywhere in the world. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor. The other type of exchange is of a virtual kind, composed of a network of computers and trades are made electronically via traders.

By design a stock exchange resembles perfect competition. Large number of rational profit maximisers actively competing with each other, trying to predict future market value of individual securities comprises the main feature of any stock market. Important current information is almost freely available to all participants. Price of individual security is determined by market forces and reflects the effect of events that have already occurred and are expected to occur. In the short run it is not easy for a market player to either exit or enter; one cannot exit and enter for few days in those stocks which are under no delivery. For example Tata Steel was in no delivery from 29/10/07 to 02/11/07. Similarly one cannot enter or exit on those stocks which are in upper or lower circuit for few regular trading sessions. Therefore a player has to depend wholly on market price for its profit maximizing output (in this case stock of securities). In the long run players may exit the market if they are not able to earn profit, but at the same time new investors are attracted by rise in market price.

As on 01/11/07 total market capital at Bombay Stock Exchange (BSE) is $1589.43 billion (source: Business Standard, 1/11/2007); out of this individual investors account for only $100bn. In spite of the fact that individual investors exist in a very large number, their capital base is less than 7% of total market capital; rest of capital is owned by foreign institutional investor and domestic institutional investors (FIIs and DIIs), which are very small in number. Average capital owned by a single large player is huge in comparison to small investor. This situation seems to have prompted Dr Dash of BSE to comment ‘The stock market activity is increasingly becoming more centralised, concentrated and non competitive, serving interest of big players only.” Table 2 shows the impact of change in FII on National Stock Exchange movement during three different time periods.

 

Table 2: Impact of FIIs’ Investment on NSE

 

 

Wave

 

 

Date

 

 

Nifty

close

 

Change    in Nifty Index

 

FLLS Net Investment

(Rs.Cr.)

 

Change in Market Capitalisation

(Rs.Cr.)

Wave 1

From

To

 

17/05/04

26/10/05

 

1388.75

2408.50

 

 

1019.75

 

 

59520

 

 

5,40,391

Wave 2

From

To

 

27/10/05

11/05/06

 

2352.90

3701.05

 

 

1348.15

 

 

38258

 

 

6,20,248

Wave 3

From

To

 

12/05/06

13/06/06

 

3650.05

2663.30

 

 

-986.75

 

 

-9709

 

 

-4,60,149

 

By design, an Indian Stock Market resembles perfect competition, not as a complete description (for no markets may satisfy all requirements of the model) but as an approximation.

 

 

 

Questions

 

  1. Is stock market a good example of perfect competition? Discuss.
  2. Identify the characteristics of perfect competition in the stock market setting.
  3. Can you find some basic aspect of perfect competition which is essentially absent in stock market?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 5   The Indian Audio Market

 

The Indian audio market pyramid is featured by the traditional radios forming its lower bulk. Besides this, there are four other distinct segments: mono recorders (ranking second in the pyramid), stereo recorders, midi systems (which offer the sound amplification of a big system, but at a far lower price and expected to grow at 25% per year) and hi-fis (minis and micros, slotted at the top end of the market).

Today the Indian audio market is abound with energy and action as both national and international majors are trying to excel themselves and elbow the others, ushering in new concepts, like CD sound, digital tuners, full logic tape deck, etc. The main players in the Indian audio market are Philips, BPL and Videocon. Of these, Philips is one of the oldest and is considered at the leading national brands. In fact it was the first company to introduce a range of international products such as CD radio cassette recorder, stand alone CD players and CD mini hi-fi systems. With the easing of the entry barriers, a number of new international players like Panasonic, Akai, Sansui, Sony, Sharp, Goldstar, Samsung and Aiwa have also entered the arena. This has led to a sea of changes in the industry and resulted in an expanded market and a happier customer, who has access to the latest international products at competitive prices. The rise in the disposable income of the average Indian, especially the upper-income section, has opened up new vistas for premium products and has provided a boost to companies to launch audio systems priced as high as Rs. 50,000 and beyond.

 

Pricing across Segments

 

Super Premium Segment: This segment of the market is largely price-insensitive, as consumers are willing to pay a premium in order to obtain products of high quality. Sonodyne has positioned itself in this segment by concentrating on products that are too small for large players to operate in profitably. It has launched a range of systems priced between Rs. 30,000 to Rs. 60,000. National Panasonic has launched its super premium range of systems by the name of Technics.

 

Premium Segment: Much of the price game is taking place in this segment, in which systems are priced around Rs. 25,000. Even the foreign players ensure that the pricing is competitive. Entry barriers of yester years compelled the demand by this segment to be partially met by the grey market. With the opening up of the market, the premium segment is witnessing a rapid growth and is currently estimated to be worth Rs. 30 crores. Growth of this segment is also being driven by consumers who want to upgrade their old music systems. Another major stimulating factor is the plethora of financing options available, bringing more and more consumers to the market.

Philips has understood the Indian listener well enough to dictate the basic principles of segmentation. It projects its products as high quality at medium price. In fact, Philips had successfully spotted an opportunity in the wide price gap between portable cassette players and hi-fi systems and pioneered the concept of a midi system (a three-in-one containing radio, tape deck and amplifier in one unit). Philips has also realised that there is a section of the rich consumer which values not just power but also clarity and is willing to pay for it. The pricing strategy of Philips was to make the most of its image as a technology leader. To this end, it used non-price variables by launching of a range of state of art machines like the FW series, and CD players. Moreover, it came up with the punch line in its advertisements as, “We Invent For You”.

BPL stands second only to Philips in the audio market and focuses on technology as its USP. Its kingpin in the marketing mix is its high technology superior quality product. It is thus at being the product-quality leader. BPL’s proposition of fidelity is translated in its punchline for its audio systems as, ‘e-fi your imagination’ (d-fi stands for digital fidelity). The company follows a market skimming strategy. When a new product was launched, it was placed in the top end of the market, and priced accordingly. The company offers a range of products in all price segments in the market without discounting the brand.

Another major player, Videocon, has managed to price its products lower even in the premium segment. The success of the Powerhouse (a 160 watt midi launched by Philips in 1990) had prompted Videocon to launch the Select Sound range of midi stereo systems at a slightly lower price. At the premium end, Videocon is making efforts to upgrade its image to being “quality-driven” by associating itself with the internationally reputed brand name of Sansui from Japan, and following a perceived value pricing method.

Sony is another brand which is positioning itself as a premium product and charges a higher price for the superior quality of sound it offers. Unlike indulging into price wars, Sony’s ad-campaigns project the message that nothing can beat Sony in the quality and intensity of sound. National Panasonic is another player that has three products in the top end of the market, priced in the Rs. 21,000 to Rs. 32,000 range.

 

Monos and Stereos: Videocon has 21% share I the overall audio market, but has been a major player only in personal stereos and two-in-ones. Its history is written with instances where it has offered products of similar quality, but at much lower prices than its competitors. In fact, Videocon launched the Sansui brand of products with a view to transform its image from that of being a manufacturer of cheap products to that of being a company that primes quality, and also to obtain a share of the hi-fi segment. Sansui is being positioned as a premium brand, targeting the higher middle, upper income groups and also the sensitive middle class Indian consumer.

The objective of Philips in this segment is to achieve higher sales volumes and hence its strategy is to expand its range and have a product in every segment of the market. The pricing method used by Philips in this segment is providing value for money.

National Panasonic offers products in the lower end of the market, apart from the top of the range. In fact, it reduced the price of one of its small two-in-ones from Rs. 3,500 to Rs. 2,400, with the logic that a forte in the lower end of the market would help in building brand reliability across a wider customer base. The company is also guided by the logic that operating in the price sensitive region of the market will help it reach optimum levels of efficiency. Panasonic has also entered the market for midis.

These apart, there also exists a sector in the Indian audio industry, with powerful regional brands in mono and stereo segments, having a market share of 59% in mono recorders and 36% in stereo recorders. This sector has a strong influence on price performance.

 

 

Questions

 

  1. What major pricing strategies have been discussed in the case? How effective these strategies have been in ensuring success of the company?
  2. Is perceived value pricing the dominant strategy of major players?
  3. Which products have reached maturity stage in audio industry? Do you think that product bundling can be effectively used for promoting sale of these products?

 

 

 

 

 

 

Attempt Any Four Case Study

 

Case 1: Zip Zap Zoom Car Company

          

Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment.  It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability.  Its financial statements are shown in Exhibits 1 and 2 respectively.

The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year.  Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector.  The company has never defaulted on its loan payments and enjoys a favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.

The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries.  The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer.  The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.

Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures.   The industry indicators predict that the economy is gradually slipping into recession.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

 

Source of Funds

Share capital                                        350

Reserves and surplus                           250                              600

Loans :

Debentures (@ 14%)               50

Institutional borrowing (@ 10%)        100

Commercial loans (@ 12%)    250

Total debt                                                                                            400

Current liabilities                                                                                 200

1,200

 

Application of Funds

Fixed Assets

Gross block                                                     1,000

Less : Depreciation                                            250

Net block                                                           750

Capital WIP                                                       190

Total Fixed Assets                                                                              940

Current assets :

Inventory                                                           200

Sundry debtors                                                    40

Cash and bank balance                                        10

Other current assets                                 10

Total current assets                                                                 260

-1200

 

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x

(Amount in Rs. Crore)

Sales revenue (80,000 units x Rs. 2,50,000)                                       2,000.0

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses    1,300.0

Variable overheads                                                        100.0

Total                                                                                                                1,400.0

Fixed cost :

R & D                                                                                          20.0

Marketing and advertising                                               25.0

Depreciation                                                                   250.0

 

Personnel                                                                          70.0

Total                                                                                                                   365.0

 

Total operating expenditure                                                                1,765.0

Operating profits (EBIT)                                                                                   235.0

Financial expense :

Interest on debentures                                                            7.7

Interest on institutional borrowings                        11.0

Interest on commercial loan                                    33.0                     51.7

Earnings before tax (EBT)                                                                                          183.3

Tax (@ 35%)                                                                                                                 64.2

Earnings after tax (EAT)                                                                                            119.1

Dividends                                                                                                                     70.0

Debt redemption (sinking fund obligation)**                                                              40.0

Contribution to reserves and surplus                                                                  9.1

*          Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).

**        The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.

The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology.  Capital investment up to a maximum of Rs. 100

crore is required.  The problem areas are three-fold.

  • The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
  • The company does not want to issue new equity shares and its retained earning are not enough for such a large investment.  Thus, the only option is raising debt.
  • The company wants to limit its additional debt to a level that it can service without taking undue risks.  With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise.  He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession.  The company can raise debt at 15 per cent from a financial institution.  While working out the debt capacity.  Mr. Shortsighted takes the following assumptions for the recession years.

  1. A maximum of 10 percent reduction in sales volume will take place.
  2. A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.  While doing so, he determines what he thinks are the “irreducible minimum” expenditures under

 

recessionary conditions.  For him, risk of insolvency is the main concern while designing the capital structure.  To support his view, he presents the income statement as shown in Exhibit 3.

 

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

Sales revenue (72,000 units x Rs. 2,35,000)                                       1,692.0

Operating expenditure

Variable cost :

Raw material and manufacturing expenses    1,170.0

Variable overheads                                                          90.0

Total                                                                                                                1,260.0

Fixed cost :

R & D                                                                                          —

Marketing and advertising                                               15.0

Depreciation                                                                   187.5

Personnel                                                                          70.0

Total                                                                                                                   272.5

Total operating expenditure                                                                1,532.5

EBIT                                                                                                                  159.5

Financial expenses :

Interest on existing Debentures                                        7.0

Interest on existing institutional borrowings      10.0

Interest on commercial loan                                30.0

Interest on additional debt                                             15.0                  62.0

EBT                                                                                                                      97.5

Tax (@ 35%)                                                                                                        34.1

EAT                                                                                                                     63.4

Dividends                                                                                                              —

Debt redemption (sinking fund obligation)                                             50.0*

Contribution to reserves and surplus                                                       13.4

 

* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)

Assumptions of Mr. Shorsighted

  • R & D expenditure can be done away with till the economy picks up.
  • Marketing and advertising expenditure can be reduced by 40 per cent.
  • Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.

 

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment.  Mr. Arthashatra  does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.

Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm.  He points out the following :

  • Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
  • Certain management policies like those relating to dividend payout, send out important signals to the investors.  The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm.  The firm should pay at least 10 per cent dividend in the recession years.
  • Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations.  This does not give the true picture.  Net cash inflows should be used to determine the amount available for servicing the debt.
  • Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession.  It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.  Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed.  From  this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution).  This will give a true picture of how the company’s cash flows will behave in recession conditions.

 

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret.  Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis.  Information on the behaviour of cash flows during the recession periods is taken into account.

The methodology undertaken is as follows :

  • Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.

 

  • Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
  • Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

 

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions.  Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.  Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Question:

Analyse the debt capacity of the company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   GREAVES LIMITED

 

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of high technology engineering products and systems. The company’s mission is “manufacture and market a wide range of high quality products, services and systems of world class technology to the total satisfaction of customers in domestic and overseas market.”

Over the years Greaves has brought to India state of the art technologies in various engineering fields by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the company’s share has shown ups and downs during 1990 to 1997. How has the company performed? The following question need answer to fully understand the performance of the company:

 

Exhibit 1

 

GREAVES LTD.

Profit and Loss Account ending on 31 March          (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
Sales

Raw Material and Stores

Wages and Salaries

Power and fuel

Other Mfg. Expenses

Other Expenses

Depreciation

Marketing and Distribution

Change in stock

214.38

170.67

13.54

0.52

0.61

11.85

1.85

4.86

1.18

253.10

202.84

15.60

0.70

0.49

15.48

1.72

5.67

3.10

287.81

230.81

18.03

1.11

0.88

16.35

1.52

5.14

4.93

311.14

213.79

37.04

3.80

2.37

25.54

4.62

5.17

0.48

354.25

245.63

37.96

4.43

2.36

31.60

5.99

9.67

– 1.13

521.56

379.83

48.24

6.66

3.57

41.40

8.53

10.81

5.63

728.15

543.56

60.48

7.70

4.84

45.74

9.30

12.44

11.86

801.11

564.35

69.66

9.23

5.49

48.64

11.53

16.98

– 5.87

Total Op Expenses 202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75
 

Operating Profit

Other Income

Non-recurring Income

 

11.61

2.14

1.30

 

13.70

3.69

2.28

 

18.90

4.97

0.10

 

19.29

4.24

10.98

 

15.48

7.72

16.44

 

28.15

14.35

0.46

 

55.95

11.35

0.52

 

69.36

13.08

1.75

PBIT   15.10   19.67   23.97   34.51   39.64   42.98   65.67   82.64
Interest     5.56     6.77   11.92   19.62   17.17   21.48   28.25   27.54
PBT     9.54   12.90   12.05   14.89   22.47   21.50   37.42   55.10
Tax

PAT

Dividend

Retained Earnings

    3.00

6.54

1.80

4.74

    3.60

9.30

2.00

7.30

    4.90

7.15

2.30

4.85

    0.00

14.89

4.06

10.83

    4.00

18.47

7.29

11.18

    7.00

14.50

8.58

5.92

    8.60

28.82

12.85

15.97

  15.80

39.30

14.18

25.12

 

Exhibit 2

 

GREAVES LTD.

Balance Sheet                                (Rupees in crore)

  1990 1991 1992 1993 1994 1995 1996 1997
ASSETS

Land and Building

Plant and Machinery

Other Fixed Assets

Capital WIP

Gross Fixed Assets

Less: Accu. Depreciation

Net Tangible Fixed Assets

Intangible Fixed Assets

 

3.88

11.98

3.64

0.09

19.59

12.91

6.68

0.21

 

4.22

12.68

4.14

0.26

21.30

14.56

6.74

0.19

 

4.96

12.98

4.38

10.25

23.57

15.79

7.78

0.05

 

21.70

33.49

5.18

11.27

71.64

19.84

51.80

4.40

 

30.82

50.78

6.95

34.84

123.39

25.74

97.65

22.03

 

39.71

75.34

8.53

14.37

137.95

33.90

104.05

22.45

 

42.34

92.49

8.87

13.92

157.62

42.56

115.06

20.04

 

43.07

104.45

10.35

14.36

172.23

53.87

118.86

21.11

Net Fixed Assets     6.89     6.93     7.83   56.20 119.68 126.50 135.10 139.97
 

Raw Materials

Finished Goods

Inventory

Accounts Receivable

Other Receivable

Investments

Cash and Bank Balance

Current Assets

Total Assets

LIABILITIES AND CAPITAL

Equity Capital

Preference Capital

Reserves and Surplus

 

5.26

29.37

34.63

38.16

32.62

3.55

8.36

117.32

124.21

 

9.86

0.20

27.60

 

6.91

33.72

40.63

53.24

40.47

14.95

8.91

158.20

165.13

 

9.86

0.20

32.57

 

7.26

38.65

45.91

67.97

49.19

15.15

12.71

190.93

198.76

 

9.86

0.20

37.42

 

21.05

53.39

74.44

93.30

24.54

27.58

13.29

233.15

289.35

 

18.84

0.20

100.35

 

28.13

52.26

80.39

122.20

59.12

73.50

18.38

353.59

473.27

 

29.37

0.20

171.03

 

44.03

58.09

102.12

133.45

64.32

75.01

30.08

404.98

531.48

 

29.44

0.20

176.88

 

53.62

69.97

123.59

141.82

76.57

75.07

33.46

450.51

585.61

 

44.20

0.20

175.41

 

50.94

64.09

115.03

179.92

107.31

76.45

48.18

526.89

666.86

 

44.20

0.20

198.79

Net Worth   37.66   42.63   47.48 119.39 200.60 206.52 219.81 243.19
Bank Borrowings

Institutional Borrowings

Debentures

Fixed Deposits

Commercial Paper

Other Borrowings

Current Portion of LT Debt

  14.81

4.13

4.77

12.31

0.00

2.33

0.00

  19.45

3.43

16.57

14.45

0.00

3.22

0.00

  26.51

9.17

19.99

15.03

0.00

3.10

0.08

  24.82

38.09

4.56

14.08

0.00

3.18

0.12

  55.12

38.76

4.37

15.57

15.00

17.08

15.08

  64.97

69.69

4.37

17.75

0.00

1.97

0.02

  70.08

89.26

2.92

20.81

0.00

2.36

1.49

118.28

63.60

1.49

19.29

0.00

2.57

1.57

Borrowings   38.35   57.12   73.72   84.61 130.82 158.73 183.94 203.66
Sundry Creditors

Other Liabilities

Provision for tax, etc.

Proposed Dividends

Current Portion of LT Dept

  37.52

5.70

3.18

1.80

0.00

  49.40

10.16

3.82

2.00

0.00

  59.34

10.70

5.14

2.30

0.08

  77.27

3.59

0.31

4.06

0.12

113.66

1.42

4.40

7.29

15.08

148.13

1.99

7.70

8.58

0.02

153.63

1.70

12.19

12.85

1.49

179.79

3.04

21.43

14.18

1.57

Current Liabilities   48.20   65.38   77.56   85.35 141.85 166.42 181.86 220.01
TOTAL LIABILITIES

Additional information:

Share premium reserve

Revaluation reserve

Bonus equity capital

124.21

 

 

 

8.51

165.13

 

 

 

8.51

198.76

 

 

 

8.51

289.35

 

47.69

8.91

8.51

473.27

 

107.40

8.70

8.51

531.67

 

107.91

8.50

8.51

585.61

 

93.35

8.31

23.25

666.86

 

93.35

8.15

23.25

 

Exhibit 3

 

GREAVES LTD.

Share Price Data

    1990 1991 1992 1993 1994 1995 1996 1997
 Closing share price (Rs)

Yearly high share price (Rs)

Yearly low share price (Rs)

Market capitalization (Rs crore

EPS (Rs)

Book value (Rs)

  27.19

29.25

26.78

65.06

4.79

35.64

34.74

45.28

21.61

67.77

6.82

37.22

121.27

121.27

34.36

236.56

9.73

42.54

  66.67

126.33

48.34

274.84

1.93

57.75

  78.34

90.00

42.67

346.35

2.66

40.61

  71.67

100.01

68.34

316.87

7.16

64.98

  47.5

90.00

45.00

210.02

5.03

45.35

  48.25

85.00

43.75

213.34

9.01

50.73

 

 

 

 

Questions

 

  1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?
  2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?
  3. How has Greaves performed in terms of return on equity? What is the contribution of return on investment, the way of the business has been financed over the period?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   CHOOSING BETWEEN PROJECTS IN ABC COMPANY

 

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get proper advice. As a consultant, what advice you will give?

 

The cash flows are as follows. All amounts are in lakhs of Rupees.

 

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5 – 10

 

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5 – 2000.

 

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)

Yrs. 11 to 15 – Rs. 10 (For the next 5 years)

 

Question:

If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   STAR ENGINEERING COMPANY

 

Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears, and automobile accessories like taximeters and speedometers.

SEC buys the electrical components, but manufactures all mechanical parts within its factory which is divided into four production departments Machining, Fabrication, Assembly, and Painting—and three service departments—Stores, Maintenance, and Works Office.

Though the company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.

In March, the company received a trial order from a government department for a sample transformer on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April and completed all manufacturing operations before the end of the month.

Since Job No 879 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the government department asked SEC to submit a detailed cost sheet for the job giving as much details as possible regarding material, labour and overhead costs.

SEC, as part of its routine financial accounting system, had collected the actual expenses for the month of April, by 5th of May. Some of the relevant data are given in Exhibit A.

The company tried to assign directly, as many expenses as possible to the production departments. However, It was not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using some rational basis. Some of the possible bases were collected by SEC’s accountant. These are presented in Exhibit B.

He also designed a format to allocate the overhead to all the production and service departments. It was realized that the expenses of the service departments on some rational basis. The accountant thought of distributing the service departments’ costs on the following basis:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. Stores department costs on the basis of direct and indirect materials used.

The accountant who had to visit the company’s banker, passed on the papers to you for the required analysis and cost computations.

 

 

REQUIRED

 

Based on the data given in Exhibits A and B, you are required to:

 

  1. Complete the attached “overhead cost distribution sheet” (Exhibit C).
    Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
  2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
  3. Do you agree with:
    a.   The procedure adopted by the company for the distribution of overhead costs?
    b.   The choice of the base for overhead absorption, i.e. labour-hour rate?

 

 

Exhibit A

 

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

  RS RS
Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

 

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

 

Others

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

(At 2 per cent of direct labour wages and Indirect labour and supervision)

Power

(Maintenance—Rs 366; Works Office Rs 2,200, Balance to Producing Departments)

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses

 

33,000

22,000

11,000

7,000

44,000

32,700

 

 
2,200

1,100

3,300

3,400

2,800

 

 

1,68,000

44,000

2,400

19,400

 

 

68,586

 

 

1,30,260

1,190

 

 

 

 

 

 

 

1,49,700

 

 

 

 

 

 

12,800

 

 

 

 

 

 

 

 

 

 

 

 

4,33,930

 
5,96,930

 

 

 

 

 

 

 

 

 

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year

Department Area

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

 

Rs

Horse

Power

Rating

Direct

Labour

Hours

Direct

Labour

Budget

 

Rs

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Works Office

Total

 

13,000

11,000

8,800

6,400

4,400

2,200

2,200

48,000

26,40,000

13,20,000

6,60,000

2,64,000

1,32,000

1,98,000

68,000

52,80,000

62,40,000

21,60,000

 

10,80,000

 

 

 

94,80,000

20,000

10,000

1,000

2,000

 

 

 

33,000

14,40,000

5,28,000

7,20,000

3,30,000

 

 

 

30,18,000

52,80,000

25,40,000

13,20,000

6,60,000

 

 

 

99,00,000

 

Note

 

The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one month—April of the budgeted year.

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit C

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
             
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

               

 

 

1,49,700

 
A.2 Indirect materials and supplies                

12,800

 
A.3 Factory Rent               1,68,000  
A.4 Depreciation of Plant and Machinery                

44,000

 
A.5 Building Rates and Taxes

 

               

2,400

 

 
A.6 Welfare Expenses

 

               

19,494

 
    A.7 Power                 68,586  
A.8 Works Office Salaries and Expenses                

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

               

1,190

 
A. Total (A.1 to A.9)               5,96,430  
B. Reallocation of Service Departments Costs to Production Departments                  
B.1 Distribution of Works Office Costs                  
B.2 Distribution of Maintenance Department’s Costs                  
B.3 Distribution of Stores Department’s Costs                  
Total Charged to Producing

C. Departments (A+B)

               

 

5,96,430

 
D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

         
E. Overhead Rate/Per Hour (D)                  

 

 

 

 

Case 5: EASTERN MACHINES COMPANY

 

Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.

 

So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.

 

Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.

 

Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.

 

Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.

 

Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.

 

Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.

 

Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.

 

Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.

 

Namdeo: We should ask somebody from our statistics dept. to attend to this problem.

 

As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?

 


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Attempt Any Four Case Study

 

Case 1: Zip Zap Zoom Car Company

          

Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment.  It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability.  Its financial statements are shown in Exhibits 1 and 2 respectively.

The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year.  Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector.  The company has never defaulted on its loan payments and enjoys a favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.

The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries.  The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer.  The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.

Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures.   The industry indicators predict that the economy is gradually slipping into recession.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

 

Source of Funds

Share capital                                        350

Reserves and surplus                           250                              600

Loans :

Debentures (@ 14%)               50

Institutional borrowing (@ 10%)        100

Commercial loans (@ 12%)    250

Total debt                                                                                            400

Current liabilities                                                                                 200

1,200

 

Application of Funds

Fixed Assets

Gross block                                                     1,000

Less : Depreciation                                            250

Net block                                                           750

Capital WIP                                                       190

Total Fixed Assets                                                                              940

Current assets :

Inventory                                                           200

Sundry debtors                                                    40

Cash and bank balance                                        10

Other current assets                                 10

Total current assets                                                                 260

-1200

 

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x

(Amount in Rs. Crore)

Sales revenue (80,000 units x Rs. 2,50,000)                                       2,000.0

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses    1,300.0

Variable overheads                                                        100.0

Total                                                                                                                1,400.0

Fixed cost :

R & D                                                                                          20.0

Marketing and advertising                                               25.0

Depreciation                                                                   250.0

 

Personnel                                                                          70.0

Total                                                                                                                   365.0

 

Total operating expenditure                                                                1,765.0

Operating profits (EBIT)                                                                                   235.0

Financial expense :

Interest on debentures                                                            7.7

Interest on institutional borrowings                        11.0

Interest on commercial loan                                    33.0                     51.7

Earnings before tax (EBT)                                                                                          183.3

Tax (@ 35%)                                                                                                                 64.2

Earnings after tax (EAT)                                                                                            119.1

Dividends                                                                                                                     70.0

Debt redemption (sinking fund obligation)**                                                              40.0

Contribution to reserves and surplus                                                                  9.1

*          Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).

**        The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.

The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology.  Capital investment up to a maximum of Rs. 100

crore is required.  The problem areas are three-fold.

  • The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
  • The company does not want to issue new equity shares and its retained earning are not enough for such a large investment.  Thus, the only option is raising debt.
  • The company wants to limit its additional debt to a level that it can service without taking undue risks.  With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise.  He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession.  The company can raise debt at 15 per cent from a financial institution.  While working out the debt capacity.  Mr. Shortsighted takes the following assumptions for the recession years.

  1. A maximum of 10 percent reduction in sales volume will take place.
  2. A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.  While doing so, he determines what he thinks are the “irreducible minimum” expenditures under

 

recessionary conditions.  For him, risk of insolvency is the main concern while designing the capital structure.  To support his view, he presents the income statement as shown in Exhibit 3.

 

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

Sales revenue (72,000 units x Rs. 2,35,000)                                       1,692.0

Operating expenditure

Variable cost :

Raw material and manufacturing expenses    1,170.0

Variable overheads                                                          90.0

Total                                                                                                                1,260.0

Fixed cost :

R & D                                                                                          —

Marketing and advertising                                               15.0

Depreciation                                                                   187.5

Personnel                                                                          70.0

Total                                                                                                                   272.5

Total operating expenditure                                                                1,532.5

EBIT                                                                                                                  159.5

Financial expenses :

Interest on existing Debentures                                        7.0

Interest on existing institutional borrowings      10.0

Interest on commercial loan                                30.0

Interest on additional debt                                             15.0                  62.0

EBT                                                                                                                      97.5

Tax (@ 35%)                                                                                                        34.1

EAT                                                                                                                     63.4

Dividends                                                                                                              —

Debt redemption (sinking fund obligation)                                             50.0*

Contribution to reserves and surplus                                                       13.4

 

* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)

Assumptions of Mr. Shorsighted

  • R & D expenditure can be done away with till the economy picks up.
  • Marketing and advertising expenditure can be reduced by 40 per cent.
  • Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.

 

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment.  Mr. Arthashatra  does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.

Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm.  He points out the following :

  • Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
  • Certain management policies like those relating to dividend payout, send out important signals to the investors.  The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm.  The firm should pay at least 10 per cent dividend in the recession years.
  • Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations.  This does not give the true picture.  Net cash inflows should be used to determine the amount available for servicing the debt.
  • Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession.  It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.  Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed.  From  this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution).  This will give a true picture of how the company’s cash flows will behave in recession conditions.

 

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret.  Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis.  Information on the behaviour of cash flows during the recession periods is taken into account.

The methodology undertaken is as follows :

  • Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.

 

  • Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
  • Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

 

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions.  Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.  Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Question:

Analyse the debt capacity of the company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   GREAVES LIMITED

 

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of high technology engineering products and systems. The company’s mission is “manufacture and market a wide range of high quality products, services and systems of world class technology to the total satisfaction of customers in domestic and overseas market.”

Over the years Greaves has brought to India state of the art technologies in various engineering fields by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the company’s share has shown ups and downs during 1990 to 1997. How has the company performed? The following question need answer to fully understand the performance of the company:

 

Exhibit 1

 

GREAVES LTD.

Profit and Loss Account ending on 31 March          (Rupees in crore)

1990 1991 1992 1993 1994 1995 1996 1997
Sales

Raw Material and Stores

Wages and Salaries

Power and fuel

Other Mfg. Expenses

Other Expenses

Depreciation

Marketing and Distribution

Change in stock

214.38

170.67

13.54

0.52

0.61

11.85

1.85

4.86

1.18

253.10

202.84

15.60

0.70

0.49

15.48

1.72

5.67

3.10

287.81

230.81

18.03

1.11

0.88

16.35

1.52

5.14

4.93

311.14

213.79

37.04

3.80

2.37

25.54

4.62

5.17

0.48

354.25

245.63

37.96

4.43

2.36

31.60

5.99

9.67

– 1.13

521.56

379.83

48.24

6.66

3.57

41.40

8.53

10.81

5.63

728.15

543.56

60.48

7.70

4.84

45.74

9.30

12.44

11.86

801.11

564.35

69.66

9.23

5.49

48.64

11.53

16.98

– 5.87

Total Op Expenses 202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75
 

Operating Profit

Other Income

Non-recurring Income

 

11.61

2.14

1.30

 

13.70

3.69

2.28

 

18.90

4.97

0.10

 

19.29

4.24

10.98

 

15.48

7.72

16.44

 

28.15

14.35

0.46

 

55.95

11.35

0.52

 

69.36

13.08

1.75

PBIT   15.10   19.67   23.97   34.51   39.64   42.98   65.67   82.64
Interest     5.56     6.77   11.92   19.62   17.17   21.48   28.25   27.54
PBT     9.54   12.90   12.05   14.89   22.47   21.50   37.42   55.10
Tax

PAT

Dividend

Retained Earnings

    3.00

6.54

1.80

4.74

    3.60

9.30

2.00

7.30

    4.90

7.15

2.30

4.85

    0.00

14.89

4.06

10.83

    4.00

18.47

7.29

11.18

    7.00

14.50

8.58

5.92

    8.60

28.82

12.85

15.97

  15.80

39.30

14.18

25.12

 

Exhibit 2

 

GREAVES LTD.

Balance Sheet                                (Rupees in crore)

1990 1991 1992 1993 1994 1995 1996 1997
ASSETS

Land and Building

Plant and Machinery

Other Fixed Assets

Capital WIP

Gross Fixed Assets

Less: Accu. Depreciation

Net Tangible Fixed Assets

Intangible Fixed Assets

 

3.88

11.98

3.64

0.09

19.59

12.91

6.68

0.21

 

4.22

12.68

4.14

0.26

21.30

14.56

6.74

0.19

 

4.96

12.98

4.38

10.25

23.57

15.79

7.78

0.05

 

21.70

33.49

5.18

11.27

71.64

19.84

51.80

4.40

 

30.82

50.78

6.95

34.84

123.39

25.74

97.65

22.03

 

39.71

75.34

8.53

14.37

137.95

33.90

104.05

22.45

 

42.34

92.49

8.87

13.92

157.62

42.56

115.06

20.04

 

43.07

104.45

10.35

14.36

172.23

53.87

118.86

21.11

Net Fixed Assets     6.89     6.93     7.83   56.20 119.68 126.50 135.10 139.97
 

Raw Materials

Finished Goods

Inventory

Accounts Receivable

Other Receivable

Investments

Cash and Bank Balance

Current Assets

Total Assets

LIABILITIES AND CAPITAL

Equity Capital

Preference Capital

Reserves and Surplus

 

5.26

29.37

34.63

38.16

32.62

3.55

8.36

117.32

124.21

 

9.86

0.20

27.60

 

6.91

33.72

40.63

53.24

40.47

14.95

8.91

158.20

165.13

 

9.86

0.20

32.57

 

7.26

38.65

45.91

67.97

49.19

15.15

12.71

190.93

198.76

 

9.86

0.20

37.42

 

21.05

53.39

74.44

93.30

24.54

27.58

13.29

233.15

289.35

 

18.84

0.20

100.35

 

28.13

52.26

80.39

122.20

59.12

73.50

18.38

353.59

473.27

 

29.37

0.20

171.03

 

44.03

58.09

102.12

133.45

64.32

75.01

30.08

404.98

531.48

 

29.44

0.20

176.88

 

53.62

69.97

123.59

141.82

76.57

75.07

33.46

450.51

585.61

 

44.20

0.20

175.41

 

50.94

64.09

115.03

179.92

107.31

76.45

48.18

526.89

666.86

 

44.20

0.20

198.79

Net Worth   37.66   42.63   47.48 119.39 200.60 206.52 219.81 243.19
Bank Borrowings

Institutional Borrowings

Debentures

Fixed Deposits

Commercial Paper

Other Borrowings

Current Portion of LT Debt

  14.81

4.13

4.77

12.31

0.00

2.33

0.00

  19.45

3.43

16.57

14.45

0.00

3.22

0.00

  26.51

9.17

19.99

15.03

0.00

3.10

0.08

  24.82

38.09

4.56

14.08

0.00

3.18

0.12

  55.12

38.76

4.37

15.57

15.00

17.08

15.08

  64.97

69.69

4.37

17.75

0.00

1.97

0.02

  70.08

89.26

2.92

20.81

0.00

2.36

1.49

118.28

63.60

1.49

19.29

0.00

2.57

1.57

Borrowings   38.35   57.12   73.72   84.61 130.82 158.73 183.94 203.66
Sundry Creditors

Other Liabilities

Provision for tax, etc.

Proposed Dividends

Current Portion of LT Dept

  37.52

5.70

3.18

1.80

0.00

  49.40

10.16

3.82

2.00

0.00

  59.34

10.70

5.14

2.30

0.08

  77.27

3.59

0.31

4.06

0.12

113.66

1.42

4.40

7.29

15.08

148.13

1.99

7.70

8.58

0.02

153.63

1.70

12.19

12.85

1.49

179.79

3.04

21.43

14.18

1.57

Current Liabilities   48.20   65.38   77.56   85.35 141.85 166.42 181.86 220.01
TOTAL LIABILITIES

Additional information:

Share premium reserve

Revaluation reserve

Bonus equity capital

124.21

 

 

 

8.51

165.13

 

 

 

8.51

198.76

 

 

 

8.51

289.35

 

47.69

8.91

8.51

473.27

 

107.40

8.70

8.51

531.67

 

107.91

8.50

8.51

585.61

 

93.35

8.31

23.25

666.86

 

93.35

8.15

23.25

 

Exhibit 3

 

GREAVES LTD.

Share Price Data

  1990 1991 1992 1993 1994 1995 1996 1997
 Closing share price (Rs)

Yearly high share price (Rs)

Yearly low share price (Rs)

Market capitalization (Rs crore

EPS (Rs)

Book value (Rs)

  27.19

29.25

26.78

65.06

4.79

35.64

34.74

45.28

21.61

67.77

6.82

37.22

121.27

121.27

34.36

236.56

9.73

42.54

  66.67

126.33

48.34

274.84

1.93

57.75

  78.34

90.00

42.67

346.35

2.66

40.61

  71.67

100.01

68.34

316.87

7.16

64.98

  47.5

90.00

45.00

210.02

5.03

45.35

  48.25

85.00

43.75

213.34

9.01

50.73

 

 

 

 

Questions

 

  1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?
  2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?
  3. How has Greaves performed in terms of return on equity? What is the contribution of return on investment, the way of the business has been financed over the period?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   CHOOSING BETWEEN PROJECTS IN ABC COMPANY

 

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get proper advice. As a consultant, what advice you will give?

 

The cash flows are as follows. All amounts are in lakhs of Rupees.

 

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5 – 10

 

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5 – 2000.

 

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)

Yrs. 11 to 15 – Rs. 10 (For the next 5 years)

 

Question:

If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   STAR ENGINEERING COMPANY

 

Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears, and automobile accessories like taximeters and speedometers.

SEC buys the electrical components, but manufactures all mechanical parts within its factory which is divided into four production departments Machining, Fabrication, Assembly, and Painting—and three service departments—Stores, Maintenance, and Works Office.

Though the company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.

In March, the company received a trial order from a government department for a sample transformer on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April and completed all manufacturing operations before the end of the month.

Since Job No 879 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the government department asked SEC to submit a detailed cost sheet for the job giving as much details as possible regarding material, labour and overhead costs.

SEC, as part of its routine financial accounting system, had collected the actual expenses for the month of April, by 5th of May. Some of the relevant data are given in Exhibit A.

The company tried to assign directly, as many expenses as possible to the production departments. However, It was not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using some rational basis. Some of the possible bases were collected by SEC’s accountant. These are presented in Exhibit B.

He also designed a format to allocate the overhead to all the production and service departments. It was realized that the expenses of the service departments on some rational basis. The accountant thought of distributing the service departments’ costs on the following basis:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. Stores department costs on the basis of direct and indirect materials used.

The accountant who had to visit the company’s banker, passed on the papers to you for the required analysis and cost computations.

 

 

REQUIRED

 

Based on the data given in Exhibits A and B, you are required to:

 

  1. Complete the attached “overhead cost distribution sheet” (Exhibit C).
    Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
  2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
  3. Do you agree with:
    a.   The procedure adopted by the company for the distribution of overhead costs?
    b.   The choice of the base for overhead absorption, i.e. labour-hour rate?

 

 

Exhibit A

 

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

RS RS
Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

 

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

 

Others

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

(At 2 per cent of direct labour wages and Indirect labour and supervision)

Power

(Maintenance—Rs 366; Works Office Rs 2,200, Balance to Producing Departments)

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses

 

33,000

22,000

11,000

7,000

44,000

32,700

2,200

1,100

3,300

3,400

2,800

 

 

1,68,000

44,000

2,400

19,400

 

 

68,586

 

 

1,30,260

1,190

 

 

 

 

 

 

 

1,49,700

 

 

 

 

 

 

12,800

 

 

 

 

 

 

 

 

 

 

 

 

4,33,930

5,96,930

 

 

 

 

 

 

 

 

 

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year

Department Area

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

 

Rs

Horse

Power

Rating

Direct

Labour

Hours

Direct

Labour

Budget

 

Rs

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Works Office

Total

 

13,000

11,000

8,800

6,400

4,400

2,200

2,200

48,000

26,40,000

13,20,000

6,60,000

2,64,000

1,32,000

1,98,000

68,000

52,80,000

62,40,000

21,60,000

 

10,80,000

 

 

 

94,80,000

20,000

10,000

1,000

2,000

 

 

 

33,000

14,40,000

5,28,000

7,20,000

3,30,000

 

 

 

30,18,000

52,80,000

25,40,000

13,20,000

6,60,000

 

 

 

99,00,000

 

Note

 

The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one month—April of the budgeted year.

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit C

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

 

 

 

1,49,700

A.2 Indirect materials and supplies  

12,800

A.3 Factory Rent 1,68,000
A.4 Depreciation of Plant and Machinery  

44,000

A.5 Building Rates and Taxes

 

 

2,400

 

A.6 Welfare Expenses

 

 

19,494

    A.7 Power   68,586
A.8 Works Office Salaries and Expenses  

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

 

1,190

A. Total (A.1 to A.9) 5,96,430
B. Reallocation of Service Departments Costs to Production Departments
B.1 Distribution of Works Office Costs
B.2 Distribution of Maintenance Department’s Costs
B.3 Distribution of Stores Department’s Costs
Total Charged to Producing

C. Departments (A+B)

 

 

5,96,430

D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

E. Overhead Rate/Per Hour (D)

 

 

 

 

Case 5: EASTERN MACHINES COMPANY

 

Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.

 

So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.

 

Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.

 

Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.

 

Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.

 

Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.

 

Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.

 

Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.

 

Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.

 

Namdeo: We should ask somebody from our statistics dept. to attend to this problem.

 

As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?

 

 

Attempt Any Four Case Study

 

CASE – 1   Your Job and Your Passion—You Can Pursue Both!

 

The 21st century offers many challenges to every one of us. As more firms go global, as more economies interconnect, and as the Web blasts away boundaries to communication, we become more informed citizens. This interconnectedness means that the organizations you work for will require you to develop both general and specialized knowledge—such as speaking multiple languages, using various software applications, or understanding details of financial transactions. You will have to develop general management skills to foster your ability to be self-reliant and thrive in a changing market-place. And here’s the exciting part: As you build both types of knowledge, you may be able to integrate your growing expertise with the causes or activities you care most about. Or, your career adventure may lead you to a new passion.

Former presidents George H. W. Bush and Bill Clinton are well known for combining their management skills—running a country—with their passion for helping people around the world. Together they have raised funds to assist disaster victims, those with HIV/AIDS, and others in need. Jake Burton turned his love of snow sports into an entire industry when he founded Burton Snowboards. Annie Withey poured her business and marketing knowledge into her two famous business ventures: Smartfood and Annie’s Homegrown. Both products were the result of her passion for healthful foods made from organic ingredients.

As you enter the workforce, you may have no idea where your career path will lead. You may be asking yourself, “How will I fit in?” “Where will I live?” “How much will I earn?” “Where will my business and personal careers evolve as the world continuous to change at such a fast pace?” If you are feeling nervous because you don’t know the answers to these questions yet, relax. A career is a journey, not a single destination. You may have one type of career or several. It is likely you will work for several organisations, or you may run one or more businesses of your own.

As you ask yourself what you want to do and where you want to be, take a few minutes to review the chapter and its main topics. Think about your personality, what you like and dislike, what you know and what you want to learn, what you fear and what you dream. Then try the following exercise.

 

 

 

Questions

 

  1. Create a three-column chart in which the first column lists nonmanagement skills you have. Are you good at travel? Do you know how to build furniture? Are you a whiz at sports statistics? Are you an innovative cook? Do you play video games for hours? In the second column, list the causes or activities about which you are passionate. These may dovetail with the first list, but they might not.
  2. Once you have you two columns complete, draw lines between entries that seem compatible. If you are good at building furniture, you might have also listed a concern about families who are homeless. Remember that not all entries will find a match—the idea is to begin finding some connections.
  3. In the third column, generate a list of firms or organizations you know about that reflect your interests. If you are good at building furniture, you might be interested working for the Habitat for Humanity organization, or you might find yourself gravitating towards a furniture retailer like Ikea or Ethan Allen. You can do further research on organizations via Internet or business publications.

 

 

 

Note: Solve any 4 Cases Study’s

 

CASE: I    Enterprise Builds On People

 

When most people think of car-rental firms, the names of Hertz and Avis usually come to mind. But in the last few years, Enterprise Rent-A-Car has overtaken both of these industry giants, and today it stands as both the largest and the most profitable business in the car-rental industry. In 2001, for instance, the firm had sales in excess of $6.3 billion and employed over 50,000 people.

Jack Taylor started Enterprise in St. Louis in 1957. Taylor had a unique strategy in mind for Enterprise, and that strategy played a key role in the firm’s initial success. Most car-rental firms like Hertz and Avis base most of their locations in or near airports, train stations, and other transportation hubs. These firms see their customers as business travellers and people who fly for vacation and then need transportation at the end of their flight. But Enterprise went after a different customer. It sought to rent cars to individuals whose own cars are being repaired or who are taking a driving vacation.

The firm got its start by working with insurance companies. A standard feature in many automobile insurance policies is the provision of a rental car when one’s personal car has been in an accident or has been stolen. Firms like Hertz and Avis charge relatively high daily rates because their customers need the convenience of being near an airport and/or they are having their expenses paid by their employer. These rates are often higher than insurance companies are willing to pay, so customers who these firms end up paying part of the rental bills themselves. In addition, their locations are also often inconvenient for people seeking a replacement car while theirs is in the shop.

But Enterprise located stores in downtown and suburban areas, where local residents actually live. The firm also provides local pickup and delivery service in most areas. It also negotiates exclusive contract arrangements with local insurance agents. They get the agent’s referral business while guaranteeing lower rates that are more in line with what insurance covers.

In recent years, Enterprise has started to expand its market base by pursuing a two-pronged growth strategy. First, the firm has started opening  airport locations to compete with Hertz and Avis more directly. But their target is still the occasional renter than the frequent business traveller. Second, the firm also began to expand into international markets and today has rental offices in the United Kingdom, Ireland and Germany.

Another key to Enterprise’s success has been its human resource strategy. The firm targets a certain kind of individual to hire; its preferred new employee is a college graduate from bottom half of graduating class, and preferably one who was an athlete or who was otherwise actively involved in campus social activities. The rationale for this unusual academic standard is actually quite simple. Enterprise managers do not believe that especially high levels of achievements are necessary to perform well in the car-rental industry, but having a college degree nevertheless demonstrates intelligence and motivation. In addition, since interpersonal relations are important to its business, Enterprise wants people who were social directors or high-ranking officers of social organisations such as fraternities or sororities. Athletes are also desirable because of their competitiveness.

Once hired, new employees at Enterprise are often shocked at the performance expectations placed on them by the firm. They generally work long, grueling hours for relatively low pay.

 

And all Enterprise managers are expected to jump in and help wash or vacuum cars when a rental agency gets backed up. All Enterprise managers must wear coordinated dress shirts and ties and can have facial hair only when “medically necessary”. And women must wear skirts no shorter than two inches above their knees or creased pants.

 

So what are the incentives for working at Enterprise? For one thing, it’s an unfortunate fact of life that college graduates with low grades often struggle to find work. Thus, a job at Enterprise is still better than no job at all. The firm does not hire outsiders—every position is filled by promoting someone already inside the company. Thus, Enterprise employees know that if they work hard and do their best, they may very well succeed in moving higher up the corporate ladder at a growing and successful firm.

 

 

Question:

 

  1. Would Enterprise’s approach human resource management work in other industries?
  2. Does Enterprise face any risks from its human resource strategy?
  3. Would you want to work for Enterprise? Why or why not?

 

 

 

CASE: 2    THE STRATEGIC ASPIRATIONS OF THE RESERVE BANK OF INDIA

 

The Reserve Bank of India (RBI) is India’s central bank or ‘the bank of the bankers’. It was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1935. The Central Office of the RBI, initially set up at Kolkata, is at Mumbai. The RBI is fully owned by the Government of India.

The history of RBI is closely aligned with the economic and financial history of India. Most central banks around the world were established around the beginning of the twentieth century. The Bank was established on the basis of the Hilton Young Commission. It began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. After independence, RBI gradually strengthened its institution-building capabilities and evolved in terms of functions from central banking to that of development. There have been several attempts at reorganisation, restructuring and creation of specialised institutions to cater to emerging needs.

The Preamble of the RBI describes its basic functions like this: ‘….to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.’ The vision states that the RBI ‘….aims to be a leading central bank with credible, transparent, proactive and contemporaneous policies and seeks to be a catalyst for the emergence of a globally competitive financial system that helps deliver a high quality of life to the people in the country.’ The mission states that ‘RBI seeks to develop a sound and efficient financial system with monetary stability conductive to balanced and sustained growth of the Indian economy’. The corporate values of underlining the mission statement include public interest, integrity, excellence, independence of views and responsiveness and dynamism.

The three areas in which objectives of the RBI can be stated are as below.

  1. Monetary policy objectives such as containing inflation and promoting economic growth, management of foreign exchange reserves and making currency available.
  2. Objectives set for managing financial sector developments such as supervision of systems and information access and assisting banking and financial institutions to become competitive globally.
  3. Organisational development objectives such as development of economic research facilities, creating information system for supporting economic decision-making, financial management and human resource management.

Strategic actions taken to realise the objectives fall under four categories:

  1. The thrust area of monetary policy formulation and managing financial sector;
  2. Evolving the legal framework to support the thrust area;
  3. Customer service for providing support and creation of positive relationship; and
  4. Organisational support such as structure, systems, human resource development and adoption of modern technology.

The major functions performed by the RBI are:

  • Acting as the monetary authority
  • Acting as the regulator and supervisor of the financial system
  • Discharging responsibilities as the manager of foreign exchange
  • Issue currency
  • Play as developmental role
  • Related functions such as acting as the banker to the government and scheduled banks

The management of the RBI is the responsibility of the central board of directors headed by the governor and consisting of deputy governors and other directors, all of whom are appointed by the government. There are four local boards based at Chennai, Kolkata, Mumbai and New Delhi. The day-to-day management of RBI is in the hands of the executive directors, managers at various levels and the support staff. There are about 22000 employees at RBI, working in 25 departments and training colleges.

The RBI identified its strengths and weaknesses as under.

  • Strengths A large body of competent officers and staff; access to key data on the economy; wide organisational network with 22 regional offices; established infrastructure; ability to attract talent; and financial self sufficiency.
  • Weaknesses Structural rigidity, lack of accountability and slow decision-making; eroded specialist know-how; strong employee unions with rigid industrial relations stance; surplus staff; and weak market intelligence.

Over the years, the RBI has evolved in terms of structure and functions, in response to the role assigned to it. There have been sweeping changes in the economic, social and political environment. The RBI has had to respond to it even in the absence of a systematic strategic plan. In 1992, the RBI, with the assistance of a private consultancy firm, embarked on a massive strategic planning exercise. The objective was to establish a roadmap to redefine RBI’s role and to review internal organisational and managerial efficacy, address the changing expectations from external stakeholders and reposition the bank in the global context. The strategic planning exercise was buttressed by departmental position papers and documents on various subjects such as technology, human resources and environmental trends. The strategic plan of the RBI emerged with four sections dealing with the statement of mission, objectives and policy, a review of RBI’s strengths and weaknesses and strategic actions required with an implementation plan. The strategic plan reiterates anticipation of evolving external environment in the medium-term; revisiting strengths and weaknesses (evaluation of capabilities); and doing away with the outdated mandates for enhancing efficiency in operations in furtherance of best public interests. The results of these efforts are likely to manifest in attaining a visible focus, reinforced proficiency, realisation of shared sense of purpose, optimising resource use and build-up of momentum to achieve goals.

Historically, the RBI adopted the time-tested technique of responding to external environment in a pragmatic manner and making piecemeal changes. The dilemma in adoption of a comprehensive strategic plan was the risk of trading off the flexibility of the pragmatic approach to creating rigidity imposed by a set model of planning.

 

 

 

 

Questions:

 

  1. Consider the vision and mission statements of the Reserve Bank of India. Comment on the quality of both these statements.
  2. Should the RBI go for a systematic and comprehensive strategic plan in place of its earlier pragmatic approach of responding to environmental events as and when they occur? Why?

 

 

 

 

 

 

CASE: 3    THE INTERNATIONALISATION OF KALYANI GROUP

 

The Kalyani Group is a large family-business group of India, employing more than 10000 employees. It has diverse businesses in engineering, steel, forgings, auto components, non-conventional energy and specialty chemicals. The annual turnover of the Group is over US$2.1 billion. The Group is known for its impressive internationalisation achievements. It has nine manufacturing locations spread over six countries. Over the years, it has established joint ventures with many global companies such as ArvinMeritor, USA, Carpenter Technology Corporation, USA, Hayes Lemmerz, USA and FAW Corporation, China.

The flagship company of the Group is Bharat Forge Limited that is claimed to be the second largest forging company in the world and the largest nationally, with about 80 per cent share in axle and engine components. The other major companies of the Group are Kalyani Steels, Kalyani Carpenter Special Steels, Kalyani Lemmerz, Automotive Axles, Kalyani Thermal Systems, BF Utilities, Hikal Limited, Epicenter and Synise Technologies

The emphasis on internationalisation is reflected in the vision statement of the Group where two of the five points relate to the Group trying to be a world-class organisation and achieving growth aggressively by accessing global markets. The Group is led by Mr. B.N. Kalyani, who is considered to be the major force behind the Group’s aggressive internationalisation drive. Mr. Kalyani joined the Group in 1972 when it was a small-scale diesel engine component business.

The corporate strategy of the Group is a combination of concentration of its core competence in its business with efforts at building, nurturing and sustaining mutually beneficial partnerships with alliance partners and customers. The value of these partnerships essentially lies in collaborative product development with the partners who are the original equipment manufacturers. The foreign partners are not intended to provide expansion in capacity, but to enable the Kalyani Group to extend its global marketing reach.

In achieving its successful status, the Kalyani Group has followed the path of integration, extending from the upstream steel making to downstream machining for auto components such as crank-shafts, front axle beams, steering knuckles, cam-shafts, connecting rods and rocker arms. In all these products, the Group has tried to move up the value chain instead of providing just the raw forgings. In the 1990s, it undertook a restructuring exercise to trim its unrelated businesses such as television and video products and concentrate on its core business of auto components.

Four factors are supposed to have influenced the growth of the Group over the years. These are mentioned below:

  • Focussing on core businesses to maximise growth potential
  • Attaining aggressive cost savings
  • Expanding geographically to build global capacity and establishing leading positions
  • Achieving external growth through acquisitions

The Group companies are claimed to be positioned at either number one or two in their respective businesses. For instance, the Group claims to be number one in forging and machined components, axle aggregates, wheels and alloy steel. The technology used by the Group in its mainline business of auto components and other businesses, is claimed to be state-of-the-art. The Group invests in forging technology to enhance efficiency, production quality and design capabilities. The Group’s emphasis on technology can be gauged from the fact that in the 1990s, it took the risky decision of investing Rs. 100 crore in the then latest forging technology, when the total Group turnover was barely Rs. 230 crore. Information technology is applied for product development, reducing production and product development time, supply-chain management and marketing of products. The Group lays high emphasis on research and development for providing engineering support, advanced metallurgical analysis and latest testing equipment in tandem with its high-class manufacturing facilities.

Being a top-driven group, the pattern of strategic decision-making within seems to be entrepreneurial. There was an attempt to formulate a five-year strategic plan in 1997, with the participation of the company executives. But no much is mentioned in the business press about that collaborative strategic decision-making after that.

Recent strategic moves include Kalyani Steels, a Group company, entering into a joint venture agreement in may 2007, with Gerdau S.A. Brazil for installation of rolling mills. An attempt to move out of the mainstream forging business was made when the Group strengthened its position in the prospective business of wind energy through 100 per cent acquisition of RSBconsult GmbH (RSB) of Germany. Prior to the acquisition, the Group was just a wind farm operator and supplier of components.

 

Questions:

 

  1. What is the motive for internationalisation by the Kalyani Group? Discuss.

 

  1. Which type of international strategy is Kalyani Group adopting? Explain.

 

 

 

 


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CONTACT:

 

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Attempt Only Four Case Study

 

CASE 1: The McGee Cake Company

 

In early 2001, Doc and Lyn McGee formed McGee Cake Company. The company produced a full line of cakes, and its specialties included chess cake, lemon pound cake, and double-iced, double-chocolate cake. The couple formed the company as an outside interest, and both continued to work at their current jobs. Doc did all the baking, and Lyn handled the marketing and distribution. With good product quality and a sound marketing plan, the company grew rapidly. In early 2006, the company was featured in a widely distributed entrepreneurial magazine. Later that year, the company was featured in Gourmet Desserts, a leading specialty food magazine. After the article appeared in Gourmet Desserts, sales exploded, and the company began receiving orders from all over the world.

 

Because of the increased sales, Doc left his other job, followed shortly by Lyn. The company hired additional workers to meet demand. Unfortunately, the fast growth experienced by the company led to cash flow and capacity problems. The company is currently producing as many cakes as possible with the assets it owns, but demand for its cakes is still growing. Further, the company has been approached by a national supermarket chain with a proposal to put four of its cakes in all the chain’s stores, and a national restaurant chain has contacted the company about selling McGee cakes in its restaurants. The restaurant would sell the cakes without a brand name.

 

Doc and Lyn have operated the company as a sole proprietorship. They have approached you to help manage and direct the company’s growth. Specifically, they have asked you to answer the following questions:

 

  1. What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC?
  2. What are the advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation?
  3. Ultimately, what action would you recommend the company undertake? Why?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE 2: Ration Analysis at S&S Air, Inc.

 

Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the company’s performance. Chris graduated from college five years ago with a finance degree. He has been employed in the finance department of a Fortune 500 company since then.

 

S&S Air was founded 10 years ago by friends Mark Sexton and Todd Story. The company has manufactured and sold light airplanes over this period, and the company’s products have received high reviews for safety and reliability. The company has a niche market in that it sells primarily to individuals who own and fly their own planes. The company has two models; the Birdie, which sells for $53,000, and the Eagle, which sells for $78,000.

 

Although the company manufactures aircraft, its operations are different from commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated parts, the company can complete the manufacture of an airplane in only five weeks. The company also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial air-plane may take one and one-half to two years to manufacture once the order is placed.

 

Mark and Todd have provided the following financial statements. Chris has gathered the industry ratios for the light airplane manufacturing industry.

 

S&S Air, Inc.

2006 Income Statement

Sales                                                   $21,785,300

Cost of goods sold                                15,874,700

Other expenses                                        2,762,500

Depreciation                                               976,200

EBIT                                                     $ 2,171,900

Interest                                                        341,600

Taxable income                                    $ 1,830,300

Taxes (40%)                                                732,120

Net income                                            $ 1,098,180

 

Dividends                           $439,272

Add to retained earnings      658,908

 

 

 

 

 

 

 

S&S Air, Inc.

2006 Balance Sheet

                   Assets                                                   Liabilities and Equity
Current assets

Cash

Account receivable

Inventory

Total current assets

 

Fixed assets

Net plant and equipment

 

 

 

 

Total assets

 

$     315,000

506,000

740,800

$  1,561,800

 

 
$11,561,000

 

 

 

 

 

$13,077,800

 

Current liabilities

Accounts payable

Notes payable

Total current liabilities

 

Long-term debt

 

Shareholder equity

Common stock

Retained earnings

Total equity

 

Total liabilities and equity

 

$   635,000

1,450,000

$2,085,000

 

 

$3,800,000

 

 

$    250,000

6,942,800

$ 7,192,800

 

$13,077,800

 

 

 

Light airplane Ratios
  Lower

Quartile

 

Median

Upper

Quartile

Current ratio

Quick ratio

Cash ratio

Total asset turnover

Inventory turnover

Receivables turnover

Total debt ratio

Debt-equity ratio

Equity multiplier

Times interest earned

Cash coverage ratio

Profit margin

Return on assets

Return on equity

0.50

0.21

0.08

0.68

4.89

6.27

0.44

0.79

1.79

5.18

5.84

4.05%

6.05%

9.93%

1.43

0.38

0.21

0.85

6.15

9.82

0.52

1.08

2.08

8.06

8.43

6.98%

10.53%

16.54%

 1.89

0.62

0.39

1.38

10.89

14.11

0.61

1.56

2.56

9.83

10.27

9.87%

13.21%

26.15%

 

 

 

 

Questions:

 

  1. Using the financial statements provided for S&S Air, calculate each of the ratios listed in the table for the light aircraft industry.
  2. Mark and Todd agree that a ratio analysis can provide a measure of the company’s performance. They have chosen Boeing as an aspirant company. Would you choose Boeing as an aspirant company? Why or why not? There are other aircraft manufacturers S&S Air could use as aspirant companies. Discuss whether it is appropriate to use any of the following companies: Bombardier, Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.
  3. Compare the performance of S&S Air to the industry. For each ratio, comment on why it might be viewed as positive or negative relative to the industry. Suppose you create an inventory ratio calculated as inventory divided by current liabilities. How do you think S&S Air’s ratio would compare to the industry average?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE 3: The MBA Decision

 

Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for the internship, neither school will allow its student to work while enrolled in its MBA program.

 

Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $50,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 35 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben has a savings account with enough money to cover the entire cost of his MBA program.

 

The Ritter College of Business at Wilton University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $95,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of higher salary, his average income tax rate will increase to 31 percent.

 

The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Ben thinks that he will receive an offer of $78,000 per year upon graduation, with a $10,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate level of income will be 29 percent.

 

Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben also estimates that room and board expenses will cost $20,000 per year at both schools. The appropriate discount rate is 6.5 percent.

 

 

 

 

 

 

 

 

 

 

Questions

 

  1. How does Ben’s age affect his decision to get an MBA?
  2. What other, perhaps nonquantifiable, factors affect Ben’s decision to get an MBA?
  3. Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly financial standpoint?
  4. Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
  5. What initial salary would Ben need to receive to make him indifferent attending Wilton University and staying in his current position?
  6. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4        Bullock Gold Mining

 

Seth Bullock, the owner of Bullock Gold Mining is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

 

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $500 million today, and it will have a cash flow of $80 million nine years from today costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table. Bullock Mining has a 12 percent required return on all of its gold mines.

 

Year Cash Flow
0

1

2

3

4

5

6

7

8

9

─$500,000,000

60,000,000

90,000,000

170,000,000

230,000,000

205,000,000

140,000,000

110,000,000

70,000,000

─80,000,000

 

 

Question:

 

  1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.

 

  1. Based on your analysis, should the company open the mine?

 

  1. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project.

 

 

 

 

 

 

CASE 5: The Beta for American Standard

 

Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firm’s founders, has been talking to Joey about the firm’s investment portfolio.

 

As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specially, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. One position the company holds is stock in American Standard (ASD). American Standard manufactures air conditioning systems, bath and kitchen fixtures and fittings and vehicle control systems. Additionally, the company offers commercial and residential heating, ventilation, air conditioning equipment, systems, and controls.

 

Covili and Wyatt currently uses a commercial data vendor for information about its positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how stock betas and other information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked Joey to do the following assignments:

  1. Go to finance.yahoo.com and download the ending monthly stock prices for American Standard (ASD) for the last 60 months. Also, be sure to download the dividend payments over this period as well. Next, download the ending value of the S&P 500 index over the same period. For the historical risk-free rate, go to the St. Louis Federal Reserve Web site (www.stlouisfed.org) and find the three-month Treasury bill secondary market rate. Download this file. What are the monthly returns, average monthly returns, and standard deviation for American Standard stock, the three-month Treasury bill, and the S&P 500 for this period?
  2. Beta is often estimated by linear regression. A model often used is called the market model, which is:
    Rt ─ R¦t  = αi + Βi  [RMt ─ R¦t] + εt
    In this regression, Rt is the return on the stock and R¦t  is the risk-free rate for the same period. RMt is the return on a stock market index such as the S&P 500 index. αi is the regression intercept, and Βi is the slope (and the stock’s estimated beta). εt represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept αi is often called Jensen’s alpha. What does it measure? If an asset has a positive Jensen’s alpha, where would it plot with respect to the SML? What is the financial interpretation of the residuals in the regression?
  3. Use the market model to estimate the beta for American Standard using the last 36 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on American Standard against the index and also show the fitted line.
  4. When the beta of a stock is calculated using monthly returns, there is a debate over the number of months that should be used in the calculation. Rework the previous questions using the last 60 months of returns. How does this answer compare to what you calculated previously? What are some arguments for and against using shorter versus longer periods? Also, you’ve used monthly data, which are common choice. You could have used daily, weekly, quarter, or even annual data. What do you think are the issues here?
  5. Compare your beta for American Standard to the beta you find on finance.yahoo.com. How similar are they? Why might they be different?

 

Note: Solve any 8 out of 10.

 

  1. (a) Discuss the term ‘Continuing Guarantee’. How can it be revoked?
    • State briefly the rights and obligations of a bailee.

 

  1. (a) What do you understand by the term Implied ‘Authority of a partner’?

(b)  Enumerate the acts which are not covered under implied authority.

 

  1. (a) What are the rights and duties of a minor in relation to partnership business?

(b)   Distinguish between —

(i)  Sub-agent and Substituted Agent

(ii)  Sale, Bailment and Pledge

 

  1. (a) Explain the rights of a partner.

(b)   Distinguish between the following:

(i)  Succession and Assignment.

(ii)  Contract of Indemnity and Contract of Guarantee.

 

  1. Write short note on.
    1. Non-registration of a firm.
    2. Capacity of Contract
  • Kinds of Bailment.
  1. Anticipatory breach of a Contract.

 

  1. a) When is a Surety Discharged from Liability by the conduct of the creditor.
  2. b) Describe the rules relating to passing of property in the sale of goods.

 

  1. a) What is an illegal agreement? State the effects of illegality.
  2. b) What is ‘Supervening Impossibility’? What are its effect upon the contract?
  3. c) What are the remedies available to the buyer when goods in wrong quantity

delivered to him?

  1. d) When shall a retired partner be discharged from his liabilities for the acts of the firm before retirement?

 

 

  1. (a) State the principles on which damages are assessed for breach of contract.

(b)  Describe the law relating to the ‘right of resale’ available to an unpaid seller

in the Sale of Goods Act, 1930.

 

 

  1. a) What are the rules regarding delivery of goods?
  2. b) Distinguish between:
  3. i) Novation and Alteration.
  4. ii) Liquidated damages and penalty

 

COST AND ACCOUNTING

 

Note : Solve any 8 questions out of 10.

 

  1. “Management accounting is a mid-way between financial and cost accounting.” Elucidate.

 

  1. What is the major revenue recognition criterion?

 

 

  1. What is a trading account? What are its major constituents? What is its major outcome?

 

 

  1. The cash flow statement is as useful to shareholders and lenders as to management. Explain.

 

 

  1. (a) “All future costs are relevant.” Do you agree? Why?

(b) “Fixed costs are really variable. The more you produce the less they become.”

Do you agree? Explain.

 

  1. In connection with inventory ordering and control, certain terms are basic. Explain the meaning of each of the following:
    1. Economic order quantity
    2. Re-order point
    3. Lead time
    4. Safety stock

 

  1. What is meant by under/over-absorption of factory overheads? How will you account for them in cost accounts? Does it bear any impact while submitting quotations?

 

 

  1. A manufacturing company operating a system of budgetary control finds that their production capacity during the year varies between 75 per cent and 90 per cent as against the budgeted capacity of 80 per cent for the year. It has been suggested that a system budgets should be introduced to effectively control costs. Outline the steps you would take to implement this suggestion keeping in mind that the management would still require periodic comparison with their overall budget during the year.

 

 

  1. “Transfer prices must always be equal to externally determined market of comparative products or services.” Comment fully.

 

 

 

COOKING LPG LTD

DETERMINATION OF WORKING CAPTIAL

Introduction

Cooking LPG Ltd, Gurgaon, is a private sector firm dealing in the bottling and supply of domestic LPG for household consumption since 1995. The firm has a network of distributors in the districts of Gurgaon and Faridabad. The bottling plant of the firm is located on National Highway – 8 (New Delhi – Jaipur), approx. 12 kms from Gurgaon.  The firm has been consistently performing we.”  and plans to expand its market to include the whole National Capital Region.

The production process of the plant consists of receipt of the bulk LPG through tank trucks, storage in tanks, bottling operations and distribution to dealers.   During the bottling process, the cylinders are subjected to pressurized filling of LPG followed by quality control and safety checks such as weight, leakage and other defects.  The cylinders passing through this process are sealed and dispatched to dealers through trucks.  The supply and distribution section of the plant prepares the invoice which goes along with the truck to the distributor.

Statement of the Problem :

Mr. I. M. Smart, DGM(Finance) of the company, was analyzing the financial performance of the company during the current year.  The various profitability ratios and parameters of the company indicated a very satisfactory performance.  Still, Mr. Smart was not fully content-specially with the management of the working capital by the company.  He could recall that during the past year, in spite of stable demand pattern, they had to, time and again, resort to bank overdrafts due to non-availability of cash for making various payments.  He is aware that such aberrations in the finances have a cost and adversely affects the performance of the company.  However, he was unable to pinpoint the cause of the problem.

He discussed the problem with Mr. U.R. Keenkumar, the new manager (Finance).  After critically examining the details, Mr. Keenkumar realized that the working capital was hitherto estimated only as approximation by some rule of thumb without any proper computation based on sound financial policies and, therefore, suggested a reworking of the working capital (WC) requirement.  Mr. Smart assigned the task of determination of WC to him.

Profile of Cooking LPG Ltd.

1)         Purchases : The company purchases LPG in bulk from various importers ex-Mumbai and Kandla, @ Rs. 11,000 per MT.  This is transported to its Bottling Plant at Gurgaon through 15 MT capacity tank trucks (called bullets), hired on annual contract basis.  The average transportation cost per bullet ex-either location is Rs. 30,000.  Normally, 2 bullets per day are received at the plant.  The company make payments for bulk supplies once in a month, resulting in average time-lag of 15 days.

2)         Storage and Bottling : The bulk storage capacity at the plant is 150 MT (2 x 75 MT storage tanks)  and the plant is capable of filling 30 MT LPG in cylinders per day.  The plant operates for 25 days per month on an average.  The desired level of inventory at various stages is as under.

  • LPG in bulk (tanks and pipeline quantity in the plant) – three days average production / sales.
  • Filled Cylinders – 2 days average sales.
  • Work-in Process inventory – zero.

3)         Marketing : The LPG is supplied by the company in 12 kg cylinders, invoiced @ Rs. 250 per cylinder.  The rate of applicable sales tax on the invoice is 4 per cent.  A commission of Rs. 15 per cylinder is paid to the distributor on the invoice itself.  The filled cylinders are delivered on company’s expense at the distributor’s godown, in exchange of equal number of empty cylinders.  The deliveries are made in truck-loads only, the capacity of each truck being 250 cylinders.  The distributors are required to pay for deliveries through bank draft.  On receipt of the draft, the cylinders are normally dispatched on the same day.  However, for every truck purchased on pre-paid basis, the company extends a credit of 7 days to the distributors on one truck-load.

4)         Salaries and Wages : The following payments are made :

  • Direct labour – Re. 0.75 per cylinder (Bottling expenses) – paid on last day of the month.
  • Security agency – Rs. 30,000 per month paid on 10th of subsequent month.
  • Administrative staff and managers – Rs. 3.75 lakh per annum, paid on monthly basis on the last working day.

5)         Overheads :

  • Administrative (staff, car, communication etc) – Rs. 25,000 per month – paid on the 10th of subsequent month.
  • Power (including on DG set) – Rs. 1,00,000 per month paid on the 7th Subsequent month.
  • Renewal of various licenses (pollution, factory, labour CCE etc.) – Rs. 15,000 per annum paid at the beginning of the year.
  • Insurance – Rs. 5,00,000 per annum to be paid at the beginning of the year.
  • Housekeeping etc – Rs. 10,000 per month paid on the 10th of the subsequent month.
  • Regular maintenance of plant – Rs. 50,000 per month paid on the 10th of every month to the vendors.  This includes expenditure on account of lubricants, spares and other stores.
  • Regular maintenance of cylinders (statutory testing) – Rs. 5 lakh per annum – paid on monthly basis on the 15th of the subsequent month.
  • All transportation charges as per contracts – paid on the 10th subsequent month.
  • Sales tax as per applicable rates is deposited on the 7th of the subsequent month.

6)   Sales : Average sales are 2,500 cylinders per day during the year.  However, during the winter months (December to February), there is an incremental demand of 20 per cent.

7)   Average Inventories : The average stocks maintained by the company as per its policy guidelines :

  • Consumables (caps, ceiling material, valves etc) – Rs. 2 lakh.  This amounts to 15 days consumption.
  • Maintenance spares – Rs. 1 lakh
  • Lubricants – Rs. 20,000
  • Diesel (for DG sets and fire engines) – Rs. 15,000
  • Other stores (stationary, safety items) – Rs. 20,000

8)         Minimum cash balance including bank balance required is Rs. 5 lakh.

9)         Additional Information for Calculating Incremental Working Capital During Winter.

  • No increase in any inventories take place except in the inventory of bulk LPG, which increases in the same proportion as the increase of the demand.  The actual requirements of LPG  for additional supplies are procured under the same terms and conditions from the suppliers.
  • The labour cost for additional production is paid at double the rate during wintes.
  • No changes in other administrative overheads.
  • The expenditure on power consumption during winter increased by 10 per cent.  However, during other months the power consumption remains the same as the decrease owing to reduced production is offset by increased consumption on account of compressors /Acs.
  • Additional amount of Rs. 3 lakh is kept as cash balance to meet exigencies during winter.
  • No change in time schedules for any payables / receivables.
  • The storage of finished goods inventory is restricted to a maximum 5,000 cylinders due to statutory requirements.

 

Question:

  1. Determine working capital?

 

 

 

  1. 2

M/S HI-TECH ELECTRONICS

M/s. Hi – tech Electronics, a consumer electronics outlet, was opened two years ago in Dwarka, New Delhi. Hard work and personal attention shown by the proprietor, Mr. Sony, has brought success.  However, because of insufficient funds to finance credit sales, the outlet accepted only cash and bank credit cards.  Mr. Sony is now considering a new policy of offering installment sales on terms of 25 per cent down payment and 25 per cent per month for three months as well as continuing to accept cash and bank credit cards.

Mr. Sony feels this policy will boost sales by 50 percent.  All the increases in sales will  be credit sales.  But to follow through a new policy, he will need a bank loan at the rate of 12 percent.  The sales projections for this year without the new policy are given in Exhibit 1.

Exhibit 1 Sales Projections and Fixed costs

Month Projected sales without instalment option Projected sales with instalment option
January Rs. 6,00,000 Rs. 9,00,000
February       4,00,000       6,00,000
March       3,00,000       4,50,000
April      2,00,000     3,00,000
May      2,00,000      3,00,000
June      1,50,000      2,25,000
July      1,50,000      2,25,000
August      2,00,000      3,00,000
September      3,00,000      4,50,000
October      5,00,000      7,50,000
November      5,00,000      15,00,000
December      8,00,000      12,00,000
Total Sales    48,00,000    72,00,000
Fixed cost      2,40,000      2,40,000

 

He further expects 26.67 per cent of the sales to be cash, 40 per cent bank credit card sales on which a 2 per cent fee is paid, and 33.33 per cent on instalment sales.  Also, for short term seasonal requirements, the film takes loan from chit fund to which Mr. Sony subscribes @ 1.8 per cent per month.

Their success has been due to their policy of selling at discount price.  The purchase per unit is 90 per cent of selling price.  The fixed costs are Rs. 20,000 per month.  The proprietor believes that the new policy will increase miscellaneous cost by Rs. 25,000.

The business being cyclical in nature, the working capital finance is done on trade – off basis.  The proprietor feels that the new policy will lead to bad debts of 1 per cent.

(a)       As a financial consultant, advise the proprietor whether he should go for the extension of credit facilities.

(b)       Also prepare cash budget for one year of operation of the firm, ignoring interest.  The minimum desired cash balance & Rs. 30,000, which is also the amount the firm has on January 1.  Borrowings are possible which are made at the beginning of a month and repaid at the end when cash is available.

 

 

 

Attempt Only Four Case Study

CASE – 1

 

You are the CFO of a large Indian pharmaceutical company. Over the last five years your company has grown, primarily through overseas acquisitions. You started acquiring companies in Europe and North America in 2000.

Your balance sheet on March 2005 has assets equivalent of US$200 million, including those of your subsidiaries.

In the last board meeting, a presentation made by your European subsidiary painted a worrisome picture. This bulk drug manufacturing facility sources its raw materials from a small South African country, which is facing political unrest. This means that the reliability of this source of raw material, in the days to come, is poor. Your subsidiary is keen to source this material from a small Taiwanese firm. This Taiwanese firm is willing to supply the raw material but wants payment in US dollars for the January to June 2006 period; in euros for the July to December 2006 period through its Cayman Island bank account.

If this supply contract clicks, it could mean at least two things: one, getting a reliable supplier, and two, opening a link in the Far East market.

You are preparing to present a case for this supply contract to the top management. You search the web to get some data on USD/INR and Europe/INR behaviour.

 

 

 

Question:

 

What are the issues that you will take into account and what is the likely response from the board members?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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CONTACT:

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Attempt Any Four Case Study

 

Case 1: Zip Zap Zoom Car Company

          

Zip Zap Zoom Company Ltd is into manufacturing cars in the small car (800 cc) segment.  It was set up 15 years back and since its establishment it has seen a phenomenal growth in both its market and profitability.  Its financial statements are shown in Exhibits 1 and 2 respectively.

The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year.  Last year, the company had announced 20 per cent dividend, which was the highest in the automobile sector.  The company has never defaulted on its loan payments and enjoys a favorable face with its lenders, which include financial institutions, commercial banks and debenture holders.

The competition in the car industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign car manufactures many of them being market leaders in their respective countries.  The small car segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer.  The Zip Zap Zoom’s senior management realizes the need for large scale investment in up gradation of technology and improvement of manufacturing facilities to pre-empt competition.

Whereas on the one hand, the competition in the car industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for cars, but has also led to adoption of price cutting strategies by various car manufactures.   The industry indicators predict that the economy is gradually slipping into recession.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

 

Source of Funds

Share capital                                        350

Reserves and surplus                           250                              600

Loans :

Debentures (@ 14%)               50

Institutional borrowing (@ 10%)        100

Commercial loans (@ 12%)    250

Total debt                                                                                            400

Current liabilities                                                                                 200

1,200

 

Application of Funds

Fixed Assets

Gross block                                                     1,000

Less : Depreciation                                            250

Net block                                                           750

Capital WIP                                                       190

Total Fixed Assets                                                                              940

Current assets :

Inventory                                                           200

Sundry debtors                                                    40

Cash and bank balance                                        10

Other current assets                                 10

Total current assets                                                                 260

-1200

 

Exhibit 2 Profit and Loss Account for the year ended March 31, 200x

(Amount in Rs. Crore)

Sales revenue (80,000 units x Rs. 2,50,000)                                       2,000.0

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses    1,300.0

Variable overheads                                                        100.0

Total                                                                                                                1,400.0

Fixed cost :

R & D                                                                                          20.0

Marketing and advertising                                               25.0

Depreciation                                                                   250.0

 

Personnel                                                                          70.0

Total                                                                                                                   365.0

 

Total operating expenditure                                                                1,765.0

Operating profits (EBIT)                                                                                   235.0

Financial expense :

Interest on debentures                                                            7.7

Interest on institutional borrowings                        11.0

Interest on commercial loan                                    33.0                     51.7

Earnings before tax (EBT)                                                                                          183.3

Tax (@ 35%)                                                                                                                 64.2

Earnings after tax (EAT)                                                                                            119.1

Dividends                                                                                                                     70.0

Debt redemption (sinking fund obligation)**                                                              40.0

Contribution to reserves and surplus                                                                  9.1

*          Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).

**        The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.

The company is faced with the problem of deciding how much to invest in up

gradation of its plans and technology.  Capital investment up to a maximum of Rs. 100

crore is required.  The problem areas are three-fold.

  • The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
  • The company does not want to issue new equity shares and its retained earning are not enough for such a large investment.  Thus, the only option is raising debt.
  • The company wants to limit its additional debt to a level that it can service without taking undue risks.  With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.

Mr. Shortsighted, the company’s Finance Manager, is given the task of determining the additional debt that the firm can raise.  He thinks that the firm can raise Rs. 100 crore worth debt and service it even in years of recession.  The company can raise debt at 15 per cent from a financial institution.  While working out the debt capacity.  Mr. Shortsighted takes the following assumptions for the recession years.

  1. A maximum of 10 percent reduction in sales volume will take place.
  2. A maximum of 6 percent reduction in sales price of cars will take place.

Mr. Shorsighted prepares a projected income statement which is representative of the recession years.  While doing so, he determines what he thinks are the “irreducible minimum” expenditures under

 

recessionary conditions.  For him, risk of insolvency is the main concern while designing the capital structure.  To support his view, he presents the income statement as shown in Exhibit 3.

 

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

Sales revenue (72,000 units x Rs. 2,35,000)                                       1,692.0

Operating expenditure

Variable cost :

Raw material and manufacturing expenses    1,170.0

Variable overheads                                                          90.0

Total                                                                                                                1,260.0

Fixed cost :

R & D                                                                                          —

Marketing and advertising                                               15.0

Depreciation                                                                   187.5

Personnel                                                                          70.0

Total                                                                                                                   272.5

Total operating expenditure                                                                1,532.5

EBIT                                                                                                                  159.5

Financial expenses :

Interest on existing Debentures                                        7.0

Interest on existing institutional borrowings      10.0

Interest on commercial loan                                30.0

Interest on additional debt                                             15.0                  62.0

EBT                                                                                                                      97.5

Tax (@ 35%)                                                                                                        34.1

EAT                                                                                                                     63.4

Dividends                                                                                                              —

Debt redemption (sinking fund obligation)                                             50.0*

Contribution to reserves and surplus                                                       13.4

 

* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)

Assumptions of Mr. Shorsighted

  • R & D expenditure can be done away with till the economy picks up.
  • Marketing and advertising expenditure can be reduced by 40 per cent.
  • Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.

 

He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment.  Mr. Arthashatra  does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.

Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm.  He points out the following :

  • Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
  • Certain management policies like those relating to dividend payout, send out important signals to the investors.  The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm.  The firm should pay at least 10 per cent dividend in the recession years.
  • Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations.  This does not give the true picture.  Net cash inflows should be used to determine the amount available for servicing the debt.
  • Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession.  It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on.  Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed.  From  this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution).  This will give a true picture of how the company’s cash flows will behave in recession conditions.

 

The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret.  Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis.  Information on the behaviour of cash flows during the recession periods is taken into account.

The methodology undertaken is as follows :

  • Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.

 

  • Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
  • Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

 

Assuming a normal distribution of the expected behaviour, the mean expected

value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.

Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions.  Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.

To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside.  Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)

Question:

Analyse the debt capacity of the company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   GREAVES LIMITED

 

Started as trading firm in 1922, Greaves Limited has diversified into manufacturing and marketing of high technology engineering products and systems. The company’s mission is “manufacture and market a wide range of high quality products, services and systems of world class technology to the total satisfaction of customers in domestic and overseas market.”

Over the years Greaves has brought to India state of the art technologies in various engineering fields by setting up manufacturing units and subsidiary and associate companies. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. The sales of Greaves Limited has increased from Rs 214 crore in 1990 to Rs 801 crore in 1997. Profits before interest and tax (PBIT) of the company increased from Rs 15 crore to Rs 83 crore in 1997. The market price of the company’s share has shown ups and downs during 1990 to 1997. How has the company performed? The following question need answer to fully understand the performance of the company:

 

Exhibit 1

 

GREAVES LTD.

Profit and Loss Account ending on 31 March          (Rupees in crore)

1990 1991 1992 1993 1994 1995 1996 1997
Sales

Raw Material and Stores

Wages and Salaries

Power and fuel

Other Mfg. Expenses

Other Expenses

Depreciation

Marketing and Distribution

Change in stock

214.38

170.67

13.54

0.52

0.61

11.85

1.85

4.86

1.18

253.10

202.84

15.60

0.70

0.49

15.48

1.72

5.67

3.10

287.81

230.81

18.03

1.11

0.88

16.35

1.52

5.14

4.93

311.14

213.79

37.04

3.80

2.37

25.54

4.62

5.17

0.48

354.25

245.63

37.96

4.43

2.36

31.60

5.99

9.67

– 1.13

521.56

379.83

48.24

6.66

3.57

41.40

8.53

10.81

5.63

728.15

543.56

60.48

7.70

4.84

45.74

9.30

12.44

11.86

801.11

564.35

69.66

9.23

5.49

48.64

11.53

16.98

– 5.87

Total Op Expenses 202.72 239.40 268.91 291.85 338.77 493.41 672.20 731.75
 

Operating Profit

Other Income

Non-recurring Income

 

11.61

2.14

1.30

 

13.70

3.69

2.28

 

18.90

4.97

0.10

 

19.29

4.24

10.98

 

15.48

7.72

16.44

 

28.15

14.35

0.46

 

55.95

11.35

0.52

 

69.36

13.08

1.75

PBIT   15.10   19.67   23.97   34.51   39.64   42.98   65.67   82.64
Interest     5.56     6.77   11.92   19.62   17.17   21.48   28.25   27.54
PBT     9.54   12.90   12.05   14.89   22.47   21.50   37.42   55.10
Tax

PAT

Dividend

Retained Earnings

    3.00

6.54

1.80

4.74

    3.60

9.30

2.00

7.30

    4.90

7.15

2.30

4.85

    0.00

14.89

4.06

10.83

    4.00

18.47

7.29

11.18

    7.00

14.50

8.58

5.92

    8.60

28.82

12.85

15.97

  15.80

39.30

14.18

25.12

 

Exhibit 2

 

GREAVES LTD.

Balance Sheet                                (Rupees in crore)

1990 1991 1992 1993 1994 1995 1996 1997
ASSETS

Land and Building

Plant and Machinery

Other Fixed Assets

Capital WIP

Gross Fixed Assets

Less: Accu. Depreciation

Net Tangible Fixed Assets

Intangible Fixed Assets

 

3.88

11.98

3.64

0.09

19.59

12.91

6.68

0.21

 

4.22

12.68

4.14

0.26

21.30

14.56

6.74

0.19

 

4.96

12.98

4.38

10.25

23.57

15.79

7.78

0.05

 

21.70

33.49

5.18

11.27

71.64

19.84

51.80

4.40

 

30.82

50.78

6.95

34.84

123.39

25.74

97.65

22.03

 

39.71

75.34

8.53

14.37

137.95

33.90

104.05

22.45

 

42.34

92.49

8.87

13.92

157.62

42.56

115.06

20.04

 

43.07

104.45

10.35

14.36

172.23

53.87

118.86

21.11

Net Fixed Assets     6.89     6.93     7.83   56.20 119.68 126.50 135.10 139.97
 

Raw Materials

Finished Goods

Inventory

Accounts Receivable

Other Receivable

Investments

Cash and Bank Balance

Current Assets

Total Assets

LIABILITIES AND CAPITAL

Equity Capital

Preference Capital

Reserves and Surplus

 

5.26

29.37

34.63

38.16

32.62

3.55

8.36

117.32

124.21

 

9.86

0.20

27.60

 

6.91

33.72

40.63

53.24

40.47

14.95

8.91

158.20

165.13

 

9.86

0.20

32.57

 

7.26

38.65

45.91

67.97

49.19

15.15

12.71

190.93

198.76

 

9.86

0.20

37.42

 

21.05

53.39

74.44

93.30

24.54

27.58

13.29

233.15

289.35

 

18.84

0.20

100.35

 

28.13

52.26

80.39

122.20

59.12

73.50

18.38

353.59

473.27

 

29.37

0.20

171.03

 

44.03

58.09

102.12

133.45

64.32

75.01

30.08

404.98

531.48

 

29.44

0.20

176.88

 

53.62

69.97

123.59

141.82

76.57

75.07

33.46

450.51

585.61

 

44.20

0.20

175.41

 

50.94

64.09

115.03

179.92

107.31

76.45

48.18

526.89

666.86

 

44.20

0.20

198.79

Net Worth   37.66   42.63   47.48 119.39 200.60 206.52 219.81 243.19
Bank Borrowings

Institutional Borrowings

Debentures

Fixed Deposits

Commercial Paper

Other Borrowings

Current Portion of LT Debt

  14.81

4.13

4.77

12.31

0.00

2.33

0.00

  19.45

3.43

16.57

14.45

0.00

3.22

0.00

  26.51

9.17

19.99

15.03

0.00

3.10

0.08

  24.82

38.09

4.56

14.08

0.00

3.18

0.12

  55.12

38.76

4.37

15.57

15.00

17.08

15.08

  64.97

69.69

4.37

17.75

0.00

1.97

0.02

  70.08

89.26

2.92

20.81

0.00

2.36

1.49

118.28

63.60

1.49

19.29

0.00

2.57

1.57

Borrowings   38.35   57.12   73.72   84.61 130.82 158.73 183.94 203.66
Sundry Creditors

Other Liabilities

Provision for tax, etc.

Proposed Dividends

Current Portion of LT Dept

  37.52

5.70

3.18

1.80

0.00

  49.40

10.16

3.82

2.00

0.00

  59.34

10.70

5.14

2.30

0.08

  77.27

3.59

0.31

4.06

0.12

113.66

1.42

4.40

7.29

15.08

148.13

1.99

7.70

8.58

0.02

153.63

1.70

12.19

12.85

1.49

179.79

3.04

21.43

14.18

1.57

Current Liabilities   48.20   65.38   77.56   85.35 141.85 166.42 181.86 220.01
TOTAL LIABILITIES

Additional information:

Share premium reserve

Revaluation reserve

Bonus equity capital

124.21

 

 

 

8.51

165.13

 

 

 

8.51

198.76

 

 

 

8.51

289.35

 

47.69

8.91

8.51

473.27

 

107.40

8.70

8.51

531.67

 

107.91

8.50

8.51

585.61

 

93.35

8.31

23.25

666.86

 

93.35

8.15

23.25

 

Exhibit 3

 

GREAVES LTD.

Share Price Data

  1990 1991 1992 1993 1994 1995 1996 1997
 Closing share price (Rs)

Yearly high share price (Rs)

Yearly low share price (Rs)

Market capitalization (Rs crore

EPS (Rs)

Book value (Rs)

  27.19

29.25

26.78

65.06

4.79

35.64

34.74

45.28

21.61

67.77

6.82

37.22

121.27

121.27

34.36

236.56

9.73

42.54

  66.67

126.33

48.34

274.84

1.93

57.75

  78.34

90.00

42.67

346.35

2.66

40.61

  71.67

100.01

68.34

316.87

7.16

64.98

  47.5

90.00

45.00

210.02

5.03

45.35

  48.25

85.00

43.75

213.34

9.01

50.73

 

 

 

 

Questions

 

  1. How profitable are its operations? What are the trends in it? How has growth affected the profitability of the company?
  2. What factors have contributed to the operating performance of Greaves Limited? What is the role of profitability margin, asset utilisation, and non-operating income?
  3. How has Greaves performed in terms of return on equity? What is the contribution of return on investment, the way of the business has been financed over the period?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 3   CHOOSING BETWEEN PROJECTS IN ABC COMPANY

 

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get proper advice. As a consultant, what advice you will give?

 

The cash flows are as follows. All amounts are in lakhs of Rupees.

 

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5 – 10

 

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5 – 2000.

 

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)

Yrs. 11 to 15 – Rs. 10 (For the next 5 years)

 

Question:

If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 4   STAR ENGINEERING COMPANY

 

Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears, and automobile accessories like taximeters and speedometers.

SEC buys the electrical components, but manufactures all mechanical parts within its factory which is divided into four production departments Machining, Fabrication, Assembly, and Painting—and three service departments—Stores, Maintenance, and Works Office.

Though the company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.

In March, the company received a trial order from a government department for a sample transformer on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April and completed all manufacturing operations before the end of the month.

Since Job No 879 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the government department asked SEC to submit a detailed cost sheet for the job giving as much details as possible regarding material, labour and overhead costs.

SEC, as part of its routine financial accounting system, had collected the actual expenses for the month of April, by 5th of May. Some of the relevant data are given in Exhibit A.

The company tried to assign directly, as many expenses as possible to the production departments. However, It was not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using some rational basis. Some of the possible bases were collected by SEC’s accountant. These are presented in Exhibit B.

He also designed a format to allocate the overhead to all the production and service departments. It was realized that the expenses of the service departments on some rational basis. The accountant thought of distributing the service departments’ costs on the following basis:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. Stores department costs on the basis of direct and indirect materials used.

The accountant who had to visit the company’s banker, passed on the papers to you for the required analysis and cost computations.

 

 

REQUIRED

 

Based on the data given in Exhibits A and B, you are required to:

 

  1. Complete the attached “overhead cost distribution sheet” (Exhibit C).
    Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
  2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
  3. Do you agree with:
    a.   The procedure adopted by the company for the distribution of overhead costs?
    b.   The choice of the base for overhead absorption, i.e. labour-hour rate?

 

 

Exhibit A

 

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

RS RS
Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

 

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

 

Others

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

(At 2 per cent of direct labour wages and Indirect labour and supervision)

Power

(Maintenance—Rs 366; Works Office Rs 2,200, Balance to Producing Departments)

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses

 

33,000

22,000

11,000

7,000

44,000

32,700

 
2,200

1,100

3,300

3,400

2,800

 

 

1,68,000

44,000

2,400

19,400

 

 

68,586

 

 

1,30,260

1,190

 

 

 

 

 

 

 

1,49,700

 

 

 

 

 

 

12,800

 

 

 

 

 

 

 

 

 

 

 

 

4,33,930

5,96,930

 

 

 

 

 

 

 

 

 

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year

Department Area

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

 

Rs

Horse

Power

Rating

Direct

Labour

Hours

Direct

Labour

Budget

 

Rs

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Works Office

Total

 

13,000

11,000

8,800

6,400

4,400

2,200

2,200

48,000

26,40,000

13,20,000

6,60,000

2,64,000

1,32,000

1,98,000

68,000

52,80,000

62,40,000

21,60,000

 

10,80,000

 

 

 

94,80,000

20,000

10,000

1,000

2,000

 

 

 

33,000

14,40,000

5,28,000

7,20,000

3,30,000

 

 

 

30,18,000

52,80,000

25,40,000

13,20,000

6,60,000

 

 

 

99,00,000

 

Note

 

The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one month—April of the budgeted year.

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit C

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

 

 

 

1,49,700

A.2 Indirect materials and supplies  

12,800

A.3 Factory Rent 1,68,000
A.4 Depreciation of Plant and Machinery  

44,000

A.5 Building Rates and Taxes

 

 

2,400

 

A.6 Welfare Expenses

 

 

19,494

    A.7 Power   68,586
A.8 Works Office Salaries and Expenses  

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

 

1,190

A. Total (A.1 to A.9) 5,96,430
B. Reallocation of Service Departments Costs to Production Departments
B.1 Distribution of Works Office Costs
B.2 Distribution of Maintenance Department’s Costs
B.3 Distribution of Stores Department’s Costs
Total Charged to Producing

C. Departments (A+B)

 

 

5,96,430

D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

E. Overhead Rate/Per Hour (D)

 

 

 

 

Case 5: EASTERN MACHINES COMPANY

 

Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.

 

So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.

 

Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.

 

Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.

 

Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.

 

Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.

 

Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.

 

Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.

 

Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.

 

Namdeo: We should ask somebody from our statistics dept. to attend to this problem.

 

As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?


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   Mangerial Economics

                                

 

 

Attempt Any Four Case Study

 

CASE – 1   Dabur India Limited: Growing Big and Global

 

Dabur is among the top five FMCG companies in India and is positioned successfully on the specialist herbal platform. Dabur has proven its expertise in the fields of health care, personal care, homecare and foods.

The company was founded by Dr. S. K. Burman in 1884 as small pharmacy in Calcutta (now Kolkata), India. And is now led by his great grandson Vivek C. Burman, who is the Chairman of Dabur India Limited and the senior most representative of the Burman family in the company. The company headquarters are in Ghaziabad, India, near the Indian capital New Delhi, where it is registered. The company has over 12 manufacturing units in India and abroad. The international facilities are located in Nepal, Dubai, Bangladesh, Egypt and Nigeria.

S.K. Burman, the founder of Dabur, was trained as a physician. His mission was to provide effective and affordable cure for ordinary people in far-flung villages. Soon, he started preparing natural remedies based on Ayurved for diseases such as Cholera, Plague and Malaria. Due to his cheap and effective remedies, he became to be known as ‘Daktar’ (Indianised version of ‘doctor’). And that is how his venture Dabur got its name—derived from Daktar Burman.

The company faces stiff competition from many multi national and domestic companies. In the Branded and Packaged Food and Beverages segment major companies that are active include Hindustan Lever, Nestle, Cadbury and Dabur. In case of Ayurvedic medicines and products, the major competitors are Baidyanath, Vicco, Jhandu, Himani and other pharmaceutical companies.

 

Vision, Mission and Objectives

 

Vision statement of Dabur says that the company is “dedicated to the health and well being of every household”. The objective is to “significantly accelerate profitable growth by providing comfort to others”. For achieving this objective Dabur aims to:

  • Focus on growing core brands across categories, reaching out to new geographies, within and outside India, and improve operational efficiencies by leveraging technology.
  • Be the preferred company to meet the health and personal grooming needs of target consumers with safe, efficacious, natural solutions by synthesising deep knowledge of ayurveda and herbs with modern science.
  • Be a professionally managed employer of choice, attracting, developing and retaining quality personnel.
  • Be responsible citizens with a commitment to environmental protection.
  • Provide superior returns, relative to our peer group, to our shareholders.

 

Chairman of the company

 

Vivek C. Burman joined Dabur in 1954 after completing his graduation in Business Administration from the USA. In 1986 he was appointed Managing Director of Dabur and in 1998 he took over as Chairman of the Company.

Under Vivek Burman’s leadership, Dabur has grown and evolved as a multi-crore business house with a diverse product portfolio and a marketing network that traverses the whole of India and more than 50 countries across the world. As a strong and positive leader, Vivek C. Burman has motivated employees of Dabur to “do better than their best”—a credo that gives Dabur its status as India’s most trusted nature-based products company.

 

Leading brands

 

More than 300 diverse products in the FMCG, Healthcare and Ayurveda segments are in the product line of Dabur. List of products of the company include very successful brands like Vatika, Anmol, Hajmola, Dabur Amla Chyawanprash, Dabur Honey and Lal Dant Manjan with turnover of Rs.100 crores each.

Strategic positioning of Dabur Honey as food product, lead to market leadership with over 40% market share in branded honey market; Dabur Chyawanprash is the largest selling Ayurvedic medicine with over 65% market share. Dabur is a leader in herbal digestives with 90% market share. Hajmola tablets are in command with 75% market share of digestive tablets category. Dabur Lal Tail tops baby massage oil market with 35% of total share.

CHD (Consumer Health Division), dealing with classical Ayurvedic medicines has more than 250 products sold through prescription as well as over the counter. Proprietary Ayurvedic medicines developed by Dabur include Nature Care Isabgol, Madhuvaani and Trifgol.

However, some of the subsidiary units of Dabur have proved to be low margin business; like Dabur Finance Limited. The international units are also operating on low profit margin. The company also produces several “me – too” products. At the same time the company is very popular in the rural segment.

 

 

 

Questions

 

  1. What is the objective of Dabur? Is it profit maximisation or growth maximisation? Discuss.
  2. Do you think the growth of Dabur from a small pharmacy to a large multinational company is an indicator of the advantages of joint stock company against proprietorship form? Elaborate.

 

 

 

 

 

 

 

 

 

 

 

 

CASE – 2   IT Industry: Checkered Growth

 

IT industry is now considered as vital for the development of any economy. Developing countries value the importance of this industry due to its capacity to provide much needed export earnings and support in the development of other industries. Especially in Indian context, this industry has assumed a significant position in the overall economy, due to its exemplary potentials in creating high value jobs, enhancing business efficiency and earning export revenues. The IT revolution has brought unexpected opportunities for India, which is emerging as an increasingly preferred location for customised software development. Experts are estimating the global IT industry to grow to US$1.6 million over the coming six years and exports to reach Rs. 2000 billion by 2008. It is envisaged that Indian IT industry, though a very small portion of the global IT pie, has tremendous growth prospects.

 

Stock Taking

 

The decade of 1970 may be taken as the stage of introduction of the Indian IT industry. The early years were marked by 75 per cent of software development taking place overseas and the rest 25 per cent in India. Exports of Indian software until the mid-1970s was mainly Eastern Europe, followed by US. Tata Consultancy Services (TCS) was among the pioneers in selling its services outside India, by working for IBM Labs in the US. The hardware segment lagged behind its software counterpart. With instances of exports worth US$ 4 million in 1980, the software segment of the industry has shown an uneven profile. It was not until 1980s that vigorous and sustained growth in software exports begun, as MNCs like Texas Instruments started to take serious interest in India as a centre of software production. Destinations of export also underwent changes, with US dominating the main export market with 75 per cent of the exports. The IT Enabled Services (ITeS) segment, however, had not emerged at this stage.

It was also during the mid to late 1980s that computer firms shifted focus from mainframe computers (the mainstay of MNCs) to Personal Computers (PCs). In March 1985, Minicomp installed the first ever PC at CSI, Delhi; this changed the entire industry for good. With the entry of networking and applications like CAD/CAM, PC sales soared in 1987-88, touching 50,000 units.

From a modest growth in the mid-1980s software exports moved up to Rs. 3.8 billion in 1991-92. Since then, it grew at an incredible rate, up to 115 per cent in 1993. The hardware could also register an annual growth of 40 per cent in this period, backed by a surging demand for PCs and networking. Growth of the industry was also driven by the emergence and rapid growth of the ITeS segment.

IT sector’s share of GDP rose steadily in this period, rate of increase being the highest at 44.91 per cent in 2000-01. It was in the same year that the size of the total IT market was the biggest in the decade, at Rs. 56,592 crore. The overall IT market was also found to increase till 2000-01. The overall IT market was also found to increase till 2000-01, with the only exception of 1998-99. The domestic market also showed an overall increase till 2000-01, registering a spectacular CAGR of 50.39 per cent. Aggregate output of software and services also increased in this period, though at an uneven rate. Of approximately $1 billion worth of sales in 1991-1992, domestic hardware sales constituted 37.2 per cent (13.4 per cent growth over the previous year), exports of hardware 6.6 per cent.

During 2000-01 the growth in the hardware segment was driven mainly by PCs, which contributed about 58 per cent of the total hardware market. This period also witnessed the phenomenon of increasing share of Tier 2 and cities in PC sales, thereby indicating PC penetration into the hinterland. PC shipments had increased by 35 per cent every year from 1997 till 2000-01 when it reached 1.8 million PCs. The commercial PC market saw a growth of 23.5 per cent mainly due to slashing of prices by major vendors.

It was in 2001-02 that the industry had a sharp fall in rate of growth of its share of GDP to 5.90 per cent, from 44.91 per cent in the previous year. The total IT market also showed a fall in growth rate from 56.42 per cent in 2000-01 to a mere 16.24 per cent in the next year, growing further at the rate of 16.25 per cent in the next year. Software export was also affected, registering a low growth of 28.74 per cent and failed to maintain its growth rate of 65.30 per cent in the previous year. It got further lowered to 26.30 per cent in 2002-03. CAGR of total output of software and services (in Rs. crore) came down to 25.61 in 2001-02 and further to 25.11 in 2002-03. The domestic market showed a steep decline in growth to 3 per cent in 2001-02 from an outstanding 50.39 per cent in 2000-01. It could, however, recover by growing at 4.11 per cent in the next year.

 

 

 

 

 

 

 

Table 1: Indian IT Industry: 1996-97 to 2002-03

 

Year A* B* C* D* E*
1996-97

1997-98<