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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?

2. How does lifting of ‘Country-wise quota regime’ help Arvind Mills?

3. 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 all Cases.

Case 1: PROMOTING THE PROTÉGÉ

The die was cast. Prem Nath Divan, executive chairman of Vertigo, the country’s largest engineering project organization, decided to switch tracks for a career in academics. Divan was still six years short of the company’s retirement age of 65. His premature exit was bound to create a flutter at the Vertigo board. Having joined Vertigo as a management trainee soon after college, he had gradually risen through the hierarchy to take a board position as the marketing director of the firm at 32. He had become the president five years later and the youngest chairman of the company at 45. But, by the time he was 50, the whizkid had acquired a larger than life image of a role model for younger managers and a statesman who symbolized the best and brightest face of Indian management.
On his wife’s suggestion that it would be wise to discuss the move with one of his trusted colleagues before making a formal announcement of his intention to seek premature retirement, Divan called on Ramcharan Saxena, a solicitor who has been on the Vertigo board for over a decade. Sexena was surprised at Divan’s plan. But he was unfazed. “If that is what you want to do for the rest of your life, we can only wish you well”, he told him. “The board will miss you. But the business should go on. We should get down to the task of choosing a successor. The sooner it is done, the better.
“I think the choice is quite obvious, “said Divan, “Ranjan Warrior. He is good and …” Divan was taken aback to see Saxena grimace. “You don’t have anything against him, do you?” he asks him. “No, no,” said Saxena, “He is good. A financial strategist and a visionary. His conceptual skills have served the company well. But he has always had staff role with no line experience. What we need is someone from operations. Like Richard Crasta.”
“Richard known things inside out alright”, said Divan, “But he is just a doer. Not fire in the belly. Vertigo needs someone who understands the value of power and known how to use it. Like me. Like Ranjan.”
“That is just the problem, “said Saxena. “Prem, let me tell you something. Ranjan is a man in your own image. Everyone known that he is your protégé. And are never popular. He has generated a lot of resentment among senior Veritigo executives and there would be a revolt if he were to succeed you. An exodus is something we can’t afford to have on our hands. We should think of someone else in the interest of stability to top management.” Divan could not believe what he heard. He had always prided himself on his hands – on style and thought he had his ear to the ground. “How could I lose touch?” he wondered, somewhat shaken.
“When you are the boss, people accept your authority without question,” continued Saxena. “In any case, you have been successful at Vertigo and it is difficult to argue with success. But the moment you announce your intention to leave, the aura begins to fade away. And in deciding on your successor, the board will seek your opinion, with due regard to your judgment. The board member must do what in their view is right for the company. Having said that, may I also mention that if there is a showdown in the boardroom, you could always choose to stay on ? We would like it. Or we could bring in an outsider.”

“I have finalized my career plans and there is no question of staying on beyond six months from now,” said Divan. “The board is scheduled to meet next month. Let us shelve the matter till then. In the meantime, I rely on you, Ram, to keep this discussion between the two of us.”
“Of course yes,” said Saxena.
On his way home, Divan thought about the matter in detail. Bringing an outsider would undo all his life’s work at Vertigo. There were considerations like cuture and compatibility which were paramount. The chairman had to be an inside man. “Richard lacks stature, “Divan said to himself. “Ranjan is the one I have been grooming, but heavens, the flip side of it all had missed me completely. There is no way I can allow a split at the top just before I quit. I must leave on a high note in my own interest. I must find a way out of he imminent mess.”

Question:
1. What should Divan do?

Case 2: PREJUDICES IN WORKPLACES : REAL OR PERCEIVED ?

Manjula Srivastav had been head of marketing for the last four years at Blue Chips, a computer products firm. The company’s turnover had increased by two – and a half times during the period and its market share in a number of precuts had also moved up marginally. What was creditable was that all this had happened in an environment in which computer prices had been crashing.
Although she had a talent for striking an instant report with people – particularly with the company’s dealers – Srivastav often found herself battling against odds, as she perceived it, as far as her relationships with her subordinates and peers in the company were concerned. Srivastav had to fight male prejudice all the way. She found it unfair that she had to prove herself regularly at work and she used to make her displeasure on that score quite obvious to everyone.
Six months ago, Blue Chips had been taken over by an industrial group which had a diversity of business interests and was, more importantly, flush with funds. The change of ownership had led to a replacement of the managing director, but it had not affected the existing core management team. Anand Prakash, the new managing director, had his priorities clear. “Blue Chips will go international,” he had declared in the first executive committee meeting, “and exports will be our first concern.”
Prakash had also brought in Harish Naik as his executive assistant with special responsibility for exports. Naik had been seconded to Srivastav for five weeks as a part of a familiarization programme. Much to her surprise, he had been appointed, within two months, as the vice president (exports), with compensation and perks higher than her own. Srivastav had made a formal protest to Prakash who had assured her that he was aware of her good work in the company and that she would have an appropriate role once the restructuring plan he was already working on would by put into effect.
One morning, as she entered the office and switched on her workstation, a message flashed on her screen. It was from Prakash. “Want to see you sometime today regarding restructuring. Will 2.30 be convenient?” It went.
Later at his office, Prakash had come straight to the point. He wanted to create a new post called general manager (public affairs) in the company. “With your excellent background in customer relations and connections with the dealer network, you are the ideal material for the job,” he said, “and I am offering it to you.” Srivastav was quick to react. “There is very little I can contribute in that kind of job,” she said. “I was in fact expecting to be promoted as vice president (home marketing).” Prakash said that the entire gamut of marketing functions would be looked after by Naik who would have boardroom responsibility for both domestic and export sales. “If you continue in marketing, you will have to be reporting to Naik which I thought may not be fair to you. In any case, we need someone who is strong in marketing to handle public affairs. Let me assure you that the new post I am offering will in no way diminish your importance in the company. You will in fact be reporting to me directly.”
“You are being unfair and your are diminishing my importance in the company,” reported Srivastav. “You know that I am a hardcore marketing professional and you also know I am the best. Why then am I being deprived of a rightful promotion in marketing? Tell me,” she asked pointedly, “would you have done this to a male colleague?”
“That is a hypothetical question,” said Prakash. “But I can’t think of any other slot for you in the restructuring plan I want to implement except what I am offering.”

“If the reason why you are asking me to handle this fancy public affairs business of yours,” said Srivastav, “is that you can’t think of any other slot for me, then I would have second thoughts about continuing to work for this company.”
“May I reiterate,” Said Prakash, “that I value your role and its is precisely because of this that I am delegating to you the work I have been personally handling so far? May I also state that I am upgrading the job not only because it is important but also because it should match your existing stature in the organization?”
“I need to think about this. I will let you know tomorrow,” said Srivastav and left the office.
What should she do?

Case 3: MECHANIST’S INDISCIPLINED BEHAVIOUR
Dinesh, a machine operator, worked as a mechanist for Ganesh, the supervisor. Ganesh told Dinesh to pick up some trash that had fallen from Dinesh’s work area, and Dinesh replied, “I won’t do the janitor’s work.”
Ganesh replied, “When you drop it, you pick it up”. Dinesh became angry and abusive, calling Ganesh a number of names in a loud voice and refusing to pick up the trash. All employees in the department heard Dinesh’s comments.
Ganesh had been trying for two weeks to get his employees to pick up trash in order to have cleaner workplace and prevent accidents. He talked to all employees in a weekly departmental meeting and to each employee individually at least once. He stated that he was following the instructions of the general manager. The only objection came from Dinesh.
Dinesh has been with the company for five years, and in this department for six months. Ganesh had spoken to him twice about excessive alcoholism, but otherwise his record was good. He was known to have quick temper.
This outburst by Dinesh hurt Ganesh badly. Ganesh told Dinesh to come to the office and suspended him for one day for insubordination and abusive language to a supervisor. The decision was within company policy, and similar behaviors had been punished in other departments.
After Dinesh left Ganesh’s office, Ganesh phoned the HR manager, reported what he had done, and said that he was sending a copy of the suspension order for Dinesh’s file.

Questions:
1. How would you rate Dinesh’s behaviour? What method of appraisal would you use?
2. Do you assess any training needs of employees? If yes, what inputs should be embodied in the training programme?

Case 4: RISE AND FALL
Jagannath (Jaggu to his friends) is an over ambitious young man. For him ends justify means.
With a diploma in engineering. Jaggu joined, in 1977, a Bangalore-based company as a Technical Assistant. He got himself enrolled as a student in an evening college and obtained his degree in engineering in 1982. Recognizing as Engineer-Sales in 1984.
Jaggu excelled himself in the new role and became the blue-eyed boy of the management. Promotions came to him in quick succession. He was made Manager-Sales in 1986 and Senior Manager-Marketing in 1988.
Jaggu did not forget his academic pursuits. After being promoted as Engineer-Sales, he joined an MBA (part-time) programme. After completing MBA, Jaggu became a Ph.D. scholar and obtained his doctoral degree in 1989.
Functioning as Senior Manger-Marketing, Jaggu eyed on things beyond his jurisdiction. He started complaining against Suresh the Section Head and Prahalad the Unit Chief (both production) with Ravi, the EVP (Executive – Vice President). The complaints included delay in executing orders, poor quality and customer rejections. Most of the complaints were concocted.
Ravi was convinced and requested Jaggu to head the production section so that things could be straightened up there. Jaggu became the Section head and Suresh was shifted to sales.
Jaggu started spreading his wings. He prevailed upon Ravi and got sales and quality under his control, in addition to production. Suresh, an equal in status, was now subordinated to Jaggu. Success had gone to Jaggu’s head. He had everything going in his favor-position, power, money, and qualification. He divided workers and used them as pawns. He ignored Prahalad and established direct link with Ravi. Unable to bear the humiliation, Prahalad quit the company. Jaggu was promoted as General Manager. He became a megalomaniac.
Things had to end at some point. It happened in Jaggu’s life too. There were complaints against him. He had inducted his brother – in – law, Ganesh, as an engineer. Ganesh was by nature corrupt. He stole copper worth Rs. 5 lakh and was suspended. Jaggu tried to defend Ganesh but failed in his effort. Corruption charges were also leveled against Jaggu who was reported to have made nearly Rs. 20 lakh for himself.
On the new-year day of 1993, Jaggu was reverted back to his old position- sales. Suresh was promoted and was asked to head production. Roles got reversed. Suresh became boss to Jaggu.
Unable to swallow the insult, Jaggu put in his papers.
Back home, Jaggu started his own consultancy claiming himself as an authority in quality management. He poached on his previous company and picked up two best brains in quality.
Fro 1977 to 1993, Jaggu’s career graph had a steep rise and a sudden fall. Whether there would be another hump in the curve is a big question.

Questions:
1. Bring out the principles of promotion that were employed in promoting Jaggu.
2. What would you do if you were (i) Suresh, (ii) Prahalad or (iii) Ravi?
3. Bring out the ethical issues involved in Jaggu’s behaviour.


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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.
a) A maximum of 10 percent reduction in sales volume will take place.
b) 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 :
(a) 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.

(b) 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.
(c) 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:
a. Works office costs on the basis of direct labour hours.
b. Maintenance costs on the basis of book value of plant and machinery.
c. 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 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.

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 ever¬growing 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 ND¬YAG 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 world¬class 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 Mercedes¬Benz, 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.

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 tie¬up 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 geographically¬dispersed 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.

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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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?

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

3. 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?

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

3. 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?

2. 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?

3. Describe how the Conrads could use market controls plans and implement their expansion.


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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.
a) A maximum of 10 percent reduction in sales volume will take place.
b) 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 :
(a) 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.

(b) 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.
(c) 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:
a. Works office costs on the basis of direct labour hours.
b. Maintenance costs on the basis of book value of plant and machinery.
c. 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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BUSINESS LAW

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.

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Note: Solve any 4 Cases Study’s

CASE: I Conceptualise and Get Sacked

HSS Ltd. is a leader in high-end textiles having headquarters in Bangalore.
The company records a turnover of Rs 1,000 cr. Plus a year. A year back, HSS set up a unit at Hassan (250 km away from Bangalore) to spin home textiles. The firm hired Maniyam as GM-HR and asked him to operationalise the Hassan unit.
Maniyam has a vision. Being a firm believer in affirmative actions, he plans to reach out to the rural areas and tap the potentials of teenaged girls with plus two educational background. Having completed their 12th standard, these girls are sitting at homes, idling their time, watching TV serials endlessly and probably dreaming about their marriages. Junior colleges are located in their respective villages and it is easy for these girls to get enrolled in them. But degree colleges are not nearby. The nearest degree college is minimum 10 km and no parents dare send their daughters on such long distances and that too for obtaining degrees, which would not guarantee them jobs but could make searching for suitable boys highly difficult.
These are the girls to whom Maniyam wants to reach out. How to go about hiring 1500 people from a large number who can be hired? And Karnataka is a big state with 27 districts. The GM-HR studies the geography of all the 27 districts and zeroes in on nine of them known for backwardness and industriousness.
Maniyam then thinks of the principals of Junior Colleges in all the nine districts as contact persons to identify potential candidates. This route is sure to ensure desirability and authenticity of the candidates. The girls are raw hands. Except the little educational background, they know nothing else. They need to be trained. Maniyam plans to set up a training centre at Hassan with hostel facilities for new hires. He even hires Anil, an MBA from UK, to head the training centre.
All is set. It is bright day in October 2006. MD and the newly hired VP-HR came to Hassan from Bangalore. 50 principals from different parts of the nine districts also came on invitation from Maniyam and Anil. Discussions, involving all, go on upto 2 PM. At that time, MD and VP-HR ask Maniyam to meet them at the guest house to discuss some confidential matter.
In this meeting, Maniyam is told that his style of functioning does not jell with the culture of HSS. He gets the shock of life. He responds on expected by submitting his papers.
Back in his room, Maniyam wonders what has gone wrong. Probably, the VP-HR being the same age as he is, is feeling jealous and insecure since the MD has all appreciation for the concept and the way things are happening. Maniyam does not have regrets. On the contrary he is happy that his concept is being followed though he has been sacked. After all, HSS has already hired 500 girls. With Rs 3,000 plus a month each, these girls and their parents now find it easy to find suitable boys.

Question:

1. What mad the MD change his mind and go against Maniyam? What role might the VP-HR have played in the episode?

2. If you were Maniyam, what would you do?

CASE: II A Tale of Twists and Turns

Rudely shaken, Vijay came home in the evening. He was not in a mood to talk to his wife. Bolted inside, he sat in his room, lit a cigarette, and brooded over his experience with a company he loved most.
Vijay, an M.Com and an ICWA, joined the finance department of a Bangalore-based electric company (Unit 1), which boasts of an annual turnover of Rs. 400 crores. He is smart, intelligent, but conscientious. He introduced several new systems in record-keeping and was responsible for cost reduction in several areas. Being a loner, Vijay developed few friends in and outside the organization. He also missed promotions four times though he richly deserved them.
G.M. Finance saw to it that Vijay was shifted to Unit 2 where he was posted in purchasing. Though purchasing was not his cup of tea, Vijay went into it whole hog, streamlined the purchasing function, and introduced new systems, particularly in vendor development. Being honest himself, Vijay ensured that nobody else made money through questionable means.
After two years in purchasing, Vijay was shifted to stores. From finance to purchasing to stores was too much for Vijay to swallow.
He burst out before the unit head, and unable to control his anger, Vijay put in his papers too. The unit head was aghast at this development but did nothing to console Vijay. He forwarded the papers to the V.P. Finance, Unit 1.
The V.P. Finance called in Vijay, heard him for a couple of hours, advised him not to lose heart, assured him that his interests would be taken care of and requested him to resume duties in purchasing Unit 2. Vijay was also assured that no action would be taken on the papers he had put in.
Six months passed by. Then came the time to effect promotions. The list of promotees was announced and to his dismay, Vijay found that his name was missing. Angered, Vijay met the unit head who coolly told Vijay that he could collect his dues and pack off to his house for good. It was great betrayal for Vijay.

Question:

1. What should Vijay do?

CASE: III Mechanist’s Indisciplined Behaviour

Dinesh, a machine operator, worked as a mechanist for Ganesh, the supervisor. Ganesh told Dinesh to pick up some trash that had fallen from Dinesh’s work area, and Dinesh replied, “I won’t do the janitor’s work.”
Ganesh replied, “when you drop it, you pick it up”. Dinesh became angry and abusive, calling Ganesh a number of names in a loud voice and refusing to pick up the trash. All employees in the department heard Dinesh’s comments.
Ganesh had been trying for two weeks to get his employees to pick up trash in order to have cleaner workplace and prevent accidents. He talked to all employees in a weekly departmental meeting and to each employee individually at least once. He stated that he was following the instructions of the general manager. The only objection came from Dinesh.
Dinesh has been with the company for five years, and in this department for six months. Ganesh had spoken to him twice about excessive alcoholism, but otherwise his record was good. He was known to have quick temper.
This outburst by Dinesh hurt Ganesh badly, Ganesh told Dinesh to come to the office and suspended him for one day for insubordination and abusive language to a supervisor. The decision was within company policy, and similar behaviours had been punished in other departments.
After Dinesh left Ganesh’s office, Ganesh phoned the HR manager, reported what he had done, and said that he was sending a copy of the suspension order for Dinesh’s file.

Question:

1. How would you rate Dinesh’s behaviour? What method of appraisal would you use? Why?

2. Do you assess any training needs of employees? If yes, what inputs should be embodied in the training programme?

CASE: IV A Case of Misunderstood Message

Indane Biscuits is located in an industrial area. The biscuit factory employs labour on a daily basis. The management does not follow statutory regulations, and are able to get away with violations by keeping the concerned inspectors in good books.
The factory has a designated room to which employees are periodically called either to hire or to fire.
On the National Safety Day, the Industries Association, of which Indane Biscuits is a member, decided to celebrate collectively at a central place. Each of the member was given a specific task. The Personnel Manager, Indane Biscuits, desired to consult his supervisors and to inform everybody through them about the safety day celebrations. He sent a memo requesting them to be present in the room meant for hiring and firing. As soon as the supervisors read the memo, they all got panicky thinking that now it was their turn to get fired. They started having ‘hush-hush’ consultations. The workers also learnt about it, and since they had a lot of scores to settle with the management they extended their sympathy and support to the supervisors. As a consequence, everybody struck work and the factory came to a grinding halt.
In the meantime, the personnel manager was unaware of the developments and when he came to know of it he went immediately and tried to convince the supervisors about the purpose of inviting them and the reason why that particular room was chosen. To be fair to the Personnel Manager, he selected the room because no other room was available. But the supervisors and the workers were in no mood to listen.
The Managing Director, who rushed to the factory on hearing about the strike, also couldn’t convince the workers.
The matter was referred to the labour department. The enquiry that followed resulted in all irregularities of the factory getting exposed and imposition of heavy penalties. The Personnel Manager was sacked. The factory opened after prolonged negotiations and settlements.

Question:

1. In the case of the Indane Biscuits, bring out the importance of ‘context’ and ‘credibility’ in communication.
2. List the direct and indirect causes for the escalation of tension at Indane Biscuits.
3. If you were the Personnel Manager what would you do?

CASE: V Rise and Fall

Jagannath (Jaggu to his friends) is an over ambitious young man. For him ends justify means.
With a diploma in engineering. Jaggu joined, in 1977, a Bangalore-based company as a Technical Assistant. He got himself enrolled as a student in a evening college and obtained his degree in engineering in 1982. Recognising his improved qualification, Jaggu was promoted as Engineer-Sales in 1984.
Jaggu excelled himself in the new role and became the blue-eyed boy of the management. Promotions came to him in quick succession. He was made Manager-Sales in 1986 and Senior Manager-Marketing in 1988.
Jaggu did not forget his academic pursuits. After being promoted as Engineer-Sales, he joined an MBA (part-time) programme. After completing MBA, Jaggu became a Ph.D. scholar and obtained his doctoral degree in 1989.
Functioning as Senior Manager-Marketing, Jaggu eyed on things beyond his jurisdiction. He started complaining Suresh—the Section Head and Phahalad the Unit Chief (both production) with Ravi, the EVP (Executive-Vice President). The complaints included delay in executing orders, poor quality and customer rejections. Most of the complaints were concocted.
Ravi was convinced and requested Jaggu to head the production section so that things could be straightened up there. Jaggu became the Section head and Suresh was shifted to sales.
Jaggu started spreading wings. He prevailed upon Ravi and got sales and quality under his control, in addition to production. Suresh, an equal in status, was now subordinated to Jaggu. Success had gone to Jaggu’s head. He had everything going in his favour—position, power, money and qualification. He divided workers and used them as pawns. He ignored Prahalad and established direct link with Ravi. Unable to bear the humiliation, Prahalad quit the company. Jaggu was promoted as General Manager. He became a megalomaniac.
Things had to end at some point. It happened in Jaggu’s life too. There were complaints against him. He had inducted his brother-in-law, Ganesh, as an engineer. Ganesh was by nature corrupt. He stole copper worth Rs.5 lakh and was suspended. Jaggu tried to defend Ganesh but failed in his effort. Corruption charges were also leveled against Jaggu who was reported to have made nearly Rs.20 lakh himself.
On the new-year day of 1993, Jaggu was reverted to his old position—sales. Suresh was promoted and was asked to head production. Roles got reversed. Suresh became the boss to Jaggu.
Unable to swallow the insult, Jaggu put in his papers.
From 1977 to 1993, Jaggu’s career graph has a steep rise and sudden fall. Whether there would be another hump in the curve is a big question.

Question:

1. Bring out the principles of promotion that were employed in promoting Jaggu.

2. What would you do if you were (i) Suresh, (ii) Prahalad or (iii) Ravi?

3. Bring out the ethical issues involved in Jaggu’s behaviour.

CASE: VI Chairman and CEO Seeking a Solution and Finding It

Sitting on 50-plus year old ION Tyres, the Kolkata-based tyres and tubes manufacturing company with a turnover of more than Rs.1,000 crore, both A.K. Mathur, and Raman Kumar, the CEO are searching for solutions to problems which their company started unfolding.
Financial performance of ION Tyres, is poor as reflected in its falling PBT. Performance gap between the top performer in tyres and tubes and ION Tyres ranges from 4 per cent to 5 per cent. The company has aging managerial people and equally old plant and equipment. High cost of production keeps the company in a disadvantaged position. “Boss is always right” culture has permeated everywhere. Common thread binding all the departments is missing. Each department is a stand alone entity.
There are positives nevertheless. ION Tyres and tubes are famous world-wide for durability, and superior quality. The company offers a wide range of bias tyres and tubes catering to all users segments like heavy and light commercial vehicles, motorbikes, scooters, and autos. The firm has state-of-the-art radial plant. The client list of ION comprises several big guns in Indian corporate sector. Tata Motors, Hero Honda, TVS Motors, Mahindra and Mahindra, L&T, Eicher, Swaraj Mazda, Maruti Udyog and Bajaj are the regularly buying ION’s tyres and tubes.
ION seems to have everything going in its favour. It is the market leader in the Indian market enjoying 19 per cent of the market share; manufactures 5.6 m tyres per year, has a network of 50 regional offices with over 4,000 dealers and 180 C&F agents.
Suddenly both Chairman and CEO have realised that there are too many road blocks ahead of them and the journey to be rough and bumpy.
Realisation dawned on Mathur and Raman Kumar way back in 2001 when they both attended a two-day seminar on “Enhancing Organisational Capability through Balanced Scorecard” organised by CII at Kolkotta. The duo had personal talk with Sanjeev Kumar, the then Chairman of CII. They are now convinced that Balanced Score card is ideal performance assessment tool that could be used in ION with greater benefits.
Mathur and Raman Kumar acted fast. They soon organised a workshop on “Balanced Score” to educate in-house managers about the concept and the procedural aspects of its implementation. There was initial resistance to accept the scorecard as the managers felt that they were already burdened since they were busy implementing other quality improvement initiatives. Deliberations in the workshop changed them. They are now convinced and enthusiastic about the positives of the scorecard. They are ready to implement the system.
A two member task force was constituted comprising Director—HRD and G.M.—Strategy and Planning. The task force travelled to all three factories as well as zonal headquarters to unfold the implementation of scorecard. The scorecard principles were implemented successfully from November 2002 and completed by March 2003. Figures 1 to 4 show the scorecards adopted by ION Tyres.

Financial
“To succeed financially how should we appear to our shareholder Objectives Measure Target Initiatives
To achieve turnover of Rs.1850 crs by FY05 • Sales turnover
• PBIDT • To achieve turnover of Rs.1850 crs by FY05
• PBIDT of Rs.150 crs (FY05)
• Decrease in conversion cost from Rs.25 to Rs.21/kg in Bhopal plant and Rs.25/kg in Mysore plant • Develop acceptable 1000-20 lug tyres
• Increasing number of sales offices from 180 to 220
• 7 day work week to be introduced at Bhopal plant
• Improve fuel wastage and ensure lower power
• VP Technology and MD to initiate technology tie-ups

Fig. 1

Customer
“To achieve our vision, how should we appear to out customers” Objectives Measure Target Initiatives
Improvement in customer satisfaction • Customer satisfaction survey (by external agency) • To improve from 65% to 70%
• Customer engagement at 30% • Claim settlement to be reduced from 8 to 2 days
• Improvement of casing value of used tyres, atleast by 15%
• Cost per Kilometer of tyre comparable to competitors

Fig. 2

Outcomes of scorecard implementation have been very encouraging. PBT improved and the gap between ION Tyres and the toppers in the industry reduced by 50 per cent. A transparent and objective performance assessment system came to be kept in place. With inertia and the ennui being broken, both Mathur and Kumar felt galvanized and realised that the road ahead of them was no more bumpy and rough. Thus, solutions to the problems were found.

Learning and Growth
“To achieve our vision, how will we sustain our ability to change an improve” Objectives Measure Target Initiatives
Identification of “high-fliers”; Talents to be identified through development workshops • Job enrichment, job enlargement, job rotation
• Competency Assessment
• Potential Appraisals • Career planning for the High-Fliers (expected to be around 30 managers)
• Successions planning for all key positions
• 5 manday’s training/manager/year • Move people within same functions, in the first two years and at the year two move them to another function
• Variable pay component in the ration 1:4 for the “high-fliers”
• Non-financial rewards
• Felicitation by company chairman in presence of family members for recognizing extraordinary contributions

Fig. 3

Internal Business Processes
“To satisfy our shareholders and customers, what business processes must we excel at” Objectives Measure Target Initiatives
Introduction of new products in the commercial tyre segment
Reduction of development time
Quarterly reconciliation of accounts receivables from dealers
Annual increases on-time to employees • Introduction of 3-4 new products per year in commercial tyre segment
• Reduction of development time from 18 months to 6 months
• Achieve 100% reconciliation
• Annual increases by on time by 1st July • Introduction of 3-4 new products per year in commercial tyre segment
• Reduction of development time from 18 months to 6 months
• Achieve 100% reconciliation
• Annual increases by on time by 1st July • Regular quarterly review of performance
• KRA targets to be ready by 1st April
• European certification for tyres

Fig.4

Question:

1. Do you agree with the conclusion drawn at the end of the case that scorecard system has galvanised ION Tyres? In other words, does scorecard system deserve all the credit?

2. Will quality improvement initiatives clash with scorecard implementation? If yes, how to avoid the clashes?


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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?

2. 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?

2. 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?

2. 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?

2. 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
purchaser. Is this putting too heavy a burden on sellers?

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

Entrepreneurship

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?

2. 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?

3. 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?

2. 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?

3. 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?


MARKETING MANAGEMENT IIBMS ONGOING EXAM ANSWER PROVIDED

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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.

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

3. 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.

2. 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: 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.
a) A maximum of 10 percent reduction in sales volume will take place.
b) 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 :
(a) 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.

(b) 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.
(c) 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:
a. Works office costs on the basis of direct labour hours.
b. Maintenance costs on the basis of book value of plant and machinery.
c. 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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ATEMPT 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:
(a) Credit Administration Department (Transferred from Corporate Service Unit)
(b) Credit Department I and II (Transferred from Middle Market Banking Unit)
(c) 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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Attempt Any Four Case Studies

Case I-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, 1934. 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 the RBI is closely aligned with the economic and financial history of India. Most cen¬tral 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 tak¬ing 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 inde¬pendence, RBI gradually strengthened its institu¬tion-building capabilities and evolved in terms of functions from central banking to that of develop¬ment. There have been several attempts at reor-ganisation, 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 secur¬ing monetary stability in India and generally to op-erate 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 poli-cies 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 de¬velop a sound and efficient financial system with monetary stability conducive to balanced and sus-tained growth of the Indian economy’. The corporate values 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;
2. Customer services for providing support and creation of positive relationship; and
3. 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 a 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 offers 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 as signed 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 II- WHAT LIES IN STORE FOR THE RETAILING INDUSTRY IN INDIA?*

India is not known as the ‘nation of shopkeepers’, yet it has as many as 5 million retail outlets of all shapes and sizes. Some other optimistic estimates “place the number at as high as 12 million. Whatever be the number, India can claim to have the highest number of retail outlets per capita in the world. But almost all of these are small outfits occupying an average of 500 square feet in size, managed by family members, having negligible investment in land and assets, paying little or no tax and known as the kirana dukaan (‘mom and pop’ stores in the U.S or the corner grocery stores in the U.K.). These outlets offer mainly food items and groceries—the staple of retailing in India. Customer contact is personal and one-on-one, often running through generations. There are a limited number of items offered! often sold on credit—the payment to be collected at the end of the month. The quality of items standard, with moderate pricing.
There is great hype about the growth and prospects of organised retailing industry in India. It must be noted, however, that organised retailing constitutes barely 2 per cent of the total retailing industry in India, the rest 98 percent being under the control of the unorganised, informal sector of’ kirana dukaans. Market research agencies and consultants come up with encouraging forecasts about this segment of the retailing industry. For instance, AT. Kearney’s Global Retail Development Index ranks 30 emerging countries on a 100- point scale. Its 2007-ranking places India at number one for the third consecutive year, with 92 points, fol¬lowed by Russia and China. The size of the organised retailing industry is estimated at US $8 billion and projected to grow at a compound annual growth rate of 40 per cent to US $22 billion by 2010. Overall, the Indian retailing industry is expected to grow from the current US $350 billion to US $427 billion by 2010 and US $635 billion by 2015.

The economic environment in the post-liberalisation period after 1991, has created several factors that have made this high growth of the organised retailing industry possible. India’s impressive economic growth rate of 9 per cent is the prime driver of increasing disposable incomes in the hands of the consumer. The growing size of the consuming class in India, in tandem with the entry and expansion of the organised sector players in recent years, has set the pace for corporate investment in retail business. Practically, every major Indian business group is looking for opportunities in the growing retailing industry. Among them are the big names in the Indian corporate sector such as the AV Birla group, Bharti, Godrej, ITC group, Mahindras, Reliance, Tatas and the Wadia group.
The international environment presently is replete with examples of the fast-paced growth of the retailing industry in many developing countries around the world. In the post-liberalisation period, there is more openness and awareness of the international developments among Indians. The ease of travel abroad and the exposure through television and Internet have increase the awareness of the urban Indian consumer to the convenience of modern shopping. The modern retail formats thus have gained acceptance in India. Carrefour, Tesco and Wal-Mart are the international players already operating in India, with several others like Euroset, Supervalue and Starbucks having plans to enter soon. These international companies bring to India the latest developments in the retailing industry and help to set up a benchmark for the domestic player.

The market environment is one of the most significant in terms of the growth and prospects of the retailing industry in India. In terms of geography, the reach of the organised retailing industry has been growing. In addition to the mega-cities of Mumbai and Delhi, cities such as Bangalore, Pune, Hyderabad, Kolkata and Chennai are also witnessing a boom in organised retail activity. Retailers are now trying to focus on smaller cities such as Nagpur, Indore, Chandigarh, Lucknow or Cochin. There are interesting possibilities regarding the re¬tail formats. Traditionally, street carts, pavement shops, kirana stores, public distribution systems, kiosks, weekly markets and such other formats unique to India, have been in existence for a long time. At present, most organised retail formers are imitations of those used abroad. These include hyper and supermarkets, convenience store, department stores and specialty chains. Among these formats, a notable trend has been the development of integrated retail-cum-entertainment centres and malls as opposed to stand-alone developments. Besides these, there are some attempts at indigenous formats aimed at the rural markets-such as those by ITC’s Choupal Sagar, DSCL’s Hairyali Kisaan Bazaar and Godrej group’s Godrej Aadhar. Pricing is an important issue in the retailing industry. Generally, the bulk buying yield lower costs of procurement for the big retailers—a part of which they pass on to the customer in the form of lower prices. In food retailing, for instance, there is a clear trend of low prices being the determining factor in purchase decisions by the cost-conscious Indian consumer. But, lower prices may not be a major issue with the higher-income groups that may place greater emphasis on the quality of products and retail service, store ambience and convenience of shopping. For the majority of Indian consumers however, price is likely to remain a significantly important issue in the purchase decision. Competition has already accelerated with many Indian business groups having entered or likely to enter this booming industry.
The political environment in India is ambiguous! in terms of its support to the organised retailing industry. This is obvious as the unorganised sector employs nearly 8per cent of the Indian population and is widely spread geographically. The whelming presence in terms of 98 per cent of the total retailing industry also is a significant political issue. In a democracy, the politics of numbers makes it imperative for the political class to adopt an ambiguous stand. In some cases, politicians have acted in favour of the unorganised sector by disallowing the setting up of large retail some states. Overall, however, there is ambiguity as there are several environmental trends in favor of the development of the organised retailing industry.
In the regulatory environment, there has gradual easing of the restrictions albeit at a slow pace, in view of the ambiguous political stance as indicated above. Interestingly, the retailing industry, is still not recognised as an industry in India, Foreign direct investment of up to 100 per cent is not permitted though it is possible for foreign players to enter through the routes of agreements, cash-and-carry wholesale trading and strategic licensing agreements. Another problem area is of the real estate laws at the level of state governments that are yet to be clear on the issue of allowing large stores. Restructuring of the tax structure for the retailing industry is another regulatory issue requiring governmental action. However, tariffs on imported consumer items have been gradually aligned to meet the prescribed WTO norms and reduction of import restrictions are likely to help the growing organised retailing industry.
The socio-cultural environment offers many interesting insights into the changing tastes and references of the urban and semi-urban Indian consumer. There is a large rural market consisting of nearly 720 million consumers, spread over more 600,000 villages. India’s consumers are young: 70 percent of the country’s citizens are low the age of 36 and half of those are under 18 years of age. These people have deep roots in the local culture and traditions, yet are eager to get connected with and know the outside world. According to a DSP Merrill Lynch report, the key factor providing a thrust to the retail boom in India the changing age profile of spenders. A group of seven million young Indians in their mid-twenties, learning over US$ 5000 per year, is emerging every year. This group constitutes people who are enthusiastic spenders and like to visit the new format retail outlets for the convenience and time saving they offer. Malls are also being perceived as just places for shopping, but for spending leisure time and as meeting places. There has been an emergence of a combination of the retail outlet and entertainment centres having multiplexes, with food courts and video game parlours.
But there are some pitfalls too. For instance, organised retailing in India has had to deal with the misconception among middle-class consumers that the modern retail formats being air conditioned, sophisticated places are bound to be more expensive.
The supplier environment probably offers the biggest constraint on the growth of the retailing industry in India. Reaching India’s consumers cost effectively is a distribution nightmare, owing to the sheer geographical size of the country and the presence of traditional, fragmented distribution and retailing networks and erratic logistics. For instance, the apparel segment that is one of the two top segments, the other being food, have had to invest in back-end processes to support supply chains. Supply chain management and merchandising practices are increasingly converging and apparel retailers are establishing collaborations with their vendors. Another area of concern is the severe shortage of skills in retailing. Human resource development for the retailing industry has picked up lately but may take time to fill the gap caused due to the shortage of personnel.
The technological environment for the organised retailing industry straddles many areas such as IT support to supply chain management, logistics, transportation and store operations. Some global retailers have demonstrated that an innovative use of technology can provide a substantial strategic advantage. The large number of store items, the diversity of sourcing and the gigantic effort required to coordinate actions in a large retail context is ideal for using IT as a support function. For instance, an innovative use of IT can help in a wide variety of functions such as quick information processing and timely decision-making, reduction in processing costs, real-time monitoring and control of opera¬tions, security of transactions and operations inte¬gration. The availability of supply chain management, customer relationship management an merchandising software can help much while performing activities such as ordering and tracking inventory items, warehousing, transportation and customer profiling.
Overall, the Indian scenario offers an interesting mix of possibilities and challenges. A successful model of large-scale retailing appropriate for the Indian context is yet to emerge. The modern retail formats accepted globally are in the process of implementation and their acceptability is yet to be established.

Questions:

1. Identify the opportunities and threats that the retailing industry in India offers to local and foreign companies.
2. Prepare an ETOP for a company interested in entering the retailing industry in India.

Case III -HELPAGE INDIA

The developments in medical sciences—the lowering of mortality rates and the increase in life expectancy—have ironically led to a situation where there are increasingly, a larger number of aged people in the society. The situation in most countries of the world is that the number of ageing people is increasing. India too, like other developing countries, experiences a rapid ageing of the population, with estimated 80 million aged people. Almost eight out of ten of these aged people live in rural areas.

The challenges that the elderly people in society face are many. For instance, a report in the Indian context indicates the following challenges:
 90% of senior citizens receive no social se¬curity or medical care.
 73% of senior citizens are illiterate and can only earn a livelihood through physical labour, which is possible only if they are healthy in their old age.
 80% of senior citizens live in rural areas with inadequate or inaccessible medical facilities; many are unable to access the medical facilities because of reduced mobility in the old age.
 55% of women over the age of 60 are widows with no means of support

The elderly people, or senior citizens, are the fastest growing segment of the Indian society. By 2025, the population of the elderly is expected to reach 177 million.

Unlike many developed countries, India does not have an effective security net for the elderly people. There have been sporadic attempts by governments at the central and state levels to pay old age pensions, but like most government schemes, there is a lot of leakage of funds and inefficiency. There is also a lack of post-retirement avenues for re-employment.
Socio-economic developments such as urbanization modernisation and globalisation have impacted the economic structure and led to an erosion of societal values and the weakening of social institutions such as the joint family. The changing mores of society have created a chasm between generations. The intergenerational differences have created a situation where the younger people are involved in education, career building and establishing themselves in life, ending up ignoring the needs of the elderly among them. The older generation is caught between a society which cares little for them and the absence of social security, leading them to a situation where they are left to fend for themselves. It is in this context that institutions such as HelpAge India play a positive role in society.

HelpAge India, established in 1978, is a secular, not-for-profit, non-governmental organisation, registered under the Societies Registration Act of 1860. Its mission is stated as ‘to work for the cause and care of the disadvantaged older persons and to improve their quality of life’. The three core values that guide HelpAge India’s work are rights, relief and resources. HelpAge India is one of the founder members of HelpAge International, a body of 51 nations representing the cause of the elderly at the United Nations. It is also a member of the International Federation on Ageing.
The organisation of HelpAge India consists of a head office at New Delhi, with four regional and thirty-three area offices situated all over India. The governing body of the organisation consists of ten distinguished people from different walks of life. Besides the governing body, there are three committees: the operations committee, the business development committee, and the audit committee. The CEO, Mr Mathew Cherian oversees the planning and implementation of policies and programmes, with the support of five electors. The regional directors are responsible for their own regions. The program division at the head office chooses the partner agencies to provide the services to the elderly people.

HelpAge India raises resources to perform three types of functions:
 Advocacy about policies for the elderly persons with the national and local governments
 Creating awareness in society about the concerns of the aged and promote better understanding of ageing issues
 Help the elderly persons become aware of their own rights so that they get their due and are able to play an active role in society

The major programmes undertaken by HelpAge India include mobile medicare units, ophthalmic care for performing cataract surgeries, Adopt-a-Gran, support to old-age homes, day care centres, income generation and disaster relief.

The business model of HelpAge India is based on revenue generation through grants and donations from international and national source. Nearly half of the donations come from international donors. About a fifth of the donors are individuals. The sources of contributions come from fundraising activities that include direct mail, school fundraising corporate fundraising, sale of greeting cards, acting as corporate agent for insurance, organizing event and establishing a shop-for-a-cause that sells gift made by disadvantaged people. A review report on the activities of HelpAge India enumerates its strong points as below:
 Wide Reach and Impact HelpAge India has been able to impact the lives of a large number of elderly people and their families by adopting a holistic approach that provide immediate relief as well as long-tern sustainable improvement.
 Effective Partnerships in Development HelpAge India has evolved as a development support agency through creating partner agencies, that is funded to implement the projects.
 High Degree of Charitable Commitment Typically non-profit organisations spend a loft; on overhead and administrative costs. But3 HelpAge India is able to put nearly eighty-five, per cent of the funds towards actual project implementation.
 Focus on Efficiency and Transparency The partner agencies are chosen carefully and monitored thoroughly. This results in increased efficiency and low overheads. Project implementation through partnerships increases efficiency and cuts down on 3overhead costs.
 Quality of Management The management; quality of HelpAge India is good and there are a lot of committed people. New employees are also trained to be sensitive to the mission of the organisation.

With a wide spread of activities and being a non-governmental organisation having limited funding, HelpAge India has adopted modern means of information technology and networking. Most of the HelpAge executives work in the field and have no direct access to the office network. They have to use e-mail in order to maintain contact with their regional or area offices. They use cyber-cafes or handheld devices for sending and receiving e-mails. HelpAge has installed a secure connection at an initial cost of Rs. 4 lakh and annual upgradation cost of Rs. 75,000 to access e-mail from anywhere, with a high level of security and protection of data and contents.

The nature of non-profit organisations demands certain requirements. Among these, transparency of operations and funds management is a major one. There are many NGOs that are accused or suspected of misappropriating funds for personal benefit. HelpAge India is conscious of this fact and gives high priority to information disclosure. The audited financial statements and the annual report are available on its website. The financial statements give a detailed account of the expenditure on individual projects. The expenses on travel and salaries of its employees and CEO are also mentioned. The individual donors are provided information regarding the use of the funds donated by them.

The functional approach at HelpAge India consists of developing projects based on the assessment of the needs of its target community rather than on implementing them directly. The implementation takes place through the partner agencies. Rather than outright grants, it supports income generation projects for the elderly people. The success of implementation critically depends on the identification and appointment of partner agencies. The officers of HelpAge India physically inspect the proposed agencies and check on their management to ensure that they are not family-run set-ups established for personal gains. HelpAge India works presently, with nearly 400 partner agencies. These include, for instance, about 150 charitable eye hospitals that act as partner agencies for the ophthalmic care programme.

HelpAge India with its slogan of ‘fighting isolation, poverty and neglect’ moves on its mission of providing ‘equal rights, dignity for elders’. It foresees its future activities in the area of rights based advocacy for a better life for the elderly people by bringing them into the mainstream of society rather than being marginalised to the fringes.

Questions
1. In your opinion, what is the distinctive competence of HelpAge India?
2. Prepare a strategic advantage profile for HelpAge India.

Case IV- BHARAT HEAVY ELECTRICALS LIMITED CONCENTRATES ON THE EQUIPMENT INDUSTRY

Bharat Heavy Electricals Limited (BHEL) is India’s largest engineering and manufacturing enterprise, operating in the energy sector, employing more than 42000 people. Established in 1956, it has established its presence in the heavy electrical equipments industry nationally as well as globally. BHEL is one of the navaratnas (lit. nine gems) among the public sector enterprises in India. Its vision is to be ‘a world class enterprise committed to enhancing stakeholder value’. Its mission statement is: ‘to be an Indian multinational engineering enterprise providing total business solutions through quality products, systems, and services in the fields of energy, industry, transportation, infrastructure, and other potential areas’.

BHEL is a huge organisation, manufacturing over 180 products categorised into 30 major product groups, catering to the core sectors of power generation and transmission, industry, transportation, telecommunications and renewable energy. It has 14 manufacturing divisions, four power sector regional centres, over 100 project sites, eight service centres and 18 regional offices. It acquires technology from abroad and develops its own technology at its research and development centres. The operations of BHEL are organised into three business sectors of power, industry and overseas business. Besides the business sector departments, there are the corporate functional departments of engineering and R&D, human resource development, finance and corporate planning and development.
BHEL’s turnover hit an all-time high of Rs. 18,739 crore, registering a growth of 29 per cent, while net profit increased by 44 per cent to touch Rs. 2,415 crore in 2006-07. The company has a comfortable order book position of Rs. 55,000 crore for 2007-8 and beyond. The company booked ex¬port orders worth Rs. 1,903 crore in 2006-07. It is looking toward to US$10 billion exports by 2012 from the present US$ 4 billion. The capital investment plan of BHEL for the 11th National Plan period envisages an investment of Rs 3,200 crore, mainly to enhance its manufacturing capacity from 10000 MW to 15000 MW.

BHEL has formulated a five-year strategic plan with the aim of achieving a sustainable profitable growth, targeting at a turnover of Rs. 45,000 crore by 2012. The strategy is driven by a combination of organic and inorganic growth. Organic growth is planned through capacity and capability enhancement, designed to leverage the company’s core are s of power, supported by the industry, transmission, exports and spares and services businesses. For the purpose of inorganic growth, BHEL plans to pursue mergers and acquisition and joint ventures and grow operations both in domestic and export markets.

BHEL is involved in several strategic business initiatives at present for internationalisation. These include targeting the export markets, positioning itself as a reputed engineering, procurement and construction (EPC) contractor globally, and looking for opportunities for overseas joint ventures.

An example of a concentration strategy of BHEL in the power sector is the joint venture with another public Enterprise, National Thermal Power Corporation, to perform EPC activities in the power sector. It is to be noted that NTPC as a power generation utility and BHEL as an EPC contractor have worked together on several domestic projects earlier, but without a forma partnership. BHEL also has join1 ventures with GE of the US and Siemens AG of Germany. Other strategic initiatives include management contract for Bharat Pumps and Compressors Ltd. and a proposed takeover of Bharat Heavy Plates and Vessels, both being sister publics enterprises.

Despite its impressive performance, BHEL is unable to fulfil the requirements for power equipment in the country. The demand for power has been exceeding the growth and availability. There are serious concerns about energy shortages owing to inadequate generation and transmission, as well as inefficiencies in the power sector. Since this sector is a major part of the national infrastructure, problems in the fibwer sector affect the overall economic growth the country as well as its attractiveness as a destination for foreign investments. BHEL also faces stiff competition from international players in the power equipment sector, mainly of Korean; and Chinese origin. There seems to be an undercurrent of conflict between the two governmental ministries of power and heavy industries. BHEL operates administratively under the Ministry of Heavy Industries, but supplies mainly to the power sector that is under the Ministry of Power. There has been talk of establishing another power equipment company as a part of the NTPC for some time, with the purpose of lessening the burden on BHEL.

Questions
1. BHEL is mainly formulating and implementing concentration strategies nationally as well as globally, in the power equipment sector. Do you think it should broaden the scope of its strategies to include integration or diversification? Why?
2. Suppose BHEL plans to diversify its business. What areas should it diversify into? Give reasons to justify your choice.

Case V -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 ad 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 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 aggres¬sive 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 on its core competence in its businesses 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 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 crankshafts, front axle beams, steering knuckles, camshafts, 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 crore businesses to maximize 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 3 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 not 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 percent acquisition of RSB consult 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 internationalization by the Kalyani Group? Discuss.

2. Which type of international strategy is Kalyani Group adopting? Explain.

Case VI -CORPORATE RESTRUCTURING OF THE INDIAN REAILWAYS

On 16 April 1853, a locomotive pulling 14 carriages and 400 people left what was then Bombay, to a 21-gun salute, and shuttled to Thane, 34 km away. The journey took about 75 minutes. That was the way Indian Railways was born. Some estimates consider the Indian Railways as the world’s largest commercial enterprise in terms of the number of employees.

Indian Railways is a departmental undertaking of the Government of India. The Central Ministry of Railways oversees the policy making for the Indian Railways and is headed by a union minister. There are some ministers of state holding specific responsibilities. The administration of Indian Railways is done through the Railway Board headed by a chairman and having six members.

There are 16 railway zones, each headed by a General Manager who reports to the Railway Board. The zones are divided into divisions under the control of divisional railway managers. There are 44 functional departments, including those of engineering, mechanical, electrical, signal and telecommunications, accounts, personnel and operating, commercial and safety branches. At the operational levels, there are station superintendents and station masters who control individual railway stations. Apart from the Indian Railways, the Ministry also has a number of public sector enterprises under its administrative control. There is an autonomous organization called the Centre for Railway information System, dedicated to developing specialized application software for the railways.

The financial matters of the Indian Railways are dealt with through an elaborate system involving the parliament of India down to the accounts departments at the divisional headquarters. The Railway budget is presented every year and passed by both houses of the parliament. The budget is based on the expected traffic and the projected tariff and capital and revenue expenditure. Dividends are paid to the Central government on the capital invested. Indian Railways is subjected to the same audit control as other government ministries and departments.

The Indian Railways is Asia’s largest and the world’s second largest rail network under a single management. It is a multi-gauge, multi-traction system covering over 60,000 route kilometers, with 300 railways yards and 700 repair shops and covers most of the country’s vast geographical spread. The rolling stock fleet of the Indian Railways comprises 7,566 locomotives, 37,840 coaches and 222 million freight wagons. With a workforce of around 1.4 million, it runs more than 11,000 trains daily.

The Indian Railways has evolved into a vertically integrated organization. Various units are engaged in designing, manufacturing and maintaining the rolling stock, running institutions such as hospitals, schools, housing estates and hotels and catering. It issues licenses to a large number of uniformed porters and authorized hawkers. These are only some of the major activities that the Indian Railways perform.
There are many problems facing the Indian Railways. Among these, the major ones are:
• Cross-subsidisation of passenger and freight tariff
• High energy and fuel costs
• High accident rate
• Antiquated communication, safety and signaling equipment.
• Ageing infrastructure including rail tracks and bridges.
• High establishment and personnel costs.
• Emerging competition from low-cost airlines.

Many areas of the Indian Railways are in need of improvement. Several actions have been taken over the years that include:
• Upgrading technology, especially the application of IT
• Improving the quality of railway services
• Production of better quality locomotives and
• Introduction of fast long-distance trains
• Addition of value-added services such as introducing banking facilities on trains.

A Status Paper on the Indian Railways was issued May 1998, followed by another in 2002. These status papers underlined issues confronting the Indian Railways and possible options. The Status Paper-1998, for instance, focused on the strategies related to honing the marketing capability for bulk and non-bulk freight and passenger services, reducing operating costs, evolving a financial strategy, bringing about cultural change and addressed issues of concern in areas such as research and development and IT. Similarly, the status paper of 2002 presented several issues and posed several questions related to its functioning.

A report published in 2001 by a government appointed group chaired by Rakesh Mohan, now the deputy governor of Reserve Bank of India, called for a radical restructuring of the Indian Railways. The main thrust of its recommendations was on shedding the non-core activities such as catering and manufacturing not related to its main activities of passenger and freight transportation and becoming a focussed organisation.

Freight has been the key revenue earner for Indian Railways. The target for 2007-08 is at 785 million tonnes. The market share of freight traffic had been on the decline over the last few decades, owing to improvements in road infrastructure. To arrest this decline, it became imperative to: enhance customer responsiveness through cargo visibility and information dissemination, reduce operating expenses and improve asset utilisation. In order to achieve these aims, the Indian Railways installed a computerised Freight Operations Information System, with the assistance of CMC Limited.

There is much hype around the financial turnaround of the Indian Railways. Here, the major achievements have been in the areas of improved freight and passenger earnings, gross traffic revenue, higher cash surplus, higher net revenue, better operating ratio and return on capital. For instance, the Indian Railways is proud of its achievements in terms of an above 78 per cent operating ratio and a 20 per cent return on capital in 2006- 2007.

Overall, the Indian Railways have benefited from several managerial initiatives taken over the recent past, such as corporatisation of many of its activities and hiving off, separate companies to perform functions performed in-house earlier. For example, the Indian Railways Catering and Tourism Corporation took over the non-core activities of catering while Rail Tel Corporation was formed to create the optic fibre network for communications. Another subtle manner of change seems to be the creeping nature of privatisation of non-core services and adoption of modern business methods of marketing and human resource management to improve operational efficiency. These seem to be working though critics say that the increase in the general economic activity and overloading of wagons is the cause of this improved short-term performance.

Certain inherent issues have become a part of the Indian Railways heritage. Among these are: overdependence on freight business, much of freight business arising from a select few commodities, passenger traffic being concentrated in low-yield suburban traffic and high density of traffic in the certain areas coupled with under-utilised assets and facilities in others. The fundamental issues of the dilemma whether Indian Railways is an organisation in the nature of a public utility, designed to discharge social obligations, or is it a commercial orgarnisation for which financial performance and operational efficiency are imperative still remain.

Questions
1. Comment on the steps taken to reduce the extent of vertical integration at the Indian Railways. Suggest a few more measures that could be taken.

2. Discuss the measures taken for corporate restructuring of the Indian Railways, in your opinion, are these adequate for dealing with the problems faced? Why?

3. Propose the basic elements of a corporate turnaround for the Indian Railways.


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Note : Attempt only 8 Questions

1. A company is deciding to choose between two mutually exclusive projects A and B. Project A requires an initial investment of Rs. 3,00,000 and is expected to generate cash flow of Rs. 1,50,000 per annum for the 3 years of its life. Project B, on the other hand, requires 3,40,000, has a life of 6 years and would generate Rs., 1,00,000 every year. Which proposal should be accepted?

2. A repairman is to be hired by a company to repair machines that break down following a Poisson process, with an average rate of four per hour. The cost of non-productive machine time is Rs 90 per hour. The company has the option of choosing either a fast or a slow repairman. The fast repairman charges Rs 70 per hour and will repair machines at an average rate of 7 per hour, while the slow repairman charges Rs 50 per hour and will repair machines at an average rate of 6 per hour. Which repairman should be hired?
3. A company has Rs 6,00,000 to invest, and a total of three investments are available to it. If xj rupees (in lakhs) are invested j, then a net present value (in lakhs of rupees) of vj(xj) is obtained, where vj(xj)’s are given below:
V1(x1) = 7 x1 + 2
V2(x2) = 3 x2 + 7
V3(x3) = 4 x3 + 5
The amount placed in each investment has to be in multiples of Rs 1 lakh only. How should the company invest Rs 6,00,000 in order to maximise the net present value obtained from the investments?
4. An investor has Rs 10,000 to invest and she has an opportunity to invest the amount in either of two investments A or B, at the beginning of each of the following three years. The investment A results either in a total loss of the amount invested with probability 0.2. The conditions allow at the most one investment each year and she can invest only Rs 10,000 each time and any additional funds accumulated are left idle. Using dynamic programming, find the investment policy that maximizes the expected amount of money will have after three years.
5. A company manufacturers around 150 mopeds. The daily production varies from 146 to 154 depending upon the availability of raw materials and other working conditions.

Production per day Probability
146 0.04
147 0.09
148 0.12
149 0.14
150 0.11
151 0.10
152 0.20
153 0.12
154 0.08
The finished mopeds are transported in a specially arranged lorry accommodating only 150 mopeds. Using following random numbers 80,81,76,74,64,43,18,26,10,12,65,68,69,61,57, stimulate the process to find out:
(i) What will be the average number of mopeds waiting in the factory?
(ii) What will be the average number of empty spaces on the lorry?
6. The XYZ company is considering whether or not to invest Rs 1,20,000 in an investment proposal to add a new product to its existing range. The management forecasts that the new plant will generate incremental net cash flows, each of which is assumed to be normally distributed random variable with following parameters.

Year Expected Value (Rs) Standard Deviation (Rs)
1 44,000 5,800
2 40,000 5,600
3 40,000 6,000
4 35,000 5,000
5 30,000 4,000
Using the discount rate of 10 % determine:
(a) the mean of the present value distribution and its standard deviation,
(b) the probability that the investment shall have a negative NPV,
(c) whether the project should be undertaken if the management has laid down that no project be undertaken unless it has at least 70 % chance of giving an NPV at least equal to Rs 25,000.
7. Differentiate marginal and average revenue.
8. What are reasons for conducting business research?
9. Explain the consumer surplus and producer surplus with an example.
10. The company had declared that the sales of Horlicks has increased by 10% after the advertisement. You assigned to measure the impact of advertisement among horlics users. Try to develop the questionnaire for measuring impact of advertisement on horlicks among the users.


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Attempt Only Eight Question:-
1. How would operations strategy for a service industry be different if any from that for a manufacturing industry ? (Its an example & explain)
2. Consider the following two mutually exclusive projects. The net cash flows are given below:
YEAR NET CASH FLOWS FROM PROJECT A NET CASH FLOWS FROM PROJECT B
0 – Rs. 1,00,000 – Rs. 1,00,000/-
1 + Rs. 30,000 + Rs. 15,000/-
2 + Rs. 35,000 + Rs. 17,500/-
3 + Rs. 40,000 + Rs. 20,000/-
4 + Rs. 45,000 + Rs. 22,500/-
5 + Rs. 25,000/-
6 + Rs. 27,500/-
7 + Rs. 30,000/-
8 + Rs. 32,500/-

If the desired rate of return is 10% which project should be chosen?
3. What are the levels of aggregation in forecasting for a manufacturing organization? How should this hierarchy of forecasts be linked and used ?
4. How would forecasting be useful for operations in a BPO (Business processes outsourcing) unit ? What factors may be important for this industry ? Discuss .
5. A good work study should be followed by good supervision for getting good results. Explain with an example.
6. What is job evaluation ? Can it be alternatively used as job ranking ? How does one ensure that job evaluation evaluates the job and not the man ? Explain with examples ?
7. What is the impact of technology on jobs ? What are the similarities between job enlargement & job rotation ? Discuss the importance of training in the content of job redesign ? Explain with examples ?
8. What is an internet connectivity ? How is it important in to days business would with respect to materials requirement planning & purchasing. Explain with examples ?
9. Would a project management organization be different from an organization for regular manufacturing in what ways. Examples.
10. How project evaluation different from project appraisal? Explain with examples.


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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.

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

3. 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 behaviour
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.

2. 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 Ant Four Case Study

CASE – 1 Power for All: Myth or Reality?

The power sector in India is undergoing rapid changes especially for the last few years. The Government has promised “Power for All” by 2012. The growth of power sector in India has been consistent. From a humble beginning of 1,700 MW in 1950-51 to 1,18,400 MW in 2004-05, the development of power sector has traveled a long way. There has been quantum rise in thermal power generation in 1970-71, 1980-81 and 1990-91 and greater rise in hydro electric power production since 2000-01. The government is promoting clean source of energy, i.e. hydro electric power. The sectoral outlay for power in successive five year plans has consistently been increasing. However, it has increased at a faster rate from sixth five year plan, i.e., 1980-85 onwards.
The following table gives the pattern of consumption of electricity on the basis of consumer segments.

Pattern of Electricity Consumption (Utilities)
(Percentage)
year Domestic Commercial Industry traction agriculture others
1950-51 12.6 7.5 62.6 7.4 3.9 4.0
2000-01 23.9 7.1 34 2.6 26.8 5.6
2004-05 24.8 8.1 35.6 2.5 22.9 6.1

However, industry has shown decreasing trend of electricity consumption whereas irrigation has shown increasing trend, which is a positive sign for our agriculture. The ‘commercial’ and ‘traction’ sectors have no conspicuous fluctuation pattern in their electricity consumption.
The State of Uttar Pradesh is the largest in India. It has a population of over 166 million (Census 2001). If Uttar Pradesh were to be a country, it would be the 7th largest country in the world. In some of the social and income indicators, the State has made rapid progress. It is one of the largest software exporting states in the country and has led India’s BPO (Business Process Outsourcing) boom in the last few years. The growth rate in software export of U.P. is the highest among all States (GOUP Policy 2003). The State has a cross-cultural milieu of population with diversity of customers, markets and buyers. It has satellite towns like Noida, Ghaziabad, Greater Noida, etc. that are emerging as new industrial hubs; therefore there is growing demand for infrastructure facilities like power, transport, health, education, road, shopping malls, multiplexes, etc. in these cities.
The power situation in the State of Uttar Pradesh is that of deficit, i.e., demand exceeds the supply and generation of power. Uttar Pradesh has electricity generation capacity of 4000 MW against demand of 6500 MW of power. Recognizing the demand-supply gap at the national level, the Government of India through Electricity Act 2003 is implementing a ‘Power-for-All’ plan, under which 1,00,000 MW of new installed generating capacity is to be added by the year 2012.
Even with the present electrification levels, the additional capacity requirement for supplying continuous power in the State of Uttar Pradesh is 1,300 MW. For universal access the capacity requirements would be over 11,250 MW that would shoot up to over 14,200 MW, if U.P. (Uttar Pradesh) were to attain the national per capita consumption. Compared to this requirement, the availability in 2009 would be just 8,650 MW as per present estimates, if all planned projects fructify (Power Policy 2003, GOUP).
The situation has been further exacerbated due to state reorganization in 2000. Prior to this U.P.’s hydel capacity was 1497 MW and thermal capacity was 3909 MW. Subsequent to reorganisation, U.P. retained only 516 MW of low cost hydel power, while the balance hydel capacity has been allocated to Uttaranchal. The cost due to the unavailability of cheap hydel power which has since gone to Uttaranchal is Rs 400 crore.
U.P.’s ability to supply power to its consumers is limited by the financial capacity of State power utility (UPPCL) to purchase power, especially after the securitisation of power purchase under the Expert Group recommendations that mandates regular payment of current dues. There is a vicious cycle of poor recovery, leading to the poor quality of UPPCL to purchase power and attract investments, leading to poor quality supply even to the remunerative consumers, resulting in these consumers moving away from the grid. It has resulted in a further deepening of the financial crisis and its concomitant result of poorer quality of supply.

Questions

1. What are the factors responsible for this excess demand for electricity?

2. The demand supply gap is reformed by the government intervention. Explain this phenomenon by a demand supply model.

3. What do you think will happen to the price of electricity?

CASE – 2 Automobile Industry in India: New Production Paradigm

The Industry

The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective of the economic resilience of the country. The automobile industry witnessed a growth of 19.35 percent in April-July 2006 when compared to April-July 2005. As per Davos Report 2006, India is largest three wheeler market in the world; 2nd largest two wheeler market; 4th largest tractor market; 5th largest commercial vehicle market and 11th largest passenger car market in the world and expected to be the seventh largest by 2016. India is among few countries that are showing a growth rate of 30 per cent in demand for passenger cars. The industry currently accounts for nearly 4% of the GNP and 17% of the indirect tax revenue.
The well developed Indian automotive industry produces a wide variety of vehicles including passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles, scooters, motorcycles, mopeds, three wheelers, tractors etc. Economic liberalisation over the years has made India as one of the prime business destination for many global automotive players, including international giants like Ford, Toyota, GM and Hyundai have also made their presence with a mark.
As per another report, every commercial vehicle manufactured, creates 13.31 jobs, while every passenger car creates 5.31 jobs and every two-wheeler creates 0.49 jobs in the country. Besides, the automobile industry has an output multiplier of 2.24, i.e., for every additional rupee of output in the auto industry, the overall output of the Indian economy increases by Rs. 2.24.
The India automotive sector has a presence across all vehicle segment and key components. In terms of volume, two wheelers dominate the sector, with nearly 80 per cent share, followed by passenger vehicles with 13 per cent. At present, there are 12 manufacturers of passenger cars, 5 manufacturers of multi utility vehicles (MUVs), 9 manufacturers of commercial vehicles (CVs), 12 of two wheelers and 4 of three wheelers, besides 5 manufacturers of engines.

Table: Vehicle Segment-wise Market Share (2005-06)

Item
Percent Share

Commercial vehicles 3.94
Passenger vehicles 12.83
Two Wheelers 79.19
Three Wheelers 4.04

Total
100.00

Source: Report of Society of Indian Automobile Manufacturers (SIAM), 2006.

Although the automotive industry in India is nearly six decades old, until 1982, there were only three manufacturers – M/s Hindustan Motors, M/s Premier Automobiles and M/s Standard Motors in the motorcar sector. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models.

The Company

Maruti Udyog Ltd. (MUL) has become Suzuki Motor Corporation’s R&D hub for Asia outside Japan. Maruti introduced upgraded versions of the Esteem, Maruti 800 and Omni, completely designed and styled inhouse. This followed the upgradation of WagonR and Zen models, done inhouse only a year before. Maruti engineers also worked with their counterparts in Suzuki Motor Corporation in the design and development of its new model, Swift.

The company launched superior Bharat Stage III versions of most of its models, well before the Government deadline. Maruti also set up a Centre for Excellence with a corpus or Rs. 100 million. This was done in collaboration with suppliers, who contributed an additional Rs. 50 million. The Centre provides consultancy and training support to Maruti’s Suppliers and Sales Network to enable them to achieve standards in Quality, Cost, Service and Technology Orientation.

Maruti has embarked upon this new project in collaboration with SMC for the manufacture of diesel engines, petrol engines and transmission assemblies for four wheeled vehicles. The project is being implemented in the existing Joint Venture Company viz. Suzuki Metal India Limited (renamed Suzuki Powertrain India Limited).

Questions

1. Identify the most important factors of production in case of automobile industry. Also attempt to explain the relative significance of each of these factors.

2. What more information would you like to obtain in order to draw a production function for Maruti Udyog? Explain with logic.

3. Automobile industry is a good example of capital augmenting technical progress. Discuss.

CASE – 3 Indian Cement Industry: Riding the High Tide

India is the second largest producer of cement in the world, just behind China. Indian cement industry comprises of 130 large cement plants and 365 mini cement plants with installed capacity of 172 million tonnes per annum (mtpa); these plants are located in states like Gujarat, Rajasthan and Madhya Pradesh. The large cement plants accounts for over 94 percent of the total installed capacity. However two large groups, viz. the Aditya Birla Group and the Holcim Group; together control more than 40 per cent of total capacity. This apart, more than 25 per cent of total capacity is controlled by global majors. These include Lafarge of France, Holderbank of Switzerland and Cemex of Mexico. The Indian cement industry is characterised by takeovers and acquisitions, which contributes to gaining market power and thus enables companies to enjoy pricing power, which is typically oligopoly.

Cement: Output and Consumption

India accounts for 6.4% of global production of 2.22 billion tonnes of cement. Indian cement industry has grown in terms of installed capacity and production. Cement production increased by over 9 per cent in FY2007, reaching 154.74 mtpa, in comparison to 12.40 per cent in FY2006, 7.07 in FY2005 and 5.19 per cent in FY2004. Decade-wise, Indian cement production has increased at 8.2 per cent (CAGR) during FY1996-2006, as compared to 6.9 per cent during 1986-1996.
Cement consumption in India has increased by more than 10.53% during FY 2007 to 148.41 mtpa compared to 134.27 in FY 2006. During the decade 1997-2007, the cement consumption has increased by 8% at 10 yearly compound annual growth rate (CAGR). The changing face of Indian demography, growth of nuclear families, higher disposable income, changing pattern of spending, easily available home loans, increased urbanisation and growth of metro and semi-metro cities are some of the vital factors behind a tremendous spurt in the housing sector. In order to keep pace with an optimistic rate of economic growth, there is a rising demand for commercial and retail space, IT Parks and SEZs. Another recent trend has been initiated by the Government, with increase investment in infrastructure, like National Highway Development Projects. It is expected that a construction opportunity of over Rs. 7.6 trillion will be created over next five years.
Apart from meeting the entire domestic demand, the industry is also exporting cement and clinker. The export of cement during 2001-02 and 2003-04 was 5.14 million tonnes and 6.92 million tonnes respectively. Export during April-May, 2003 was 1.35 million tonnes. Major exporters were Gujarat Ambuja Cements Ltd. and L&T Ltd.

Pricing

Cement industry has been decontrolled from price and distribution on 1st March 1989 and de-licensed on 25th July 1991. During last four years (2003-2007) cement prices have gradually increased from around Rs 150 per bag to Rs 230 per bag in 2007. Cement manufacturers control over market can be gauged by the fact that even 20-25% freight hike was straight passed on to consumers. Average industry ROCE has reached more than 26% due to the recent burst in cement prices. Encouraged by such lucrative returns cement manufacturers have decided to increase capacity by more than 97 million tonnes over next three years of which 43.7 million tonnes is likely to complete in FY 2009. Thus, the cement supply will increase by more than 11% in next three years.
Cement consumption growing at around 10% and production at 11% would naturally create a situation of over production. As per estimates, cement industry will face over capacity of 17.7 mtpa in 2008 and 37.7 in 2009. Therefore it is expected that capacity utilisation will fall significantly. Further new players are likely to join the industry with huge production capacities.

Questions

1. Do you think cement industry in India presents a good explanation of oligopoly? Which characteristics of oligopoly do you find in the above case?

2. How has decontrolling of cement prices helped the growth of this industry?

3. Do you see possibilities of cartel or implicit collusion in the above case? How?

CASE – 4 From Wages to Packages: the Journey of Software

Organisations across all industries are undergoing a shift in emphasis from tangible resources to valuable, rare and inimitable human resource in order to attain competitive advantage. Many leading organisations have started adopting an investment perspective towards their employees by moving from a traditional wage and salary system to compensation “packages”. The underlying reasons behind such a change include ensuring a motivational climate, encouraging efficiency and productivity for attainment of strategic goals, and gaining control over labour costs.
Wage and salary system bears a strong relationship with the performance, satisfaction and attainment of goals of the employees of a firm. This has prompted companies to start offering full packages of monetary and non monetary rewards as compensation or wage/salary to their employees.

Dimensions of Compensation

Compensation affects a person economically, sociologically and psychologically. It also compensates for the opportunity cost and real cost occurring to the specific type of human resource in being in the present context. Proper management of compensation helps a firm procure, maintain and retain a productive workforce.
A sound compensation package should encompass factors like adequacy of wages, social balance, supply and demand, fair comparison, equal pay for equal work and work measurement. The concept of adequacy can be disintegrated into two components: internal and external. The internal component can be linked with the concept of fair wages; it is the money wage adequate for an employee to maintain a decent standard of living. External adequacy, on the contrary, is in relation to comparable jobs in the same industry(s) with the same skill-set required.
Besides the element of adequacy, compensation is instrumental in motivation. An equitable compensation package may increase employee motivation. Inequity, on the contrary, may motivate employees to take corrective actions, which may be harmful to the firm. Firms thus link compensation to performance appraisal to enhance motivation, and hence productivity. Compensation may also be looked upon as a controlling device to ensure that employees behave in particular manner. An organisation may choose to offer a higher package to a particular employee in order to allure another employee to perform better.

Compensation in Software

Let us now take you to the software industry, known in corporate history for adding new facets to realms of wage and salary administration. It is software that has introduced compensation as a multi-dimensional tool. Differentials in compensation packages among various levels of software professionals, focus on skill-based compensation, rewards essentially linked to performance and negotiability have all added new facades to compensation.
In a recently conducted countrywide comprehensive survey of salary, Businessworld covered aspects like costs, compensation and benefits across 12 sectors of the Indian economy. The survey had revealed an arbitrage between high employee salaries overseas, with the low cost workforce in India. It has also found human resource contributing the largest component, namely 44 percent of the industry’s total cost. The annual entry-level salary has been revealed to range from Rs. 3.21 lakhs in the western part of the country to Rs. 5.23 lakhs in the north.
The Businessworld survey has found that the weakening dollar has hit the margins of the Indian software industry, thus compelling software firms to rationalize on employee costs. As competition is intensifying, software organisations must focus on ‘added value’ of their employees, by encouraging them to increase their efforts and performance on a continuous basis. This can be achieved by an overhauling of the entire compensation packages, including basic salary, along with incentive systems (including increase in salary, performance bonuses, stock options and retirement packages). Apart from such core components, emphasis must also be given to redesigning non-monetary incentives like words of praise, special recognition, job security and autonomy in decision making. On the whole, all such parameters of compensation strategies should be directed towards providing the ability to reinforce desired behaviours, and also serve the traditional functions of attracting and maintaining a qualified workforce.

Questions

1. Which factors, according to you, are prompting organisations to adopt a package instead of traditional salary?

2. Do you think package compensation is more suitable in modern globalised business? Can you draw some lessons from marginal productivity theory?

3. Do you think that the case supports the efficiency wage theory or bargaining theory? Give arguments in support of your logic.

CASE – 5 India in Search of a Way to Harness the Inflation “Dragon”

India has seen high rates of inflation until the early nineties and faces its attendant consequences. Since mid nineties the priority for policy maker has been to bring inflation to single digit. Just like appropriate diagnosis is must for proper treatment, similarly an inquiry into the causes of inflation in the country is necessary. Today inflation is not merely caused by domestic factors but also by global factors. And that is natural, as the Indian economy undergoes structural changes the causes of domestic inflation too have undergone changes. The economy of India is growing at a satisfactory 8 to 9 percent a year. Therefore change in purchasing power of people is natural and when we take to national level, it is a huge amount. Given the size of population of India even a small increase of Rs. 100 in the per capita income would mean an additional aggregate demand worth Rs. 110 billion. This has put an extraordinary highly demand on various commodities.
What has further compounded the problem is the inflow of foreign investments, which is the natural fallout of globalisation. The excessive global liquidity has facilitated buoyant growth of money and credit in 2005-06 and 2006-07. For instance near-zero interest rate regime in Japan has encouraged people to borrow in Japan and invest elsewhere for higher returns. Obviously, some of this money, estimated by experts to be approximately $200 billion, has undoubtedly found its way into the asset market of other countries in alternative investments such as commodities, stocks, real estates and other markets across continents, leverage may times over. And India is emerging as an attractive destination. The net accretion to the foreign exchange reserves aggregates to in excess of about Rs. 225,000 crore in 2006-07. Crucially, this incremental flow of foreign exchange into the country has resulted in increased credit flow by our banks. Naturally this is another fuel for growth and inflation.
Further, the sustained flow of foreign money has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels. This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation. As pointed out in the Economic Survey 2007-08, the current bout of inflation is caused by a multiplicity of factors, mostly monetary and global.
To conclude, it must be understood that growth naturally comes with its attendant costs and consequences. The government has been aiming at keeping inflation below 5% but it keeps on deceiving now and then. A stock market boom, a real estate boom and a benign inflation in consumer goods market in an economically impossible idealism. These are pointers to a need for a different strategy to handle inflation.
Reserve Bank of India’s strategy of Market Stabilisation Scheme (MSS) to dealing with excessive liquidity, the increase in repo rates to make credit over extension costly and CRR to restrict excessive money supply have limitation with such huge forex inflows.
While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalisation. The Government has to find out some unconventional methods of controlling inflation besides focusing on timely implementation of infrastructure projects and improving productivity to fill demand supply gap. One such measure could be revaluation o Indian rupee against dollars.

Questions :
1. What are the major factors contributing to inflation in India in the recent past? How have they changed since 1991-92?
2. What measures do you suggest should be taken up by government of India to handle inflationary pressure?
3. Evaluate the suggestion of revaluating Indian rupee against dollars to control inflation.


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

Attempt Only Four Case Study
CASE I

EMPLOYEE MOTIVATION IN A GOVERNMENT ORGANIZATION”

Bhumika Services Ltd., one of the largest public sector companies of India, was serving more than 31 million customers. Along with its vast customer base, BSNL’s financial and asset bases too were vast and strong. Changing regulations, converging markets, competition and ever demanding customers had generated challenges for BSNL. The Indore division of BSNL was the first in the country, which faced competition in basic telecom services from 1998. In spite of being a government department, Indore telephones had to face the competition, and relentless efforts were put in to improve the services and provide world¬class telecom services to its customers. Among the various services offered by Indore Telecom, 197 and 183 were two special services. 197 provided non-metered enquiry services to obtain telephone numbers by simply giving the name of person/name of organization/ name and designation of person, or by giving address. 183 on the other hand, was a non¬metered enquiry service that provided similar services for distant stations. There were a large number of complaints related to these services. Complaints were either directly forwarded to the district office by customers or raised during Telephone Adalats or pointed out by correspondents during press conferences, which were conducted quarterly. Complaints ranged from non-response, long waiting time to rude responses.

S. Baheti took charge as Area Manager (North) on July 25, 2001 In the Indore Division. Immediately after taking charge, he realized that special services like 197 and 183 required urgent attention as they were directly affecting the image of the organization amongst customers. Since most of the complaints during Telephone Adalats and press conferences were related to these services, Baheti wanted to reach the root cause of the problem, to solve it forever. In this process, he looked at the background of the employees involved in the special services and found that most of the employees were office bearers of various unions that were active in the organization. The problem was more complicated than it seemed to during interactions, the employees indicated that they were not to be blamed for poor services since they were facing a number of problems in providing services and senior officials were not paying enough attention to alleviate their problems. Defective handsets, non-operating telephone lines, disturbance in lines, jacks not making proper connections, fans and air conditioners not working properly and non availability of typewriter/computer terminals were some of the problems brought to the notice of Baheti by operators.

Further investigation revealed that in addition to these technical problems, there were some Human Resource Management problems as well, such as frequent short leave, extended breaks, uninformed leave and indifferent attitude of employees towards customers. Baheti identified that despite technical problems, some operators were sincere towards their viork and tried their best to provide better services. To improve these services, Baheti decided to use multipronged strategies. Most of the technical problems were solved immediately, other problems that could not be solved at his level were forwarded to higher authorities and pursued rigorously. As the technical problems were taken care of, efficiency of sincere employees went up. Moreover, Baheti also began regular interaction with the operators, appreciating their good work, listening to their problems and explaining them the;-i. importance of their jobs. The employees were made aware of the facts that B5NL did not enjoy a sole monopolistic position any more and had to compete with private players. So the laidback attitude towards customer complaints was not only detrimental to the image of the organization, but also could lead to a reduced market share.

After gaining the confidence of operators, the next step was to motivate them. Towards this end, Baheti started announcing the best operator of the month and recognition was given to the operator by displaying his name on the board of honor. The criteria for award were minimum 200 calls attended per day and 20 days’ attendance. In addition, based on last six months performance, three best performers were identified. Appreciation letters from Area Manager and General Manager were conferred upon these operators in a public function and prizes of their own choice were given to them. These efforts had a desired result and the performance of all the operators showed a marked improvement. The number of calls attended by some operators increased from 200 to 700 calls per day. Further, quick and polite response had reduced customer complaints. While reviewing the situation, Baheti was quite contended to see a remarkable change in the behavior of operators just four months. He wondered whether this change was a permanent phenomenon or he would have to strategize further.

QUESTIONS

1. Discuss the long-term relevance of motivational techniques used by Baheti in the light of prevailing environment in the organization.
2. Had you been Baheti, what other techniques you would have used to improve the special services provided by the organization?


CASE II
EMPLOYEE RELATIONS AUDIT

Triveni Foods Pvt. Ltd., a multinational confectionary company, having its branches in more than 50 countries and marketing its products in about 135 countries, established one of its production units in 1988 at Mathura near Delhi. It had a workforce of nearly 320 employees and sales turnover was more than Rs. 150 crores. Being a confectionary unit, hygiene was given the upper most priority to the extent that no one was allowed to enter the production area without taking bath and wearing sterilized clothes provided by the company. The entire process was automatic and required only food specialists and labor. In order to match the required standards, emphasis was given on training and welfare of employees on regular basis. Facilities like transportation were also provided since delay by ten minutes could cause production losses at the time of shift changes.
Over a period of time due to start and workers’ redundancy, it was observed that problems like lethargy, absenteeism, violation of work practices were increasing. Absenteeism rate went up to 18 percent. Employees visited canteen for drinking water and started gossiping during working hours. Buses did not arrive on time due to which production suffered. Operators came late and left shop floor early without waiting for relievers. Employees were found hovering in administration building without any reason. It was also found that employees were violating personal hygiene standards. Malpractices were also reported with attendance process and records. These activities were having a negative impact on managerial effectiveness and performance of the unit. The management tried to take number of initiatives to overcome these problems. However, these initiatives seemed ad hoc solutions and did not serve the purpose in the long run.
In 1996, Alok Trivedi joined the company as Head of the Department H.R. While facing these problems, he realized that the causes of these problems were deep rooted and required a proactive approach. He started with an approach called Employee Relation Audit, developed by him, where everything was to be monitored, regulated and reported on regular intervals. He along with his team prepared an action plan (Appendix 1) and corrective measures were taken accordingly. Facilities of drinking water were arranged at 3 to 4 places in the production area which stopped employees from going to canteen for this purpose. Action was taken against the late arrivals of the buses. A proper time study was done and they were given ten minutes margin so that they could report on time. Operators were frequently questioned and stringent vigilance was kept for amenities. Regular counseling was also arranged. A grievance register was also kept and effective grievance redressal was undertaken. Groups were formed called ‘Pragati’ groups for solving work related problems. Employees were frequently checked for ensuring their strict adherence to personal hygiene standards. For ensuring timely processing and printing of attendance records, training was given to al! line officers and production of records was made mandatory on shift basis.
It was further decided that based on this action plan an audit should be carried out at regular periods so that actual performance could be measured. For quantification, a 5 point. scale 0- poor, 2-below average, 3-average, 4-good, 5-v.good) audit report was prepared featuring practices, criteria for evaluation, standards, observations/comments and rating :Appendix 2). For example, in canteen criteria for evaluation there were food quality, menu, timings and unauthorized presence of the employees in the kitchen. The standards were strict adherence to the rules defined. For transportation, arrival, departure and punching of cards by drivers were the criteria for evaluation. Internal teams of auditors were asked to observe and comment against the set standards and give the rating accordingly. Performance vas evaluated on the basis of percentage, the highest point being 215. For example, if the total points scored on various parameters in a audit report was one hundred and fifty five, hen percentage score would be seventy-two (l55/215xl00 = 72 per cent). The first audit “as carried out in August 1999 and percentage of performance was sixty two.
In the year 2000, the performance rose to sixty-five per cent. Proactive approach of solving le problems was adopted. For example, registers were maintained at different work areas, write down the complaints experienced by employees and action was taken by the concerned person. A complaint of tap leaking in a bathroom was recorded in register by a workman. It was attended by a supervisor in charge and he got it repaired immediately. At times these were reviewed and signed by H.R. department and the higher management. Due to these practices, a lot of improvement was observed. Better working conditions, increased productivity, rise in employees’ commitment towards their goals and better superior -subordinate relationship could be seen. In 2001, the percentage of the performance rose to seventy two. While reviewing the Employee relation audit, Alok Trivedi was quite satisfied to note the steady though slow improvement in the figures of performance.

QUESTIONS:
1. Had you been in place of Alok Trivedi, what additional measures would you have taken?
2. Critically analyze the Employee Relations Audit in the light of its contribution to self motivation of employees.


CA S E III
EMPLOYEE TURNOVER AT XYZ MOON LIFE INSURANCE

In 1950, with the enactment of the Insurance Act, Government of India decided to bring all the insurance companies under one umbrella of the Life Insurance Corporation of India (LIC). Despite the monopoly of LIC, the insurance sector was not doing well. Till 1995, only 12% of the country’s people had insurance cover. The need for exploring the insurance market was felt and consequently the Government of India set up the Malhotra Committee. On the basis of their recommendations, Insurance Development and Regulatory Authority (IRDA) Act was passed in parliament in 2000. This move allowed the private insurers in the market with the stop foreign players with 74:26% stake. XYZ- Moon life was one of the first three private players getting the license to operate in India in the year 2000.

XYZ Moon Life Insurance was a joint venture between the XYZ Group and Moon Inc. of US. XYZ starred off its operations in 1965, providing finance for industrial development and since then it had diversified into housing finance, consumer finance, mutual funds and now its latest venture was Life Insurance. Its foreign partner Moon Inc. was established in 1858 and had grown to be the largest life insurance and mutual fund company in the U.S. Moon Inc. had its presence in Asia since the past 75 years catering to over 1 million customers across 11 Asian countries.

Within a span of two years, twelve private players obtained the license from IRDA. IRDA had provided certain base policies like, Endowment Policies, Money back Policies, Retirement Policies, Term Policies, Whole Life Policies, and Health Policies. They were free to customize their products by adding on the riders. In the year 2003, the company became one of the market leaders amongst the private players. Till 2003, total market share of private insurers was about 4%, but Moon Life was performing well and had the market share of about 30% of the private insurance business.

In June 2002, XYZ Moon Life started its operations at Nagpur with one Sales Manager (SM) and ten Development Officers (DO). The role of a DO was to recruit the agents and sell a career to those who have an inclination towards insurance and could work either on part time or full time basis. They were very specific in recruiting the agents, because their contribution directly reflected their performance. All DOs faced three challenges such as Case Rate (number of policies), Case Size (amount of premium), and Recruitment of advisors by natural market, personal observations, nominators, and centre of influence. Incentives offered by the company to development officers and agents were based on their performance, which resulted into internal competition and finally converted into rivalry.

In August 2002, ,a Branch Manager joined along with one more Sales Manager and ten Development Officers. Initially, the branch was performing well and was able to build their image in the local market. As the industry was dynamic in nature, there were frequent opportunities bubbling in the market. In order to capitalize the outside opportunities, one sales manager left the organization in January 2003. As the sales manager was a real performer, he was able to convince all the good performers at XYZ Moon Life Insurance to join the new company. As a result of this, the organizational structure got disturbed and the development officers, who were earlier reporting to the SM had started reporting directly to the branch manager. Now, nepotism crept in and the branch manager began reallocating good agents to his favorite development officers. The sales team of another sales manager became weak (low performer). Seeing the low performance of the sales manager and his development officers, the company decided to terminate their services. As the employees’ turnover rate of the organization was more than the industry rate, the company had to continuously recruit sales agents as well as development officers to sustain itself in a highly competitive environment. The internal competition among development officers resulted into problems like, high employee turnover and dissatisfaction. Hence the branch was not able to perform as per the benchmarks set by the company. Its performance was not even comparable to that of other branches of the same company.

In April 2004, the company faced a grave problem, when the Branch Manager left the organization for greener pastures. To fill the position, in May 2004, the company appointed a new Branch Manager, Shashank Malik, and a Sales Manager, Rohit Pandey. The Branch Manager in his early thirties had an experience of sales and training of about 12 years and was looking after two branches i.e., Nagpur and Nasik.

Malik was given one Assistant Manager and 25 Development Officers. Out of that, ten were reporting to Assistant Manager and remaining fifteen were directly reporting to him. He was given the responsibility of handling all the operations and the authority to make all the decisions, while informing the Branch Manager. Malik opined that the insurance industry is a sunrise industry where manpower plays an important role as the business is based on relationship. He wanted to encourage one-to-one interaction, transparency and 4iscipline in his organization. While managing his team, he wanted his co-workers to analyze themselves i.e., to understand their own strengths and weaknesses. He wanted them to be result-oriented and was willing to extend his full support. Finally, he wanted to introduce weekly analysis in his game plan along with inflow of new blood in his organization. Using his vast experience, he began informal interactions among .the employees, by organizing outings and parties, to inculcate the feelings of friendliness and belonging. He wanted to increase the commitment level and integrity of his young dynamic team by facilitating proper civilization of their energy. He believed that proper training could give his team a proper understanding of the business and the dynamics of insurance industry.

QUESTIONS:

1. If you were Malik, what strategies would you adopt to solve the problem?
2. With high employee turnover in insurance industry, how can the company retain a person like Malik?


CASE IV
FRAGRANCE COMPANY LIMITED

Petals Company Limited (PCL) was initiated in the year 1919. Since then, it had produced a number of brands which enjoyed customer loyalty. It had adapted well with the changing environment and had entered into a strategic alliance with the S & G Limited, the producer of personal care products. The new company Fragrance Company Limited Was formed as a result in 1993 with equity participation from S& G and Petals Company Limited. This company marketed the products manufactured by the PCL. This alliance had given PCL access to the latest international technology in soaps and detergents. Thus, Fragrance Company Limited was now ideally placed to offer high value, international quality products at competitive prices. It was already an exporter of toilet soaps, detergents and cosmetics. It was a private organisation headed by Dharamchand, with its company’s headquarters at Mumbai and seven units all over the country with one of the units at Faridabad. The turnover of the company was Rs 900 crores. The company marketed the products using the latest international technology in soaps and detergents.

The organization structure was traditionally hierarchical with the senior vice president at the top of the management, the supervisory heads at the middle level and the workers at the shop floor. The company had 450 permanent workers, and 150 contract workers, with an average age of 32 years. The recruitment policy framed was to employ freshers. The various departments in the organization were: purchase, finance, systems, engineering services, excise and dispatch, operations and personnel department. The personnel and administration department were headed by Gyanchand and the functions of the personnel administration department were: recruitment, selection, training, counseling, performance appraisal, internal mobility of employees, negotiation With workers, fixation and implementation of rules and regulations regarding wages, salary, allowances and benefits to the workers. The philosophy of the company was based on Total Quality Management (TQM) and Kaizen. The company was highly environment-friendly and was oriented towards customer’s satisfaction.

Fragrance was facing an acute crisis due to high rate of absenteeism among its permanent workers. The losses were soaring high. There was loss in production, and high expenses and indiscipline were also observed. The personnel administration department conducted a survey in the year 1998. They found that the rate of absenteeism was about 20% on an average. The rules and regulations regarding leave were-12-17 days of leave with pay, 7 days casual leave with pay, 5 day sick leave with pay, extra leave without any pay. The benefits were provided as per the Employees State Insurance Act. The data collected revealed that 36% of the absenteeism was due to transportation problem, 48% was because of the workers staying away from their families, 52% due to festivals, 32% due to farming, 48% on account of alcholism, 80% on account of social occasions/marriages and 76% due to sickness of family members.

The other findings were that approximately 80% of the workers were married and they had children to look after and hence had a greater tendency towards taking leave, 8% of workers possessed dual jobs ,e.g., driving for others, mechanic work etc., so they felt that they could earn more on a particular day by remaining absent; 96% of the workers did not like night shifts and they remained absent from duty; 28% of the workers were not satisfied with the working conditions i.e. canteen facilities, drinking water, social and cultural activities and cleanliness. In 1998, the company tried to reduce absenteeism by introducing conveyance allowance for attendance and night shift allowance. The scheme called Inaam; was launched in which a worker who did not avail leave in three months, received Rs 200 per month. In¬house training was imparted to workers In order to educate them about the consequences of absenteeism. They were also sent for 3-6 months training to the Central Board of Workers Education on rotation.

Counseling sessions were held for the workers in order to increase their awareness. The company also introduced the philosophy of workers participation in the management to increase their involvement and commitment towards the work. The practice of organizing picnics, festival celebration, informal get-togethers, and sports activities were also adopted to increase the commitment. Regularity was made an important component of performance appraisal and promotion. After one year, Gyanchand was highly perplexed to see only a negligible improvement in the report of the survey conducted by the personnel administration department. The rate of absenteeism had dropped by only 3%, i.e. from. 20% to 17% in spite of introducing the aforesaid schemes.

QUESTIONS:

1. What role do the non-financial incentives play in motivating the workers and minimizing the rate of absenteeism?
2. What innovative solutions would you suggest to minimize the rate of absenteeism?

C A S E V
HE WHO RIDES A TIGER

In the Year of the Youth, the author took up a research project on young industrial workers. It involved comparing young and old workers. Two industries producing the same machines at similar technological level were selected. One belonged to the private sector and the other to the public sector. While the latter was started a decade later than the former, it had achieved greater expansion. Both were located in the same state.

After we obtained necessary permission to conduct our study, we reached the mofussil town where the private sector industry was located. Before we could launch our study, as a matter of principle, we wanted to meet the General Secretary of the workers’ union. The Personnel Department was not willing for this. On our insistence they called the union official. We talked to him for about half an hour but Personnel Department people were all the time hovering around. So we fixed a time in the evening to meet him in the union office in the town. We visited the union office in the evening. The union was having problem regarding wage deduction of some workers who did not show up for overtime. The overtime notice was short and they had not consented either, even then the management was threatening wage deduction for one week. The union could hardly do a thing’ as they in the past had burnt their hands when they had to unilaterally call off the 106 day old strike in which even their Treasurer had committed suicide. They were scared to the extent that they had productivity linked bonus agreement for even 12% bonus. Moreover, a new minuscue union was recently started in the company.

We visited the new union’s office next evening and held a long discussion. They asked for’ our suggestions. The union believed in legal battles more than agitations. After a visit to the industry the author visited the state headquarters of the new union. There every office bearer was surprisingly a lawyer. In the HQ we learnt that after we left, their union took out a procession and held a meeting in the temple. Perhaps this was the result of our discussion. While the older union was a prisoner of its past, the new union was free to write its own history. Workers’ interests were being served perhaps by both.

QUESTIONS:
1. Discuss merits/demerits of the role of strike, agitation and legal approach in union¬management relations.
2. What role does mutual trust play in building union-management relations?


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

General Management

Attempt Only Four Case Study

CASE 1: Spirituality in the workplace

Traditionally, the workplace and spirituality did not mix in America. But things are changing. Andre Delbecq, a Professor in Santa Clara University, a Jesuit institution, said: “There were two things I thought I’d never see in my life, the fall of the Russian empire and God being spoken about in a business school.” Now management books and conferences (including the annual meeting of the Academy of Management) deal with the various aspects of how God can be brought into the organizational environment. To be sure, people who want to integrate spiritual dimensions into the workplace are still considered rebels. But ServiceMaster, a Fortune 500 company with some 75,000 employees, created a spiritual organization culture many years ago. Indeed, Peter Drucker, one of the most prolific writers on management, had high regards for the company that is known for its products such as Terminix (pest control), TruGreen, Merry Maids, and others.
When people in the US were asked if they believe in God, some 95 per cent said yes. It is in a spiritual context that business people under the daily pressure can discuss their inner feelings. As the baby boomers, now in their 50s, are reaching the top in the organizational life, they begin to wonder what life is all about. They lived through the youth culture of the 1960s and the 1980s that was dominated by greed. They are now questioning the real meaning of life and the ethical dimension of work. Jose Zeilstra, an executive at Price WaterhouseCoopers worked around the world, practicing her Christian principles in different cultures. During her assignment in China, she strongly argued against the practice of giving “very expensive gifts.” As a result the business transaction did not work out. Yet, in the long run, while integrating her personal beliefs with her work, resulted in a very successful career. Academic institutions such a the University of St. Thomas, the University of Denver, and the Harvard Divinity School are following and studying the movement of spirituality. Other schools such as Antioch University in Los Angeles, the University of New Haven in Connecticut, the University of Scranton in Pennsylvania, Santa Clara University in California as well as institutions abroad such as the University of Bath in England and the Indian Centre for Encouraging Excellence in Bombay, India, are conducting research, conferences, or lecture on spirituality.
The cover story of Business week (November 1, 1999) discussed how company outlets such as Taco Bell, Pizza Hut, and McDonald’s as well as the Xerox Corporation pay attention to spiritual needs of their employees. Some companies claim an increase in productivity, decrease in turnover, and a reduction in fear. A research study by the consulting firm McKinsey & Co. in Australia showed that firms with spiritual programmes showed reduced turnover and improved productivity. Professor Ian I Mitroff at the University of Southern California even stated, “Spirituality could be the ultimate competitive advantage.” But there is also the concern that cult members and groups with a radical perspective could use the workplace for their own aims. Still, employees in companies that integrate spirituality in their work place count on the potential benefits of greater respect for individuals, a more humane treatment of their fellow workers, and an environment that permeates their organization with greater trust.

Question:
1. What is spirituality?
2. Is this topic appropriate for businesses?
3. What are the arguments for and against its inclusion in business?

CASE 2: Coke’s European Scare

What seemed like an isolated incident of a few bad cans of Coca-Cola at a school in Belgium turned into near disaster for the soft drink giant’s European operations. In June 1999, Coke experienced its worst nightmare—a contamination scare resulting in the recall of 14 million cases of Coke products in five European countries and a huge blow to consumer confidence in the quality and safety of the world’s most recognizable brand.
After the initial scare in Bornem, Belgium, Coke and Coca-Cola Enterprises (CCE), a bottler 40 per cent owned by Coca-Cola, thought they isolated the problem. Scientists at the CCE bottling plant in Antwerp found that lapses in quality control had led to contaminated carbon dioxide that were used in the bottling of a recent batch of Coke. Company officials saw the contamination as minor problem and they issued an apology to the school.
At the same time that the problems were being dealt with an Antwerp, things were breaking down at Coke’s Dunkirk, France, bottling plant. In Belsele, 10 miles from Bornem, children and teachers were complaining of illnesses related to drinking Coke products. The vending machines at the school were stocked with Coke from the company’s Dunkirk plant and were thought to be safe. Now a second bottling plant’s practices were being questioned. What initially seemed like an isolated incident was now a crisis.
Immediately following the second scare, Belgium’s health minister banned the sale of all products produced in the Antwerp and Dunkirk plants. Things got worse when Coke gave an incomplete set of recall codes to a school in Lochristi, Belgium, resulting in 38 children being rushed to the hospital. Immediately following this incident, French officials banned the sale of soft drinks produced in the Dunkirk plant. It was believed that fungicide on wooden shipping pallets were the cause of the illnesses at the Dunkirk plant.
On June 15, 1999, 11 days after the initial scare in Bornem, Coke finally issued an explanation to the public. Most Europeans were not satisfied. Coca-Cola officials used vague language and often contradicted one another when making statements. France’s health minister, Bernard Kouchner, stated, “That a company so very expert in advertising and marketing should be so poor in communicating on this matter is astonishing”
After three weeks of testing by both Coke officials and French government scientists, it was concluded that the plants were safe and that there was no immediate threat to the health of consumers. Coke has destroyed all of the pallets in Dunkirk and tightened quality control on co2.
How could this happen to the company that is revered worldwide for its quality control and the superiority of its products? Coke has spent decades building its reputation overseas and the European market now represent 73 per cent of total profits. While the scare has had some effect on Coke’s profits in Europe, the company is more concerned with damages to its reputation and consumer confidence in its products.
Many critics say that Coke’s slow response time, insisting that no real problem existed and belated apology have severely damaged the company’s reputation in Europe. Some would disagree and feel that Coke handled the situation as best it could. “I think that Coke acted in a responsible, diligent way,” says John Sitcher, editor of Beverage Digest. “Their first responsibility was to ascertain the facts in a clear and unequivocal way. And as soon as Coke knew what the facts were, they put out a statement to the Belgium people.”
The character and quality of a company can often be measured by how it responds to adversity. Coca-Cola believes that this crisis has forced the company to re-examine both its marketing and management strategies in Europe. Coke executives in Brussels are predicting that the company will double its European sales in the next decade and that this setback will only make the company stronger. Wall Street analysts seem to agree. Only time will tell.

Question:
1. What are the management issues in this case?
2. What did Coke do and what could have been done differently?
3. What are the key factors that were or should have been considered by management?

CASE 3 Trials and Challenges For Barrett at Intel
Intel Corporation is best known for its processors. The sign “Intel Inside” is familiar to most people using a computer. There is, for example, the Pentium 3 and 4 and the new generation Itanium. For servers and workstations, Intel produces Xeon. The colorful CEO Andy Grove led the company for many years. By 2001, however, the Chief Executive Officer Craig R. Barrett faces many challenges, including criticism.
The new strategy of moving into new markets such as information appliances, communications, and Internet services was costly and so far less than successful. In fact, the move beyond its core businesses may have detracted from its core business of computer chips. These new directions resulted in frequent reorganizations resulting in organizational uncertainties for the managers. While some think that the frequent changes were necessary to adapt to new situations and to keep the organization agile, others disagree.
Barrett’s leadership and his moves into various directions is quite different from Grove’s carefully crafted strategy that focused on chips. Barrett’s personal strengths lie in manufacturing. He invested heavily in research and development. But new products such as the Itanium require several years before they show results, and Barrett has only a few more years before his retirement. Investing in new manufacturing technologies with the aim of achieving virtually automated plants results in the reduction of manufacturing costs of chips. But the PC market is stagnated in the early 21st century and wireless communication and cell phones are becoming important in the market. In the cell phone market, for example, Motorola and Texas Instruments are developing new digital signal processors and Intel would have to work hard to catch up. A key to success of Intel may be whether the company can become an important player in the wireless market. Barrett made a number of costly acquisitions, including Level One Communications. But the question remains if the heavy investments in new technologies will result in profitable businesses. This may determine the legacy of Craig Barrett.
Question:
1. What is your assessment of Barrett’s performance and his vision for Intel? Is he the right person for the job at Intel?
2. What are some problems associated with frequent reorganization?
3. What are the pros and cons for focusing on the distant futures and the heavy investments in new technologies?

CASE: 4 Profiles of Two Visionaries—Bill Gates & Steve Jobs
Two men have their hearts and souls for developing their visions have driven the personal computer revolution. However, the way in which each of these men went about this quest has been different. Steve Jobs and Bill Gates have changed the way the world does business, but the story of their leadership styles is even more compelling than the success spawned Apple and Microsoft.
Gates and Jobs: The Early Years Bill Gates started developing his computer skills with his childhood friend Paul Allen at Lakeside School in Seattle. At the age of 14, the two had formed their first computer company. After high school, Allen and Gates left Seattle for Boston. Gates was off to Harvard and Allen began working for Honeywell. After only two years at Harvard, Gates and Allen left Boston for Albuquerque to develop a computer language for the new Altair 8080 personal computer. This computer language would become BASIC and was the foundation for Microsoft, which was created as a partnership in 1975.
After five years in New Mexico, Microsoft relocated to Bellevue, Washington in 1980 with BASIC and two other computer languages (COBOL and FORTRAN) in its arsenal. Later that year IBM began developing its first PC and was in need of an operating system. Microsoft developed the Microsoft Disk Operating System (MS-DOS) for IBM while two other companies created competing systems. Gates’ determination and persuasion of other software firms to develop programs for MS-DOS made it the default IBM platform.
As Microsoft became more successful, Gates realized that he needed help managing Microsoft. His enthusiasm, vision, and hard work were the driving force behind the company’s growth, but he recognized the need for professional management. Gates brought in another one of his friends from Harvard, Steve Ballmer. Ballmer had worked for Proctor & Gamble after graduating from Harvard and was pursuing his MBA at Stanford University. Gates persuaded Ballmer to leave school and join Microsoft. Over the years, Ballmer has become an indispensable asset to both Gates and Microsoft. In 1983, Gates continued to show his brilliance by hiring Jon Shirley who brought order to Microsoft and streamlined the organizational structure, while Ballmer served as an advisor and sounding board for Gates. Microsoft continued to grow and prosper in the 1990s and Gates became the richest man in the world with Microsoft dominating the operating systems market and the office suite software market with Microsoft Office.
Gates recognized that his role was to be the visionary of the company, but that he needed professional managers to run the operations of Microsoft. He combined his unyielding determination and passion with a well-structured management team to make Microsoft the giant it is today.
The other visionary, Steve Jobs, and his friend Steve Wosniak started Apple Computer in Job’s garage in Los Altos, California in 1976. In contrast to Bill Gates, Jobs and Wosniak were hardware experts and started with the vision for a personal computer that was affordable and easy to use. When Microsoft offered BASIC to Apple, Jobs immediately dismissed the idea on the basis that he and Wosniak could create their own version of BASIC in a weekend. This was typical Jobs: decisive and almost maniacal at times. However, Jobs eventually agreed to license Microsoft’s BASIC while pursuing his vision of developing a more usable and friendly interface for the PC.
Jobs, seen by some as the anti-Gates, is a trailblazer and a creator as opposed to Gates who is more of a consolidator of industry standards. Jobs, whose goal was to change the world with his computers, was very demanding of his employees. Jobs was not a hard-core computer programmer, but he sold the idea of the personal computer to the public. He changed the direction of Apple by developing the Macintosh (Mac) that used a new Graphical User Interface (GUI) that introduced the world to the mouse and on-screen icons. With all this success, there was a major problem developing at Apple: Steve Jobs was overconfident and did not see Gates and Microsoft as a serious threat to Apple.
Soon after the release of the Macintosh computer, Jobs asked Microsoft to develop software for the Mac operating system. Gates obliged and proceeded to launch a project copying and improving Apple’s user interface. The result of this venture was what became Microsoft Windows.
Jobs’ cocky attitude and the lack of management skills contributed to Apple’s problems. He never bothered to develop budgets and neglected his relationship with his employees. Wosniak left Apple due to differences with Jobs. In 1985, John Scully, formerly CEO of PepsiCo, was hired to replace Steve Jobs as president and CEO of Apple Computers. Differences between Scully and Jobs developed which eventually resulted in the dismissal of Jobs.
Microsoft and Apple at the turn of the Century: An Industry Giant and a Revitalized Leader With the success of Windows, the Office application suite, the Internet Explorer, Microsoft has become a household name and Bill Gates has been hailed as a business genius. The fact that Microsoft’s competitors, the press, and the US Justice Department have called Microsoft a monopoly reinforces Gates’s determination to succeed. Some people even questioned whether Microsoft can survive the Justice Department’s decision. But Bill Gates has shown that he is the master of adapting to changing market conditions and technologies.
In the 1990s, Apple went in the opposite direction. The outdated operating system and falling market share eventually led to a decrease in software development for the Mac. Something needed to be done. In 1998 Steve Jobs returned to Apple as the “interim” CEO. His vision, once again, resulted in an innovative product: the iMac. In the 80s he created the simple-to-operate Macintosh to attract people who were using IBM PCs and their clones. Now he developed a simple, stylish, and Internet-friendly computer that added some much-needed excitement to the computer market. Jobs had also changed as a manager and a leader. He had matured and looked to his professional staff for advice and ideas. The Mac is an expression of his creativity and Apple as a whole is an expression of Steve, leading to continuing the success for Apple and a renewed battle between Gates and Jobs.
Gates and Jobs in 2006 Bill Gates, one of the richest men, has also become one of the biggest charitable givers. He and his wife Linda have donated some $31 billion to philanthropic causes. When Bill Gates read the World Development Report by the World Bank, he realized that he could improve the health of people in poor countries by supplying drugs and treatment. The Bill and Melinda Gates Foundation also provides scholarships for students with different backgrounds. While Gates is very much in philanthropy, Microsoft is preparing the new Windows Vista which helps users in enhancing their computing experience.
Steve Jobs’ career also took some interesting turns. After he was fired by Scully (the person he hired), he started a company called NeXT and Pixar, the firm that created the first computer animated feature film. When Apple got into trouble, Jobs was rehired, doing some amazing things. When he was diagnosed with cancer—which fortunately could be successfully treated—his outlook on life changed. In the 2005 commencement address at Stanford University he said: “Because almost everything—all external expectations, all pride, all fear of embarrassment or failure—these things just fall away in the face of death, leaving only what is truly important.” In 2006, Jobs can look back with exciting new products such as computers and the best selling iPods: the Nano and the Video. Now, the pundits are wondering, what will be Steve’s next innovation?
Question:
1. Compare and contrast the careers of Bill Gates and Steve Jobs.
2. Compare and contrast the leadership styles and managerial practices of Gates and Jobs.
3. What do you think about the future of Microsoft and Apple Computers?
What is the outlook on life of the two computer nerds?

CASE 5: INFORMATION TECHNOLOGY AT AMERICAN AIRLINES
The information system at American Airlines has become an integral part of the overall strategy to gain a competitive edge in the industry. The extensive use of computers began in the 1950s in payroll and inventory control and extended to customer service. In the early 1960s, American developed the widely known SABRE system (SABRE stands for Semi-Automated Business Research Environment). It is one of the most sophisticated passenger reservation system used by travel agents and customers.
Shortly after implementing SABRE, American also used the system for other tasks, such as controlling freight shipments, as well as dispatching and tracking flights. When the government deregulated the airline industry in 1978, the information system became an even more important tool for competing against the low-cost airlines whose labour costs were as much as 40 to 50 per cent lower. American Airlines’ strategy was to use the information technology to compete in a variety of ways. One application was to have as many aircrafts seats as possible filled without having many passengers “bumped” through overbooking. Another application was to obtain the proper balance between discount and regular fares. It was estimated that revenues could be increased dramatically by shifting only one per cent of discount fares to the full fare—clearly a competitive advantage in a market where price change occur daily and even hourly. Still another application of the information system was to find the most efficient way to fly in order to reduce fuel cost, which is the second largest expense. Some airplanes have sensors on board to monitor essential equipment; the operational information is sent to the ground station. Maintenance can then be planned effectively and performed more efficiently when the aircraft lands. Still another application of the computer was to determine the most profitable routes. The complexity of scheduling over 13,000 pilots and flight attendants on 1300 daily flights is horrendous. The high cost of overtime can put an airline at a competitive disadvantage.
Robert L Crandall, the former chairman and president of American Airlines, thinks that information systems are the key for success. He stated: “We have taken what was once a basic reservation system and built it into an integrated information system that drives our corporate strategy as much as it is driven by that strategy.” While American Airlines has been the industry leader in the use of information technology, competition developed. The 1992 program of the European Community (EC, now the European Union or EU) was designed to eliminate trade and many political barriers. The European airline industry also became deregulated than engaging in mergers, some airlines are now integrated into a network linking selected carriers together. An illustration of the cooperation among airlines involves the two computer reservation systems called Galileo and Amadeus. Thus, American Airlines—with a strategy of expanding in the European market, the largest market in the industrialized world—has ample competition. Recently, the five biggest US Airlines (Continental, Delta, Northeast, United Airlines, and now also American Airlines) developed a common website called Orbitz.com (www.orbitz.com), which could also affect SABRE.
Technology that may have given once a competitive advantage to a company may, in time, become obsolete unless it adapts to new demands and develops new applications. Max Hopper, the architect of the SABRE system, suggests that old models are no longer sufficient. Those who can use the available tools and modify them will gain a competitive edge. The trend is away from stand-alone applications to platforms that facilitate new approaches to problem solving and decision making. SABRE is not only a reservation system, but also a system for inventory control, making flight plans, and scheduling flight crews. Other data-basses were added for car rentals, hotel reservations, and theatre shows. SABRE has become an electronic travel supermarket.
Questions:
1. Discuss the evolving use of information technology at American Airlines?
2. Should American Airlines expand its position in Europe? What are the arguments for and against this expansion?


FINANCE MANAGEMENT IIBMS EXAM ANSWER SHEETS PROVIDED

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

Attempt any Four cases

CASE : 01
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.

Suppose you are Mr.Keen Kumar, the new manager. What steps will you take for the growth of Cooking LPG Ltd.?

CASE : 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.

CASE : 3
SMOOTHDRIVE TYRE LTD

Smoothdrive Tyre Ltd manufacturers tyres under the brand name “Super Tread’ for the domestic car market. It is presently using 7 machines acquired 3 years ago at a cost of Rs. 15 lakh each having a useful life of 7 years, with no salvage value.
After extensive research and development, Smoothdrive Tyre Ltd has recently developed a new tyre, the ‘Hyper Tread’ and must decide whether to make the investments necessary to produce and market the Hyper Tread. The Hyper Tread would be ideal for drivers doing a large amount of wet weather and off road driving in addition to normal highway usage. The research and development costs so far total Rs. 1,00,00,000. The Hyper Tread would be put on the market beginning this year and Smoothdrive Tyrs expects it to stay on the market for a total of three years. Test marketing costing Rs. 50,00,000, shows that there is significant market for a Hyper Tread type tyre.
As a financial analyst at Smoothdrive Tyre, Mr. Mani asked by the Chief Financial Officer (CFO), Mr. Tyrewala to evaluate the Hyper-Tread project and to provide a recommendation or whether or not to proceed with the investment. He has been informed that all previous investments in the Hyper Tread project are sunk costs are only future cash flows should be considered. Except for the initial investments, which occur immediately, assume all cash flows occur at the year-end.
Smoothedrive Tyre must initially invest Rs. 72,00,00,000 in production equipments to make the Hyper Tread. They would be depreciated at a rate of 25 per cent as per the written down value (WDV) method for tax purposes. The new production equipments will allow the company to follow flexible manufacturing technique, that is both the brands of tyres can be produced using the same equipments. The equipments is expected to have a 7-year useful life and can be sold for Rs. 10,00,000 during the fourth year. The company does not have any other machines in the block of 25 per cent depreciation. The existing machines can be sold off at Rs. 8 lakh per machine with an estimated removal cost of one machine for Rs. 50,000.
Operating Requirements
The operating requirements of the existing machines and the new equipment are detailed in Exhibits 11.1 and 11.2 respectively.
Exhibit 11.1 Existing Machines
• Labour costs (expected to increase 10 per cent annually to account for inflation) :
(a) 20 unskilled labour @ Rs. 4,000 per month
(b) 20 skilled personnel @ Rs. 6,000 per month.
(c) 2 supervising executives @ Rs. 7,000 per month.
(d) 2 maintenance personnel @ Rs. 5,000 per month.
• Maintenance cost :
Years 1-5 : Rs. 25 lakh
Years 6-7 : Rs. 65 lakh
• Operating expenses : Rs. 50 lakh expected to increase at 5 per cent annually.
• Insurance cost / premium :
Year 1 : 2 per cent of the original cost of machine
After year 1 : Discounted by 10 per cent.

Exhibit 11.2 New production Equipment
• Savings in cost of utilities : Rs. 2.5 lakh
• Maintenance costs :
Year 1 – 2 : Rs. 8 lakh
Year 3 – 4 : Rs. 30 lakh
• Labour costs :
9 skilled personnel @ Rs. 7,000 per month
1 maintenance personnel @ Rs. 7,000 per month.
• Cost of retrenchment of 34 personnel : (20 unskilled, 11 skilled, 2 supervisors and 1 maintenance personnel) : Rs. 9,90,000, that is equivalent to six months salary.
• Insurance premium
Year 1 : 2 per cent of the purchase cost of machine
After year 1 : Discounted by 10 per cent.

The opening expenses do not change to any considerable extent for the new equipment and the difference is negligible compared to the scale of operations.
Smoothdrive Tyre intends to sell Hyper Tread of two distinct markets :
1. The original equipment manufacturer (OEM) market : The OEM market consists primarily of the large automobile companies who buy tyres for new cars. In the OEM market, the Hyper Tread is expected to sell for Rs. 1,200 per tyre. The variable cost to produce each Hyper Tread is Rs. 600.
2. The replacement market : The replacement market consists of all tyres purchased after the automobile has left the factory. This markets allows higher margins and Smoothdrive Tyre expects to sell the Hyper Tread for Rs. 1.500 per tyre. The variable costs are the same as in the OEM market.
Smoothdrive Tyre expects to raise prices by 1 percent above the inflation rate.
The variable costs will also increase by 1 per cent above the inflation rate. In addition, the Hyper Tread project will incur Rs. 2,50,000 in marketing and general administration cost in the first year which are expected to increase at the inflation rate in subsequent years.
Smoothdrive Tyre’s corporate tax rate is 35 per cent. Annual inflation is expected to remain constant at 3.25 per cent. Smoothdrive Tyre uses a 15 per cent discount rate to evaluate new product decisions.
The Tyre Market
Automotive industry analysts expect automobile manufacturers to have a production of 4,00,000 new cars this year and growth in production at 2.5 per year onwards. Each new car needs four new tyres (the spare tyres are undersized and fall in a different category) Smoothdrive Tyre expects the Hyper Tread to capture an 11 per cent share of the OEM market.
The industry analysts estimate that the replacement tyre market size will be one crore this year and that it would grow at 2 per cent annually. Smoothdrive Tyre expects the Hyper Tread to capture an 8 per cent market share.
You also decide to consider net working capital (NWC) requirements in this scenario. The net working capital requirement will be 15 per cent of sales. Assume that the level of working capital is adjusted at the beginning of the year in relation to the expected sales for the year. The working capital is to be liquidated at par, barring an estimated loss of Rs. 1.5 crore on account of bad debt. The bad debt will be a tax-deductible expenses.
As a finance analyst, prepare a report for submission to the CFO and the Board of Directors, explaining to them the feasibility of the new investment.

CASE : 4
COMPUTATION OF COST OF CAPITAL OF PALCO LTD

In October 2003, Neha Kapoor, a recent MBA graduate and newly appointed assistant to the Financial Controller of Palco Ltd, was given a list of six new investment projects proposed for the following year. It was her job to analyse these projects and to present her findings before the Board of Directors at its annual meeting to be held in 10 days. The new project would require an investment of Rs. 2.4 crore.
Palco Ltd was founded in 1965 by Late Shri A. V. Sinha. It gained recognition as a leading producer of high quality aluminum, with the majority of its sales being made to Japan. During the rapid economic expansion of Japan in the 1970s, demand for aluminum boomed, and palco’s sales grew rapidly. As a result of this rapid growth and recognition of new opportunities in the energy market, Palco began to diversify its products line. While retaining its emphasis on aluminum production, it expanded operations to include uranium mining and the production of electric generators, and finally, it went into all phases of energy production. By 2003, Palco’s sales had reached Rs. 14 crore level, with net profit after taxes attaining a record of Rs. 67 lakh.
As Palco expanded its products line in the early 1990s, it also formalized its caital budgeting procedure. Until 1992, capital investment projects were selected primarily on the basis of the average return on investment calculations, with individual departments submitting these calculations for projects falling within their division. In 1996, this procedure was replaced by one using present value as the decision making criterion. This change was made to incorporate cash flows rather than accounting profits into the decision making analysis, in addition to adjusting these flows for the time value of money. At the time, the cost of capital for Palco was determined to be 12 per cent, which has been used as the discount rate for the past 5 years. This rate was determined by taking a weighted average cost Palco had incurred in raising funds from the capital market over the previous 10 years.
It had originally been Neha’s assignment to update this rate over the most recent 10-year period and determine the net present value of all the proposed investment opportunities using this newly calculated figure. However, she objected to this procedure, stating that while this calculation gave a good estimate of “the past cost” of capital, changing interest rates and stock prices made this calculation of little value in the present. Neha suggested that current cost of raising funds in the capital market be weighted by their percentage mark-up of the capital structure. This proposal was received enthusiastically by the Financial Controller of the Palco, and Neha was given the assignment of recalculating Palco’s cost of capital and providing a written report for the Board of Directors explaining and justifying this calculation.
To determine a weighted average cost of capital for Palco, it was necessary for Neha to examine the cost associated with each source of funding used. In the past, the largest sources of funding had been the issuance of new equity shares and internally generated funds. Through conversations with Financial Controller and other members of the Board of Directors, Neha learnt that the firm, in fact, wished to maintain its current financial structure as shown in Exhibit 1.

Exhibit 1 Palco Ltd Balance Sheet for Year Ending March 31, 2003
Assets Liabilities and Equity
Cash
Accounts receivable
Inventories
Total current assets
Net fixed assets
Goodwill
Total assets Rs. 90,00,000
3,10,00,000
1,20,00,000
5,20,00,000
19,30,00,000
70,00,000
25,20,00,000
Accounts payable
Short-term debt
Accrued taxes
Total current liabilities
Long-term debt
Preference shares
Retained earnings
Equity shares
Total liabilities and equity shareholders fund
Rs. 8,50,000
1,00,000
11,50,000
1,20,00,000
7,20,00,000
4,80,00,000
1,00,00,000
11,00,000

25,20,00,000

She further determined that the strong growth patterns that Palco had exhibited over the last ten years were expected to continue indefinitely because of the dwindling supply of US and Japanese domestic oil and the growing importance of other alternative energy resources. Through further investigations, Neha learnt that Palco could issue additional equity share, which had a par value of Rs. 25 pre share and were selling at a current market price of Rs. 45. The expected dividend for the next period would be Rs. 4.4 per share, with expected growth at a rate of 8 percent per year for the foreseeable future. The flotation cost is expected to be on an average Rs. 2 per share.

Preference shares at 11 per cent with 10 years maturity could also be issued with the help of an investment banker with an investment banker with a per value of Rs. 100 per share to be redeemed at par. This issue would involve flotation cost of 5 per cent.
Finally, Neha learnt that it would be possible for Palco to raise an additional Rs. 20 lakh through a 7 – year loan from Punjab National Bank at 12 per cent. Any amount raised over Rs. 20 lakh would cost 14 per cent. Short-term debt has always been usesd by Palco to meet working capital requirements and as Palco grows, it is expected to maintain its proportion in the capital structure to support capital expansion. Also, Rs. 60 lakh could be raised through a bond issue with 10 years maturity with a 11 percent coupon at the face value. If it becomes necessary to raise more funds via long-term debt, Rs. 30 lakh more could be accumulated through the issuance of additional 10-year bonds sold at the face value, with the coupon rate raised to 12 per cent, while any additional funds raised via long-term debt would necessarily have a 10 – year maturity with a 14 per cent coupon yield. The flotation cost of issue is expected to be 5 per cent. The issue price of bond would be Rs. 100 to be redeemed at par.
In the past, Palco had calculated a weighted average of these sources of funds to determine its cost of capital. In discussion with the current Financial Controller, the point was raised that while this served as an appropriate calculation for external funds, it did not take into account the cost of internally generated funds. The Financial Controller agreed that there should be some cost associated with retained earnings and need to be incorporated in the calculations but didn’t have any clue as to what should be the cost.
Palco Ltd is subjected to the corporate tax rate of 40 per cent.
From the facts outlined above, what report would Neha submit to the Board of Directors of palco Ltd ?

CASE : 5
ARQ LTD

ARQ Ltd is an Indian company based in Greater Noida, which manufactures packaging materials for food items. The company maintains a present fleet of five fiat cars and two Contessa Classic cars for its chairman, general manager and five senior managers. The book value of the seven cars is Rs. 20,00,000 and their market value is estimated at Rs. 15,00,000. All the cars fall under the same block of depreciation @ 25 per cent.
A German multinational company (MNC) BYR Ltd, has acquired ARQ Ltd in all cash deal. The merged company called BYR India Ltd is proposing to expand the manufacturing capacity by four folds and the organization structure is reorganized from top to bottom. The German MNC has the policy of providing transport facility to all senior executives (22) of the company because the manufacturing plant at Greater Noida was more than 10 kms outside Delhi where most of the executives were staying.
Prices of the cars to be provided to the Executives have been as follows :
Manager (10) Santro King Rs. 3,75,000
DGM and GM (5) Honda City 6,75,000
Director (5) Toyota Corolla 9,25,000
Managing Director (1) Sonata Gold 13,50,000
Chairman (1) Mercedes benz 23,50,000
The company is evaluating two options for providing these cars to executives
Option 1 : The company will buy the cars and pay the executives fuel expenses, maintenance expenses, driver allowance and insurance (at the year – end). In such case, the ownership of the car will lie with the company. The details of the proposed allowances and expenditures to be paid are as follows :
a) Fuel expense and maintenance Allowances per month
Particulars Fuel expenses Maintenance allowance
Manager
DGM and GM
Director
Managing Director
Chairman Rs. 2,500
5,000
7,500
12,000
18,000 Rs. 1,000
1,200
1,800
3,000
4,000
b) Driver Allowance : Rs. 4,000 per month (Only Chairman, Managing Director and Directors are eligible for driver allowance.)
c) Insurance cost : 1 per cent of the cost of the car.

The useful life for the cars is assumed to be five years after which they can be sold at 20 per cent salvage value. All the cars fall under the same block of depreciation @ 25 per cent using written down method of depreciation. The company will have to borrow to finance the purchase from a bank with interest at 14 per cent repayable in five annual equal instalments payable at the end of the year.
Option 2 : ORIX, The fleet management company has offered the 22 cars of the same make at lease for the period of five years. The monthly lease rentals for the cars are as follows (assuming that the total of monthly lease rentals for the whole year are paid at the end of each year.

Santro Xing Rs. 9,125
Honda City 16,325
Toyota Corolla 27,175
Sonata Gold 39,250
Mercedes Benz 61,250
Under this lease agreement the leasing company, ORIX will pay for the fuel, maintenance and driver expenses for all the cars. The lessor will claim the depreciation on the cars and the lessee will claim the lease rentals against the taxable income. BYR India Ltd will have to hire fulltime supervisor (at monthly salary of Rs. 15,000 per month) to manage the fleet of cars hired on lease. The company will have to bear additional miscellaneous expense of Rs. 5,000 per month for providing him the PC, mobioe phone and so on.
The company’s effective tax rate is 40 per cent and its cost of capital is 15 per cent.
Analyse the financial viability of the two options. Which option would you recommend ? Why ?


BUSINESS LAW IIBMS ONGOING EXAM ANSWER SHEETS PROVIDED

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BUSINESS LAW

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.

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:

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?

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.

HUMAN RESOURCE MANAGEMENT
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?

MANAGERIAL ECONOMICS

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.

MARKETING MANAGEMENT

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.

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?

OPERATION MANAGEMENT
CASE – 1

The Indian Railways’ ambitious Kashmir Railway Project. This was one of its most important and difficult projects as it aimed to build a railroad connection through the Himalayan foothills linking Kashmir with the rest of India. The main objective of this project was to provide an alternative and more reliable mode of transportation system to the people of Kashmir than the existing mode of travel by road. Officially, this track was named as the Jammu-Udhampur-Katra-Qazigund-Baramulla link (JUSBRL). The unique features of this line, according to observers, were the presence of a major earthquake zone, extreme environmental conditions in terms of temperature, and the most extreme geological profile throughout the entire terrain.

Some experts lauded the Indian Railway’s initiatives and how it had overcome some of the challenges associated with the project and said that once accomplished it would be an engineering miracle. However, it was also criticized on many fronts and some experts believed that the project had been bungled at the planning stage itself.

Question:

» Understand issues and challenges in executing a large infrastructure project by studying the ambitious Kashmir Railway Project which once accomplished would be an engineering miracle.

» Appreciate the difficulties before the project managers due to the fragile geology and steep topography – presence of a major earthquake zone, extreme environmental conditions in terms of temperature, etc.

» Appreciate the difficulties involved in the execution of large infrastructure projects in developing countries, and how these can be overcome.

QUANTITATIVE METHOD

1. “All quantitative techniques have hardly any real-life applications.” Do you agree with the statement? Discuss

2. A company makes two kinds of leather belts. Belt A is a high quality belt, and belt B is of lower quality. The respective profits are Rs 20 and Rs 15 per belt. Each belt of type A requires twice as much time as belt of type B, and if all belts were of type B, the company could make 1,000 per day. The supply of leather is sufficient for only 800 belts per day (both A and B combined). Belt A requires a fancy buckle, and only 400 per day are available. There are only 700 buckles a day available for belt B. What should be the daily production of each type of belts to maximize profit. Use simplex method.

3. How can you formulate an assignment problem as a standard linear programming problem? Illustrate.

4. The following are the timing in regard to two jobs J1 and J2, each of which requires to be processed on two machines A and B in the order ‘A following B’. In what sequence should they be performed so that the total processing time involved is the least? Also obtain the time involved.

Job Time (Hours)
_______________________________________
Machine A Machine B
J1 6 8
J2 7 3

Use graphical method.
5. What function does inventory perform? State the two basic inventory decisions management must take as they attempt to accomplish the functions of inventory just described by you.

6. A truck owner finds from his past experience that the maintenance costs are Rs 200 for the first year and then increase by Rs 2,000 every year. The cost of the truck type A is Rs 9,000. Determine the best age at which to replace the truck. If the optimum replacement is followed, what will be the average yearly cost of owning and operating the truck? Truck type B costs Rs 10,000. Annual operating costs are Rs 400 for the first year and then increase by Rs 800 every year. The truck owner has now the truck type A which is one year old. Should it be replaced with B Type, and if so, when?

7. What are the major comparative characteristics of the PERT model and the CPM model? What are their limitations, if any? Discuss.

8. Describe the steps involved in the process of decision making.

9. A person plays a game in which he gains Rs 20 with a probability of 0.4 or loses Rs 10 with a probability of 0.6. He has an amount of Rs 20 with him and plays the game repeatedly until he loses all the amount he has or adds Rs 30 or Rs 40 to the initial amount. Draw up a transition probability matrix of him.

10. “Simulation is typically the process of carrying out sampling experiments on the models of the system rather than the system itself.” Elucidate this statement by taking some examples.

STRATEGIC MANAGEMENT
MANAGING HINDUSTAN UNILEVER STRATEGICALLY

Unilever is one of the world’s oldest multinational companies. Its origin goes back to the 19th century when a group of companies operating independently, produced soaps and margarine. In 1930, the companies merged to form Unilever that diversified into food products in 1940s. Through the next five decades, it emerged as a major fast-moving consumer goods (FMCG) multinational operating in several businesses. In 2004, the Unilever 2010 strategic plan was put into action with the mission to ‘bring vitality to life’ and ‘to meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good, and get more out of life’. The corporate strategy is of focusing on bore businesses of food, home care and personal care. Unilever operates in more than 100 countries, has a turnover of € 39.6 billion and net profit of € 3.685 billion in 2006 and derives 41 per cent of its income from the developing and emerging economies around the world. It has 179,000 employees and is a culturally-diverse organisation with its top management coming from 24 nations. Internationalisation is based on the principle of local roots with global scale aimed at becoming a ‘multi-local multinational’.
The genesis of Hindustan Unilever (HUL) in India, goes back to 1888 when Unilever exported Sunlight soap to India. Three Indian, subsidiaries came into existence in the period 1931-1935 that merged to form Hindustan Lever in 1956. Mergers and acquisitions of Lipton (1972), Brooke Bond (1984), Ponds (1986), TOMCO (1993), Lakme (1998) and Modern Foods (2002) have resulted in an organisation that is a conglomerate of several businesses that have been continually restructured over the years.
HUL is one of the largest FMCG company in India with total sales of Rs. 12,295 crore and net profit of 1855crore in 2006. There are over 15000 employees, including more than 1300 managers. The present corporate strategy of HUL is to focus on core businesses. These core businesses are in home and personal care and food. There are 20 different consumer categories in these two businesses. For instance, home and personal care is made up of personal wash, laundry, skin care, hair care, oral care, deodorants, colour cosmetics and ayurvedic personal and health care, while food businesses have tea, coffee, ice creams and processed food brands. Apart from the two product divisions, there are separate departments for specialty exports and new ventures.
Strategic management at HUL is the responsibility of the board of directors headed by a chairman. There are five independent and five whole-time directors. The operational management is looked after by a management committee comprising of Vice Chairman, CEO and managing director and executive directors of the two business divisions and functional areas. The divisions have a lot of autonomy with dedicated assets and resources. A divisional committee having the executive director and heads of functions of sales, commercial and manufacturing looks after the business level decision-making. The functional-level management is the responsibility of the functional head. For instance, a marketing manager has a team of brand managers looking after the individual brands. Besides the decentralised divisional structure, HUL has centralised some functions such as finance, human resource management, research, technology, information technology and corporate and legal affairs.
Unilever globally and HUL nationally, operate in the highly competitive FMCG markets. The consumer markets for FMCG products are finicky: it’s difficult to create customers and much more difficult to retain them. Price is often the central concern in a consumer purchase decision requiring producers to be on continual guard against cost increases. Sales and distribution are critical functions organisationally. HUL operates in such a milieu. It has strong competitors such as the multinationals Procter & Gamble, Nivea or L’Oreal and formidable local companies such as, Amul, Nirma or the Tata

Questions:

1. State the strategy of Hindustan Unilever in your own words.
2. At what different levels is strategy formulated in HUL?
3. Comment on the strategic decision-making at HUL.
4. Give your opinion on whether the shift in strategic decision-making from India to Unilever’s headquarters could prove to be advantageous to HUL or not.


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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?

2. How does lifting of ‘Country-wise quota regime’ help Arvind Mills?

3. 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.