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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 maximum of 10 percent reduction in sales volume will take place.
- A maximum of 6 percent reduction in sales price of cars will take place.
Mr. Shorsighted prepares a projected income statement which is representative of the recession years. While doing so, he determines what he thinks are the “irreducible minimum” expenditures under
recessionary conditions. For him, risk of insolvency is the main concern while designing the capital structure. To support his view, he presents the income statement as shown in Exhibit 3.
Exhibit 3 projected Profit and Loss account
(Amount in Rs. Crore)
Sales revenue (72,000 units x Rs. 2,35,000) 1,692.0
Operating expenditure
Variable cost :
Raw material and manufacturing expenses 1,170.0
Variable overheads 90.0
Total 1,260.0
Fixed cost :
R & D ---
Marketing and advertising 15.0
Depreciation 187.5
Personnel 70.0
Total 272.5
Total operating expenditure 1,532.5
EBIT 159.5
Financial expenses :
Interest on existing Debentures 7.0
Interest on existing institutional borrowings 10.0
Interest on commercial loan 30.0
Interest on additional debt 15.0 62.0
EBT 97.5
Tax (@ 35%) 34.1
EAT 63.4
Dividends --
Debt redemption (sinking fund obligation) 50.0*
Contribution to reserves and surplus 13.4
* Rs. 40 crore (existing debt) + Rs. 10 crore (additional debt)
Assumptions of Mr. Shorsighted
- R & D expenditure can be done away with till the economy picks up.
- Marketing and advertising expenditure can be reduced by 40 per cent.
- Keeping in mind the investor confidence that the company enjoys, he feels that the company can forgo paying dividends in the recession period.
He goes with his worked out statement to the Director Finance, Mr. Arthashatra, and advocates raising Rs. 100 crore of debt to finance the intended capital investment. Mr. Arthashatra does not feel comfortable with the statements and calls for the company’s financial analyst, Mr. Longsighted.
Mr. Longsighted carefully analyses Mr. Shortsighted’s assumptions and points out that insolvency should not be the sole criterion while determining the debt capacity of the firm. He points out the following :
- Apart from debt servicing, there are certain expenditures like those on R & D and marketing that need to be continued to ensure the long-term health of the firm.
- Certain management policies like those relating to dividend payout, send out important signals to the investors. The Zip Zap Zoom’s management has been paying regular dividends and discontinuing this practice (even though just for the recession phase) could raise serious doubts in the investor’s mind about the health of the firm. The firm should pay at least 10 per cent dividend in the recession years.
- Mr. Shortsighted has used the accounting profits to determine the amount available each year for servicing the debt obligations. This does not give the true picture. Net cash inflows should be used to determine the amount available for servicing the debt.
- Net Cash inflows are determined by an interplay of many variables and such a simplistic view should not be taken while determining the cash flows in recession. It is not possible to accurately predict the fall in any of the factors such as sales volume, sales price, marketing expenditure and so on. Probability distribution of variation of each of the factors that affect net cash inflow should be analyzed. From this analysis, the probability distribution of variation in net cash inflow should be analysed (the net cash inflows follow a normal probability distribution). This will give a true picture of how the company’s cash flows will behave in recession conditions.
The management recognizes that the alternative suggested by Mr. Longsighted rests on data, which are complex and require expenditure of time and effort to obtain and interpret. Considering the importance of capital structure design, the Finance Director asks Mr. Longsighted to carry out his analysis. Information on the behaviour of cash flows during the recession periods is taken into account.
The methodology undertaken is as follows :
- Important factors that affect cash flows (especially contraction of cash flows), like sales volume, sales price, raw materials expenditure, and so on, are identified and the analysis is carried out in terms of cash receipts and cash expenditures.
- Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.
- Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.
Assuming a normal distribution of the expected behaviour, the mean expected
value of net cash inflow in adverse conditions came out to be Rs. 220.27 crore with standard deviation of Rs. 110 crore.
Keeping in mind the looming recession and the uncertainty of the recession behaviour, Mr. Arthashastra feels that the firm should factor a risk of cash inadequacy of around 5 per cent even in the most adverse industry conditions. Thus, the firm should take up only that amount of additional debt that it can service 95 per cent of the times, while maintaining cash adequacy.
To maintain an annual dividend of 10 per cent, an additional Rs. 35 crore has to be kept aside. Hence, the expected available net cash inflow is Rs. 185.27 crore (i.e. Rs. 220.27 – Rs. 35 crore)
Question:
Analyse the debt capacity of the company.
ANSWER
Subject – International Business
Marks - 100
Note: Solve any 4 Cases Study’s
CASE: I ARROW AND THE APPAREL INDUSTRY
Ten years ago, Arvind Clothing Ltd., a subsidiary of Arvind Brands Ltd., a member of the Ahmedabad based Lalbhai Group, signed up with the 150- year old Arrow Company, a division of Cluett Peabody & Co. Inc., US, for licensed manufacture of Arrow shirts in India. What this brought to India was not just another premium dress shirt brand but a new manufacturing philosophy to its garment industry which combined high productivity, stringent in-line quality control, and a conducive factory ambience.
Arrow’s first plant, with a 55,000 sq. ft. area and capacity to make 3,000 to 4,000 shirts a day, was established at Bangalore in 1993 with an investment of Rs 18 crore. The conditions inside—with good lighting on the workbenches, high ceilings, ample elbow room for each worker, and plenty of ventilation, were a decided contrast to the poky, crowded, and confined sweatshops characterising the usual Indian apparel factory in those days. It employed a computer system for translating the designed shirt’s dimensions to automatically mark the master pattern for initial cutting of the fabric layers. This was installed, not to save labour but to ensure cutting accuracy and low wastage of cloth.
The over two-dozen quality checkpoints during the conversion of fabric to finished shirt was unique to the industry. It is among the very few plants in the world that makes shirts with 2 ply 140s and 3 ply 100s cotton fabrics using 16 to 18 stitches per inch. In March 2003, the Bangalore plant could produce stain-repellant shirts based on nanotechnology.
The reputation of this plant has spread far and wide and now it is loaded mostly with export orders from renowned global brands such as GAP, Next, Espiri, and the like. Recently the plant was identified by Tommy Hilfiger to make its brand of shirts for the Indian market. As a result, Arvind Brands has had to take over four other factories in Bangalore on wet lease to make the Arrow brand of garments for the domestic market.
In fact, the demand pressure from global brands which want to outsource form Arvind Brands is so great that the company has had to set up another large factory for export jobs on the outskirts of Bangalore. The new unit of 75,000 sq. ft. has cost Rs 16 crore and can turn out 8,000 to 9,000 shirts per day. The technical collaborators are the renowned C&F Italia of Italy.
Among the cutting edge technologies deployed here are a Gerber make CNC fabric cutting machine, automatic collar and cuff stitching machines, pneumatic holding for tasks like shoulder joining, threat trimming and bottom hemming, a special machine to attach and edge stitch the back yoke, foam finishers which use air and steam to remove creases in the finished garment, and many others. The stitching machines in this plant can deliver up to 25 stitches per inch. A continuous monitoring of the production process in the entire factory is done through a computerised apparel production management system, which is hooked to every machine. Because of the use of such technology, this plant will need only 800 persons for a capacity which is three times that of the first plant which employs 580 persons.
Exports of garments made for global brands fetched Arvind Brands over Rs 60 crore in 2002, and this can double in the next few years, when the new factory goes on full stream. In fact, with the lifting of the country-wise quota regime in 2005, there will be surge in demand for high quality garments from India and Arvind is already considering setting up two more such high tech export-oriented factories.
It is not just in the area of manufacture but also retailing that the Arrow brand brought a wind of change on the Indian scene. Prior to its coming, the usual Indian shirt shop used to be a clutter of racks with little by way of display. What Arvind Brands did was to set up exclusive showrooms for Arrow shirts in which the functional was combined with aesthetic. Stuffed racks and clutter eschewed. The product were displayed in such a manner the customer could spot their qualities from a distance. Of course, today this has become standard practice with many other brands in the country, but Arrow showed the way. Arrow today has the largest network of 64 exclusive outlets across India. It is also present in 30 retail chains. It branched into multi-brand outlets in 2001, and is present in over 200 select outlets.
From just formal dress shirts in the beginning, the product range of Arvind Brands has expanded in the last ten years to include casual shirts, T-shirts, and trousers. In the pipeline are light jackets and jeans engineered for the middle-aged paunch. Arrow also tied up with the renowned Italian designer, Renato Grande, who has worked with names like Versace and Marlboro, to design its Spring / Summer Collection 2003. The company has also announced its intention to license the Arrow brand for other lifestyle accessories like footwear, watches, undergarments, fragrances, and leather goods. According to Darshan Mehta, President, Arvind Brands Ltd., the current turnover at retail prices of the Arrow brand in India is about Rs 85 crore. He expects the turnover to cross Rs 100 crore in the next few years, of which about 15 per cent will be from the licensed non-clothing products.
In 2005, Arvind Brands launched a major retail initiative for all its brands. Arvind Brands licensed brands (Arrow, Lee and Wrangler) had grown at a healthy 35 per cent rate in 2004 and the company planned to sustain the growth by increasing their retail presence. Arvind Brands also widened the geographical presence of its home-grown brands, such as Newport and Ruf-n Tuf, targeting small towns across India. The company planned to increase the number of outlets where its domestic brands would be available, and draw in new customers for readymades. To improve its presence in the high-end market, the firm started negotiating with an international brand and is likely to launch the brand.
The company has plans to expand its retail presence of Newport Jeans, from 1200 outlets across 480 towns to 3000 outlets covering 800 towns.
For a company ranked as one of the world’s largest manufactures of denim cloth and owners of world famous brands, the future looks bright and certain for Arvind Brands Ltd.
Company profile
Name of the Company :Arvind Mills
Year of Establishment :1931
Promoters : Three brothers--Katurbhai, Narottam Bhai, and Chimnabhai
Divisions :Arvind Mills was split in 1993 into Units—textiles, telecom and garments. Arvind Ltd. (textile unit) is 100 per cent subsidiary of Arvind Mills.
Growth Strategy :Arvind Mills has grown through buying-up of sick units, going global and acquisition of German and US brand names.
Questions
- Why did Arvind Mills choose globalization as the major route to achieve growth when the domestic market was huge?
ANSWER
When businesses decide to expand through global marketing there are certain issues of concern, for example, where a product will be most productive with consumers or how to promote the product in another country and is the demand for the product large enough that it will bring in enough profits for the business. Marketers of a company must create a marketing strategy that will influence consumers locally but also internationally. For example, The Bank of North Carolina was a local bank but wanted to extend the company but needed a marketing strategy that would introduce the company to a global market. The best way to approach this situation was merger with one of the highest respecting banks in the nation Bank of America. From the merger it brought recognition to the local bank and also has consumers in other parts of the world. Merging with other well known establishments is one way of putting local businesses out on the market.
- How does lifting of ‘Country-wise quota regime’ help Arvind Mills?
- 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
- Is the economic environment of Kenya favourable to international business? Yes or no—substantiate.
ANSWER
No, economic environment of Kenya is not favourable to international business.
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
- 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
- Why has the ‘late corner’s strategy’ of Toyota failed in China, though it succeeded in India?
- 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
- What product strategy did WOI adopt? And why? Global standardisation? Local customisaton?
- What pricing strategy did WOI follow? What, according to you, could have been the appropriate strategy?
- 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.
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
- What is the objective of Dabur? Is it profit maximisation or growth maximisation? Discuss.
ANSWER
Objectives are:
- 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.
- 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.
ANSWER
Yes I think the growth of Dabur from a small pharmacy to a large multinational company is an indicator of the following advantages of joint stock company.
CASE – 2 IT Industry: Checkered Growth
IT industry is now considered as vital for the development of any economy. Developing countries value the importance of this industry due to its capacity to provide much needed export earnings and support in the development of other industries. Especially in Indian context, this industry has assumed a significant position in the overall economy, due to its exemplary potentials in creating high value jobs, enhancing business efficiency and earning export revenues. The IT revolution has brought unexpected opportunities for India, which is emerging as an increasingly preferred location for customised software development. Experts are estimating the global IT industry to grow to US$1.6 million over the coming six years and exports to reach Rs. 2000 billion by 2008. It is envisaged that Indian IT industry, though a very small portion of the global IT pie, has tremendous growth prospects.
Stock Taking
The decade of 1970 may be taken as the stage of introduction of the Indian IT industry. The early years were marked by 75 per cent of software development taking place overseas and the rest 25 per cent in India. Exports of Indian software until the mid-1970s was mainly Eastern Europe, followed by US. Tata Consultancy Services (TCS) was among the pioneers in selling its services outside India, by working for IBM Labs in the US. The hardware segment lagged behind its software counterpart. With instances of exports worth US$ 4 million in 1980, the software segment of the industry has shown an uneven profile. It was not until 1980s that vigorous and sustained growth in software exports begun, as MNCs like Texas Instruments started to take serious interest in India as a centre of software production. Destinations of export also underwent changes, with US dominating the main export market with 75 per cent of the exports. The IT Enabled Services (ITeS) segment, however, had not emerged at this stage.
It was also during the mid to late 1980s that computer firms shifted focus from mainframe computers (the mainstay of MNCs) to Personal Computers (PCs). In March 1985, Minicomp installed the first ever PC at CSI, Delhi; this changed the entire industry for good. With the entry of networking and applications like CAD/CAM, PC sales soared in 1987-88, touching 50,000 units.
From a modest growth in the mid-1980s software exports moved up to Rs. 3.8 billion in 1991-92. Since then, it grew at an incredible rate, up to 115 per cent in 1993. The hardware could also register an annual growth of 40 per cent in this period, backed by a surging demand for PCs and networking. Growth of the industry was also driven by the emergence and rapid growth of the ITeS segment.
IT sector’s share of GDP rose steadily in this period, rate of increase being the highest at 44.91 per cent in 2000-01. It was in the same year that the size of the total IT market was the biggest in the decade, at Rs. 56,592 crore. The overall IT market was also found to increase till 2000-01. The overall IT market was also found to increase till 2000-01, with the only exception of 1998-99. The domestic market also showed an overall increase till 2000-01, registering a spectacular CAGR of 50.39 per cent. Aggregate output of software and services also increased in this period, though at an uneven rate. Of approximately $1 billion worth of sales in 1991-1992, domestic hardware sales constituted 37.2 per cent (13.4 per cent growth over the previous year), exports of hardware 6.6 per cent.
During 2000-01 the growth in the hardware segment was driven mainly by PCs, which contributed about 58 per cent of the total hardware market. This period also witnessed the phenomenon of increasing share of Tier 2 and cities in PC sales, thereby indicating PC penetration into the hinterland. PC shipments had increased by 35 per cent every year from 1997 till 2000-01 when it reached 1.8 million PCs. The commercial PC market saw a growth of 23.5 per cent mainly due to slashing of prices by major vendors.
It was in 2001-02 that the industry had a sharp fall in rate of growth of its share of GDP to 5.90 per cent, from 44.91 per cent in the previous year. The total IT market also showed a fall in growth rate from 56.42 per cent in 2000-01 to a mere 16.24 per cent in the next year, growing further at the rate of 16.25 per cent in the next year. Software export was also affected, registering a low growth of 28.74 per cent and failed to maintain its growth rate of 65.30 per cent in the previous year. It got further lowered to 26.30 per cent in 2002-03. CAGR of total output of software and services (in Rs. crore) came down to 25.61 in 2001-02 and further to 25.11 in 2002-03. The domestic market showed a steep decline in growth to 3 per cent in 2001-02 from an outstanding 50.39 per cent in 2000-01. It could, however, recover by growing at 4.11 per cent in the next year.
Table 1: Indian IT Industry: 1996-97 to 2002-03
| Year | A* | B* | C* | D* | E* | |
| 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 | 1.22 1.45 1.87 2.71 2.87 3.09 | 18,641 25,307 36,179 56,592 65,788 76,482 | 3,900 6,530 10,940 17,150 28,350 36,500 46,100 | 6,594 10,899 16,879 23,980 37,350 47,532 59,472 | 9,438 12,055 14,227 18,837 28,330 29,181 30,382 | |
*A: share of GDP of the Indian IT market, B: size of the Indian IT market (in Rs. crore), C: software and services exports (in Rs. crore), D: size of software and services (in Rs. crore), E: size of the domestic market (in Rs. crore) Questions 1. Try to identify various stages of growth of IT industry on basis of information given in the case and present a scenario for the future. 2. Study the table given. Apply trend projection method on the figures and comment on the trend. 3. Compute a 3 year moving average forecast for the years 1997-98 through 2003-04. By almost any measure, David Galbenski’s company Contract Counsel was a success. It was a company Galbenski and a law school buddy, Mark Adams, started in 1993; it helps companies find lawyers on a temporary contract basis. The growth over the past five years had been furious. Revenue went from less than $200,000 to some $6.5 million at the end of 2003, and the company was placing thousands of lawyers a year. At then the revenue growth began to flatten; the company grew just 8% in 2004 despite a robust market for legal services estimated at about $250 billion in the United States alone. Frustrated and concerned, Galbenski stepped back and began taking a hard look at his business. Could he get it back on the fast track? “Most business books say that the hardest threshold to cross is that $10 million sales mark,” he says. “I knew we couldn’t afford to grow only 10% a year. We needed to blow right through that number.” For that to happen, Galbenski knew he had to expand his customer base beyond the Midwest into large legal supermarkets such as Boston, New York, and Washington, D.C. He also knew that in doing so, he could run into stiff competition from larger publicly traded rivals. Contract Counsel’s edge has always been its low price, Clients called when dealing with large-scale litigation or complicated merger and acquisition deals, either of which can require as many as 100 lawyers to manage the discovery process and the piles of documents associated with it. Contract Counsel’s temps cost about $75 an hour, roughly half of what a law firm would charge, which allowed the company to be competitive despite its relatively small size. Galbenski was counting on using the same strategy as he expanded into new cities. But would that be enough to spur the hyper growth that he craved for? At that time, Galbenski had been reading quite a bit about the growing use of offshore employees. He knew companies like General Electric, Microsoft and Cisco were saving bundles by setting up call and data centers in India. Could law firms offshore their work? Galbenski’s mind raced with possibilities. He imagined tapping into an army of discount-priced legal minds that would mesh with his existing talent pool in the U.S. The two work forces could collaborate over the Web and be productive on a 24-7 basis. And the cost could be massive. Using offshore workers was a risk, but the payoff was potentially huge. Incidentally Galbenski and his eight-person management team were preparing to meet for their semiannual review meeting. The purpose of the two-day event was to decide the company’s goals for the coming year. Driving to the meeting, Galbenski struggled to figure out exactly what he was going to say. He was still undecided about whether to pursue an incremental and conservative national expansion or take a big gamble on overseas contractors. The Decision The next morning Galbenski kicked off the management meeting. Galbenski laid out the facts as he saw them. Rather than look at just the next five years of growth, look at the next 20, he said. He cited a Forrester Research prediction that some 79,000 legal jobs, totaling $5.8 billion in wages, would be sent offshore by 2015. He challenged his team to be pioneers in creating a new industry, rather than stragglers racing to catch up. His team applauded. Returning to the office after the meeting, Galbenski announced the change in strategy to his 20 full-timers. Then he and his team began plotting a global action plan. The first step was to hire a company out of Indianapolis, Analysts International, to start compiling a list of the best legal services providers in countries where people had comparatively strong English skills. The next phase was vetting the companies in person. In February 2005, just three months after the meeting in Port Huron, Galbenski found himself jetting off on a three months trip to scout potential contractors in India, Dubai, and Sri Lanka. Traveling to cities like Bangalore, Chennai and Hyderabad, he interviewed executives from more than a dozen companies, investigating their day-to-day operations firsthand. India seemed like the best bet. With more than 500 law schools and about 200,000 law students graduating each year, it had no shortage or attorneys. What amazed Galbenski, however, was that thanks to the Web, lawyers in India had access to the same research tools and case summaries as any associate in the U.S. Sure, they didn’t speak American English. “But they were highly motivated, highly intelligent, and extremely process-oriented,” he says. “They were also eager to tackle the kinds of tasks that most new associated at law firms look down upon” such as poring over and coding thousands of documents in advance of a trial. In other words, they were perfect for the kind of document-review work he had in mind. After a return visit to India in August 2005, Galbenski signed a contract with two legal services companies: QuisLex, in Hyderabad, and Manthan Services in Bangalore. Using their lawyers and paralegals, Galbenski figured he could cut his document-review rates to $50 an hour. He also outsourced the maintenance of the database used to store the contact information for his thousands of contractors. In all, he spent about 12 months and $250,000 readying his newly global company. Convincing U.S. based clients to take a chance on the new service hasn’t been easy. In November, Galbenski lined up pilot programs with four clients (none of which are ready to publicise their use of offshore resources). To help get the word out, he launched a website (offshore-legal-services.com), which includes a cache of white papers and case studies to serve as a resource guide for companies interested in outsourcing. Questions 1. As money costs will decrease due to decision to outsource human resource, some real costs and opportunity costs may surface. What could these be? ANSWER Companies choose outsourcing to reduce costs, minimize business risks, and hasten product market entry. The cost reduction may result from improved organizational effectiveness, shorter product development cycles, greater access to high technology, or restructured and improved use of resources. Outsourcing often leads to enhanced effectiveness by permitting the company to focus on core competencies and lessen its demands on tangible resources. 2. Elaborate the external and internal economies of scale as occurring to Contract Counsel. ANSWER These are real economies which are related to the distribution of the product. These may be due to advertisement, large-scale sales promotion, exclusive agreements with distributors, and change in the model or style of the product. 3. Can you see some possibility of economies of scope from the information given in the case? Discuss. ANSWER Economies of scope are changes in average costs because of changes in the mix of output between two or more products. This refers to the potential cost savings from joint production – even if the products are not directly related to each other. | ||||||
CASE – 4 Indian Stock Market: Does it Explain Perfect Competition?
The stock market is one of the most important sources for corporates to raise capital. A stock exchange provides a market place, whether real or virtual, to facilitate the exchange of securities between buyers and sellers. It provides a real time trading information on the listed securities, facilitating price discovery.
Participants in the stock market range from small individual investors to large traders, who can be based anywhere in the world. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor. The other type of exchange is of a virtual kind, composed of a network of computers and trades are made electronically via traders.
By design a stock exchange resembles perfect competition. Large number of rational profit maximisers actively competing with each other, trying to predict future market value of individual securities comprises the main feature of any stock market. Important current information is almost freely available to all participants. Price of individual security is determined by market forces and reflects the effect of events that have already occurred and are expected to occur. In the short run it is not easy for a market player to either exit or enter; one cannot exit and enter for few days in those stocks which are under no delivery. For example Tata Steel was in no delivery from 29/10/07 to 02/11/07. Similarly one cannot enter or exit on those stocks which are in upper or lower circuit for few regular trading sessions. Therefore a player has to depend wholly on market price for its profit maximizing output (in this case stock of securities). In the long run players may exit the market if they are not able to earn profit, but at the same time new investors are attracted by rise in market price.
As on 01/11/07 total market capital at Bombay Stock Exchange (BSE) is $1589.43 billion (source: Business Standard, 1/11/2007); out of this individual investors account for only $100bn. In spite of the fact that individual investors exist in a very large number, their capital base is less than 7% of total market capital; rest of capital is owned by foreign institutional investor and domestic institutional investors (FIIs and DIIs), which are very small in number. Average capital owned by a single large player is huge in comparison to small investor. This situation seems to have prompted Dr Dash of BSE to comment ‘The stock market activity is increasingly becoming more centralised, concentrated and non competitive, serving interest of big players only.” Table 2 shows the impact of change in FII on National Stock Exchange movement during three different time periods.
Table 2: Impact of FIIs’ Investment on NSE
Wave | Date | Nifty close | Change in Nifty Index | FLLS Net Investment (Rs.Cr.) | Change in Market Capitalisation (Rs.Cr.) |
| Wave 1 From To | 17/05/04 26/10/05 | 1388.75 2408.50 | 1019.75 | 59520 | 5,40,391 |
| Wave 2 From To | 27/10/05 11/05/06 | 2352.90 3701.05 | 1348.15 | 38258 | 6,20,248 |
| Wave 3 From To | 12/05/06 13/06/06 | 3650.05 2663.30 | -986.75 | -9709 | -4,60,149 |
By design, an Indian Stock Market resembles perfect competition, not as a complete description (for no markets may satisfy all requirements of the model) but as an approximation.
Questions
- Is stock market a good example of perfect competition? Discuss.
ANSWER
The stock market is an example of perfect competition in that everyone has the same chances of ups and downs in a certain market. Laws also help to ensure it's perfect competition by making insider trading illegal.
- Identify the characteristics of perfect competition in the stock market setting.
ANSWER
- Can you find some basic aspect of perfect competition which is essentially absent in stock market?
ANSWER
Some basic aspect of perfect competition which is essentially absent in stock market are:
CASE – 5 The Indian Audio Market
The Indian audio market pyramid is featured by the traditional radios forming its lower bulk. Besides this, there are four other distinct segments: mono recorders (ranking second in the pyramid), stereo recorders, midi systems (which offer the sound amplification of a big system, but at a far lower price and expected to grow at 25% per year) and hi-fis (minis and micros, slotted at the top end of the market).
Today the Indian audio market is abound with energy and action as both national and international majors are trying to excel themselves and elbow the others, ushering in new concepts, like CD sound, digital tuners, full logic tape deck, etc. The main players in the Indian audio market are Philips, BPL and Videocon. Of these, Philips is one of the oldest and is considered at the leading national brands. In fact it was the first company to introduce a range of international products such as CD radio cassette recorder, stand alone CD players and CD mini hi-fi systems. With the easing of the entry barriers, a number of new international players like Panasonic, Akai, Sansui, Sony, Sharp, Goldstar, Samsung and Aiwa have also entered the arena. This has led to a sea of changes in the industry and resulted in an expanded market and a happier customer, who has access to the latest international products at competitive prices. The rise in the disposable income of the average Indian, especially the upper-income section, has opened up new vistas for premium products and has provided a boost to companies to launch audio systems priced as high as Rs. 50,000 and beyond.
Pricing across Segments
Super Premium Segment: This segment of the market is largely price-insensitive, as consumers are willing to pay a premium in order to obtain products of high quality. Sonodyne has positioned itself in this segment by concentrating on products that are too small for large players to operate in profitably. It has launched a range of systems priced between Rs. 30,000 to Rs. 60,000. National Panasonic has launched its super premium range of systems by the name of Technics.
Premium Segment: Much of the price game is taking place in this segment, in which systems are priced around Rs. 25,000. Even the foreign players ensure that the pricing is competitive. Entry barriers of yester years compelled the demand by this segment to be partially met by the grey market. With the opening up of the market, the premium segment is witnessing a rapid growth and is currently estimated to be worth Rs. 30 crores. Growth of this segment is also being driven by consumers who want to upgrade their old music systems. Another major stimulating factor is the plethora of financing options available, bringing more and more consumers to the market.
Philips has understood the Indian listener well enough to dictate the basic principles of segmentation. It projects its products as high quality at medium price. In fact, Philips had successfully spotted an opportunity in the wide price gap between portable cassette players and hi-fi systems and pioneered the concept of a midi system (a three-in-one containing radio, tape deck and amplifier in one unit). Philips has also realised that there is a section of the rich consumer which values not just power but also clarity and is willing to pay for it. The pricing strategy of Philips was to make the most of its image as a technology leader. To this end, it used non-price variables by launching of a range of state of art machines like the FW series, and CD players. Moreover, it came up with the punch line in its advertisements as, “We Invent For You”.
BPL stands second only to Philips in the audio market and focuses on technology as its USP. Its kingpin in the marketing mix is its high technology superior quality product. It is thus at being the product-quality leader. BPL’s proposition of fidelity is translated in its punchline for its audio systems as, ‘e-fi your imagination’ (d-fi stands for digital fidelity). The company follows a market skimming strategy. When a new product was launched, it was placed in the top end of the market, and priced accordingly. The company offers a range of products in all price segments in the market without discounting the brand.
Another major player, Videocon, has managed to price its products lower even in the premium segment. The success of the Powerhouse (a 160 watt midi launched by Philips in 1990) had prompted Videocon to launch the Select Sound range of midi stereo systems at a slightly lower price. At the premium end, Videocon is making efforts to upgrade its image to being “quality-driven” by associating itself with the internationally reputed brand name of Sansui from Japan, and following a perceived value pricing method.
Sony is another brand which is positioning itself as a premium product and charges a higher price for the superior quality of sound it offers. Unlike indulging into price wars, Sony’s ad-campaigns project the message that nothing can beat Sony in the quality and intensity of sound. National Panasonic is another player that has three products in the top end of the market, priced in the Rs. 21,000 to Rs. 32,000 range.
Monos and Stereos: Videocon has 21% share I the overall audio market, but has been a major player only in personal stereos and two-in-ones. Its history is written with instances where it has offered products of similar quality, but at much lower prices than its competitors. In fact, Videocon launched the Sansui brand of products with a view to transform its image from that of being a manufacturer of cheap products to that of being a company that primes quality, and also to obtain a share of the hi-fi segment. Sansui is being positioned as a premium brand, targeting the higher middle, upper income groups and also the sensitive middle class Indian consumer.
The objective of Philips in this segment is to achieve higher sales volumes and hence its strategy is to expand its range and have a product in every segment of the market. The pricing method used by Philips in this segment is providing value for money.
National Panasonic offers products in the lower end of the market, apart from the top of the range. In fact, it reduced the price of one of its small two-in-ones from Rs. 3,500 to Rs. 2,400, with the logic that a forte in the lower end of the market would help in building brand reliability across a wider customer base. The company is also guided by the logic that operating in the price sensitive region of the market will help it reach optimum levels of efficiency. Panasonic has also entered the market for midis.
These apart, there also exists a sector in the Indian audio industry, with powerful regional brands in mono and stereo segments, having a market share of 59% in mono recorders and 36% in stereo recorders. This sector has a strong influence on price performance.
Questions
- What major pricing strategies have been discussed in the case? How effective these strategies have been in ensuring success of the company?
ANSWER
Much of the price game is taking place in this segment, in which systems are priced around Rs. 25,000. Even the foreign players ensure that the pricing is competitive. Entry barriers of yester years compelled the demand by this segment to be partially met by the grey market. With the opening up of the market, the premium segment is witnessing a rapid growth and is currently estimated to be worth Rs. 30 crores. Growth of this segment is also being driven by consumers who want to upgrade their old music systems. Another major stimulating factor is the plethora of financing options available, bringing more and more consumers to the market
- Is perceived value pricing the dominant strategy of major players?
ANSWER
Yes value pricing the dominant strategy of major players,
Value pricing, or value optimized pricing, is a pricing strategy. It sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices.
- Which products have reached maturity stage in audio industry? Do you think that product bundling can be effectively used for promoting sale of these products?
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