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The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
1
N.B.: 1) Attempt any four cases (20 Marks Each)
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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
2
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.?
The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
3
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 installment 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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
4
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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
5
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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
6
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
The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
7
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 ?
The Indian Institute Of Business Management & Studies
Subject: Finance Management. Marks: 100
8
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 ?
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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.
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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.
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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.
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Subject: Finance Management Marks: 100
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
3.88
11.98
3.64
0.09
19.59
12.91
6.68
4.22
12.68
4.14
0.26
21.30
14.56
6.74
4.96
12.98
4.38
10.25
23.57
15.79
7.78
21.70
33.49
5.18
11.27
71.64
19.84
51.80
30.82
50.78
6.95
34.84
123.39
25.74
97.65
39.71
75.34
8.53
14.37
137.95
33.90
104.05
42.34
92.49
8.87
13.92
157.62
42.56
115.06
43.07
104.45
10.35
14.36
172.23
53.87
118.86
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Intangible Fixed Assets 0.21 0.19 0.05 4.40 22.03 22.45 20.04 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 utilization, 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?
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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?
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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.
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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
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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
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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
1,20,00
0
44,000
60,
000
27,
500
E. Overhead Rate/Per Hour (D)
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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 have 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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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
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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 exportoriented
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.
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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 twofifths
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.
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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
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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
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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.
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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.
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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 Punebased
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 alsoran.
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
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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
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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,
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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 airconditioned
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.
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Eventually, she left the heat, dust and din to the little shirt factory and returned to the protected, airconditioned
world of the limousine.
“What I’ve experienced today and the role I’ve played in creating that living hell will stay with me
forever,” she thought. Later in the day, she asked herself whether what she had seen was an
inevitable consequence of pricing policies that enabled the British customer to purchase shirts at
£12.99 instead of £13.99 and at the same time allowed the company to make its mandatory 56
percent profit margin. Were her negotiating skills—the result of many years of training—an indirect
cause of the terrible conditions she has seen?
Once Jones returned to the United Kingdom, she considered her position and the options open to her
as a buyer for a large, publicly traded, retail chain operating in a highly competitive environment.
Her dilemma was twofold: Can an ambitious employee afford to exercise a social conscience in his or
her career? And can career-minded individuals truly make a difference without jeopardising their
future? Answer her.
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Attempt Any Four Case Study
CASE – 1 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.
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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.
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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
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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
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.
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CASE – 3 Outsourcing to India: Way to Fast Track
By almost any measure, David Galbenski’s company Contract Counsel was a success. It was a company
Galbenski and a law school buddy, Mark Adams, started in 1993; it helps companies find lawyers on a
temporary contract basis. The growth over the past five years had been furious. Revenue went from
less than $200,000 to some $6.5 million at the end of 2003, and the company was placing thousands of
lawyers a year.
At then the revenue growth began to flatten; the company grew just 8% in 2004 despite a robust
market for legal services estimated at about $250 billion in the United States alone. Frustrated and
concerned, Galbenski stepped back and began taking a hard look at his business. Could he get it back
on the fast track? “Most business books say that the hardest threshold to cross is that $10 million sales
mark,” he says. “I knew we couldn’t afford to grow only 10% a year. We needed to blow right through
that number.”
For that to happen, Galbenski knew he had to expand his customer base beyond the Midwest into
large legal supermarkets such as Boston, New York, and Washington, D.C. He also knew that in doing
so, he could run into stiff competition from larger publicly traded rivals. Contract Counsel’s edge has
always been its low price, Clients called when dealing with large-scale litigation or complicated
merger and acquisition deals, either of which can require as many as 100 lawyers to manage the
discovery process and the piles of documents associated with it. Contract Counsel’s temps cost about
$75 an hour, roughly half of what a law firm would charge, which allowed the company to be
competitive despite its relatively small size. Galbenski was counting on using the same strategy as he
expanded into new cities. But would that be enough to spur the hyper growth that he craved for?
At that time, Galbenski had been reading quite a bit about the growing use of offshore employees. He
knew companies like General Electric, Microsoft and Cisco were saving bundles by setting up call and
data centers in India. Could law firms offshore their work? Galbenski’s mind raced with possibilities.
He imagined tapping into an army of discount-priced legal minds that would mesh with his existing
talent pool in the U.S. The two work forces could collaborate over the Web and be productive on a 24-
7 basis. And the cost could be massive.
Using offshore workers was a risk, but the payoff was potentially huge. Incidentally Galbenski and his
eight-person management team were preparing to meet for their semiannual review meeting. The
purpose of the two-day event was to decide the company’s goals for the coming year. Driving to the
meeting, Galbenski struggled to figure out exactly what he was going to say. He was still undecided
about whether to pursue an incremental and conservative national expansion or take a big gamble on
overseas contractors.
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The Decision
The next morning Galbenski kicked off the management meeting. Galbenski laid out the facts as he
saw them. Rather than look at just the next five years of growth, look at the next 20, he said. He cited a
Forrester Research prediction that some 79,000 legal jobs, totaling $5.8 billion in wages, would be
sent offshore by 2015. He challenged his team to be pioneers in creating a new industry, rather than
stragglers racing to catch up. His team applauded. Returning to the office after the meeting, Galbenski
announced the change in strategy to his 20 full-timers.
Then he and his team began plotting a global action plan. The first step was to hire a company out of
Indianapolis, Analysts International, to start compiling a list of the best legal services providers in
countries where people had comparatively strong English skills. The next phase was vetting the
companies in person. In February 2005, just three months after the meeting in Port Huron, Galbenski
found himself jetting off on a three months trip to scout potential contractors in India, Dubai, and Sri
Lanka. Traveling to cities like Bangalore, Chennai and Hyderabad, he interviewed executives from
more than a dozen companies, investigating their day-to-day operations firsthand.
India seemed like the best bet. With more than 500 law schools and about 200,000 law students
graduating each year, it had no shortage or attorneys. What amazed Galbenski, however, was that
thanks to the Web, lawyers in India had access to the same research tools and case summaries as any
associate in the U.S. Sure, they didn’t speak American English. “But they were highly motivated, highly
intelligent, and extremely process-oriented,” he says. “They were also eager to tackle the kinds of
tasks that most new associated at law firms look down upon” such as poring over and coding
thousands of documents in advance of a trial. In other words, they were perfect for the kind of
document-review work he had in mind.
After a return visit to India in August 2005, Galbenski signed a contract with two legal services
companies: QuisLex, in Hyderabad, and Manthan Services in Bangalore. Using their lawyers and
paralegals, Galbenski figured he could cut his document-review rates to $50 an hour. He also
outsourced the maintenance of the database used to store the contact information for his thousands of
contractors. In all, he spent about 12 months and $250,000 readying his newly global company.
Convincing U.S. based clients to take a chance on the new service hasn’t been easy. In November,
Galbenski lined up pilot programs with four clients (none of which are ready to publicise their use of
offshore resources). To help get the word out, he launched a website (offshore-legal-services.com),
which includes a cache of white papers and case studies to serve as a resource guide for companies
interested in outsourcing.
Questions
1. As money costs will decrease due to decision to outsource human resource, some real costs
and opportunity costs may surface. What could these be?
2. Elaborate the external and internal economies of scale as occurring to Contract Counsel.
3. Can you see some possibility of economies of scope from the information given in the case?
Discuss.
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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.
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Table 2: Impact of FIIs’ Investment on NSE
Wave
Date
Nifty
close
Change in
Nifty Index
FLLS Net
Investment
(Rs.Cr.)
Change in
Market
Capitalisation
(Rs.Cr.)
Wave 1
From
To
17/05/04
26/10/05
1388.75
2408.50
1019.75
59520
5,40,391
Wave 2
From
To
27/10/05
11/05/06
2352.90
3701.05
1348.15
38258
6,20,248
Wave 3
From
To
12/05/06
13/06/06
3650.05
2663.30
-986.75
-9709
-4,60,149
By design, an Indian Stock Market resembles perfect competition, not as a complete description (for
no markets may satisfy all requirements of the model) but as an approximation.
Questions
1. Is stock market a good example of perfect competition? Discuss.
2. Identify the characteristics of perfect competition in the stock market setting.
3. Can you find some basic aspect of perfect competition which is essentially absent in stock
market?
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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 upperincome
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
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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 productquality
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
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base. The company is also guided by the logic that operating in the price sensitive region of the market
will help it reach optimum levels of efficiency. Panasonic has also entered the market for midis.
These apart, there also exists a sector in the Indian audio industry, with powerful regional brands in
mono and stereo segments, having a market share of 59% in mono recorders and 36% in stereo
recorders. This sector has a strong influence on price performance.
Questions
1. What major pricing strategies have been discussed in the case? How effective these strategies
have been in ensuring success of the company?
2. Is perceived value pricing the dominant strategy of major players?
3. Which products have reached maturity stage in audio industry? Do you think that product
bundling can be effectively used for promoting sale of these products?
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