IIBM MBA ONGOING EXAM ANSWER SHEETS PROVIDED
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
Attempt Any Four Case Study (20 marks for each 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
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
Sundry debtors 40
Cash and bank balance 10
Other current assets 10
Total current assets 260
-1200
Exhibit 2 Profit and Loss Account for the year ended March 31, 200x
(Amount in Rs. Crore)
Sales revenue (80,000 units x Rs. 2,50,000) 2,000.0
Operating expenditure :
Variable cost :
Raw material and manufacturing expenses 1,300.0
Variable overheads 100.0
Total 1,400.0
Fixed cost :
R & D 20.0
Marketing and advertising 25.0
Depreciation 250.0
Personnel 70.0
Total 365.0
Total operating expenditure 1,765.0
Operating profits (EBIT) 235.0
Financial expense :
Interest on debentures 7.7
Interest on institutional borrowings 11.0
Interest on commercial loan 33.0 51.7
Earnings before tax (EBT) 183.3
Tax (@ 35%) 64.2
Earnings after tax (EAT) 119.1
Dividends 70.0
Debt redemption (sinking fund obligation)** 40.0
Contribution to reserves and surplus 9.1
* Includes the cost of inventory and work in process (W.P) which is dependent on demand (sales).
** The loans have to be retired in the next ten years and the firm redeems Rs. 40 crore every year.
The company is faced with the problem of deciding how much to invest in up gradation of its plans and technology. Capital investment up to a maximum of Rs. 100 crore is required. The problem areas are three-fold.
The company cannot forgo the capital investment as that could lead to reduction in its market share as technological competence in this industry is a must and customers would shift to manufactures providing latest in car technology.
The company does not want to issue new equity shares and its retained earning are not enough for such a large investment. Thus, the only option is raising debt.
The company wants to limit its additional debt to a level that it can service without taking undue risks. With the looming recession and uncertain market conditions, the company perceives that additional fixed obligations could become a cause of financial distress, and thus, wants to determine its additional debt capacity to meet the investment requirements.
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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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.
The Indian Institute Of Business Management & Studies
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
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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?
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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?
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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.
The Indian Institute Of Business Management & Studies
Subject: Finance Management Marks: 100
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
The Indian Institute Of Business Management & Studies
Subject: Human Resources Analytics Marks: 100
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
The Indian Institute Of Business Management & Studies
Subject: Human Resources Analytics Marks: 100
A.4 Depreciation of Plant and Machinery
44,000
A.5 Building Rates and Taxes
2,400
A.6 Welfare Expenses
19,494
A.7 Power
68,586
A.8 Works Office Salaries and Expenses
1,30,260
A.9 Miscellaneous Stores Expenses
1,190
A. Total (A.1 to A.9)
5,96,430
B. Reallocation of Service Departments Costs to Production Departments
B.1 Distribution of Works Office Costs
B.2 Distribution of Maintenance Department’s Costs
B.3 Distribution of Stores Department’s Costs
Total Charged to Producing
C. Departments (A+B)
5,96,430
D. Labour Hours Actuals for April
1,20,000
44,000
60,000
27,500
E. Overhead Rate/Per Hour (D)
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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.
Question:
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
CASE: I Managing the Guinness brand in the face of consumers’ changing tastes
1997 saw the US$19 billion merger of Guinness and GrandMet to form Diageo, the world’s largest
drinks company. Guinness was the group’s top-selling beverage after Smirnoff vodka, and the group’s
third most profitable brand, with an estimated global value of US$1.2 billion. More than 10 million glasses
of the popular stout were sold every day, predominantly in Guinness’s top markets: respectively, the UK,
Ireland, Nigeria, the USA and Cameroon.
However, the famous dark stout with the white, creamy head was causing some strategic concerns
for Diageo. In 1999, for the first time in the 241-year of Guinness, sales fell. In early 2002 Diageo CEO Paul
Walsh announced to the group’s concerned shareholders that global volume growth of Guinness was
down 4 per cent in the last six months of 2001 and, more alarmingly, sales were also down 4 per cent in
its home market, Ireland. How should Diageo address falling sales in the centuries-old brand shrouded in
Irish mystique and tradition?
The changing face of the Irish beer market
The Irish were very fond of beer and even fonder of Guinness. With close to 200 litres per capita
drunk each year—the equivalent of one pint per person per day—Ireland ranked top in worldwide per
capita beer consumption, ahead of the Czech Republic and Germany.
Beer accounted for two-thirds of all alcohol bought in Ireland in 2001. Stout led the way in volume
sales and accounted for 40 per cent of all beer value sales. Guinness, first brewed in 1759 in Dublin by
Arthur Guinness, enjoyed legendary status in Ireland, a national symbol as respected as the green, white
and gold flag. It was by far the most popular alcoholic drink in Ireland, accounting for nearly one of every
two pints of beer sold. Its nearest competitors were Budweiser and Heineken, which held 13 per cent and
12 per cent of the market respectively.
However, the spectacular economic growth of the Irish economy since the mid-1990s had opened
up the traditional drinking market to new cultures and influences, and encouraged the travel-friendly
Irish to try other drinks. Beer and in particular stout were losing popularity compared with wine or the
recently launched RTDs (ready-to-drinks) or FABs (flavoured alcoholic beverages), which the younger
generation of drinkers considered trendier and ‘healthier’. As a Euromonitor report explained: Younger
consumers consider dark beers and stout to be old fashioned drinks, with the perceived stout or ale
drinker being an old, slightly overweight man and thus not in tune with image conscious youth culture.
Beer sales, which once accounted for 75 per cent of all alcohol bought in Ireland, were expected to drop
to close to 50 per cent by 2006, while stout sales were forecast to decrease by 12 per cent between 2002
and 2006.
Giving Guinness a boost in its home market
With Guinness alone accounting for 37 per cent of Diageo’s volume in the market, Guinness/UDV Ireland
was one of the first to feel the pain caused by the declining popularity of beer and in particular stout. A
Euromonitor report in February 2002 explained how the profile of the Guinness drinker, typically men
aged 21-plus, was affected: The average age of Guinness drinkers is rising and this is bringing about the
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worrying fact that the size of the Guinness target audience is falling. The rate of decline is likely to
quicken as the number of less brand loyal, non-stout drinking younger consumers increases.
The report continued:
In Ireland, in particular, the consumer base for Guinness is shrinking as the majority of 18 to 24 year olds
consistently reject stout as a product relevant to their generation, opting instead to consume lager or
spirits.
Effectively, one-third of young Irish men and half of young Irish women had reportedly never tried
Guinness. A Guinness employee provided another explanation. Guinness is similar to coffee in that when
you’re young you drink it [coffee] with sugar, but when you’re older you drink it without. It’s got a similar
acquired taste and once you’re over the initial hurdle, you’ll fall in love with it.
In an attempt to lure young drinkers to the somewhat ‘acquired’ Guinness taste (40 per cent of the Irish
population was under the age of 24) Diageo had invested millions in developing product innovations and
brand building in Ireland’s 10,000 pubs, clubs and supermarkets.
Product innovation
Until the mid-1990s most Guinness in Ireland was drunk in a pint glass in the local pub. The launch of
product innovations in the form of a new cooling mechanism for draft Guinness and the ‘widget’
technology applied to cans and bottles attempted to modernize the brand’s image and respond to
increasing competition from other local and imported stouts and lagers.
‘A perfect head’ for canned Guinness. In 1989, and at a cost of more than £10 million, Guinness developed
an ingenious ‘widget’ device for its canned draft stout sold in ‘off-trade’ outlets such as supermarkets and
off-licenses. The widget, placed in the bottom of the can, released a gas that replicated the draft effect.
Although over 90 per cent of beer in Ireland was sold in ‘on-trade’ pubs and bars, sale of beer in the
cheaper ‘off-trade’ channel were slowly gaining in importance. The Guinness brand manager at the time,
John O’Keeffe, explained how home drinkers could now enjoy a smoother, creamier head similar to the
one obtained in a pub thanks to the new widget technology:
When the can is opened, the pressure causes the nitrogen to be released as the widget moves through the
beer, creating the classic draft Guinness surge.
Nearly 10 years later, in 1997, the ‘floating widget’ was introduced, which improved the effectiveness of
the device. A colder pint In 1997 Guinness Draft Extra Cold was launched in Ireland. An additional chilled
tap system could be added to the standard barrel in pubs, allowing the Guinness to be served at 4ºC
rather than the normal 6ºC. By serving Guinness at a cooler temperature, Guinness/UDV hoped to mute
the bitter taste of the stout and make it more palatable for younger adults, who were increasingly
accustomed to drinking chilled lager, particularly in the summer
A cooler image for Guinness
In October 1999 the widget technology was applied to long-stemmed bottles of Guinness. The launch was
supported by a US$2 million TV and outdoor board campaign. The packaging—with a clear, shiny plastic
wrap, designed to look like a pint complete with creamy head—was quite a departure from the
traditional Guinness look.
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The objective was to reposition Guinness alongside certain similarly packaged lagers and RTDs and offer
younger adults a more fashionable way to drink Guinness: straight from the bottle. It also gave Guinness
easier access to the growing number of clubs and bars that were less likely to serve traditional draft
Guinness easier access to the growing number of clubs and bars that were less likely to serve traditional
draft Guinness, which could be kept for only six to eight weeks and took two minutes to pour. The RTDs,
by contrast, had a shelf-life of more than a year and were drunk straight from the bottle.
However, financial analyst remained sceptical about the Guinness product innovations, which had no
significant positive impact on sales or profitability:
The last news about the success of the recently introduced innovations suggests that they have not had a
notably material impact on Guinness brand performance.
Brand building
Euromonitor estimates that, in 2000, Diageo invested between US$230 and US$250 million worldwide in
Guinness advertising and promotions. However, with a cost-cutting objective, the company reduced
marketing expenses in both Ireland and the UK up to 10 per cent in 2001 and the number of global
Guinness agencies from six to two.
Nevertheless, Guinness remained one of the most advertised brands in Ireland. It was the leading cinema
advertiser and, in terms of advertising, was second only to the national telecoms provider, Eircom.
Guinness was also heavily promoted at leading sporting and music events, in particular those that were
popular with the younger age groups.
The ultimate tribute to the brand was the opening of the new Guinness Storehouse in Dublin in late 2000,
a sort of Mecca for all Guinness fans. The Storehouse was also a fashionable visitor centre with an art
gallery and restaurants, and regularly hosted evening events. The company’s design brief highlighted
another key objective:
To use an ultramodern facility to breathe life into an ageing brand, to reconnect an old company with
young (sceptical) customers.
As the Storehouse’s design firm’s director, Ralph Ardill, explained:
Guinness Storehouse had become the top tourist destination in Ireland, attracting more than half a
million people and hosting 45,000 people for special events and training.
The Storehouse also had training facilities for Guinness’s bartenders and 3000 Irish employees. The
quality of the Guinness pint remained a high priority for the company, which not only developed pub-like
classrooms at the Storehouse but also employed teams of draft technicians to teach barmen how to pour
a proper pint. The process involved two steps—the pour and the top-up—and took a total of 119.5
seconds. Barmen also needed to learn how to check that the pressure gauges were properly set and that
the proportion of nitrogen to carbon dioxide in the gas was correct.
The uncertain future of the Guinness brand in Ireland
Despite Guinness/DUV’s attempt to appeal to the younger generation of drinkers and boost its fading
image, rumours persisted in Ireland about the brand future. The country’s leading and respected
newspaper, the Irish times, reported in an article in July 2001:
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The uncertainty over its future all adds to the air of crisis that is building around Guinness Ireland Group
four months ago…The review is not complete and the assumption is that there is more bad news to come.
In the pubs across Ireland, the traditional Guinness drinkers looked on anxiously as the younger
generation drank Bacardi Breezers, Smirnoff Ices or Californian wines. Could the goliath Guinness survive
another two centuries? Was the preference for these new drinks just a fad or fashion, or did Diageo need
to seriously reconsider how it marketed Guinness?
A quick solution?
In late February 2002, Diageo CEO Paul Walsh revealed that the company was testing technology to cut
the waiting time for a pint of Guinness from 1 minute 59 seconds to 15-25 seconds. Ultrasound could
release bubbles in the stout and form the head instantly, making a pint of Guinness that would be
indistinguishable from one produced by the slower, traditional method.
‘A two-minute pour is not relevant to our customers today,’ Walsh said. A Guinness spokeswoman
continued, ‘We have got to move with the times and the brand must evolve. We must take all the
opportunities that we can. In outlets where it is really busy, if you walk in after nine o’clock in the evening
there will be a cloth over the Guinness pump because it takes longer to pour than other drinks. Aware
that some consumers might not be attracted by the innovation, she added ‘It wouldn’t be put
everywhere—only where people want a quick pint with no effect on the quality.’
Although still being tested, the ‘quick-pour pint’ was a popular topic of conversation in Dublin pubs,
among barmen and customers alike. There were rumours that it would be introduced in Britain only;
others thought it would be released worldwide.
Some market commentators viewed the quick-pour pint as an innovative way to appeal to the younger,
less patient segment in which Guinness had under-performed. Others feared that the young would be
unconvinced by the introduction, and loyal customers would be turned off by what they characterized as
a ‘marketing u-turn’.
Question:
1. From a marketing perspective, what has Guinness done to ensure its longevity?
2. How would you characterize the Guinness brand?
3. What could Guinness do to attract younger drinkers? And to retain its older loyal customer base?
Can both be done at the same time?
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CASE: II The grey market
Introduction
The over-50s market has long been ignored by advertising and marketing firms in favour of the market.
The complexity of how to appeal to today’s mature customers, without targeting their age, has proved
just too challenging for many companies. But this preoccupation with youth runs counter to demographic
changes. The over-50s represent the largest segment of the population, across western
developed countries, due largely to the post-Second World War baby boom. The sheer size of this grey
market, which will continue to grow as birth and mortality rates fall, coupled with its phenomenal
spending power, presents enormous opportunities for business. However, successfully unleashing its
potential will depend on companies truly understanding the attitudes, lifestyles and purchasing interests
of this post-war generation.
Demographic forces
Following the Second World War many countries experienced a baby boom phenomenon as returning
soldiers began families. This, coupled with a more positive outlook on the future, resulted in the baby
boom generation, born between 1946 and 1964. Now beginning to enter retirement, this affluent group
globally numbers approximately 532 million. In Western Europe they account for the largest proportion
of the total population at 14.9%, followed closely by 14.2% in North America and 13.5 % in Australia.
Table 1: Global population aged 45-54 by region: baby boomers as a % of the total population
1990/2002
Baby boomers as a
% total population
1990 2002 % point change
Western Europe 12.9 14.9 2.0
North America 9.9 14.2 4.3
Australasia 10.4 13.5 3.1
Eastern Europe 9.7 13.0 3.3
Asia-Pacific 7.8 9.8 2.0
Latin America 6.6 8.4 1.8
Africa/Middle East 2.6 2.3 20.3
WORLD 7.9 9.5 1.6
The grey market is big and getting bigger. Between 1990 and 2002 the global baby boomer population
increased by 41%. The rate of growth is predicted to decrease to 35% between 2002 and 2015.
Particularly noteworthy is the predicted increase in the proportion of baby boomers in many Western
European countries, such as Austria, Spain, Germany, Italy, and the UK. In developed countries, according
to the United Nations, the percentage of elderly people (60+) is forecast to rise from one-fifth of the
population to one-third by 2050. The growth in the elderly population is exacerbated by falling fertility
rates in many developed countries, coupled with a rise in human longevity.
The influences and buyer behaviour patterns of baby boomers
The members of the baby boomer generation are quite unlike their more conservative parents’
generation. They are the children of the rebellious ‘swinging sixties’, growing up on the sounds of the
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Beatles and the Rolling Stones. Better educated than their parents, in a time of greater prosperity, they
indulged in more hedonistic lifestyle. It has been said that they were the first ‘me generation’. Now, in
later life, they have retained their liberal, adventurous and youthful attitude to life. Aptly termed ‘younger
older people’ they abhor antiquated stereotypes of elderly people, preferring to be defined by their
attitude rather than their age.
Baby boomers are also tend to be very wealthy. Many are property owners and may have gained an
inheritance from parents or other relatives. They have higher than average incomes or have retired with
private pension plans. With their children having flown the nest they have greater financial freedom and
more time to indulge themselves. Having worked all their lives, and educated their children, many baby
boomers do not believe it is their responsibility to safeguard the financial future of their children by
carefully protecting their children’s inheritance. They are instead liquidating their assets, intent on
enjoying their later life to full, often through conspicuous consumption.
Based on research conducted by Euromonitor, the main areas of expenditure in the baby boomer market
are financial services, tourism, food and drink, luxury cars, electrical/electronic goods, clothing, health
products, and DIY and gardening.
Table 2: Global population aged 45-54 in thousands by country: developed countries 2002-2015
Country 2002 2010 2015 %change 2002/2015
Austria 1,059 1,277 1,371 29
Spain 4,921 5,741 6,189 26
Germany 10,991 12,963 13,508 26
Italy 7,684 8,591 9,347 23
UK 7,786 8,731 9,388 22
New Zealand 521 607 613 21
Ireland 474 529 555 18
Switzerland 997 1,120 1,159 17
Australia 2,661 3,006 3,057 16
Greece 1,359 1,476 1,559 15
Canada 4,505 5,320 5,122 15
Netherlands 2,301 2,492 2,604 14
Portugal 1,334 1,438 1,511 13
Norway 612 640 678 13
Denmark 745 761 802 11
USA 38,951 44,140 42,207 8
Belgium 1,423 1,549 1,526 8
Sweden 1,206 1,179 1,233 2
Japan 18,344 15,661 16,459 -10
Finland 820 749 718 -12
France 8,266 7,626 7,292 -12
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Figure 1 Global Baby boomer market: % analysis by broad sector 2002 (% value)
Note: sectors valued on the basis of estimates by senior managers in major companies in each sector,
consumer expenditure and industry sector data.
Unsurprisingly the financial sector is the largest in this market. Baby boomers are concerned with
being financially secure in their retirement. An ageing population, coupled with a rise in human longevity,
is giving rise to a pensions crisis across Western Europe. Baby boomers are therefore right to be
preoccupied with how they will maintain their lifestyle over the long term. They are actively engaging in
financial planning, both before and after retirement. Popular financial service products include
endowments, life insurance, personal pensions, PEPs and ISAs.
Baby boomers have adventurous attitudes with a desire to see the world. In their retirement
foreign travel is a key expenditure. Given their greater levels of sophistication and education, baby
boomers are much more demanding of holidays that suit their lifestyles. This group is very diverse, with
holiday interests ranging from action-packed adventures to culturally rich experiences.
Baby boomers want to maintain a youthful appearance in line with their youthful way of living.
Fear of becoming invisible is a genuine concern among older generations. This image conciousness is
reflected in their spending on clothing, cosmetics and anti-ageing products. Luxury cars also a key status
symbols for this group.
The home is another area of expenditure. Once children have flown the nest, many baby boomers
redecorate the home to suit their needs. Electrical and electronic purchases are key indulgences among
these technologically savvy consumers. Gardening is another pastime enjoyed by older generations.
Financial
services
22%
DIY/gardening
3%
Health
products
10%
Clothing
11%
Electrical/elec
tronic
11%
Luxury cars
12%
Food/drink
13%
tourism
18%
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Health is also a priority. Baby boomers invest in private health insurance and over-the-counter
pharmaceutical products to maintain their healthy lives.
Business opportunities
The sheer size of the grey market, which is getting bigger in many countries—characterized by
consumers with disposable income, ample free time, interest in travel, concern about financial security
and health, awareness of youth culture and brands and desire for aspirational living—makes this market
enormously attractive to many business sectors. Pharmaceuticals, health and beauty, technology, travel
financial services, luxury cars, lavish food and entertainment are key growth sectors for the grey market.
However, successfully tapping into this market will depend on companies truly understanding the
attitudes, lifestyles and purchasing interests of this post-war generation. Communicating with this group
is a tricky business, but, done right, it can be hugely rewarding.
When targeting the older consumer it is important to target their lifestyle and not their age. Older
people do not want to be reminded, in a patronizing way, of their age or what they should be doing now
they are a certain stage in life. With an interest in maintaining a youthful way of life these consumers are
interested in similar brands to those that appeal to younger generations. The key for the companies is to
find a way of making their brands also appeal to an older consumer without explicitly targeting their age.
One tried-and tested method of targeting this group is to use nostalgia. Mercedes Benz used the Janis
Joplin song ‘Oh Lord won’t you buy me a Mercedes Benz’ to great effect despite the obvious irony in that
the song was written to highlight the dangers of materialism! Volkswagen’s new retro-style Beetle has
also been popular among this group.
In the tourism sector Saga Holidays, the leader in holidays for the over-50s, has changed its
product offering to reflect changing trends among this group. In line with the more adventurous attitudes
of many older consumers it now offers more action-packed adventure holidays to far-flung destinations.
More recently, Thomas Cook has rebranded it over-50s ‘Forever Young’ programme to reflect the
diverse interest of its target customers. Its new primetime brochure targets five distinct groups with the
following holiday types: ‘Discover’, ‘Learn’, ‘Relax’, ‘Active’ and ‘Enjoy Life’.
Conclusion
The over-50s represent the largest segment of the population across Western developed countries. This
affluent market is big and getting bigger. Having ignored it for so long marketers are finally beginning to
see the enormous opportunities presented by the grey market. But conquering this market will not be
easy. The baby boomer generation is quite unlike its predecessors. With a youthful and adventuresome
spirit these ‘younger older people’ want to be defined by their attitude and not by their age. Only time
will tell whether today’s marketers are up to the challenge.
Questions
1. Why is the grey market so attractive to business?
2. Identify the influences on the purchasing behaviour of the over-50s consumer.
3. Discuss the challenges involved in targeting the grey market.
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CASE: III Nivea: managing an umbrella brand
‘In many countries consumer are convinced that Nivea is a local brand, a mistake which Beiersdoft, the
German makers, take as a compliment.’
(Quoted on leading brand consultancy Wolff-Olins’ website, www.wolff-olins.com)
An ode to Nivea’s success
In May 2003, a survey of ‘Global Mega Brand Franchises’ revealed that the Nivea Cosmetics brand had
presence in the maximum number of product categories and countries. The survey, conducted by USbased
ACNielsen, aimed at identifying those brands that had ‘successfully evolved beyond their original
product categories’. A key parameter was the presence of these brands in multiple product categories as
well as countries.
Nivea’s performance in this study prompted a yahoo.com news article to name it the ‘Queen of Mega
Brands’. This title was appropriate since the brand was present in over 14 product categories and was
available in more than 150 countries. Nivea was the market leader in skin creams and lotions in 28
countries, in facial cleansing in 23 countries, in facial skin care in 18 countries, and in suntan products in
15 countries. In many of those countries, it was reportedly believed to be a brand of local origin—having
been present in them for many decades. This fact went a long way in helping the brand attain leadership
status in many categories and countries (see Table 3).
Table 3 Nivea: market positions
CATEGORY Skin
care
Baby
care
Sun
protection
Men’s
care
COUNTRY
Austria 1 1 2 1
Belgium 1 1 3 1
UK 1 3 - 1
Germany 1 1 3 1
France 1 1 1 3
Italy 1 1 5 1
Netherlands 1 1 5 1
Spain 1 4 - 1
Switzerland 1 1 4 1
The study covered 200 consumer packaged goods brands from over 50 global manufacturers. The brands
had to be available in at least 15 of the countries studied; the same name had to be used in at least three
product categories and meet franchise in at least three of the five geographical regions.
In its home country Germany, too, many of Nivea’s products were the market leaders in their segments.
This market leadership status translated into superior financial performance. Between 1991 and 2001,
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Nivea posted double-digit growth rates every year. For 2001, the brand generated revenues of €2.5
billion, amounting to 55 per cent of the parent company’s (Beiersdoft) total revenue for the year. The
120-year-old, Hamburg-based Beiersdoft has often been credited with meticulously building the Nivea
brand into the world’s number one personal care brand. According to a survey conducted by ACNielsen in
the late 1990s, the brand had a 15 per cent share in the global skin care products market. While Nivea
had always been the company’s star performer, the 1990s were a period of phenomenal growth for the
brand. By successfully extending what was essentially a ‘one-product wonder’ into many different
product categories, Beiersdoft had silenced many critics of its umbrella branding decision.
The marketing game for Nivea
Millions of customers across the world have been familiar with the Nivea brand since their childhood.
The visual (colour and packaging) and physical attributes (feel, smell) of the product stayed on in their
minds. According to analysts, this led to the formation of a complex emotional bond between customers
and the brand, a bond that had strong positive under-tones. According to a superbrands.com. my article,
Nivea’s blue colour denoted sympathy, harmony, friendship and loyalty. The white colour suggested
external cleanliness as well as inner purity. Together, these colours gave Nivea the aura of an honest
brand.
To customers, Nivea was more than a skin care product. They associated Nivea with good health, graceful
ageing and better living. The company’s association Nivea with many sporting events, fashion events and
other lifestyle-related events gave the brand a long-lasting appeal. In 2001, Franziska Schmiedebach,
Beiersdoft’s Corporate Vice President (Face Care and Cosmetics), commented that Nivea’s success over
the decades was built on the following pillars: innovation, brand extension and globalization (see Table 4
for the brand’s sales growth from 1995-2002)
Table 4 Nivea: worldwide sales growth (%)
Innovation and brand extensions
Innovation and brand extensions went hand in hand for Nivea. Extensions had been made back in the
1930s and had continued in the 1960s when the face care range Nivea Visage was launched. However, the
first major initiative to extend the brand to other products came in the 1970s. Naturally, the idea was to
cash in on Nivea’s strong brand equity. The first major extension was launch of ‘Nivea For Men’
aftershave in the 1970s. Unlike the other aftershaves available in market, which caused the skin to burn
on application, Nivea For Men soothed the skin. As a result, the product became a runaway success.
The positive experience with the aftershave extension inspired the company to further explore the
possibilities of brand extensions. Moreover, Beiersdoft felt that Nivea’s unique identity, the values it
Sales Growth 1995 1996 1997 1998 1999 2000 2001 2002
In Million € 1040 1166 1340 1542 1812 2101 2458 2628
In per cent 9.8 12.1 14.9 15.1 17.5 16.0 17.0 6.9
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represented (trustworthiness, simplicity, consistency, caring) could easily be used to make the transition
to being an umbrella brand. The decision to diversify its product range was also believed to have
influenced by intensifying competitive pressures. L’Oreal’s Plenitude range, Procter & Gamble’s Oil of
Olay range, Unilever’s Pond’s range, and Johnson & Johnson’s Neutrogena range posed stiff competition
to Nivea.
Though Nivea was the undisputed market leader in the mass-market face cream segment worldwide, its
share was below Oil of Olay’s, Pond’s and Plenitude’s in the US market. While most of the competing
brands had a wide product portfolio, the Nivea range was rather limited. To position Nivea as a
competitor in a larger number of segments, the decision to offer a wider range inevitable.
Beiersdoft’s research centre—employing over 150 dermatological and cosmetics researchers,
pharmacists and chemists—supported its thrust on innovations and brand extensions. During the 1990s,
Beiersdoft launched many extensions, including men’s care products, deodorants (1991), Nivea Body
(1995), and Nivea Soft (1997). Most of these brand extension decisions could be credited to Rolf Kunisch,
who became Beiersdoft’s CEO in the early 1990s. Rolf Kunisch firmly believed in the company’s ‘twin
strategy’ of extension and globalization.
By the beginning of the twenty-first century, the Nivea umbrella brand offered over 300 products in 14
separate segments of the health and beauty market (see Table 5 and Figure 2 for information on Nivea’s
brand extensions). Commenting on Beiersdoft’s belief in umbrella branding, Schmiedebach said,
‘Focusing your energy and investment on one umbrella brand has strong synergetic effects and helps
build leading market positions across categories.’ A noteworthy aspect of the brand extension strategy
was the company’s ability to successfully translate the ‘skin care’ attributes of the original Nivea cream to
the entire gamut of products.
Table 5 Nivea: brand portfolio
Category Products
Nivea Bath Care Shower gels, shower specialists, bath foams, bath specialists, soaps, kids’
products, intimate care
Nivea Sun (sun care) Sun protection lotion, anti-ageing sun cream, sensitive sun lotion, sunspray,
children’s sun protection, deep tan, after tan, self –tan, Nivea baby
sun protection
Nivea Beaute (colour cosmetics) Face, eyes, lips, nails
Nivea For Men (men’s care) Shaving, after shaving, face care, face cleansing
Nivea Baby (baby care) Bottom cleansing, nappy rash protection, general cleansing, moisturizing,
sun protection
Nivea Body (body care) Essential line, performance line, pleasure line
Nivea Crème Nivea crème
Nivea Deodorants Roll-ons, sprays, pump sprays, sticks, creams, wipes, compact
Nivea Hand (hand care) Hand care lotions and creams
Nivea Lip Care Basic care, special care, cosmetic care, extra protection care
Nivea Visage (face care) Daily cleaning, deep cleaning, facial masks (cleaning/care), make-up
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remover, active moisture care, advanced repair care, special care
Nivea Vital (mature skin care) Basic face care, specific face care, face cleansing products, body care
Nivea Soft Nivea soft moisturizing cream
Nivea Hair Care Hair care (shampoos, rinse, treatment, sun); hair styling (hairspray and
lacquer, styling foams and specials, gels and specials)
Figure 2 Nivea Universe
The company ensured that each of its products addressed a specific need of consumers. Products in all
the 14 categories were developed after being evaluated on two parameters with respect to the Nivea
mother brand. First, the new product had to be based on the qualities that the mother brand stood for
NIVEA
NIVEA
Visage
NIVEA
For
Men
NIVEA
Creme
NIVEA
Body
NIVEA
Sun
NIVEA
Soft
Skin Care
NIVEA
Beaute
NIVEA
Baby
NIVEA
Hand NIVEA
Vital
NIVEA
Hair
NIVEA
Deodorrants
Personal Care
NIVEA
Bath
Care
NIVEA
Lipcare
Personal Care
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and, second, it ha to offer benefits that were consistent with those that the mother brand offered. Once a
new product cleared the above test, it was evaluated for its ability to meet consumer needs and its scope
for proving itself to be a leader in the future. For instance, a Nivea shampoo not only had to clean hair, it
also had to be milder and gentler than other shampoos in the same range.
Beiersdoft developed a ‘Nivea Universe’ framework for streamlining and executing its brand extension
efforts. This framework consisted of a central point, an inner circle of brands and an outer circle of
brands (see Figure 2)
The centre of the model housed the ‘mother brand’, which represented the core values of
trustworthiness, honesty and reliability. While the brands in the inner circle were closely related to the
core values of the Nivea brand, the brands in the outer circle were seen as extensions of these core
values. The inner-circle brands strengthened the existing beliefs and values associated with the Nivea
brand. The outer circle brands, however, sought to add new dimensions to the brand’s personality,
thereby opening up avenues, for future growth.
The ‘global-local’ strategy
The Nivea brand retained its strong German heritage and was treated as a global brand for many decades.
In the early days, local managers believed that the needs of customers from their countries were
significantly different from those of customers in other countries. As a result, Beiersdoft was forced to
offer different product formulations an packaging, and different types of advertising support.
Consequently, it incurred high costs.
It was only in the 1980s that Beiersdoft took a conscious decision to globalize the appeal of Nivea. The
aim to achieve a common platform for the brand on a global scale and offer customers from different
parts of the world a wider variety of product choices. This was radical departure from its earlier
approach, in which product development and marketing efforts were largely focused on the German
market. The new decision was not only expected to solve the problems of high costs, it was also expected
to further build the core values of the brand.
To globalize the brand, the company formulated strategies with the help of a team of ‘international’
experts with ‘local expertise’. This team developed new products for all the markets. Their
responsibilities included, among others, deciding about the way in which international advertising
campaigns should be adapted at the local level. The idea was to leave the execution of strategic decisions
to local partners. However, Beiersdoft monitored the execution to ensure that it remained in line with the
global strategic plan.
This way, Beiersdoft ensured that the nuances of consumer behaviour at the local level understood and
that their needs were addressed. Company sources claimed that by following the above approach, it was
easy to transfer know-how between headquarters and the local offices. In addition, the motivation level
of the local partners also remained on the higher side.
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The company established a set of guidelines that regulated how the marketing mix of a new
product/brand was to be developed. These guidelines stipulated norms with respect to product, pricing,
promotion, packaging and other related issues. For instance, a guideline regarding advertising read,
‘Nivea advertising is about skin care. It should be present visually and verbally. Nivea advertising is
simple, it is unpretentious and human.’
Thus all advertisements for any Nivea product depicted images related to ‘skin care’ and ‘unpretentious
human life’ in one way or the other. The company consciously decided not to use supermodels to
promote its products. The predominant colours in all campaigns remained blue and white. However, local
issues were also kept in mind. For instance, in the Middle East, Nivea relied more on outdoor media as it
worked out to be much more cost-effective. And since showing skin in the advertisements went against
the region’s culture, the company devised ways of advertising skin without showing skin.
Many brand management experts have spoken of the perils of umbrella management, such as brand
dilution and the lack of ‘change’ for consumers. However, the umbrella branding strategy worked for
Beiersdoft. In fact, the company’s growth was the most dynamic since its inception during 1990s—the
decade when the brand extension move picked up momentum. The strong yearly growth during the
1990s and the quadrupling of sales were attributed by company sources to the thrust on brand extension.
Questions
1. Discuss the reasons for the success of the Nivea range of products across the world. Why did
Beiersdoft decide to extend the brand to different product categories? In the light of Beiersdoft’s
brand extension of Nivea, critically comment on the pros and cons of adopting an umbrella
branding strategy. Compare the use of such a strategy with the use of an independent branding
strategy.
2. According to you, what are the core values of the Nivea brand? What type of brand extension
framework did Beiersdoft develop to ensure that these core values id not get diluted? Do you think
the company was able to protect these core values? Why/why not?
3. What were the essential components of Beiersdoft’s global expansion strategy for Nivea? Under
what circumstances would a ‘global-strategy-local execution’ approach be beneficial for a
company? When and why should this approach be avoided?
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CASE: IV Pret a Manger: passionate about food
Introduction
Pret a Manger (French for ‘ready to eat’) is a chain of coffee shops that sells a range of upmarket, healthy
sandwiches and desserts as well as a variety o coffees to an increasingly discerning set of lunchtime
customers. Started in London, England, in 1986 by two university graduates, Pret a Manger has more
than 120 stores across the UK. In 2002 it sold 25 million sandwiches and 14 million cups of coffee, and
had a turnover of over £100 million. Buckingham Palace reportedly orders more than £1000 worth of
sandwiches a week and British Prime Minister Tony Blair has had Pret sandwiches delivered to number
10 Downing Street for working lunches. The company also has ambitious plans to expand further—it
already has stores in New York, Hong Kong and Tokyo, and has set its sights on further international
growth.
Background and company history
In 1986, Pret a Manger was founded with one shop, in central London, and a £17,000 loan, by two
property law graduates, Julian Metcalf and Sinclair Beecham, who had been students together at the
University of Westminster in the early 1980s. At that time the choice of lunchtime eating in London and
other British cities was more limited than it is today. Traditionally, some ate in restaurants while many
favoured that well-known British institution, the pub, as a choice for lunchtime eating and drinking.
There was, however, a growing awareness among many people of the benefits of healthy eating and a
healthy lifestyle, and lunchtime habits were changing. There was a general trend towards taking shorter
lunch brakes and, among office workers, to take lunch at their desks. For those who wanted food to take
away, the choice in fast food was dominated by the large chains such as McDonald’s, Burger King and
Kentucky Fried Chicken (now KFC) while other types of carry-out food, such as pizzas, were also
available.
Sandwiches also played an important part in British lunchtime eating. Named after its eighteenth-century
inventor, the Earl of Sandwich, the humble sandwich had long been a popular British lunch choice,
especially for those with little time to spare. Prior to Pret’s arrival on the scene, sandwiches were sold
mainly either pre-packed in supermarkets and high-street variety chain stores such as Marks and
Spencer and Boots, or in the many small sandwich bars that were to be found in the business districts of
large cities like London, Sandwich bars were usually small, independently owned or family run shops that
made sandwiches to order for customers who waited in a queue, often out on to the pavement outside.
Dissatisfied with the quality of both the food and service from traditional sandwich bars, Metcalf and
Beecham decided that Pret a Manger should offer something different. They wanted Pret’s food to be high
quality and healthy, and preservative and additive free. In the beginning, they shopped for the food
themselves at local markets and returned to the store where they made the sandwiches each morning.
Pret’s offering was based around premium-quality sandwiches and other health-orientated lunches
including salads, sushi and a range of desserts, priced higher than at traditional sandwich bars, and sold
pre-packed in attractive and convenient packaging ready to go. There was also a choice of different
coffees, as well as some healthy alternatives. Service aimed to be fast and friendly go give customers a
minimum of queuing time.
Pret a Manger: ‘Passionate about What We do’
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Pret a Manger strongly emphasizes the quality of its products. Its promotional material and website
claims that it is:
‘passionate about food, rejecting the use of obscure chemicals, additives and preservatives common in so
much of the prepared and fast food on the market today…it there’s a secret to our success so far we like
to think its determination to focus continually on quality—not just our food, but in every aspect of what
we do’.
Great importance is also placed on freshness. Unlike those sold in high-street shops or supermarkets,
Pret’s sandwiches are all hand-made by staff in each shop starting at 6.30 every morning, rather than
being prepared and delivered by a supplier or from a central location. Metcalf and Beecham believe this
gives their sandwiches a freshness and distinctiveness. All food that hasn’t been sold in the shops by the
end of the day is given away free to local charities.
Careful sourcing of supplies for quality has also always been important. Genetically modified ingredients
are banned and the tuna Pret buys, for example, must be ‘dolphin friendly’. There is also a drive for
constant product improvement and innovation—the company claims that its chocolate brownie dessert
has been improved 33 times over the last few years—and, on average, a new product is tried out in the
stores every four days. Aware that some of its customers are increasingly health conscious, Pret’s website
menu carefully lists not only what is available, but also the ingredients and nutritional values in terms of
energy, protein, fats and dietary fibre for each item.
The level and quality of service from staff in the shop is a critical factor. The stores are self-service, with
customers helping themselves to sandwiches and other products form the supermarket-style
refrigerated cabinets. Staff at the counter at the back of the store then serve customers coffee and take
payment. Service is friendly, smiling and efficient, in contrast to many retail and restaurant outlets in
Britain where, historically, service quality has not always been high. Prêt puts an emphasis on human
resource management issues such as effective recruitment and training so as to have frontline staff who
can show the necessary enthusiasm and also remain fast and courteous under the pressure of a busy
lunchtime sales period. These staff are usually young and enthusiastic, some are students, many are
international. The pay they receive is above the fast-food industry average and staff turnover is 98 per
cent a year, which sounds high—however, this is against an industry norm of around 150 per cent. In
2001, Pret had 55,000 applications for 1500 advertised vacancies.
Recently, Fortune magazine voted Pret one of the top 10 companies to work for in Europe. According to
its own promotional recruitment material, Pret is an attractive and fun place to work: ‘We don’t work
nights, we wear jeans, we party!’ Service quality is checked regularly by the use of mystery shoppers: if a
shop receives a good report, then the staff there receive a 75p an hour bonus in the week of the visit.
Head office managers also visit stores on a regular basis and every three or four months every one of
these managers works as a ‘buddy’, where they spend a day making sandwiches and working on the floor
in one of the shops to help them keep in touch with what is going on. Store employees work in teams and
are briefed daily, often on the basis of customer responses that come in from in-store reply cards,
telephone calls and the company website. The website, which, lists the names and phone numbers of its
senior executives, actively invites customers to comment or complain about their experience with Pret,
and encourages them to contact the company. Great importance is placed on this customer feed-back,
both positive and negative, which is discussed at weekly management meetings.
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The design of the stores is also distinctive. Prominently featuring the company logo, they are fitted out in
a high-tech with metal cladding and interiors in Pret’s own corporate dark red colour. Each store plays
music, helping to create a stylish and lively atmosphere. Although the shops mainly sell carry out food
and coffee in the morning and through the lunchtime period, many also have tables and seating where
customers can drink coffee and eat inside the store or, weather permitting, on the pavement outside.
Growth and competition
Three years after the first Pret shop was launched another was opened and, after that, the chain began to
grow so that, by 1998, there were 65 throughout London. In the late 1990s stores were also opened in
other British cities such as Bristol, Cambridge and Manchester. Although growth in the UK has been
rapid—between 2000 and 2002 the company opened 40 new outlets and there are over 120 throughout
Britain—Pret’s policy has always been to own and manage all its own stores and not to franchise to other
operators. In 2002, £1 million was spent in launching an Internet service that enables customers to order
sandwiches online.
Plans for international growth have been more cautious. In 2000 the company made its first move
overseas when it opened a shop near Wall Street in New York. However, there were problems on several
fronts in moving into the USA. Metcalf is quoted saying, ‘As a private company its very difficult to set up
abroad. We didn’t know where to begin in New York—we ended up having all the equipment for the shop
made here and shipped over.’ There were also staffing and service quality difficulties—Pret reportedly
found it difficult to recruit people in New York who had the required friendliness to serve in the stores
and had to import British staff. Despite these problems, several other shops in New York have followed
and, in 2001, Pret opened its first outlet in Hong Kong.
During the 1990s, coffee shops boomed as the British developed a growing taste for drinking coffee in
pavement cafes, and competition for Pret grew as other chains entered the fray. Rivals like Coffee
Republic, Caffè Nero, Costa Coffee (now owned by leisure group Whitbread) Aroma (owned by
McDonald’s) and American worldwide operator Starbucks all came into the market, as well as a number
of smaller independents. All these chains offer a wide range of coffees but with varying product offerings
in terms of food, pricing and style (Starbucks, for example, offers comfortable arm-chairs around tables,
which encourage people to linger or work in a laptop in the store). In a London shopping street it is not
uncommon to see three or four rival outlets next door to or within a few yards of each other. However, it
quickly became clear that the sector was overcrowded and, apart from Starbucks, some of the other
chains reportedly struggled to make a profit. In 2002 Coffee Republic was taken over by Caffè Nero,
which also eventually acquired the ailing Aroma chain from McDonald’s. Costa Coffee was the largest
chain overall with over 300 shops throughout Britain, while Starbucks was expanding aggressively and
aimed to have an eventual 4000 stores worldwide.
The future
As work and lifestyles get busier, the demand for convenience and fast foods continues to grow. In 2000,
some estimates put the total value of the fast-food market in Britain, excluding sandwiches, at over £6
billion and growing about £200-£300 million a year. While the growth in sales of some types of fast food,
like burgers, was showing signs of slowing down, sandwiches continued to increase in popularity so that
by 2002 sales wee an estimated £3 billion. Customers are also getting more health conscious and choosy
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about what they eat and, increasingly, want nutritional information about food from labelling and
packaging.
In January 2001, in a surprise move, Pret’s two founders sold a 33 per cent stake in the company to fastfood
giant McDonald’s for an estimated £25 million. They claim that McDonald’s will not have any
influence over what Pret does or the products it sells, but that the investment by McDonald’s will help
their plan for future development. According to Metcalf:
‘We’ll still be in charge—we’ll have the majority of shares. Pret will continue as it does… The deal wasn’t
about money—we could have sold the shares for much more to other buyers but they wouldn’t have
provided the support we need.’
After a long run of success, Pret has ambitious plans for the future. It hopes to open at least 20 new stores
a year in the UK. In late 2002 it opened its first store in Tokyo, Japan, in partnership with McDonald’s. The
menu there is described as being 75 per cent ‘classic Pret’ with the remaining 25 per cent designed more
to please local tastes. In other international markets, the plan is to move cautiously—Pret’s first move
will be to open more stores in New York and Hong Kong, where it has already been successful.
Questions
1. How has Pret a Manger positioned its brand?
2. Explain how the different elements of the services marketing mix support and contribute to the
positioning of Pret a Manger.
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Case V ‘Fast Fashion’: exploring how retailers get affordable fashion on to the
high street
The term ‘fast fashion’ has become very much de rigueur within the fashion retailing industry. Retailers
have to react quickly to changes in the market, possess lean manufacturing operations, and utilize
responsive supply chains in order to get the latest fashions to the mass market. Stores such as H&M, Zara,
Mango, Top Shop and Benetton have been tremendously successful in being responsive to the fashion
needs of the market. Excellent logistical and marketing information systems are seen as key to the
implementation of the ‘fast fashion’ concept. ‘Fast fashion’ is the emphasis of putting fashionable and
affordable design concepts, which match consumer demand, on to the high street as quickly as possible.
These retailers get sought-after fashions into stores in a matter of weeks, rather than the previous
industry norm, which relied on production lead times ranging from six months to a year. The concept of
‘fast fashion’ relies of a number of central components: excellent marketing information systems, flexible
production and logistics operations, excellent communications within the supply chain, and leveraging
advanced IT systems. These components allow stores to track consumer demand, and deliver a rapid
response to changes in the marketplace. The results are invigorating for fashion retailers, with ‘fast
fashion’ retailers’ sales growing by 11 per cent, compared with the industry norm of 2 per cent.
Within the fashion industry a number of different levels exist, the exclusive haute couture ranges
(made to measure), the designer ready-to-wear collections, and then copycat designs by mass-market
retailers. Fashion has now gone to the high street, becoming more democratic for the mass market.
The traditional fashion- retailing model was seasonal, whereby retailers would typically launch
two seasons: spring and autumn collections. Fashion retailers would buy for these collections from their
supplier network a year in advance, and allow for between 20-30 per cent of their purchasing budgets
open to specific fashion changes in the market. Typically, retailers would have perennial offerings that
rarely change as well as catering to the whims of fashion, such as basic T-shirts and jeans.
Now, through the ‘fast fashion’ philosophy, new items are being stocked in stores more frequently. These
newer product ranges stimulate shoppers into frequenting these stores on a more regular basis, in some
cases weekly to see new fashion items. Savvy brand-loyal shoppers know when new stock is being
delivered to their favourite store. Through increased stock replenishment of new, fashionable items,
consumers are increasing their footfall to these stores, and furthermore these stores are developing
brand images as cutting edge, trendy, and fashionable. This increased footfall, where shoppers regularly
visit a store, eliminates the need for major expenditure on advertising and promotion. Also the concept of
‘fast fashion’ is helping to improve sales, conversion ratios within these stores. Due to the limited supply
of designs available, this creates an aura of exclusivity for these garments, further enhancing the brands
of these ‘fast fashion retailers’ as leading fashion brands.
Famous for ABBA, Volvos and IKEA, now Sweden has another international success story: H&M. The basic
business premise behind H&M is ‘fashion and quality at the best price’. The company now has over 1068
stores in 21 countries. H&M sources 50 per cent of its goods in Europe and the remainder in low-cost
Asian countries. Sourcing decisions are dependent on cost, quality, lead times and export regulations. The
lead times for items can vary from a minuscule two weeks to six months, dependent on the item itself.
H&M believes that having very short lead times can be beneficial in terms of stock control, however it is
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not the most important criteria for all items. Basic clothing garments can have lead times running into
months, due to consistent demand. However, items that are more trend- and fashion-conscious require
very short lead times, to match demand. H&M is now also in the process of teaming up with prestigious
designers like Karl Lagerfeld to create affordable fashion ranges.
The firm utilizes close relationships with its network of production offices and 700 suppliers. Unlike
some other clothing retailers, H&M outsources all of its production to independent suppliers. The dyeing
of garments is postponed until as late as possible in the production process to allow greater flexibility
and adaptation to the whims of the fashion buyer. Items from around the world are shipped to a
centralized transit warehouse in Hamburg, Germany, where quality checks are undertaken, and the items
are allocated to individual stores or placed in centralized storage. Items that are placed in this ‘call-off
warehouse’ are allocated to stores where there is more demand for the particular item. For example, if
pairs of a particular style of jeans are selling well in London, more jeans are shipped from Hamburg to
H&M’s London stores.
Table 6: Some of the key players in apparel industry
H&M Next Benetton
Originated in Sweden Originated in the UK Originated in Italy
Chain has 1069 stores in 21
countries
Has 380 stores in the UK and
Ireland and has 80 franchise
stores overseas
Has a presence in 120
countries and uses a retail
network o 5000 stores
Originally called Hennes &
Mauritz, renamed as H&M.
Sells women’s and men’s
apparel. Doesn’t own any
manufacturing resources.
Motto—‘Fashion and quality at
the best price’.
Sells women’s wear, men’s
wear and homeware. The firm
has a very successful catalogue
business. Targets the top end
of the mass market, focusing on
fashionable moderately priced
clothing
Sell under brand name such as
Benetton, Playlife, Sisley and
Killer Loop. Uses a network of
franchises/partner stores.
Established huge brand
awareness through its
infamous ad campaigns.
Zara Mango Arcadia
Originated in Spain Originated in Spain Originated in the UK
Chain has 729 Zara stores Chain has 770 stores in 70
countries
Chain has over 2000 stores
Zara is the main part of the
Spanish Inditex group and is
valued at nearly €14 billion.
Operates under the mantra of
affordable fashion, and adopts
the principle of market-driven
supply.
Operates a successful franchise
operation (more than half are
franchises). The company
specializes exclusively in
targeting the young female
mid-market.
Operates several different
fascia, targeting different types
of customer, with stores such
as Burton, Dorothy Perkins,
Evans, Wallis, Top Shop, Top
Man, Miss Selfridge and Outfit.
Owner Philip Green also owns
BHS stores and Etam UK
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Sourcing low-cost garments with quick response times is a vital element of the concept. Many of the ‘fast
fashion’ retailers utilize a vast network of suppliers, so that their stores are replenished with latest
designs. Some firms are entirely vertically integrated, where the retailer owns and controls the entire
supply chain. For example, Zara buys its fabric from a company owned by its parent, Inditex, and buys
dyes from another company also within the group. Retailers source their goods from countries such as
China, North Africa, Turkey and low-cost eastern European countries. If cost were the sole basis for
supplier selection, then the vast majority of products would be sourced from the Far East. However, the
lead times for delivery of goods are quite substantial in comparison to sourcing garments in Eastern
Europe (e.g. shipping goods from China can take sex weeks, whereas from Hungary takes two days). As a
result of this, retailers are using a hybrid approach, sourcing closer to markets for more fashionorientated
lines. The drive towards reduced lead times is allowing companies to be more responsive to
market changes. The benefits of such a quick response to market changes are reduced costs, lean
inventories, faster merchandise flow and closer collaborative supply chain relationships.
The concept of ‘postponement’ is a key strategy used within the fashion retailing industry. It is the
delayed configuration of a garment’s final design until the final market destination and/or customer
requirement is known and, once this is known, the garment is assembled or customized. The material and
styles are kept generic for a long as possible, before final customization. A classic illustration of the
concept of postponement is its usage by Benetton. Colours can come in and out of fashion. Benetton
delays when its garments are finally product differentiated, so that this matches what is selling. For
example, a Benetton sweater would be stitched and assembled from its original grey yarn and then, based
on feedback from Benetton’s distribution network as to what colours were selling, the sweater would be
dyed at the very final stage of production. The concept of postponement allows greater inventory cost
saving, and increased flexibility in matching actual demand.The production and logistics facilities for
these ‘fast fashion’ retailers are colossal in that each design may have several colour variants, and the
retailer needs to produce an array of garments in a number of different sizes. The number of stock
keeping units (SKUs) is therefore staggering. As a result, companies require a very reliable and
sophisticated information system—for example, Zara has to deal with over 300,000 new SKUs every year.
Benetton has a fully automated sorting and shipping system, managing over 110 million items a year,
with a staff of only 24 employees in its centralized distribution centres. Mango, another successful
Spanish fashion chain, also utilizes a high-tech distribution system, which can sort and pack 12,000
folded items an hour and 7000 hanging garments an hour.
Many in the industry see Zara as the classic illustration of the concept of ‘fast fashion’ in operation.
The company can get a garment from design, through production and ultimately on to the shelf in a mere
15 days. The norm for the industry has typically run to several months. The group’s basic business
philosophy is to seduce customers with the latest fashion at attractive prices. It has grown rapidly as a
fashion retail powerhouse by adopting four central strategies: creativity and innovation; having an
international presence; utilizing a multi-format strategy; and through vertically integrating its entire
supply chain. For the ‘fast fashion’ concept to be successful, it requires close relationships between
suppliers and retailers, information sharing and utilization of technology. Information is utilized along
the entire supply chain, according to the demand. It controls design, production and the logistics
elements of the business. Real-time demand feeds the production systems.
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Zara is part of the Inditex group of fashion retail brands. This group adopts a multi-format strategy with
different store brands targeting different types of customers. Zara is its key fashion-retailing brand. Zara
opened its first store in 1975 in Spain and has now become a fashion powerhouse, operating in four
continents, with 729 stores, located in over 54 countries. It has become very hip all over the world, for its
value for money and stylish designs. The chain is building large numbers of brand devotees because of its
fashionable designs, which are in tune with the very latest trends, and a very convincing price-quality
offering. Each of the different store brands (outlined in Table- 7) needs to be strongly differentiated in
order for the strategy to work effectively.
Table 7 Number of Inditex stores by fascia
Zara 729
Pull and Bear 373
Massimo Dutti 330
Bershka 305
Stradivarius 228
Oysho 106
Zara Home 63
Kiddy’s Class 131
TOTAL 2265
Figure 3 Zara’s market-led supply
Zara does not undertake any conventional advertising, except as a vehicle for announcing a new store
opening, the start of sales of seasons. The company uses the stores themselves as its main promotional
strategy, to convey its image. Zara tries to locate its stores in prime commercial areas. Deep inside the
lairs of its corporate headquarters, 25 full-scale store windows are set up, whereby Zara window
designers can experiment with design layouts and lighting. The approved design layouts are shipped out
Design
Retail Store
Production &
Supply
Logistics
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to all Zara’s stores, so that a Zara shop front in London will be the same as in Lisbon and throughout the
entire chain. The store itself is the company’s main promotional vehicle.
One of Zara’s key philosophies was the realization that fashion, much like food, has a ‘best before’
date: that fashion trends change rapidly. What style consumers want this month may not be same in two
months’ time. Fashion retailers have to adapt to what the marketplace wants for the here and now. The
company is guilty of under-stocking garments, as it does not want to be left with obsolete or out-offashion
items. The key driving force behind its success is to minimize inventory levels, getting product
out on to the retail floor space, and by being responsive to the needs of the market. Zara uses its stores to
find out what consumers really want, designs are selling, what colours are in demand, which items are
hot sellers and which are complete flops. It uses a sophisticated marketing information system to provide
feedback to headquarters and allow it to respond to what the marketplace wants. Similarly, Mango uses a
computerized logistical system that allows the matching of clothes designs to particular stores based on
personality traits and even climate variances (i.e. ‘It this garment suitable for the Mediterranean
Summer?). This sophisticated IT infrastructure allows for more responsive market-led retailing,
matching suitable clothing lines to compatible stores.
At the end of each day, Zara sales assistants report to the store manager using wireless headsets,
to communicate inventory levels. The stores then report back to Zara’s design and distribution
departments on what consumers are buying, asking for or avoiding. Both hard sales data and soft data
(i.e. customer feedback on the latest designs) are communicated directly back to the company’s
headquarters, through open channels of communication. Zara’s 250 designers use market feedback for
their next creations. Designers work hand in hand with market analyst, in cross-functional teams, to pick
up on the latest trends. Garments are produced in comparatively small production runs, so as not to be
over-exposed if a particular item is a very poor seller. If a product is a poor seller, it is removed after as
little as two weeks. Roughly 10 per cent of stock falls into this unsold category, in direct contrast to
industry norms of between 17 and 20 per cent. Zara produces nearly 11,000 designs a year. Stock items
are seen as assets that are extremely perishable and, if they are sitting on shelves or racks in a
warehouse, they are simply not making money for the organization.
In the course of one year alone, Zara has been able to launch 24 different collections into its
network of stores. After designs have been approved, fabrics are dyed and cut by highly automated
production lines. These pre-cut pieces are then sent out of nearly 350 workshops in northern Spain and
Portugal. These workshops employ nearly 11,000 ‘grey economy’ workers mainly women, who may want
to supplement their income. Seamstresses stitch the pre-cut pieces into garments using easy-to-follow
instructions supplied by Zara. The typical seamstress’s wage in Zara’s workshop network is extremely
competitive when compared with those in ‘third world’ countries where other fashion retailers mainly
outsource their production. Furthermore, the proximity of these workshops allows for greater flexibility
and control, Zara achieves greater control over its supply chain through having a high degree of
integration within the supply chain. By owning suppliers, Zara has greater control production capacities,
quality and scheduling. This is in stark contrast to Benetton, which is close to being a virtual organization,
outsourcing production to third-party suppliers and directly owning only a handful of its stores, the
majority being franchises or partner stores.
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24
The finished garments are then sent back to Zara’s colossal state-of-the-art logistics centre. Here
they are electronically tagged, quality control double-checks them, and then they are sorted into
distribution lots, ensuring the items arrive at their ultimate destinations. Each item is tagged with pricing
information. There is no pan-European pricing for Zara’s products: prices are different in each national
market. Zara believes each national market has its own particular nuances, such as higher salaries or
higher taxation, therefore it has to adjust the price of each garment to make it suitable in each country
and to reflect these differences. Shipments leave La Coruňa bound for every one of the Zara stores in over
54 countries twice a week, every week. The company’s average turnaround time from designing to
delivery of a new garment takes on average 10 to 15 days, and delivery of goods takes a maximum of 21
days, which is unparalleled in an industry where lead times are usually months, not days. Zara’s business
model tries to fulfill real-time fashion retailing and not second-guessing what consumers’ needs are for
next season, which may be six months away. As a result of Zara utilizing this ultra-responsive supply
chain, 85 per cent of its entire product range obtains full ticket price, whereas the industry norm is
between 60 and 70 per cent.
The successful adoption of the ‘fast fashion’ concept by these international retailers has drastically
altered the competitive landscape in apparel retailing. Consumers’ expectations are also rising with these
improved retail offerings. Clothes shoppers are seeking out the latest fashions at value-for-money prices
in enticing store environments. Now other well-established high-street fashion retailers have to adapt to
these challenges, by being more responsive, cost efficient, speedy and flexible in their operations. The rag
trade is churning out the latest value-for-money fashions at breakneck speed. ‘Fast fashion’ is what the
marketplace is demanding.
Questions
1. Discuss how supply chain management can contribute to the marketing success of these retailers.
2. Discuss the central components necessary for the fast fashion concept to work effectively.
3. Critically evaluate the concept of ‘market-driven supply’, discussing the merits and pitfalls of its
implementation in fashion retailing.
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Attempt Only 4 Case Study
CASE – 1 MANAGING HINDUSTAN UNILEVER STRATEGICALLY
Unilever is one of the world’s oldest multinational companies. Its origin goes back to the 19th century when a
group of companies operating independently, produced soaps and margarine. In 1930, the companies
merged to form Unilever that diversified into food products in 1940s. Through the next five decades, it
emerged as a major fast-moving consumer goods (FMCG) multinational operating in several businesses. In
2004, the Unilever 2010 strategic plan was put into action with the mission to ‘bring vitality to life’ and ‘to
meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look
good, and get more out of life’. The corporate strategy is of focusing on bore businesses of food, home care
and personal care. Unilever operates in more than 100 countries, has a turnover of € 39.6 billion and net
profit of € 3.685 billion in 2006 and derives 41 per cent of its income from the developing and emerging
economies around the world. It has 179,000 employees and is a culturally-diverse organisation with its top
management coming from 24 nations. Internationalisation is based on the principle of local roots with global
scale aimed at becoming a ‘multi-local multinational’.
The genesis of Hindustan Unilever (HUL) in India, goes back to 1888 when Unilever exported Sunlight soap
to India. Three Indian, subsidiaries came into existence in the period 1931-1935 that merged to form
Hindustan Lever in 1956. Mergers and acquisitions of Lipton (1972), Brooke Bond (1984), Ponds (1986),
TOMCO (1993), Lakme (1998) and Modern Foods (2002) have resulted in an organisation that is a
conglomerate of several businesses that have been continually restructured over the years.
HUL is one of the largest FMCG company in India with total sales of Rs. 12,295 crore and net profit of
1855crore in 2006. There are over 15000 employees, including more than 1300 managers. The present
corporate strategy of HUL is to focus on core businesses. These core businesses are in home and personal
care and food. There are 20 different consumer categories in these two businesses. For instance, home and
personal care is made up of personal wash, laundry, skin care, hair care, oral care, deodorants, colour
cosmetics and ayurvedic personal and health care, while food businesses have tea, coffee, ice creams and
processed food brands. Apart from the two product divisions, there are separate departments for specialty
exports and new ventures.
Strategic management at HUL is the responsibility of the board of directors headed by a chairman. There are
five independent and five whole-time directors. The operational management is looked after by a
management committee comprising of Vice Chairman, CEO and managing director and executive directors of
the two business divisions and functional areas. The divisions have a lot of autonomy with dedicated assets
and resources. A divisional committee having the executive director and heads of functions of sales,
commercial and manufacturing looks after the business level decision-making. The functional-level
management is the responsibility of the functional head. For instance, a marketing manager has a team of
brand managers looking after the individual brands. Besides the decentralised divisional structure, HUL has
centralised some functions such as finance, human resource management, research, technology, information
technology and corporate and legal affairs.
Unilever globally and HUL nationally, operate in the highly competitive FMCG markets. The consumer
markets for FMCG products are finicky: it’s difficult to create customers and much more difficult to retain
them. Price is often the central concern in a consumer purchase decision requiring producers to be on
continual guard against cost increases. Sales and distribution are critical functions organisationally. HUL
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operates in such a milieu. It has strong competitors such as the multinationals Procter & Gamble, Nivea or
L’Oreal and formidable local companies such as, Amul, Nirma or the Tata
FMCG companies to contend with. Rivals have copied HUL’s strategies and tactics, especially in the area of
marketing and distribution. Its innovations such as new style packaging or distribution through women
entrepreneurs are much valued but also copied relentlessly, hurting its competitive advantage.
HUL is identified closely with India. There is a ring of truth to its vision statement: ‘to earn the love and
respect of India by making a real difference to every Indian’. It has an impeccable record in corporate social
responsibility. There is an element of nostalgia associated with brands like Lifebuoy (introduced in 1895)
and Dalda (1937) for senior citizens in India. Consequently Indians have always perceived HUL as an Indian
company rather than a multinational. HUL has attempted to align its strategies in the past to the special
needs of Indian business environment. Be it marketing or human resource management, HUL has
experimented with new ideas suited to the local context. For instance, HUL is known for its capabilities in
rural marketing, effective distribution systems and human resource development. But this focus on India
seems to be changing. This might indicate a change in the strategic posture as well as recognition that Indian
markets have matured to the extent that they can be dealt with by the global strategies of Unilever. At the
corporate level, it could also be an attempt to leverage global scale while retaining local responsiveness to
some extent.
In line with the shift in corporate strategy, the focus of strategic decision-making seems to have moved from
the subsidiary to the headquarters. Unilever has formulated a new global realignment under which it will
develop brands and streamline product offerings across the world and the subsidiaries will sell the products.
Other subtle indications of the shift of decision-making authority could be the appointment of a British CEO
after nearly forty years during which there were Indian CEOs, the changed focus on a limited number of
international brands rather than a large range of local brands developed over the years and the namechange
from Hindustan Lever to Hindustan Unilever.
The shift in the strategic decision-making power from the subsidiary to headquarters could however, prove
to be double-edged sword. An example could be of HUL adopting Unilever’s global strategy of focussing on a
limited number of products, called the 30 power brands in 2002. That seemed a perfectly sensible strategic
decision aimed at focusing managerial attention to a limited set of high-potential products. But one
consequence of that was the HUL’s strong position in the niche soap and detergent markets suffering owing
to neglect and the competitors were quick to take advantage of the opportunity. Then there are the statistics
to deal with: HUL has nearly 80 per cent of sales and 85 per cent of net profits from the home and personal
care businesses. Globally, Unilever derives half its revenues from food business. HUL does not have a strong
position in the food business in India though the food processing industry remains quite attractive both in
terms of local consumption as well as export markets. HUL’s own strategy of offering low-price, competitive
products may also suffer at the cost of Unilever’s emphasis on premium priced, high end products sold
through modern outlets.
There are some dark clouds on the horizon. HUL’s latest financials are not satisfactory. Net profit is down,
sales are sluggish, input costs have been rising and new food products introduced in the market have yet to
pick up. All this while, in one market segment after another, a competitor pushes ahead. In a company of
such a big size and over-powering presence, these might still be minor events developments in a long history
that needs to be taken in stride. But, pessimistically, they could also be pointers to what may come.
Questions:
1. State the strategy of Hindustan Unilever in your own words.
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2. At what different levels is strategy formulated in HUL?
3. Comment on the strategic decision-making at HUL.
4. Give your opinion on whether the shift in strategic decision-making from India to Unilever’s
headquarters could prove to be advantageous to HUL or not.
CASE: 2 THE STRATEGIC ASPIRATIONS OF THE RESERVE BANK OF INDIA
The Reserve Bank of India (RBI) is India’s central bank or ‘the bank of the bankers’. It was established on
April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1935. The Central Office of
the RBI, initially set up at Kolkata, is at Mumbai. The RBI is fully owned by the Government of India.
The history of RBI is closely aligned with the economic and financial history of India. Most central banks
around the world were established around the beginning of the twentieth century. The Bank was established
on the basis of the Hilton Young Commission. It began its operations by taking over from the Government the
functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the
management of Government accounts and public debt. After independence, RBI gradually strengthened its
institution-building capabilities and evolved in terms of functions from central banking to that of
development. There have been several attempts at reorganisation, restructuring and creation of specialised
institutions to cater to emerging needs.
The Preamble of the RBI describes its basic functions like this: ‘….to regulate the issue of Bank Notes and
keeping of reserves with a view to securing monetary stability in India and generally to operate the currency
and credit system of the country to its advantage.’ The vision states that the RBI ‘….aims to be a leading
central bank with credible, transparent, proactive and contemporaneous policies and seeks to be a catalyst
for the emergence of a globally competitive financial system that helps deliver a high quality of life to the
people in the country.’ The mission states that ‘RBI seeks to develop a sound and efficient financial system
with monetary stability conductive to balanced and sustained growth of the Indian economy’. The corporate
values of underlining the mission statement include public interest, integrity, excellence, independence of
views and responsiveness and dynamism.
The three areas in which objectives of the RBI can be stated are as below.
1. Monetary policy objectives such as containing inflation and promoting economic growth, management
of foreign exchange reserves and making currency available.
2. Objectives set for managing financial sector developments such as supervision of systems and
information access and assisting banking and financial institutions to become competitive globally.
3. Organisational development objectives such as development of economic research facilities, creating
information system for supporting economic decision-making, financial management and human resource
management.
Strategic actions taken to realise the objectives fall under four categories:
1. The thrust area of monetary policy formulation and managing financial sector;
2. Evolving the legal framework to support the thrust area;
3. Customer service for providing support and creation of positive relationship; and
4. Organisational support such as structure, systems, human resource development and adoption of
modern technology.
The major functions performed by the RBI are:
Acting as the monetary authority
Acting as the regulator and supervisor of the financial system
Discharging responsibilities as the manager of foreign exchange
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Issue currency
Play as developmental role
Related functions such as acting as the banker to the government and scheduled banks
The management of the RBI is the responsibility of the central board of directors headed by the governor
and consisting of deputy governors and other directors, all of whom are appointed by the government. There
are four local boards based at Chennai, Kolkata, Mumbai and New Delhi. The day-to-day management of RBI
is in the hands of the executive directors, managers at various levels and the support staff. There are about
22000 employees at RBI, working in 25 departments and training colleges.
The RBI identified its strengths and weaknesses as under.
Strengths A large body of competent officers and staff; access to key data on the economy; wide
organisational network with 22 regional offices; established infrastructure; ability to attract talent; and
financial self sufficiency.
Weaknesses Structural rigidity, lack of accountability and slow decision-making; eroded
specialist know-how; strong employee unions with rigid industrial relations stance; surplus staff; and weak
market intelligence.
Over the years, the RBI has evolved in terms of structure and functions, in response to the role assigned to it.
There have been sweeping changes in the economic, social and political environment. The RBI has had to
respond to it even in the absence of a systematic strategic plan. In 1992, the RBI, with the assistance of a
private consultancy firm, embarked on a massive strategic planning exercise. The objective was to establish
a roadmap to redefine RBI’s role and to review internal organisational and managerial efficacy, address the
changing expectations from external stakeholders and reposition the bank in the global context. The
strategic planning exercise was buttressed by departmental position papers and documents on various
subjects such as technology, human resources and environmental trends. The strategic plan of the RBI
emerged with four sections dealing with the statement of mission, objectives and policy, a review of RBI’s
strengths and weaknesses and strategic actions required with an implementation plan. The strategic plan
reiterates anticipation of evolving external environment in the medium-term; revisiting strengths and
weaknesses (evaluation of capabilities); and doing away with the outdated mandates for enhancing
efficiency in operations in furtherance of best public interests. The results of these efforts are likely to
manifest in attaining a visible focus, reinforced proficiency, realisation of shared sense of purpose,
optimising resource use and build-up of momentum to achieve goals.
Historically, the RBI adopted the time-tested technique of responding to external environment in a
pragmatic manner and making piecemeal changes. The dilemma in adoption of a comprehensive strategic
plan was the risk of trading off the flexibility of the pragmatic approach to creating rigidity imposed by a set
model of planning.
Questions:
1. Consider the vision and mission statements of the Reserve Bank of India. Comment on the quality of
both these statements.
2. Should the RBI go for a systematic and comprehensive strategic plan in place of its earlier pragmatic
approach of responding to environmental events as and when they occur? Why?
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CASE: 3 THE INTERNATIONALISATION OF KALYANI GROUP
The Kalyani Group is a large family-business group of India, employing more than 10000 employees. It has
diverse businesses in engineering, steel, forgings, auto components, non-conventional energy and specialty
chemicals. The annual turnover of the Group is over US$2.1 billion. The Group is known for its impressive
internationalisation achievements. It has nine manufacturing locations spread over six countries. Over the
years, it has established joint ventures with many global companies such as ArvinMeritor, USA, Carpenter
Technology Corporation, USA, Hayes Lemmerz, USA and FAW Corporation, China.
The flagship company of the Group is Bharat Forge Limited that is claimed to be the second largest forging
company in the world and the largest nationally, with about 80 per cent share in axle and engine
components. The other major companies of the Group are Kalyani Steels, Kalyani Carpenter Special Steels,
Kalyani Lemmerz, Automotive Axles, Kalyani Thermal Systems, BF Utilities, Hikal Limited, Epicenter and
Synise Technologies
The emphasis on internationalisation is reflected in the vision statement of the Group where two of the five
points relate to the Group trying to be a world-class organisation and achieving growth aggressively by
accessing global markets. The Group is led by Mr. B.N. Kalyani, who is considered to be the major force
behind the Group’s aggressive internationalisation drive. Mr. Kalyani joined the Group in 1972 when it was a
small-scale diesel engine component business.
The corporate strategy of the Group is a combination of concentration of its core competence in its business
with efforts at building, nurturing and sustaining mutually beneficial partnerships with alliance partners and
customers. The value of these partnerships essentially lies in collaborative product development with the
partners who are the original equipment manufacturers. The foreign partners are not intended to provide
expansion in capacity, but to enable the Kalyani Group to extend its global marketing reach.
In achieving its successful status, the Kalyani Group has followed the path of integration, extending from the
upstream steel making to downstream machining for auto components such as crank-shafts, front axle
beams, steering knuckles, cam-shafts, connecting rods and rocker arms. In all these products, the Group has
tried to move up the value chain instead of providing just the raw forgings. In the 1990s, it undertook a
restructuring exercise to trim its unrelated businesses such as television and video products and concentrate
on its core business of auto components.
Four factors are supposed to have influenced the growth of the Group over the years. These are mentioned
below:
Focussing on core businesses to maximise growth potential
Attaining aggressive cost savings
Expanding geographically to build global capacity and establishing leading positions
Achieving external growth through acquisitions
The Group companies are claimed to be positioned at either number one or two in their respective
businesses. For instance, the Group claims to be number one in forging and machined components, axle
aggregates, wheels and alloy steel. The technology used by the Group in its mainline business of auto
components and other businesses, is claimed to be state-of-the-art. The Group invests in forging technology
to enhance efficiency, production quality and design capabilities. The Group’s emphasis on technology can be
gauged from the fact that in the 1990s, it took the risky decision of investing Rs. 100 crore in the then latest
forging technology, when the total Group turnover was barely Rs. 230 crore. Information technology is
applied for product development, reducing production and product development time, supply-chain
management and marketing of products. The Group lays high emphasis on research and development for
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providing engineering support, advanced metallurgical analysis and latest testing equipment in tandem with
its high-class manufacturing facilities.
Being a top-driven group, the pattern of strategic decision-making within seems to be entrepreneurial. There
was an attempt to formulate a five-year strategic plan in 1997, with the participation of the company
executives. But no much is mentioned in the business press about that collaborative strategic decisionmaking
after that.
Recent strategic moves include Kalyani Steels, a Group company, entering into a joint venture agreement in
may 2007, with Gerdau S.A. Brazil for installation of rolling mills. An attempt to move out of the mainstream
forging business was made when the Group strengthened its position in the prospective business of wind
energy through 100 per cent acquisition of RSBconsult GmbH (RSB) of Germany. Prior to the acquisition, the
Group was just a wind farm operator and supplier of components.
Questions:
1. What is the motive for internationalisation by the Kalyani Group? Discuss.
2. Which type of international strategy is Kalyani Group adopting? Explain.
CASE 4: THE STORY OF SYNERGOS UNFOLDS
Synergos is a young management and strategy consulting firm based at Mumbai. It was established in 1992
at a time when there were a lot of expectations among the industry people from the liberalisation policies
that were started the previous year by the Government of India.
The consulting firm is an entrepreneurial venture started by Urmish Patel, a dynamic person who worked
with a multinational consulting firm at the time. He left his comfortable position there to venture into the
management consultancy industry. The motivation was to be ‘the master of his own destiny’ rather than
being an employee working for others. Urmish comes from an upper middle-class Gujarati family, settled in a
small town in Rajasthan. His father was a government servant who retired with a meagre pension. His
mother is a housewife. His other siblings are all educated and well-settled in their respective careers and
professions. Urmish is a creative individual, uncomfortable with the status-quo. During his student days at a
college at Jaipur, he was continually coming up with bright ideas that some of his friends found to be
preposterous. To him, however, these were perfectly achievable ideas. He studied biotechnology and then
went to the US on a scholarship to do his Masters. After a semester at a well-known university there, he lost
interest and switched to pursue an MBA. He liked it and soon settled down to work with an American
consultancy firm and toured several countries on varied assignments during the seven years he worked
there.
In 1992 came the urge to Urmish to chuck his job and be on his own. It was risky, yet an exciting step to take.
His accumulated capital was limited—just enough to rent office space, buy a few computers and hire an
assistant. There were no consultancy assignments for the first three months. But an acquaintance soon came
to his aid, introducing him to the CFO of a major family business group who needed advice on a performance
improvement project they wanted to launch. The opportunity came in handy though the returns were
nothing to write home about. That project was the first step to
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many more that came gradually. Synergos started gaining presence in the competitive management
consultancy industry and attracting attention from the people whom they worked for. Word-of-mouth
publicity led them from one project to another for the first three years till 1995. Synergos took up whatever
came its way, delivering a cost-effective solution to its clients. A team of four had formed by now, each
member of the team specialising in services rendered to the clients. For instance, one of the members is a
specialist in engineering projects, while another has expertise finance. The third one is a service sector
specialist, also having experience in dealing with government matters.
The phase of rapid growth started some time in 1995 when the Synergos team decided to focus on the small
and medium enterprises (SMEs). These were firms that realised they had problems needing specialist
advice, but were apprehensive to approach the big firms on account of their limited outlay and inexperience
of dealing with such firms. Synergos came to their aid by tailoring their services as near as possible to their
needs. Another differentiation platform Synergos offered to its client was a fully-integrated consultancy
service where it got involved right from the stage of planning down to its implementation and monitoring.
Presently, Synergos has grown to be a medium-sized consultancy firm, serving clients in India and abroad,
working for industries ranging from auto components to financial services and for manufacturing
organisations to service providers. Some-how, nearly half of the assignments it has worked on have been for
mid-sized, upcoming, family-owned businesses, a niche it has served well. These organisations typically need
a boutique sort of consultancy that can offer customised services dealing with a broad range of practices
related to strategy, organisation design, mergers and acquisitions and operational matter such as logistics
and supply-chain management. Synergos fits in with their requirements owing to its personalised service
and reasonable commission structure.
The organisational structure at Synergos has a board at the top, consisting of seven people, including the
four founding members and three independent directors. One of the independent directors is the chairman
of the board. Urmish, as the founder CEO, also heads an executive management committee with each of the
founding members, leading three other top-level committees dealing with business portfolio, service
management and executive recruitment.
The management team is called the professional group. The rest of the employees are referred to as the staff.
The professional group has young women and men who are graduates from some of the best institutions in
India and abroad. They are assigned to taskforces based on their qualifications, experience and interests. The
departmentation at Synergos is flexible, based on an interplay of the three categories: skill, service and
specialty. For instance, a professional may have IT skills, may have worked to provide supply-chain
management services and developed expertise in handling operational assignments for medium-sized food
and beverage firms. There is a lot of multi-tasking however, to utilise the wide range of skills and special
expertise that the professionals have. For administrative matters, the professionals are assigned to clientservice
departments of industry solutions, enterprise solutions and technology solutions. The flexibility that
such an organisational arrangement affords seems to have been the major reason for the evolution of the
organisation structure at Synergos over the years.
The staff group of employees consists of the support people who provide a variety of services to the
professionals. Among these are research assistants, industry analysts, documentation experts and secretarial
staff. There is no set pattern for assignment of staff to the administrative departments and generally, a needbased
approach is followed, depending on the workload at a particular time.
Recruitment for professionals is stringent. Synergos typically looks for a good combination of education and
experience and lays much emphasis on the compatibility of the prospective employee with the shared
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values. Creativity, broad range of professional interests, intellectual acumen, team-working and physical
fitness to undertake demanding tasks and work for long hours are the criteria for hiring. There are not many
training opportunities except the on-the-job learning. New professionals are assigned to a mentor for some
time till they are ready to handle assignments autonomously. The staff members are usually recruited from
fresh graduates, with good degrees from reputed institutions, in arts, sciences and commerce. The staff
positions are also open for persons wanting to work on part-time or project-bases. Emphasis is given to the
ability of the prospective staff to undertake multi-tasking and work with documentation and word
processing and presentation software packages.
The compensation system consists of a base salary with commission and bonus depending on performance.
There are other usual elements such as medical reimbursement, loan facility and gratuity and retirement
benefits. the performance appraisal is informal, with at least one of the four founding members being part of
the evaluation committee for a professional. Usually, the founding member closest to the work area of the
employee is involved in determining the rewards to be given. The time-cycle for appraisal is one year.
Management control is discreet and performance-based rather than behaviour-based. The means for control
are informal, such as direct supervision.
Urmish is a strong proponent of the emergent strategy and is not in favour of tying Synergos to a fixed
strategic posture. So are the other founder members, though at times they do talk about deciding on a niche
such as SME organisations as clients and enterprise solutions as the core competence. In the highly
fragmented consultancy industry where it is possible for even one person to set up an office in a commercial
area and leverage connections to secure projects, Synergos is open to opportunities as they emerge, while
trying to maintain the flexibility that has made it successful till now.
Questions:
1. Identify the type of organisation structure being used at Synergos and explain how it works. What
are the benefits of using this type of structure? What are the pitfalls?
2. Express your opinion about whether the structure is in line with the recruitments of the strategy that
Synergos is implementing.
3. Based on the information related to the information, control and reward systems available in the
case, examine whether these systems are appropriate for the type of strategy being implemented.
CASE: 5 EXERCISING STRATEGIC AND OPERATIONAL CONTROLS AT iGATE GLOBAL SOLUTIONS
The Bangalore-based iGATE Global Solutions is the flagship company of iGATE Corporation, a NASDAQ-listed
US-based corporation. Known earlier as Mascot Systems, it was set up in India in 1993, to offer staffing
services. It acquired business process outsourcing (BPO) and contact centre businesses in 2003, making it an
end-to-end IT and ITES service provider. Its service portfolio includes consulting, IT services, data analytics,
enterprise systems, BPO/BSP, contact centre and infrastructure management services. iGATE has over 100
active clients and centres based in Canada, China, Malaysia, India, the UK and the US. Chairman, Ashok
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Trivedi and CEO Phaneesh Murthy, an ex-Infosys IT professional and their partners hold a major stake, with
some participation by institutional and public investors. The revenues for 2006-2007 are over Rs. 805 crore
and net profits, Rs. 49.6 crore.
The corporate strategies of iGATE are offering integrated IT services and divesting the legacy IT staffing
business and possibly making acquisitions in the domain expertise for financial services businesses. The
business strategy is focused differentiation based on the focal points of testing, infrastructure management
and enterprise solutions. The competitive tactic is avoiding head-on competition with the formidable larger
players in the industry by carving out a niche. The business definition is serving large customers and staying
away from sub-contracting work.
iGATE adopts a differentiation business model based on an integrated technology and operations model
which it calls as the iTOPS model. This is an advancement over the prevalent model in the ITES industry
based on low-cost arbitrage model. iTOPS is based on transaction-based pricing for services and supporting
the clients by providing the platform, processes and services.
The strategic evaluation and control has both the elements of strategic as well as operational controls.
The functional and operational implementation is aimed at achieving four sets of objectives:
(a) Shifting from small customers to large customer (Fortune 1000 companies)
(b) Shifting away from stocking to project-consulting assignments
(c) Working directly with clients rather than with system integrators
(d) Moving from a local to international markets
Some illustrations of the performance indicators that reflect these objectives are:
1. On-shore versus off-shore mix of business revenues: In 2004, this ratio was 55:45 and in 2007,
it has improved to 27:73, indicating a much higher revenue generation from off-shore business.
2. Billing rates: Revenue charged from clients on assignments. With project consulting
assignments from off-shore clients, where the revenues are typically higher, with lower costs and higher
productivity in India, the realisations from billing have to be higher. The industry norms for ITES are US$18-
25 per hour for off-shore and US$ 55-65 per hour for on-shore assignments.
3. The number of large clients from Fortune 1000 companies: Presently, iGATE has nearly half of
its more than 100 clients from Fortune 1000 companies, of which the top 10 account for 70 per cent of its
business.
4. Controlling employee costs: This is an area where concerted effort is required from the HR and
finance functions. Hiring less experienced employees lowers the compensation bill. In the IT and ITES
industry, attracting and retaining well-qualified and experienced employees is a critical success factor. The
performance indicator for this objective is the cost per employee.
5. Human resource metrics such as the hiring and attrition rates: In the IT and ITES industry, the
human resource metrics such as hiring and attrition rates are critical indicators. Increasing the number of
employees and lowering the attrition rate by retaining the employees is a big challenge. There are presently
about 5800 employees, likely to go up to 8500 in the next two years. The attrition of 20 per cent presently at
iGATE is on the higher side. But such attrition is common in the industry where the employee mobility is
high and employee pinching a widespread trend.
The human resource management function being critical in an industry where so many challenges exist,
needs a strong emphasis on training and development, motivation, autonomy and attractive incentives.
iGATE has an integrated people management model focusing on developing technical, behavioural and
leadership competencies. The three metrics by which the HR function is assessed are: human capital index,
work culture and employee affective commitment. The reward system at iGATE consists of meritorious
employees across all levels being granted restricted stock options, thus providing an incentive to remain
with the company till they become due. The company, though, is an average paymaster, which disadvantage
The Indian Institute of Business Management & Studies
Subject: Strategic Management Marks: 100
it tries to trade-off offering a more challenging work environment, quicker promotions and chances for
practising innovation.
Critics say that that iGATE lacks the big-brand appeal of the larger players such as Infosys and Wipro, cannot
compete on scale and is still under the shadow of its original business of body-shopping IT personnel.
Questions:
1. Analyse the iGATE case to highlight how it could apply some of the strategic controls such as premise
control, implementation control, strategic surveillance and special alert control.
2. Analyse and describe the process of setting of standards at iGATE.
3. Give your opinion on the effectiveness of the role of reward system in exercising HR performance
management at iGATE and suggest what improvements are possible, given the environmental conditions in
the IT/ITES industry in India at present.
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