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BUSINESS LAW

Attempt any 10 Questions

1. How are right of lien and stoppage-in-transit affected by sub-sale or pledge by the buyer?

2. Discuss the rule regarding duration of transit. When does it come of an end?

3. Comment on the statement,”Delivery does not amount to acceptance of goods”?

4. State the exceptions to the rule that no one can convey a better title than what he has.

5. When are the goods said to be unascertained? What are the rules as to the transfer of property in the unascertained goods to the buyer?

6. Discuss the implied condition relating to sale by sample?

7. Discuss the doctrine of caveat emptor and state its exceptions.

8. What is the effect of perishing of goods on the contract of sale?

9. Explain the various methods of creating agency?

10. Pledge can be created only of movable property. Comment.

11. Discuss the position of guarantee in respect of loans to a minor.

12. Does the release by the creditor of one of the sureties discharge the others?

13. Explain the provisions relating to appointment of directors in Producer Company.

14. Two separate company wish to amalgamate. State the steps which they must take for this purpose.

15. Does the failure of inspector to submit his or her report in time amount to an end to investigation?

16. A, the secretary of the company is also a minority shareholder. He is removed from the post of secretary. He brings complaint on the ground of oppression? Advise

17. A single member of a company wishes to challenge the decisions of the majority. Can he succeed?

18. What new provisions have been made for the protection of interests of debenture holders?

19. Write a short note on Consumer Protection Councils.

20. Describe the powers of SEBI relating to the working of the depository system.

FINANCE MANAGEMENT

Attempt Any Four Case Study

Case 1: Zip Zap Zoom Car Company

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

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

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

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

Exhibit 1 Balance sheet as at March 31,200 x

(Amount in Rs. Crore)

Source of Funds

Share capital 350

Reserves and surplus 250 600

Loans :

Debentures (@ 14%) 50

Institutional borrowing (@ 10%) 100

Commercial loans (@ 12%) 250

Total debt 400

Current liabilities 200

1,200

Application of Funds

Fixed Assets

Gross block 1,000

Less : Depreciation 250

Net block 750

Capital WIP 190

Total Fixed Assets 940

Current assets :

Inventory 200

Sundry debtors 40

Cash and bank balance 10

Other current assets 10

Total current assets 260

-1200

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

(Amount in Rs. Crore)

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

Operating expenditure :

Variable cost :

Raw material and manufacturing expenses 1,300.0

Variable overheads 100.0

Total 1,400.0

Fixed cost :

R & D 20.0

Marketing and advertising 25.0

Depreciation 250.0

Personnel 70.0

Total 365.0

Total operating expenditure 1,765.0

Operating profits (EBIT) 235.0

Financial expense :

Interest on debentures 7.7

Interest on institutional borrowings 11.0

Interest on commercial loan 33.0 51.7

Earnings before tax (EBT) 183.3

Tax (@ 35%) 64.2

Earnings after tax (EAT) 119.1

Dividends 70.0

Debt redemption (sinking fund obligation)** 40.0

Contribution to reserves and surplus 9.1

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

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

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

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

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

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

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

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

b) A maximum of 6 percent reduction in sales price of cars will take place.

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

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

Exhibit 3 projected Profit and Loss account

(Amount in Rs. Crore)

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

Operating expenditure

Variable cost :

Raw material and manufacturing expenses 1,170.0

Variable overheads 90.0

Total 1,260.0

Fixed cost :

R & D ---

Marketing and advertising 15.0

Depreciation 187.5

Personnel 70.0

Total 272.5

Total operating expenditure 1,532.5

EBIT 159.5

Financial expenses :

Interest on existing Debentures 7.0

Interest on existing institutional borrowings 10.0

Interest on commercial loan 30.0

Interest on additional debt 15.0 62.0

EBT 97.5

Tax (@ 35%) 34.1

EAT 63.4

Dividends --

Debt redemption (sinking fund obligation) 50.0*

Contribution to reserves and surplus 13.4

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

Assumptions of Mr. Shorsighted

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

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

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

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

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

The methodology undertaken is as follows :

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

(b) Each factor’s behaviour (variation behaviour) in adverse conditions in the past is studied and future expectations are combined with past data, to describe limits (maximum favourable), most probable and maximum adverse) for all the factors.

(c) Once this information is generated for all the factors affecting the cash flows, Mr. Longsighted comes up with a range of estimates of the cash flow in future recession periods based on all possible combinations of the several factors. He also estimates the probability of occurrence of each estimate of cash flow.

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

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

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

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

Question:

Analyse the debt capacity of the company.

CASE – 2 GREAVES LIMITED

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

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

Exhibit 1

GREAVES LTD. Profit and Loss Account ending on 31 March (Rupees in crore)
	1990	1991	1992	1993	1994	1995	1996	1997
Sales Raw Material and Stores Wages and Salaries Power and fuel Other Mfg. Expenses Other Expenses Depreciation Marketing and Distribution Change in stock	214.38 170.67 13.54 0.52 0.61 11.85 1.85 4.86 1.18	253.10 202.84 15.60 0.70 0.49 15.48 1.72 5.67 3.10	287.81 230.81 18.03 1.11 0.88 16.35 1.52 5.14 4.93	311.14 213.79 37.04 3.80 2.37 25.54 4.62 5.17 0.48	354.25 245.63 37.96 4.43 2.36 31.60 5.99 9.67 - 1.13	521.56 379.83 48.24 6.66 3.57 41.40 8.53 10.81 5.63	728.15 543.56 60.48 7.70 4.84 45.74 9.30 12.44 11.86	801.11 564.35 69.66 9.23 5.49 48.64 11.53 16.98 - 5.87
Total Op Expenses	202.72	239.40	268.91	291.85	338.77	493.41	672.20	731.75
Operating Profit Other Income Non-recurring Income	11.61 2.14 1.30	13.70 3.69 2.28	18.90 4.97 0.10	19.29 4.24 10.98	15.48 7.72 16.44	28.15 14.35 0.46	55.95 11.35 0.52	69.36 13.08 1.75
PBIT	15.10	19.67	23.97	34.51	39.64	42.98	65.67	82.64
Interest	5.56	6.77	11.92	19.62	17.17	21.48	28.25	27.54
PBT	9.54	12.90	12.05	14.89	22.47	21.50	37.42	55.10
Tax PAT Dividend Retained Earnings	3.00 6.54 1.80 4.74	3.60 9.30 2.00 7.30	4.90 7.15 2.30 4.85	0.00 14.89 4.06 10.83	4.00 18.47 7.29 11.18	7.00 14.50 8.58 5.92	8.60 28.82 12.85 15.97	15.80 39.30 14.18 25.12

Exhibit 2

GREAVES LTD. Balance Sheet (Rupees in crore)
	1990	1991	1992	1993	1994	1995	1996	1997
ASSETS Land and Building Plant and Machinery Other Fixed Assets Capital WIP Gross Fixed Assets Less: Accu. Depreciation Net Tangible Fixed Assets Intangible Fixed Assets	3.88 11.98 3.64 0.09 19.59 12.91 6.68 0.21	4.22 12.68 4.14 0.26 21.30 14.56 6.74 0.19	4.96 12.98 4.38 10.25 23.57 15.79 7.78 0.05	21.70 33.49 5.18 11.27 71.64 19.84 51.80 4.40	30.82 50.78 6.95 34.84 123.39 25.74 97.65 22.03	39.71 75.34 8.53 14.37 137.95 33.90 104.05 22.45	42.34 92.49 8.87 13.92 157.62 42.56 115.06 20.04	43.07 104.45 10.35 14.36 172.23 53.87 118.86 21.11
Net Fixed Assets	6.89	6.93	7.83	56.20	119.68	126.50	135.10	139.97
Raw Materials Finished Goods Inventory Accounts Receivable Other Receivable Investments Cash and Bank Balance Current Assets Total Assets LIABILITIES AND CAPITAL Equity Capital Preference Capital Reserves and Surplus	5.26 29.37 34.63 38.16 32.62 3.55 8.36 117.32 124.21 9.86 0.20 27.60	6.91 33.72 40.63 53.24 40.47 14.95 8.91 158.20 165.13 9.86 0.20 32.57	7.26 38.65 45.91 67.97 49.19 15.15 12.71 190.93 198.76 9.86 0.20 37.42	21.05 53.39 74.44 93.30 24.54 27.58 13.29 233.15 289.35 18.84 0.20 100.35	28.13 52.26 80.39 122.20 59.12 73.50 18.38 353.59 473.27 29.37 0.20 171.03	44.03 58.09 102.12 133.45 64.32 75.01 30.08 404.98 531.48 29.44 0.20 176.88	53.62 69.97 123.59 141.82 76.57 75.07 33.46 450.51 585.61 44.20 0.20 175.41	50.94 64.09 115.03 179.92 107.31 76.45 48.18 526.89 666.86 44.20 0.20 198.79
Net Worth	37.66	42.63	47.48	119.39	200.60	206.52	219.81	243.19
Bank Borrowings Institutional Borrowings Debentures Fixed Deposits Commercial Paper Other Borrowings Current Portion of LT Debt	14.81 4.13 4.77 12.31 0.00 2.33 0.00	19.45 3.43 16.57 14.45 0.00 3.22 0.00	26.51 9.17 19.99 15.03 0.00 3.10 0.08	24.82 38.09 4.56 14.08 0.00 3.18 0.12	55.12 38.76 4.37 15.57 15.00 17.08 15.08	64.97 69.69 4.37 17.75 0.00 1.97 0.02	70.08 89.26 2.92 20.81 0.00 2.36 1.49	118.28 63.60 1.49 19.29 0.00 2.57 1.57
Borrowings	38.35	57.12	73.72	84.61	130.82	158.73	183.94	203.66
Sundry Creditors Other Liabilities Provision for tax, etc. Proposed Dividends Current Portion of LT Dept	37.52 5.70 3.18 1.80 0.00	49.40 10.16 3.82 2.00 0.00	59.34 10.70 5.14 2.30 0.08	77.27 3.59 0.31 4.06 0.12	113.66 1.42 4.40 7.29 15.08	148.13 1.99 7.70 8.58 0.02	153.63 1.70 12.19 12.85 1.49	179.79 3.04 21.43 14.18 1.57
Current Liabilities	48.20	65.38	77.56	85.35	141.85	166.42	181.86	220.01
TOTAL LIABILITIES Additional information: Share premium reserve Revaluation reserve Bonus equity capital	124.21 8.51	165.13 8.51	198.76 8.51	289.35 47.69 8.91 8.51	473.27 107.40 8.70 8.51	531.67 107.91 8.50 8.51	585.61 93.35 8.31 23.25	666.86 93.35 8.15 23.25

Exhibit 3

GREAVES LTD. Share Price Data
	1990	1991	1992	1993	1994	1995	1996	1997
Closing share price (Rs) Yearly high share price (Rs) Yearly low share price (Rs) Market capitalization (Rs crore EPS (Rs) Book value (Rs)	27.19 29.25 26.78 65.06 4.79 35.64	34.74 45.28 21.61 67.77 6.82 37.22	121.27 121.27 34.36 236.56 9.73 42.54	66.67 126.33 48.34 274.84 1.93 57.75	78.34 90.00 42.67 346.35 2.66 40.61	71.67 100.01 68.34 316.87 7.16 64.98	47.5 90.00 45.00 210.02 5.03 45.35	48.25 85.00 43.75 213.34 9.01 50.73

Questions

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

CASE – 3 CHOOSING BETWEEN PROJECTS IN ABC COMPANY

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

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

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

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

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

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

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

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

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

Question:

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

CASE – 4 STAR ENGINEERING COMPANY

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

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

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

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

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

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

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

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

a. Works office costs on the basis of direct labour hours.

b. Maintenance costs on the basis of book value of plant and machinery.

c. Stores department costs on the basis of direct and indirect materials used.

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

REQUIRED

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

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.
Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
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

Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

Others

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

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

Power

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

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses

33,000

22,000

11,000

7,000

44,000

32,700

2,200

1,100

3,300

3,400

2,800

1,68,000

44,000

2,400

19,400

68,586

1,30,260

1,190

1,49,700

12,800

4,33,930

5,96,930

Exhibit B

STAR ENGINEERING COMPANY Projected Operation Data for the Year
Department	Area (sq.m)	Original Book of Plant & Machinery Rs	Direct Materials Budget Rs	Horse Power Rating	Direct Labour Hours	Direct Labour Budget Rs
Machining Fabrication Assembly Painting Stores Maintenance Works Office Total	13,000 11,000 8,800 6,400 4,400 2,200 2,200 48,000	26,40,000 13,20,000 6,60,000 2,64,000 1,32,000 1,98,000 68,000 52,80,000	62,40,000 21,60,000 10,80,000 94,80,000	20,000 10,000 1,000 2,000 33,000	14,40,000 5,28,000 7,20,000 3,30,000 30,18,000	52,80,000 25,40,000 13,20,000 6,60,000 99,00,000

Note

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

Exhibit C STAR ENGINEERING COMPANY Actual Overhead Distribution Sheet for April
Departments Overhead Costs	Production Departments				Service Departments	Total Amount Actuals for April (Rs)	Basis for Distribution
Departments Overhead Costs						Total Amount Actuals for April (Rs)	Basis for Distribution
A. Allocation of Overhead to all departments A.1 Indirect Labour and Supervision						1,49,700
A.2 Indirect materials and supplies						12,800
A.3 Factory Rent						1,68,000
A.4 Depreciation of Plant and Machinery						44,000
A.5 Building Rates and Taxes						2,400
A.6 Welfare Expenses						19,494
A.7 Power						68,586
A.8 Works Office Salaries and Expenses						1,30,260
A.9 Miscellaneous Stores Expenses						1,190
A. Total (A.1 to A.9)						5,96,430
B. Reallocation of Service Departments Costs to Production Departments
B.1 Distribution of Works Office Costs
B.2 Distribution of Maintenance Department’s Costs
B.3 Distribution of Stores Department’s Costs
Total Charged to Producing C. Departments (A+B)						5,96,430
D. Labour Hours Actuals for April	1,20,000	44,000	60,000	27,500
E. Overhead Rate/Per Hour (D)

Case 5: EASTERN MACHINES COMPANY

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

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

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

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

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

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

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

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

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

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

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

GENERAL MANAGEMENT

Attempt Any Four Case Study

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

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

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

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

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

Questions

1. Create a three-column chart in which the first column lists nonmanagement skills you have. Are you good at travel? Do you know how to build furniture? Are you a whiz at sports statistics? Are you an innovative cook? Do you play video games for hours? In the second column, list the causes or activities about which you are passionate. These may dovetail with the first list, but they might not.

2. Once you have you two columns complete, draw lines between entries that seem compatible. If you are good at building furniture, you might have also listed a concern about families who are homeless. Remember that not all entries will find a match—the idea is to begin finding some connections.

3. In the third column, generate a list of firms or organizations you know about that reflect your interests. If you are good at building furniture, you might be interested working for the Habitat for Humanity organization, or you might find yourself gravitating towards a furniture retailer like Ikea or Ethan Allen. You can do further research on organizations via Internet or business publications.

CASE – 2 Biyani – Pioneering a Retailing Revolution in India

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

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

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

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

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

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

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

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

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

Questions

1. The tremendous success of the ‘Pantaloons’, ‘Big Bazaar’ and ‘Food Bazaar’ retailing formats, easily made PRIL the number one retailer in India by early 2004, in terms of turnover and retail area occupied by its outlets. Explain how Biyani is further planning to consolidate his businesses.

2. “Our striving toward looking at the Indian market differently and strategizing with the evolving customer helped us perform better.” What other qualities of Kishore Biyani do you think were instrumental in making him top retailer of India?

CASE – 3 The New Frontier for Fresh Foods Supermarkets

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

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

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

Questions

1. What steps can Vivian Noble take to recruit and develop her new workforce?

2. What other ways can Noble help her company reach out to the community?

3. How will Fresh Foods Supermarkets as whole benefit from successfully moving into this new region of the country?

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

THE EVOLUTION OF THE FIRM

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

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

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

Highlights and responsibilities of the job description include:

· Supervising day-to-day office personnel and operations (phones, meetings, word processing, mail, billings, payroll, general overhead, and maintenance).

· Improving customer relations (more expeditious processing of cases and clients).

· Expanding the customer base.

· Enhancing relations with the local communities.

· Managing the annual budget and related incentive programs.

· Maintaining annual growth in sales of 10 percent while maintaining or exceeding the current profit margin.

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

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

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

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

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

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

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

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

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

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

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

Questions

1. Do you agree with Howser’s suggestion to “sit tight and ride out the storm,” or should the partners take some action immediately? If so, what actions specifically?

2. Assume that the creation of the GM—Operation position was a good decision. What leadership style and type of individual would you try to place in this position?

3. Consider your own leadership style. What types of positions and situations should you seek? What types of positions and situation should you seek to avoid? Why?

CASE – 5 The Grizzly Bear Lodge

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

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

Questions

1. Discuss how Rudy and Diane can use feedforward, concurrent, and feedback controls both now and in future at the Grizzly Bear Lodge to ensure their guests’ satisfaction.

2. What might be some of the fundamental budgetary considerations the Conrads would have as they plan the expansion of their logic?

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

HUMAN RESOURCE MANAGEMENT

Note: Solve any 4 Cases Study’s

CASE: I Enterprise Builds On People

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

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

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

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

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

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

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

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

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

Question:

1. Would Enterprise’s approach human resource management work in other industries?

2. Does Enterprise face any risks from its human resource strategy?

3. Would you want to work for Enterprise? Why or why not?

CASE: II Doing The Dirty Work

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

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

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

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

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

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

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

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

Question:

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

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

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

CASE: III On Pegging Pay to Performance

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

But how should he see it through?

CASE: IV Crisis Blown Over

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

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

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

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

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

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

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

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

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

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

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

Question:

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

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

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

CASE: V A Case of Burnout

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

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

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

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

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

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

Question:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

1. What should he do?

MANAGERIAL ECONOMICS

Attempt Any Four Case Study

CASE – 1 Dabur India Limited: Growing Big and Global

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

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

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

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

Vision, Mission and Objectives

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

· Focus on growing core brands across categories, reaching out to new geographies, within and outside India, and improve operational efficiencies by leveraging technology.

· Be the preferred company to meet the health and personal grooming needs of target consumers with safe, efficacious, natural solutions by synthesising deep knowledge of ayurveda and herbs with modern science.

· Be a professionally managed employer of choice, attracting, developing and retaining quality personnel.

· Be responsible citizens with a commitment to environmental protection.

· Provide superior returns, relative to our peer group, to our shareholders.

Chairman of the company

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

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

Leading brands

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

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

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

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

Questions

1. What is the objective of Dabur? Is it profit maximisation or growth maximisation? Discuss.

2. Do you think the growth of Dabur from a small pharmacy to a large multinational company is an indicator of the advantages of joint stock company against proprietorship form? Elaborate.

CASE – 2 IT Industry: Checkered Growth

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

Stock Taking

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

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

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

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

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

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

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

Year	A*	B*	C*	D*	E*
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03	1.22 1.45 1.87 2.71 2.87 3.09	18,641 25,307 36,179 56,592 65,788 76,482	3,900 6,530 10,940 17,150 28,350 36,500 46,100	6,594 10,899 16,879 23,980 37,350 47,532 59,472	9,438 12,055 14,227 18,837 28,330 29,181 30,382
A: share of GDP of the Indian IT market, B: size of the Indian IT market (in Rs. crore), C: software and services exports (in Rs. crore), D: size of software and services (in Rs. crore), E: size of the domestic market (in Rs. crore) Questions* 1. Try to identify various stages of growth of IT industry on basis of information given in the case and present a scenario for the future. 2. Study the table given. Apply trend projection method on the figures and comment on the trend. 3. Compute a 3 year moving average forecast for the years 1997-98 through 2003-04. CASE – 3 Outsourcing to India: Way to Fast Track By almost any measure, David Galbenski’s company Contract Counsel was a success. It was a company Galbenski and a law school buddy, Mark Adams, started in 1993; it helps companies find lawyers on a temporary contract basis. The growth over the past five years had been furious. Revenue went from less than $200,000 to some $6.5 million at the end of 2003, and the company was placing thousands of lawyers a year. At then the revenue growth began to flatten; the company grew just 8% in 2004 despite a robust market for legal services estimated at about $250 billion in the United States alone. Frustrated and concerned, Galbenski stepped back and began taking a hard look at his business. Could he get it back on the fast track? “Most business books say that the hardest threshold to cross is that $10 million sales mark,” he says. “I knew we couldn’t afford to grow only 10% a year. We needed to blow right through that number.” For that to happen, Galbenski knew he had to expand his customer base beyond the Midwest into large legal supermarkets such as Boston, New York, and Washington, D.C. He also knew that in doing so, he could run into stiff competition from larger publicly traded rivals. Contract Counsel’s edge has always been its low price, Clients called when dealing with large-scale litigation or complicated merger and acquisition deals, either of which can require as many as 100 lawyers to manage the discovery process and the piles of documents associated with it. Contract Counsel’s temps cost about $75 an hour, roughly half of what a law firm would charge, which allowed the company to be competitive despite its relatively small size. Galbenski was counting on using the same strategy as he expanded into new cities. But would that be enough to spur the hyper growth that he craved for? At that time, Galbenski had been reading quite a bit about the growing use of offshore employees. He knew companies like General Electric, Microsoft and Cisco were saving bundles by setting up call and data centers in India. Could law firms offshore their work? Galbenski’s mind raced with possibilities. He imagined tapping into an army of discount-priced legal minds that would mesh with his existing talent pool in the U.S. The two work forces could collaborate over the Web and be productive on a 24-7 basis. And the cost could be massive. Using offshore workers was a risk, but the payoff was potentially huge. Incidentally Galbenski and his eight-person management team were preparing to meet for their semiannual review meeting. The purpose of the two-day event was to decide the company’s goals for the coming year. Driving to the meeting, Galbenski struggled to figure out exactly what he was going to say. He was still undecided about whether to pursue an incremental and conservative national expansion or take a big gamble on overseas contractors. The Decision The next morning Galbenski kicked off the management meeting. Galbenski laid out the facts as he saw them. Rather than look at just the next five years of growth, look at the next 20, he said. He cited a Forrester Research prediction that some 79,000 legal jobs, totaling $5.8 billion in wages, would be sent offshore by 2015. He challenged his team to be pioneers in creating a new industry, rather than stragglers racing to catch up. His team applauded. Returning to the office after the meeting, Galbenski announced the change in strategy to his 20 full-timers. Then he and his team began plotting a global action plan. The first step was to hire a company out of Indianapolis, Analysts International, to start compiling a list of the best legal services providers in countries where people had comparatively strong English skills. The next phase was vetting the companies in person. In February 2005, just three months after the meeting in Port Huron, Galbenski found himself jetting off on a three months trip to scout potential contractors in India, Dubai, and Sri Lanka. Traveling to cities like Bangalore, Chennai and Hyderabad, he interviewed executives from more than a dozen companies, investigating their day-to-day operations firsthand. India seemed like the best bet. With more than 500 law schools and about 200,000 law students graduating each year, it had no shortage or attorneys. What amazed Galbenski, however, was that thanks to the Web, lawyers in India had access to the same research tools and case summaries as any associate in the U.S. Sure, they didn’t speak American English. “But they were highly motivated, highly intelligent, and extremely process-oriented,” he says. “They were also eager to tackle the kinds of tasks that most new associated at law firms look down upon” such as poring over and coding thousands of documents in advance of a trial. In other words, they were perfect for the kind of document-review work he had in mind. After a return visit to India in August 2005, Galbenski signed a contract with two legal services companies: QuisLex, in Hyderabad, and Manthan Services in Bangalore. Using their lawyers and paralegals, Galbenski figured he could cut his document-review rates to $50 an hour. He also outsourced the maintenance of the database used to store the contact information for his thousands of contractors. In all, he spent about 12 months and $250,000 readying his newly global company. Convincing U.S. based clients to take a chance on the new service hasn’t been easy. In November, Galbenski lined up pilot programs with four clients (none of which are ready to publicise their use of offshore resources). To help get the word out, he launched a website (offshore-legal-services.com), which includes a cache of white papers and case studies to serve as a resource guide for companies interested in outsourcing. Questions 1. As money costs will decrease due to decision to outsource human resource, some real costs and opportunity costs may surface. What could these be? 2. Elaborate the external and internal economies of scale as occurring to Contract Counsel. 3. Can you see some possibility of economies of scope from the information given in the case? Discuss.

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

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

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

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

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

Table 2: Impact of FIIs’ Investment on NSE

Wave	Date	Nifty close	Change in Nifty Index	FLLS Net Investment (Rs.Cr.)	Change in Market Capitalisation (Rs.Cr.)
Wave 1 From To	17/05/04 26/10/05	1388.75 2408.50	1019.75	59520	5,40,391
Wave 2 From To	27/10/05 11/05/06	2352.90 3701.05	1348.15	38258	6,20,248
Wave 3 From To	12/05/06 13/06/06	3650.05 2663.30	-986.75	-9709	-4,60,149

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

Questions

1. Is stock market a good example of perfect competition? Discuss.

2. Identify the characteristics of perfect competition in the stock market setting.

3. Can you find some basic aspect of perfect competition which is essentially absent in stock market?

CASE – 5 The Indian Audio Market

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

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

Pricing across Segments

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

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

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

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

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

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

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

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

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

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

Questions

1. What major pricing strategies have been discussed in the case? How effective these strategies have been in ensuring success of the company?

2. Is perceived value pricing the dominant strategy of major players?

3. Which products have reached maturity stage in audio industry? Do you think that product bundling can be effectively used for promoting sale of these products?

MARKETING MANAGEMENT

Note: Solve any 4 Cases Study’s

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

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

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

The changing face of the Irish beer market

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

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

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

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

Giving Guinness a boost in its home market

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

The report continued:

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

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

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

Product innovation

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

‘A perfect head’ for canned Guinness

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

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

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

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

A colder pint

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

A cooler image for Guinness

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

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

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

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

Brand building

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

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

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

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

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

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

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

The uncertain future of the Guinness brand in Ireland

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

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

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

A quick solution?

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

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

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

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

Question:

1. From a marketing perspective, what has Guinness done to ensure its longevity?

2. How would you characterize the Guinness brand?

3. What could Guinness do to attract younger drinkers? And to retain its older loyal customer base? Can both be done at the same time?

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 demo-graphic 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 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

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. 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.

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 US-based 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	Skin care	Baby care	Sun protection	Men’s care
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, 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 (%)

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

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 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, sun-spray, 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 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 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.

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?

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’

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.

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 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 fast-food 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.

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 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

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 fashion-orientated 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.

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 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-of-fashion 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.

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 fulfil 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.

OPERATION MANAGEMENT

Attempt All Case Study

CASE – 1

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

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

Question:

» Understand issues and challenges in executing a large infrastructure project by studying the ambitious Kashmir Railway Project which once accomplished would be an engineering miracle.
» Appreciate the difficulties before the project managers due to the fragile geology and steep topography - presence of a major earthquake zone, extreme environmental conditions in terms of temperature, etc.
» Appreciate the difficulties involved in the execution of large infrastructure projects in developing countries, and how these can be overcome.

CASE – 2

Spain-based Mango MNG Holding SL (Mango), the flagship of a group of companies involved in design, manufacture, and distribution of garments and fashion accessories, sold garments for men and women and accessories through exclusive stores. The company was started in 1984 in Spain, and expanded rapidly to more than 107 countries across the world by 2012. Mango went on to become the second largest textile exporter in Spain. Mango was one of the pioneers of fast fashion. The company was able to design the garments and send them to the stores within a span of three months.

It could also bring designs with slight modifications within just two weeks. The case discusses Mango’s business model under which it retained some of the core activities of its value chain in-house while outsourcing the rest of the activities. Important activities like design and distribution were managed completely by the company, while manufacturing, which was a labor-intensive task, was outsourced. The company retailed through its own outlets as well as through franchisees. This business model helped the company expand rapidly and also minimize the risks.

Question:

» Analyze Mango's business model.
» Study the design, production, distribution, and store management processes at Mango.
» Evaluate Mango's core and non-core activities.
» Understand which processes can be managed in-house and which ones can be outsourced..

CASE – 3

Tthe Just-in-Time (JIT) implementation at Harley-Davidson Motor Company (Harley-Davidson), a US-based motorcycle manufacturing company. JIT, a philosophy developed by Japanese companies, aims at reducing inventory and advocates the production of only what is needed when needed and no more. After World War II, Harley-Davidson faced fierce competition from Japanese automobile companies which were able to produce better quality motorcycles at comparatively lower cost. Harley-Davidson visited some of the Japanese companies and found that Japanese companies were following three main practices: employee involvement, use of statistical process control, and JIT. The company soon realized that in order to beat Japanese competition, it had to implement these practices as well. The company successfully implemented JIT practices and reaped several benefits.

After spectacular growth in the 1990s and the early 2000s, Harley-Davidson again faced hard times from 2007. The case also looks at the challenges faced by the company in the latter part of the first decade of the new millennium, and how it was trying to focus on ‘continuous improvement' in a bid to bring itself back into profits.

Question:

» To understand Just-in-time philosophy and its importance in reducing overall production cost and enhancing product quality.
» To understand how the JIT philosophy requires the alignment of operational strategies to achieve the goal.
» To understand the important role of having a stable supplier network for achieving JIT.
» To understand that besides the use of statistical techniques in achieving JIT, employees' involvement is equally important.
» To discuss the challenges faced by Harley-Davidson since 2007.
» To explore operational strategies that Harley-Davidson can adopt to overcome those strategies.

CASE – 4

The case discusses the master franchise model of the US-based Domino's Pizza Inc (Domino's). Domino's, which was started in the 1960s, expanded in international markets mainly through its master franchise model. Under this model, the franchisees were provided with exclusive rights to operate stores, or to sub-franchise them in a particular area. Domino's recruited franchisees with business experience and knowledge of local markets as master franchisees, and was able to mitigate the risks associated with entering and operating in international markets. Under master franchising, in markets where there was high potential for development, Domino's transferred market exclusivity to an individual/company, who had a significant presence and knowledge about the local markets.

These individuals/companies in turn invested in establishing the master franchise, whose responsibilities include building stores, sub-franchising, operating distribution system, etc. The case discusses in detail the store operations of Domino's and the benefits of its master franchise system.

Question:

» Understand the master franchise model of Domino's and its advantages.

» Examine some of the unique features of the master franchise model of Domino's.

» Analyze the store operations of Domino's.

» Examine the training/support provided by Domino's to the franchisees.

» Understand how the master franchise model helped Domino's in facing the adverse impact of global economic slowdown successfully.

QUANTITATIVE METHODS

Note: Solve any 8 Question out of 10.

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

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

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

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

Job Time (Hours)

_______________________________________

Machine A Machine B

J1 6 8

J2 7 3

Use graphical method.

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

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

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

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

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

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

STRATEGIC MANAGEMENT

CASE – 1 MANAGING HINDUSTAN UNILEVER STRATEGICALLY

Unilever is one of the world’s oldest multinational companies. Its origin goes back to the 19^th century when a group of companies operating independently, produced soaps and margarine. In 1930, the companies merged to form Unilever that diversified into food products in 1940s. Through the next five decades, it emerged as a major fast-moving consumer goods (FMCG) multinational operating in several businesses. In 2004, the Unilever 2010 strategic plan was put into action with the mission to ‘bring vitality to life’ and ‘to meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good, and get more out of life’. The corporate strategy is of focusing on bore businesses of food, home care and personal care. Unilever operates in more than 100 countries, has a turnover of € 39.6 billion and net profit of € 3.685 billion in 2006 and derives 41 per cent of its income from the developing and emerging economies around the world. It has 179,000 employees and is a culturally-diverse organisation with its top management coming from 24 nations. Internationalisation is based on the principle of local roots with global scale aimed at becoming a ‘multi-local multinational’.

The genesis of Hindustan Unilever (HUL) in India, goes back to 1888 when Unilever exported Sunlight soap to India. Three Indian, subsidiaries came into existence in the period 1931-1935 that merged to form Hindustan Lever in 1956. Mergers and acquisitions of Lipton (1972), Brooke Bond (1984), Ponds (1986), TOMCO (1993), Lakme (1998) and Modern Foods (2002) have resulted in an organisation that is a conglomerate of several businesses that have been continually restructured over the years.

HUL is one of the largest FMCG company in India with total sales of Rs. 12,295 crore and net profit of 1855crore in 2006. There are over 15000 employees, including more than 1300 managers. The present corporate strategy of HUL is to focus on core businesses. These core businesses are in home and personal care and food. There are 20 different consumer categories in these two businesses. For instance, home and personal care is made up of personal wash, laundry, skin care, hair care, oral care, deodorants, colour cosmetics and ayurvedic personal and health care, while food businesses have tea, coffee, ice creams and processed food brands. Apart from the two product divisions, there are separate departments for specialty exports and new ventures.

Strategic management at HUL is the responsibility of the board of directors headed by a chairman. There are five independent and five whole-time directors. The operational management is looked after by a management committee comprising of Vice Chairman, CEO and managing director and executive directors of the two business divisions and functional areas. The divisions have a lot of autonomy with dedicated assets and resources. A divisional committee having the executive director and heads of functions of sales, commercial and manufacturing looks after the business level decision-making. The functional-level management is the responsibility of the functional head. For instance, a marketing manager has a team of brand managers looking after the individual brands. Besides the decentralised divisional structure, HUL has centralised some functions such as finance, human resource management, research, technology, information technology and corporate and legal affairs.

Unilever globally and HUL nationally, operate in the highly competitive FMCG markets. The consumer markets for FMCG products are finicky: it’s difficult to create customers and much more difficult to retain them. Price is often the central concern in a consumer purchase decision requiring producers to be on continual guard against cost increases. Sales and distribution are critical functions organisationally. HUL operates in such a milieu. It has strong competitors such as the multinationals Procter & Gamble, Nivea or L’Oreal and formidable local companies such as, Amul, Nirma or the Tata

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 name-change 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.

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

· Issue currency

· Play as developmental role

· Related functions such as acting as the banker to the government and scheduled banks

The management of the RBI is the responsibility of the central board of directors headed by the governor and consisting of deputy governors and other directors, all of whom are appointed by the government. There are four local boards based at Chennai, Kolkata, Mumbai and New Delhi. The day-to-day management of RBI is in the hands of the executive directors, managers at various levels and the support staff. There are about 22000 employees at RBI, working in 25 departments and training colleges.

The RBI identified its strengths and weaknesses as under.

· Strengths A large body of competent officers and staff; access to key data on the economy; wide organisational network with 22 regional offices; established infrastructure; ability to attract talent; and financial self sufficiency.

· Weaknesses Structural rigidity, lack of accountability and slow decision-making; eroded specialist know-how; strong employee unions with rigid industrial relations stance; surplus staff; and weak market intelligence.

Over the years, the RBI has evolved in terms of structure and functions, in response to the role assigned to it. There have been sweeping changes in the economic, social and political environment. The RBI has had to respond to it even in the absence of a systematic strategic plan. In 1992, the RBI, with the assistance of a private consultancy firm, embarked on a massive strategic planning exercise. The objective was to establish a roadmap to redefine RBI’s role and to review internal organisational and managerial efficacy, address the changing expectations from external stakeholders and reposition the bank in the global context. The strategic planning exercise was buttressed by departmental position papers and documents on various subjects such as technology, human resources and environmental trends. The strategic plan of the RBI emerged with four sections dealing with the statement of mission, objectives and policy, a review of RBI’s strengths and weaknesses and strategic actions required with an implementation plan. The strategic plan reiterates anticipation of evolving external environment in the medium-term; revisiting strengths and weaknesses (evaluation of capabilities); and doing away with the outdated mandates for enhancing efficiency in operations in furtherance of best public interests. The results of these efforts are likely to manifest in attaining a visible focus, reinforced proficiency, realisation of shared sense of purpose, optimising resource use and build-up of momentum to achieve goals.

Historically, the RBI adopted the time-tested technique of responding to external environment in a pragmatic manner and making piecemeal changes. The dilemma in adoption of a comprehensive strategic plan was the risk of trading off the flexibility of the pragmatic approach to creating rigidity imposed by a set model of planning.

Questions:

1. Consider the vision and mission statements of the Reserve Bank of India. Comment on the quality of both these statements.

2. Should the RBI go for a systematic and comprehensive strategic plan in place of its earlier pragmatic approach of responding to environmental events as and when they occur? Why?

CASE: 3 THE INTERNATIONALISATION OF KALYANI GROUP

The Kalyani Group is a large family-business group of India, employing more than 10000 employees. It has diverse businesses in engineering, steel, forgings, auto components, non-conventional energy and specialty chemicals. The annual turnover of the Group is over US$2.1 billion. The Group is known for its impressive internationalisation achievements. It has nine manufacturing locations spread over six countries. Over the years, it has established joint ventures with many global companies such as ArvinMeritor, USA, Carpenter Technology Corporation, USA, Hayes Lemmerz, USA and FAW Corporation, China.

The flagship company of the Group is Bharat Forge Limited that is claimed to be the second largest forging company in the world and the largest nationally, with about 80 per cent share in axle and engine components. The other major companies of the Group are Kalyani Steels, Kalyani Carpenter Special Steels, Kalyani Lemmerz, Automotive Axles, Kalyani Thermal Systems, BF Utilities, Hikal Limited, Epicenter and Synise Technologies

The emphasis on internationalisation is reflected in the vision statement of the Group where two of the five points relate to the Group trying to be a world-class organisation and achieving growth aggressively by accessing global markets. The Group is led by Mr. B.N. Kalyani, who is considered to be the major force behind the Group’s aggressive internationalisation drive. Mr. Kalyani joined the Group in 1972 when it was a small-scale diesel engine component business.

The corporate strategy of the Group is a combination of concentration of its core competence in its business with efforts at building, nurturing and sustaining mutually beneficial partnerships with alliance partners and customers. The value of these partnerships essentially lies in collaborative product development with the partners who are the original equipment manufacturers. The foreign partners are not intended to provide expansion in capacity, but to enable the Kalyani Group to extend its global marketing reach.

In achieving its successful status, the Kalyani Group has followed the path of integration, extending from the upstream steel making to downstream machining for auto components such as crank-shafts, front axle beams, steering knuckles, cam-shafts, connecting rods and rocker arms. In all these products, the Group has tried to move up the value chain instead of providing just the raw forgings. In the 1990s, it undertook a restructuring exercise to trim its unrelated businesses such as television and video products and concentrate on its core business of auto components.

Four factors are supposed to have influenced the growth of the Group over the years. These are mentioned below:

· Focussing on core businesses to maximise growth potential

· Attaining aggressive cost savings

· Expanding geographically to build global capacity and establishing leading positions

· Achieving external growth through acquisitions

The Group companies are claimed to be positioned at either number one or two in their respective businesses. For instance, the Group claims to be number one in forging and machined components, axle aggregates, wheels and alloy steel. The technology used by the Group in its mainline business of auto components and other businesses, is claimed to be state-of-the-art. The Group invests in forging technology to enhance efficiency, production quality and design capabilities. The Group’s emphasis on technology can be gauged from the fact that in the 1990s, it took the risky decision of investing Rs. 100 crore in the then latest forging technology, when the total Group turnover was barely Rs. 230 crore. Information technology is applied for product development, reducing production and product development time, supply-chain management and marketing of products. The Group lays high emphasis on research and development for providing engineering support, advanced metallurgical analysis and latest testing equipment in tandem with its high-class manufacturing facilities.

Being a top-driven group, the pattern of strategic decision-making within seems to be entrepreneurial. There was an attempt to formulate a five-year strategic plan in 1997, with the participation of the company executives. But no much is mentioned in the business press about that collaborative strategic decision-making after that.

Recent strategic moves include Kalyani Steels, a Group company, entering into a joint venture agreement in may 2007, with Gerdau S.A. Brazil for installation of rolling mills. An attempt to move out of the mainstream forging business was made when the Group strengthened its position in the prospective business of wind energy through 100 per cent acquisition of RSBconsult GmbH (RSB) of Germany. Prior to the acquisition, the Group was just a wind farm operator and supplier of components.

Questions:

1. What is the motive for internationalisation by the Kalyani Group? Discuss.

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

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 client-service 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 need-based 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 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 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

(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 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.

CASESTUDYANDPROJECTREPORTS.COM

Saturday, 10 February 2018

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