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Note:
Solve any 10 Questions.
- Explain ‘AVIATION MAINTENANCE SAFETY’
- Explain the functions of ‘MATERIAL
SUPPORT’ in aviation industry.
- What are the essential elements in
Aviation Maintenance Programme .
- Explain airplane maintenance techniques in
aviation.
- Analyse HUMAN FACTORS in aviation
industry.
- What is called ‘RELIABILITY’ in aviation –
State maintenance.
- What are the ‘REGULATORY’ documents in
aviation industry.
- Define the following:
a) Hospitality management
b) Guest
c) Motel
d) B & B hotels
e) Stewarding - What
is Aircraft inspection? How is it’s carried out?
- What
are roles or functions of ICAO in International civil aviation structure?
- Draw
and explain runway and taxiway markings and lightings.
- Explain
Passenger Load Factor (PLF) in detail?
- Explain
civilian and military airports? Give some name of some international
airport in India
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 |
|||||||||||
|
|
RS |
RS |
|||||||||
|
Indirect
Labour and Supervisions: Machining Fabrication Assembly Painting Stores Maintenance Indirect
Materials and Supplies Machining Fabrication Assembly Painting Maintenance Others Factory
Rent Depreciation
of Plant and Machinery Building
Rates and Taxes Welfare
Expenses (At 2
per cent of direct labour wages and Indirect labour and supervision) Power (Maintenance—Rs
366; Works Office Rs 2,200, Balance to Producing Departments) Works
Office Salaries and Expenses Miscellaneous
Stores Department Expenses |
33,000 22,000 11,000 7,000 44,000 32,700
2,200 1,100 3,300 3,400
1,68,000
44,000
2,400
19,400
68,586 1,30,260
1,190
|
1,49,700 12,800 4,33,930
5,96,930
|
|||||||||
Exhibit B
|
STAR ENGINEERING COMPANY Projected Operation Data for the Year |
||||||
|
Department |
Area (sq.m) |
Original Book of Plant & Machinery Rs |
Direct Materials Budget Rs |
Horse Power Rating |
Direct Labour Hours |
Direct Labour Budget Rs |
|
Machining Fabrication Assembly Painting Stores Maintenance Works Office Total |
13,000 11,000 8,800 6,400 4,400 2,200 2,200 48,000 |
26,40,000 13,20,000
6,60,000
2,64,000
1,32,000
1,98,000
68,000 52,80,000 |
62,40,000 21,60,000 10,80,000 94,80,000 |
20,000 10,000
1,000
2,000 33,000 |
14,40,000
5,28,000
7,20,000
3,30,000 30,18,000 |
52,80,000 25,40,000 13,20,000
6,60,000 99,00,000 |
Note
The
estimates given in this exhibit are for the budgeted year January to December
where as the actuals in Exhibit A are just one month—April of the budgeted
year.
|
Exhibit
C STAR ENGINEERING COMPANY Actual Overhead Distribution Sheet for
April |
|||||||||||
|
Departments Overhead
Costs |
Production Departments |
Service Departments |
Total Amount Actuals for April (Rs) |
Basis for Distribution |
|||||||
|
|
|
|
|
|
|
|
|||||
|
A.
Allocation of Overhead to all departments A.1 Indirect Labour and Supervision |
|
|
|
|
|
|
|
1,49,700 |
|
||
|
A.2 Indirect materials and supplies |
|
|
|
|
|
|
|
12,800 |
|
||
|
A.3 Factory Rent |
|
|
|
|
|
|
|
1,68,000 |
|
||
|
A.4 Depreciation of Plant and Machinery |
|
|
|
|
|
|
|
44,000 |
|
||
|
A.5 Building Rates and Taxes |
|
|
|
|
|
|
|
2,400 |
|
||
|
A.6 Welfare Expenses |
|
|
|
|
|
|
|
19,494 |
|
||
|
A.7 Power |
|
|
|
|
|
|
|
68,586 |
|
||
|
A.8 Works Office Salaries and Expenses |
|
|
|
|
|
|
|
1,30,260 |
|
||
|
A.9 Miscellaneous Stores Expenses |
|
|
|
|
|
|
|
1,190 |
|
||
|
A. Total (A.1 to A.9) |
|
|
|
|
|
|
|
5,96,430 |
|
||
|
B. Reallocation of Service Departments
Costs to Production Departments |
|
|
|
|
|
|
|
|
|
||
|
B.1 Distribution of Works Office Costs |
|
|
|
|
|
|
|
|
|
||
|
B.2 Distribution of Maintenance
Department’s Costs |
|
|
|
|
|
|
|
|
|
||
|
B.3 Distribution of Stores Department’s
Costs |
|
|
|
|
|
|
|
|
|
||
|
Total Charged to Producing C. Departments (A+B) |
|
|
|
|
|
|
|
5,96,430 |
|
||
|
D. Labour Hours Actuals for April |
1,20,000 |
44,000 |
60,000 |
27,500 |
|
|
|
|
|
||
|
E. Overhead Rate/Per Hour (D) |
|
|
|
|
|
|
|
|
|
||
Case 5: EASTERN
MACHINES COMPANY
Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.
So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.
Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.
Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.
Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.
Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.
Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.
Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.
Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.
Namdeo: We should ask somebody from our statistics dept. to attend to this problem.
As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?
IIBMS QUESTION PAPER
Subject – Mangerial Economics
Marks - 100
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?
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