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Note: Solve any 4
Cases Study’s
CASE: I Conceptualise and Get Sacked
HSS Ltd. is a leader in high-end textiles
having headquarters in
The company records a turnover of Rs 1,000
cr. Plus a year. A year back, HSS set up a unit at Hassan (250 km away from
Maniyam has a vision. Being a firm
believer in affirmative actions, he plans to reach out to the rural areas and
tap the potentials of teenaged girls with plus two educational background.
Having completed their 12th standard, these girls are sitting at homes, idling
their time, watching TV serials endlessly and probably dreaming about their
marriages. Junior colleges are located in their respective villages and it is
easy for these girls to get enrolled in them. But degree colleges are not
nearby. The nearest degree college is minimum 10 km and no parents dare send
their daughters on such long distances and that too for obtaining degrees,
which would not guarantee them jobs but could make searching for suitable boys
highly difficult.
These are the girls to whom
Maniyam wants to reach out. How to go about hiring 1500 people from a large
number who can be hired? And Karnataka is a big state with 27 districts. The
GM-HR studies the geography of all the 27 districts and zeroes in on nine of
them known for backwardness and industriousness.
Maniyam then thinks of the
principals of Junior Colleges in all the nine districts as contact persons to
identify potential candidates. This route is sure to ensure desirability and
authenticity of the candidates. The girls are raw hands. Except the little
educational background, they know nothing else. They need to be trained.
Maniyam plans to set up a training centre at Hassan with hostel facilities for
new hires. He even hires Anil, an MBA from
All is set. It is bright day in
October 2006. MD and the newly hired VP-HR came to Hassan from
In this meeting, Maniyam is told
that his style of functioning does not jell with the culture of HSS. He gets
the shock of life. He responds on expected by submitting his papers.
Back in his room, Maniyam wonders
what has gone wrong. Probably, the VP-HR being the same age as he is, is
feeling jealous and insecure since the MD has all appreciation for the concept
and the way things are happening. Maniyam does not have regrets. On the
contrary he is happy that his concept is being followed though he has been
sacked. After all, HSS has already hired 500 girls. With Rs 3,000 plus a month
each, these girls and their parents now find it easy to find suitable boys.
Question:
1.
What
mad the MD change his mind and go against Maniyam? What role might the VP-HR
have played in the episode?
2.
If
you were Maniyam, what would you do?
CASE: II A Tale of Twists and Turns
Rudely shaken, Vijay came home in the
evening. He was not in a mood to talk to his wife. Bolted inside, he sat in his
room, lit a cigarette, and brooded over his experience with a company he loved
most.
Vijay, an M.Com and an ICWA,
joined the finance department of a Bangalore-based electric company (Unit 1),
which boasts of an annual turnover of Rs. 400 crores. He is smart, intelligent,
but conscientious. He introduced several new systems in record-keeping and was
responsible for cost reduction in several areas. Being a loner, Vijay developed
few friends in and outside the organization. He also missed promotions four
times though he richly deserved them.
G.M. Finance saw to it that Vijay
was shifted to Unit 2 where he was posted in purchasing. Though purchasing was
not his cup of tea, Vijay went into it whole hog, streamlined the purchasing
function, and introduced new systems, particularly in vendor development. Being
honest himself, Vijay ensured that nobody else made money through questionable
means.
After two years in purchasing,
Vijay was shifted to stores. From finance to purchasing to stores was too much
for Vijay to swallow.
He burst out before the unit head,
and unable to control his anger, Vijay put in his papers too. The unit head was
aghast at this development but did nothing to console Vijay. He forwarded the
papers to the V.P. Finance, Unit 1.
The V.P. Finance called in Vijay,
heard him for a couple of hours, advised him not to lose heart, assured him
that his interests would be taken care of and requested him to resume duties in
purchasing Unit 2. Vijay was also assured that no action would be taken on the
papers he had put in.
Six months passed by. Then came
the time to effect promotions. The list of promotees was announced and to his
dismay, Vijay found that his name was missing. Angered, Vijay met the unit head
who coolly told Vijay that he could collect his dues and pack off to his house
for good. It was great betrayal for Vijay.
Question:
1.
What
should Vijay do?
CASE: III Mechanist’s Indisciplined Behaviour
Dinesh, a machine operator, worked as a
mechanist for Ganesh, the supervisor. Ganesh told Dinesh to pick up some trash
that had fallen from Dinesh’s work area, and Dinesh replied, “I won’t do the
janitor’s work.”
Ganesh replied, “when you drop it,
you pick it up”. Dinesh became angry and abusive, calling Ganesh a number of
names in a loud voice and refusing to pick up the trash. All employees in the
department heard Dinesh’s comments.
Ganesh had been trying for two
weeks to get his employees to pick up trash in order to have cleaner workplace
and prevent accidents. He talked to all employees in a weekly departmental
meeting and to each employee individually at least once. He stated that he was
following the instructions of the general manager. The only objection came from
Dinesh.
Dinesh has been with the company
for five years, and in this department for six months. Ganesh had spoken to him
twice about excessive alcoholism, but otherwise his record was good. He was
known to have quick temper.
This outburst by Dinesh hurt
Ganesh badly, Ganesh told Dinesh to come to the office and suspended him for
one day for insubordination and abusive language to a supervisor. The decision
was within company policy, and similar behaviours had been punished in other
departments.
After Dinesh left Ganesh’s office,
Ganesh phoned the HR manager, reported what he had done, and said that he was
sending a copy of the suspension order for Dinesh’s file.
Question:
1.
How
would you rate Dinesh’s behaviour? What method of appraisal would you use? Why?
2.
Do
you assess any training needs of employees? If yes, what inputs should be
embodied in the training programme?
CASE: IV A Case of Misunderstood Message
Indane Biscuits is located in an industrial
area. The biscuit factory employs labour on a daily basis. The management does
not follow statutory regulations, and are able to get away with violations by
keeping the concerned inspectors in good books.
The factory has a designated room
to which employees are periodically called either to hire or to fire.
On the National Safety Day, the
Industries Association, of which Indane Biscuits is a member, decided to celebrate
collectively at a central place. Each of the member was given a specific task.
The Personnel Manager, Indane Biscuits, desired to consult his supervisors and
to inform everybody through them about the safety day celebrations. He sent a
memo requesting them to be present in the room meant for hiring and firing. As
soon as the supervisors read the memo, they all got panicky thinking that now
it was their turn to get fired. They started having ‘hush-hush’ consultations.
The workers also learnt about it, and since they had a lot of scores to settle
with the management they extended their sympathy and support to the
supervisors. As a consequence, everybody struck work and the factory came to a
grinding halt.
In the meantime, the personnel
manager was unaware of the developments and when he came to know of it he went
immediately and tried to convince the supervisors about the purpose of inviting
them and the reason why that particular room was chosen. To be fair to the
Personnel Manager, he selected the room because no other room was available.
But the supervisors and the workers were in no mood to listen.
The Managing Director, who rushed
to the factory on hearing about the strike, also couldn’t convince the workers.
The matter was referred to the
labour department. The enquiry that followed resulted in all irregularities of
the factory getting exposed and imposition of heavy penalties. The Personnel
Manager was sacked. The factory opened
after prolonged negotiations and settlements.
Question:
1.
In
the case of the Indane Biscuits, bring out the importance of ‘context’ and
‘credibility’ in communication.
2.
List
the direct and indirect causes for the escalation of tension at Indane
Biscuits.
3.
If
you were the Personnel Manager what would you do?
CASE: V Rise and Fall
Jagannath (Jaggu to his friends) is an over
ambitious young man. For him ends justify means.
With a diploma in engineering.
Jaggu joined, in 1977, a Bangalore-based company as a Technical Assistant. He
got himself enrolled as a student in a evening college and obtained his degree
in engineering in 1982. Recognising his improved qualification, Jaggu was
promoted as Engineer-Sales in 1984.
Jaggu excelled himself in the new
role and became the blue-eyed boy of the management. Promotions came to him in
quick succession. He was made Manager-Sales in 1986 and Senior
Manager-Marketing in 1988.
Jaggu did not forget his academic
pursuits. After being promoted as Engineer-Sales, he joined an MBA (part-time)
programme. After completing MBA, Jaggu became a Ph.D. scholar and obtained his
doctoral degree in 1989.
Functioning as Senior
Manager-Marketing, Jaggu eyed on things beyond his jurisdiction. He started
complaining Suresh—the Section Head and Phahalad the Unit Chief (both
production) with
Jaggu started spreading wings. He
prevailed upon
Things had to end at some point.
It happened in Jaggu’s life too. There were complaints against him. He had
inducted his brother-in-law, Ganesh, as an engineer. Ganesh was by nature
corrupt. He stole copper worth Rs.5 lakh and was suspended. Jaggu tried to
defend Ganesh but failed in his effort. Corruption charges were also leveled
against Jaggu who was reported to have made nearly Rs.20 lakh himself.
On the new-year day of 1993, Jaggu
was reverted to his old position—sales. Suresh was promoted and was asked to
head production. Roles got reversed. Suresh became the boss to Jaggu.
Unable to swallow the insult,
Jaggu put in his papers.
From 1977 to 1993, Jaggu’s career
graph has a steep rise and sudden fall. Whether there would be another hump in
the curve is a big question.
Question:
1.
Bring
out the principles of promotion that were employed in promoting Jaggu.
2.
What
would you do if you were (i) Suresh, (ii) Prahalad or (iii)
3.
Bring
out the ethical issues involved in Jaggu’s behaviour.
CASE: VI Chairman and CEO Seeking a Solution and
Finding It
Sitting on 50-plus year old ION Tyres, the
Kolkata-based tyres and tubes manufacturing company with a turnover of more
than Rs.1,000 crore, both A.K. Mathur, and Raman Kumar, the CEO are searching
for solutions to problems which their company started unfolding.
Financial performance of ION
Tyres, is poor as reflected in its falling PBT. Performance gap between the top
performer in tyres and tubes and ION Tyres ranges from 4 per cent to 5 per
cent. The company has aging managerial people and equally old plant and
equipment. High cost of production keeps the company in a disadvantaged
position. “Boss is always right” culture has permeated everywhere. Common
thread binding all the departments is missing. Each department is a stand alone
entity.
There are positives nevertheless.
ION Tyres and tubes are famous world-wide for durability, and superior quality.
The company offers a wide range of bias tyres and tubes catering to all users
segments like heavy and light commercial vehicles, motorbikes, scooters, and
autos. The firm has state-of-the-art radial plant. The client list of ION
comprises several big guns in Indian corporate sector. Tata Motors, Hero Honda,
TVS Motors, Mahindra and Mahindra, L&T, Eicher, Swaraj Mazda, Maruti Udyog
and Bajaj are the regularly buying ION’s tyres and tubes.
ION seems to have everything going
in its favour. It is the market leader in the Indian market enjoying 19 per
cent of the market share; manufactures 5.6 m tyres per year, has a network of
50 regional offices with over 4,000 dealers and 180 C&F agents.
Suddenly both Chairman and CEO
have realised that there are too many road blocks ahead of them and the journey
to be rough and bumpy.
Realisation dawned on Mathur and
Raman Kumar way back in 2001 when they both attended a two-day seminar on
“Enhancing Organisational Capability through Balanced Scorecard” organised by
CII at Kolkotta. The duo had personal talk with Sanjeev Kumar, the then
Chairman of CII. They are now convinced that Balanced Score card is ideal
performance assessment tool that could be used in ION with greater benefits.
Mathur and Raman Kumar acted fast.
They soon organised a workshop on “Balanced Score” to educate in-house managers
about the concept and the procedural aspects of its implementation. There was
initial resistance to accept the scorecard as the managers felt that they were
already burdened since they were busy implementing other quality improvement
initiatives. Deliberations in the workshop changed them. They are now convinced
and enthusiastic about the positives of the scorecard. They are ready to
implement the system.
A two member task force was
constituted comprising Director—HRD and G.M.—Strategy and Planning. The task
force travelled to all three factories as well as zonal headquarters to unfold
the implementation of scorecard. The scorecard principles were implemented
successfully from November 2002 and completed by March 2003. Figures 1 to 4
show the scorecards adopted by ION Tyres.
|
Financial |
||||
|
“To succeed financially how should we
appear to our shareholder |
Objectives |
Measure |
Target |
Initiatives |
|
To achieve turnover of Rs.1850 crs by FY05 |
· Sales turnover · PBIDT |
· To achieve turnover of Rs.1850
crs by FY05 · PBIDT of Rs.150 crs (FY05) · Decrease in conversion cost from
Rs.25 to Rs.21/kg in |
· Develop acceptable 1000-20 lug
tyres · Increasing number of sales
offices from 180 to 220 · 7 day work week to be introduced
at · Improve fuel wastage and ensure
lower power · VP Technology and MD to initiate
technology tie-ups |
|
Fig. 1
|
Customer |
||||
|
“To achieve our vision, how should we
appear to out customers” |
Objectives |
Measure |
Target |
Initiatives |
|
Improvement in customer satisfaction |
· Customer satisfaction survey (by
external agency) |
· To improve from 65% to 70% · Customer engagement at 30% |
· Claim settlement to be reduced
from 8 to 2 days · Improvement of casing value of
used tyres, atleast by 15% · Cost per Kilometer of tyre
comparable to competitors |
|
Fig. 2
Outcomes of scorecard implementation have
been very encouraging. PBT improved and the gap between ION Tyres and the
toppers in the industry reduced by 50 per cent. A transparent and objective
performance assessment system came to be kept in place. With inertia and the
ennui being broken, both Mathur and Kumar felt galvanized and realised that the
road ahead of them was no more bumpy and rough. Thus, solutions to the problems
were found.
|
Learning and
Growth |
||||
|
“To achieve our vision, how will we sustain
our ability to change an improve” |
Objectives |
Measure |
Target |
Initiatives |
|
Identification of “high-fliers”; Talents to
be identified through development workshops |
· Job enrichment, job
enlargement, job rotation · Competency Assessment · Potential Appraisals |
· Career planning for the
High-Fliers (expected to be around 30 managers) · Successions planning for all key
positions · 5 manday’s training/manager/year |
· Move people within same
functions, in the first two years and at the year two move them to another
function · Variable pay component in the
ration 1:4 for the “high-fliers” · Non-financial rewards · Felicitation by company chairman
in presence of family members for recognizing extraordinary contributions |
|
Fig. 3
|
Internal Business
Processes |
||||
|
“To satisfy our shareholders and customers,
what business processes must we excel at” |
Objectives |
Measure |
Target |
Initiatives |
|
Introduction of new products in the
commercial tyre segment Reduction of development time Quarterly reconciliation of accounts
receivables from dealers Annual increases on-time to employees |
· Introduction of 3-4 new products
per year in commercial tyre segment · Reduction of development time from
18 months to 6 months · Achieve 100% reconciliation · Annual increases by on time by
1st July |
· Introduction of 3-4 new products
per year in commercial tyre segment · Reduction of development time
from 18 months to 6 months · Achieve 100% reconciliation · Annual increases by on time by
1st July |
· Regular quarterly review of
performance · KRA targets to be ready by 1st
April · European certification for tyres
|
|
Fig.4
Question:
1.
Do
you agree with the conclusion drawn at the end of the case that scorecard
system has galvanised ION Tyres? In other words, does scorecard system deserve
all the credit?
2.
Will
quality improvement initiatives clash with scorecard implementation? If yes,
how to avoid the clashes?
IIBMS QUESTION PAPER
Subject – Managerial 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?
VISIT US AT
Attempt Any
Four Case Study
Case Study 1 :
Structuring global companies
As the chapter illustrates, to carry out their
activities in pursuit of their objectives, virtually all organisations adopt some form of
organisational structure. One traditional method of
organisation is to group individuals by function or purpose, using a departmental structure to allocate
individuals to their specialist areas (e.g. Marketing, HRM and so on ). Another is to
group activities by product or service, with each product group normally responsible
for providing its own functional requirements. A
third is to combine the two in the form of a matrix structure with its vertical and horizontal flows of
responsibility and authority, a method of organisation much favoured in
university Business Schools.
What of companies with a global reach: how do
they usually organise them-
selves?
Writing in the Financial Times in November
2000 Julian Birkinshaw, Associate Professor of
Strategic and International Management at London Business School, identifies
four basic models of global company structure:
● The International Division - an arrangement
in which the company establishes a
separate
division to deal
with business outside
its own country.
The
International Division would typically be
concerned with tariff and trade issues,
foreign agents/partners and other aspects
involved in selling overseas. Normally
the division does not make anything itself, it
is simply responsible for interna-
tional sales. This arrangement tends to be
found in medium-sized companies
with limited international sales. 
The Global Product Division - a product-based
structure with managers responsible
for their product line globally. The company
is split into a number of global busi-
nesses arranged by product (or service) and
usually overseen by their own
president. It has been a favoured structure
among large global companies such as
BP, Siemens and 3M.
● The Area Division - a geographically based
structure in which the major line of
authority lies with the country (e.g. Germany)
or regional (e.g. Europe) manager who
is responsible for the different product
offerings within her/his geographical area.
● The Global Matrix - as the name suggests a
hybrid of the two previous structural
types. In the global matrix each business
manager reports to two bosses, one
responsible for the global product and one for
the country/region. As we indi-
cated in the previous edition of this book,
this type of structure tends to come
into and go out of fashion. Ford, for example,
adopted a matrix structure in the
later 1990s, while a number of other global
companies were either streamlining
or dismantling theirs (e.g. Shell, BP, IBM).
As Professor Birkinshaw indicates, ultimately
there is no perfect structure and organisations tend
to change their approach over time according to changing circumstances,
fads, the perceived
needs of the
senior executives or the
predispositions of
powerful individuals. This observation is no less true of universities than it
is of traditional businesses.
Case study questions
1.
Professor
Birkinshaw’s article identifies the advantages and disadvantages of being
a global business. What are his major arguments?
2.
In
your opinion what are likely to be the key factors determining how a global company will organise itself?
Case 2 : Resource
prices
As we saw in Chapter 1, resources such as
labour, technology and raw materials
constitute inputs into the production process that are utilised by
organisations to
produce outputs. Apart
from concerns over the quality, quantity and availability of
the different factors of
production, businesses are also interested in the issue of
input prices since these
represent costs to the organisation which ultimately have
to be met from revenues if the business is to survive. As in any other market,
the
prices of economic
resources can change over time for a variety of reasons, most, if
not all, of which are
outside the direct control of business organisations. Such fluc-
tuations in input prices can be illustrated by the following examples:
● Rising labour costs - e.g. rises in wages or
salaries and other labour-related costs
(such as pension contributions or healthcare
schemes) that are not offset by
increases in productivity or changes in
working practices. Labour costs could rise
for a variety of reasons including skills
shortages, demographic pressures, the
introduction of a national minimum wage or
workers seeking to maintain their
living standards in an
inflationary period.
● Rising raw material costs - e.g. caused by
increases in the demand for certain raw
materials and/or shortages (or bottlenecks) in
supply. It can also be the result of
the need to switch to more
expensive raw material sources because of customer
pressure, environmental
considerations or lack of availability.
● Rising energy costs - e.g. caused by demand
and/or supply problems as in the oil
market in recent years, with growth in India
and China helping to push up
demand and coinciding with supply difficulties
linked to events such as the war
in Iraq, hurricanes in the Gulf of Mexico or
decisions by OPEC.
● Increases in the cost of purchasing new
technology/capital equipment - e.g.
caused by the need to compete with rivals or
to meet more stringent government
regulations in areas such as health and safety or the environment.
As the above examples illustrate, rising input
prices can be the result of factors operating at both
the micro and macro level and these can range from events which are linked to natural causes to
developments of a political, social and/or economic kind. While many of these influences in
the business environment are uncontrollable,
there are steps business organisations can (and do) often take to address the issue of rising input prices that
may threaten their competitiveness. Examples include
the following:
● Seeking cheaper sources of labour (e.g. Dyson
moved its production of vacuum
cleaners to the Far East).
● Abandoning salary-linked pension schemes or
other fringe benefits (e.g. com-
pany cars, healthcare provisions, paid
holidays).
● Outsourcing certain activities (e.g. using
call centres to handle customer com-
plaints, or outsourcing services such as security,
catering, cleaning, payroll, etc.). ●
Switching raw materials or energy suppliers (e.g. to take advantage of
discounts
by entering into longer agreements to
purchase). 
● Energy-saving measures (e.g. through better
insulation, more regular servicing of
equipment, product and/or
process redesign).
● Productivity gains (e.g. introducing
incentive schemes).
In addition to measures such as these, some
organisations seek cost savings through
divestment of parts of the
business or alternatively through merger or takeover
activity. In the former
case the aim tends to be to focus on the organisation’s core
products/services and to
shed unprofitable and/or costly activities; in the latter the
objective is usually to
take advantage of economies of scale, particularly those asso-
ciated with purchasing, marketing, administration and financing the business.
Case study questions
1. If a company is considering switching production to a country
where wage costs
are lower, what other factors will it need
to take into account before doing so?
2.
Will increased
environmental standards imposed by government on businesses
inevitably result in
higher business costs?
Case 3 :
Government and business - friend or foe?
As we have seen, governments intervene in the
day-to-day working of the economy
in a variety of ways in
the hope of improving the environment in which industrial
and commercial activity
takes place. How far they are successful in achieving this
goal is open to question.
Businesses, for example, frequently complain of over-
interference by
governments and of the burdens
imposed upon them
by
government legislation and
regulation. Ministers, in contrast, tend to stress how
they have helped to create an environment conducive to entrepreneurial activity
through the different policy initiatives and through a supportive legal and
fiscal
regime. Who is right? 
While there is no simple answer to this
question, it is instructive to examine the
different surveys which
are regularly undertaken of business attitudes and condi-
tions in different
countries. One such survey by the European Commission - and
reported by Andrew Osborn
in the Guardian on 20 November 2001 - claimed that
whereas countries such as
Finland, Luxembourg, Portugal and the Netherlands
tended to be regarded as
business-friendly, the United Kingdom was perceived as
the most difficult and
complicated country to do business with in the whole of
Europe. Foreign firms
evidently claimed that the UK was harder to trade with than
other countries owing to
its bureaucratic procedures and its tendency to rigidly
enforce business
regulations. EU officials singled out Britain’s complex tax formali-
ties, employment
regulations and product conformity rules as particular problems
for foreign companies -
criticisms which echo those of the CBI and other represen-
tative bodies who have
been complaining of the cost of over-regulation to UK firms
over a considerable number of years.
The news, however, is not all bad. The
Competitive Alternatives study (2002) by
KPMG of costs in various
cities in the G7 countries, Austria and the Netherlands
indicated that Britain is
the second cheapest place in which to do business in the
nine industrial countries
(see www.competitivealternatives.com). The survey, which
looked at a range of
business costs - especially labour costs and taxation -, placed
the UK second behind
Canada world-wide and in first place within Europe. The
country’s strong showing
largely reflected its competitive labour costs, with manu-
facturing costs estimated
to be 12.5 per cent lower than in Germany and 20 per
cent lower than many other
countries in continental Europe. Since firms frequently
use this survey to
identify the best places to locate their business, the data on rela-
tive costs are likely to
provide the UK with a competitive advantage in the battle for
foreign inward investment (see Mini case, above).
Case study questions
1. How
would you account for the difference in perspective between firms who often
complain of government over-interference in business matters and ministers who
claim that they have the
interests of business at heart when taking decisions?
2.
To what extent
do you think that relative costs are the critical factor in determining
inward investment
decisions?
Case 4 : The
end of the block exemption
As we have seen in the chapter, governments
frequently use laws and regulations to promote competition within the marketplace in
the belief that this has significant benefits for the
consumer and for the economy generally. Such interventions occur not only at national level, but also in
situations where governments work together to provide mutual benefits, as in the European
Union’s attempts to set up a ‘Single Market’ across the member states of the
EU.
While few would deny that competitive markets
have many benefits, the search
for increased competition
at national level and beyond can sometimes be
restrained by the
political realities of the situation, a point underlined by a previous
decision of the EU authorities to allow a block exemption from the normal rules
of
competition in the EU car market. Under this system, motor manufacturers
operat-
ing within the EU were permitted to create networks of selective and exclusive dealerships and to engage in certain other
activities normally outlawed under the competition provisions of the single market.
It was argued that the system of selective and exclusive distribution (SED)
benefited consumers by providing them with a cradle-to-grave service, alongside what was
said to be a highly competitive supply situation within the heavily branded
global car market.
Introduced in 1995, and extended until the end
of September 2002, the block
exemption was highly
criticised for its impact on the operation of the car market in
Europe. Following a
critical report by the UK competition authorities in April 2000,
the EU published a review
(in November 2000) of the workings of the existing
arrangement for distributing and servicing cars, highlighting its adverse
conse-
quences for both consumers
and retailers and signalling the need for change. Despite
intensive lobbying by the
major car manufacturers, and by some national govern-
ments, to maintain the
current rules largely intact, the European Commission
announced its intention of
replacing the block exemption regulation when it expired
in September, subject of course to consultation with interested parties.
In essence the Commission’s proposals aimed to
give dealers far more independ-
ence from suppliers by
allowing them to solicit for business anywhere in the EU
and to open showrooms wherever they want; they would also be able to sell cars
supplied by different
manufacturers under the same roof. The plan also sought to
open up the aftersales
market by breaking the tie which existed between sales and
servicing. The proposal
was that independent repairers would in future be able to
get greater access to the
necessary spare parts and technology, thereby encouraging
new entrants to join the market with reduced initial investment costs.
While these proposals were broadly welcomed by
groups representing consumers
(e.g. the Consumer
Association in the UK), some observers felt that the planned
reforms did not go far
enough to weaken the power of the suppliers over the market
(see e.g. the editorial in
the Financial Times, 11 January 2002). For instance it
appeared to be the case
that while manufacturers would be able to supply cars to
supermarkets and other new
retailers, they would not be required by law to do so,
suggesting that a market
free-for-all was highly unlikely to emerge in the foreseeable
future. Equally the
Commission’s plans appeared to do little to protect dealers from
threats to terminate their franchises should there be a dispute with the
supplier.
In the event the old block exemption scheme
expired at the end of September
2002 and the new rules
began the next day. However, the majority of the provisions
under the EC rules did not
come into effect until the following October (2003) and
the ban on ‘location
clauses’ - which limit the geographical scope of dealer opera-
tions - only came into
effect two years later. Since October 2005 dealers have been
free to set up secondary
sales outlets in other areas of the EU, as well as their own
countries. This is
expected to stengthen competition between dealers across the
Single Market to the
advantage of consumers (e.g. greater choice and reduced prices).
Case study questions
1.
Can you suggest
any reasons why the European Commission was willing to grant
the block exemption in the first place, given that it ran counter to its
proposals for
a Single Market?
2.
Why might the
new reforms make cars cheaper for European consumers?
Case 5 : The sale of goods on the
Internet
The sale of consumer goods on the Internet
(particularly those between European member states)
raises a number of legal issues. First, there is the issue of trust, with-
out which the consumer
will not buy; they will need assurance that the seller is genuine, and that they will get the goods that
they believe they have ordered.
Second, there is the issue
of consumer rights with respect to the goods in question: what rights exist and do they vary across
Europe? Last, the issue of enforcement: what happens should anything go wrong?
Information and trust
Europe recognises the problems of doing business across the
Internet or telephone
and it has attempted to address the main stumbling blocks via Directives. The
Consumer Protection (Distance Selling) Regulations 2000 attempts to address the
issues of trust in cross-border consumer sales, which may take place over the
Internet (or telephone). In short, the consumer needs to know quite a bit of
infor-
mation, which they may otherwise have easy access to if they were buying face
to
face. Regulation 7 requires inter alia for the seller to identify themselves
and an
address must be provided if the goods are to be paid for in advance. Moreover,
a
full description of the goods and the final price (inclusive of any taxes) must
also
be provided. The seller must also inform the buyer of the right of cancellation available under Regulations 10-12, where the buyer has a right to
cancel the contract for seven days starting on the day after the consumer
receives the goods or services. Failure to inform the consumer of this right
automatically extends the period to three months. The cost of returning goods
is to be borne by the buyer, and the seller is entitled to deduct the costs
directly flowing from recovery as a restocking fee. All of this places a
considerable obligation on the seller; however, such data should stem many
misunderstandings and so greatly assist consumer faith and confidence in
non-face-to-face sales.
Another concern for the consumer is fraud. The consumer who has
paid by
credit card will be protected by section 83 of the Consumer Credit Act 1974,
under
which a consumer/purchaser is not liable for the debt incurred, if it has been
run
up by a third party not acting as the agent of the buyer. The Distance Selling
Regulations extend this to debit cards, and remove the ability of the card
issuer to
charge the consumer for the first £50 of loss (Regulation 21). Moreover,
section 75
of the Consumer Credit Act 1974 also gives the consumer/buyer a like claim
against
the credit card company for any misrepresentation or breach of contract by the
seller. This is extremely important in a distance selling transaction, where
the seller
may disappear.
What quality and what rights?
The next issue relates to the quality that may be expected from
goods bought over
the Internet. Clearly, if goods have been bought from abroad, the levels of
quality
required in other jurisdictions may vary. It is for this reason that Europe has
attempted to standardise the issue of quality and consumer rights, with the
Consumer Guarantees Directive (1999/44/EC), thus continuing the push to encour-
age cross-border consumer purchases. The implementing Sale and Supply of Goods
to Consumer Regulations 2002 came into force in 2003, which not only lays down
minimum quality standards, but also provides a series of consumer remedies
which
will be common across Europe. The Regulations further amend the Sale of Goods
Act 1979. The DTI, whose job it was to incorporate the Directive into domestic
law
(by way of delegated legislation) ensured that the pre-existing consumer rights
were
maintained, so as not to reduce the overall level of protection available to
con-
sumers. The Directive requires goods to be of ‘normal’ quality, or fit for any
purpose made known by the seller. This has been taken to be the same as our
pre-
existing ‘reasonable quality’ and ‘fitness for purpose’ obligations owed under
sections 14(2) and 14(3) of the Sale of Goods Act 1979. Moreover, the
pre-existing
remedy of the short-term right to reject is also retained. This right provides
the
buyer a short period of time to discover whether the goods are in conformity
with
the contract. In practice, it is usually a matter of weeks at most. After that
time has
elapsed, the consumer now has four new remedies that did not exist before,
which
are provided in two pairs. These are repair or replacement, or price reduction
or
rescission. The pre-existing law only gave the consumer a right to damages,
which
would rarely be exercised in practice. (However, the Small Claims Court would
ensure a speedy and cheap means of redress for almost all claims brought.) Now
there is a right to a repair or a replacement, so that the consumer is not left
with an
impractical action for damages over defective goods. The seller must also bear
the
cost of return of the goods for repair. So such costs must now be factored into
any
business sales plan. If neither of
these remedies is suitable or actioned within a ‘rea-
sonable period
of time’ then the consumer may rely on the second pair of
remedies.
Price reduction permits the consumer to claim back a segment of the pur-
chase price if
the goods are still useable. It is effectively a discount for defective
goods.
Rescission permits the consumer to reject the goods, but does not get a full
refund, as
they would under the short-term right to reject. Here money is knocked
off for
‘beneficial use’. This is akin to the pre-existing treatment for breaches of
durability,
where goods have not lasted as long as goods of that type ought reason-
ably be
expected to last. The level of compensation would take account of the use
that the consumer has (if any) been able to put the goods to and a deduction
made
off the return
of the purchase price. However, the issue that must be addressed is as
to the length
of time that goods may be expected to last. A supplier may state the
length of the
guarantee period, so a £500 television set guaranteed for one year
would have a
life expectancy of one year. On the other hand, a consumer may
expect a television set to last ten years. Clearly, if the set went wrong after
six
months, the
consumer would only get £250 back if the retailer’s figure was used,
but would
receive £475 if their own figure was used. It remains to be seen how this
provision will work in practice.
One problem with distance sales
has been that of liability for goods which arrive
damaged. The
pre-existing domestic law stated that risk would pass to the buyer once
the goods were
handed over to a third-party carrier. This had the major problem in
practice of who would actually be liable for the damage. Carriers would blame
the
supplier and
vice versa. The consumer would be able to sue for the loss, if they were
able to
determine which party was responsible. In practice, consumers usually went
uncompensated
and such a worry has put many consumers off buying goods over the
Internet. The
Sale and Supply of Goods to Consumer Regulations also modify the
transfer of
risk, so that now the risk remains with the seller until actual delivery. This
will clearly
lead to a slight increase in the supply of goods to consumers, with the
goods usually
now being sent by insured delivery. However, this will avoid the prob-
lem of who is actually liable and should help to boost confidence.
Enforcement
Enforcement for domestic sales is
relatively straightforward. Small-scale consumer
claims can be
dealt with expeditiously and cheaply under the Small Claims Court.
Here claims
under £5000 for contract-based claims are brought in a special court
intended to
keep costs down by keeping the lawyers’ out of the court room, as a vic-
torious party
cannot claim for their lawyers’ expenses. The judge will conduct the
case in a more
‘informal’ manner, and will seek to discover the legal issues by ques-
tioning both parties, so no formal knowledge of the law is required. The total
cost of
such a case, even if it is lost, is the cost of issuing the proceedings
(approximately
10 per cent of the value claimed)
and the other side’s ‘reasonable expenses’. Expenses
must be kept
down, and a judge will not award value which has been deliberately run
up, such
first-class rail travel and stays in five star hotels. Residents of Northampton
have hosted a
trial of an online claims procedure, so that claims may now be made
via the
Internet. (www.courtservice.gov.uk outlines the procedure for MCOL,
or
Money Claims
Online.) Cases will normally be held in the defendant’s court, unless the
complainant is a consumer and the defendant a business.
Enforcement is the weak point in the European
legislation, for there is, as yet, no
European-wide Small Claims
Court dealing with transnational European transac-
tions. The consumer is
thus forced to contemplate expensive civil action abroad in a
foreign language, perhaps
where no such small claims system exists - a pointless
measure for all but the
most expensive of consumer purchases. The only redress lies
in EEJ-Net, the European
Extra-Judicial Network, which puts the complainant in
touch with any applicable
professional or trade body in the supplier’s home member
state. It does require the
existence of such a body, which is unlikely if the transac-
tion is for electrical
goods, which is one of the most popular types of Internet
purchase. Therefore, until
Europe provides a Euro Small Claims Court, the consumer
cross-border buyer may
have many rights, but no effective means of enforcement.
Until then it would appear
that section 75 of the Consumer Credit Act 1974, which
gives the buyer the same
remedies against their credit card company as against the
seller, is the only
effective means of redress.
Case study questions
1. Consider the checklist of data which a
distance seller must provide to a consumer
purchaser. Is this
putting too heavy a burden on sellers?
2. Is a consumer distance buyer any better off
after the European legislation?
3. Are there any remaining issues that must be tackled to increase
European cross-
border consumer trade? 
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