MANAGERIAL ECONOMIS IIBMS EXAM ANSWER SHEETS

 MANAGERIAL ECONOMIS IIBMS EXAM ANSWER SHEETS

The Indian Institute of Business Management & Studies

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Attempt Any Four Case Study

CASE – 1 Dabur India Limited: Growing Big and Global

Dabur is among the top five FMCG companies in India and is positioned successfully on the specialist

herbal platform. Dabur has proven its expertise in the fields of health care, personal care, homecare

and foods.

The company was founded by Dr. S. K. Burman in 1884 as small pharmacy in Calcutta (now Kolkata),

India. And is now led by his great grandson Vivek C. Burman, who is the Chairman of Dabur India

Limited and the senior most representative of the Burman family in the company. The company

headquarters are in Ghaziabad, India, near the Indian capital New Delhi, where it is registered. The

company has over 12 manufacturing units in India and abroad. The international facilities are located

in Nepal, Dubai, Bangladesh, Egypt and Nigeria.

S.K. Burman, the founder of Dabur, was trained as a physician. His mission was to provide effective

and affordable cure for ordinary people in far-flung villages. Soon, he started preparing natural

remedies based on Ayurved for diseases such as Cholera, Plague and Malaria. Due to his cheap and

effective remedies, he became to be known as ‘Daktar’ (Indianised version of ‘doctor’). And that is how

his venture Dabur got its name—derived from Daktar Burman.

The company faces stiff competition from many multi national and domestic companies. In the

Branded and Packaged Food and Beverages segment major companies that are active include

Hindustan Lever, Nestle, Cadbury and Dabur. In case of Ayurvedic medicines and products, the major

competitors are Baidyanath, Vicco, Jhandu, Himani and other pharmaceutical companies.

Vision, Mission and Objectives

Vision statement of Dabur says that the company is “dedicated to the health and well being of every

household”. The objective is to “significantly accelerate profitable growth by providing comfort to

others”. For achieving this objective Dabur aims to:

 Focus on growing core brands across categories, reaching out to new geographies, within and

outside India, and improve operational efficiencies by leveraging technology.

 Be the preferred company to meet the health and personal grooming needs of target consumers

with safe, efficacious, natural solutions by synthesising deep knowledge of ayurveda and herbs with

modern science.

 Be a professionally managed employer of choice, attracting, developing and retaining quality

personnel.

 Be responsible citizens with a commitment to environmental protection.

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

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Chairman of the company

Vivek C. Burman joined Dabur in 1954 after completing his graduation in Business Administration

from the USA. In 1986 he was appointed Managing Director of Dabur and in 1998 he took over as

Chairman of the Company.

Under Vivek Burman’s leadership, Dabur has grown and evolved as a multi-crore business house with

a diverse product portfolio and a marketing network that traverses the whole of India and more than

50 countries across the world. As a strong and positive leader, Vivek C. Burman has motivated

employees of Dabur to “do better than their best”—a credo that gives Dabur its status as India’s most

trusted nature-based products company.

Leading brands

More than 300 diverse products in the FMCG, Healthcare and Ayurveda segments are in the product

line of Dabur. List of products of the company include very successful brands like Vatika, Anmol,

Hajmola, Dabur Amla Chyawanprash, Dabur Honey and Lal Dant Manjan with turnover of Rs.100

crores each.

Strategic positioning of Dabur Honey as food product, lead to market leadership with over 40%

market share in branded honey market; Dabur Chyawanprash is the largest selling Ayurvedic

medicine with over 65% market share. Dabur is a leader in herbal digestives with 90% market share.

Hajmola tablets are in command with 75% market share of digestive tablets category. Dabur Lal Tail

tops baby massage oil market with 35% of total share.

CHD (Consumer Health Division), dealing with classical Ayurvedic medicines has more than 250

products sold through prescription as well as over the counter. Proprietary Ayurvedic medicines

developed by Dabur include Nature Care Isabgol, Madhuvaani and Trifgol.

However, some of the subsidiary units of Dabur have proved to be low margin business; like Dabur

Finance Limited. The international units are also operating on low profit margin. The company also

produces several “me – too” products. At the same time the company is very popular in the rural

segment.

Questions

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

2. Do you think the growth of Dabur from a small pharmacy to a large multinational company is

an indicator of the advantages of joint stock company against proprietorship form? Elaborate.

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CASE – 2 IT Industry: Checkered Growth

IT industry is now considered as vital for the development of any economy. Developing countries

value the importance of this industry due to its capacity to provide much needed export earnings and

support in the development of other industries. Especially in Indian context, this industry has

assumed a significant position in the overall economy, due to its exemplary potentials in creating high

value jobs, enhancing business efficiency and earning export revenues. The IT revolution has brought

unexpected opportunities for India, which is emerging as an increasingly preferred location for

customised software development. Experts are estimating the global IT industry to grow to US$1.6

million over the coming six years and exports to reach Rs. 2000 billion by 2008. It is envisaged that

Indian IT industry, though a very small portion of the global IT pie, has tremendous growth prospects.

Stock Taking

The decade of 1970 may be taken as the stage of introduction of the Indian IT industry. The early

years were marked by 75 per cent of software development taking place overseas and the rest 25 per

cent in India. Exports of Indian software until the mid-1970s was mainly Eastern Europe, followed by

US. Tata Consultancy Services (TCS) was among the pioneers in selling its services outside India, by

working for IBM Labs in the US. The hardware segment lagged behind its software counterpart. With

instances of exports worth US$ 4 million in 1980, the software segment of the industry has shown an

uneven profile. It was not until 1980s that vigorous and sustained growth in software exports begun,

as MNCs like Texas Instruments started to take serious interest in India as a centre of software

production. Destinations of export also underwent changes, with US dominating the main export

market with 75 per cent of the exports. The IT Enabled Services (ITeS) segment, however, had not

emerged at this stage.

It was also during the mid to late 1980s that computer firms shifted focus from mainframe computers

(the mainstay of MNCs) to Personal Computers (PCs). In March 1985, Minicomp installed the first ever

PC at CSI, Delhi; this changed the entire industry for good. With the entry of networking and

applications like CAD/CAM, PC sales soared in 1987-88, touching 50,000 units.

From a modest growth in the mid-1980s software exports moved up to Rs. 3.8 billion in 1991-92.

Since then, it grew at an incredible rate, up to 115 per cent in 1993. The hardware could also register

an annual growth of 40 per cent in this period, backed by a surging demand for PCs and networking.

Growth of the industry was also driven by the emergence and rapid growth of the ITeS segment.

IT sector’s share of GDP rose steadily in this period, rate of increase being the highest at 44.91 per

cent in 2000-01. It was in the same year that the size of the total IT market was the biggest in the

decade, at Rs. 56,592 crore. The overall IT market was also found to increase till 2000-01. The overall

IT market was also found to increase till 2000-01, with the only exception of 1998-99. The domestic

market also showed an overall increase till 2000-01, registering a spectacular CAGR of 50.39 per cent.

Aggregate output of software and services also increased in this period, though at an uneven rate. Of

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approximately $1 billion worth of sales in 1991-1992, domestic hardware sales constituted 37.2 per

cent (13.4 per cent growth over the previous year), exports of hardware 6.6 per cent.

During 2000-01 the growth in the hardware segment was driven mainly by PCs, which contributed

about 58 per cent of the total hardware market. This period also witnessed the phenomenon of

increasing share of Tier 2 and cities in PC sales, thereby indicating PC penetration into the hinterland.

PC shipments had increased by 35 per cent every year from 1997 till 2000-01 when it reached 1.8

million PCs. The commercial PC market saw a growth of 23.5 per cent mainly due to slashing of prices

by major vendors.

It was in 2001-02 that the industry had a sharp fall in rate of growth of its share of GDP to 5.90 per

cent, from 44.91 per cent in the previous year. The total IT market also showed a fall in growth rate

from 56.42 per cent in 2000-01 to a mere 16.24 per cent in the next year, growing further at the rate

of 16.25 per cent in the next year. Software export was also affected, registering a low growth of 28.74

per cent and failed to maintain its growth rate of 65.30 per cent in the previous year. It got further

lowered to 26.30 per cent in 2002-03. CAGR of total output of software and services (in Rs. crore)

came down to 25.61 in 2001-02 and further to 25.11 in 2002-03. The domestic market showed a steep

decline in growth to 3 per cent in 2001-02 from an outstanding 50.39 per cent in 2000-01. It could,

however, recover by growing at 4.11 per cent in the next year.

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

Year A* B* C* D* E*

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

18,641

25,307

36,179

56,592

65,788

76,482

3,900

6,530

10,940

17,150

28,350

36,500

46,100

6,594

10,899

16,879

23,980

37,350

47,532

59,472

9,438

12,055

14,227

18,837

28,330

29,181

30,382

*A: share of GDP of the Indian IT market, B: size of the Indian IT market (in Rs. crore), C: software and

services exports (in Rs. crore), D: size of software and services (in Rs. crore), E: size of the domestic

market (in Rs. crore)

Questions

1. Try to identify various stages of growth of IT industry on basis of information given in the

case and present a scenario for the future.

2. Study the table given. Apply trend projection method on the figures and comment on the

trend.

3. Compute a 3 year moving average forecast for the years 1997-98 through 2003-04.

The Indian Institute of Business Management & Studies

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CASE – 3 Outsourcing to India: Way to Fast Track

By almost any measure, David Galbenski’s company Contract Counsel was a success. It was a company

Galbenski and a law school buddy, Mark Adams, started in 1993; it helps companies find lawyers on a

temporary contract basis. The growth over the past five years had been furious. Revenue went from

less than $200,000 to some $6.5 million at the end of 2003, and the company was placing thousands of

lawyers a year.

At then the revenue growth began to flatten; the company grew just 8% in 2004 despite a robust

market for legal services estimated at about $250 billion in the United States alone. Frustrated and

concerned, Galbenski stepped back and began taking a hard look at his business. Could he get it back

on the fast track? “Most business books say that the hardest threshold to cross is that $10 million sales

mark,” he says. “I knew we couldn’t afford to grow only 10% a year. We needed to blow right through

that number.”

For that to happen, Galbenski knew he had to expand his customer base beyond the Midwest into

large legal supermarkets such as Boston, New York, and Washington, D.C. He also knew that in doing

so, he could run into stiff competition from larger publicly traded rivals. Contract Counsel’s edge has

always been its low price, Clients called when dealing with large-scale litigation or complicated

merger and acquisition deals, either of which can require as many as 100 lawyers to manage the

discovery process and the piles of documents associated with it. Contract Counsel’s temps cost about

$75 an hour, roughly half of what a law firm would charge, which allowed the company to be

competitive despite its relatively small size. Galbenski was counting on using the same strategy as he

expanded into new cities. But would that be enough to spur the hyper growth that he craved for?

At that time, Galbenski had been reading quite a bit about the growing use of offshore employees. He

knew companies like General Electric, Microsoft and Cisco were saving bundles by setting up call and

data centers in India. Could law firms offshore their work? Galbenski’s mind raced with possibilities.

He imagined tapping into an army of discount-priced legal minds that would mesh with his existing

talent pool in the U.S. The two work forces could collaborate over the Web and be productive on a 24-

7 basis. And the cost could be massive.

Using offshore workers was a risk, but the payoff was potentially huge. Incidentally Galbenski and his

eight-person management team were preparing to meet for their semiannual review meeting. The

purpose of the two-day event was to decide the company’s goals for the coming year. Driving to the

meeting, Galbenski struggled to figure out exactly what he was going to say. He was still undecided

about whether to pursue an incremental and conservative national expansion or take a big gamble on

overseas contractors.

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The Decision

The next morning Galbenski kicked off the management meeting. Galbenski laid out the facts as he

saw them. Rather than look at just the next five years of growth, look at the next 20, he said. He cited a

Forrester Research prediction that some 79,000 legal jobs, totaling $5.8 billion in wages, would be

sent offshore by 2015. He challenged his team to be pioneers in creating a new industry, rather than

stragglers racing to catch up. His team applauded. Returning to the office after the meeting, Galbenski

announced the change in strategy to his 20 full-timers.

Then he and his team began plotting a global action plan. The first step was to hire a company out of

Indianapolis, Analysts International, to start compiling a list of the best legal services providers in

countries where people had comparatively strong English skills. The next phase was vetting the

companies in person. In February 2005, just three months after the meeting in Port Huron, Galbenski

found himself jetting off on a three months trip to scout potential contractors in India, Dubai, and Sri

Lanka. Traveling to cities like Bangalore, Chennai and Hyderabad, he interviewed executives from

more than a dozen companies, investigating their day-to-day operations firsthand.

India seemed like the best bet. With more than 500 law schools and about 200,000 law students

graduating each year, it had no shortage or attorneys. What amazed Galbenski, however, was that

thanks to the Web, lawyers in India had access to the same research tools and case summaries as any

associate in the U.S. Sure, they didn’t speak American English. “But they were highly motivated, highly

intelligent, and extremely process-oriented,” he says. “They were also eager to tackle the kinds of

tasks that most new associated at law firms look down upon” such as poring over and coding

thousands of documents in advance of a trial. In other words, they were perfect for the kind of

document-review work he had in mind.

After a return visit to India in August 2005, Galbenski signed a contract with two legal services

companies: QuisLex, in Hyderabad, and Manthan Services in Bangalore. Using their lawyers and

paralegals, Galbenski figured he could cut his document-review rates to $50 an hour. He also

outsourced the maintenance of the database used to store the contact information for his thousands of

contractors. In all, he spent about 12 months and $250,000 readying his newly global company.

Convincing U.S. based clients to take a chance on the new service hasn’t been easy. In November,

Galbenski lined up pilot programs with four clients (none of which are ready to publicise their use of

offshore resources). To help get the word out, he launched a website (offshore-legal-services.com),

which includes a cache of white papers and case studies to serve as a resource guide for companies

interested in outsourcing.

Questions

1. As money costs will decrease due to decision to outsource human resource, some real costs

and opportunity costs may surface. What could these be?

2. Elaborate the external and internal economies of scale as occurring to Contract Counsel.

3. Can you see some possibility of economies of scope from the information given in the case?

Discuss.

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

The stock market is one of the most important sources for corporates to raise capital. A stock

exchange provides a market place, whether real or virtual, to facilitate the exchange of securities

between buyers and sellers. It provides a real time trading information on the listed securities,

facilitating price discovery.

Participants in the stock market range from small individual investors to large traders, who can be

based anywhere in the world. Their orders usually end up with a professional at a stock exchange,

who executes the order. Some exchanges are physical locations where transactions are carried out on

a trading floor. The other type of exchange is of a virtual kind, composed of a network of computers

and trades are made electronically via traders.

By design a stock exchange resembles perfect competition. Large number of rational profit

maximisers actively competing with each other, trying to predict future market value of individual

securities comprises the main feature of any stock market. Important current information is almost

freely available to all participants. Price of individual security is determined by market forces and

reflects the effect of events that have already occurred and are expected to occur. In the short run it is

not easy for a market player to either exit or enter; one cannot exit and enter for few days in those

stocks which are under no delivery. For example Tata Steel was in no delivery from 29/10/07 to

02/11/07. Similarly one cannot enter or exit on those stocks which are in upper or lower circuit for

few regular trading sessions. Therefore a player has to depend wholly on market price for its profit

maximizing output (in this case stock of securities). In the long run players may exit the market if they

are not able to earn profit, but at the same time new investors are attracted by rise in market price.

As on 01/11/07 total market capital at Bombay Stock Exchange (BSE) is $1589.43 billion (source:

Business Standard, 1/11/2007); out of this individual investors account for only $100bn. In spite of

the fact that individual investors exist in a very large number, their capital base is less than 7% of total

market capital; rest of capital is owned by foreign institutional investor and domestic institutional

investors (FIIs and DIIs), which are very small in number. Average capital owned by a single large

player is huge in comparison to small investor. This situation seems to have prompted Dr Dash of BSE

to comment ‘The stock market activity is increasingly becoming more centralised, concentrated and

non competitive, serving interest of big players only.” Table 2 shows the impact of change in FII on

National Stock Exchange movement during three different time periods.

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Table 2: Impact of FIIs’ Investment on NSE

Wave

Date

Nifty

close

Change in

Nifty Index

FLLS Net

Investment

(Rs.Cr.)

Change in

Market

Capitalisation

(Rs.Cr.)

Wave 1

From

To

17/05/04

26/10/05

1388.75

2408.50

1019.75

59520

5,40,391

Wave 2

From

To

27/10/05

11/05/06

2352.90

3701.05

1348.15

38258

6,20,248

Wave 3

From

To

12/05/06

13/06/06

3650.05

2663.30

-986.75

-9709

-4,60,149

By design, an Indian Stock Market resembles perfect competition, not as a complete description (for

no markets may satisfy all requirements of the model) but as an approximation.

Questions

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

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

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

market?

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CASE – 5 The Indian Audio Market

The Indian audio market pyramid is featured by the traditional radios forming its lower bulk. Besides

this, there are four other distinct segments: mono recorders (ranking second in the pyramid), stereo

recorders, midi systems (which offer the sound amplification of a big system, but at a far lower price

and expected to grow at 25% per year) and hi-fis (minis and micros, slotted at the top end of the

market).

Today the Indian audio market is abound with energy and action as both national and international

majors are trying to excel themselves and elbow the others, ushering in new concepts, like CD sound,

digital tuners, full logic tape deck, etc. The main players in the Indian audio market are Philips, BPL

and Videocon. Of these, Philips is one of the oldest and is considered at the leading national brands. In

fact it was the first company to introduce a range of international products such as CD radio cassette

recorder, stand alone CD players and CD mini hi-fi systems. With the easing of the entry barriers, a

number of new international players like Panasonic, Akai, Sansui, Sony, Sharp, Goldstar, Samsung and

Aiwa have also entered the arena. This has led to a sea of changes in the industry and resulted in an

expanded market and a happier customer, who has access to the latest international products at

competitive prices. The rise in the disposable income of the average Indian, especially the upperincome

section, has opened up new vistas for premium products and has provided a boost to

companies to launch audio systems priced as high as Rs. 50,000 and beyond.

Pricing across Segments

Super Premium Segment: This segment of the market is largely price-insensitive, as consumers are

willing to pay a premium in order to obtain products of high quality. Sonodyne has positioned itself in

this segment by concentrating on products that are too small for large players to operate in profitably.

It has launched a range of systems priced between Rs. 30,000 to Rs. 60,000. National Panasonic has

launched its super premium range of systems by the name of Technics.

Premium Segment: Much of the price game is taking place in this segment, in which systems are

priced around Rs. 25,000. Even the foreign players ensure that the pricing is competitive. Entry

barriers of yester years compelled the demand by this segment to be partially met by the grey market.

With the opening up of the market, the premium segment is witnessing a rapid growth and is

currently estimated to be worth Rs. 30 crores. Growth of this segment is also being driven by

consumers who want to upgrade their old music systems. Another major stimulating factor is the

plethora of financing options available, bringing more and more consumers to the market.

Philips has understood the Indian listener well enough to dictate the basic principles of segmentation.

It projects its products as high quality at medium price. In fact, Philips had successfully spotted an

opportunity in the wide price gap between portable cassette players and hi-fi systems and pioneered

the concept of a midi system (a three-in-one containing radio, tape deck and amplifier in one unit).

Philips has also realised that there is a section of the rich consumer which values not just power but

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also clarity and is willing to pay for it. The pricing strategy of Philips was to make the most of its image

as a technology leader. To this end, it used non-price variables by launching of a range of state of art

machines like the FW series, and CD players. Moreover, it came up with the punch line in its

advertisements as, “We Invent For You”.

BPL stands second only to Philips in the audio market and focuses on technology as its USP. Its kingpin

in the marketing mix is its high technology superior quality product. It is thus at being the productquality

leader. BPL’s proposition of fidelity is translated in its punchline for its audio systems as, ‘e-fi

your imagination’ (d-fi stands for digital fidelity). The company follows a market skimming strategy.

When a new product was launched, it was placed in the top end of the market, and priced accordingly.

The company offers a range of products in all price segments in the market without discounting the

brand.

Another major player, Videocon, has managed to price its products lower even in the premium

segment. The success of the Powerhouse (a 160 watt midi launched by Philips in 1990) had prompted

Videocon to launch the Select Sound range of midi stereo systems at a slightly lower price. At the

premium end, Videocon is making efforts to upgrade its image to being “quality-driven” by associating

itself with the internationally reputed brand name of Sansui from Japan, and following a perceived

value pricing method.

Sony is another brand which is positioning itself as a premium product and charges a higher price for

the superior quality of sound it offers. Unlike indulging into price wars, Sony’s ad-campaigns project

the message that nothing can beat Sony in the quality and intensity of sound. National Panasonic is

another player that has three products in the top end of the market, priced in the Rs. 21,000 to Rs.

32,000 range.

Monos and Stereos: Videocon has 21% share I the overall audio market, but has been a major player

only in personal stereos and two-in-ones. Its history is written with instances where it has offered

products of similar quality, but at much lower prices than its competitors. In fact, Videocon launched

the Sansui brand of products with a view to transform its image from that of being a manufacturer of

cheap products to that of being a company that primes quality, and also to obtain a share of the hi-fi

segment. Sansui is being positioned as a premium brand, targeting the higher middle, upper income

groups and also the sensitive middle class Indian consumer.

The objective of Philips in this segment is to achieve higher sales volumes and hence its strategy is to

expand its range and have a product in every segment of the market. The pricing method used by

Philips in this segment is providing value for money.

National Panasonic offers products in the lower end of the market, apart from the top of the range. In

fact, it reduced the price of one of its small two-in-ones from Rs. 3,500 to Rs. 2,400, with the logic that

a forte in the lower end of the market would help in building brand reliability across a wider customer

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base. The company is also guided by the logic that operating in the price sensitive region of the market

will help it reach optimum levels of efficiency. Panasonic has also entered the market for midis.

These apart, there also exists a sector in the Indian audio industry, with powerful regional brands in

mono and stereo segments, having a market share of 59% in mono recorders and 36% in stereo

recorders. This sector has a strong influence on price performance.

Questions

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

have been in ensuring success of the company?

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

3. Which products have reached maturity stage in audio industry? Do you think that product

bundling can be effectively used for promoting sale of these products?