Business Planning and Policy

12 Jul

Answer the following question.

Q1. How to develop a case study?

Q2. Explain international expansion theories.

Q3. What are the reasons for mergers and acquisitions?

Q4. What are the routes to gain competitive advantage?

Q5. How to strengthen core competencies?

Q6. Define mission statement. What are the characteristics of mission statement?

Q7. What is the importance and advantages of vision?

Q8. Define business policy. What are the features of business policy?

Managerial Economics

06 Jul

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?

Managerial Economics

06 Jul

CASE – 1   Power for All: Myth or Reality?

The power sector in India is undergoing rapid changes especially for the last few years. The Government has promised “Power for All” by 2012. The growth of power sector in India has been consistent. From a humble beginning of 1,700 MW in 1950-51 to 1,18,400 MW in 2004-05, the development of power sector has traveled a long way. There has been quantum rise in thermal power generation in 1970-71, 1980-81 and 1990-91 and greater rise in hydro electric power production since 2000-01. The government is promoting clean source of energy, i.e. hydro electric power. The sectoral outlay for power in successive five year plans has consistently been increasing. However, it has increased at a faster rate from sixth five year plan, i.e., 1980-85 onwards.

The following table gives the pattern of consumption of electricity on the basis of consumer segments.

Pattern of Electricity Consumption (Utilities)

(Percentage)

year Domestic Commercial Industry traction agriculture others
1950-51 12.6 7.5 62.6 7.4 3.9 4.0
2000-01 23.9 7.1 34 2.6 26.8 5.6
2004-05 24.8 8.1 35.6 2.5 22.9 6.1

However, industry has shown decreasing trend of electricity consumption whereas irrigation has shown increasing trend, which is a positive sign for our agriculture. The ‘commercial’ and ‘traction’ sectors have no conspicuous fluctuation pattern in their electricity consumption.

The State of Uttar Pradesh is the largest in India. It has a population of over 166 million (Census 2001). If Uttar Pradesh were to be a country, it would be the 7th largest country in the world. In some of the social and income indicators, the State has made rapid progress. It is one of the largest software exporting states in the country and has led India’s BPO (Business Process Outsourcing) boom in the last few years. The growth rate in software export of U.P. is the highest among all States (GOUP Policy 2003). The State has a cross-cultural milieu of population with diversity of customers, markets and buyers. It has satellite towns like Noida, Ghaziabad, Greater Noida, etc. that are emerging as new industrial hubs; therefore there is growing demand for infrastructure facilities like power, transport, health, education, road, shopping malls, multiplexes, etc. in these cities.

The power situation in the State of Uttar Pradesh is that of deficit, i.e., demand exceeds the supply and generation of power. Uttar Pradesh has electricity generation capacity of 4000 MW against demand of 6500 MW of power. Recognizing the demand-supply gap at the national level, the Government of India through Electricity Act 2003 is implementing a ‘Power-for-All’ plan, under which 1,00,000 MW of new installed generating capacity is to be added by the year 2012.

Even with the present electrification levels, the additional capacity requirement for supplying continuous power in the State of Uttar Pradesh is 1,300 MW. For universal access the capacity requirements would be over 11,250 MW that would shoot up to over 14,200 MW, if U.P. (Uttar Pradesh) were to attain the national per capita consumption. Compared to this requirement, the availability in 2009 would be just 8,650 MW as per present estimates, if all planned projects fructify (Power Policy 2003, GOUP).

The situation has been further exacerbated due to state reorganization in 2000. Prior to this U.P.’s hydel capacity was 1497 MW and thermal capacity was 3909 MW. Subsequent to reorganisation, U.P. retained only 516 MW of low cost hydel power, while the balance hydel capacity has been allocated to Uttaranchal. The cost due to the unavailability of cheap hydel power which has since gone to Uttaranchal is Rs 400 crore.

U.P.’s ability to supply power to its consumers is limited by the financial capacity of State power utility (UPPCL) to purchase power, especially after the securitisation of power purchase under the Expert Group recommendations that mandates regular payment of current dues. There is a vicious cycle of poor recovery, leading to the poor quality of UPPCL to purchase power and attract investments, leading to poor quality supply even to the remunerative consumers, resulting in these consumers moving away from the grid. It has resulted in a further deepening of the financial crisis and its concomitant result of poorer quality of supply.

Questions:

1. What are the factors responsible for this excess demand for electricity?

2. The demand supply gap is reformed by the government intervention. Explain this phenomenon by a demand supply model.

3. What do you think will happen to the price of electricity?

 

CASE – 2   Automobile Industry in India: New Production Paradigm

The Industry

The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective of the economic resilience of the country. The automobile industry witnessed a growth of 19.35 percent in April-July 2006 when compared to April-July 2005. As per Davos Report 2006, India is largest three wheeler market in the world; 2nd largest two wheeler market; 4th largest tractor market; 5th largest commercial vehicle market and 11th largest passenger car market in the world and expected to be the seventh largest by 2016. India is among few countries that are showing a growth rate of 30 per cent in demand for passenger cars. The industry currently accounts for nearly 4% of the GNP and 17% of the indirect tax revenue.

The well developed Indian automotive industry produces a wide variety of vehicles including passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles, scooters, motorcycles, mopeds, three wheelers, tractors etc. Economic liberalisation over the years has made India as one of the prime business destination for many global automotive players, including international giants like Ford, Toyota, GM and Hyundai have also made their presence with a mark.

As per another report, every commercial vehicle manufactured, creates 13.31 jobs, while every passenger car creates 5.31 jobs and every two-wheeler creates 0.49 jobs in the country. Besides, the automobile industry has an output multiplier of 2.24, i.e., for every additional rupee of output in the auto industry, the overall output of the Indian economy increases by Rs. 2.24.

The India automotive sector has a presence across all vehicle segment and key components. In terms of volume, two wheelers dominate the sector, with nearly 80 per cent share, followed by passenger vehicles with 13 per cent. At present, there are 12 manufacturers of passenger cars, 5 manufacturers of multi utility vehicles (MUVs), 9 manufacturers of commercial vehicles (CVs), 12 of two wheelers and 4 of three wheelers, besides 5 manufacturers of engines.

Table:   Vehicle Segment-wise Market Share (2005-06)

Item

 

Percent Share

 

Commercial vehicles

 3.94

Passenger vehicles

12.83

Two Wheelers

 79.19

Three Wheelers

4.04

 

Total

             100.00

Source: Report of Society of Indian Automobile Manufacturers (SIAM), 2006.

Although the automotive industry in India is nearly six decades old, until 1982, there were only three manufacturers – M/s Hindustan Motors, M/s Premier Automobiles and M/s Standard Motors in the motorcar sector. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models.

The Company

Maruti Udyog Ltd. (MUL) has become Suzuki Motor Corporation’s R&D hub for Asia outside Japan. Maruti introduced upgraded versions of the Esteem, Maruti 800 and Omni, completely designed and styled inhouse. This followed the upgradation of WagonR and Zen models, done inhouse only a year before. Maruti engineers also worked with their counterparts in Suzuki Motor Corporation in the design and development of its new model, Swift.

The company launched superior Bharat Stage III versions of most of its models, well before the Government deadline. Maruti also set up a Centre for Excellence with a corpus or Rs. 100 million. This was done in collaboration with suppliers, who contributed an additional Rs. 50 million. The Centre provides consultancy and training support to Maruti’s Suppliers and Sales Network to enable them to achieve standards in Quality, Cost, Service and Technology Orientation.

Maruti has embarked upon this new project in collaboration with SMC for the manufacture of diesel engines, petrol engines and transmission assemblies for four wheeled vehicles. The project is being implemented in the existing Joint Venture Company viz. Suzuki Metal India Limited (renamed Suzuki Powertrain India Limited).

Questions:

1. Identify the most important factors of production in case of automobile industry. Also attempt to explain the relative significance of each of these factors.

2. What more information would you like to obtain in order to draw a production function for Maruti Udyog? Explain with logic.

3. Automobile industry is a good example of capital augmenting technical progress. Discuss.

 

CASE – 3   Indian Cement Industry: Riding the High Tide

India is the second largest producer of cement in the world, just behind China. Indian cement industry comprises of 130 large cement plants and 365 mini cement plants with installed capacity of 172 million tonnes per annum (mtpa); these plants are located in states like Gujarat, Rajasthan and Madhya Pradesh. The large cement plants accounts for over 94 percent of the total installed capacity. However two large groups, viz. the Aditya Birla Group and the Holcim Group; together control more than 40 per cent of total capacity. This apart, more than 25 per cent of total capacity is controlled by global majors. These include Lafarge of France, Holderbank of Switzerland and Cemex of Mexico. The Indian cement industry is characterised by takeovers and acquisitions, which contributes to gaining market power and thus enables companies to enjoy pricing power, which is typically oligopoly.

Cement: Output and Consumption

India accounts for 6.4% of global production of 2.22 billion tonnes of cement. Indian cement industry has grown in terms of installed capacity and production. Cement production increased by over 9 per cent in FY2007, reaching 154.74 mtpa, in comparison to 12.40 per cent in FY2006, 7.07 in FY2005 and 5.19 per cent in FY2004. Decade-wise, Indian cement production has increased at 8.2 per cent (CAGR) during FY1996-2006, as compared to 6.9 per cent during 1986-1996.

Cement consumption in India has increased by more than 10.53% during FY 2007 to 148.41 mtpa compared to 134.27 in FY 2006. During the decade 1997-2007, the cement consumption has increased by 8% at 10 yearly compound annual growth rate (CAGR). The changing face of Indian demography, growth of nuclear families, higher disposable income, changing pattern of spending, easily available home loans, increased urbanisation and growth of metro and semi-metro cities are some of the vital factors behind a tremendous spurt in the housing sector. In order to keep pace with an optimistic rate of economic growth, there is a rising demand for commercial and retail space, IT Parks and SEZs. Another recent trend has been initiated by the Government, with increase investment in infrastructure, like National Highway Development Projects. It is expected that a construction opportunity of over Rs. 7.6 trillion will be created over next five years.

Apart from meeting the entire domestic demand, the industry is also exporting cement and clinker. The export of cement during 2001-02 and 2003-04 was 5.14 million tonnes and 6.92 million tonnes respectively. Export during April-May, 2003 was 1.35 million tonnes. Major exporters were Gujarat Ambuja Cements Ltd. and L&T Ltd.

Pricing

Cement industry has been decontrolled from price and distribution on 1st March 1989 and de-licensed on 25th July 1991. During last four years (2003-2007) cement prices have gradually increased from around Rs 150 per bag to Rs 230 per bag in 2007. Cement manufacturers control over market can be gauged by the fact that even 20-25% freight hike was straight passed on to consumers. Average industry ROCE has reached more than 26% due to the recent burst in cement prices. Encouraged by such lucrative returns cement manufacturers have decided to increase capacity by more than 97 million tonnes over next three years of which 43.7 million tonnes is likely to complete in FY 2009. Thus, the cement supply will increase by more than 11% in next three years.

Cement consumption growing at around 10% and production at 11% would naturally create a situation of over production. As per estimates, cement industry will face over capacity of 17.7 mtpa in 2008 and 37.7 in 2009. Therefore it is expected that capacity utilisation will fall significantly. Further new players are likely to join the industry with huge production capacities.

Questions:

1. Do you think cement industry in India presents a good explanation of oligopoly? Which characteristics of oligopoly do you find in the above case?

2. How has decontrolling of cement prices helped the growth of this industry?

3. Do you see possibilities of cartel or implicit collusion in the above case? How?

 

CASE – 4   From Wages to Packages: the Journey of Software

Organisations across all industries are undergoing a shift in emphasis from tangible resources to valuable, rare and inimitable human resource in order to attain competitive advantage. Many leading organisations have started adopting an investment perspective towards their employees by moving from a traditional wage and salary system to compensation “packages”. The underlying reasons behind such a change include ensuring a motivational climate, encouraging efficiency and productivity for attainment of strategic goals, and gaining control over labour costs.

Wage and salary system bears a strong relationship with the performance, satisfaction and attainment of goals of the employees of a firm. This has prompted companies to start offering full packages of monetary and non monetary rewards as compensation or wage/salary to their employees.

Dimensions of Compensation

Compensation affects a person economically, sociologically and psychologically. It also compensates for the opportunity cost and real cost occurring to the specific type of human resource in being in the present context. Proper management of compensation helps a firm procure, maintain and retain a productive workforce.

A sound compensation package should encompass factors like adequacy of wages, social balance, supply and demand, fair comparison, equal pay for equal work and work measurement. The concept of adequacy can be disintegrated into two components: internal and external. The internal component can be linked with the concept of fair wages; it is the money wage adequate for an employee to maintain a decent standard of living. External adequacy, on the contrary, is in relation to comparable jobs in the same industry(s) with the same skill-set required.

Besides the element of adequacy, compensation is instrumental in motivation. An equitable compensation package may increase employee motivation. Inequity, on the contrary, may motivate employees to take corrective actions, which may be harmful to the firm. Firms thus link compensation to performance appraisal to enhance motivation, and hence productivity. Compensation may also be looked upon as a controlling device to ensure that employees behave in particular manner. An organisation may choose to offer a higher package to a particular employee in order to allure another employee to perform better.

Compensation in Software

Let us now take you to the software industry, known in corporate history for adding new facets to realms of wage and salary administration. It is software that has introduced compensation as a multi-dimensional tool. Differentials in compensation packages among various levels of software professionals, focus on skill-based compensation, rewards essentially linked to performance and negotiability have all added new facades to compensation.

In a recently conducted countrywide comprehensive survey of salary, Businessworld covered aspects like costs, compensation and benefits across 12 sectors of the Indian economy. The survey had revealed an arbitrage between high employee salaries overseas, with the low cost workforce in India. It has also found human resource contributing the largest component, namely 44 percent of the industry’s total cost. The annual entry-level salary has been revealed to range from Rs. 3.21 lakhs in the western part of the country to Rs. 5.23 lakhs in the north.

The Businessworld survey has found that the weakening dollar has hit the margins of the Indian software industry, thus compelling software firms to rationalize on employee costs. As competition is intensifying, software organisations must focus on ‘added value’ of their employees, by encouraging them to increase their efforts and performance on a continuous basis. This can be achieved by an overhauling of the entire compensation packages, including basic salary, along with incentive systems (including increase in salary, performance bonuses, stock options and retirement packages). Apart from such core components, emphasis must also be given to redesigning non-monetary incentives like words of praise, special recognition, job security and autonomy in decision making. On the whole, all such parameters of compensation strategies should be directed towards providing the ability to reinforce desired behaviours, and also serve the traditional functions of attracting and maintaining a qualified workforce.

Questions:

1. Which factors, according to you, are prompting organisations to adopt a package instead of traditional salary?

2. Do you think package compensation is more suitable in modern globalised business? Can you draw some lessons from marginal productivity theory?

3. Do you think that the case supports the efficiency wage theory or bargaining theory? Give arguments in support of your logic.

 

CASE – 5  India in Search of a Way to Harness the Inflation “Dragon”

India has seen high rates of inflation until the early nineties and faces its attendant consequences. Since mid nineties the priority for policy maker has been to bring inflation to single digit. Just like appropriate diagnosis is must for proper treatment, similarly an inquiry into the causes of inflation in the country is necessary. Today inflation is not merely caused by domestic factors but also by global factors. And that is natural, as the Indian economy undergoes structural changes the causes of domestic inflation too have undergone changes. The economy of India is growing at a satisfactory 8 to 9 percent a year. Therefore change in purchasing power of people is natural and when we take to national level, it is a huge amount. Given the size of population of India even a small increase of Rs. 100 in the per capita income would mean an additional aggregate demand worth Rs. 110 billion. This has put an extraordinary highly demand on various commodities.

What has further compounded the problem is the inflow of foreign investments, which is the natural fallout of globalisation. The excessive global liquidity has facilitated buoyant growth of money and credit in 2005-06 and 2006-07. For instance near-zero interest rate regime in Japan has encouraged people to borrow in Japan and invest elsewhere for higher returns. Obviously, some of this money, estimated by experts to be approximately $200 billion, has undoubtedly found its way into the asset market of other countries in alternative investments such as commodities, stocks, real estates and other markets across continents, leverage may times over. And India is emerging as an attractive destination. The net accretion to the foreign exchange reserves aggregates to in excess of about Rs. 225,000 crore in 2006-07. Crucially, this incremental flow of foreign exchange into the country has resulted in increased credit flow by our banks. Naturally this is another fuel for growth and inflation.

Further, the sustained flow of foreign money has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels. This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation. As pointed out in the Economic Survey 2007-08, the current bout of inflation is caused by a multiplicity of factors, mostly monetary and global.

To conclude, it must be understood that growth naturally comes with its attendant costs and consequences. The government has been aiming at keeping inflation below 5% but it keeps on deceiving now and then. A stock market boom, a real estate boom and a benign inflation in consumer goods market in an economically impossible idealism. These are pointers to a need for a different strategy to handle inflation.

Reserve Bank of India’s strategy of Market Stabilisation Scheme (MSS) to dealing with excessive liquidity, the increase in repo rates to make credit over extension costly and CRR to restrict excessive money supply have limitation with such huge forex inflows.

While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalisation. The Government has to find out some unconventional methods of controlling inflation besides focusing on timely implementation of infrastructure projects and improving productivity to fill demand supply gap. One such measure could be revaluation o Indian rupee against dollars.

Questions:

1. What are the major factors contributing to inflation in India in the recent past? How have they changed since 1991-92?

2. What measures do you suggest should be taken up by government of India to handle inflationary pressure?

3. Evaluate the suggestion of revaluating Indian rupee against dollars to control inflation.

Management Information Systems

06 Jul

CASE – 1   The 2004 Athens Olympics Network: Faster, Stronger—and Redundant

Claude Philipps, program director of major events at Atos Origin, the lead IT contractor for the Olympic Games, likes to be prepared. “We were ready before August, but we were still testing, because we wanted to be sure that every stupid thing that can happen was planned for,” Philipps said. “In a normal IT project, we could have delivered the application to the customer almost eight months earlier.”

But the Olympic Games was far from a normal IT project. The deadline was nonnegotiable, and there were no second chances: Everything must work, from the opening ceremony on August 13 right to the end, said Philipps, whose previous experience includes developing the control system for the world’s first computerized nuclear power plant.

With all that pressure, Philipps’s team was doing its utmost to ensure that the network would not fail. They were building multiple layers of security and redundancy, using reliable technology, and then testing it rigorously.

In the weeks before the games, the team went through two technical rehearsals in which 30 Atos Origin staffers put the network through its paces. The team spent a full week stimulating the busiest days of the games, Philipps said, dealing with “crazy scenarios of what might happen in every area: a network problem, staff stopped in a traffic jam, a security attack…everything that might happen.”

The rehearsals were intended to test people and procedures as much as the hardware and software. That was important because the IT organization Philipps built for the Athens Olympics grew from nothing to a staff of 3,400 in less than three years.

The two major components of the software that were run over the Olympic network were Atos Origin’s GMS (Games Management System), a customized suite of applications that acts as kind of ERP for the Olympics, and the IDS (Information Diffusion System).

GMS ran on Windows 2000 servers in Athens, an upgrade from the Windows NT 4 used at the Salt Lake City games in 2002. “We’re not using sexy technology,” Philipps said. “The main goal for us was to reduce the amount of risk.”

Together, GMS and IDS imposed exacting requirements on the network. GMS was, among other things, used to manage access accreditations for the games, so security was vital. Speed, too, was important: Philipps’s goal was to have the results on commentators’ screen 0.3 seconds after the athletes had crossed the line, complete with rankings, statistics, and biographies—everything that helps commentators during a live broadcast.

Yan Noblot, information security manager at Atos Origin, said the key to that was to build in redundancy—and lots of it. “We doubled everything, because we needed 100 percent availability at games time,” he said.

And when he said everything, he meant it. There was backup redundancy for the routers and switches at each site, the datacenters that processed the results, and event the PCs on the desks in the control room.

Too keep things orderly, Atos designed three different LAN configurations: one for the largest venues, including the Olympic stadium and the water sports center; another for mid-size venues such as the equestrian center; and one for the many smaller venues.

Atos used VLANs both to simplify troubleshooting and to limit damage if anyone managed to break into the network. There were separate VLANs for the commentator information system, information diffusion applications, and the game management system. Technical services, directories, management and monitoring, and the on-venue results system each had their own VLANs too, sometimes several per venue for the same function.

“The purpose was to segment the traffic so we could monitor it and contain potential issues,” Noblot said. “If someone brought in a virus, it would be contained on systems on the same VLAN and could not spread to other VLANs.”

Event results and data from the games management system were stored in two physically distant data centers hosted by OTE, which also supplied the SDH network. The primary data center was located near OTE’s headquarters in Marousi, just across the main highway from the Olympic stadium; the other was another several hundred miles away, still in Greece but in a different earthquake zone.

What makes the Olympic Games a unique project is that the athletes aren’t going to stop running just because the server does. As Philipps said, “When we speak about fixing something, it might be a work-around or a decrease of functionality, but the key thing is that the show must go on.”

Questions:

1. Could the 2004 Athens Olympics have been a success without all of the networks and backup technologies?

2. The 2004 Olympics is a global business. Can a business today succeed without information technology? Why or why not?

3. Claude Philipps said dealing with “crazy scenarios of what might happen in every area: a network problem, staff stopped in traffic jam, security attack…everything that might happen,” was the reason for so much testing. Can you think of other business that would require “crazy scenario” testing? Explain.

 

CASE – 2 Argosy Gaming Co.: Challenges in Building a Data Warehouse

When you’ve got half a dozen riverboat gambling operations, it’s important that everyone plays by the same rules. Argosy Gaming Co. (www.argosycasinos.com), with headquarters in Alton, Illinois, and a fleet of six Mississippi riverboat casinos, had decided that bringing all customer data together would enhance management’s view of operations and potentially help strengthen customer relationships. To accomplish those goals, though, the company needed to access a variety of databases and develop an extract, transform, and load (ETL) system to help construct and maintain a central data warehouse.

Jason Fortenberry, a data-warehousing analyst, came aboard at Argosy just as the company’s data warehouse project started in 2001. His job was made easier, he says, by the adoption of Hummingbird Ltd.’s Genio ETL software tool, which helped bridge systems and automate processes. But like others going through such projects, he learned the hard way that preparing for the ETL process is just as important as having the right software.

The riverboats each had unique and incompatible ways of defining a host of operational activities and customer characteristics—in essence, the floating casinos were each playing the same game but with different rules. But those problems remained hidden until reports from the company’s data warehouse began to turn up inconsistent or troubling data. That’s when Fortenberry and his staff discovered conflicting definitions for a wide range of data types—problems he wished he had identified much earlier. Fortenberry’s troubles—and his successes—are typical of ETL, the complex and often expensive prelude to data warehouse success.

ETL is often problematic because of its inherent complexity and underlying business challenges, such as making sure you plan adequately and have quality data to process. Analysts, users, and even vendors say all bets are off if you don’t have a clear understanding of your data resources and what you want to achieve with them. Then there are choices, like whether to go for a centralized architecture—the simplest and most common configuration – or a distributed system, with ETL processing spread across various software tools, system utilities, and target databases, which is sometimes a necessity in larger, more complicated data warehouses. Even if you navigate those waters successfully, you still need to ensure that the ETL foundation you build for your data warehouse can meet growing data streams and future information demands.

As the term implies, ETL involves extracting data from various sources, transforming it (usually the trickiest part), and loading it into the data warehouse. A transformation could be as simple as reordering the fields of a record from a source system. But as Philip Russom, a Giga Information Group analyst, explains, a data warehouse often contains data values and data structures that never existed in a source system. Since many analytical questions a business user would ask of a data warehouse can be answered only with calculated values (like averages, rankings or metrics), the ETL tool must calculate these from various data sources and load them into the warehouse. Similarly, notes Russom, a data warehouse typically contains “time-series” data. The average operational application keeps track of current state of a value such as a bank account balance. It’s  the job of the ETL tool to regularly add new states of a value to the series.

For his year-long ETL project, Argosy’s Fortenberry says Hummingbird’s Genio Suite, a data integration and ETL tool, quickly became the project’s “central nervous system,” coordinating the process for extracting source data and loading the warehouse.

But for Argosy, getting all that data into the warehouse didn’t produce immediate usable and dependable results. “ The lesson was that people thought that they were talking about the same thing, but they actually were not,” says Fortenberry. For example, riverboats calculated visits differently. One riverboat casinos would credit a customer with a visit only if he actually played at a slot machine or table. Another had an expanded definition and credited customers with visits when they redeemed coupons, even if they didn’t play. So identical customer activity might have on riverboat reporting 4 player visits and another reporting 10. “This type of discovery was repeated for everything from defining what a ‘player’ is to calculating a player’s profitability,” says Fortenberry.

IT played a lead role in identifying problems and helping to hammer out a consensus among the business units about how to define and use many categories of data, he says. Now, the data warehouse is running smoothly and producing dependable results for business analysis and management reporting, so the number of problem-resolution meetings has dropped dramatically. Still, Fortenberry reckons that three-quarters of the meetings he attends nowadays have a business focus. “For our part, we now know better what questions to ask business users as we continue with the data warehouse development process,” he says.

Questions:

1. What is the business value of data warehouse? Use Argosy Gaming as an example.

2. Why did Argosy use a ETL software tool? What benefits and problems arose? How were they solved?

3. What are some of the major responsibilities that business professionals and managers have in data warehouse development? Use Argosy Gaming as an example.

 

CASE – 3   Allstate Insurance, Aviva Canada, and Others: Centralized Business Intelligence at Work

The most common approach to business intelligence is to assemble a team of developers to build a data warehouse or data mart for a specific project, buy a reporting tool to use with it, and disassemble the team upon the project’s completion. However, some companies are taking a more strategic approach: standardizing on fewer business-intelligence tools and making them available throughout their organizations even before projects are planned. To execute these strategies, companies are creating dedicated groups, sometimes called competency centers or centers of excellence, to manage business-intelligence projects and provide technical and analytical expertise to other employees. Competency centers are usually staffed with people who have a variety of technical, business, and data-analysis expertise, and the centers become a repository of business-intelligence-related skills, best practices, and application standards.

About 10 percent of the 2,000 largest companies in the world have some form of business-intelligence competency center, Gartner Inc. and Howard Dresner says. Yet approaches vary. While most are centralized in one location, a few are virtual, with staff scattered throughout a company. Some are part of the IT department – or closely tied to it—while others are more independent, serving as a bridge between IT  and business-unit managers and employees.

Allstate Insurance Co.’s Enterprise Business Intelligence Tools Team is responsible for setting business-intelligence technology strategy for the company’s 40,000 employees and 12,000 independent agents, says Jim Young, the team’s senior manager.

Based in Allstate’s Northbrook, Illinois, headquarters, the center was created earlier this year by consolidating three groups built around separate business-intelligence products used in different parts of the company. The center serves as a central repository for business-intelligence expertise, providing services and training for Allstate employees, and is developing a set of standard best practices for building and using data warehouses and business-intelligence applications.

“That way, we can execute on a common strategy,” Young says. The center maintains a common business-intelligence infrastructure and manages software vendors and service providers.

At Aviva Canada Inc.,  a property and casualty insurance company, the primary role of its Information Management Services department is to bridge the communication gap between business-intelligence-tool users and Aviva’s IT department.

“Business intelligence isn’t a technology issue. BI is a business issue,” says Gerry Lee, information management services VP. Centralization is critical, because Aviva’s goal is to grow by 50 percent over the next five years, partly through additional acquisitions, Lee says. The center also impacts the company’s numerous customer relationship-management initiatives. “We couldn’t get into CRM until we had solid data-management and business-intelligence capabilities,” he says.

Cost reduction is often the driving factor for companies to create competency centers and consolidate business-intelligence systems. Standard technology and implementation practices can reduce the cost of some business-intelligence projects up to 95 percent, says Chris Amos, reporting solutions manager at British Telecom. BT established a center of excellence around Actuate’s reporting software three years ago and is developing business-intelligence systems for the telecommunications company’s wholesale, retail, and global services operations.

Despite the potential savings, funding can be an issue for creating and running business-intelligence centers of excellence. Start-up costs for a business-intelligence competency center can be $1 million to $2 million, depending on a company’s size, Gartner’s Dresner says.

Many believe the payoffs are worth it. General Electric Co.’s energy products business formed its Business Data-ModelingCenter of Excellence last year to improve data-management and business-intelligence practices for GE Energy’s 8,000 employees. That has helped the business move beyond simple reporting o financial and supplier data to more advanced forecasting and predictive analysis.

“The data’s become more actionable. The visibility of this data to the business has brought millions in savings,” says Rich Richardson, manager of business data modeling and delivery, who manages the center. That’s a business-intelligence competency center that’s more than paid for itself.

Questions:

1. What is business intelligence? Why are business-intelligence systems such a popular business application of IT?

2. What is the business value of the various BI applications discussed in the case?

3. Is a business-intelligence system an MIS or a DSS?

 

CASE – 4   Blue Cross, AT & T Wireless, and CitiStreet: Development Challenges of Self-Service Web Systems

When Web-based self-service is good, it’s really good. Customer satisfaction soars and call center costs plummet as customers answer their own questions, enter their own credit card numbers, and change their own passwords without expensive live help.

But when Web-based self-service is bad , it’s really bad. Frustrated customers click to a competitor’s site or dial up your call center—meaning you’ve paid for both a self-service website and for a call center, and the customer is still unhappy. A poorly designed Web interface that greets self-service users with a confusing sequence of options or asks them questions they can’t answer is a sure way to force them to call a help center.

Blue Cross-Blue Shield. For Blue Cross-Blue Shield of Minnesota (www.bluecrossmn.com), developing Web self-service capabilities for employee health insurance plans meant the difference between winning and losing several major clients, including retailer Target, Northwest Airlines, and General Mills. “Without it, they would not do business with us,” explains John Ounjian, CIO and senior vice president of information systems and corporate adjudication services at the $5 billion insurance provider. So when Ounjian explained to executives that the customer relationship management (CRM) project that would enable Web-based self-service by client employees would cost $15 million for the first two phases, they didn’t blink.

Blue Cross-Blue Shield also learned the importance of communicating with business units during the design phase of its Web self-service system. Ounjian and his technical team designed screen displays that featured drop-down boxes  that they thought were logical, but a focus group of end users that examined a prototype system found the feature cumbersome and the wording hard to understand. “We had to adjust our logic,” he says, of the subsequent redesign.

AT & T Wireless. When AT & T Wireless services (www.attws.com) began rolling out its new high-bandwidth wireless networks, its self-service website required customers to say whether their phones used the older Time Division Multiple Access (TDMA) network or the newer, third generation network. Most people didn’t know which network they used, only which calling plan they had signed up for, says Scott Cantrell, e-business IT program manager at AT& T Wireless. So AT & T had to redesign the site so the customer just enters his user ID and password, “and the application follows built-in rules to automatically send you to the right website,” Cantrell says.

According to Gartner Inc., more than a third of all customers or users who initiate queries over the Web eventually get frustrated and end up calling help center to get their questions answered.

Whether a self-service application is aimed at external customers or internal users such as employees, two keys to success remain the same: setting aside money and time for maintaining the site, and designing flexibility into application interfaces and business rules so the site can be changed as needed.

CitiStreet. CitiStreet (www.citistreetonline.com) is a global benefit services provider managing over $170 billion in savings and pension funds and is owned by Citigroup and State Street Corp. CitiStreet is using the JRules software development tool to make rules changes in its benefits plan administration systems, many of them featuring Web-based employee self-service. JRules manages thousands of business rules related to client policies, government regulations, and customer preferences. Previously, business analysts developed the required business rules for each business process, and IT developers did the coding. But now analysts use JRules to create and change rules, without the help from developers, says Andy Marsh, CitiStreet’s CIO. “We’ve effectively eliminated the detail design function and 80 percent of the development function,” says Marsh. IT is involved in managing the systems and platforms, but it’s less involved in rules management, he says.

The software helps speed the development process for new business systems or features, says Marsh. For example, it used to take CitiStreet six months to set up benefit plans for clients; it now takes three months. CitiStreet can also react more quickly to market changes and new government regulations. It has used the rules development software to quickly revise business rules to accommodate the changes in pension programs required by new legislation. And Marsh says that when a client company recently added a savings plan to its benefits program, CitiStreet was able to easily develop and implement changes with JRules.

Questions:

1. Why do more than a third of all Web self-service customers get frustrated and end up calling a help center? Use the experiences of Blue Cross-Blue Shield and AT & T Wireless to help you answer.

2. What are some solutions to the problems users may have with Web self-service? Use the experiences of the companies in this case to propose several solutions.

3. Visit the websites of Blue Cross-Blue Shield and AT & T Wireless. Investigate the details of obtaining and individual health plan or a new cell phone plan. What is your appraisal of the self-service features of these websites? Explain your evaluations.

 

CASE – 5   Avon Product and Guardian Life Insurance: Successful Management of IT Project

It’s déjà vu again at many companies when it comes to track record in using IT to help achieve business goals. Consider the following:

  • At companies that aren’t among the top 25 percent of IT users, three out of 10 IT projects fail on average.
  • Less than 40 percent of IT managers say their staffs can react rapidly to changes in business goals or market conditions.
  • Less than half of all companies bother to validate an IT project’s business value after it has been completed.

Those are just a few of the findings from a survey of IT managers at about 2,000 companies, including more than 80 percent of the Fortune 1,000, released in June 2003 by the Hackett Group in Atlanta. However, top-tier IT leader didn’t reach the top of their professions by being softies.

Indeed, a vast majority of them regularly rely upon hard-dollar metrics to consistently demonstrate to top brass the business value IT investments are expected to yield. That’s what sets them apart from so many of their colleagues. “Good business-case  methodology leads to good project management, but it’s amazing how many companies fall short here,” says Stephen J. Andriole, a professor of business technology at Villanova University and consultant at Cutter Consortium. The lack of good project management at such companies may also lead to business units taking on IT development projects without the knowledge or oversight of a company’s IT department. Business units may initiate such “rogue projects” because they see the IT department as too slow, or a source of too much red tape and extra costs.

Avon Products. “We apply all of the analytical rigor and financial ROI tools against each or our IT projects as well as other business projects,” says Harriet Edelman, senior vice president and CIO at Avon Products Inc. (www.avon.com) in New York. Those tools include payback, NPV, and IRR calculations, as well as risk analyses on every investment, she says.

The $6 billion cosmetics giant also monitors each IT project to gauge its efficiency and effectiveness during the course of development and applies a red/yellow/green coding system to reflect the current health of a project, says Edelman. A monthly report about the status of projects that are valued at more than $250,000 and deal with important strategic content is presented to senior line managers, the CEO, and the chief operating officer. In addition, Avon uses an investment-tracking database for every IT project to monitor project costs on a rolling basis. The approach makes its easier for the company’s IT and business managers to quickly determine whether a project should be accelerated, delayed, or canceled and assists the finance organization in forecasting requirements.

Guardian Life Insurance. Dennis S. Callahan says he has “put a strong emphasis on governance” since becoming CIO at The Guardian Life Insurance Company (www.glic.com) two years ago, Callahan has done so, in part, by applying NPV and IRR calculation to all IT projects with a five-year cash flow. “The potential fallout from inaction could result in loss of market share,” says Callahan, who was promoted to executive vice president recently. So Guardian’s approach to IT investments “is very hare-dollar- and metrics oriented, with a bias toward action,” he says. Still, Callahan and his team do have a process for incorporating “soft” costs and benefits into their calculations. They do that, Callahan says, by encouraging their business peers “to discuss how an investment can impact market share and estimate how those numbers are going to change. Same thing with cost avoidance – if we invest in a project that’s expected to help us avoid hiring 10 operations staffer to handle growing business transaction volumes.”

Callahan also keeps close tabs on capital spending throughout the course of a project. New York-based Guardian has a project management office that continually monitors the scope time, and cost of each project valued at more than $100,000, according to Callahan. Guardian also has monthly reviews of variances of scope, time, and costs on all projects costing more than $100,000.

Using return-on-investment calculations to cost-justify and demonstrate the value of IT investments to senior management is only of the techniques top IT leaders use to win project approvals, says Callahan and others. “We approach everything that we do in terms of payback.” President and CEO Dennis Manning and other board members “really relate to that kind of justification,” Callahan says. “So we turn that into hard-dollar returns and benefits for application development and infrastructure investment.” “One of the biggest things we do in demonstrating value to the CEO and the board is showing that everything we do reflects the company’s business strategy,” says Rick Omartian, chief financial officer for Guardian’s IT department.

Questions:

1. What are several possible solutions to the failures in IT project management at many companies described at the start of this case? Defend your proposals.

2. What are several key ways that Avon and Guardian assure that their IT projects are completed successfully and support the goals of the business?

3. If you were the manager of a business unit at Avon or Guardian, what are several other things you would like to see their IT groups do to assure the success of an IT project for your business unit? Defend your suggestions.

Logistics Management

06 Jul

CASE STUDY 1

Read the following case and answer the questions given at the end.

Passenger Interchange

In most major cities the amount of congestion on the roads is increasing. Some of this is due to commercial vehicles, but by far the majority is due to private cars.There are several ways of controlling the number of vehicles using certain areas. These include prohibition ofcars in pedestrian areas, restricted entry, limits onparking, traffic calming schemes, and so on. A relatively new approach has road-user charging, where cars pay afee to use a particular length of road, with the fee possibly changing with prevailing traffic conditions.

Generally, the most effective approach to reducing traffic congestion is to improve public transport. These services must be attractive to people who judge them by a range of factors, such as the comfort of seating, amount of crowding, handling of luggage, availability offood, toilets, safety, facilities in waiting areas. Availabilityof escalators and lifts, and so on. However, the dominant considerations are cost, time and reliability.

Buses are often the most flexible form of public transport, with the time for a journey consisting of four parts:

  • joining time, which is the time needed to get to a bus stop
  • waiting time, until the bus arrives
  • journey time, to acnrallg do the travelling
  • leaving time, to get from the bus to the final destination.

Transport policies can reduce these times by acombination of frequent services, well-planned routes, and bus priority schemes. Then convenient journeys andsubsidised travel make buses an attractive alternative.

One problem, however, is that people have to changebuses, or transfer between buses and other types of transport, including cars, planes, trains, ferries and trams.Then there are additional times for moving between onetype of transport and the next, and waiting for the nextpart of the service. These can be minimised by an integrated transport system with frequent, connecting services at ‘passenger interchanges’.

Passenger interchanges seem a good idea, but theyare not universally popular. Most people prefer a straight-through journey between two points, even if this is less frequent than an integrated service with interchanges. The reason is probably because there are more opportunities for things to go wrong, and experiences suggests that even starting a journey does not guarantee that it will successfully finish.

In practice, most major cities such as London and Paris have successful interchanges, and they are spreading into smaller towns, such as Montpellier in France. For theten years up to 2001, the population of Montpellier grewby more than 8.4 per cent, and it moved from being the 22nd largest town in France to the eighth largest. It has good transport links with the porti of Sete, an airport, inland waterways, main road networks and a fast rail linkto Paris. In 2001, public transport was enhanced with a 15 kilometre tramline connecting major sites in the towncentre with other transport links. At the same time, buses were rerouted to connect to the tram, cycling was encouraged for short distances, park-and-ride services were improved, and journeys were generally made easier, As a result, there lns been an increase in use of publlc transport, a reduction in the number of cars in the town centre, and improved air quality. When the tram opened in 2000, a third of the population tried it in the first weekend, and it carried a million people within seven weeks of opening. In 2005, a second tramline will add 19 kilometres to the routes.

Questions:

(a) Are the problems of moving people significantly different from the problems of moving goods or Services?

(b) What are the benefits of public transport over private transport? Should public transport be encouraged and, if so, how?

(c) What are the benefits of integrated public transport systems?

 

CASE STUDY 2

Read the following case and answer the questions given at the end.

Kozmo, the Online convenience store to shut down

New York-based Kozmo, the 3-year-old company announced that it would stop delivery service in all nine cities it operates. New York-based Kozmo, which dispatched legions of orange-clad deliverymen to cart goods to customers’ doors, is the latest dot.com dream to evaporate in the market downturn. Amazon com, venture capital firm Flatiron Partners and coffee giant Starbucks were among the investors in Kozmo.

Kozmo said in December that investors promised a total of $30 million in private funding. But last month the company learned that an investor had backed out of a $6 million commitment. Kozmo executives had been working on a merger deal with Los Angeles-based PDQuick, another online grocer, sources said. The deal collapsed when funding that was promised to PDQuick did not materialize. Sources said Kozmo still has money but decided to close now and liquidate to ensure that employees could receive a severance package.

Just last month, Kozmo Chief Executive Gerry Burdo was upbeat about Kozmo’s future, saying he was looking to steer Kozmo away from its Internet-only business model and toward a “clicks and bricks” approach. But some analysts say Kozmo’s business model only made sense in the context of a densely packed city such as New York. Vern Keenan, a financial analyst with Keenan Vision, said the service had a chance to work in only a few other cities around the world, such as Lonclon, Stockholm or Paris. “This seemed like a dumb idea from the beginning,” Keenan said. “This grew out of a New York City frame of mind and it simply didn’t translate.”

Kozmo was started by a pair of twenty-something former college roommates. They got the idea for the company on a night when they craved videos and snacks and wished a business existed that would deliver it to them. Kozmo offered free delivery and charged competitive prices when it launched in New York. Though customers loved the service, the costs of delivery were high.

After co-founder and former Chief Executive Joseph park stepped down, Burdo slashed Kozmo’s overhead, instituted a delivery fee and oversaw several rounds of layoffs. The company also closed operations in San Diego and Houston. Burdo said last month that profitability was not far away. The company had reached a milestone last December when it reported profits at one of its operations for the first time. Kozmo later saw two more operations reach profitability as a result of brisk holiday business.

Online delivery companies have been among the most ravaged by the Internet shakeout. Kozmo’s rival in New York, Urbanfetch, shuttered its consumer operations last fall. Online grocers such as Webvan and Peapod have also struggled, and smaller operations such as Streamline.com and ShopLink.com have dosed down. Peapod was days away from closing last year when Dutch grocer Royal Ahold agreed to take a majority stake.

From the very beginning, supply chain management was to be a core competency of Kozmo. The promising dot.com would deliver your order everything from the latest video to electronics equipment in less than an hour. The technology was superior, the employees were enthusiastict, the customers were satisfied. But eventually, Kozmo ran out of time and money.

Questions:

(a) What, in your opinion, is the major reason for the failure of Kozmo?

(b) Do you think that Kozmo promised what its supply chain could not bear? What could have prevented its shut-down?

 

CASE STUDY 3

Read the following case and answer the questions given at the end.

Case Study:

ABL is one of the leading Producers of medical instrumentation. It manufactures equipment for use in Hospital. This large, high tech machines cost significant amount. Each machine is tailored to hospital requirements and installed in a specially prepared space. These units are manufactured in ABL’s plant in UK and shipped for installation to hospitals all around the world. ABL’s Supply chain manager has passion for integrated supply chain management.

He and his team always have multiple improvement projects underway. Their goals up are:

  • Bring the order to delivery cycle time down below three weeks. While improving quality and lower cost.
  • Involving product designer to change the design for easier manufacturing, installation and customization.
  • Reducing supplier base so that 20 key supplier provide about 90 percent of supplier volume.
  • Obtaining the same performance from the internal supplier that is expected of external.
  • Involving suppliers in evaluation, design and analysis process.
  • Using simple order transaction based on electronic media.
  • Enhance Customer Satisfaction.
  • Measures monitor and improve the same systematically.

Currently ABL is using a state of the art ERP software couple with SCM functions. It has also developed information system for their suppliers. ABL has also lined up with expressway, a leading logistic company by which the delivery times are monitored continuously. ABL believes in delivering a perfect order.

Questions:

a) What is ABL’s strategy for good supply chain Management?

b) Give any two goals set up by ABL and list their implications on ABL.

c) What is the software being use at ABL? Apply that software to theoretical used and explain.

d) What is perfect order in this case?

 

CASE STUDY 4

Read the following case and answer the questions given at the end.

Case Study:

Farm Equipment manufactured limited (FEML), established in 1965. Is one of the world’s leading producers of agriculture equipments. FEML’s latest efforts on supplier relationship have their origins in the plant redefining its business strategies during the 1990s. As a result of their redefinition, the factory was focused on sheet steel stampings, weddings, assembly and paint as core manufacturing process. With this strategy purchased passed costs began to represent an increasing percentage of the FEMS’s manufactured costs. This laid the first corner stone in FEML’s re-examination of supplier relations. The second corner stone fell in place when, because of capacity constraints, steel stamping dept was unable to fill the factory’s total stamping requirements and this led to the development of external stamping sources.

Now the third corner stone was laid: Discussion began to arise as to whether the internal stamping dept should be treated the same as external stamping suppliers with the implication that the internal stamping dept should compete for business and receive the same level of support at any other outside source.

Typically FEMC’s suppliers are small and medium sized manufacturers. Increasingly, such companies have been under industry wide competitive pressure to reduce overhead and trim costs. Many of them have reduced their employees to minimum necessary to run daily operations. Planning and implementation of new manufacturing strategies is beyond the capabilities of these companies because of lack of manufacturing strategies is beyond the capabilities of these companies because of lack of expertise. This realization led to the fourth and final corner stone. A vigorous debate began on “why don’t strategic outside sources receive the level of support provided to FEML’s internal sources”?

In 1995, Mr. sonawala, GM-scm at FEMC’s jeadquarters, initiated a pilot supplies development programme.  The aim was to resolve the debate via a pilot experiment to support 16 suppliers. An agreement was forged with the pilot suppliers that would entitle FEML to share in any savings obtained from the improvements over next 18 months. FEML’s engineers were sent out to work with the suppliers who participated in the project. The result showed price reduction that resulted for FEML enabled it to more than recoup the investment it made.

Based on these results, in 2001, the FEML works formed a dedicated supplier development group on providing resource to assist strategic supplies in implementing SCM. Recent improvement efforts have targeted lead – time reduction in supplier’s factories. In addition to providing personnel to work at the supplier’s facilities, FEML has provided training and education for supplier’s staff. As a result of these efforts, FEML has seen reduction of more than 90./. in lead time at some supplier’s and resulting price reductions to FEML (after providing suppliers share) have been as much as 15./

Questions:

a) What should be the basis for sharing benefits between FEML and its suppliers?

b) “Managing lead time is more important than reducing the inventory in a supply Chain”. Defend the statement in the context of FEML.

c) Explain the brief performance indicators at FEML and its suppliers end.

d) List at least four factors on which suppliers of FEML needs to be evaluated.

 

Questions:

Q 5. “There are many possible structures for supply chain, but the simplest view has materials converging on an organisation through tiers of suppliers and products diverging through tiers of customers.” Elaborate.

Q 6. Elobrate clearly the meaning of “World-Class” in World-Class Supply Chain Management (WCSCM). What are the features of World-Class Companies ? Give your answer highlighting different characteristics pertaining to management level, quality control, operations/production and technological advances.

Q 7. What are the essential differences in the Supply Chain Management of Products vs. Services? Discuss the application of Supply Chain Management principles in Financial Services.

Logistics Management

06 Jul

CASE I

A CASE OF ALPHA TELENET LIMITED

Alpha Telecom Ltd., a part of Alpha Group was established in 1976 by its visionary Chairman and Managing Director, A. S. Verma. The company started with manufacturing of Electronic Push Button Telephones (EPBT) and Cordless phones in 1985 in Allahabad. On July 7, 1995 Alpha Tele-Ventures Limited was incorporated. A mobile service called ‘Web-Tel’ was launched in Kochin, which eventually expanded its operations in Andhra Pradesh in 1996.

Till 1994, fixed telephone services were provided by Department of Telecommunications (DoT) which had a monopoly in this business. This was regarded as self-defeating because DoT was a regulator as well as a competitor. With increasing pressure for privatisation, the government agreed to give license to private operators. Finally in December 1996, the bill of privatisation of fixed telephone services was passed. The New Telecom Policy (NTP) with its targets for improving tele-density was an ambitious policy. The NTP planned to achieve a tele-density (number of telephones per 100 people) of 7 by the year 2005 and 15 by the year 2010, which translated into 130 mn lines. The policy also planned an investment of Rs. 4000 billion by the year 2010. The above factors combined with the fact that the domestic long distance telephony was open to private players, led to considerable demand for the company’s products. But to get the tenders from Ministry of Telecommunication, Government of India, a license fee was to be paid over a period of 15 years and the viability of telecom projects was also affected by the guidelines that required private operators to earmark at least 10% of their telephone lines for villages. The operating companies did not like the idea of having to pay for the maintenance of lines that might not be used most of the times. The license fee of Maharashtra state was minimum at Rs.643 crores. Thus, Alpha Telenet, a pioneer in every field wanted to avail this opportunity and started the survey for extending the services in Pune. Their marketing survey team provided the statistics of existing customers of DoT, the waiting list of DoT, potential of users for successive years and so on.

Alpha Telenet Ltd. (ATL) decided to start their fixed line telephone operations in technical collaboration with Telecom Italia at Pune in Maharashtra. Initially, they received permission for installing their exchanges covering 0.5 km. of radius which was too small with respect to the cost involved and thus difficult to achieve lucrative returns. After struggling for a year, they finally got permission to set up exchanges covering 1 km. of radius. They set up their exchanges in potential areas in the city. Another problem was that the consumer’s mindset fixated was with DoT and they were not ready to accept the services of Alpha Telenet Ltd. This was due to opposite tariff rates for household consumers. Consumers did not rely on ATL as they were private players. ATL initially had attracted the customers from the areas where the waiting line for DoT connections was high. Further, they had provided the connections with wireless CDMA receivers for only Rs. 3000 (movable within the area of 5 km radius) though its actual cost was Rs.15,000. The connection between exchanges by optical fibre ensured high quality of voice and data transmission, which was later to be shifted to the conventional copper wires for consumer connections. The company made the connection using Ring Topology stay connected even in case of line disturbances.

They also installed a Submarine Optical Fibre Cable to Singapore with an 8.4 Tbps (terabits per second) capacity providing high-class worldwide connectivity. Alpha Telenet installed the latest Digital Switches from Tiemens and other devices, which were fully compatible with the equipment of other telecom providers in India. The company installed a digital Geographical Information System (GIS) for network surveillance. A 24-hr Internal Network Management System for technical support and infrastructure maintenance were also installed with a dedicated round-the-clock toll-free call centre to ensure prompt services.

In 1997, Alpha Telenet Ltd. obtained a license for providing fixed-line services in Maharashtra state circle and formed a joint venture with Behrin Telecom, Alpha BT, for providing VSAT services. On June 4, 1998 they started the first private fixed-line services launched in Pune in the Maharashtra circle and thereby ending fixed-:-line services monopoly of DoT (now TSNL). Alpha entered into a license agreement with DoT in 2002 to provide international long distance services in India and became the first private telecommunications service provider. The company also launched fixed line services in the states of Goa, Uttar Pradesh, Gujarat and Delhi.

With the start of basic telephony services in the .state of Maharashtra, residents of the area and others felt a great sense of breaking away from the old and traditional government monopoly. The kind of ill-treatment of customers and also the red-tapism and bureaucracy which prevailed earlier, was about to end. It was observed that no private telecom company wanted to start their operations in less profitable areas like Bihar and other eastern states .

The tariff plans of the TSNL and Alpha Telenet Ltd. were opposite to each other. TSNLS tariff structure was upwards i.e., price per unit increase with number of calls and vice versa for Alpha Telenet. This was the beginning of the entry of private players in the sector.

Questions:

1. Give a critical analysis of the privatisation of telecom sector in India.?

2. Highlight the secrets of success of Alpha Telenet Ltd. in terms of technological advancements and service provided?

 

CASE II

GEARING· FOR GROWTH

Premier Differential Gears Pvt. Ltd. (PDGL) was formed in the year 1991 near Noida in the state of Uttar Pradesh (India). The company was established to cater to the ever­growing needs of the differential gear market for cars, jeeps, trucks, and tractors. It was established under the aegis of the parent company called Premier Gears Pvt. Ltd. which in turn was established in the year 1962 at Noida. The parent company was engaged in the manufacturing of automobile transmission gears. With a modest start in 1961, it had never looked back and by 2006, it became the largest manufacturer of automobile transmission gears in the country. The parent company had employee strength of 2,500 trained and dedicated employees and was producing a range of over 1,000 gears. Premier Gears Pvt. Ltd. was making gears for virtually every major brand of truck, car, jeep and tractor. In 2006, the group company comprised of three firms namely, Premier Gears Pvt. Ltd. (manufacturing Transmission gears, Gearbox assemblies, Laser marking machines, and Material handling equipments), Premier Differential Gears Pvt. Ltd. (manufacturing differential gears) and Elve Corporation (a government recognized export house).

PDGL was manufacturing a wide range of Crown Wheel and Pinions, Bevel Gears, Bevel Pinions, and Spider Kit Assemblies. The installed capacity was 20,000 sets per month. PDGLs focus on quality, fast product development and customer service had enabled it to become an OEM supplier to many car and tractor companies in India, the EU, and Asia. Almost 75% of the total production was exported to a number of countries like Germany, Russia, USA, China, Japan, South Mrica, etc. The domestic OEM and replacement market accounted for the remaining 25% of the company’s sales and in a short span of time, the company had become one of the major players in the Indian replacement market. The use of latest technology and comprehensive quality control systems at PDGL go a long way to ensure that customers get exactly what they want.

PDGL was using world class Gleason machines in its manufacturing programme. The raw material for manufacturing gears was in the form of forgings, which were procured from various parts of the country for manufacturing crown wheels and pinions. These forgings were subjected to turning followed by drilling. The drilled crowns and pinions were taken for tapping, which were then rimmed. After this, the teeth cutting procedure was applied which was called broaching. The broached units were then heat-treated. Heat treatment was very critical in producing gears having short tolerance levels. To meet this end, the company had two rotary furnaces and one state-of-the-art Continuous Gas Carburizing Furnace (CGCF) from Aichelin ALD of Austria to heat-treat its products. After the heat treatment, a number of intermediate processes like short blasting, phosphating, lapping were performed which resulted into the finished product, ready for putting company marks to avoid imitation/forgery. The company had developed a state-of-the-art 70-watt ND­YAG laser-marking machine in collaboration with Quantum Laser (UK), which was used for marking on its produces. Laser marking was environment-friendly and was applied without any force or contact and thus the material was not subjected to any stress. The marked products were” manually pushed onto a conveyer for packing and dispatching. All the above have enabled the company to meet international standards and to produce world­class gears with the highest performance standards.

The upstream portion of the supply chain at PDGL included a number of forgers located at “geographically dispersed locations in various parts of the country. These forgers were supplying the forgings to PDGL, which were then used in manufacturing the differential gears. All of the raw material was routed to the POGL works through road transport and”” due to large distances, transportation costs were a major issue in increasing the efficiency of this upstream portion of the supply chain. The forgings were supplied according to the drawings and dimensions set by design engineers at the company. The company indeed tried some local suppliers to cope up with the increasing transportation costs but the results on quality front wet satisfactory. To serve this end, the company was planning to develop some local suppliers. It had planned to provide them support in the areas of procuring good material for producing forgings, procuring good quality machines and” training their workforce in the required technical know-how. This was considered as an investment by the company to reduce its inbound transportation costs. To meet the small lot requirements of the forgings, the company was also contemplating to share the truckloads with the parent company. This was feasible because of the geographical proximity of the parent company, which was situated at a distance of less than 15 kms, the similar nature of raw material and same suppliers supplying to both the units.

The internal supply chain at PDGL comprised of various processing stations/lines” through which the forgings were transformed into finished differential gears. The movement of the work-in-progress between various stations was semi-automatic in which the workers manually placed the goods on trolleys/carts. Even the finished units were manually placed on a conveyer; which needed to be pushed to send the units to the packing section. There was a risk of units being damaged in this process. To minimize this risk, the company was planning to have automatic systems for moving the material from one place to another. It was decided to have hydraulic lifts, cranes, electronic escalators and the likes for progression of material from forging to packing. The packing material was stored on first floor as and when it arrived, with the help of casual laborers, which was inefficient and also involved a: risk of some· casualty.

The downstream portion of the supply chain at PDGL included around 10 distributors located evenly in various parts of the country. These distributors were supplying the products of PDGL to number of car, truck, jeep and tractor manufacturers. This portion of the supply chain also included a large replacement market, which accounted for almost half of the company’s domestic sales. To meet its distribution needs the company had a panel of transporters, who used to distribute the finished goods. At times, the consignments scheduled for distributors were delayed because of lack of full truckload. One possible solution to this problem was sharing of truckload with the parent company. This was feasible because both the companies shared the same distribution network. The distribution of export consignments was through an intermediary who helped the company in exporting its products to the US, UK, Germany, China, Italy, Turkey, Saudi Arabia, Singapore, Malaysia, Thailand, Indonesia, and Nigeria, amongst other countries. The company’s wide export range included replacement gears for internationally renowned automotive manufacturers like Mercedes­Benz, Mitsubishi, Toyota, Nissan, Clark, Eaton, Fuller, New Process, ZP, Hino, Fuso, Tong Feng, Tata, Leyland, Massey Ferguson, Magirus – Deutz and various others.

There was a shortage of skilled employees. Therefore, the company has recently started training input for all their 400 employees. These training programmes are being conducted in the organization to enhance the skills of the employees and the duration of these programmes were 20 hours per month. On the financial front, the company is continuously moving on the growth track showing better financial results year after year. It has embarked on an ambitious plan to double its turnover by the end of this financial year and to become the world’s numero-uno in the automotive gear-manufacturing segment. The current capacity utilization was at a meager 6000 sets against a total installed capacity of 20,000 sets per month.

Questions:

1. Comment on the upstream and downstream supply chain portions operating in the company.

2. How far are the plans to improve the supply chain efficiency in the company feasible?

3. “Internal supply chain at the company can be characterized by the lack of it”. Comment.

 

CASE III

INTELLIGENT MOVEMENTS: ANYWHERE ANYTIME

Deepak Pai, an engineering graduate and a postgraduate in management from United States, was working in Transport Corporation of India (TCI), the market leader in conventional transportation. He established Speed Cargo as an express cargo distribution company after leaving TCI. Speed Cargo, started with its head office at Hyderabad, as a small cargo specialist in 1989, upgrading itself to desk-to-desk cargo in 1992, cargo management services in 1995 and became a public limited company when it was listed in Bombay Stock Exchange in 1999. The company was maintaining a strong customer base of prestigious companies like Acer, Cadilla, Sony, Panasonic, Titan, Dabur and Hitachi to name a few.

Speed Cargo Limited (SCL), a leader in the express cargo movement pioneered in distribution and supply chain management solutions in India. It differentiated the concept of cargo, from conventional transport industry by offering door pickup, door delivery, assured delivery date and containerized movement. It had a turnover of Rs.3600 million in 2005-06. The company had a strong team of 6400 employees with the fleet of 2000 vehicles on road and an extensive network covering 3,20,000 kilometers per day and a reach of 594 out of 602 districts in India. In addition to this, it was having a well-structured multimodal connectivity and 6lakh square feet mechanized warehousing facility. Warehousing facilities were comprised of the most modern storied system and material handling equipment offering very high level of operational efficiency. The four modes of transport – Road, Air, Sea and Rail were seamlessly integrated, enabling SCL to effortlessly reach anytime anywhere.

The international wing of SCL took care of the SAARC countries and Asia Pacific region covering 220 countries with a specialized India-centric perspective. The company had gone online by connecting 90 percent of its offices to provide web-centric solutions to its customers.

The company also offered money back guarantee to express cargo services. The services offered were customized for corporate, small and medium enterprises, cluster markets, wholesale markets and individuals. The state-of-the-art technology made things easier for the customers whose cargo could be tracked and traced in the simplest manner, because SCL had an effective tracking system. SCL believed that best of technology enabled best of service, and its outlays on providing the IT edge had always resulted in innovative services and solutions. SCL, in its day-to-day operations, used technologically advanced equipments like Fork Lifters, Hydraulic Trucks, Hand Trolly, Drum Trolly, Rubber Pads cushioning, Taper Rollers to move big crates, color codes for identification to delivery what it promised.

Between 1989, when company was born, and 1995, SCL started a unique value added service called Cash-On-Delivery for the advantage of its customers. SCL introduced Call Free Number for the first time in the logistics industry in India. To establish largest network in air and to facilitate faster delivery of shipments, SCL entered into a tie-up with Indian Airlines in 1996; The Company introduced the concept of 3rd party logistics and later started offering complete logistics and supply chain solutions in 1997. The courier service Suvidha later rechristened as Zipp was launched in 1998. The company entered into a tie­up with Bhutan and Maldives Postal Departments to expand its operations to SAARC countries in 1999. The Speed Cargo Development Center was set up at Pune in India for training of its employees in the same year.

An exclusive cargo train in association with Indian Railways between Mumbai and Kolkata was launched in 2001. Based on a survey conducted by Frost and Sullivan, SCL was conferred the Voice of Customer Award for being the best logistics company in 2003. After simplifying the internal process for faster and better communication, and a smarter way to work, SCL set up its corporate office at Singapore in 2003 to create an international hub with an aim to reach out to the world. The company introduced a mechanized racking system in the automated warehouse at Panvel (Maharastra) in 2004.

SCL was sensitive to the avenues where it could contribute to building a better society. Displaying continuous social responsibility, SCL associated itself with several community development programs and contributed generously to many social causes. SCL was the first to build makeshift houses for 400 families who were affected during a massive earthquake in Bhuj district of Gujarat in India during January 2001. They reached the devastated village the same day to provide food, clothes, medication and water to the affected people.

In 2003, SCL accepted to develop one of the government schools located at Banjara Hills in Hyderabad, and built a building with basic facilities like classrooms, staff rooms and toilets, and provided furniture for students and staff. The housekeeping and security of the school, which was now having 1100 students, was also taken care of by the company. After Tsunami, one of the worst natural disasters that struck South East Asia in December 2004 leaving over 10 lakh people dead and over 4 million displaced, SCL was on the rescue scene as it brought in food, water, clothing, medication, a team of doctors and cooks, and provided the affected people with essential utensils. After rehabilitating the people in Nagapattnam and Cuddalore, it took up the development of a high school in Nagore where 500 students came in from the Tsunami affected families. SCL also actively participated in Kargil contributions and other rescue and rehabilitation works in India.

LOOKING AHEAD

SCL believed that in the age of convergence, it had kept pace with time with its infrastructure, people and technological capabilities for moving cargo to its destination on time, by making intelligent movements in air and sea, as well as on road and rail. The company had experience of handling wide range of materials including confidential papers related to University examination and sensitive goods like polio drops and life-saving medicines. In view of the strengths of its competitors such as DHL, Safexpress and Blue Dart, the company had enhanced services with a greater focus on cargo management and customer satisfaction with the new operations backed by better strategic planning. To achieve its aim, SCL had strategically tied-up with Jubli Commercials, an lATA accredited freight forwarder, which started its operations as Air Cargo Agent.

The company was confident that it was set to become 24 x 7 one-stop solution provider for all freight forwarding services including customs clearance for international cargo. SCL having 40 percent share in express distribution business was developing a huge centralized warehouse on 22 acres of land at Nagpur in India. The centralized warehouse, which was about to be commissioned, was designed as a major hub or express distribution center for 200 smaller hubs as its spokes catering to the needs of its customers across India. SCL believed that it is a concept, a vision and an idea ahead of its time, which looked at a global perspective and was constantly reinventing itself in delivering the future of logistics.

Questions:

1. What made SCL a leader in the logistics industry?

2. Discuss the strategies adopted by SCL for its survival in the competitive scenario.

3. Comment on the contributions of SCL to society.

4. What steps the company should take to globalize its network reach?

5. Discuss the strategies adopted by SCL for expansion.

 

CASE IV

LOGISTICS OUTSOURCING

Company Profile

Indian Steels Limited (ISL) is a Rs. 6000 crore company established in the year 1986. The company envisaged being a continuously growing top class company to deliver superior quality and cost effective products for infrastructure development. With major customers being from Public Sector Undertakings, the company has established itself well and is said to be considering its expansion plan and proposed merger with another steel making giant in the country.

In 1996, owing to the cut throat competition in the emerging dynamic global markets, ISL emphasized on both effectiveness and efficiency. The company strongly believed in focusing on its core competency (i.e. manufacturing of steel) and outsourcing the rest to its reliable partners. Outsourcing of its outbound logistics was one such move in this direction. ISL out sourced its stockyards and other warehousing services to a third party called Consignment Agent, who was selected on an annual basis through a process of competitive bidding. The CA was responsible for the entire distribution of the products within the geographical limits of the allotted market segment and was paid by the company according to the loads of transaction (measured in metric tonnes) dealt by him. The company also believed in maintaining long-term relationships with the suppliers as well as the buyers. It always prioritized the needs of its regular and important customers over others and this worked out to be a win-win strategy. The case brings out the model of outsourcing logistics the company has adapted for the enhancement of its supply chain competency and thus leveraging more on its core competency which led to increased productivity.

Indian Steels Limited (ISL) is a Rs. 6000 crore company established in the’ year 1986. The company envisaged being a continuously growing top class company to deliver superior quality and cost effective products for infrastructure development. The company performed with a mission to attain 7 million ton liquid steel capacity through technological up-gradation, operational efficiency arid expansion; to produce steel with international standards of cost and quality; and to meet the aspirations of the stakeholders. The production started in the year 1988 and initially, it manufactured Angles, Pig Irons) Beams and Wire Rods that were mainly used for constructing roads) dams and bridges. These products were mainly supplied to Public Sector Undertakings such as Railways, Public Works Department (PWD) Central Public Works Department (CPWD) Rashtriya Setu Nigam Limited, Audyogik Kendra Vikas Nigam Ltd. and various foundry units. The company had its headquarters at Raipur with three stockyards (a kind of warehouse with a huge land to store the products).

The company has established itself well and is said to be considering its expansion plan and proposed merger with another steel making giant in the country. The company was awarded ISO 9001, ISO 14001 and ISO 18001 certifications. The temperature in the plant premises is reportedly about 6°C lesser than that of the township, thanks to the greenery being maintained therein.

Logistics Outsourcing

Outbound logistics which basically connects the source of supply with the sources of demand with an objective of bridging the gap between the market demand and capabilities of the supply sources was always a problem for companies operating in this industry. Consisting of components like warehousing network, transportation network) inventory control system and supporting information systems outbound logistics was always playing a key role in making the right product available at the right place, at the right time at the least possible cost. In 1996 owing to the cut throat competition in the emerging dynamic global markets, ISL emphasized on both effectiveness and efficiency. The company strongly believed in focusing on its core competency (Le. manufacturing of steel) and outsourcing the rest to its reliable partners. Outsourcing of its outbound logistics was one such move in this direction.

Recognizing the growing demand for its products from the big, diversified and geographically­dispersed customers, the company started expanding the number of warehousing stockyards. From a humble beginning, the company today has 26 stockyards; most of them are outsourced. Each of the outsourced stockyards was managed by a third party, which the company referred to as Consignment Agent (hereafter referred to as CA) in the area. The CA was selected on an annual basis through competitive bidding process. The performance of CA was closely monitored by a company representative (full time employee of ISL working in the site of CA). The CA was responsible for the entire distribution of the products within the geographical limits of the allotted market segment and Was paid by the company according to the loads of transaction (measured in metric tonnes) dealt by him. Based on their sales turnover CAs were trifurcated into A, Band C categories. The CAs with a monthly turnover of Rs. 150-200 crore fell under A category) whereas those with Rs. 100 – 150 crore were B and less than Rs. 100 \ crore were C category.

In addition to the company representative) a team of marketing division operated in the town where, the site of CA was located. This department was responsible or estimating the future demand, translating it into orders and sending to the manufacturing plant. Material dispatch was done using either one or a combination of the two modes: Rail, Road. While using rail as the mode of transportation, the company had a choice to book a Normal Rake (a full train with about 35 wagons, each wagon with an approximate capacity of 60 tonnes) or a Jumbo Rake (a full train of about 52 wagons, each wagon with an approximate capacity of 60 tonnes). At times, the company was engaging the services of the CONCOR (Container Corporation of India) where a train of 62 to 70 wagons, each wagon with about 26 tonnes capacity was used for transportation. Instead, if the company decided to send the material by road, the company had a choice between Trailor (25-30 tonnes} and Truck (15-20 tonnes). The choice of transportation mode was based on the quantity of dispatch.

As soon as the material was dispatched from the manufacturing plant, the respective CA used to get a Stock Transfer Chalaan electronically through Virtual Private Network, which was developed by a professional software service provider. In-transit, monitoring was generally done with the help of Indian Railways, if the mode was Rail. Otherwise, truck/trailor drivers were contacted through mobile phone. Transit generally took five to six days, providing time for CA to plan for receiving materials. The CA used to utilize this time for arranging material handling devices like heavy cranes and required labour. The material thus unloaded was reaching the warehousing stockyard where CA was responsible for arranging the materials as per the warehousing norms of ISL.

The company broadly classified materials into Long Products and Rounds. Products falling into each category were further classified by their size, shape and utility and the company used a distinct colour code for this purpose. Each subcategory of material had a specific place for downloading. The company used Bin System for this purpose. While downloading the material in stockyard, the company norms insisted that CA arrange for providing Dunnagt Material. This enabled the CA to store material without 1 direct contact with the land surface and thus reduced the probability of material deterioration. Material was stored in the stockyard until an authorized representative of the customer used to come and collect it. While dispatching material to the customer, a Loading Slip was generated against the Delivery Order. The company” also believed in maintaining long-term relationships with the suppliers as well as the buyers. It always prioritized the needs of its regular and important customers over others and this worked out to be a win-win strategy.

Operational problems were majorly because of uncertainties in transportation, fluctuation in supply of electricity and the load bearing capacity of the soil in the stockyard. Some: more problems were encountered whenever there was a change in CA and these were overcome by training the employees of the new CA and keeping the old CA responsible for the: material in his stockyard for six months after the contract as well. Observations reveal that, at times there were situations wherein CAs had to do those things which they were not legally supposed to do (like subcontracting) because of the pressures mounted by political leaders with selfish interests.

Despite these problems, this model of outsourcing logistics was working out very well for the company. The practices, which were started in the year 1996 have sustained major changes in the environment and are being practiced even in 2006. It has enhanced the supply chain competency of the company by enabling it leverage more on its core competency, which leads to increased productivity.

Questions:

1. Analyze the case in view of the logistics outsourcing practices of the ISL.

2. Discuss the importance of logistics outsourcing with reference to supply chain management.

3. Suggest strategies for further strengthening the supply chain of ISL.

4. The participants/students are expected to have a clear understanding of Supply Chain and Logistics Management concepts.

5. The issues involved in the case are Sales Forecasting, Strategic Sourcing, Selection of Warehousing Service Provider, Transportation Mode and other nuances in Logistics Management.

Inventory Management

06 Jul

1. Discuss a few steps that can be adopted to control WIP.

2. What is recycling? What benefits will it give to an organization?

3. MRP just prepares the shopping lists. It does not do the shopping or cook the dinner’.Comment.

4. What is JIT? How does it eliminate inventory? What are the advantages of implementing JIT?

5. What is forecasting? Why is it done and what are its uses? List some considerations thatshould be taken into account while forecasting.

6. What is the purpose of safety stock? How will the use of safety stock affect the EOQ? How willthe safety stock affect the total annual carrying cost of the material?

7. Comptek computers wants to reduce a large stock of PCs it is discontinuing. It has offered auniversity book store a quantity discount pricing schedule as follows:

Quantity Price (Rs.)

 

1-49 14,000
50-89 11,000
>90 9000

The annual carrying cost for the bookstore for a PC is Rs. 190, the ordering cost is Rs. 2,500and annual demand for this particular model is estimated to be 200 units. The bookstore wantsto determine if it should take advantage of this discount or order the basic EOQ size.

8. What is Safety Stock? List out the various factors influencing the safety stock.

9. Define Service Level? How does it help in determining the Safety Stock? Explain withexample.

10. Write Short notes of the followings: –

A) Inventory with Supplier

B) Inventory carrying cost.

International Financial Management

06 Jul

CASE I

You are just one week ‘young’ in your job as a treasury executive in a leading laptop trader/supplier in India. Earlier your company was sourcing assembled laptops from China, but with the incentives provided in the Budget of 2006 by the Finance Minister of India, your company is planning to enter assembly/manufacturing market in India.

Now, your company is planning to source components and sub assemblies from Taiwanese firms. This will involve a lot of foreign exchange trading and contracts.

Since you are from a leading business school in India, your CFO has asked you to make a presentation to the top management on various possibilities relating to forex market in India.

Question:

What is all that you would like to tell the top management so as to establish your credibility?

 

CASE II

While you are making presentation to the top management a middle aged person enters the boardroom. All the board members exchange smiles with this person.

At the end of your presentation, this new entrant speaks up, “Well, that was a very interesting presentation. It appears that you know a lot about forex markets in India.” This person continues, “While, I was on flight today, I came across an interesting bit of information. There was a story in the newspaper mentioning that one can make a ‘killing’ in forex market, if one is smart enough. I feel that you should tell us about this ‘killing’ business as well.” And goes on to add with a smile and tinge of sarcasm, “I guess this will make our treasury a ‘profit center’”. All the board members nod in unison. The chairman takes out the day’s paper and hands it over to you to examine the possibility of making a ‘killing’ in the market.

Sweat breaks on your eyebrows. You do not remember having seen newspaper quotes during your course work, since you devoted the majority of your time during MBA days to cultural activities and student exchange programmes. This is going to be your first real challenge in the industry. You ask for some time to examine the numbers. The chairman and CFO give you patronizing looks and ask you to come back after a working lunch and tell the board about your findings. As you come back to your desk, you feel sudden loss of appetite.

After a while, the same person walks up to your desk and says, “I can understand your predicament. I know you are fresh from your MBA, and just one week young with our company. I hope these numbers help you to present your case”, while handing over a piece of paper to you. You do not like the patronizing tone. You thank this person for encouragement (!). You find following details staring at you.

USD/CHF : 1.5963/1.5973. This is a quote available from a bank in Zurich. At the same time, a bank in New York is offering the following spot quote: CHF/USD : 0.6265/0.6270

Further, a New York bank is currently offering these spot quotes:

USD/JPY : 112.25/112.55 and USD/AUD : 1.6659/1.6672

At the same time, a bank in Sydney is quoting :

AUD/JPY : 68.80/68.97

Additionally, the following pair of spot and forward quotes are also available:

GBP/USD spot : 1.6531/1.6600 and

GBP/USD 1-month forward : 1.6566/1.6577

Hope this helps!

Question:

What will you do next? How will you present your analysis?

 

CASE III

You are back to your office after a long holiday in Caribbean Islands with your family members. This was a gift for your outstanding performance last year. Your predictions about exchange rate and interest rates were bang on target. This forecast helped your company to save over a hundred million dollars. Your CEO wants you to replicate this performance this fiscal. You have promised your daughter and your spouse that you will be taking them to Amazon forests for white water rafting next year.

Business Situation

Your company is the largest cloth manufacturer in the world in your segment. You are planning forays into the branded garments segment. Since you want to keep transportation costs at their minimum, you are planning to set up manufacturing bases in all the major markets. Think Global –Act Local’ is your mantra, as well.

Plant and Machinery

It is expected that your three plants will be set up in Mexico, Brazil, and Australia. These plants will have about the same capacity and are likely to cost about USD ten million each. The construction period could be anywhere from two to five years, depending on the support received from local government officials. This investment could easily make your company the second largest manufacturer of cloth in that segment.

Ownership

Your company has a choice of either setting up a 100% subsidiary or a joint venture with one of the local companies.

Local Issues

There are local political parties who can make life difficult in Brazil. However, in Mexico and Australia you are likely to sail smoothly.

Cashflow

There are no credible estimates for cashflow because the local markets are an uncharted territory for you. All you know is: you goods will be priced in local currency.

Capital

On this front, you have multiple choices: (i) raising domestic equity in rupee terms, (ii) mix of debt and equity in rupee terms, (iii) USD denominated bond issue, (iv) raising local currency debt.

Question:

Should your company make this investment? If yes, then which will be the best route to (a) maximiza-tion of profits, (b) minimizing risk, (c) finding the optional mix of profits and risk. What all information to you need to arrive at these answers? How will you structure your analysis?

 

CASE IV

“Ready for take off”, voice of the Captain crackles over announcement system and brings you back to present. You are returning after attending the glittering function where ‘DFO of the Year’ award was presented. While coming out of the function, you overheard someone saying, “That’s no big deal! If this person is really great then why not try and get the ‘Financial Engineer of Year’ award!!” The comment was definitely aimed at you, the winner of this year’s award.

Your company is one of the leading software companies in India, having a turnover of over USD 500 million in the last financial year. Now, for reasons best know to them, the board members are keen that the company should diversify into commodity trading. As you savour the gourmet meal, the aircraft starts shaking suddenly and an announcement is made, “We have hit an air-pocket. We expect more turbulence ahead. Please occupy immediately the nearest vacant seat available and fasten seat-belts for your safety.” There is near commotion in the cabin, and the next moment you find a middle-aged gentleman seated.” There is near commotion in the cabin, and the next to you whose face is familiar; you exchange greetings with each other.

You start talking and as the discussion builds up you find that the other person was also there during the presentation ceremony and he was, in fact, ‘Financial Engineer of the Year’ last year. He shows keen interest in your company and appears to know a lot about your company’s future plans. He offers to exchange you purchase of coffee worth USD 10 million options floating in return for sugar futures fixed, over next six months. You struggle to see the reason and remain non committal.

On your return to office you find that your company needs to enter into interest rate swap for its forthcoming commodity trading project. But this activity will be starting in about nine months from now and it will involve series of swaps, required to be settled every month for about JPY 100 million fixed against AUS dollar floating. This is coming from your overseas software business in these countries, where your company has taken a perpetual loan from the local banks due to the Government’s policy to demonstrate that you have long term business interests in those countries.

You are keen to manage the risk of your foreign currency receivables portfolio, typically in EUR, with variable timing by having a cross currency swap with a hardware vendor from China. You have not yet decided about the currency which will be profitable against EUR.

While, you are in this process, your phone rings and the winner of ‘Financial Engineer of the Year’ award is on line asking you to join him for a dinner meeting next Friday. You sense that it could be good opportunity for you to learn a few things from him.

You have about ten days time on your hand, and you are keen to get ‘Financial Engineer of the Year” award next year.

Question:

How will you proceed to structure this situation? What all information will be needed? What is your perception of the risks involved in the proposed structure?

 

CASE V

You are the chief financial officer of a leading dental hospital located in India. Your hospital has been having a roaring practice. You have a large group of dedicated doctors and a wide range of patients traveling from all over the region. Your hospital is known for its professional perfection and value-for-money services.

Of late the hospital has started offering services to relatively well off customers under ‘cosmetic dentistry’. The opening of this market segment has helped the hospital to reduce per patient charges for patients of ‘essential dentistry’. The hospital is also planning to start ‘mobile dental clinics’ to cover rural areas, in line with its motto ‘Oral Hygiene for All’.

While the Ministry of Public Health and Social Welfare is supporting the second initiative, the Ministry of Tourism and Hospitality is supporting the previous initiative along the lines of ‘Smile India’ campaign. This has helped India in becoming a preferred destination for the emerging market for ‘health tourism’. A majority of customers of cosmetic treatment are from Europe and the US of A. Recent interest of some of the corporate clients from Australia and some pop-divas has given your hospital practically free media coverage.

Expectedly, this success is not an unmitigated blessing. Competition in the region is coming from a Chinese dental hospital. They are offering ‘tooth’ transplant with the help of a Korean firm. This firm has asked a claim that they have the technology to organically grow a tooth with the help of root-canal cells taken from a patient. This is a time consuming and costly process and requires a longer stay in China and frequent visits to Korea, but patients do not seem to mind—since they are assured of an ‘organically’ grown tooth.

There is another competitor coming up in Belgium. They have a different technology. It is neither ‘organic’ nor as good as Indian, but highly cost effective since they fix an artificial tooth in a metallic socket, which can be removed and refitted without much effort.

However, in last few months, the dedicated lot of dentists with your hospital are also reading the media reports and there is growing feeling among them that the hospital is increasingly straying away from its path of ‘oral hygiene for all’. Some of the younger dentists have, on more than one occasion voiced their demand for higher compensation. Recently, a group of experienced dentists have taken up visiting positions with the Belgian hospital for a few weeks in a year. Now, the dentists have taken up visiting positions with the Belgian hospital for a few weeks in a year. Now, the dentists want a pay hike and that wages to be paid in USD, not in INR as was the practice so far.

Your CEO has asked you to see her with the possible scenario analysis in a month from now.

You have gone through all your cost sheets. You know that the costliest element is the special grade dental cement, which is to be imported in packs of 1000gm each costing over INR 1,000,000. Each tooth requires about 2gm of this secial grade cement. Adding other facilities and services, it costs INR 3000 per tooth for each ‘cosmetic’ treatment. Your charges are in the range of USD 200 which is very competitive in the international market. However, the Chinese-Korean combine is offering ‘organic’ tooth at USD 600 per tooth, all inclusive. The Belgian experiment is at about USD 30 per tooth, but has a shorter useful life.

When you look at your cash inflow you find that your earnings are in all possible currencies of the world but your costs are tied with USD and INR. The cover story of The Economist indicates possibility of USD appreciating against INR and other major currencies on account of successful resolution of the Iraq situation and peaceful resolution of the Iraq crisis, leading to the softening of world oil market prices. Though you are not a dentist by profession, you have a tooth in every possible profession! You have suggested to the chief dentist to explore the possibility of using heavy metal/precious metal with ceramic composite. You heard about this kind of material in your previous job while dealing with the Japanese Satellite Agency. The chief dentist was not very happy but promised to explore the possibility. You want to get into this material because there are commodity futures available on heavy/precious metals, while there is no way to cover ‘special grade cement’.

With this information on hand, you want to approach the Ministry of Public Health and Social Welfare and the Ministry of Tourism and Hospitality with a request to absorb price variation due to strengthening dollar. You have also approached RBI to grant permission to trade in futures in all the currencies in the world, but there are problems.

Question:

How will you guide your CEO in this situation?

 

CASE VI

Here are the ‘excerpts’ from a closed room discussion heads of purchase, marketing, production and the treasurer of Advanced Tectonic Devices. [The dialogues given below might appear to be unduly contrived to an expert. This was necessary for attaining clarity for our purpose and maintaining the printability of the statements; impolite usages are deliberately expunged.]

Head Marketing: See, after a long drawn effort, spread over six months, my boys and girls have managed to get this big #$%^*@ order totaling equivalent of USD 1.5 million. I had to @#$%^*& the happiness of all my staff to get this deal going. Despite an international competitive bidding we have got this order for the supply of high precision devices to the European Space Agency for the launch of a Japanese communication satellite. This supply agreement is likely to be signed in anytime over next two weeks. The exact rupee equivalent of this order will be known when the price is frozen, on the date of signing of contract.

Head Production: Thanks to all your efforts and advance planning, we are in a position to meet all deadlines, without an iota of problem. My only concern is about the raw material supply linkage. Give me material today and I will deliver the component without any problem in a matter of ten days. Add a cushion of two more days, if some rework in required due to material flaw. [Ends this sentence with a deprecating chuckle, obviously directed towards the head of purchase.]

Head Purchase: (He turns to Head Treasury) You production persons, when will you learn to behave. See, just before coming to this meeting I called the raw material supplier with our dates and quantity. He told me that material for entire order can’t be purchased in one lot due to international trade restrictions. This grade of alloy steel is on the international watch list due to possible use in nuclear weapons. Therefore, only a part of total material requirement can be bought at a time. As soon as one lot is consumed in production, we will need to issue a certificate to this effect, and then only the next lot of high alloy steel can be purchased. He turns to head treasury, See, the payment is to be made every fortnight for raw material (high alloy steel billets) over next six months, in equal installments of USD 100,000 each. Without fail! Any trouble on that front will jeopardize the entire supply sequence.

Head Marketing: As per the terms of contract, the buyer will be able to pay 50% of the contracted amount once the payload in fitted on the launch rocket in EUR (that is equivalent of USD 750,000) and the remaining 50% (that is equivalent of USD 750,000) immediately after launch of the satellite in JPY.

Head Treasury: [Definitely not amused] What is this @#$%& contract you have drawn. At least you *&%^$# should consult me before getting into any such commitments. Our chief economist is not comfortable with the world economy outlook. In her opinion, Japan appears to be heading towards yet another cycle of recession. EUR is likely to strengthen against JPY and USD over next six months. As far as INR is concerned, not much variation is expected over next months. And you expect me to do a profitable deal under the circumstances!! [Leaves the meeting room abruptly, door slams behind him, and some muffled shouts are heard]

Well, as you would have guessed it by now, you are the treasurer who feels slighted due to the process adopted by marketing, purchase, and production heads.

Question:

What are the choices available with you to meet these cashflow requirements? Analyze each possibility in detail and argue for and against each of them.

 

CASE VII

The first part of payment was received as planned. All are happy. The second part is due. The rocket is successfully launched but there is a problem. Since the time the communication satellite has been deployed, there has been a continuous decline in the bandwidth and transponder hire charges. Your counter party wants to renegotiate the terms of payment.

Question:

What will you do? How you will protect your interest in this situation?

 

Questions:

1. A young financial analyst in Canadian firm has been assigned the task of evaluating a direct investment project in Mexico. She has worked out the operating cash flows of the project for the next 7 years For finding the NPV of the project she proposes the following four alternatives:

(a) Discount the nominal MEP (Mexican Peso) cash flows using the Mexican nominal interest rate used for similar projects and translate into CAD using the current MEP/CAD spot rate.

(b) Discount the real i.e. inflation adjusted MEP cash flows using the Mexican real interest rate and translate at the current spot rate.

(c) Forecast the MEP/CAD exchange rate for the next 7 years using PPP; translate nominal MEP cashflows into nominal CAD cash flows; discount using nominal CAD interest rate used for similar projects.

(d) Adjust the nominal CAD cash flows for Canadian inflation and discount using real Canadian interest rate.

Her boss says that if relative PPP and covered interest parity hold, the above alternatives would yield identical answers. Is he right? If not, can you correct him? Justify your answers with appropriate and sufficiently detailed arguments.

2. Consider a firm with a healthy cash flow but very low profits—because, for example, of high depreciation allowances. Your boss argues that such a firm should probably borrow in a strong (low-interest) currency, because the high-tax shield from weak-currency loans is more likely to be lost than the low tax shield from strong-currency loans. Is this analysis accurate?

International Business

06 Jul

1. Trace the evolution of international business.

2. What is the contribution of MNCs towards the development of developing countries?

3. Explain the following theories of FDI:

(i) Product Life Cycle.

(ii) Market Imperfections.

4. What is new economic policy? Why was it needed?

5. Define the term `international business’. Compare and contrast international business with domestic business.

6. What is an MNC? What are its salient features?

7. Describe, in brief, all the components of economic environment?

8. What are the limitations of social responsibility?

9. Define international financial management. Bring out its scope.

10. What is international financial management? How does it compare and contrast with domestic financial management?

International Business

06 Jul

CASE: I    UNFAIR PROTECTION OR VALID DEFENSE?

Mexico Widens Anti-dumping Measure…Steel at the Core of US-Japan Trade Tensions…Competitors in Other Countries Are Destroying an American Success Story…It Must Be Stopped”, scream headlines around the world.

International trade theories argue that nations should open their doors to trade. Conventional free trade wisdom says that by trading with others, a country can offer its citizens greater volume and selection of goods at cheaper prices than it could in the absence of it. Nevertheless, truly free trade still does not exist because national governments intervene. Despite the efforts of the World Trade Organisation (WTO) and smaller group of nations, governments seem to be crying foul in the trade game now more than ever before.

We see efforts at protectionism in the rising trend in governments charging foreign producers for “dumping” their goods on world markets. Worldwide, the number of antidumping cases that were initiated stood at about 150 in 1995, 225 in 1996, 230 in 1997, and 300 in 1998.

There is no shortage of similar examples. The United States charges Brazil, Japan, and Russia with dumping their products in the US market as way out of tough economic times. The US steel industry wants the government to slap a 200 per cent tariff on certain types of steel. But car makers in the United States are not complaining, and General Motors even spoke out against the antidumping charge—as it is enjoying the benefits of low-cost steel for use in its auto production. Canadian steel makers followed the lead of the United Sates are pushing for antidumping actions against the four nations.

Emerging markets, too are jumping into the fray. Mexico recently expanded coverage of its Automatic Import Advice System. The system requires importers (from a select list of countries) to notify Mexican officials of the amount and price o a shipment ten days prior to its expected arrival in Mexico. The ten-day notice gives domestic producers advance warning of incoming low-priced products so they can complain of dumping before the products clear customs and enter the marketplace. India is also getting onboard by setting up a new government agency to handle antidumping cases. Even Argentina, China, Indonesia, South Africa, South Korea, and Thailand are using this recently-popularised tool of protectionism.

Why is dumping on the rise in the first place? The WTO has made major inroads on the use of tariffs, slashing them across almost every product category in recent years. But the WTO does not have the authority to punish companies, but only governments. Thus, the WTO cannot pass judgments against the individual companies that are dumping products in other markets. It can only pass rulings against the government of the country that impose an antidumping duty. But the WTO allows countries to retaliate against nations whose producers are suspected of dumping when it can be shown that: (1) the alleged offenders are significantly hurting domestic producers, and (2) the export price is lower than the cost of production or lower than the home-market price.

Supporters of antidumping tariffs claim that they prevent dumpers from undercutting the prices charged by producers in a target market and driving them out of business. Another claim in support of antidumping is that it is an excellent way of retaining some protection against potential dangers of totally free trade. Detractors of antidumping tariffs charge that once such tariffs are imposed they are rarely removed. They also claim that it costs companies and governments a great deal of time and money to file and argue  their cases. It is also argued that the fear of being charged with dumping causes international competitors to keep their prices higher in a target market than would other wise be the case. This would allow domestic companies to charge higher prices and not lost marketshare—forcing consumers to pay more for their goods.

Questions

1. “You can’t tell consumers that the low price they are paying for a particular fax machine or automobile is somehow unfair. They’re not concerned with the profits of companies. To them, it’s just a great bargain and they want it to continue.” Do you agree with this statement? Do you think that people from different cultures would respond differently to this statement? Explain your answers.

2. As we’ve seen, the WTO cannot currently get involved in punishing individual companies for dumping—its actions can only be directed towards governments of countries. Do you think this is a wise policy? Why or why not? Why do you think the WTO was not given the authority to charge individual companies with dumping? Explain.

3. Identify a recent antidumping case that was brought before the WTO. Locate as many articles in the press as you can that discuss the case. Identify the nations, product(s), and potential punitive measures involved. Supposing you were part of the WTO’s Dispute Settlement Body, would you vote in favour of the measures taken by the retailing nation? Why or why not?

 

CASE: II   WAITING IN NEW DELHI

Richard was a 30-year-old American, sent by his Chicago-based company to set up a buying office in India. The new office’s main mission was to source large quantities of consumer goods in India: cotton piecegoods, garments, accessories and shoes, as well as industrial products such as tent fabrics and cast iron components.

India’s Ministry of Foreign Trade (MFT) had invited Richard’s company to open this buying office because they knew it would promote exports, bring in badly-needed foreign exchange and provide manufacturing knowhow to Indian factories.

Richard’s was, in fact, the first international sourcing office to be located anywhere in South Asia. The MFT wanted it to succeed so that other Western and Japanese companies could be persuaded to establish similar procurement offices.

The expatriate manager decided to set up the office in the capital, New Delhi, because he knew he would have to frequently meet senior government officials. Since the Indian government closely regulated all trade and industry, Richard often found it necessary to help his suppliers obtain import licenses for the semi-manufactures and components required to produce the finished goods his company had ordered.

Richard found these government meetings frustrating. Even though he always phoned to make firm appointments, the bureaucrats usually kept him waiting for half an hour or more. Not only that, his meetings would be continuously interrupted by phone calls and unannounced visitors as well as by clerks bringing in stacks of letters and documents to be signed. Because of all the waiting and the constant interruptions, it regularly took him half a day or more to accomplish something that could have been done back home in 20 minutes.

Three months into this assignments, Richard began to think about requesting a transfer to a more congenial part of the world. ‘somewhere where things work’. He just could not understand why the Indian officials were being so rude. Why did they keep him waiting? Why didn’t the bureaucrats hold their incoming calls and sign those papers after the meeting, so as to avoid the constant interruptions?

After all, the government of India had actually invited his company to open this buying office. So didn’t he have the right to expect reasonably courteous treatment from the officials in the various ministries and agencies he had to deal with?
Questions

1. Why did Richard not able to jell with local conditions?

2. If you were Richard, what would you do?

 

CASE: III   THE P&G FIASCO

The break-up of the joint venture between the American FMCG (Fast Moving Consumer Goods) giant, Procter and Gamble (P&G) and the leading Indian business group, Godrej in 1996 is a case that goes down in the history of corporate India as an event  few would like to forget. It was a shortlived marriage. The year was 1992 and the two firms announced the formation of a strategic alliance that seemed to hold great promise for both companies. As part of the deal, the two companies set up a marketing joint venture, P&G- Godrej (PGG) in which P&G held a 51 per cent stake and Godrej the remaining 49 per cent. David Thomas, P&G’s country manager was appointed the CEO while Adi Godrej, the head of the Indian company became the chairman.

To begin with everything looked bright and promising for the alliance. Both the partners were well-known names in the consumer goods industry.

Modalities were worked out very well. P&G paid Godrej nearly Rs 50 crore to acquire its detergent brands—Trilo, Key, and Ezee. P&G, on its part, gave a commitment that it would utilize Godrej’s soap making capacity of 80,000 tpa. Godrej was allowed to complete its existing manufacturing contracts for two other MNCs, Johnson and Johnson and Reckitt and Coleman, but could not take up any new contracts. P&G, on its part, would not appoint any other supplier until Godrej’s soap making capacity had been fully utilised. Godrej transferred 400 of its salespeople to the joint venture. P&G acted quite fast in finalizing the alliance lest arch rival Hindustan Lever would move in, if it did not.

P&G gained access to the manufacturing facility of Godrej. It would have taken a couple of years to set up to implement a project on its own. Godrej also had expertise in vegetable oil technology for making soaps. Vegetable oils like palm oil and rice bran oil can only be used in India for making soaps as beef tallow is banned. Godrej also had network of retail outlets which were thrown open for P&G. Even though P&G was not a stranger to India, its Indian operations were essentially those of the erstwhile Richardson Hindustan, which was mainly known for the famous Vicks, a pharmaceutical product. The non-pharma distribution network of Godrej was of immense benefit to P&G. Godrej had excess manufacturing capacity, which proved to be a burden and the company was struggling to find ways of utilizing the excess facility. Godrej also hoped to access superior technology and managerial skills of P&G.

The alliance became operational in April 1993. Around this time, P&G increased its stake in its Indian subsidiary P&G (India) from 51 per cent to 65 per cent, while Godrej, having functioned for several years as a private limited company, went public. As soon as the alliance became operational, P&G engineers introduced  new systems such as Good Manufacturing Practices and Materials Resource Planning in Godrej plants. The two companies seemed to show a considerable amount of sensitivity to the cultural differences between them. For about a year, it looked as though things were going fine. Thereafter, elements of distrust began to surface and the two firms found the differences in management styles too significant to be brushed aside. By December 1994, rumours were rife that P&G and Godrej did not see eye to eye on many key issues.

One reason why the relationship soured was that the performance did not match expectations. In 1992, Godrej had sold 29,000 tonnes of soap. This increased to 46,000 in 1994 but fell sharply to 38,000 tonnes in 1995. While sales did not rise as expected, costs were increasing. Due to the cost plus agreement, Godrej had little incentive to cut costs. Informed sources were of the opinion that Godrej was charging Rs 10,000 more per tonne than the expected processing costs.

To compound the problem, Godrej expressed its dissatisfaction on the ground that P&G did not promote brands like Trilo and Key. It was also unhappy with P&G’s methodical and analytical approach as opposed to its own intuitive method of launching brands at great speed. P&G, on its part, felt that there was little logic or coordination in Godrej’s brand building exercises. By mid-1994, differences became sharp between the partners, and a senior executive, HK Press, on deputation to the joint venture, was quietly eased out and sent back to the Godrej group company.

The year 1996, as stated earlier, saw the termination of the alliance. The two companies would have little to do with each other, except for Godrej continuing to make Camay for  P&G for two more years and providing office space to P&G at its Vikhroli complex. PGG would be taken over by P&G, which would also retain the detergent brands, Trilo, Key, and Ezee. Most of PGG’s 550 people and the distribution network consisting of some 3000 stockists would stay with P&G. Godrej would absorb about 100 salespeople and get back its seven soap brands, which had been leased to PGG.

Questions

1. What according to you, are the factors that favoured the alliance between P&G and Godrej?

2. What went wrong with the joint venture? Why did it break up within four years of its formation?

3. What signal s does this joint venture fiasco send to other foreign investors?

 

CASE: IV    CHINESE EVOLVING ACCOUNTING SYSTEM

Attracted by its rapid transformation from a socialist planned economy into a market economy, economic annual growth rate of around 12 per cent, and a population in excess of 1.2 billion, Western firms over the past 10 years favoured China as a site for foreign direct investment. Most see China as an emerging economic superpower, with an economy that will be as large as that of Japan by 2000 and that of the US  before 2010, if current growth projections hold true.

The Chinese government sees foreign direct investment as a primary engine of China’s economic growth. To encourage such investment, the government has offered generous tax incentives to foreign firms that invest in China, either on their own or in a joint venture with a local enterprise. These tax incentives include a two-year exemption from corporate income tax following an investment, plus a further three years during which taxes are paid at only 50 per cent of the standard tax rate. Such incentives when coupled with the promise of China’s vast internal market have made the country a prime site for investment by Western firms. However, once established in China, many Western firms find themselves struggling to comply with the complex and often obtuse nature of China’s rapidly evolving accounting system.

Accounting in China has traditionally been rooted in information gathering and compliance reporting designed to measure the government’s production and tax goals. The Chinese system was based on the old Soviet system, which had little to do with profit  or accounting systems created to report financial positions or the results of foreign operations.

Although the system is changing rapidly, many problems associated with the old system still remain.

One problem for investors is a severe shortage of accountants, financial managers, and auditors in China, especially those experienced with market economy transactions and international accounting practices. As of 1995, there were only 25,000 accountants in China, far short of the hundreds of thousands that will be needed if China continues on its path towards becoming a market economy. Chinese enterprises, including equity and cooperative joint ventures with foreign firms, must be audited by Chinese accounting firms, which are regulated by the state. Traditionally, many experienced auditors have audited only state-owned enterprises, working through the local province or city authorities and the state audit bureau to report to the government entity overseeing the audited firm. In response t the shortage of accountants schooled in the principles of private-sector accounting, several large international auditing firms have established joint ventures with emerging Chinese accounting and auditing firms to bridge the growing need for international accounting, tax, and securities expertise.

A further problem concerns the somewhat halting evolution of China’s emerging accounting standards. Current thinking is that China won’t simply adopt the international accounting standards specified by the IASC, nor will it use the generally accepted accounting principles of any particular country as its model. Rather, accounting standards in China are expected to evolve in a rather piecemeal fashion, with the Chinese adopting a few standards as they are studied and deemed appropriate for Chinese circumstances.

In the meantime, current Chinese accounting principles, present difficult problems for Western firms. For example, the former Chinese accounting system didn’t need to accrue unrealized losses. In an economy where shortages were the norm, of a state-owned company didn’t sell its inventory right away, it could store it and use it for some other purpose later. Similarly, accounting principles assumed the state always paid its debts—eventually. Thus, Chinese enterprises don’t generally provide for lower-of-cost or market inventory adjustments or the creation of allowance for bad debts, both of which are standard practices in the west.

Questions

1. What factors have shaped the accounting system currently in use in China?

2. What problems does the accounting system, currently in use in China, present to foreign investors in joint ventures with Chinese companies?

3. If the evolving Chinese system does not adhere to IASC standards, but instead to standards that the Chinese governments deem appropriate to China’s “special situation”, how might this affect foreign firms with operations in China?

 

CASE: V THE JUGGERNAUT ROLLS ON – BUT THE ROAD AHEAD IS HUMPY AND BUMPY

It al started with the takeover of Tetly in 2000.Then became Daewoo Commercial Vehicles (2004); Tyco Global (2004); Natsteel (2005); Teleglobe (2005); Brunner Mond (2006); Millienniums Steel (2006); Eight O’Clock (2006); Ritz Carlton (2006); Corus (2007); PT Bumi Resources with 30 per cent stake (2007); and General Chem Partners (2008). The latest in the acquisition spree is the takeover of Jaguar and Land Rover (March 2008). The stake involved in all these buyouts is a whopping Rs. 81,527 crore.

It is a moment of glory which any Indian should be proud of—particularly because of the timing of the Jaguar and Land Rover deal. Compared to the Corus deal, which carried a price tag of Rs. 53,850 crore, the buyout of the two brands, with Rs. 9223 crore, is miniscule. But what makes it breath taking? First, the deal has been struck when the world economy is dipping and companies everywhere are facing falling fortunes. Viewed against this background, Tata deal demonstrates how resilient and vibrant Indian companies are. Second, the brands acquired are no mean “also rans”. Jaguar and Land Rover are world’s top class brands with a long history. Land Rover was born in 1880s and Jaguar in 1930s. Third, the acquisition of the two brands marks a paradigm shift of the balance of power in financial and technological arenas. The power is shifting form West to East. Finally, from now onwards, Tata’s name (read India) will be seen and heard on the premier markets of Europe and Americas.

Sentiments apart, challenges before Tata’s are going to be hard nuts. Tata Motors, the flagship company of Tatas which deemed to have acquired Jaguar and Land Rover, has no experience in managing luxury brands. The Indian car maker is well-known for offering rugged cheap cars, buses, and trucks suiting to Indian buyers and Indian roads. Its costliest passenger vehicle, the Safari Dicor, is about Rs. 1 lakh cheaper than the least expensive Land Rover. Will Tata Motors be able to sustain the quality of the two brands?

The Indian market for luxury cars is growing but is still small. The cheapest luxury cars available in India, such as Honda Siel Cars India Ltd’s Accord, cost around Rs. 15.5 lakh. It is believed that some 5000 luxury cars are sold in India every year. True some Indians do own and use high-end foreign brands, such as BMW, Mercedes-Benz, Audi, and Lxus, but their numbers are still in thousands, a fraction of the 1.4 million cars sold each year in the country’s exploding automobile market. Nor the markets in Europe and America are promising because of the recession in their economies.

The not so profitable brands (Jaguar has been making losses) and commitments made to British labour unions in a slowing economy could compound problems for Tata Motors. Trade unions, representing the 16,000—strong Ford workforce in UK, have in a way paved the way for Tata takeover. It is these unions that, in principle, picked up Tatas as their “preferential choice” as the bidder. The Tatas have now assured job and better working conditions to the British workforce. Going by the domestic track record of Tatas, the British workers feel reassured about their future under the Indian management.

Ford has agreed to use its finance arm to help its dealers and Tatas sell their cars for another 12 months. It will also supply engines, transfer some intellectual property and offer engineering support, Inspite of this, Tata might be required t pump in more money to develop new and improved products as the EU gets tougher about controlling pollution, especially from cars made and driven in Europe.

Also, refinancing debt is likely to pose a big challenge to Tata Motors. The company may find it difficult to raise long-term debt in the current environment. While Tatas managed to get a bridge loan of $3 billion for a period of 12 months, it may have trouble raising debt to repay that loan as lendors have grown jittery over extending credit.

Thus, the road ahead of Tata Motors is humpy and bumpy.

But going by the clout enjoyed by Tata Motors, the challenges may not be insurmountable. Tata Motors is a $5.5 billion company and is the leader in commercial vehicles in each segment, and the second largest in the passenger vehicles market with winning products in the compact, midsize car and utility vehicle segments. The company is the world’s fifth largest medium and heavy commercial vehicle manufacturer.

The company’s 22,000 employees are guided by the vision to the “best in the manner in which we operate, best in the products we deliver and best in our value system and ethics.”

Established in 1945, Tata Motors’ presence indeed cuts across the length and breadth of India. Close to four million Tata vehicles ply on Indian roads, since the first vehicle rolled out in 1954. The company’s manufacturing base is spread across Jamshedpur, Pune and Lucknow, supported by a nation-wide dealership, sales, services and spare parts network comprising over 2,000 touch points.

The foundation of the company’s growth over the last 50 years is a deep understanding of economic stimuli and customer needs, and the ability to translate them into customer-desired offerings through leading edge R&D. With 1,400 engineers and scientists, the company’s Engineering Research Centre, established in 1956, has enabled pioneering technologies and products. The company today has R&D centres in Pune, Jamshedpur, Lucknow, in India, and in South Korea, Spain, and the UK.

With the announcement of the launch of one lakh rupee car Nano, Tata Motors has gained the attention of people around the world.

Questions

1. Do you think the challenges listed above are genuine? If yes, how do you think the Tatas will face them?

2. With the widest range of cars (from the cheapest to the costliest) under its belt, how do you think Tata Motors will manage and sustain?