SUBJECT: Managerial Economics 100The Indian Institute of Business Management & Studies Marks: CASE – 1 Dabur India Limited: Growing Big and Global Questions 1. What is the objective of Dabur? Is it profit maximisation or growth maximisation? Discuss. Answer : The objective is to “significantly accelerate profitable growth by providing comfort to others”. It is growth maximization because 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. 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. Answer: While opting company form of business, the entrepreneur should clearly gone through the distinction between company with partnership form of business. The next step arises a regard to why to go for company form of business. [ The following points depicts the advantageous points of this form of business. Advantages of Joint Stock Company: (1) Huge resources: A company can raise large amount of resources from the genera public by issuing shares. Since, there is no maximum limit of the number of shareholders ii case of public company, fresh shares can be issued to meet the financial requirement. Capita can also be obtained by issuing debentures and accepting public deposits. (2) Limited liability: The liability of the shareholders is limited to the extent of the face value of the shares held by them or guarantee given by them. The shareholders are not liable personally for the payment of debt of the company. Thus, limited liability encourages the investors to put their money in the shares of the company. (3) Transferability of shares: The shares of the public company are transferable without any restriction. A shareholder can sell his shares at any time to anybody in the stock exchange Therefore, the conservative and cautious investors are also attracted to invest in the shares of public company. This brings liquidity to the investors. (4) Stability of existence: A joint 1 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: stock company enjoys perpetual succession. It continues for a long period of time because it is unaffected by the death, insolvency of the shareholders directors. Change of ownership and management also does not affect the continuity of the business. (5) Efficient management: A company can hire the services of professional manager for its functional areas because of its financial strength. The directors who look after the management of the company are generally experienced and persons of business acumen Therefore, the management of a company is sure to be efficient. (6) Scope for expansion: A company can generate huge financial resources by issuing shares and debentures to finance new projects. Companies also transfer a portion of their profit to reserve which can be utilised for future expansion. ] 2 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: CASE – 2 IT Industry: Checkered Growth 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. Answer : The Indian IT industry has been the great success story of India's liberalisation. Starting with an export of around $100 million and 5000 employees at the beginning of the 1990s, it has grown to exports of $70 billion and 2.8 million employees today, and a globally dominating industry too. It has transformed India, created pride in being Indian and given the much needed respect to our passport globally. Including business in India, the industry has crossed $100 billion in revenues with over 3.5 million employees, amongst the top 2 industries in India today. After such a fantastic run the industry is facing new challenges, raising questions about its future. For us to understand the current state of the industry and its challenges it is important to understand its various phases of growth so far. The industry has gone through two distinct phases and is entering the third phase of growth. It has succeeded in overcoming many challenges along the way and has created five of the top 10 global leaders in software services. The 90s were the decade of unprecedented growth. Spending on IT in the US grew from 3% of GDP in the early 1980s to 9% by 2000, creating great value and demand and an acute shortage of talent. India became the country of choice, pioneering the offshore delivery model, revolutionising service delivery. The Y2K phenomenon further accelerated growth. This was the opportunistic growth phase topped by the Internet boom. Capital poured into Silicon Valley and analysts predicted the start of a new era of point and click, predicting the death of the bricks and mortar business model. The boom ended with the Nasdaq collapse in 2002 but by then Indian IT had grown in scale and sophistication with some great companies. They were experts in delivering projects on time and within budget. The market grew rapidly and Indian IT grew much faster. The second phase of growth started with focus on Main Street after the bust, tackling the challenges of technology complexity. Indian IT became leaders in quality, dominating the application development and maintenance space (ADM). Starting as bottom feeders, tackling small projects in the early 1990s, they now started handling projects in the million dollar range and reduced the complexity of software maintenance, which existed across many generations of technology, from the mainframe to distributed computing , to the web. They added services like 3 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: testing, infrastructure management services, enterprise application etc to their services profile. By the time the financial crisis hit Wall Street in 2008, they were world leaders in these services. However, because of their domination, pricing power almost disappeared as most of them had the best quality standards, great service delivery and very less differentiation. Amongst the top companies, there was a slow divergence of strategy, with a few focusing on the premium end of business and the greater number on the ADM piece. Off shoring created new engines of growth despite the overall market growing more slowly, with focus on cost saving, high quality delivery, service excellence and vendor consolidation. Indian IT grew rapidly and became the dominant player globally, with India having the second largest concentration of IT talent in the world. The financial crisis led to a slowdown, as the financial services industry was the largest spender on IT and the bubble economy of the last decade had enhanced spending on IT. With the financial crisis subsiding in the US, Europe facing the Euro crisis and the emerging markets becoming the dominant engine of economic growth globally, the Indian IT industry is entering the third phase of growth. This phase is going to be painful as growth will only emerge by getting market share rather than a larger share of a growing market. 4 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: 2. Study the table given. Apply trend projection method on the figures and comment on the trend. Answer : 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) is continuously increasing. 3. Compute a 3 year moving average forecast for the years 1997-98 through 2003-04. Answer : Year A* 3 years B* moving average 3 years movin g avera ge C* 3 years movin g avera ge D* 3 years movin g avera ge E* 3 years movin g avera ge 199697 199798 199899 199900 200001 200102 200203 3,900 1.22 1.45 1.87 2.71 2.87 3.09 1.335 1.513333 33 2.01 2.483333 33 2.89 2.98 18,64 1 25,30 7 36,17 9 56,59 2 65,78 8 76,48 2 6,530 21,97 4 26,70 9 39,35 9 52,85 3 66,28 7 71,13 5 10,94 0 17,15 0 28,35 0 36,50 0 46,10 0 7,123 11,54 0 18,81 3 27,33 3 36,98 3 41,30 0 6,594 10,89 9 16,87 9 23,98 0 37,35 0 47,53 2 59,47 2 9,438 12,05 5 14,22 7 18,83 7 28,33 0 29,18 1 30,38 2 11,45 7 17,25 3 26,07 0 36,28 7 48,11 8 53,50 2 11,90 7 15,04 0 20,46 5 25,44 9 29,29 8 29,78 2 5 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: CASE – 3 Outsourcing to India: Way to Fast Track 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? Answer : Outsourcing human resources or some of its processes to an external provider is a major business decision as, while it may be cost-effective, it introduces new elements of risk, including: • • • • • • Loss of control Impact on the employer/employee relationship Loss of flexibility Failure to deliver cost benefits Legal or regulatory requirements Industrial relations issues The operation of any HR outsourcing arrangement should be governed by a service level agreement. This will define the required standards of performance by both parties and any penalties for non-compliance. A service level agreement is a crucial document and must be negotiated with great care to mitigate the above risks. People management plays a crucial role in delivering organisational performance. In today's 6 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: modern, knowledge economy this is more true than ever before. The decision to outsource human resources is therefore not to be taken lightly. There are many circumstances in which outsourcing HR services can deliver tangible benefits to the organisation, for example by freeing HR professionals to devote more time to a strategic role supporting organisational performance. 2. Elaborate the external and internal economies of scale as occurring to Contract Counsel. Answer : Alfred Marshall made a distinction between internal and external economies of scale. When a company reduces costs and increases production, internal economies of scale have been achieved. External economies of scale occur outside of a firm, within an industry. Thus, when an industry's scope of operations expands due to, for example, the creation of a better transportation network, resulting in a subsequent decrease in cost for a company working within that industry, external economies of scale are said to have been achieved. With external ES, all firms within the industry will benefit. In addition to specialization and the division of labor, within any company there are various inputs that may result in the production of a good and/or service. • Lower input costs: When a company buys inputs in bulk - for example, potatoes used to make French fries at a fast food chain - it can take advantage of volume discounts. (In turn, the farmer who sold the potatoes could also be achieving ES if the farm has lowered its average input costs through, for example, buying fertilizer in bulk at a volume discount.) Costly inputs: Some inputs, such as research and development, advertising, managerial expertise and skilled labor are expensive, but because of the possibility of increased efficiency with such inputs, they can lead to a decrease in the average cost of production and selling. If a company is able to spread the cost of such inputs over an increase in its production units, ES can be realized. Thus, if the fast food chain chooses to spend more money on technology to eventually increase efficiency by lowering the average cost of hamburger assembly, it would also have to increase the number of hamburgers it produces a year in order to cover the increased technology expenditure. Specialized inputs: As the scale of production of a company increases, a company can employ the use of specialized labor and machinery resulting in greater efficiency. This is because workers would be better qualified for a specific job - for example, someone who only makes French fries - and would no longer be spending extra time learning to do work • • 7 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: • • not within their specialization (making hamburgers or taking a customer's order). Machinery, such as a dedicated French fry maker, would also have a longer life as it would not have to be over and/or improperly used. Techniques and Organizational inputs: With a larger scale of production, a company may also apply better organizational skills to its resources, such as a clear-cut chain of command, while improving its techniques for production and distribution. Thus, behind the counter employees at the fast food chain may be organized according to those taking inhouse orders and those dedicated to drive-thru customers. Learning inputs: Similar to improved organization and technique, with time, the learning processes related to production, selling and distribution can result in improved efficiency practice makes perfect! 3. Can you see some possibility of economies of scope from the information given in the case? Discuss. Answer : Yes, I can see possibility of economies of scope from the information given in the case . Economies of scope are cost advantages that result when firms provide a variety of products rather than specializing in the production or delivery of a single product or service. Economies of scope also exist if a firm can produce a given level of output of each product line more cheaply than a combination of separate firms, each producing a single product at the given output level. Economies of scope can arise from the sharing or joint utilization of inputs and lead to reductions in unit costs. Scope economies are frequently documented in the business literature and have been found to exist in countries, electronic-based B2B (businessto-business) providers, home healthcare, banking, publishing, distribution, and telecommunications. CASE – 4 Indian Stock Market: Does it Explain Perfect Competition? Questions 8 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: 1. Is stock market a good example of perfect competition? Discuss. Answer: It is not a level playing field. Just a few problems: People manipulate stock prices (especially low priced ones) by hyping them up or artificially inflating them while they take the other side (i.e. short the stock). Insider trading. [ Some people get the scoop on a stock and trade it before the general public gets the news. Front trading. A broker or specialist will see a big order coming in to either buy or sell. They then buy or sell from their account before executing the big order thus gaining profit that other people don't have a chance to get. 2. Identify the characteristics of perfect competition in the stock market setting. Answer : Large number of rational profit maximizes 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 & reflects the effect of events that have already occurred & are expected to occur. In the short run it is not easy for a market player to either exit or enter, one cannot exit or enter for few days in those stocks which are under no delivery. 3. Can you find some basic aspect of perfect competition which is essentially absent in stock market? Answer : Four characteristics or conditions must be present for a perfectly competitive market structure to exist. First, there must be many firms in the market, none of which is large in terms of its sales. [ Second, firms should be able to enter and exit the market easily. Third, each firm in the market produces and sells a nondifferentiated or homogeneous product. Fourth, all firms and consumers in the market have complete information about prices, product quality, and production techniques. 9 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: CASE – 5 The Indian Audio Market Questions 1. What major pricing strategies have been discussed in the case? How effective these strategies have been in ensuring success of the company? Answer : Major pricing strategies discussed in the case : Customer-based pricing Penetration pricing Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price. Price skimming Skimming involves setting a high price before other competitors come into the market . This is often used for the launch of a new product which faces little or no competition – usually due to some technological features. Such products are often bought by “early adopters” who are prepared to pay a higher price to have the latest or best product in the market. Good examples of price skimming include innovative electronic products, such as the Apple iPad and Sony PlayStation 3. 10 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: Loss leaders The use of loss leaders is a method of sales promotion. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop. But does this strategy work? Predatory pricing (note: this is illegal) With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing is illegal under competition law. Psychological pricing The aim of psychological pricing is to make the customer believe the product is cheaper than it really is. Pricing in this way is intended to attract customers who are looking for “value”. 2. Is perceived value pricing the dominant strategy of major players? Answer: Yes , perceived value pricing is the dominant strategy of major players. Perceived Value One way to increase prices without damaging customer relationships is by adding to the perceived value of your product or service. Perceived value is the value a customer assigns your product based on what he believes he is getting out of it. This perception is a combination of tangible and intangible factors. For example, an executive going to the airport can choose a taxicab or a town car service. Both will get her to the same place and will take the same amount of time, but the average airport trip fee is about $25 more for a town car versus a taxi. Part of that is based on the higher cost of purchasing and maintaining the vehicle, but most of it comes from the service's perceived value. Here are some examples of how to market based on perceived values: 11 SUBJECT: Managerial Economics 100 The Indian Institute of Business Management & Studies Marks: Tangible Benefits • • You are always on time: provide a money-back guarantee if you are late. You have the most comprehensive program: provide a chart showing how the features of your service or product stack up against your competitors'. Intangible Benefits • • You help your customers look good at work: publish testimonials of customers saying how much their boss appreciated them based on the service you provided. You make your customers feel rich/successful/beautiful: display images of the people your customers want to emulate using your product or service. 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? Answer : CD has reached at maturity stage. The third stage of industry life cycle is the maturity. In the maturity stage, efficiencies of the dominant business model render these organizations a competitive advantage over the very competition. The competition within the industry is growing rather aggressive because of many competitors and substitute products in the field. All these factors price, competition, and cooperation are taking on complex form. In fact, some companies are shifting some of its production overseas to obtain competitive advantage. When effective, a product bundling strategy can significantly increase profits on individual sales and over time. Product bundling in banking can increase profits by 15 to 30 percent, according to consulting firm Collabera. Selling multiple products or components in one solution means a greater initial return on the costs of acquiring a customer. Some companies use bundling as a way to package less popular products with hot selling items, although this reasoning is sometimes criticized. Customers often prefer to achieve a cluster of satisfactions through one purchase. People buy products to solve problems or address needs. If a customer has multiple needs and your product bundle addresses most or all of them, this is convenient for the customer. He can make one stop instead of multiple stops. Additionally, customers often experience economies of scale when buying a bundle of products. If they have a need for the individual components in the bundle, they typically understand that the total price is lower when the products are purchased as a bundle. 12