IIBMS Case Study Solution Archives - Page 4 of 9

Marketing Management

Case Study-I

“Waiting in New Delhi

“Richard was a 30 year-old American manager sent by his Chicago-based company to set up a representative office in India. This new office’s main mission was to source consumer products such as cotton piece goods, garments, accessories and shoes as well as certain industrial goods, e.g. tent fabrics and cast iron components.

“India’s Ministry of Foreign Trade had invited his company to pen this office because they knew it would promote exports, brig in badly-needed foreign exchange and provide manufacturing knowhow to Indian factories. This was in fact the first international sourcing office to be located anywhere in South Asia, and the MFT very much wanted it to succeed so that other Western and Japanese companies could be persuaded to establish similar procurement offices.

“Richard decided to set up the office in New Delhi because he knew that he would have to meet very frequently with senior government officials. Since the Indian government closely regulates all trade and industry, Richard often found it necessary to help his suppliers obtain import licenses for the semi-manufactures and components they required to produce finished goods for his company.

“Richard found the government meetings very frustrating. Although he always phoned to make appointments, the bureaucrats almost always kept him waiting for half an hour or more. Not only that, his meetings would be continuously interrupted by phone calls, unannounced visitors and assistants bringing in stacks of letters and documents to be signed. Because of he waiting and the constant interruptions, it regularly took half a day or more to accomplish something that could have been done back home in 20 minutes or less.
“Three months into this assignment, 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 officials here were being so rude. Why did they keep him waiting? Why didn’t they hold incoming calls and sign 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 office. So didn’t he have the right to expect reasonably courteous treatment from the bureaucrats in the various ministries and agencies he had to deal with (Richard R. Gesteland)?”
What Richard does not realize, Mr. Gesteland explained, is that the Indian way of doing business is vastly different from the American way of doing business. What is acceptable in some cultures, may not be considered acceptable or the standard in others. In India, being a half hour or more late is not unusual and is not considered rude. India has what Mr. Gesteland calls fluid time, in which no times are firmly set. Additionally, it is acceptable to take telephone calls during meetings. It is also considered acceptable to sign papers and have unexpected visitors. Although this may seem to an American to be backwards, a waste of time, and impolite, it is considered the standard and a perfectly acceptable manner of doing business in India.

Questions:

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

2. If you were Richard ,What would you do

CASE: II The Sudkurier

The Sudkurier is a regional daily newspaper in south-western Germany. On average 310,000 people in the area read the newspaper regularly. The great majority of those readers subscribe to its home delivery service, which puts the paper on their doorsteps early in the morning. On the market for the last 35 years, the Sudkurier contains editorial sections on politics, the economy, sports, local news, entertainment and features, as well as advertising. The newspaper is financially independent and its staff is free of any political affiliation. Management at the Sudkurier would like to bring the paper into line with the current needs of its readers. For this purpose, the management team is considering the use of market research.

Management would like to have information about the following.

What newspaper or other media are the Sudkurier’s main competitors?
Do most readers read the Sudkurier for the local news, sports and classified ads, and should these sections therefore be expanded at the expense of the sections on politics and the economy?
Should the Sudkurier’s layout be modernized?
Do mostly lower levels of society read the Sudkurier?
Into what political category do readers and non-readers the Sudkurier?
Which suppliers of products and services consider the Sudkurier especially appropriate for their advertising?

Source: Regional Press Study, Gfk-Medienforschung Contest-Census

Questions:

1. Explain how you will methodically go about compiling the requested information covered in the seven questions for management. Include in your explanation an estimate of the expense involved in obtaining the information.

2. Develop a 10-question questionnaire for the purpose of making a survey.

CASE: III Unilever in Brazil: marketing strategies for low-income customers

After three successful years in the Personal Care division of Unilever in Pakistan, Laercio Cardoso was contemplating attractive leadership positioning China when he received a phone call from Robert Davidson, head of Unilever’s Home Care division in Brazil, his home country. Robert was looking for someone to explore growth opportunities in the marketing of detergents to low-income consumers living in the north-east of Brazil and felt that Laercio had the seniority and skills necessary for the project. Though he had not been involved in the traditional Unilever approach to marketing detergents, his experience in Pakistan had made him acutely aware of the threat posed by local detergent brands targeted at low-income consumers.

At the start of the project—dubbed ‘Everyman’—Laercio assembled an interdisciplinary team and began by conducting extensive field studies to understand the lifestyle, aspirations and shopping habits of low-income consumers. Increasing detergent use by these consumers was crucial for Unilever given that the company already had 81 per cent of the detergent powder market. But some ….esalers had national coverage and economies of scale but did not directly serve the small stores where low-income consumers shopped, necessitating another layer of smaller wholesalers, which increased their cost to US$0.10 per kg. Alternatively, Unilever could contract with dozens of specialize distributors who would get exclusive rights to sell the new Unilever detergent. These specialized distributors would have a better ability to implement point of purchase marketing and would cost less ($0.05 per kg).

Question:

1. Describe the consumer behaviour differences among laundry products’ customers in Brazil. What market segments exists?

2. Should Unilever bring out a new brand or use one of its existing brands to target the north-eastern Brazilian market?

3. How should the brand be positioned in the marketplace and within the Unilever family of brands?

Case 4 Ryanair: the low fares airlines

In April 2005, Ryanair abandoned an experiment in paid-for in flight entertainment, after passengers were reluctant to rent the consoles at the £5 required to receive the service. Apparently, market research discovered passengers are unwilling to invest on such short flights, with the ideal being six-hour flights to longer-haul holiday destinations. When the experiment was launched in November 2004, Michael O’Leary hailed the move as ‘the next revolution of the low-fares industry…we expect to make enormous sums of money’.

Questions:

1. How does Ryanair’s pricing strategy account for its successful performance to date? Would you suggest any changes to Ryanair’ pricing approach? Why/why not?

2. Is the ‘no-fares’ strategy a useful approach for Ryanair in the short term? In the long term?

3. Do the issues facing Ryanair threaten its low-fares model?

Case V LEGO: the toy industry changes

How times have changed for LEGO. The iconic Danish toy maker, best known for its LEGO brick, was once the must-have toy for every child. However, LEGO has been facing a number of difficulties since the late 1990: falling sales, falling market share, job losses and management reshuffles. Once vote ‘Toy of the Century’ and with a history of uninterrupted sales growth, it appears LEGO has fallen victim to changing market trends. Today’s young clued-up consume is far more likely to be seen surfing the web, texting on their mobile phone, listening to their MP3 player or playing on their Game Boy than enjoying a LEGO set. With intensifying competition in the toy market, the challenge for LEGO is to create aspirational, sophisticated, innovative toys that are relevant to today’s tweens.

History

In 1932 Ole Kirk Christiansen, a Danish carpenter, established a business making wooden toys. He named the company ‘LEGO’ in 1934, which comes from Danish words ‘leg godt’, meaning ‘play well’. Later, coincidentally, it was discovered that in Latin it means, ……
still remaining true to its wholesome ‘play well’ brand values? Will LEGO succeed in its attempts to target young girls and its desire to target a more adult audience? Will it succeed in its attempts to reduce costs and improve efficiencies? Will CEO Jorgen Vig Knudstorp succeed where his predecessors have failed? Only in the fullness of time will these questions be answered but one thing is for sure: no brand, no matter how powerful, can afford to become complacent in an increasingly competitive business environment.
Questions:

1. Why did LEGO encounter serious economic difficulties in the late 1990s?

2. Conduct a SWOT analysis of LEGO and identify the company’s main sources of advantage.

3.Critically evaluate the LEGO turnaround strategy.

Marketing Management

01 Sep

MBA Assignment Admin 0 Comment Marketing Management IIBMS Assignment, IIBMS Case Study Solution

CASE: I Playing to a new beat: marketing in the music industry

Good old fashioned rock ‘n’ roll could be dead. If a mobile phone ringtone in the shape of the vocalizations of the animated Crazy Frog dominates the billboard charts for months on end, then it could well signal the death knell for the industry, and how it operates. If this ubiquitous amphibian’s aurally annoying song, converted from a mobile phone ringtone, outsold even mainstay acts such as Oasis and Coldplay, why should music companies invest millions in cultivating fresh musical talent, hoping for them to be the next big thing, when their efforts can be beaten by basic synthesizer music? The industry is facing a number of challenges that it has to address, such as strong competition, piracy, changing delivery formats, increasing cost pressures, demanding pri-madonnas and changing customer needs. Gone are the days when music moguls were reliant on sales from albums alone, now the industry trawls for revenue from a variety of sources, such as ringtones, merchandising, concerts, and music DVDs, leveraging extensive back catalogues, and music rights from advertising, movies and TV programming.

The music industry is in a state of flux at the moment. The cornerstone of the industry—the singles chart—has been facing terminal decline since the mid-1990s. Some retailers are now not even stocking singles due to this marked freefall. Some industry commentators blame the Internet as the sole cause, while others point to value differences between the price of an album and the price of a single as too much. Likewise, some commentators criticize the heavy pre-release promotion of new songs, the targeting of ever-younger markets by pop acts, and the explosion of digital television music channels as root causes of the single’s demise. The day when the typical record buyer browses through rows of shelves for a much sought-after band or song on a Saturday afternoon may be thing of the past.

Long-term success stories for the music industry are increasingly difficult to develop. The old tradition of A&R (which stands for ‘Artists & Repertoire’) was to sign, nurture and develop musical talent over a period of years. The industry relied on continually feeding the system with fresh talent that could prove to be the next big thing and capture the public imagination. Now corporate short-term thinking has enveloped business strategies. If an act fails to be an immediate hit, the record label drops them. The industry is now characterized by an endless succession of one-hit wonders and videogenic artist churning out classic cover songs, before vanishing off the celebrity radar. Four large music labels now dominate the industry (see Table 1), and have emerged through years of consolidation.

Table 1 The ‘big four’ music labels

Universal Music	Sony BMG
The largest music label, with 26 per cent of global music market share; artists on its roster include U2, Limp Bizkit, Mariah Carey and No Doubt	Merger consolidated its position; artists on its roster include Michael Jackson, Lauryn Hill, Westlife, Dido, Outkast and Christina Aguilera
Warner Music	EMI
Third biggest music group; artists on its roster include Madonna, Red Hot Chili Peppers and REM	Artists on its roster include the Rolling Stones, Coldplay, Norah Jones, Radiohead, and Robbie Williams

The ‘big four’ labels have the marketing clout and resources to invest heavily in their acts, providing them with expensive videos, publicity tours and PR coverage. This clout allows their acts to get vital airplay and video rotation on dedicated TV music channels. Major record labels have been accused of offering cash inducements of gifts to radio stations and DJs in an effort to get their songs on playlists. This activity is known in the industry as ‘radio payola’.

Consumer have flocked to the Internet, to download, to stream, to ‘rip and burn’ copyrighted music material. The digital music revolution has changed the way people listen, use and obtain their favourite music. The very business model that has worked for decades, buying a single or album from a high-street store, may not survive. Music executives are left questioning whether the Internet will kill the music business model has been fundamentally altered. According to the British Phonographic Industry (BPI), it estimated that 8 million people in the UK are downloading music from the Internet—92 per cent of them doing so illegally. In 2005 alone, sales of CD singles fell by a colossal 23 per cent. To put the change into context, the sales of digital singles increased by 746.6 per cent in 2005. Consumers are buying their music through different channels and also listening to their favourate songs through digital media rather than through standard CD, cassette or vinyl. The emergence of MP3 players, particularly the immensely popular Apple iPod, has transformed the music landscape even further. Consumers are now downloading songs electronically from the Internet, and storing them on these digital devices or burning them onto rewritable CDs.

Glossary of online music jargon

Streaming: Allows the user to listen to or watch a file as it is being simultaneously downloaded. Radio channels utilize this technology to transmit their programming on the Internet.

‘Rip n burn’: Means downloading a song or audio file from the Internet and then burning them onto rewritable CDs or DVD.

MP3 format: MP3 is a popular digital music file format. The sound quality is similar to that of a CD. The format reduces the size of a song to one-tenth of its original size allowing for it to be transmitted quickly over computer networks.

Apple iPod: The ‘digital jukebox’ that has transformed the fortunes of the pioneer PC maker. By the end of 2004 Apple is expected to have sold 5 million units of this ultra-hip gadget. It was the ‘must-have item’ for 2003. The standard 20 GB iPod player can hold around 5000 songs. Other hardware companies, such as Dell & Creative Labs, have launched competing devices. These competing brands can retail for less than £75.

Peer-to-peer networks (P2P): These networks allow users to share their music libraries with other net users. There is no central server, rather individual computers on the Internet communicating with one another. A P2P program allows users to search for material, such as music files, on other computers. The program lets users find their desired music files through the use of a central computer server. The system works lime this; a user sends in a request for a song; the system checks where on the Internet that song is located; that song is downloaded directly onto the computer of the user who made the request. The P2P server never actually holds the physical music files—it just facilitates the process.

The Internet offers a number of benefits to music shoppers, such as instant delivery, access to huge music catalogues and provision of other rich multi-media material like concerts or videos, access to samples of tracks, cheaper pricing (buying songs for 99p rather than an expensive single) and, above all, convenience. On the positive side, labels now have access to a wider global audience, possibilities of new revenue streams and leveraging their vast back catalogues. It has diminished the bargaining power of large retailers, it is a cheaper distribution medium than traditional forms and labels can now create value-laden multimedia material for consumers. However, the biggest problem is that of piracy and copyright theft. Millions of songs are being downloaded from the Internet illegally with no payment to the copyright holder. The Internet allows surfers to download songs using a format called ‘MP3’, which doesn’t have inbuilt copyright protection, thus allowing the user to copy and share with other surfers with ease. Peer to peer (P2P) networks such as Kazaa and Grokster have emerged and pose an even deadlier threat to the music industry—they are enemies that are even harder to track and contain. Consumers can easily source and download illegal copyrighted material with considerable ease using P2P networks (see accompanying box).

P2P Networks used for file sharing

Kazaa

Gnutella

Grokster

Morpheus

eDonkey

Imesh

Bearshare

WinMX

A large number of legal download sites have now been launched, where surfers can either stream their favourite music or download it for future use in their digital libraries. This has been due to the rapid success of small digital medial players such the Apple iPod. The legal downloading of songs has grown exponentially. A la carte download services and subscription-based services are the two main business models. Independent research reveals that the Apple’s iTunes service has over 70 per cent of the market. Highlighting this growing phenomenon of the Internet as an official channel of distribution, new music charts are now being created, such as the ‘Official Download Chart’. Industry sources suggest that out of a typical 99p download, the music label get 65p, while credit card companies get 4p, leaving the online music store with 30p per song download. These services may fundamentally eradicate the concept of an album, with customers selecting only a handful of their favourite songs rather than entire standard 12 tracks. These prices are having knock-on consequences for the pricing of physical formats. Consumers are now looking for a more value-laden music product rather than simply 12 songs with an album cover. Now they are expecting behind the scenes access to their favourite group, live concert footage and other content-rich material.

Big Noise Music is an example of one of the legitimate downloading sites running the OD2 system. The site is different in that for every £1 download, 10p of the revenue goes to the charity Oxfam.

The music industry is ferociously fighting back by issuing lawsuits for breach of copyright to people who are illegally downloading songs from the Internet using P2P software. The recording industry has started to sue thousands of people who illegally share music using P2P. They are issuing warnings to net surfers who are P2P software that their activities are being watched and monitored. Instant Internet messages are being sent to those who are suspected of offering songs illegally. In addition, they have been awarded court orders so that Internet providers must identify people who are heavily involved in such activity. The music industry is also involved heavily in issue advertising campaigns, by promoting anti-piracy websites such as www.pro-music.org to educate people on the industry and the impact of piracy on artists. These types of public awareness campaigns are designed to illustrate the implications of illegal downloading.

Small independent music labels view P2P networks differently, seeing them as vital in achieving publicity and distribution for their acts. These firms simply do not have the promotional resources or distribution clout of the ‘big four’ record labels. They see P2P networks as an excellent viral marketing tool, creating buzz about a song or artist that will ultimately lead to wider mainstream and commercial appeal. The Internet is used to create communities of fans who are interested in their music, providing them access to free videos and other material. It allows independent acts the opportunity to distribute their music to a wider audience, building up their fan base through word of mouth. Savvy unsigned bands have sophisticated websites showcasing their work, and offering free downloads as well as opportunities for audio-philes to purchase their tunes. Alternatively major labels still see that to gain success one has to get a video on rotation on MTV and that this in turn encourages greater airplay on radio stations, ultimately leading to increased purchases.

Table 2 The major legitimate online music provider

Name	Details	Pricing
Apple iTunes	Huge catalogue of over 750,000 songs; compatible with Apple’s very hip iPod system; offers free single of the week and other exclusive material	79p per track, £7.99 per album
Napster	The now-legitimate website offers over 1,000,000 songs; offers several streaming radio stations too	Subscription based—subscribers pay £9.99 a month to stream any of the catalogue, plus another 99p to download on to a CD
Sony Connect	over 300,000 songs from the major labels; excellent sound quality but compatible only with Sony products due to proprietary file formats	From 80p- £1.20 per track, and £8- £10 per album
Bleep.com	Small catalogue of 15,000 songs with a focus on independent music labels; high-quality downloads due to media files used	99p per track, £6.99 per album
Wippit	UK-based service; 175,000 songs to download; gives a selection of free tracks every month	From 30p to £1 to download; alternatively, users can subscribe to the service for £50 a year to gain access to 60,000 songs
OD2 System, used by: Mycokemusic.com HMV.com MSN.com TowerRecord.co.uk Big Noise Music	These online sites use the OD2 system for music downloads; they look after encryption, hosting, royalty management and the entire e-commerce system; provides access to nearly 350,000 tracks from 12,000 recording artists	Varying product bundles, typically 99p for track download, and 1p for streaming

For traditional music retailers the retailing landscape is getting more competitive, with multiple channels of distribution emerging due to the Internet and large supermarket chains now selling music CDs. Supermarkets are becoming one of the main channels of distribution through which consumers buy music. These supermarkets are stocking only a limited number of the best-selling music titles, limiting the number of distribution outlets for new and independent music. Only charts hits and greatest hits collections will make it on to the shelves of such outlets.

Now consumers can buy albums from traditional Internet retailers such as Amazon.com, and also on websites that utilize access to grey markets such as cdwow.co.uk, as well as through legitimate download retailers. This has left traditional music retail operations with a severe conundrum: how can they entice more shoppers into their stores? The accompanying box highlights where typical shoppers source their music at present.

Where do people buy their music?

Music stores (like HMV, Virgin Megastore)	16 per cent
Chains (like Woolworth, WHSmith)	16 per cent
Supermarkets (like Tesco, Asda)	21.6 per cent
Mail order	3.9 per cent
Internet sales (like Amazon.com)	7 per cent
Downloads	Not yet measured

The issue of online music retailers using parallel importing, such as CDWOW (www.cdwow.co.uk) is a concern. These retailers are taking advantage of worldwide price discrepancies for legitimate music CDs, sourcing them in low-cost countries like Hong Kong and exporting them into European countries. Prices for music in these markets are considerably lower than the market that they are exporting to, and they don’t even charge for international delivery. Yet technological improvements have led to revenue opportunities for the industry. Development such as online radio, digital rights management, Internet streaming, tethered downloads (locked to PC), downloads (burnable, portable), in-store kiosks, ring-tones, mobile message clips and games soundtracks are great potential revenue sources. In an effort to unlock this potential the major labels have digitized their entire back catalogues. In the wake of these dramatic environmental changes the industry has had to radically adapt. The ‘big four’ music labels are consolidating even further, developing a digital music strategy, and re-evaluating their entire traditional business model. Mobile phones are seen as the next primary channel of distribution for digital music. High penetration levels in the market for mobile phones and the inherent mobility advantages make this the next crucial battlefield for the music industry.

The Internet may emerge as the primary channel of distribution for music, and the music industry is going to have to adapt to these changes. The move towards the online distribution of entertainment is still in its infancy, with more investment into the telecommunications infrastructure, such as greater Internet access, increased access to broadband technology, 3G technology and changing the way people shop for music will undoubtedly take time. The digital revolution will fundamentally change the way people purchase and consume their musical preferences. In forthcoming years the digital format will become more mainstream, leading to a proliferation of channels of distribution for music. However, as with most new channels of technology, catalogue shopping, Internet shopping likewise, and ‘video never really killed the radio star’… but will the Internet kill the record store?

Questions:

1. Discuss the micro and macro forces that are affecting the music industry.

2. Based on this analysis, what strategic options would you recommend for both music publishers and music retailers in the current marketing environment?

3. Discuss the advantages and disadvantages associated with online distribution from a music label’s perspective.

CASE: II The Sudkurier

Management would like to have information about the following.

What newspaper or other media are the Sudkurier’s main competitors?
Do most readers read the Sudkurier for the local news, sports and classified ads, and should these sections therefore be expanded at the expense of the sections on politics and the economy?
Should the Sudkurier’s layout be modernized?
Do mostly lower levels of society read the Sudkurier?
Into what political category do readers and non-readers the Sudkurier?
Which suppliers of products and services consider the Sudkurier especially appropriate for their advertising?
What advertising or information dot the readers think is missing from the Sudkurier?

You are an employee of the Sudkurier who has been instructed to obtain the requested information and to prepare your findings for the decision-makers. You are in the fortunate position of receiving regular reports about the people’s media use from the Arbeitsgemeinschaft Media-Analyse e.V. Relevant excerpts from the most recent survey are shown here as Tables 3 and Table 4

Table 3 Media analysis of readership structure

Range in Circulation Area (1)		Readers per edition of SUDKURIER			National average in %
		RANGE		Total in %
		in %	Absolute	Total in %
Total		53.5	310,000	100.0	100.0
Gender	Men	55.5	150,000	49.0	47.2
	Women	51.6	160,000	51.0	52.8
Age Groups	14-19 years	51.8	20,000	8.0	7.2
	20-29 years	41.0	50,000	15.0	19.1
	30-39 years	52.1	50,000	16.0	16.4
	40-49 years	61.8	50,000	16.0	15.2
	50-59 years	61.1	60,000	19.0	16.5
	60-69 years	53.6	40,000	13.0	13.5
	70 years and older	57.4	40,000	13.0	12.2
Educational Level	Secondary school without apprenticeship	49.4	60,000	18.0	17.6
	Secondary school with apprenticeship	50.8	100,000	31.0	39.6
	Continuing education without Abitur	60.8	110,000	36.0	27.0
	Abitur, university preparation, university/college	49.7	50,000	15.0	15.8
Occupation	Trainee, pupil, student	44.7	40,000	11.0	11.0
	Full-time employee	54.6	160,000	50.0	51.7
	Retire, pensioner	57.3	70,000	23.0	21.8
	Unemployed	52.4	50,000	16.0	15.5
Occupation of main wage earner	Self-employed, mid- to large business/Freelancer	63.8	20,000	5.0	3.1
	Self-employed, small business,/Farmer	59.9	30,000	10.0	7.1
	Managers and civil servants	58.6	30,000	9.0	8.7
	Other employees and civil servants	49.3	120,000	40.0	42.9
	Skilled staff	57.6	100,000	32.0	32.5
	Unskilled staff	38.7	10,000	4.0	5.6
Net Household Income/month	4500 and more	62.7	100,000	31.0	23.9
	3500-4500	52.7	60,000	19.0	20.8
	2500-3500	54.9	80,000	26.0	25.9
	to 2500	44.1	70,000	23.0	29.3
Number of wage earners	1 earner	45.4	100,000	33.0	40.4
	2 earner	56.5	130,000	41.0	42.6
	3 earner	62.7	80,000	25.0	16.9
Household Size	1 Person	41.8	50,000	14.0	17.9
	2 Persons	55.5	90,000	29.0	31.8
	3 Persons	59.5	70,000	22.0	22.4
	4 Persons and more	54.8	110,000	35.0	27.9
Children in Household	Children less than 2 years of age	52.7	10,000	4.0	3.8
	2 to less than 4 years	38.4	10,000	4.0	5.4
	4 to less than 6 years	45.8	10,000	5.0	5.2
	6 to less than 10 years	43.8	20,000	8.0	8.5
	10 to less than 14 years	54.1	30,000	10.0	9.2
	14 to less than 18 years	57.7	50,000	16.0	13.7
	No children under 14	54.9	250,000	79.0	77.4
	No children under 18	53.6	210,000	67.0	68.1
Driving Licence	yes	55.2	250,000	80.0	73.0
	no	47.3	60,000	20.0	27.0
Private Automobile		55.5	270,000	86.0	80.0
Garden	own garden	60.4	240,000	76.0	57.0
	without garden	39.8	70,000	23.0	43.0
Housing	own house	62.1	180,000	58.0	46.0
	own apartment	45.9	10,000	3.0	3.0
	rent house or apartment	44.7	120,000	38.0	49.0
Electrical Appliances	Freezer/Deep freeze	59.6	200,000	62.0	51.0
Last Holiday Journey	Within the last 12 months	55.1	190,000	62.0	n.a.
	1-2 years ago	51.0	40 ,000	14.0	n.a.
	More than two years ago	48.6	50 ,000	16.0	n.a.
	Never	55.4	30 ,000	9.0	n.a.
Last Holiday Destination	Germany	57.4	70 ,000	23.0	n.a.
	Austria, Switzerland, South Tyrol	48.7	60 ,000	20.0	n.a.
	Elsewhere in Europe	53.4	130,000	42.0	n.a.
	Country outside Europe	51.4	20 ,000	5.0	n.a.
	Did not travel	56.4	30 ,000	9.0	n.a.
1) Entire circulation area 310 ,000 readers per edition Example: 53.5% of people older than 14 years in the circulation of the Sudkurier daily 55.5% of all men older than 14 years and 51.6% of women older than 14 read the Sudkurier daily; that is 150 ,000 men and 160 ,000 women.

Table 4 Reader behaviour

What purchasing information is used?

Media purchasing information

for medium and long-term acquisition

(11 product areas; Basis: total population)

Daily newspaper 61%

Posters on the street 9 %

Leaflets 36 %

Television 24%

Radio 13%

Magazines 27 %

Free newspapers 49%

Credibility of advertising in the media

Advertising in… is generally believable and reliable

(Basis: broadest user group in each case)

Regional newspaper 49%

Television 30%

Public radio 20%

Privately-owned radio 14 %

Magazines 15%

Free newspaper 23%

Advertising in… is most informative

(Basis: broadest reading group)

Regional newspapers (subscription) 62 %

Television 47%

Public Radio 29%

Privately-owned radio 26%

Magazines 27 %

Free newspapers 36 %

Time spent reading daily newspaper

(Basis: broadest user group)

less than 15 minutes 7 %

15-24 minutes 21 %

25-34 minutes 28 %

35-65 minutes 34 %

more than 65 minutes 10 %

I often consult/depend on advertising in…

(Basis: broadest user group in each case)

Regional newspapers (subscription) 27 %

Television 11%

Public Radio 89%

Privately-owned radio 6%

Magazines 7 %

Free newspapers 18 %

Source: Regional Press Study, Gfk-Medienforschung Contest-Census

Questions:

2. Develop a 10-question questionnaire for the purpose of making a survey.

CASE: III Unilever in Brazil: marketing strategies for low-income customers

Consumer behavior

The 48 million people living in the north-east (NE) of Brazil lag behind their south-eastern (SE) counterparts on just about every development indicator. In the NE, 53 per cent of the population live on less than two minimum wages versus 21 per cent inn the SE. In the NE, only 28 per cent of households own a washing machine versus 67 per cent in the SE. Women in the NE scrub clothes in a washbasin or sink using bars of laundry soap, a process that requires intense and sustained effort. They then add bleach to remove tough stains and only a little detergent powder in the end, primarily to make the clothes smell good. In the SE, the process is similar to European or North American standards. Women mix powder detergent and softener in a washing machine and use laundry soap and bleach only to remove the toughest stains.

The penetration and usage of detergent powder and laundry soap is the same in the NE and the SE (97 per cent). However, north-easterners use a little less detergent (11.4 kg per years versus 12.9 kg) and a lot more soap (20 kg versus 7 kg) than south-easterners. Many women in the NE view washing clothes as one of the pleasurable routine activities of their week. This is because they often do their washing in a public laundry, river or pond where they meet and chat with their friends. In the SE, in contrast, most women wash clothes alone at home. They perceive washing laundry as a chore and are primarily interested in ways to improve the convenience of the process.

People in the NE and SE differ in the symbolic value they attach to cleanliness. Many poor north-easterners are proud of the fact that they keep themselves and their families clean despite their low income. Because it is so labour intensive, many women see the cleanliness of clothes as an indication of the dedication of the mother to her family, and personal and home cleanliness is a main subject of gossip. In the SE, where most women own a washing machine, it has much lower relevance for self-esteem and social status. Along with price, the primarily low-income consumers of the NE evaluate detergents on six key attributes (Figure 1 provides importance ratings, the range of consumer expectations, and the perceived positioning of key detergent brands on each attribute).

Competition

In 1996 Unilever was a clear leader in the detergent powder category in Brazil, with an 81 per cent market share, achieved with three brands: Omo (one of Brazil’s favourate brands across all categories) Minerva (the only brand to be sold as both detergent powder and laundry soap with a more hedonistic ‘care’ positioning) and Campeiro (Unilever’s cheapest brand). Proctor & Gamble, which had recently entered the Brazilian market, had 15 per cent of the market with three brands (Ace, Bold and the low-price brand Pop). Other competitors were smaller companies (see Figure 2).

The Brazilian fabric wash market consists of two categories: detergent powder and laundry soap. In 1996 detergent was a US$106 million (42,000 tons) market in the NE. In 1996 the NE market for laundry soap bars was as large as the detergent powder market (US$102 million for 81,250 tons). The NE market for laundry soap is much easier to produce than powdered laundry detergent. Laundry soap is a multi-use product that has many home and personal care uses. Table 5 provides key information on all powder and laundry soap brands (packaging, positioning, key historical facts, and financial and market data).

Table 5

Brand	Packaging	Positioning	Key Data
OMO	Cardboard pack: 1 kg & 500g.	Removes stains with low quantity of product when used in washing machines, thus reducing the need for soap or bleach.	S: 55.20 WP: 3.00 FC: 1.65 PKC: 0.35 PC: 0.35
Minerva	Cardboard pack: 1 kg & 500g.		S: 17.60 WP: 2.40 FC: 1.40 PKC: 0.35 PC: 0.30
Campeiro	Cardboard pack: 1 kg & 500g.		S: 6.05 WP: 1.70 FC: 0.90 PKC: 0.35 PC: 0.20
Ace	Cardboard pack: 1 kg & 500g
Bold	Cardboard pack: 1 kg & 500g.
Pop	Cardboard pack: 1 kg & 500g.
Invicto	Cardboard pack: 1 kg & 500g.
Minerva	Plastic pack with 5 bars of 200g.
Bem-te-vi	Plastic pack with 5 bars of 200g or single bar of 200g.

Figure 1 & 2 Market Share and wholesale Price of Major Brands in the Laundry Soap and Detergent Powder Categories in the Northeast in 1996

Decisions

Robert Davidson, head of Unilever’s Home Care Division in Brazil, and Laercio Cardoso, head of the ‘Everyman’ research project aided at understanding the low-income consumer segment, must re-examine Unilever’s strategy for low-income consumers in the NE region of Brazil and make three important decisions.

Go/no go. Should Unilever divert money from its premium brands to invest in a lower-margin segment of the market? Does Unilever have the right skills and structure to be profitable in a market in which even small local entrepreneurs struggle to break even? In the long run, what would Unilever gain and what would it risk losing?
Marketing and branding strategy. Unilever already has three detergent brands with distinct positionings. Does it need to develop a new brand with a new value proposition or can it reposition its existing brands or use a brand extension?
Marketing mix. What price, product, promotion and distribution strategy would allow Unilever to deliver value to low-income consumers without cannibalizing its own premium brands too heavily? Is it just a matter of price?

Product

Unilever could produce a product comparable to Campeiro, its cheapest product, but would it deliver the benefits that low-income consumers wanted? Alternatively, Unilever could use Minerva’s formula but it might be too expensive for low-income consumers. If they could eliminate some ingredients, Unilever’s scientists could develop a third formula that would cost about 10 per cent more than Campeiro’s formula. The difficulty would be in determining which attributes to eliminate, which to retain and which, if any would actually need to be improved relative to both existing brands.

Larger packages would reduce the cost per kilo but could price the product out of the weekly budget range of the poorest consumers. Unilever could use a plastic sachet, which would cost 30 per cent of the price of traditional cardboard boxes, but market research data had shown that low-income consumers were attached to boxes and regarded anything else as good for only second-rate products. One solution might be to launch multiple types and sizes.

Price

Priced significantly above Campeiro and Minerva soap, the product would be out of reach for the target segment. Priced too low, it would increase the cost of the inevitable cannibalization of existing Unilever brands. Should Unilever use coupons or other means to reduce the cost of the product for low-income consumers? Or should it change the price of Omo, Minerva and Campeiro?

Promotion

In the low-income segment, lower margins meant that volume had to be reached very quickly for the product to break even. It was therefore crucial to find a radical ‘story’, one that would immediately put the new brand on the map. What would be the objective of the communication? What should be the key message? Low-income consumers might be reluctant to buy a product advertised ‘for the low-income people’ especially as products with that kind of message are typically of inferior quality. On the other hand, using the classic aspirational communication of most Brazilian brands could confuse consumers and lead to unwanted cannibalization.

In regular detergent markets Unilever had established that the most effective allocation of communication expenditure was 70 cent above-the-line (media advertising) and 30 per cent below-the-line (trade promotions, events, point- of-purchase marketing). The advantages of using primarily media advertising are its low cost per contact and high reach because almost all Brazilians, irrespective of income, are avid television watchers. One alternative would be to use 70 per cent below-the-line communication. At US$0.05 per kg, this plan would require only one-third of the cost of a traditional Unilever communication plan. On the other hand, it would lower the reach of communication, increase the cost of per contact, and make a simultaneous launch in all north-eastern cities more difficult to organize.

Distribution

Unilever did not have the ability to distribute to the approximately 75,000 small outlets spread over the NE, yet access to these stores was key because low-income consumers rarely shopped in large supermarkets like Wal-Mart or Carrefour. Unilever could rely on its existing network of generalist wholesalers who supplied its detergents and a wide variety of products to small stores. These wholesalers had national coverage and economies of scale but did not directly serve the small stores where low-income consumers shopped, necessitating another layer of smaller wholesalers, which increased their cost to US$0.10 per kg. Alternatively, Unilever could contract with dozens of specialize distributors who would get exclusive rights to sell the new Unilever detergent. These specialized distributors would have a better ability to implement point of purchase marketing and would cost less ($0.05 per kg).

Question:

1. Describe the consumer behaviour differences among laundry products’ customers in Brazil. What market segments exists?

2. Should Unilever bring out a new brand or use one of its existing brands to target the north-eastern Brazilian market?

3. How should the brand be positioned in the marketplace and within the Unilever family of brands?

Case 4 Ryanair: the low fares airlines

The year 2004 did not begin well for Ryanair. On 28 January, the airline issued its first profits warning and ended a run of 26 quarters of rising profits. On that day, when the markets opened, the company was worth €5 billion. By close of business, its value had shrunk to worth €3.6 billion, as its share price plunged from worth €6.75 to €4.86. Investors were dismayed by the airline’s admission that it was facing ‘an enormous and sudden reduction of 25 to 30 per cent in yields’ (i.e. average fare levels) in the first quarter of 2004 (the last fiscal quarter of 2004). This was on top of an earlier fall of 10 to 15 per cent in the first nine months.

In April 2004, Chief Executive Michael O’Leary forecast a ‘bloodbath’, an ‘awful’ 2004/2005 winter for European airlines, amid continuing fare wars, with a shakeout among the many budget airlines. ‘We will be helping to make it awful,’ warned Mr O’Leary, as he announced an 800,000 free seats giveaway. The most difficult markets were predicted to be Germany and the UK regions where many new carriers, which were ‘losing money on an heroic scale’, had entered the arena. O’Leary anticipated that the company’s 2004 profits would decline by 10 per cent, while 2005 profits would increase by up to 20 per cent with a 5 per cent drop in yields. However, if yields were to fall by as much as 20 per cent, the 2005 outcome would be break-even, at best.

Yet, by 31 May 2005, on Ryanair’s 20^th birthday, the carrier was able to announce record results for the year ended 31 March 2005. Both passenger volumes and net profits grew year on year by 19 per cent to 27.6 million from 23.1 million and €268.9 from €226.6 million respectively. The all- important passenger yield figure (revenue per passenger) grew by 2 per cent, partially offsetting the 14 per cent yield decline in 2003/2004. Ancillary revenues were 40 per cent higher, rising faster than passenger volumes, which resulted in total revenues rising by 24 per cent to €1.337 billion. Operating costs rose 25 per cent, fractionally more than revenue growth, due principally to higher fuel costs. The 2005 results announcement was followed by a 3.4 per cent jump in the company’s share price, to close to €6.46 on the day.

Ryanair’s adjusted after-tax margin for the full year at 20 per cent compared very to figures for Aer Lingus, British Airways, easyJet, Lufthansa, Southwest and Virgin, with margins of 8, 1, 3, minus 5, 7, .1 per cent respectively (2003/2004 results). Despite the dire warnings and the temporary dip in fiscal 2004, Ryanair had arguably come through its crisis with flying colours. How did it manage this?

Overview of Ryanair

Ryanair, Europe’s first budget airline, with 229 routes across 20 countries at of May 2005, is one of the world’s most profitable, fastest-growing carriers. Founded in 1985 by the Ryan family as an alternative to the then state monopoly carrier Aer Lingus, Ryanair started out as a full-service airline. After accumulating severe financial losses, finally, in 1990/91, the company came up with a survival plan, spearhead by Michael O’Leary and the Ryans, to transform itself into a low-fares no-frills carrier, based on the model pioneered by Southwest Airlines, the Texas-based operator. Ryanair, first floated on the Dublin Stock Exchange in 1997, is quoted on the Dublin and London Stock exchanges and on NASDAQ, where it was admitted to the NASDAQ-100 in 2002. In June 2005, Ryanair’s market capitalization stood €5 billion, the second highest carrier in the world, next to Southwest Airlines, and ahead of airlines with vastly greater turnover—such as Lufthansa with capitalization at €4.7 billion, British Airways at €4.3 billion and Air France/KLM at €3.5 billion. Its market capitalization was nearly four times that of easyJet, its UK-based budget airline rival. This was despite easyJet’s higher turnover, similar passenger volumes and a slightly larger fleet.

Ryanair’s fares strategy

Ryanair’s core strategy entails offering the lowest fares, and the airline claims that it generally makes its lowest fares widely available by allocating a majority of seat inventory to its two lowest fare categories. In fact, was Ryanair, originally styled as the ‘low-fares airline’, actually becoming a ‘no-fares airline’? Half of Ryanair’s passenger will be flying for free by 2009, pledged Michael O’Leary in an interview with a German newspaper. He said that ticket prices would fall by an average 5 per cent a year over the next five years, as passenger numbers grew by five million annually. One analyst speculated that Ryanair pronouncement on free seats ‘is designed to put the wind up potential competitors in the hotly contested German market. Of course, a balance must be struck between low fares to attract customers and a sufficient yield to ensure viability.

An integral part of the low fares strategy is revenue enhancement through ancillary activities, increasingly used to subsidize airfares in order to improve Ryanair margins to compensate for falls in fare yields. These include on-board sales, charter flights, travel reservations and insurance, car rentals, in-flight television advertising, and advertising outside its air-craft, whereby a corporate sponsor pays to paint an aircraft, whereby a corporate sponsor pays to paint an aircraft with its logo. Advertising on Ryanair’s popular website also provides ancillary income. Despite the abolition of duty-free sales on intra-EU travel in 1999, Ryanair’s revenue from duty-paid sales and ancillary services has continued to rise. In 2005, ancillary revenues comprised 18.3 per cent of total operating revenue, up from 16.1 per cent the year before, and the ambition is to grow at twice the rate of increase in its passenger traffic. The company has outlined plans to continue raising ancillary revenues through further penetration of existing products and the introduction of new ones, especially on-board entertainment and gaming products/services. Ryanair is also considering entering the highly competitive mobile phone market and has been in talks with various UK operators with a view to forming a joint venture.

Its low fares policy notwithstanding, Ryanair was able to realize a 2 per cent growth in yields in fiscal 2005. This is attributable to a number of favourable factors in the competitive landscape. Underlying passenger growth volumes returned in the industry as a whole, reducing the intensity of competition. Mainstream European operators like British Airways, Lufthansa and Air France/KLM were increasingly abandoning the short-haul sector, preferring to concentrate their growth on more lucrative long-run haul routes. Moreover, these airlines reacted to the massive price rise in the cost of aviation fuel by introducing a fuel surcharge on their fares. For example, the surcharge levied by British Airways equated to 22 per cent of an average Ryanair fare.

Another favourable factor was the failure of the threat of new entrants to materialize. Michael O’Leary’s prophecy of a 2004/2005 winter bloodbath in the European airline industry had been based on the forecast of many new entrants into the budget airlines sector, thus intensifying overcapacity. While new rivals continued to enter the fray, at any one time large numbers were also dying off. Autumn 2004 saw the demise of a number of budget airlines—for example, Volare, an Italian low-fare and charter operator, and V-Bird, a Dutch-owned carrier. Yet, new entrants were still launching. However, it was agreed that the industry could not sustain the some 47low-fares airlines operating as of the end of November 2004, Michael O’Leary predicted that the anticipated shake-out would be accelerated by rising oil prices. ‘Many of our competitor airlines who were losing money heroically when fuel was US$25 a barrel are doomed the longer it stays at US$50. We anticipate there will be further airline casualties as the perfect storm of declining fares and record high oil prices force loss-making carriers out of the industry.

Low fares require cost savings

To quote Michael O’Leary, ‘Any fool can sell low air fares and lose money. The difficult bit is to sell the lowest air fares and make profits. If you don’t make profits, you can’t lower your air fares or reward your people invest in new aircraft or take on the really big airlines like BA and Lufthansa.’

According to the company, its no-frills service allows it to prioritize features important to its clientele, such as frequent departures, advance reservations, baggage handling and consistent on-time services. Simultaneously, it eliminates non-essential extras that interfere with the reliable, low-cost delivery of its basic flights. The eliminated extras include advance seat assignments, in-flight meals, multi-class seating, access to a frequent-flyer programme, complimentary drinks and amenities. In 1997, Ryanair dropped its cargo services, at an estimated annual cost of IR£400,000 in revenue. Without the need to load and upload cargo, the turnaround time of an aircraft was reduced from 30 to 25 minutes, according to the company. It claims that business travellers, attracted by frequency and punctuality, comprise 40 per cent of its passengers, despite often less conveniently located airports and the absence of pampering.

In conjunction with the elimination of non-essential extras, the organization of its operations enables the airline to minimize costs, based on five main sources.

Fleet commonality (Boeing 737s, like Southwest Airlines): this results in lower maintenance and staff training costs. In 2005, the company negotiated a new Boeing deal that takes down its per-seat costs for all post-January 2005 deliveries to rock-bottom levels. This deal not only establishes a platform for growth; a younger fleet also enables further cost reductions through lower fuel utilization and maintenance costs.
Contracting out of aircraft cleaning, ticketing, baggage handling and other services, other than at Dublin Airport; this is more economical and flexible, while it entails less aggravation in terms of employee relations.
Airport charges and point-to-point route policy: Ryanair uses secondary airports that are less congested, motivated to offer better deals and have fewer delays, resulting in increased punctuality and shorter turnaround times.
Staff costs and productivity: productivity-based pay schemes and non-unionized staff.
Marketing costs; Ryanair was the first airline to reduce and finally eliminate travel agents’ fees. In January 2000, Ryanair launched its www.ryanair.com website. This has had the effect of saving money on staff costs, agents’ commissions and computer reservation charges, while significantly contributing to growth. In 2005, Internet sales accounted for 97 per cent of all bookings. Ryanair supplements its advertising with the use of free publicity to highlight its position as the low fares champion, by attacking various constituencies that threaten its cost structure. These include EU regulators, airport authorities, politicians and trade unions. Its per passenger marketing costs of 60c are considered to be the lowest across the European airline sector.

The year 2005 saw enormous volatility in the price of oil, and the global airline industry faced losses of US$6 billion. Ryanair, which had been unhedged with respect to oil prices since September 2004, announced on 1 June that it was hedging 75 per cent of its fuel needs for the October 2005 to March 2006 period, at a price of US$47 a barrel. At times, in previous weeks, the price had stood at US$53-plus per barrel. At the end of June, the price had hit US$60 and analysts were predicting it would rise to US$70-plus in the coming months.

Low costs contribute to a low break-even load factor of 62 per cent, so the airline can make money even if it fills fewer seats than other budget competitors with higher costs and higher break-even load factors. For example, easyJet’s break-even load factor is 73 per cent, while that of Virgin Express is 83 per cent. Table 6 shows Ryanair’s operating cost structure.

Table 6 Ryanair consolidated profit and loss accounts

Operating revenues Scheduled revenues Ancillary revenues		Year ended 31 March 2005 €000		Year ended 31 March 2004 €000
		1,128,116		924,566
		208,470		149,658
Total operating revenues—continuing operations	1,336,586		1,074,224
Operating expenses
Staff costs		140,997		123,624
Depreciation and amortization		98,703		98,130
Other operating expenses
Fuel and oil		265,276		174,991
Maintenance, materials and repairs	37,934		43,420
Marketing and distribution costs	19,622		16,141
Aircraft rentals		33,471		11,541
Route charges		135,672		110,271
Airport and handling charges		178,384		147,221
other		97,038		78,034
Total operating expenses	1,007,097		803,373
Operating profit before exceptional costs and goodwill		329,489		270,851
Profit for the year		266,741		206,611

Customer service

The airline’s claims of attention to customer service are encompassed in its Passenger Charter, which embraces a number of doctrines:

Sell the lowest fares at all times on all routes and match competitors’ special offers.
Allow flight and name changes with requisite fee
Strive to deliver on-time performance
Provide information to passengers regarding commercial and operational conditions
Provide complaint response within seven days
Provide prompt refunds
Eliminate overbooking and involuntary denial of boarding
Publish monthly service statistics
eliminate lost or delayed luggage
Ryanair will not provide refreshments or meals or accommodation to passengers facing delays; any passenger who wish to avail themselves of such services will be asked to pay for them directly to the service provider
Ryanair facilitates wheelchair passengers travelling in their own wheelchair; where passengers require a wheelchair, Ryanair directs those passengers to a third-party wheelchair supplier at the passenger’s own expense; Ryanair is lobbying the handful of airports that do not provide a free wheelchair service to do so.

The company has confirmed that it would introduce a number of cost-cutting new features on its flights. For instance, the Ryanair fleet would heretofore be devoid of reclining seats, window blinds, headrests, seat pockets and other ‘non-essentials’. Leather seats instead of cloth ones would allow faster turnaround times since leather is quicker and easier to clean. More controversially, Michael O’Leary hoped eventually to wean passengers off checked-in luggage, eliminating the need for baggage handling, suitcase holding areas and lost property. In 2004, Ryanair had one of the lowest baggage allowances of any major airline, at 15 kg a person, and charged up to €7 for every additional kilo, one of the highest surcharges in European aviation.

Successive Annual Reports cite-on-time performance (defined as up to 15 minutes after scheduled time in UK Civil Aviation Authority statistics) and baggage handling as of key importance to customers. On punctuality, Ryanair claims to be the most punctual airline between Dublin and London. On baggage handling, Ryanair claims less than one bag lost per 1000 carried, better than even the best US airline, Alaska Airlines, with 3.48 bags per 1000 lost, and considerably better than its role model Southwest Airlines with 5.00 per 1000 lost.

Tables 7and 8, and Figure 3 provide some independent comparisons of Ryanair with other airlines on punctuality and customer perceptions.

Reporting airport/airline	Origin/ destination	% early to No. of 15minutes		Average delay flights
Reporting airport/airline		flights	late	(minutes)	unmatched
Birmingham—Ryanair	Dublin	180	88	6	0
Birmingham—Aer Lingus	Dublin	299	89	7	2
Birmingham—MyTravel	Dublin	4	50	20	0
Heathrow—Aer Lingus	Dublin	785	71	16	2
Heathrow—bmi British Midland	Dublin	432	71	14	0
Stansted—Ryanair	Dublin	727	79	11	1
Gatwick—British Airways	Dublin	180	82	9	0
Gatwick—Ryanair	Dublin	298	87	8	2
Heathrow— bmi British Midland	Brussels	354	73	13	1
Heathrow— British Airways	Brussels	452	84	9	2
Heathrow— bmi British Midland	Palermo	8	25	37	0
Heathrow—Alitalia	Milan(Linate)	174	63	15	0
Heathrow— British Airways	Milan(Linate)	178	80	10	0
Heathrow— bmi British Midland	Milan(Linate)	172	68	13	0
Heathrow—Alitalia	Milan (Malpensa)	298	48	24	0
Heathrow— British Airways	Milan (Malpensa)	180	80	10	0
Stansted— Ryanair	Bergamo	172	76	10	0
Stansted— easyJet	Bologna	60	70	14	0
Stansted— easyJet	Milan(Linate)	60	42	39	0
Stansted— easyJet	Rome (Ciampio)	120	76	12	0
Stansted— Ryanair	Rome (Ciampio)	356	79	9	0
Stansted— easyJet	Edinburgh	327	60	20	0
Stansted— easyJet	Nice	120	70	24	0
Stansted— Virgin Express	Nice	1	0	184	0
Stansted— Ryanair	Montpellier	59	76	14	2
Stansted— Ryanair	Prestwick	562	87	6	4
Stansted— easyJet	Glasgow	276	87	8	0
Glasgow—Aer Lingus	Dublin	176	80	9	4
Glasgow—bmi British Midland	Dublin	2	100	0	0

On punctuality, it must be borne in mind that one is not necessarily comparing like with like when contrasting figures for congested Heathrow with Stansted or Luton, even if all serve London. Also not counted in the statistics were cancelled flights. Ryanair has been known to ‘consolidate’ passengers by transferring them from their original flight to later or alternative routing without any notice, if passengers were unfortunate enough to have originally been booked on a low seat occupancy flight. Ryanair has announced that it would ignore European Commission proposals stipulating that passengers whose flight has been cancelled and who have to wait for an alternative flight should be provided with care while waiting, stating ‘we do not, and never will offer refreshments’.

Clouds on the horizon?

Despite its winning performance in its 2005 results, a number of issues faced Ryanair

While the competitive threat of new budget carriers had not emerged, some of the mainstream carriers were becoming quasi-budget airlines on short-haul routes. An important instance of this was Aer Lingus, the national state-owned airline of Ireland, operating domestic and international services, with a fleet of 30 aircraft. The events of 11 September 2001 were particularly traumatic for Aer Lingus, as the airline teetered on the verge of bankruptcy. In late 2001, the choice was to change, or to be taken over or liquidated. Led by a determined and focused chief executive and senior management team, the company set about cutting costs. By the end of 2002, Aer Lingus had turned a 2001 €125 million loss into a €33 million profit, and it improved still further in 2003 with a net profit of €69.2 million. In essence. Aer Lingus claimed that it had transformed itself into a low-fares airline, and that it matched Ryanair fares on most routes, or that it was only very slightly higher. The airline’s chief operating officer said that “Aer Lingus no longer offers a gold-plated service to customers, but offers a more practical and appropriate service…it clearly differentiates itself from no-frills carriers. We fly to main airports and not 50 miles away. We assign seats for passengers, we beat low fares competitors on punctuality, even though we fly to more congested airports, and we always fulfil our commitment to customers—unlike no frills carrier. While Aer Lingus had been an early adopter, other mainstream airlines like British Airways and Air France/KLM were also converting short-haul intra-European routes to the value model offered by Aer Lingus.
Further source of pressure came from the EU. A decision from the EU Commission in February 2004 ruled that had been receiving illegal state subsidies for its base airport at publicly owned Charleroi Airport (styled ‘Brussels South’ by Ryanair). Of course, it was not only the Charleroi decision but also the precedent it could set that was of concern. Other deals with public airports would come under scrutiny, although the vast majority of the airline’s slots were at private airports. Also, it was estimated that Ryanair would have to repay €2.5 million and €7 million to Charleroi’s regional government. Ryanair appealed the decision, but also threatened to initiate state aid cases and complaints against every other airline flying into any state airports offering concessions and discounts. Airport fees comprised 19 per cent of Ryanair’s operating costs and were deemed to be an inherent part of the airline’s low-cost model. Thus, Ryanair warned that there was no mid-cost alternative model. Nevertheless, two months after the Charleroi verdict, Ryanair confirmed that it had agreed a new deal there. It would keep flying all its 11 routes from Charleroi, continuing existing airports and handling charges until the airport, which accommodated 1.8 million passengers a year at the time, reached two million passengers a year. The EU Commission was not readily convinced and initiated an investigation of the new settlement.
On another regulatory matter, the EU had devised fresh rules to cover overbooking that results in boarding denials to passengers by air-lines. Air travellers bumped off overbooked flights by EU airlines would receive automatic compensation of between €250 and €600. Compensation might also be claimed when flights are cancelled for reasons that are the carrier’s responsibility, provided the passengers have not been given two weeks’ notice or offered alternative flights. Ryanair declared that the new rules would not impact its operations, as it did not overlook its flights, and had the fewest number of cancellations and the best punctuality record in Europe. It suggested that, it the EU is serious, it should just outlaw the practice of over-booking entirely.
A few days prior to the EU decision on Charleroi, on 30 January 2004, at the Central London County Court, a disabled man won a landmark case against Ryanair after it charged him £18 (€25) for a wheelchair he needed at Stansted to get from the check-in desk to the aircraft. The passenger was awarded £1336 (€2400) in compensation from Ryanair, as the UK-based Disability Commission said it may launch a class action against the airline on behalf of 35 other passengers. Ryanair’s immediate reaction was to levy 70c a flight on all customers using the affected airports. In December 2004, the decision against Ryanair was upheld on appeal, although it was somewhat mitigated when the Court of Appeal decided that Stansted Airport was also answerable and had to pay half of Ryanair’s liability for damages, with interest. In response, Ryanair’s lawyer suggested that the 50:50 split in liability was unclear and unexplained, and ‘could well have been delivered by King Solomon’.

Also in 2004, a disgruntled Ryanair passenger set up a website inviting complaints about the airline. Ryanair moved to have the website shut down in early 2005, on the grounds that it contained material that is ‘untrue, unfounded, malicious and deeply damaging to the good name and trading reputation of Ryanair’, and that the name and appearance of the site, which resembled that of Ryanair’s home website could be construed as ‘abusive registration’. However, the site has reappeared under an ISP provider in Canada, and its number of hits has increased since the incident was reported in the British satirical magazine Private Eye.

On another front, Ryanair was in dispute against the British Airports Authority (BAA), as it filed a writ at the High Court in London for alleged ‘monopoly abuse’ at Stansted. Michael O’Leary warned that the action was only the first skirmish in what would become ‘the mother and father of a war’. The Chief Executive of the BAA announced that he did not intend to negotiate further reductions to Ryanair’s deeply discounted deal on landing charges at Stansted, due to finish in March 2007. The average charge per passenger would rise form £3 to £5 at the airport, whose capacity utilization was now so high that it was running out of slots at peak times. Meanwhile, Michael O’Leary was scathing about ‘grandiose plans’ to build a second runway at Stansted at cost of £4 billion, ‘when the cost of a runway and even a terminal should run no more than £400 million.
As if these issues were not enough, a number of Dublin-based Ryanair pilots were planning to establish their own association, the Ryanair European Pilots Association with links to the British Airline Pilots Association (BALPA), the Irish Airline Pilots Association (IALPA) and the European Cockpit Association. In November 2004, these pilots, supported by IALPA, took a complaint about victimization against Ryanair to the Irish Labour Court. Ryanair could potentially face a compensation bill of £44 million if 170 victimization claims brought by its Dublin-based pilots were to be upheld. The company had out-lined various consequences to pilots if they joined a trades union: possible redundancy when the existing 737-200 fleet was phased out, no share options or pay increases, non promotions and no payment for future recurrent training. The airline declared its determination to keep out trades unions and to take a case to the High Court to prove that legislation attempting to force companies to negotiate with unions was unconstitutional. A ruling favourable to the pilots in February 2005 by the Irish Labour Relations Commission, ordering that Ryanair had to attend a hearing dealing with the pilot’ complaints, was dismissed by Michael O’Leary: ‘It is no surprise that the brothers have found in favour of the brothers. We will fight them on the beaches, in the fields, and in the valleys,’ he said. Meanwhile, the airline is also fighting a number of legal challenges, including proceedings against IALPA, accusing it of conducting an organized campaign of harassment and intimidation of Ryanair pilots through a website, warning them off flying the airline’s new aircraft. Indeed, the carrier claims that specific threats issued on the website are being investigated by the Irish police. In April 2005, Ryanair abandoned an experiment in paid-for in flight entertainment, after passengers were reluctant to rent the consoles at the £5 required to receive the service. Apparently, market research discovered passengers are unwilling to invest on such short flights, with the ideal being six-hour flights to longer-haul holiday destinations. When the experiment was launched in November 2004, Michael O’Leary hailed the move as ‘the next revolution of the low-fares industry…we expect to make enormous sums of money’.

Questions:

1. How does Ryanair’s pricing strategy account for its successful performance to date? Would you suggest any changes to Ryanair’ pricing approach? Why/why not?

2. Is the ‘no-fares’ strategy a useful approach for Ryanair in the short term? In the long term?

3. Do the issues facing Ryanair threaten its low-fares model?

Case V LEGO: the toy industry changes

History

In 1932 Ole Kirk Christiansen, a Danish carpenter, established a business making wooden toys. He named the company ‘LEGO’ in 1934, which comes from Danish words ‘leg godt’, meaning ‘play well’. Later, coincidentally, it was discovered that in Latin it means, ‘I put together’. The LEGO name was chosen to represent company philosophy, where play is seen as integral to a child’s successful growth and development. In 1947 the company began to make plastic products and in 1949 it launched its world-famous automatic building brick. Ole Kirk Christiansen was succeeded by his son Godtfred in 1950, and under this new leadership the LEGO group introduced the revolutionary ‘LEGO System of Play’, which focused on the importance of learning through play. The company began exporting in 1953 and soon developed a strong international reputation.

The LEGO brick, with its new interlocking system, was launched in 1958. During the 1960s LEGO began to use wheels, small motors and gears to give its products the power of motion. LEGOLAND was established in Billund in 1968, as a symbol of LEGO creativity and imagination. Later, in the 1990s, two new parks were opened in Britain and California. LEGO figures were introduced in 1974, giving the LEGO brand a personality. The 1980s saw the beginning of digital development, with LEGO forming a partnership with Media Laboratory at the Massachusetts Institute of Technology in the USA. This resulted in the launch of LEGO TECHNIC Computer and paved the way for LEGO robots. LEGO introduced a constant flow of new products in the 1990s, and placed greater focus on intelligence and behaviour. The new millennium saw LEGO crowned the ‘Toy of the Century’ by Fortune magazine and the British Association of Toy Retailers. LEGO is currently the fourth largest toy manufacturer in the world after Mattel, Hasbro and Bandai, with a presence in over 130 countries.

Challenges for the traditional toy market

A number of environmental shifts have been affecting the toy market over the past decade. Some of these are described below.

Kids getting older younger. By the time most kids reach the age of eight they have outgrown the offerings of the traditional toy market. A central factor in children abandoning toys earlier in their lack of free time to play. Children today have a lot more scheduled activities and, with greater emphasis on academic achievement, a lot more time is spent studying. Faced with more media and entertainment choices these sophisticated and technologically savvy consumers are favouring electronic, fashion, make-up and lifestyle products. The most susceptible group to this age compression are ‘tweens’—children between the ages of 8 and 12—a US$5 billion market, accounting for 20 per cent of the US$20.7 billion traditional toy industry.
Intensifying competition from the electronic and games market. As noted above, today’s young consumer is far more likely to be seen surfing the web, texting on their mobile phone, listening to their MP3 player or playing on their Game Boy than enjoying a LEGO set. A survey by NPD Funworld, in 2003, found that tween boys who played video game spent approximately 40 per cent less time playing with action figures when compared with the previous year. Handheld toys with a video and gaming element suit the mobile lifestyle of today’s tween. As demand for these more sophisticated toys increases, traditional toy makers are facing more direct competition with the electronic and video games market.
Fickleness of young consumers. The toy market today is very fashion-driven, leading to shorter product life cycles. Toy manufacturers are facing increasing pressure to develop a competency in forecasting market changes and improving their speed of response to those changes. In an effort to get a share of the huge revenues generated by the latest hot toy, many toy manufacturers have left themselves more vulnerable to greater earnings volatility.
Power of the retail sector. Consolidation in the retail sector and the expansion of many retail chains has placed enormous pressure on the profit margins of traditional toy makers. Major retailers can exert tremendous power over their suppliers because of the vast quantities they buy. Many retailers insert a clause in their supplier contracts that gives them a certain percentage of profit regardless of the retail price.

Traditional toy makers are struggling to keep up with these environmental changes. It appears no one is safe, when even the world-renowned LEGO brand can fall victim to changing market trends. The cracks first began to show in 1998, when LEGO made a loss for the first time in its history. This began a major reversal in the fortunes of a company that had become accustomed to decades of uninterrupted sales growth (see Table 9). Ironically, it is the success of LEGO that may ultimately have paved the way for its downfall.

Table 9 : LEGO financial information

LEGO financial information (Mdkk)	2004	2003	2002	2001	2000
Income statement
Revenue	6704	7196	10006	9475	8379
Expenses	(6601)	( 8257)	(9248)	(8554)	(9000)
Profit/(loss) before special items, financial income and expenses and tax	103	(1061)	868	921	(621)
Impairment of fixed assets	( 723)	( 172)	–	–	–
Restructuring expenses	( 502	( 283)	–	( 122)	( 191)
Operating profit/(loss)	(1122)	(1516)	868	799	( 812)
Financial income and expenses	( 115)	18	( 251)	( 278)	( 280)
Profit/(loss) before tax	(1237)	(1498)	617	521	(1092)
Profit/(loss) on continuing activities	(1473)	(953 )	348	420	( 788)
Profit/(loss) discontinuing activities	( 458)	18	(22)	(54)	(75)
Net profit/(loss) for the year	(1931)	(935)	326	366	(863)
Employees: Average number of employees (full-time), continuing activities	5569	6542	6659	6474	6570
Average number of employees (full-time), discontinuing activities	1725	1756	1657	1184	1328

What went wrong for LEGO

According to Kjeld Kirk Kristiansen, owner of the business and grandson of its founder, following many years of success the LEGO culture had become ‘inward looking’ and ‘complacent’ and had failed to keep pace with the changes taking place in the toy market. This lack of environmental sensitivity was evident in the US market in 2003, where LEGO failed to predict demand for its Bionicle figures, resulting in two of its best-selling products from this range being out of stock in the run-up to Christmas. It appeared nothing had been learned from the previous year, when also in the run-up to Christmas the much sought-after Hogwarts Castle sets were out of stock across the UK.

LEGO had also become over-dependent on licences in the 1990s, for products such as Star Wars and Harry Potter, as its main source of growth. This left LEGO vulnerable to the faddishness of these products: the years in which Star Wars and Harry Potter films were released coincided with profitable years for LEGO, while losses were reported in the intervening years.

The diversification of the brand into the manufacture of items such as clothing, bags and accessories was another mistake for LEGO. The company over-complicated its product portfolio and it ran close to over-stretching the LEGO brand. Kristiansen, resumed leadership in 2004 to guide the company out of crisis, is quoted as saying ‘LEGO was so busy chasing the fashion of the day it took its eye off its core brand.’

He phasing-out of its long-established pre-school Duplo brand, to be replaced by LEGO Explore, was another error. Parents were left confused, with many believing the larger-size Duplo brick had been discontinued. This error resulted in a loss of revenues from the pre-school market in 2003. Adult fans of LEGO (AFOLs) were also left disgruntled when LEGO changed the colour of its new building bricks so that they no longer matched the colour of the old bricks.

While other toy manufacturers have moved production to low-cost destinations such as China, LEGO has been reluctant to follow suit. Today it still manufactures the bulk of its product in Billund and Switzerland. The reasons posited for the company’s reluctance to move include a strong sense of loyalty to Billund, where one-quarter of the residents work at the LEGO factory, and concerns that a move would affect its brand image. While its loyalty to these sites is admirable, and brand image worries understandable, the question is whether its long-term future is viable without such a move.

A new direction for LEGO

In an attempt to turn around its fortunes LEGO has developed a number of new marketing strategies. These include the following.

A back-to-basics strategy is seeing LEGO refocus on its core brick-based product range and place more emphasis on its key target group—younger children. In 2003, LEGO relaunched its classic range of brick-based products and many new product lines have centred on eternal themes such as Town, Castle, Pirates and Vikings. LEGO has reinstated the Duplo brand and introduced the Quarto brand, which consists of larger bricks for children under two. Other new lines include LEGO Sports, born from strategic alliances with the National Hockey League and US National Basketball Association. While the traditional audience of LEGO has always been young boys it has introduced a new range, ‘Clikits’, a social toy developed specifically for a female audience. Clikits consists of pretty pastel-coloured bricks, which provide numerous options to create jewellery and fashion accessories.
LEGO has admitted to over-diversifying its brand. In response to this, LEGO has withdrawn many of its manufacturing lines, instead opting to outsource these to third parties via licensing deals. LEGO is also selling its LEGOLAND parks in a bid to refocus efforts on its core product and improve its financial situation.
In an attempt to create a story-based, multi-channel, LEGO has engaged in a number of licensing deals, with varying degrees of success, but more importantly it is now developing its own intellectual property. The Bionicle range, launched in 2001, was the first time LEGO has created a story from the start as the basis for a new product range. The Bionicles combine physical snap-together kits with an online virtual world. This toy brand has also been extended into entertainment in the form of comics, books and a Miramax movie: Bionicle: Mask of light. The range has proved a major success for LEGO and, building on this success, it has developed Knights Kingdom.
Sub-brands that LEGO has neglected, including Mindstorms and LEGO TECHNIC, both aimed at older children and enjoyed by some adults, are being given more attention. With so many adult fans of LEGO, efforts are also being made to further engage the adult market. The company is currently considering whether to market its management training tool, entitled LEGO Serious Play, to a wider adult audience.
LEGO has overhauled its packaging, and the style and tone of its advertising. The emphasis is now being placed on the LEGO play an educational experience as opposed to product detail. The strap-line ‘play on’ was introduced in January 2003 to accompany the change. The slogan draws its inspiration from the company’s five core values: creativity, imagination, learning, fun and quality. LEGO is also making greater use of more interactive communication tools to promote its products, which it is believed will encourage consumers to interact more with the brand. 2005 has seen LEGO invite fans on a tour of the company. Here they are given the opportunity to meet new product developers, designers and toolmakers, and learn about the company’s history, culture and values.
LEGO is also taking steps to reverse its insular culture. In an attempt to build a more market-driven organization, it is spending more time consulting children, parents, retailers and AFOLs. The company established the LEGO Vision Lab in 2002 to examine how the future will look to children and their families. A variety of sources are being used to make assessments of future worldwide family patterns, including anthropology, architecture, consumer patterns and awareness, culture, philosophy, sociology and technology.
Plagued by supply-chain inefficiencies LEGO has improved production time from concept to the retailer’s shelf. An example of this is the Duplo Castle, which was developed in nine months.

Conclusion

Having taken its eye off the ball, LEGO is fighting back with a new customer-focused strategic approach. Continuous improvement, in response to changing market trends, is now key if LEGO is to ward off the many challenges it still faces. It is still involved in many licence agreements, making it vulnerable to this cyclical market. Its back-to-basics strategy has been widely praised but it remains to be seen if LEGO can balance this with its increasing activity in software. With children’s growing appetite for video games with a more violent content, can LEGO satisfy this target group while still remaining true to its wholesome ‘play well’ brand values? Will LEGO succeed in its attempts to target young girls and its desire to target a more adult audience? Will it succeed in its attempts to reduce costs and improve efficiencies? Will CEO Jorgen Vig Knudstorp succeed where his predecessors have failed? Only in the fullness of time will these questions be answered but one thing is for sure: no brand, no matter how powerful, can afford to become complacent in an increasingly competitive business environment.

Questions:

1. Why did LEGO encounter serious economic difficulties in the late 1990s?

2. Conduct a SWOT analysis of LEGO and identify the company’s main sources of advantage.

3. Critically evaluate the LEGO turnaround strategy.

Marketing Management

01 Sep

MBA Assignment Admin 0 Comment Marketing Management IIBMS Assignment, IIBMS Case Study Solution

Q.1. (a) From a marketing perspective, what has Guinness done to ensure its longevity?

(b) How would you characterize the Guinness brand?

Q.2. (a) What are the strengths and limitations of the Internet as a data collection instrument?

(b) What is meant by a marketing information system? Discuss, using examples, the main components of such a system.

Q.3. (a) What are the advantages and disadvantages of co-branding? Suggest two co-branding alliances that you think might be successful, explaining why.

(b) The product life cycle is more likely to mislead marketing management than provide useful insights. Discuss.

Q.4. (a)The marketing of services is no different to the marketing of physical goods. Discuss.

(b) Discuss the role of service staff in the creation of a quality service. Can you give examples from your own experiences of good and bad service encounters?

Q.5. (a)How would you justify the price differences for a cup of coffee that you might encounter if you purchase it in a local office shop versus a top-class hotel?

(b) Discuss how a company pursuing a build strategy is likely to react to both price rise and price cuts by competitors.

Marketing Management

01 Sep

MBA Assignment Admin 0 Comment Marketing Management IIBMS Assignment, IIBMS Case Study Solution

CASE: 1 Absolut Vodka: creating advertising history

The Absolut advertising campaign was often regarded by advertising experts as one of the most brilliant, innovative, successful and long-running campaigns ever. The several prestigious awards that the campaign has won since its first ad was launched stand as testimony to this fact (See Table) for details of some of the awards).

Table: A brief list of awards won by Absolut advertisements

Year	Award(s)
1989	The Kelly Grand Prize for the ad ‘Absolutla’
1990	Grand EFFIE Award for Absolut advertising campaign
1991	The Kelly Grand Prize for the ad ‘Absolut Glasnost’
1992	Award of Excellence’ for animation on the Internet by the communication Arts magazine
1993	Absolut Advertising Campaign introduced in the ‘Hall of Fame’ by the American Marketing Association
2000	Four Cresta Awards for international Advertising for the ads ‘Absolut Accessory’, ‘Absolut Auckland’, ‘Absolut Voyeur’ and ‘Absolut Space’ from Creative Standards International and the International Advertising Association
2002	Insight Award for Best online advertising
2003	EFFIE Gold Award for sustained success of the Absolut advertising campaign

‘Absolut adventure’: the making of a legend

In early 1979, Absolut vodka launched in the USA at the liquor trade convention held at Fairmont Hotel in New Orleans. Initially, the company concentrated its marketing efforts in and around New York, Los Angeles, San Francisco and Boston because these were the places where new trends were created, media attention was intense and the bar culture prevailed.

V&S had sold around 25,000 cases of Absolut vodka when advertising agency TBWA took over its ad account in late 1979. Two at TBWA, Graham Turner and Geoff Hayes, were assigned the job of creating the ads for the ‘still not so popular Swedish vodka’. The duo began by getting familiar with the product’s taste and conducting extensive research on different liquor ads of the previous 10 years. They found that most ads were pretentious and pompous, featuring people dressed in expensive attire and living lavish lifestyles with a small liquor bottle tucked in some corner. Moreover, none of the ads was targeted at people below 40.

After extensive research and effort, the admen came up with three different advertisement samples. The first featured a Russian soldier looking through a pair of binoculars with each lens reflecting the Absolut vodka bottle, accompanied by a slogan that read ‘Here’s something that Russians would really love to put behind bars.’ This ad was aimed at challenging the Russian vodka brand Stolichnaya. The second ad featured some of the favourite pastimes of Swedes, with a picture of the bottle; the slogan read ‘There’s nothing the Swedes enjoy more when it’s cold.’ The third ad featured only the Absolut vodka bottle with a halo over it, with a two-word slogan: ‘Absolut Perfection’ (a modified version of one of the ads created at NW Ayer). This ad was designed with the intention of humorously portraying as pure and natural.

The admen had come up with a dozen designs, which depicted the bottle in different ways accompanied by a two-word slogan. It was one of the simplest themes anyone associated with Absolut had created up until then. The ads featured the Absolut bottle, a description of the product and the two-word slogan with one word describing the theme and the other the brand name itself. In early 1980, V&S launched the first advertisement, ‘Absolut Perfection’, along these lines. Since then, the bottle has been retained as the centerpiece for every advertisement of Absolut vodka accompanied by a two-word slogan.

All Absolut ads were published in popular American newspapers and magazines like Newsweek, Time, New York, Los Angeles, New Yorker, New York Times, Interview and GQ. Carillon decided to continue using the same ad concept with a variety of themes. Experts felt that by using the same concept to depict various events, people or things, Absolut ads always gave people something to think about. Soon the ads had become a topic of interest among liquor consumers.

People began drinking Absolut not only because it was a new premium brand available on the market, but also to experience the image that its advertisement had created—that of simplicity and purity. Analysts credited the popularity of Absolut to its advertisements as they involved viewers in a creative process. Within three years, v Absolut vodka was being exported to 16 different markets worldwide as well as its home country, Sweden. In 1984, V&S exported six million litres of Absolut vodka. In the USA, sales were doubling every year (see the table).

Table V&S: Income statements, 1997-2002 (SEK million)

Particulars/year	1997	1998	1999	2000	2001	2002
Net Sales	3223.6	3,446.9	4028.6	5711.5	6725.1	9092.8
Other operating revenues	(10.3)	32.3	43.2	104.3	175.3	149.6
Operating Expenses	(2449.8)	(2626.8)	(2924.9)	(4177.4)	(4741.2)	(6686.6)
Depreciation, amortization and write-downs	(105.7)	(130.7)	(85.6)	(235.0)	(394.9)	(519.2)
Non-recurring items	(17.0)	287.3	(143.3)	46.1	–	–
Operating Profit	640.8	1009.0	918.0	1449.5	1764.3	2036.6
Financial items, net	31.5	50.6	46.0	(16.2)	(292.6)	(167.6)
Profit before taxes	672.3	1059.6	964.0	1433.3	1471.7	1869.0
Taxes	(175.0)	(197.3)	(273.5)	(437.2)	(462.0)	(598.5)
Minority share	(0.4)	(0.8)	(0.3)	(61.9)	(0.5)	(5.7)
Net profit for the period	496.9	861.5	690.2	934.2	1009.2	1264.8

In 1985, Michel Roux, President of Carillon and in charge of US distribution, came up with the idea of getting Absolut bottle painted and using it as an ad. Initially, there was opposition to this idea as it was a departure from the central idea of having the bottle photographed. However, Roux went ahead and commissioned celebrated artist Andy Warhol to paint the bottle, marking the beginning of Absolut’s association with art. The painting attracted a lot of accolades and the celebrity association gave the brand a great deal of mileage.

Thereafter, several artists painted their own interpretations of the Absolut bottle. Analysts observed that painting an Absolut bottle had apparently become an issue of pride for many leading artists. Big names such as Keith Haring, Kenny Scharf, Stephen Sprouse, Edward Ruscha, Arman and Britto made their own interpretation of the Absolut bottle (see Table given below for details). The above exercise was not only in the form of painting, but also in sculpture, glasswork, photography, folk art, wood work, computer/digital art and many other media. As Absolut’s association with the world of art gave the brand a lot of media attention and publicity, the company began regularly publishing these art ads along with the regular ads. Analysts noted that what began as an advertising campaign to promote an unknown Swedish vodka brand had become a part of American culture.

Table Absolut’s association with art and fashion

Year		Name	Description
ABSOLUT ART
1990	Absolut Glasnost			This art collection featured paintings by 26 Russian artists including Alexander Kosolapov, Evgeny Mitta and Leonid Lamm.
1993	Absolut Latino			This collection featured artwork contributed by 16 artists from South and Central America. This collection showcased the artist’s interpretations of the Absolut bottle in traditional and contemporary Latino themes depicting the relationship between reality and illusion. Some of the artist who contributed to this collection were: Alberto Icaza, Vik Muniz and Monica Castillo.
1997	Absolut Expressions			This collection featured art work contributed by 14 African and America artists. The artists (including Anita Philyaw, Maliaka Favorite and Frank Bowling among others) presented their interpretations of the bottle in traditional African art, early American folk art and in abstract imagery through mediums like canvas, quilts, and sculptures.
1998-99	Absolut Originals			This included paintings contributed by 16 European artists including Damien Hirst, Maurizio Cattelan and Francesco Clemente.
2000	Absolut Ego (Paris) Absolut Exhibition (New York) Absolut Art			Collections featured paintings contributed by famous artists like Damien Hirst and Nam June Paik.
Absolut FASHION
1995	Absolut Newton			This campaign featured designer wear created by famous fashion designers John Galliano, Helmut Lang, Anna Molinari and Martine Sitbon. It was first featured as an eight-page insert in Vogue, a popular fashion magazine.
1997	Absolut Versace			This eight-page insert in Vogue featured designer wear created by Gianni Versace, the famous Italian designer. Gianni’s creations were modeled by famous models like Naomi Campbell, Kate Moss, Mark Findley and Marcus Schenkenberg, and photographed by famous fashion photographer Herb Ritts.
1999	Absolut Tom Ford/ Absolut Gucci			This campaign included designer collections created by Tom Ford (of Gucci) a famous American fashion designer. The campaign was shot at a discotheque in Paris and was included as an eight-page insert in Vogue.
2000	Absolut Gaultier			This campaign featured designs by Jean Paul Gaultier, inspired by Absolut and other Swedish legends. It was included as an eight-page insert in Vogue and other popular European fashion magazines.

Roux now began toying with the idea of making ads that were ‘stylish, hip and audacious’. With this began Absolut’s association with the world of fashion. In 1988, Roux commissioned the famous American fashion designer David Cameron to design an advertisement for the bottle. Instead of featuring the Absolut bottle, Cameron designed a dress (with the Absolut Vodka name and the text printed on it) that was modelled by a famous model of the day, Rachel Williams (she ‘represented’ the bottle). This print ad, named ‘Absolut Cameron’, was launched in February 1988 and gained tremendous publicity. On the day of its publication, 5000 women reportedly called TBWA wanting to buy the dress shown in the ad.

This led to the next phase of Absolut’s advertising strategy, wherein the bottle began to be represented in new, innovative ways. By the mid-1990s TBWA ran several ads linked to fashion, like Absolut Fashion (eight pages of coverage in Vogue), Absolut Style and Absolut Menswear, in popular fashion magazines like Vogue, Elle and GQ (see Table for details).

As the themes for the advertisements became more complicated, the cost of producing them went up substantially. For instance, some of the Absolut Christmas ads cost more than US$1 million to produce. Thus, over the years, V&S continually increased its advertising budget. TBWA spent approximately US$25 million on Absolut ads in 1990, an increase from US$750,000 in 1981. In 1997, Absolut also became associated with The Ice Hotel (an entire hotel made from ice) in Jukkasjarvi, Sweden. An ‘Absolut Ice Bar’ was added to the Ice Hotel, where different kinds of drinks made from various Absolut brands were served in glasses also made of ice.

By the end of the 1990s, Absolut ads began targeting not only the sophisticated, upper-class consumers but also sports fans, professionals, artists, intellectuals and even those who could not comprehend subjects like art and literature. Clearly, V&S was now aiming at a broader set of customers as the ads were featured in almost all kinds of magazines: sports, entertainment, art and fashion, business, and so on. By now the company had launched more than 1000 Absolut ads all over the world.

‘Absolut continuity’: the brand marches strongly ahead

By 2ooo, Absolut advertisements were recognized the world over for their stylish, humorous and innovative attributes. As people began collecting the ads, analyst observed that the brand had become an advertising phenomenon. More importantly, sales of Absolut were increasing over the years. Apart from the USA, Absolut was now exported to Russia and many Asian and Latin America countries. The brand generated most of its sales in the USA, Canada, Sweden, Greece, Spain, Germany and Mexico. In 2002, total sales stood at 7.5 million cases, making it the world’s largest premium spirit brands.

In 2002, Absolut was presented with the international advertising industry’s most prestigious awards for its online advertising on its website, www. absolut.com, and the Absolut fashion campaign. Advertising experts regarded the website as ‘a premier online brand and lifestyle destination’.

Commenting on the creativity that Absolut ads stood for, Richard W. Lewis, author of Absolut book: The Absolut Vodka Advertising Story, says, ‘Readers enjoy a relationship with this advertising that they have with few other advertising campaigns, especially in the print media. They are challenged, entertained, tickled, inspired and maybe even befuddled as they try to figure out what is happening inside an Absolut ad.’

In January 2003, the company launched Absolut Vanilia. Unlike the previous variants, Absolut Vanilia was launched in a white bottle. The launch of the new flavour was not only supported by print advertisements, but also with radio and outdoor ad campaigns. These ads were launched in a phased manner, beginning with teaser ads in different magazines in April 2003 followed by interactive online ads. The online ads were featured on websites like Maxim.com, EntertainmentWeekly.com, style.com, and Wired.com. These ads were created specifically to suit the product tag-line ‘a different kind of vanilla’.

In October 2003, in line with its penchant for creativity/innovation, Absolut ventured into the world of music with the launch of the Absolut Three Tracks project. This campaign featured music created by different artists according to their interpretations of the Absolut bottle. Analysts felt that the Absolut Three Tracks project, had opened am entirely new chapter in brand communications, as it enabled users to ‘listen to the Absolut brand.’ Commenting on this, Michael Persson, Director, Market Communications, ASC, said, ‘For years, our consumers have seen interpretations of the brand by some of the world’s most prominent artists and designers. With this new project they will also be able to listen to the brand: this is the voice of Absolut’.

Advertising experts felt that even 25 years after its launch, the Absolut advertising campaign was still going strong, innovatively, without changing the central theme. Even while creating music for Absolut Three Tracks, the bottle was used as the central theme. Aril Brikha, one of the artists who created a music track for Absolut Three Track said, ‘I had scanned the shape into a computer program that turns a picture into a tone—a futuristic way of including a picture without letting the listener know. I find it quite similar to previous Absolut projects where the bottle has been hidden in a picture.’ Industry observers as well as customers agreed on one issue: whatever the mode of expression—be it art, photography, technology, fashion or music—Absolut had until now stood for ‘brilliance in advertising’. Said an analyst, ‘We are surprised each year by the creativity and innovation of the brand. It is successful because it is contemporary. There is no end to the campaign.’

Questions:

1. Discuss the role advertising plays in increasing brand awareness and brand loyalty among consumers, especially for products that have very subtle differentiable attributes. In the above context, examine the impact Absolut advertisements had on its target audience. Do you think the advertisements fulfilled their purpose?

2. ‘The Absolut advertising campaign is successful because it is contemporary.’ How did TBWA maintain the ‘freshness’ of the Absolut campaign? Discuss with respect to the brand’s association with different media: art, fashion, technology and music.

3. Even though Absolut ads have been depicted in different media, the central theme of the campaign has remained unchanged (the bottle and the two-word slogan) over the years. In light of the above statement, do you think that the campaign will manage to hold sway or lose in impact in the near future? Give reasons to support your arguments.

CASE: 2 Tesco: the customer relationship management champion

Every three months, millions of people in the UK receive a magazine from the country’s number one retailing company, Tesco. Nothing exceptional about the concept—almost all leading retailing companies across the world send out mailers/magazines to their customers. these initiatives promote the store’s products, introduce promotional schemes and contain discount coupons. However, what sets Tesco apart from such run-of-the-mill initiatives is the fact that it has mass-customized these magazines.

Every magazine has a unique combination of articles, advertisements related to Tesco’s offerings and third-party advertisements. Tesco ensured that all its customers received magazines that contained material suited to their lifestyles. The company had worked out a mechanism for determining the advertisements and promotional coupons that would go in each of the over 150,000 variants of the magazine. This has been made possible by its would-renowned customer relationship management (CRM) strategy framework.

According to Tesco sources, the company’s CRM initiative was not limited to the loyalty card scheme; it was more of a company-wide philosophy. Industry observers felt that Tesco’s CRM initiatives enabled it to develop highly focused marketing strategies. Thanks to its CRM initiatives, the company became UK’s number one retailer in 1995, having struggled at number two behind rival Sainsbury’s for decades. In 2003, the company’s market share was 26.7 per cent, while Sainsbury’s market share was just 16.8 per cent.

CRM the Tesco way

Tesco’s efforts towards offering better services to its customers and meeting their needs can be traced back to the days when it positioned itself as a company that offered good-quality products at extremely competitive prices. Even its decision to offer premium-end merchandise and services in the 1970s was prompted by growing customer demand for the same (see Table 2.A for the company’s ‘core purpose’ and ‘values’, which highlight the importance placed on customer service).

The biggest customer service initiative (and the first focused CRM drive) came in the form of the loyalty card scheme that was launched in 1995. This initiative was partly inspired by the growing popularity of such schemes in other parts of the world and partly by Tesco’s belief that it would be able to serve its customers in a much better (and more profitable) manner
Table 2 A Tesco: core purpose and values

CORE PURPOSE

Creating value for customers, to earn their lifetime loyalty

Values

1. No one tries harder for customers:

understand customer better than anyone, be energetic, be innovative and be first for customers, use our strengths to deliver unbeatable value to our customers

look after our people so they can look after our customers

2. Treat people how we like to be treated:

all retailers, there’s one team—the Tesco Team

trust and respect each other

strive to do our very best

give support to each other and praise more than criticize

ask more than tell and share knowledge so that it can be used

enjoy work, celebrate success and learn from experience

by using such as scheme. Tesco knew that, at any of its outlets, the top 100 customers were worth as much as the bottom 4000 (in terms of sales). While the top 5 per cent of customers accounted for 20 per cent of sales, the bottom 25 per cent accounted for only 2 per cent. The company realized that by giving extra attention to the top customers (measured by the frequency of purchases and the amount spent) it stood to gain a great deal.

To ensure the programme’s success, it was essential that all Tesco employees understood the rationale for it as well as its importance. So, the company distributed over 140,000 educational videos about the programme to its staff at various stores. These videos explained why the initiative was being undertaken, what the company expected to gain from it, and why it was important for employees to participate whole-heartedly in it.

Table 2B: Tesco: classifying customers

EXPENDITURE	SHOPPING FREQUENCY
	Daily	Twice weekly	Weekly	Stop start	Now and then	Hardly ever
High Spend	PREMIUM		STANDARD		POTENTIAL
Medium Spend	STANDARD		POTENTIAL		UNCOMMITTED
Low Spend	POTENTIAL		UNCOMMITTED
	FREQUENT		INFREQUENT		RARE

Impressed with the programme’s results over six months, the company had introduced the scheme in all its stores by February 1995. The stores captured every one of the over 8 million transactions made per week at Tesco stores in a database. All the transactions were linked to individual customer profiles and generated over 50 gigabytes of data every week. Dunnhumby used state-of-the-art data-mining techniques to manage and analyse the database. Initially, it took over a few weeks to analyse the vast amount of data generated. To overcome this problem, Dunnhumby put in place new software that reduced this time to just a few days. As a result, it became possible to come up with useful and timely insights into customer behaviour in a much faster way.

Table 2C: How Tesco used the information generated by its Clubcards

Pricing	Discounts were offered on goods that were bought by highly price-conscious customers. While the company kept prices low on often-bought goods/staples, for less familiar lines it adopted a premium pricing policy.
Merchandising	The product portfolio was devised based on customer profiles and purchasing behaviour records. Depending on the loyalty shown by customers towards a particular product, the substitute available for the same, and the seasonality, the product ranges were modified.
Promotion	Promotions were aimed at giving special (and more) rewards to loyal customers. Few promotions were targeted at the other customers.
Customer service	Extra attention was given to stocking those products that were bought by loyal customers.
Media effectiveness	The effectiveness of media campaigns could be evaluated easily by noticing changes in the buying patterns of those customers whom the said campaign was targeted at.
Customer acquisition	The launch of new ventures (such as TPF and Tesco.com) went smoothly since Tesco targeted the ‘right’ kinds of customers.
Market research	While conducting marketing research, Tesco was able to tap those customers that fitted accurately into the overall research plan.
Customer communication	It was possible to mass customize communication campaigns based on individual customer preferences and characteristics. Tesco began holding ‘customer evenings’ for interacting with customers, gathering more information, and gaining new customers through referrals

The analysis of the data collected enabled Tesco to accurately pinpoint the time when purchases were made, the amount the customer spent, and the kinds of products purchased. Based on the amount spent and the frequency of shopping, customers were classified into four broad categories: Premium, Standard, Potential and Uncommitted (see Table 2B). Further, profiles were created for all the customers on the basis of the types of products they purchased. Customers were categorized along dimensions such as Value, Convenience , Frozen, Healthy Eating, Fresh and Kids.

Tesco also identified over 5000 need segments based on the purchasing habits and behaviour patterns of its customers. Each of these segments could be targeted specifically with tailor-made campaigns and advertisements. The company also identified eight ‘primary life stage’ need segments based on the profiles of its customers. These segments included ‘single adults’, ‘pensioners’ and ‘urban professionals’, among others.

Using the information regarding customer classification, Tesco’s marketing department devised customized strategies for each category, Pricing, promotion and product-related decisions were taken after considering the preferences of customers. Also, customers received communication s that were tailored to their buying patterns. The data collected through its Clubcard loyalty card scheme allowed Tesco to modify its strategies on various fronts such as pricing, inventory management, shopping analysis, customer acquisition, new product launches, store management, online customer behaviour and media effectiveness (see Table 2C).

Tesco began giving many special privileges, such as valet parking and personal attention from the store manager, to its high-value customers. special cards were created for students and mothers, discounts were offered on select merchandise, and the financial service venture was included in the card scheme. The data generated were used innovatively (e.g. special attention given to expectant mothers in the form of personal shopping assistants, priority parking and various other facilities). The company also tied up with airline companies and began offering Frequent Flyer Miles to customers in return for the points on their Clubcards.

Reaping the benefits

Commenting on the way the data generated were used, sources at Dunnhumby said that the data allowed Tesco to target individual customers (the rifle-shot approach) instead of targeting them as a group (the carpet-bombing approach). Since the customers received coupons that matched their buying patterns, over 20 per cent of Tesco’s coupons were redeemed—as against the industry average of 0.5 per cent. The number of loyal customers has increased manifold since the loyalty card scheme was launched (see Figure 2A).

The quarterly magazine Tesco sent to its customers was customized based on the segments identified. Customers falling into different categories received magazines that were compiled specifically for them—the articles covered issues that interested them, and the advertisements and discount coupons were about those products/services that they were mostly likely to purchase. This customization attracted third-party advertisers, since it assured them that their products/services would be noticed by those very customers they planned to target. Naturally, Tesco recovered a large part of

Figure 2A: Tesco increasing number of loyal customers

its investment in this exercise through revenues generated by outside advertisements.

The data collected through the cards helped the company enter the financial services business as well. The company carried out targeted research on the demographic data and zeroed in on those customers who were the most likely to opt for financial services. Due to the captive customer base and the cross-selling opportunity, the cost of acquiring customers for its financial services was 50 per cent less than it would be for a bank or financial services company.

Reportedly, the data generated by the Clubcard initiative played a major role in the way the online grocery retailing business was run. The data helped the company identify the areas in which customers were positively inclined towards online shopping. Accordingly, the areas in which online shopping was to be introduced were decided upon. Since the prospective customers were already favourably disposed, Tesco.com took off to a good start and soon emerged as one of the few profitable dotcom ventures worldwide. By 2003, the website was accessible to 95 per cent of the UK population and generated business of £ 15 million per week.

By sharing the data generated with manufacturers, Tesco was able to offer better services to its customers. It gave purchasing pattern information to manufacturers, but withheld the personal information provided by customers (such as names and addresses). The manufacturers used this information to modify their own product mixes and promotional strategies. In return for this information, they gave Tesco customers subsidies and incentives in the form of discount coupons.

The Clubcards also helped Tesco compete with other retailers. When Tesco found out that around 25 per cent of its customers who belonged to the high-income bracket were defecting to rival Marks & Spencer, it developed a totally new product range, ‘Tesco Finest’, to lure them back. This range was then promoted to affluent customers through personalized promotions. As planned, the defection of customers from this segment slowed down considerably.

In February 2003, Tesco launched a new initiative targeted at its female customers. Named ‘Me Time’, the new loyalty scheme offered ladies free sessions at leading health spas, luxury gyms and beauty saloons, and discounts on designer clothes, perfumes, and cosmetics. This scheme was rather innovative since it allowed Tesco customers to redeem the points accumulated through their Clubcards at a large number of third-party outlets. Company official Crawford Davidson remarked, ‘Up until now, our customers have used Tesco Clubcard vouchers primarily to buy more shopping for the home. However, from now on, “Me Time” will give customers the options of spending the rewards on themselves.’

As a result of the above strategies, Tesco was able to increase returns even as it reduced promotions. Dunnhumby prepared a profit and loss statement for the activities of the marketing department to help assess the performance of the Clubcards initiative. Dunnhumby claimed that Tesco saved around £300 million every year through reduction in expenditure on promotions. The money saved thus was ploughed back into the business to offer more discounts to customers.

By the end of the 1990s, over 10 million households in the UK owned around 14 million Tesco Clubcards. This explained why as high as 80 per cent of the company’s in-store transactions and 85 per cent of its revenues were accounted for by the cards. Thanks largely to this initiative, Tesco’s turnover went up by 52 per cent between 1995 and 2000, while floor space during the same period increased by only 15 per cent.

An invincible company? Not exactly…

Tesco’s customer base and the frequency with which each customer visited its stores had increased significantly over the years. However, according to reports, the average purchase per visit had not gone up as much as Tesco would have liked. Analysts said that this was not a very positive sign. They also said that, while it was true that Tesco was the market leader by a wide margin, it was also true Asda and Morrisons were growing rapidly.

Tesco’s growth was based largely on its loyalty card scheme. But in recent years, the very concept of loyalty cards has been criticized on various grounds. Some analysts claimed that the popularity of loyalty cards would decline in the future as all retailing companies would begin offering more or less similar schemes. Critics also commented that the name ‘loyalty card’ as a misnomer since customers were primarily interested in getting the best price for the goods and services they wanted to buy.

Research conducted by Black Sun, a company specializing in loyalty solutions, revealed that though over 50 per cent of UK’s adult population used loyalty cards, over 80 per cent of them said that they were bothered only about making cheaper purchases. Given the fact that many companies in the UK, such as HSBC, Egg and Barclaycard had withdrawn their loyalty cards, industry observers were skeptical of Tesco’s ability to continue reaping the benefits of its Clubcards scheme. Black Sun’s Director (Business Development) David Christopherson, said, ‘Most loyalty companies have a direct marketing background, which is results-driven, and focuses on the short term. This has led to a “points for prizes” loyalty model, which does not necessarily build the long-term foundations for a beneficial relationship with customers.’

Commenting on the philosophy behind Tesco’s CRM efforts, Edwina Dunn said, ‘Companies should be loyal to their customers—not the other way round.’ Taking into consideration the company’s strong performance since these efforts were undertaken, there would perhaps not be many who would disagree with Edwina.

Questions:

1. Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered.

2. How did Tesco use the information collected to modify its marketing strategies? What sort of benefits was the company able to derive as a result of such modifications?

3. What measures did Tesco adopt to support the CRM initiatives on the operational and strategic front? Is it enough for a company to implement loyalty card schemes (and CRM tools in general) in isolation? Why?

CASE: III Pret a Manger: passionate about food

Introduction

Pret a Manger (French for ‘ready to eat’) is a chain of coffee shops that sells a range of upmarket, healthy sandwiches and desserts as well as a variety o coffees to an increasingly discerning set of lunchtime customers. Started in London, England, in 1986 by two university graduates, Pret a Manger has more than 120 stores across the UK. In 2002 it sold 25 million sandwiches and 14 million cups of coffee, and had a turnover of over £100 million. Buckingham Palace reportedly orders more than £1000 worth of sandwiches a week and British Prime Minister Tony Blair has had Pret sandwiches delivered to number 10 Downing Street for working lunches. The company also has ambitious plans to expand further—it already has stores in New York, Hong Kong and Tokyo, and has set its sights on further international growth.

Background and company history

In 1986, Pret a Manger was founded with one shop, in central London, and a £17,000 loan, by two property law graduates, Julian Metcalf and Sinclair Beecham, who had been students together at the University of Westminster in the early 1980s. At that time the choice of lunchtime eating in London and other British cities was more limited than it is today. Traditionally, some ate in restaurants while many favoured that well-known British institution, the pub, as a choice for lunchtime eating and drinking. There was, however, a growing awareness among many people of the benefits of healthy eating and a healthy lifestyle, and lunchtime habits were changing. There was a general trend towards taking shorter lunch brakes and, among office workers, to take lunch at their desks. For those who wanted food to take away, the choice in fast food was dominated by the large chains such as McDonald’s, Burger King and Kentucky Fried Chicken (now KFC) while other types of carry-out food, such as pizzas, were also available.

Sandwiches also played an important part in British lunchtime eating. Named after its eighteenth-century inventor, the Earl of Sandwich, the humble sandwich had long been a popular British lunch choice, especially for those with little time to spare. Prior to Pret’s arrival on the scene, sandwiches were sold mainly either pre-packed in supermarkets and high-street variety chain stores such as Marks and Spencer and Boots, or in the many small sandwich bars that were to be found in the business districts of large cities like London, Sandwich bars were usually small, independently owned or family run shops that made sandwiches to order for customers who waited in a queue, often out on to the pavement outside.

Dissatisfied with the quality of both the food and service from traditional sandwich bars, Metcalf and Beecham decided that Pret a Manger should offer something different. They wanted Pret’s food to be high quality and healthy, and preservative and additive free. In the beginning, they shopped for the food themselves at local markets and returned to the store where they made the sandwiches each morning. Pret’s offering was based around premium-quality sandwiches and other health-orientated lunches including salads, sushi and a range of desserts, priced higher than at traditional sandwich bars, and sold pre-packed in attractive and convenient packaging ready to go. There was also a choice of different coffees, as well as some healthy alternatives. Service aimed to be fast and friendly go give customers a minimum of queuing time.

Pret a Manger: ‘Passionate about What We do’

Pret a Manger strongly emphasizes the quality of its products. Its promotional material and website claims that it is:

‘passionate about food, rejecting the use of obscure chemicals, additives and preservatives common in so much of the prepared and fast food on the market today…it there’s a secret to our success so far we like to think its determination to focus continually on quality—not just our food, but in every aspect of what we do’.

Great importance is also placed on freshness. Unlike those sold in high-street shops or supermarkets, Pret’s sandwiches are all hand-made by staff in each shop starting at 6.30 every morning, rather than being prepared and delivered by a supplier or from a central location. Metcalf and Beecham believe this gives their sandwiches a freshness and distinctiveness. All food that hasn’t been sold in the shops by the end of the day is given away free to local charities.

Careful sourcing of supplies for quality has also always been important. Genetically modified ingredients are banned and the tuna Pret buys, for example, must be ‘dolphin friendly’. There is also a drive for constant product improvement and innovation—the company claims that its chocolate brownie dessert has been improved 33 times over the last few years—and, on average, a new product is tried out in the stores every four days. Aware that some of its customers are increasingly health conscious, Pret’s website menu carefully lists not only what is available, but also the ingredients and nutritional values in terms of energy, protein, fats and dietary fibre for each item.

The level and quality of service from staff in the shop is a critical factor. The stores are self-service, with customers helping themselves to sandwiches and other products form the supermarket-style refrigerated cabinets. Staff at the counter at the back of the store then serve customers coffee and take payment. Service is friendly, smiling and efficient, in contrast to many retail and restaurant outlets in Britain where, historically, service quality has not always been high. Prêt puts an emphasis on human resource management issues such as effective recruitment and training so as to have frontline staff who can show the necessary enthusiasm and also remain fast and courteous under the pressure of a busy lunchtime sales period. These staff are usually young and enthusiastic, some are students, many are international. The pay they receive is above the fast-food industry average and staff turnover is 98 per cent a year, which sounds high—however, this is against an industry norm of around 150 per cent. In 2001, Pret had 55,000 applications for 1500 advertised vacancies.

Recently, Fortune magazine voted Pret one of the top 10 companies to work for in Europe. According to its own promotional recruitment material, Pret is an attractive and fun place to work: ‘We don’t work nights, we wear jeans, we party!’ Service quality is checked regularly by the use of mystery shoppers: if a shop receives a good report, then the staff there receive a 75p an hour bonus in the week of the visit. Head office managers also visit stores on a regular basis and every three or four months every one of these managers works as a ‘buddy’, where they spend a day making sandwiches and working on the floor in one of the shops to help them keep in touch with what is going on. Store employees work in teams and are briefed daily, often on the basis of customer responses that come in from in-store reply cards, telephone calls and the company website. The website, which, lists the names and phone numbers of its senior executives, actively invites customers to comment or complain about their experience with Pret, and encourages them to contact the company. Great importance is placed on this customer feed-back, both positive and negative, which is discussed at weekly management meetings.

The design of the stores is also distinctive. Prominently featuring the company logo, they are fitted out in a high-tech with metal cladding and interiors in Pret’s own corporate dark red colour. Each store plays music, helping to create a stylish and lively atmosphere. Although the shops mainly sell carry out food and coffee in the morning and through the lunchtime period, many also have tables and seating where customers can drink coffee and eat inside the store or, weather permitting, on the pavement outside.

Growth and competition

Three years after the first Pret shop was launched another was opened and, after that, the chain began to grow so that, by 1998, there were 65 throughout London. In the late 1990s stores were also opened in other British cities such as Bristol, Cambridge and Manchester. Although growth in the UK has been rapid—between 2000 and 2002 the company opened 40 new outlets and there are over 120 throughout Britain—Pret’s policy has always been to own and manage all its own stores and not to franchise to other operators. In 2002, £1 million was spent in launching an Internet service that enables customers to order sandwiches online.

Plans for international growth have been more cautious. In 2000 the company made its first move overseas when it opened a shop near Wall Street in New York. However, there were problems on several fronts in moving into the USA. Metcalf is quoted saying, ‘As a private company its very difficult to set up abroad. We didn’t know where to begin in New York—we ended up having all the equipment for the shop made here and shipped over.’ There were also staffing and service quality difficulties—Pret reportedly found it difficult to recruit people in New York who had the required friendliness to serve in the stores and had to import British staff. Despite these problems, several other shops in New York have followed and, in 2001, Pret opened its first outlet in Hong Kong.

During the 1990s, coffee shops boomed as the British developed a growing taste for drinking coffee in pavement cafes, and competition for Pret grew as other chains entered the fray. Rivals like Coffee Republic, Caffè Nero, Costa Coffee (now owned by leisure group Whitbread) Aroma (owned by McDonald’s) and American worldwide operator Starbucks all came into the market, as well as a number of smaller independents. All these chains offer a wide range of coffees but with varying product offerings in terms of food, pricing and style (Starbucks, for example, offers comfortable arm-chairs around tables, which encourage people to linger or work in a laptop in the store). In a London shopping street it is not uncommon to see three or four rival outlets next door to or within a few yards of each other. However, it quickly became clear that the sector was overcrowded and, apart from Starbucks, some of the other chains reportedly struggled to make a profit. In 2002 Coffee Republic was taken over by Caffè Nero, which also eventually acquired the ailing Aroma chain from McDonald’s. Costa Coffee was the largest chain overall with over 300 shops throughout Britain, while Starbucks was expanding aggressively and aimed to have an eventual 4000 stores worldwide.

The future

As work and lifestyles get busier, the demand for convenience and fast foods continues to grow. In 2000, some estimates put the total value of the fast-food market in Britain, excluding sandwiches, at over £6 billion and growing about £200-£300 million a year. While the growth in sales of some types of fast food, like burgers, was showing signs of slowing down, sandwiches continued to increase in popularity so that by 2002 sales wee an estimated £3 billion. Customers are also getting more health conscious and choosy about what they eat and, increasingly, want nutritional information about food from labelling and packaging.

In January 2001, in a surprise move, Pret’s two founders sold a 33 per cent stake in the company to fast-food giant McDonald’s for an estimated £25 million. They claim that McDonald’s will not have any influence over what Pret does or the products it sells, but that the investment by McDonald’s will help their plan for future development. According to Metcalf:

‘We’ll still be in charge—we’ll have the majority of shares. Pret will continue as it does… The deal wasn’t about money—we could have sold the shares for much more to other buyers but they wouldn’t have provided the support we need.’

After a long run of success, Pret has ambitious plans for the future. It hopes to open at least 20 new stores a year in the UK. In late 2002 it opened its first store in Tokyo, Japan, in partnership with McDonald’s. The menu there is described as being 75 per cent ‘classic Pret’ with the remaining 25 per cent designed more to please local tastes. In other international markets, the plan is to move cautiously—Pret’s first move will be to open more stores in New York and Hong Kong, where it has already been successful.

Questions

1. How has Pret a Manger positioned its brand?

2. Explain how the different elements of the services marketing mix support and contribute to the positioning of Pret a Manger.

CASE: IV The Sudkurier

Management would like to have information about the following.

What newspaper or other media are the Sudkurier’s main competitors?
Do most readers read the Sudkurier for the local news, sports and classified ads, and should these sections therefore be expanded at the expense of the sections on politics and the economy?
Should the Sudkurier’s layout be modernized?
Do mostly lower levels of society read the Sudkurier?
Into what political category do readers and non-readers the Sudkurier?
Which suppliers of products and services consider the Sudkurier especially appropriate for their advertising?
What advertising or information dot the readers think is missing from the Sudkurier?

Table 3 Media analysis of readership structure

Range in Circulation Area (1)		Readers per edition of SUDKURIER			National average in %
		RANGE		Total in %
		in %	Absolute	Total in %
Total		53.5	310,000	100.0	100.0
Gender	Men	55.5	150,000	49.0	47.2
	Women	51.6	160,000	51.0	52.8
Age Groups	14-19 years	51.8	20,000	8.0	7.2
	20-29 years	41.0	50,000	15.0	19.1
	30-39 years	52.1	50,000	16.0	16.4
	40-49 years	61.8	50,000	16.0	15.2
	50-59 years	61.1	60,000	19.0	16.5
	60-69 years	53.6	40,000	13.0	13.5
	70 years and older	57.4	40,000	13.0	12.2
Educational Level	Secondary school without apprenticeship	49.4	60,000	18.0	17.6
	Secondary school with apprenticeship	50.8	100,000	31.0	39.6
	Continuing education without Abitur	60.8	110,000	36.0	27.0
	Abitur, university preparation, university/college	49.7	50,000	15.0	15.8
Occupation	Trainee, pupil, student	44.7	40,000	11.0	11.0
	Full-time employee	54.6	160,000	50.0	51.7
	Retire, pensioner	57.3	70,000	23.0	21.8
	Unemployed	52.4	50,000	16.0	15.5
Occupation of main wage earner	Self-employed, mid- to large business/Freelancer	63.8	20,000	5.0	3.1
	Self-employed, small business,/Farmer	59.9	30,000	10.0	7.1
	Managers and civil servants	58.6	30,000	9.0	8.7
	Other employees and civil servants	49.3	120,000	40.0	42.9
	Skilled staff	57.6	100,000	32.0	32.5
	Unskilled staff	38.7	10,000	4.0	5.6
Net Household Income/month	4500 and more	62.7	100,000	31.0	23.9
	3500-4500	52.7	60,000	19.0	20.8
	2500-3500	54.9	80,000	26.0	25.9
	to 2500	44.1	70,000	23.0	29.3
Number of wage earners	1 earner	45.4	100,000	33.0	40.4
	2 earner	56.5	130,000	41.0	42.6
	3 earner	62.7	80,000	25.0	16.9
Household Size	1 Person	41.8	50,000	14.0	17.9
	2 Persons	55.5	90,000	29.0	31.8
	3 Persons	59.5	70,000	22.0	22.4
	4 Persons and more	54.8	110,000	35.0	27.9
Children in Household	Children less than 2 years of age	52.7	10,000	4.0	3.8
	2 to less than 4 years	38.4	10,000	4.0	5.4
	4 to less than 6 years	45.8	10,000	5.0	5.2
	6 to less than 10 years	43.8	20,000	8.0	8.5
	10 to less than 14 years	54.1	30,000	10.0	9.2
	14 to less than 18 years	57.7	50,000	16.0	13.7
	No children under 14	54.9	250,000	79.0	77.4
	No children under 18	53.6	210,000	67.0	68.1
Driving Licence	Yes	55.2	250,000	80.0	73.0
	No	47.3	60,000	20.0	27.0
Private Automobile		55.5	270,000	86.0	80.0
Garden	own garden	60.4	240,000	76.0	57.0
	without garden	39.8	70,000	23.0	43.0
Housing	own house	62.1	180,000	58.0	46.0
	own apartment	45.9	10,000	3.0	3.0
	rent house or apartment	44.7	120,000	38.0	49.0
Electrical Appliances	Freezer/Deep freeze	59.6	200,000	62.0	51.0
Last Holiday Journey	Within the last 12 months	55.1	190,000	62.0	n.a.
	1-2 years ago	51.0	40 ,000	14.0	n.a.
	More than two years ago	48.6	50 ,000	16.0	n.a.
	Never	55.4	30 ,000	9.0	n.a.
Last Holiday Destination	Germany	57.4	70 ,000	23.0	n.a.
	Austria, Switzerland, South Tyrol	48.7	60 ,000	20.0	n.a.
	Elsewhere in Europe	53.4	130,000	42.0	n.a.
	Country outside Europe	51.4	20 ,000	5.0	n.a.
	Did not travel	56.4	30 ,000	9.0	n.a.
1) Entire circulation area 310 ,000 readers per edition Example: 53.5% of people older than 14 years in the circulation of the Sudkurier daily 55.5% of all men older than 14 years and 51.6% of women older than 14 read the Sudkurier daily; that is 150 ,000 men and 160 ,000 women.

Table 4 Reader behaviour

What purchasing information is used?

Media purchasing information

for medium and long-term acquisition

(11 product areas; Basis: total population)

Daily newspaper 61%

Posters on the street 9 %

Leaflets 36 %

Television 24%

Radio 13%

Magazines 27 %

Free newspapers 49%

Credibility of advertising in the media

Advertising in… is generally believable and reliable

(Basis: broadest user group in each case)

Regional newspaper 49%

Television 30%

Public radio 20%

Privately-owned radio 14 %

Magazines 15%

Free newspaper 23%

Advertising in… is most informative

(Basis: broadest reading group)

Regional newspapers (subscription) 62 %

Television 47%

Public Radio 29%

Privately-owned radio 26%

Magazines 27 %

Free newspapers 36 %

Time spent reading daily newspaper

(Basis: broadest user group)

less than 15 minutes 7 %

15-24 minutes 21 %

25-34 minutes 28 %

35-65 minutes 34 %

more than 65 minutes 10 %

I often consult/depend on advertising in…

(Basis: broadest user group in each case)

Regional newspapers (subscription) 27 %

Television 11%

Public Radio 89%

Privately-owned radio 6%

Magazines 7 %

Free newspapers 18 %

Source: Regional Press Study, Gfk-Medienforschung Contest-Census

Questions:

2. Develop a 10-question questionnaire for the purpose of making a survey.

CASE: V Marketing Spotlight – Disney

The Walt Disney Company, a $27 billion-a-year global entertainment giant, recognizes what its customer’s value in the Disney brand: a fun experience and homespun entertainment based on old-fashioned family values. Disney responds to these consumer markets. Say a family goes to see a Disney movie together. They have a great time. They want to continue the experience. Disney Consumer Products, a division of the Walt Disney Company, lets them do just that through product lines aimed at specific age groups.

Take the 2004 Home on the Range movie. In addition to the movie, Disney created an accompanying soundtrack album, a line of toys and kid’s clothing featuring the heroine, a theme park attraction, and a series of books. Similarly, Disney’s 2003 Pirates of the Caribbean had a theme park ride, merchandising program, video game, TV series, and comic books. Disney’s strategy is to build consumer segment around each of its characters, from classics like Mickey Mouse and Snow White to new hits like Kim Possible. Each brand is created for a special age group and distribution channel. Baby Mickey & Co. and Disney Babies both target infants, but the former is sold through department stores and specialty gift stores whereas the latter is a lower-priced option sold through mass-market channels. Disney’s Mickey’s Stuff for Kids targets boys and girls, while Mickey Unlimited targets teens and adults.

On TV, the Disney Channel is the top primetime destination for kids age 6 to 14, and Playhouse Disney is Disney’s preschool programming targeting kids age 2 to 6. Other products, like Disney’s co-branded Visa card, target adults. Cardholders earn one Disney “dollar’’ for every $ 100 charged to the card, up to the card, up to $75,000 annually, then redeem the earnings for Disney merchandise or services, including Disney’s theme parks and resorts, Disney Stores, Walt Disney Studios, and Disney stage productions. Disney is even in Home Depot, with a line of licensed kid’s room paint colors with paint swatches in the signature mouse-and-ears shape.

Disney also has licensed food products with character brand tie-ins. For example, Disney Yo-Pals Yogurt features Winnie the Pooh and Friends. The four-ounce yogurt cups are aimed at preschoolers and have an illustrated short story under each lid that encourages reading and discovery. Keebler Disney Holiday Magic Middles are vanilla sandwich cookies that have an individual image of Mickey, Donald Duck, and Goofy imprinted in each cookie.

The integration of all the consumer product lines can be seen with Disney’s “Kim Possible’’ TV program. The series follows the action-adventures of a typical high school girl who, in her spare time, saves the world from evil villains. The number-one-rated cable program in its time slot has spawned a variety of merchandise offered by the seven Disney Consumer Product divisions. The merchandise includes:

Disney Hardlines – stationery, lunchboxes, food products, room décor.
Disney Softlines – sportswear, sleepwear, daywear, accessories.
Disney Toys – action figures, wigglers, beanbags, plush, fashion dolls, poseables.
Disney Publishing – diaries, junior novels, comic books.
Walt Disney Records – Kim Possible soundtrack.
Buena Vista Home Entertainment – DVD/video.
Buena Vista Games – Game Boy Advance.

“The success of Kim Possible is driven by action – packed storylines which translate well into merchandise in many categories,’’ said Andy Mooney, chairman, Disney Consumer Products Worldwide. Rich Ross, president of entertainment, Disney Channel, added: “Today’s kids want a deeper experience with their favorite television characters, like Kim Possible. This line of products extends our viewer’s experience with Kim, Rufus, Ron and other show characters, allowing (kids) to touch, see and live the Kim Possible experience.

Walt Disney created Mickey Mouse in 1928 (Walt wanted to call his creation Mortimer until his wife convinced him Mickey Mouse was better). Disney’s first feature-length musical animation, Snow White and the Seven Dwarfs, debuted in 1973. Today, the pervasiveness of Disney product offerings is staggering – all in all, there are over 3 billion entertainment-based impressions of Mickey Mouse received by children every year. But as Walt Disney said. “I only hope that we don’t lose sight of one thing – that it was all started by a mouse.’’

Questions:

1. What have been the key success factors for Disney?

2. Where is Disney vulnerable? What should it watch out for?

3. What recommendations would you make to their senior marketing executives going forward? What should it be sure to do with its marketing?

Marketing Management

01 Sep

MBA Assignment Admin 0 Comment Marketing Management IIBMS Assignment, IIBMS Case Study Solution

CASE: I Managing the Guinness brand in the face of consumers’ changing tastes

1997 saw the US$19 billion merger of Guinness and GrandMet to form Diageo, the world’s largest drinks company. Guinness was the group’s top-selling beverage after Smirnoff vodka, and the group’s third most profitable brand, with an estimated global value of US$1.2 billion. More than 10 million glasses of the popular stout were sold every day, predominantly in Guinness’s top markets: respectively, the UK, Ireland, Nigeria, the USA and Cameroon.

However, the famous dark stout with the white, creamy head was causing some strategic concerns for Diageo. In 1999, for the first time in the 241-year of Guinness, sales fell. In early 2002 Diageo CEO Paul Walsh announced to the group’s concerned shareholders that global volume growth of Guinness was down 4 per cent in the last six months of 2001 and, more alarmingly, sales were also down 4 per cent in its home market, Ireland. How should Diageo address falling sales in the centuries-old brand shrouded in Irish mystique and tradition?

The changing face of the Irish beer market

The Irish were very fond of beer and even fonder of Guinness. With close to 200 litres per capita drunk each year—the equivalent of one pint per person per day—Ireland ranked top in worldwide per capita beer consumption, ahead of the Czech Republic and Germany.

Beer accounted for two-thirds of all alcohol bought in Ireland in 2001. Stout led the way in volume sales and accounted for 40 per cent of all beer value sales. Guinness, first brewed in 1759 in Dublin by Arthur Guinness, enjoyed legendary status in Ireland, a national symbol as respected as the green, white and gold flag. It was by far the most popular alcoholic drink in Ireland, accounting for nearly one of every two pints of beer sold. Its nearest competitors were Budweiser and Heineken, which held 13 per cent and 12 per cent of the market respectively.

However, the spectacular economic growth of the Irish economy since the mid-1990s had opened up the traditional drinking market to new cultures and influences, and encouraged the travel-friendly Irish to try other drinks. Beer and in particular stout were losing popularity compared with wine or the recently launched RTDs (ready-to-drinks) or FABs (flavoured alcoholic beverages), which the younger generation of drinkers considered trendier and ‘healthier’. As a Euromonitor report explained: Younger consumers consider dark beers and stout to be old fashioned drinks, with the perceived stout or ale drinker being an old, slightly overweight man and thus not in tune with image conscious youth culture.

Beer sales, which once accounted for 75 per cent of all alcohol bought in Ireland, were expected to drop to close to 50 per cent by 2006, while stout sales were forecast to decrease by 12 per cent between 2002 and 2006.

Giving Guinness a boost in its home market

With Guinness alone accounting for 37 per cent of Diageo’s volume in the market, Guinness/UDV Ireland was one of the first to feel the pain caused by the declining popularity of beer and in particular stout. A Euromonitor report in February 2002 explained how the profile of the Guinness drinker, typically men aged 21-plus, was affected: The average age of Guinness drinkers is rising and this is bringing about the worrying fact that the size of the Guinness target audience is falling. The rate of decline is likely to quicken as the number of less brand loyal, non-stout drinking younger consumers increases.

The report continued:

In Ireland, in particular, the consumer base for Guinness is shrinking as the majority of 18 to 24 year olds consistently reject stout as a product relevant to their generation, opting instead to consume lager or spirits.

Effectively, one-third of young Irish men and half of young Irish women had reportedly never tried Guinness. A Guinness employee provided another explanation. Guinness is similar to coffee in that when you’re young you drink it [coffee] with sugar, but when you’re older you drink it without. It’s got a similar acquired taste and once you’re over the initial hurdle, you’ll fall in love with it.

In an attempt to lure young drinkers to the somewhat ‘acquired’ Guinness taste (40 per cent of the Irish population was under the age of 24) Diageo had invested millions in developing product innovations and brand building in Ireland’s 10,000 pubs, clubs and supermarkets.

Product innovation

Until the mid-1990s most Guinness in Ireland was drunk in a pint glass in the local pub. The launch of product innovations in the form of a new cooling mechanism for draft Guinness and the ‘widget’ technology applied to cans and bottles attempted to modernize the brand’s image and respond to increasing competition from other local and imported stouts and lagers.

‘A perfect head’ for canned Guinness

In 1989, and at a cost of more than £10 million, Guinness developed an ingenious ‘widget’ device for its canned draft stout sold in ‘off-trade’ outlets such as supermarkets and off-licences. The widget, placed in the bottom of the can, released a gas that replicated the draft effect.

Although over 90 per cent of beer in Ireland was sold in ‘on-trade’ pubs and bars, sale of beer in the cheaper ‘off-trade’ channel were slowly gaining in importance. The Guinness brand manager at the time, John O’Keeffe, explained how home drinkers could now enjoy a smoother, creamier head similar to the one obtained in a pub thanks to the new widget technology:

When the can is opened, the pressure causes the nitrogen to be released as the widget moves through the beer, creating the classic draft Guinness surge.

Nearly 10 years later, in 1997, the ‘floating widget’ was introduced, which improved the effectiveness of the device.

A colder pint

In 1997 Guinness Draft Extra Cold was launched in Ireland. An additional chilled tap system could be added to the standard barrel in pubs, allowing the Guinness to be served at 4ºC rather than the normal 6ºC. By serving Guinness at a cooler temperature, Guinness/UDV hoped to mute the bitter taste of the stout and make it more palatable for younger adults, who were increasingly accustomed to drinking chilled lager, particularly in the summe

A cooler image for Guinness

In October 1999 the widget technology was applied to long-stemmed bottles of Guinness. The launch was supported by a US$2 million TV and outdoor board campaign. The packaging—with a clear, shiny plastic wrap, designed to look like a pint complete with creamy head—was quite a departure from the traditional Guinness look.

The objective was to reposition Guinness alongside certain similarly packaged lagers and RTDs and offer younger adults a more fashionable way to drink Guinness: straight from the bottle. It also gave Guinness easier access to the growing number of clubs and bars that were less likely to serve traditional draft Guinness easier access to the growing number of clubs and bars that were less likely to serve traditional draft Guinness, which could be kept for only six to eight weeks and took two minutes to pour. The RTDs, by contrast, had a shelf-life of more than a year and were drunk straight from the bottle.

However, financial analyst remained sceptical about the Guinness product innovations, which had no significant positive impact on sales or profitability:

The last news about the success of the recently introduced innovations suggests that they have not had a notably material impact on Guinness brand performance.

Brand building

Euromonitor estimates that, in 2000, Diageo invested between US$230 and US$250 million worldwide in Guinness advertising and promotions. However, with a cost-cutting objective, the company reduced marketing expenses in both Ireland and the UK up to 10 per cent in 2001 and the number of global Guinness agencies from six to two.

Nevertheless, Guinness remained one of the most advertised brands in Ireland. It was the leading cinema advertiser and, in terms of advertising, was second only to the national telecoms provider, Eircom. Guinness was also heavily promoted at leading sporting and music events, in particular those that were popular with the younger age groups.

The ultimate tribute to the brand was the opening of the new Guinness Storehouse in Dublin in late 2000, a sort of Mecca for all Guinness fans. The Storehouse was also a fashionable visitor centre with an art gallery and restaurants, and regularly hosted evening events. The company’s design brief highlighted another key objective:

To use an ultramodern facility to breathe life into an ageing brand, to reconnect an old company with young (sceptical) customers.

As the Storehouse’s design firm’s director, Ralph Ardill, explained:

Guinness Storehouse had become the top tourist destination in Ireland, attracting more than half a million people and hosting 45,000 people for special events and training.

The Storehouse also had training facilities for Guinness’s bartenders and 3000 Irish employees. The quality of the Guinness pint remained a high priority for the company, which not only developed pub-like classrooms at the Storehouse but also employed teams of draft technicians to teach barmen how to pour a proper pint. The process involved two steps—the pour and the top-up—and took a total of 119.5 seconds. Barmen also needed to learn how to check that the pressure gauges were properly set and that the proportion of nitrogen to carbon dioxide in the gas was correct.

The uncertain future of the Guinness brand in Ireland

Despite Guinness/DUV’s attempt to appeal to the younger generation of drinkers and boost its fading image, rumours persisted in Ireland about the brand future. The country’s leading and respected newspaper, the Irish times, reported in an article in July 2001:

The uncertainty over its future all adds to the air of crisis that is building around Guinness Ireland Group four months ago…The review is not complete and the assumption is that there is more bad news to come.

In the pubs across Ireland, the traditional Guinness drinkers looked on anxiously as the younger generation drank Bacardi Breezers, Smirnoff Ices or Californian wines. Could the goliath Guinness survive another two centuries? Was the preference for these new drinks just a fad or fashion, or did Diageo need to seriously reconsider how it marketed Guinness?

A quick solution?

In late February 2002, Diageo CEO Paul Walsh revealed that the company was testing technology to cut the waiting time for a pint of Guinness from 1 minute 59 seconds to 15-25 seconds. Ultrasound could release bubbles in the stout and form the head instantly, making a pint of Guinness that would be indistinguishable from one produced by the slower, traditional method.

‘A two-minute pour is not relevant to our customers today,’ Walsh said. A Guinness spokeswoman continued, ‘We have got to move with the times and the brand must evolve. We must take all the opportunities that we can. In outlets where it is really busy, if you walk in after nine o’clock in the evening there will be a cloth over the Guinness pump because it takes longer to pour than other drinks. Aware that some consumers might not be attracted by the innovation, she added ‘It wouldn’t be put everywhere—only where people want a quick pint with no effect on the quality.’

Although still being tested, the ‘quick-pour pint’ was a popular topic of conversation in Dublin pubs, among barmen and customers alike. There were rumours that it would be introduced in Britain only; others thought it would be released worldwide.

Some market commentators viewed the quick-pour pint as an innovative way to appeal to the younger, less patient segment in which Guinness had under-performed. Others feared that the young would be unconvinced by the introduction, and loyal customers would be turned off by what they characterized as a ‘marketing u-turn’.

Question:

1. From a marketing perspective, what has Guinness done to ensure its longevity?

2. How would you characterize the Guinness brand?

3. What could Guinness do to attract younger drinkers? And to retain its older loyal customer base? Can both be done at the same time?

CASE: II The grey market

Introduction

The over-50s market has long been ignored by advertising and marketing firms in favour of the market. The complexity of how to appeal to today’s mature customers, without targeting their age, has proved just too challenging for many companies. But this preoccupation with youth runs counter to demo-graphic changes. The over-50s represent the largest segment of the population, across western developed countries, due largely to the post-Second World War baby boom. The sheer size of this grey market, which will continue to grow as birth and mortality rates fall, coupled with its phenomenal spending power, presents enormous opportunities for business. However, successfully unleashing its potential will depend on companies truly understanding the attitudes, lifestyles and purchasing interests of this post-war generation.

Demographic forces

Following the Second World War many countries experienced a baby boom phenomenon as returning soldiers began families. This, coupled with a more positive outlook on the future, resulted in the baby boom generation, born between 1946 and 1964. Now beginning to enter retirement, this affluent group globally numbers approximately 532 million. In Western Europe they account for the largest proportion of the total population at 14.9%, followed closely by 14.2% in North America and 13.5 % in Australia.

Table 1: Global population aged 45-54 by region: baby boomers as a % of the total population 1990/200

Baby boomers as a % total population	1990	2002	% point change
Western Europe	12.9	14.9	2.0
North America	9.9	14.2	4.3
Australasia	10.4	13.5	3.1
Eastern Europe	9.7	13.0	3.3
Asia-Pacific	7.8	9.8	2.0
Latin America	6.6	8.4	1.8
Africa/Middle East	2.6	2.3	20.3
WORLD	7.9	9.5	1.6

The grey market is big and getting bigger. Between 1990 and 2002 the global baby boomer population increased by 41%. The rate of growth is predicted to decrease to 35% between 2002 and 2015. Particularly noteworthy is the predicted increase in the proportion of baby boomers in many Western European countries, such as Austria, Spain, Germany, Italy, and the UK. In developed countries, according to the United Nations, the percentage of elderly people (60+) is forecast to rise from one-fifth of the population to one-third by 2050. The growth in the elderly population is exacerbated by falling fertility rates in many developed countries, coupled with a rise in human longevity.

The influences and buyer behaviour patterns of baby boomers

The members of the baby boomer generation are quite unlike their more conservative parents’ generation. They are the children of the rebellious ‘swinging sixties’, growing up on the sounds of the Beatles and the Rolling Stones. Better educated than their parents, in a time of greater prosperity, they indulged in more hedonistic lifestyle. It has been said that they were the first ‘me generation’. Now, in later life, they have retained their liberal, adventurous and youthful attitude to life. Aptly termed ‘younger older people’ they abhor antiquated stereotypes of elderly people, preferring to be defined by their attitude rather than their age.

Baby boomers are also tend to be very wealthy. Many are property owners and may have gained an inheritance from parents or other relatives. They have higher than average incomes or have retired with private pension plans. With their children having flown the nest they have greater financial freedom and more time to indulge themselves. Having worked all their lives, and educated their children, many baby boomers do not believe it is their responsibility to safeguard the financial future of their children by carefully protecting their children’s inheritance. They are instead liquidating their assets, intent on enjoying their later life to full, often through conspicuous consumption.

Based on research conducted by Euromonitor, the main areas of expenditure in the baby boomer market are financial services, tourism, food and drink, luxury cars, electrical/electronic goods, clothing, health products, and DIY and gardening.

Table 2: Global population aged 45-54 in thousands by country: developed countries 2002-2015

Country	2002	2010	2015	%change 2002/2015
Austria	1,059	1,277	1,371	29
Spain	4,921	5,741	6,189	26
Germany	10,991	12,963	13,508	26
Italy	7,684	8,591	9,347	23
UK	7,786	8,731	9,388	22
New Zealand	521	607	613	21
Ireland	474	529	555	18
Switzerland	997	1,120	1,159	17
Australia	2,661	3,006	3,057	16
Greece	1,359	1,476	1,559	15
Canada	4,505	5,320	5,122	15
Netherlands	2,301	2,492	2,604	14
Portugal	1,334	1,438	1,511	13
Norway	612	640	678	13
Denmark	745	761	802	11
USA	38,951	44,140	42,207	8
Belgium	1,423	1,549	1,526	8
Sweden	1,206	1,179	1,233	2
Japan	18,344	15,661	16,459	-10
Finland	820	749	718	-12
France	8,266	7,626	7,292	-12

Figure 1 Global Baby boomer market: % analysis by broad sector 2002 (% value)

Note: sectors valued on the basis of estimates by senior managers in major companies in each sector, consumer expenditure and industry sector data.

Unsurprisingly the financial sector is the largest in this market. Baby boomers are concerned with being financially secure in their retirement. An ageing population, coupled with a rise in human longevity, is giving rise to a pensions crisis across Western Europe. Baby boomers are therefore right to be preoccupied with how they will maintain their lifestyle over the long term. They are actively engaging in financial planning, both before and after retirement. Popular financial service products include endowments, life insurance, personal pensions, PEPs and ISAs.

Baby boomers have adventurous attitudes with a desire to see the world. In their retirement foreign travel is a key expenditure. Given their greater levels of sophistication and education, baby boomers are much more demanding of holidays that suit their lifestyles. This group is very diverse, with holiday interests ranging from action-packed adventures to culturally rich experiences.

Baby boomers want to maintain a youthful appearance in line with their youthful way of living. Fear of becoming invisible is a genuine concern among older generations. This image conciousness is reflected in their spending on clothing, cosmetics and anti-ageing products. Luxury cars also a key status symbols for this group.

The home is another area of expenditure. Once children have flown the nest, many baby boomers redecorate the home to suit their needs. Electrical and electronic purchases are key indulgences among these technologically savvy consumers. Gardening is another pastime enjoyed by older generations. Health is also a priority. Baby boomers invest in private health insurance and over-the-counter pharmaceutical products to maintain their healthy lives.

Business opportunities

The sheer size of the grey market, which is getting bigger in many countries—characterized by consumers with disposable income, ample free time, interest in travel, concern about financial security and health, awareness of youth culture and brands and desire for aspirational living—makes this market enormously attractive to many business sectors. Pharmaceuticals, health and beauty, technology, travel financial services, luxury cars, lavish food and entertainment are key growth sectors for the grey market. However, successfully tapping into this market will depend on companies truly understanding the attitudes, lifestyles and purchasing interests of this post-war generation. Communicating with this group is a tricky business, but, done right, it can be hugely rewarding.

When targeting the older consumer it is important to target their lifestyle and not their age. Older people do not want to be reminded, in a patronizing way, of their age or what they should be doing now they are a certain stage in life. With an interest in maintaining a youthful way of life these consumers are interested in similar brands to those that appeal to younger generations. The key for the companies is to find a way of making their brands also appeal to an older consumer without explicitly targeting their age. One tried-and tested method of targeting this group is to use nostalgia. Mercedes Benz used the Janis Joplin song ‘Oh Lord won’t you buy me a Mercedes Benz’ to great effect despite the obvious irony in that the song was written to highlight the dangers of materialism! Volkswagen’s new retro-style Beetle has also been popular among this group. In the tourism sector Saga Holidays, the leader in holidays for the over-50s, has changed its product offering to reflect changing trends among this group. In line with the more adventurous attitudes of many older consumers it now offers more action-packed adventure holidays to far-flung destinations.

More recently, Thomas Cook has rebranded it over-50s ‘Forever Young’ programme to reflect the diverse interest of its target customers. Its new primetime brochure targets five distinct groups with the following holiday types: ‘Discover’, ‘Learn’, ‘Relax’, ‘Active’ and ‘Enjoy Life’.

Conclusion

The over-50s represent the largest segment of the population across Western developed countries. This affluent market is big and getting bigger. Having ignored it for so long marketers are finally beginning to see the enormous opportunities presented by the grey market. But conquering this market will not be easy. The baby boomer generation is quite unlike its predecessors. With a youthful and adventuresome spirit these ‘younger older people’ want to be defined by their attitude and not by their age. Only time will tell whether today’s marketers are up to the challenge.

Questions:

1. Why is the grey market so attractive to business?

2. Identify the influences on the purchasing behaviour of the over-50s consumer.

3. Discuss the challenges involved in targeting the grey market.

CASE: III Nivea: managing an umbrella brand

‘In many countries consumer are convinced that Nivea is a local brand, a mistake which Beiersdoft, the German makers, take as a compliment.’

(Quoted on leading brand consultancy Wolff-Olins’ website, www.wolff-olins.com)

An ode to Nivea’s success

In May 2003, a survey of ‘Global Mega Brand Franchises’ revealed that the Nivea Cosmetics brand had presence in the maximum number of product categories and countries. The survey, conducted by US-based ACNielsen, aimed at identifying those brands that had ‘successfully evolved beyond their original product categories’. A key parameter was the presence of these brands in multiple product categories as well as countries.

Nivea’s performance in this study prompted a yahoo.com news article to name it the ‘Queen of Mega Brands’. This title was appropriate since the brand was present in over 14 product categories and was available in more than 150 countries. Nivea was the market leader in skin creams and lotions in 28 countries, in facial cleansing in 23 countries, in facial skin care in 18 countries, and in suntan products in 15 countries. In many of those countries, it was reportedly believed to be a brand of local origin—having been present in them for many decades. This fact went a long way in helping the brand attain leadership status in many categories and countries (see Table 3).

Table 3 Nivea: market position

CATEGORY	Skin care	Baby care	Sun protection	Men’s care
COUNTRY	Skin care	Baby care	Sun protection	Men’s care
Austria	1	1	2	1
Belgium	1	1	3	1
UK	1	3	–	1
Germany	1	1	3	1
France	1	1	1	3
Italy	1	1	5	1
Netherlands	1	1	5	1
Spain	1	4	–	1
Switzerland	1	1	4	1

The study covered 200 consumer packaged goods brands from over 50 global manufacturers. The brands had to be available in at least 15 of the countries studied; the same name had to be used in at least three product categories and meet franchise in at least three of the five geographical regions.

In its home country Germany, too, many of Nivea’s products were the market leaders in their segments. This market leadership status translated into superior financial performance. Between 1991 and 2001, Nivea posted double-digit growth rates every year. For 2001, the brand generated revenues of €2.5 billion, amounting to 55 per cent of the parent company’s (Beiersdoft) total revenue for the year. The 120-year-old, Hamburg-based Beiersdoft has often been credited with meticulously building the Nivea brand into the world’s number one personal care brand. According to a survey conducted by ACNielsen in the late 1990s, the brand had a 15 per cent share in the global skin care products market. While Nivea had always been the company’s star performer, the 1990s were a period of phenomenal growth for the brand. By successfully extending what was essentially a ‘one-product wonder’ into many different product categories, Beiersdoft had silenced many critics of its umbrella branding decision.

The marketing game for Nivea

Millions of customers across the world have been familiar with the Nivea brand since their childhood. The visual (colour and packaging) and physical attributes (feel, smell) of the product stayed on in their minds. According to analysts, this led to the formation of a complex emotional bond between customers and the brand, a bond that had strong positive under-tones. According to a superbrands.com. my article, Nivea’s blue colour denoted sympathy, harmony, friendship and loyalty. The white colour suggested external cleanliness as well as inner purity. Together, these colours gave Nivea the aura of an honest brand.

To customers, Nivea was more than a skin care product. They associated Nivea with good health, graceful ageing and better living. The company’s association Nivea with many sporting events, fashion events and other lifestyle-related events gave the brand a long-lasting appeal. In 2001, Franziska Schmiedebach, Beiersdoft’s Corporate Vice President (Face Care and Cosmetics), commented that Nivea’s success over the decades was built on the following pillars: innovation, brand extension and globalization (see Table 4 for the brand’s sales growth from 1995-2002)

Table 4 Nivea: worldwide sales growth (%)

Sales Growth	1995	1996	1997	1998	1999	2000	2001	2002
In Million €	1040	1166	1340	1542	1812	2101	2458	2628
In per cent	9.8	12.1	14.9	15.1	17.5	16.0	17.0	6.9

Innovation and brand extensions

Innovation and brand extensions went hand in hand for Nivea. Extensions had been made back in the 1930s and had continued in the 1960s when the face care range Nivea Visage was launched. However, the first major initiative to extend the brand to other products came in the 1970s. Naturally, the idea was to cash in on Nivea’s strong brand equity. The first major extension was launch of ‘Nivea For Men’ aftershave in the 1970s. Unlike the other aftershaves available in market, which caused the skin to burn on application, Nivea For Men soothed the skin. As a result, the product became a runaway success.

The positive experience with the aftershave extension inspired the company to further explore the possibilities of brand extensions. Moreover, Beiersdoft felt that Nivea’s unique identity, the values it represented (trustworthiness, simplicity, consistency, caring) could easily be used to make the transition to being an umbrella brand. The decision to diversify its product range was also believed to have influenced by intensifying competitive pressures. L’Oreal’s Plenitude range, Procter & Gamble’s Oil of Olay range, Unilever’s Pond’s range, and Johnson & Johnson’s Neutrogena range posed stiff competition to Nivea.

Though Nivea was the undisputed market leader in the mass-market face cream segment worldwide, its share was below Oil of Olay’s, Pond’s and Plenitude’s in the US market. While most of the competing brands had a wide product portfolio, the Nivea range was rather limited. To position Nivea as a competitor in a larger number of segments, the decision to offer a wider range inevitable.

Beiersdoft’s research centre—employing over 150 dermatological and cosmetics researchers, pharmacists and chemists—supported its thrust on innovations and brand extensions. During the 1990s, Beiersdoft launched many extensions, including men’s care products, deodorants (1991), Nivea Body (1995), and Nivea Soft (1997). Most of these brand extension decisions could be credited to Rolf Kunisch, who became Beiersdoft’s CEO in the early 1990s. Rolf Kunisch firmly believed in the company’s ‘twin strategy’ of extension and globalization.

By the beginning of the twenty-first century, the Nivea umbrella brand offered over 300 products in 14 separate segments of the health and beauty market (see Table 5 and Figure 2 for information on Nivea’s brand extensions). Commenting on Beiersdoft’s belief in umbrella branding, Schmiedebach said, ‘Focusing your energy and investment on one umbrella brand has strong synergetic effects and helps build leading market positions across categories.’ A noteworthy aspect of the brand extension strategy was the company’s ability to successfully translate the ‘skin care’ attributes of the original Nivea cream to the entire gamut of products.

Table 5 Nivea: brand portfolio

Category	Products
Nivea Bath Care	Shower gels, shower specialists, bath foams, bath specialists, soaps, kids’ products, intimate care
Nivea Sun (sun care)	Sun protection lotion, anti-ageing sun cream, sensitive sun lotion, sun-spray, children’s sun protection, deep tan, after tan, self –tan, Nivea baby sun protection
Nivea Beaute (colour cosmetics)	Face, eyes, lips, nails
Nivea For Men (men’s care)	Shaving, after shaving, face care, face cleansing
Nivea Baby (baby care)	Bottom cleansing, nappy rash protection, general cleansing, moisturizing, sun protection
Nivea Body (body care)	Essential line, performance line, pleasure line
Nivea Crème	Nivea crème
Nivea Deodorants	Roll-ons, sprays, pump sprays, sticks, creams, wipes, compact
Nivea Hand (hand care)	Hand care lotions and creams
Nivea Lip Care	Basic care, special care, cosmetic care, extra protection care
Nivea Visage (face care)	Daily cleaning, deep cleaning, facial masks (cleaning/care), make-up remover, active moisture care, advanced repair care, special care
Nivea Vital (mature skin care)	Basic face care, specific face care, face cleansing products, body care
Nivea Soft	Nivea soft moisturizing cream
Nivea Hair Care	Hair care (shampoos, rinse, treatment, sun); hair styling (hairspray and lacquer, styling foams and specials, gels and specials)

The company ensured that each of its products addressed a specific need of consumers. Products in all the 14 categories were developed after being evaluated on two parameters with respect to the Nivea mother brand. First, the new product had to be based on the qualities that the mother brand stood for and, second, it ha to offer benefits that were consistent with those that the mother brand offered. Once a new product cleared the above test, it was evaluated for its ability to meet consumer needs and its scope for proving itself to be a leader in the future. For instance, a Nivea shampoo not only had to clean hair, it also had to be milder and gentler than other shampoos in the same range.

Beiersdoft developed a ‘Nivea Universe’ framework for streamlining and executing its brand extension efforts. This framework consisted of a central point, an inner circle of brands and an outer circle of brands (see Figure 2)

The centre of the model housed the ‘mother brand’, which represented the core values of trustworthiness, honesty and reliability. While the brands in the inner circle were closely related to the core values of the Nivea brand, the brands in the outer circle were seen as extensions of these core values. The inner-circle brands strengthened the existing beliefs and values associated with the Nivea brand. The outer circle brands, however, sought to add new dimensions to the brand’s personality, thereby opening up avenues, for future growth.

The ‘global-local’ strategy

The Nivea brand retained its strong German heritage and was treated as a global brand for many decades. In the early days, local managers believed that the needs of customers from their countries were significantly different from those of customers in other countries. As a result, Beiersdoft was forced to offer different product formulations an packaging, and different types of advertising support. Consequently, it incurred high costs.

It was only in the 1980s that Beiersdoft took a conscious decision to globalize the appeal of Nivea. The aim to achieve a common platform for the brand on a global scale and offer customers from different parts of the world a wider variety of product choices. This was radical departure from its earlier approach, in which product development and marketing efforts were largely focused on the German market. The new decision was not only expected to solve the problems of high costs, it was also expected to further build the core values of the brand.

To globalize the brand, the company formulated strategies with the help of a team of ‘international’ experts with ‘local expertise’. This team developed new products for all the markets. Their responsibilities included, among others, deciding about the way in which international advertising campaigns should be adapted at the local level. The idea was to leave the execution of strategic decisions to local partners. However, Beiersdoft monitored the execution to ensure that it remained in line with the global strategic plan.

This way, Beiersdoft ensured that the nuances of consumer behaviour at the local level understood and that their needs were addressed. Company sources claimed that by following the above approach, it was easy to transfer know-how between headquarters and the local offices. In addition, the motivation level of the local partners also remained on the higher side.

The company established a set of guidelines that regulated how the marketing mix of a new product/brand was to be developed. These guidelines stipulated norms with respect to product, pricing, promotion, packaging and other related issues. For instance, a guideline regarding advertising read, ‘Nivea advertising is about skin care. It should be present visually and verbally. Nivea advertising is simple, it is unpretentious and human.’

Thus all advertisements for any Nivea product depicted images related to ‘skin care’ and ‘unpretentious human life’ in one way or the other. The company consciously decided not to use supermodels to promote its products. The predominant colours in all campaigns remained blue and white. However, local issues were also kept in mind. For instance, in the Middle East, Nivea relied more on outdoor media as it worked out to be much more cost-effective. And since showing skin in the advertisements went against the region’s culture, the company devised ways of advertising skin without showing skin.

Many brand management experts have spoken of the perils of umbrella management, such as brand dilution and the lack of ‘change’ for consumers. However, the umbrella branding strategy worked for Beiersdoft. In fact, the company’s growth was the most dynamic since its inception during 1990s—the decade when the brand extension move picked up momentum. The strong yearly growth during the 1990s and the quadrupling of sales were attributed by company sources to the thrust on brand extension.

Questions:

1. Discuss the reasons for the success of the Nivea range of products across the world. Why did Beiersdoft decide to extend the brand to different product categories? In the light of Beiersdoft’s brand extension of Nivea, critically comment on the pros and cons of adopting an umbrella branding strategy. Compare the use of such a strategy with the use of an independent branding strategy.

2. According to you, what are the core values of the Nivea brand? What type of brand extension framework did Beiersdoft develop to ensure that these core values id not get diluted? Do you think the company was able to protect these core values? Why/why not?

3. What were the essential components of Beiersdoft’s global expansion strategy for Nivea? Under what circumstances would a ‘global-strategy-local execution’ approach be beneficial for a company? When and why should this approach be avoided?

CASE: IV Pret a Manger: passionate about food

Introduction

Background and company history

Pret a Manger: ‘Passionate about What We do’

Pret a Manger strongly emphasizes the quality of its products. Its promotional material and website claims that it is:

Growth and competition

The future

Questions:

1. How has Pret a Manger positioned its brand?

2. Explain how the different elements of the services marketing mix support and contribute to the positioning of Pret a Manger.

Case V ‘Fast Fashion’: exploring how retailers get affordable fashion on to the high street

The term ‘fast fashion’ has become very much de rigueur within the fashion retailing industry. Retailers have to react quickly to changes in the market, possess lean manufacturing operations, and utilize responsive supply chains in order to get the latest fashions to the mass market. Stores such as H&M, Zara, Mango, Top Shop and Benetton have been tremendously successful in being responsive to the fashion needs of the market. Excellent logistical and marketing information systems are seen as key to the implementation of the ‘fast fashion’ concept. ‘Fast fashion’ is the emphasis of putting fashionable and affordable design concepts, which match consumer demand, on to the high street as quickly as possible. These retailers get sought-after fashions into stores in a matter of weeks, rather than the previous industry norm, which relied on production lead times ranging from six months to a year. The concept of ‘fast fashion’ relies of a number of central components: excellent marketing information systems, flexible production and logistics operations, excellent communications within the supply chain, and leveraging advanced IT systems. These components allow stores to track consumer demand, and deliver a rapid response to changes in the marketplace. The results are invigorating for fashion retailers, with ‘fast fashion’ retailers’ sales growing by 11 per cent, compared with the industry norm of 2 per cent.

Within the fashion industry a number of different levels exist, the exclusive haute couture ranges (made to measure), the designer ready-to-wear collections, and then copycat designs by mass-market retailers. Fashion has now gone to the high street, becoming more democratic for the mass market.

The traditional fashion- retailing model was seasonal, whereby retailers would typically launch two seasons: spring and autumn collections. Fashion retailers would buy for these collections from their supplier network a year in advance, and allow for between 20-30 per cent of their purchasing budgets open to specific fashion changes in the market. Typically, retailers would have perennial offerings that rarely change as well as catering to the whims of fashion, such as basic T-shirts and jeans.

Now, through the ‘fast fashion’ philosophy, new items are being stocked in stores more frequently. These newer product ranges stimulate shoppers into frequenting these stores on a more regular basis, in some cases weekly to see new fashion items. Savvy brand-loyal shoppers know when new stock is being delivered to their favourite store. Through increased stock replenishment of new, fashionable items, consumers are increasing their footfall to these stores, and furthermore these stores are developing brand images as cutting edge, trendy, and fashionable. This increased footfall, where shoppers regularly visit a store, eliminates the need for major expenditure on advertising and promotion. Also the concept of ‘fast fashion’ is helping to improve sales, conversion ratios within these stores. Due to the limited supply of designs available, this creates an aura of exclusivity for these garments, further enhancing the brands of these ‘fast fashion retailers’ as leading fashion brands.

Famous for ABBA, Volvos and IKEA, now Sweden has another international success story: H&M. The basic business premise behind H&M is ‘fashion and quality at the best price’. The company now has over 1068 stores in 21 countries. H&M sources 50 per cent of its goods in Europe and the remainder in low-cost Asian countries. Sourcing decisions are dependent on cost, quality, lead times and export regulations. The lead times for items can vary from a minuscule two weeks to six months, dependent on the item itself. H&M believes that having very short lead times can be beneficial in terms of stock control, however it is not the most important criteria for all items. Basic clothing garments can have lead times running into months, due to consistent demand. However, items that are more trend- and fashion-conscious require very short lead times, to match demand. H&M is now also in the process of teaming up with prestigious designers like Karl Lagerfeld to create affordable fashion ranges.

The firm utilizes close relationships with its network of production offices and 700 suppliers. Unlike some other clothing retailers, H&M outsources all of its production to independent suppliers. The dyeing of garments is postponed until as late as possible in the production process to allow greater flexibility and adaptation to the whims of the fashion buyer. Items from around the world are shipped to a centralized transit warehouse in Hamburg, Germany, where quality checks are undertaken, and the items are allocated to individual stores or placed in centralized storage. Items that are placed in this ‘call-off warehouse’ are allocated to stores where there is more demand for the particular item. For example, if pairs of a particular style of jeans are selling well in London, more jeans are shipped from Hamburg to H&M’s London stores.

Table 6: Some of the key players in apparel industry

H&M	Next	Benetton
Originated in Sweden	Originated in the UK	Originated in Italy
Chain has 1069 stores in 21 countries	Has 380 stores in the UK and Ireland and has 80 franchise stores overseas	Has a presence in 120 countries and uses a retail network o 5000 stores
Originally called Hennes & Mauritz, renamed as H&M. Sells women’s and men’s apparel. Doesn’t own any manufacturing resources. Motto—‘Fashion and quality at the best price’.	Sells women’s wear, men’s wear and homeware. The firm has a very successful catalogue business. Targets the top end of the mass market, focusing on fashionable moderately priced clothing	Sell under brand name such as Benetton, Playlife, Sisley and Killer Loop. Uses a network of franchises/partner stores. Established huge brand awareness through its infamous ad campaigns.
Zara	Mango	Arcadia
Originated in Spain	Originated in Spain	Originated in the UK
Chain has 729 Zara stores	Chain has 770 stores in 70 countries	Chain has over 2000 stores
Zara is the main part of the Spanish Inditex group and is valued at nearly €14 billion. Operates under the mantra of affordable fashion, and adopts the principle of market-driven supply.	Operates a successful franchise operation (more than half are franchises). The company specializes exclusively in targeting the young female mid-market.	Operates several different fascia, targeting different types of customer, with stores such as Burton, Dorothy Perkins, Evans, Wallis, Top Shop, Top Man, Miss Selfridge and Outfit. Owner Philip Green also owns BHS stores and Etam UK

Sourcing low-cost garments with quick response times is a vital element of the concept. Many of the ‘fast fashion’ retailers utilize a vast network of suppliers, so that their stores are replenished with latest designs. Some firms are entirely vertically integrated, where the retailer owns and controls the entire supply chain. For example, Zara buys its fabric from a company owned by its parent, Inditex, and buys dyes from another company also within the group. Retailers source their goods from countries such as China, North Africa, Turkey and low-cost eastern European countries. If cost were the sole basis for supplier selection, then the vast majority of products would be sourced from the Far East. However, the lead times for delivery of goods are quite substantial in comparison to sourcing garments in Eastern Europe (e.g. shipping goods from China can take sex weeks, whereas from Hungary takes two days). As a result of this, retailers are using a hybrid approach, sourcing closer to markets for more fashion-orientated lines. The drive towards reduced lead times is allowing companies to be more responsive to market changes. The benefits of such a quick response to market changes are reduced costs, lean inventories, faster merchandise flow and closer collaborative supply chain relationships.

The concept of ‘postponement’ is a key strategy used within the fashion retailing industry. It is the delayed configuration of a garment’s final design until the final market destination and/or customer requirement is known and, once this is known, the garment is assembled or customized. The material and styles are kept generic for a long as possible, before final customization. A classic illustration of the concept of postponement is its usage by Benetton. Colours can come in and out of fashion. Benetton delays when its garments are finally product differentiated, so that this matches what is selling. For example, a Benetton sweater would be stitched and assembled from its original grey yarn and then, based on feedback from Benetton’s distribution network as to what colours were selling, the sweater would be dyed at the very final stage of production. The concept of postponement allows greater inventory cost saving, and increased flexibility in matching actual demand.

The production and logistics facilities for these ‘fast fashion’ retailers are colossal in that each design may have several colour variants, and the retailer needs to produce an array of garments in a number of different sizes. The number of stock keeping units (SKUs) is therefore staggering. As a result, companies require a very reliable and sophisticated information system—for example, Zara has to deal with over 300,000 new SKUs every year. Benetton has a fully automated sorting and shipping system, managing over 110 million items a year, with a staff of only 24 employees in its centralized distribution centres. Mango, another successful Spanish fashion chain, also utilizes a high-tech distribution system, which can sort and pack 12,000 folded items an hour and 7000 hanging garments an hour.

Many in the industry see Zara as the classic illustration of the concept of ‘fast fashion’ in operation. The company can get a garment from design, through production and ultimately on to the shelf in a mere 15 days. The norm for the industry has typically run to several months. The group’s basic business philosophy is to seduce customers with the latest fashion at attractive prices. It has grown rapidly as a fashion retail powerhouse by adopting four central strategies: creativity and innovation; having an international presence; utilizing a multi-format strategy; and through vertically integrating its entire supply chain. For the ‘fast fashion’ concept to be successful, it requires close relationships between suppliers and retailers, information sharing and utilization of technology. Information is utilized along the entire supply chain, according to the demand. It controls design, production and the logistics elements of the business. Real-time demand feeds the production systems.

Zara is part of the Inditex group of fashion retail brands. This group adopts a multi-format strategy with different store brands targeting different types of customers. Zara is its key fashion-retailing brand. Zara opened its first store in 1975 in Spain and has now become a fashion powerhouse, operating in four continents, with 729 stores, located in over 54 countries. It has become very hip all over the world, for its value for money and stylish designs. The chain is building large numbers of brand devotees because of its fashionable designs, which are in tune with the very latest trends, and a very convincing price-quality offering. Each of the different store brands (outlined in Table- 7) needs to be strongly differentiated in order for the strategy to work effectively.

Table 7 Number of Inditex stores by fascia

Zara	729
Pull and Bear	373
Massimo Dutti	330
Bershka	305
Stradivarius	228
Oysho	106
Zara Home	63
Kiddy’s Class	131
TOTAL	2265

Figure 3 Zara’s market-led supply

Zara does not undertake any conventional advertising, except as a vehicle for announcing a new store opening, the start of sales of seasons. The company uses the stores themselves as its main promotional strategy, to convey its image. Zara tries to locate its stores in prime commercial areas. Deep inside the lairs of its corporate headquarters, 25 full-scale store windows are set up, whereby Zara window designers can experiment with design layouts and lighting. The approved design layouts are shipped out to all Zara’s stores, so that a Zara shop front in London will be the same as in Lisbon and throughout the entire chain. The store itself is the company’s main promotional vehicle.

One of Zara’s key philosophies was the realization that fashion, much like food, has a ‘best before’ date: that fashion trends change rapidly. What style consumers want this month may not be same in two months’ time. Fashion retailers have to adapt to what the marketplace wants for the here and now. The company is guilty of under-stocking garments, as it does not want to be left with obsolete or out-of-fashion items. The key driving force behind its success is to minimize inventory levels, getting product out on to the retail floor space, and by being responsive to the needs of the market. Zara uses its stores to find out what consumers really want, designs are selling, what colours are in demand, which items are hot sellers and which are complete flops. It uses a sophisticated marketing information system to provide feedback to headquarters and allow it to respond to what the marketplace wants. Similarly, Mango uses a computerized logistical system that allows the matching of clothes designs to particular stores based on personality traits and even climate variances (i.e. ‘It this garment suitable for the Mediterranean Summer?). This sophisticated IT infrastructure allows for more responsive market-led retailing, matching suitable clothing lines to compatible stores.

At the end of each day, Zara sales assistants report to the store manager using wireless headsets, to communicate inventory levels. The stores then report back to Zara’s design and distribution departments on what consumers are buying, asking for or avoiding. Both hard sales data and soft data (i.e. customer feedback on the latest designs) are communicated directly back to the company’s headquarters, through open channels of communication. Zara’s 250 designers use market feedback for their next creations. Designers work hand in hand with market analyst, in cross-functional teams, to pick up on the latest trends. Garments are produced in comparatively small production runs, so as not to be over-exposed if a particular item is a very poor seller. If a product is a poor seller, it is removed after as little as two weeks. Roughly 10 per cent of stock falls into this unsold category, in direct contrast to industry norms of between 17 and 20 per cent. Zara produces nearly 11,000 designs a year. Stock items are seen as assets that are extremely perishable and, if they are sitting on shelves or racks in a warehouse, they are simply not making money for the organization.

In the course of one year alone, Zara has been able to launch 24 different collections into its network of stores. After designs have been approved, fabrics are dyed and cut by highly automated production lines. These pre-cut pieces are then sent out of nearly 350 workshops in northern Spain and Portugal. These workshops employ nearly 11,000 ‘grey economy’ workers mainly women, who may want to supplement their income. Seamstresses stitch the pre-cut pieces into garments using easy-to-follow instructions supplied by Zara. The typical seamstress’s wage in Zara’s workshop network is extremely competitive when compared with those in ‘third world’ countries where other fashion retailers mainly outsource their production. Furthermore, the proximity of these workshops allows for greater flexibility and control, Zara achieves greater control over its supply chain through having a high degree of integration within the supply chain. By owning suppliers, Zara has greater control production capacities, quality and scheduling. This is in stark contrast to Benetton, which is close to being a virtual organization, outsourcing production to third-party suppliers and directly owning only a handful of its stores, the majority being franchises or partner stores.

The finished garments are then sent back to Zara’s colossal state-of-the-art logistics centre. Here they are electronically tagged, quality control double-checks them, and then they are sorted into distribution lots, ensuring the items arrive at their ultimate destinations. Each item is tagged with pricing information. There is no pan-European pricing for Zara’s products: prices are different in each national market. Zara believes each national market has its own particular nuances, such as higher salaries or higher taxation, therefore it has to adjust the price of each garment to make it suitable in each country and to reflect these differences. Shipments leave La Coruňa bound for every one of the Zara stores in over 54 countries twice a week, every week. The company’s average turnaround time from designing to delivery of a new garment takes on average 10 to 15 days, and delivery of goods takes a maximum of 21 days, which is unparalleled in an industry where lead times are usually months, not days. Zara’s business model tries to fulfil real-time fashion retailing and not second-guessing what consumers’ needs are for next season, which may be six months away. As a result of Zara utilizing this ultra-responsive supply chain, 85 per cent of its entire product range obtains full ticket price, whereas the industry norm is between 60 and 70 per cent.

The successful adoption of the ‘fast fashion’ concept by these international retailers has drastically altered the competitive landscape in apparel retailing. Consumers’ expectations are also rising with these improved retail offerings. Clothes shoppers are seeking out the latest fashions at value-for-money prices in enticing store environments. Now other well-established high-street fashion retailers have to adapt to these challenges, by being more responsive, cost efficient, speedy and flexible in their operations. The rag trade is churning out the latest value-for-money fashions at breakneck speed. ‘Fast fashion’ is what the marketplace is demanding.

Questions:

1. Discuss how supply chain management can contribute to the marketing success of these retailers.

2. Discuss the central components necessary for the fast fashion concept to work effectively.

3. Critically evaluate the concept of ‘market-driven supply’, discussing the merits and pitfalls of its implementation in fashion retailing.

Managerial Economics

06 Jul

MBA Assignment Admin 0 Comment Managerial Economics IIBMS Assignment, IIBMS Case Study Solution

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

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

Change in Nifty Index

FLLS Net Investment

(Rs.Cr.)

Change in Market Capitalisation

(Rs.Cr.)

Wave 1

From

17/05/04

26/10/05

1388.75

2408.50

1019.75

59520

5,40,391

Wave 2

From

27/10/05

11/05/06

2352.90

3701.05

1348.15

38258

6,20,248

Wave 3

From

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

MBA Assignment Admin 0 Comment Managerial Economics IIBMS Assignment, IIBMS Case Study Solution

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 7^th 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

MBA Assignment Admin 0 Comment Management Information Systems IIBMS Assignment, IIBMS Case Study Solution

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

MBA Assignment Admin 0 Comment Logistics Management IIBMS Assignment, IIBMS Case Study Solution

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?

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

MBA Assignment Admin 0 Comment Logistics Management IIBMS Assignment, IIBMS Case Study Solution

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 3^rd 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.

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