\n| 5. Information Technology<\/td>\n | The company has a solid Information Technology infrastructure for all its activities. The company has leveraged technology across all departments – be it procurement, logistics or sales. It has implemented SAP-R3 which is one of the leading Enterprise Resource Planning system globally. Various reports relating to inventory levels, sales, liquidity position etc. are available on a real-time basis to the senior management.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Required
\nMap the various activities performed at W-Bazar to the Porter’s Value Chain model. [20 Marks]
\nAnswer:
\nIntroduction
\nI Value chain is defined as \u201ca chain of value added activities; products pass | through the activities in a chain, gaining value at each stage\u201d. Value chain focuses on systems, and how the inputs are transformed into outputs. These entire set of activities converting the inputs into outputs that a business undertakes are interlinked to each other and a business organization carry out these activities to earn a profit or margin. A business organization should consider only those activities which add value to the end product I being delivered to the customer.<\/p>\n A value chain analysis helps to identify those activities which are not adding value (in other words wasteful activities) in the activities of business organization. For example unnecessary storage of products which increases the inventory and working capital requirement is a wasteful activity. Such wasteful activities must be removed from the process of business \\ organization to ensure that the profit margin of t-he business organization improves.<\/p>\n Value Chain Analysis also helps to identify which activities are best for the | business organization to undertake within the business and which are best \u00a7 to outsourced.
\nPorter\u2019s value chain classifies activities into primary activity and secondary | activity.<\/p>\n Primary Activities
\nPrimary activities are those activities that are directly related with production i and delivering of a product to the end customers. Primary activities will include the following activities:-<\/p>\n Inbound Logistics
\nInbound logistics involves arranging inbound movement of materials from j suppliers to the manufacturing plants or retail stores. Since the company is not involved in manufacturing, all the activities that it undertakes to deliver the products to its retail stores would form part of Inbound Logistics. For timely delivery of products to the retail stores, the company has its own transport fleet. In order to ensure minimum inventory level W-Bazar also has a JIT system in place. A reason why the company uses its own fleet of trucks is to ensure that there are no failures of supply. In JIT systems and especially in retail business, it is very vital that stock outs situation are avoided.<\/p>\n Operations:
\nIn case of manufacturing companies, operations involve those activities j which are concerned with conversion of input into outputs. In retail business, Operations consist of those activities which are concerned with planning of inventory levels of various products, running of stores, deciding the layout of various stores etc. The company operates through their owned 100 stores and doesn\u2019t have franchisee or agent model for operation of its stores. The ownership of the stores ensure that the quality standards are g maintained across various stores and customer get the best value from them. Since the stores are owned by company, so W-Bazar does not face g any risk of closing the stores due to expiry of lease arrangements. W-Bazar can also invest to build the best layout for the stores.<\/p>\n Outbound Logistics
\nThese include planning and dispatch, warehousing, distribution management, transportation, and order fulfilment. In case of a retail business, this includes activities carried out to deliver the product to the customer. W-Bazar operates through its own stores and there are no franchisee or outsourcing j arrangements. As the products are delivered directly to retail stores so the company does not have any warehousing requirement. The customers pick I up the products directly from the stores and there is no transportation requirement however the company must ensure that customers waiting [ time should be reduce at the time of invoicing and checkout from the store.<\/p>\n Marketing & Sales
\nMarketing and sales are the activity whereby company aware the consumers and customers about the products which is ultimately sold to them, market and sales include the activity like price management, product management, promotion and marketing management. The company is not spending huge money on marketing instead company is building customer loyalty by offering high quality products at affordable price.<\/p>\n Service
\nFor manufacturing industry, service generally refers to the after sales services in which value of the product are required to maintain and it includes the activities like installation, repairs, guarantee & warranty etc.
\nFor retail stores, service considers a superior experience at the company stores and how the company manages the return of the products by the customers. The company W- Bazar aims to builds customer loyalty by providing high level customer service at its stores.<\/p>\n Support Activities
\nSecondary activities are all those activities which support the function of all the primary activities. The following are the broad classification of secondary activities:<\/p>\n Procurement
\nProcurement refers to the processes of acquiring various products and include activities like identifying sources of those products, vendor selection, placing an order, purchase of products etc.
\nThe company W-Bazar deals with over 500 vendors across India on advance payment terms to procure high quality products at preferential pricing. This helps the company to get better discounts which it can pass it onto the customers. This ensures that the company does not carry the burden of discounts being offered to the customers.<\/p>\n Technology Development
\nTechnology supports all across the primary activities of an organisation. It includes activities like process automation, inventory management systems, an Enterprise Resource Planning (ERP) system etc. The company has implemented SAP R\/3 – an ERP package which helps in the management of various functions of procurement, logistics and.sales. A robust IT system is always necessary to ensure that the JIT systems work effectively. Such systems assist in real-time monitoring of inventory levels and triggering purchase orders when inventory levels are low. The entire flow of products from an order placement till the delivery to customer can be tracked seamlessly.<\/p>\n Human Resource Management
\nHuman Resource Management involves areas of recruiting, training, managing, developing and rewarding people within an organisation. The company has a very low employee turnover and a very high level of employee motivation. W-Bazar rewards all its employees generously and conducts periodic training and development programmes for its employees. This ensures that the employees are highly motivated which translates into a consistently high performance.<\/p>\n Infrastructure
\nInfrastructure includes not only the physical infrastructure but also all departments of management, Accounting, finance, legal, Strategic which are required to keep the company\u2019s store operational. All these are important for organisation\u2019s performance and it supports the primary activities.<\/p>\n ![\"Introduction](\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\") <\/p>\n
Question 6.
\n(Case Study: Value Chain Analysis; Performance Prism)
\nAural Techno is a company that designs, develops and sells audio equipment. Aural Techno is best known for its home audio systems and speakers, noise cancelling headphones, professional audio systems and automobile audio systems.
\nAural Techno sells audio equipment’s to consumers through its large network of retail outlets in its home country and via the company\u2019s wrebsite. (About – Inbound Logistic)
\nAural Techno purchases the materials and components that it needs to manufacture audio equipments from a number of different suppliers. All of the purchases are delivered to a company\u2019s godown at its factory and are held there until they are needed for production and assembling. (About – Outbound Logistic)
\nFinished products are transported from the factory to Aural Techno\u2019s retail outlets by company\u2019s own trucks. The trucks follow the same schedule each week irrespective of the load they are carrying. Audio equipments that are required for sale via the company’s website are transported to Aural Techno\u2019s distribution centre.
\n(About- Marketing)
\nThe company believes that it can attract more customers by offering quality products at reasonable prices.
\n(About – Operation)
\nEach unit is tested for quality with a real time analyser ipad app and a calibrated microphone to measure how consistently each sound system reproduced various frequencies. A bass-test sweep tone allows checking how well the subwoofer managed low-end frequencies.
\nFinally, they drive each in cars briefly to see how sound quality changes while on the move.
\n(About – Marketing & Sales)
\nThe company aims to build customer loyalty also through high level of customer services and value chain analysis. The customers can return the product if quality specifications are not met.
\n(About – After Sates)
\nThere is a separate department to handle such complaints.
\nAural Techno had implemented Balanced Scorecard as a performance measurement and management system. Company has been doing great on financial parameters and customer satisfaction parameters. Market capitalization of the company has been increased considerably over the years.
\nOf late, the company has witnessed high employee turnover ratio. Though the company has a formal exit interview process for the resigning employees, the input received from these interviews is rarely considered in improving HR practices. One of the common feedbacks from employees was that working hours are too long and they have to frequently work on weekends also and there is so much pressure to improve customer service without adequate support of system and processes. Also the truck drivers have ( been on strike thrice in the last one year demanding better pay, retirement I benefits and good working conditions.
\nAural Techno is keen to address the above issues and recently held a meeting to discuss the performance of the company. The Management Accountant % suggested to the Managing Director to use an alternative performance measurement mechanism which considers all the stakeholders instead of just shareholders and customers. The Managing Director is sceptical of the Management Accountant’s suggestions and is unclear as to whether they are suitable for the company or not. Therefore, the company seeks your assistance.
\nRequired
\n(i) IDENTIFY and EXPLAIN the various primary activities of Aural Techno in its value chain. Also SUGGEST* if there is any scope for cost reduction in these activities. [10 Marks]
\n(ii) RECOMMEND an alternative performance measurement mechanism which considers all stakeholders instead of just sharehold- I ers and customers. Also INDICATE the performance measures as applicable to the situations of Aural Techno in the alternative mechanism suggested by you. [10 Marks][Afay 2019]
\nAnswer:
\n(i) The Various Primary Activities of Aural Techno in its Value Chain Analysis
\nThe value chain is describe by Michael Porter as \u201ca chain of value added activities of internal process of a company product passes through these activities gaining value at each stage to design, produce, market, deliver and support its product\u201d with the help of this organisation try to
\n(a) eliminate non-value added activities and
\n(b) and identify the scope of product differentiation and cost leadership opportunities among the value added activities. The value chain model focuses on the work flow of an organization in the form of discrete set of activities that are linked to each other, rather than just looking at costs as per accounting cost pools.<\/p>\n Value chain model is a model that examines all the Primary Activities and Supporting Activities, each individual activities reflect the company\u2019s strategy, implementation of its strategy and underlying economics of the activities themselves.
\nProfit margin for organisation = Value created less cost of creating that value
\nPrimary activities are those activities which convert the inputs into outputs or in the provision of services.<\/p>\n As per Porter’s model Primary Activities are:
\nInbound Logistics
\nThis process involve all the activities which is related to receiving, storing and distributing the inputs (raw materials) to the production process. The company purchases the material and components that is
\nsuppliers are delivered to its godown at the factory premises. These materials are stored until required for production and assembling at the factory. These are the inbound logistics related activities.<\/p>\n Operations
\nThis process involve all the activities in transforming raw materials into finish goods, which include machining, testing and equipment maintenance, packaging etc.
\nAural Techno\u2019s work flow activities related to manufacturing of the audio equipment and components need to be considered here. In addition, the testing of equipment using ipad application, bass sweep test as also sound quality check after assembly into the car, are operations related activities.<\/p>\n Outbound Logistics
\nThis process involve all the activities such as collecting, storing and distributing the products from the assembly line to the end user cus-tomers, which includes finished goods warehousing, delivery vehicle operation, order processing and scheduling.
\nSome of the activities that would be classified here in case of Aural Techno:
\n(a) Storage of Aural Techno\u2019s finished goods within factory premises and at its distribution centre.
\n(b) Activities concerned with order taking from retail outlets as well as direct orders on the company\u2019s website.
\n(c) Scheduling and dispatch of finished goods using trucks to retail outlets and distribution centres.<\/p>\n Marketing and Sales
\nThis process involve all the activities like advertising, promotion, dis-tribution channel selection, sales department management, pricing policy and such other activities that aware the customer of the product would be listed here.
\nAll of Aural Techno\u2019s activities that relate to the above list of activities whereby it aims to spread customer awareness and built customer loyalty through quality products would be classified here.<\/p>\n Service
\nThis process involve all the activities related to after sales service such .
\nas installation, repair and part replacement, guarantee & warrantee would be classified here. Aural Techno has a separate department to handle customer complaints. Customers can return the goods if quality specifications on it are not met. Also, any other activity related to after sale service would be classified here.
\nBelow are certain measures that Aural Techno can implement to Reduce Costs
\n(a) Just in Time raw material procurement system: Procure the raw material and components only when needed for production and handling, which will reduce the inventory carrying costs.
\nLess inventory on hand could also result in saving in material obsolcence, storage, and material insurance costs. But before implementation of JIT, the organisation must consider the risk of loss due to stock out situations.
\nIt needs to develop good relationship with its suppliers to ensure streamlined delivery of inputs. At the same time inputs should meet the quality standards requirements.<\/p>\n (b) Economy of scale of delivery cost: As mention that the Company\u2019s trucks deliver the finished products to retail outlets as per a fixed schedule each week, irrespective of the load the trucks carry, this possibly results in diseconomies of cost. If there is accumulation of inventory due to lesser number of truck delivery runs, it could lead ! to high inventory carrying cost. Contrarily, if delivery truck runs are scheduled even if the trucks are not loaded to full capacity, diseconomies of delivery cost would creep in. Consequently, the production and truck delivery schedule should be streamlined efficiently and economically.<\/p>\n (c) Quality product to ensure customer\u2019s satisfaction:
\nAural Techno lays importance in the quality standard of the finished goods to ensure customer satisfaction. Lower the defects higher the cus-tomer satisfaction. If the organisation have extensive testing and inspection processes in place, such prevention helps to effectively reduce the cost of poor quality, internal failure cost as well as external failure costs. Internal failure costs like scrap, repair, rework are associated with defects found after the production but before delivery to the customer, which can be avoided, if quality inspection is done throughout the production work-flow rather than just at the end of production. External failure costs such as repairs and servicing, guarantee and warranty claims, sales returns, complaints are incurred when the customer finds the product defective and returns it, which can severely impact customer loyalty and should be minimized. Therefore, Aural Techno should invest in preventive and appraisal costs to ensure good quality in order to balance out the cost of poor quality. Preventive costs would include error proofing quality improvements, quality planning and assurance, education and training. Appraisal costs could be quality audits, inspections, supplier rating etc. Six Sigma and TQM could be effective tools to ensure efficient good quality production that would minimize cost of poor quality.<\/p>\n (d) Alternate Performance Measurement Mechanism considering all Stakeholders
\nAural Techno uses Balanced Scorecard to measure performance. Balanced Scorecard focuses on the business, financial, customer and innovation perspectives. It is mention that the organisation is doing well on financial and customer satisfaction parameters. Market capi-talization has also increased over the years, the organisation is on a growth trajectory. However, the organisation is facing issues in the form of high employee turnover and dissatisfaction among truck drivers who deliver the goods.
\nPerformance Prism is an alternate performance measurement. This framework is a second-generation performance management, conceptualized by Chris Adams and Andy Neely. The reasons why Performance prism would be an effective replacement for models like<\/p>\n Balanced Scorecard are:
\na. Balanced scorecard focuses on just two of the stakeholders
\nCustomers and Investors. Performance measurement of other stakeholders like suppliers, employees, government etc. have not been considered. The other stakeholders play an important role in the growth of the organisation\u2019s business. Hence, performance measures are needed to monitor both their contribution to the organisation as well as their overall satisfaction with the organisation.<\/p>\n b. Most of the performance measurement models do not focus on the changes that need to be made to processes and strategies.
\nBalanced Scorecard assumes that once the strategies are implemented, measuring a relevant set of metrics of performance will ensure that the rest of the operation of company also functions properly. However, this is not true. In the case of Aural Techno, both shareholders and customers are happy with the organisation\u2019s performance. Yet even in a growing business, the drivers of growth, namely other stakeholders like suppliers and employees are not satisfied. Under the Balanced scorecard performance measurement, neither is their contribution nor their satisfaction is captured.<\/p>\n c. An organisation has a \u201cQuid Pro Quo\u201d relationship with all its stakeholders. Stakeholders contribute to the organisation’s business while they also derive benefits from it. For example, employees perform their functions well, this is their contribution to Aural Techno\u2019s growth. In return, employees would want good working condition and pay to remain motivated and loyal to the organisation.
\nTherefore, Performance Prism can be a possible performance measurement mechanism that considers metrics related to a broader set of stakeholders of an organization, not limited to just customers and shareholders alone.<\/p>\n Five Interrelated Facets of the Performance Prism
\nStakeholder Satisfaction – \u201cStakeholder satisfaction involves identi-fying the organisations set of stakeholders and their needs.\u201d
\nIn contrast to balanced scorecard, the performance prism focuses on all the stakeholders of a company. Aural Techno has satisfied investors and customers, but dissatisfied employees and truck operators. The organisation must identify all its stakeholders and find the relative importance of each of the stakeholders. It can use Mendelow’s Matrix for the purpose of finding the key shareholders in terms of power and interest of stakeholders. A stakeholder group with higher power and high interest for example trade union must be kept satisfied.<\/p>\n The important stakeholders of an organisation are:<\/p>\n \n- Suppliers – Suppliers expect better price for procurements or service.<\/li>\n
- Customers – Customer expect good quality products at reasonable prices.<\/li>\n
- Investors – Investors expect return on investment.<\/li>\n
- Government – Government expect revenues and development.<\/li>\n
- Society at large – Society expect employment opportunities.<\/li>\n<\/ul>\n
After finding the stakeholders, the organisation must identify the requirement of each of the stakeholder group. What must the organisation do to ensure stakeholder satisfaction?
\nAural Techno has to ensure that it improves employee satisfaction in order to reduce its employee turnover. It should also consider the issues faced by truck drivers, communicate with them and involve them in a dialogue. If they are still unsatisfied, the organisation might suffer financially in the longer run.
\nPerformance Measure require: Average employment duration of em- j ployees, employee turnover ratio, number of strikes by truck drivers etc.<\/p>\n Stakeholder Contribution
\n\u201cStakeholder contribution involves – What the organization expect the stakeholders to contribute and deliver\u201d?
\nIn the second facet, the company has to identify the contribution re- I quired from each stakeholder group and must define ways to measure contribution of stakeholders. In turn the company will have something to offer the stakeholders. This is the \u201cQuidPro Quo” relationship. For example, Aural Techno provides quality products to its customers. The customers in turn contribute towards the profits of the company, they pay a price for the value Aural Techno offers.
\nAural Techno should provide for better working conditions to its employees. If the employees are being motivated, they will perform better and remain loyal to the organisation. They would accelerate the growth of the company. Similarly, dialogue and communication would be needed with the truck drivers to provide better pay, retirement benefits and good working conditions. Truck drivers in turn need to ensure on time and safe delivery of goods to retail outlets.
\nPerformance Measure require: on time delivery by truck drivers, productivity, Efficiency of employees.<\/p>\n Strategies
\n\u201cStrategies involve – What strategies should an organisation adopt that derives stakeholder contribution while reciprocating by ensuring their satisfaction\u201d?<\/p>\n The company should identify strategies that ensure that:<\/p>\n \n- The stakeholders needs and desires are satisfied.<\/li>\n
- Stakeholders contribute to the company’s objectives.<\/li>\n
- wants and needs of the stakeholders are satisfied.<\/li>\n<\/ul>\n
Performance measures must be consider to confirm that the strategies are working. Good and effective implementation of strategies depends on appropriate communication of strategies, implemented by managers and continuous evaluation of appropriateness of strategies.
\nAural Techno has to introduce strategies to retain employees by means of better pay, good working conditions and growth opportunities within the organisation. The strategy will be effective when the employee turnover is reduced after following these initiatives. Similarly, the issues faced by the truck drivers need to be resolved by taking appropriate strategic decisions. The absence of strikes will show that these decisions have been effective.
\nPerformance Measures: Employee turnover after implementation of new strategy, efficiency of deliveries after all the issues with the truck drivers have been resolved.<\/p>\n Processes
\n\u201cProcess involve – What necessary processes are required, to satisfy the above strategies\u201d?
\nProcesses ensure successful implementation of strategies. Each process could have sub-process. Persons responsible for the process have to be identified to assign responsibility of functioning of the process. Processes require continuous evaluation. Instead of evaluating all at once, the organisation has to identify important processes that are critical to the business. Porter’s Value Chain Analysis can be used to identify and evaluate various processes in the company.
\nAural Techno should have well defined processes to hire appropriately skilled personnel for the job, transparent pay scale structure etc.
\nHuman Resource Manager is responsible for this process. The working condition of truck drivers can be improved by providing sufficient training and better working environment.
\nPerformance Measures: Number of personnel hired at various skill levels, average payout for each of these skilled groups, hours of employee training, maintenance log of trucks etc.<\/p>\n Capabilities
\n\u201cCapabilities involves – What resources should a company need to effectively operate these processes\u201d? A company must have the right capabilities in order to support the process. Capabilities could include resources, technology and infrastructure for a particular process to work.
\nAural Techno may decide to enhance pay\/salaries, however it should have sufficient financial resources to make these payments. Performance Measures: Amount spent on training and new recruitments etc.<\/p>\n Conclusion
\n\u201cConclusion – Manage these interlinked facets to cater to all stake-holders\u201d
\nWhile meeting targets as defined by performance measures should be emphasized, the performance measurement system should be flexible and dynamic to allow the stakeholders to voice their opinions and ex-pectations as well. Taking their requirements into consideration, along with managing capabilities and processes, Aural Techno can implement effective strategies that will cater to the needs of all stakeholders.<\/p>\n <\/p>\n Question 7.
\n(Case Study : Value Chain Analysis)
\nNity is an Indian sportswear company. They open their first retail outlet in 1989 and by the early 21st century, Nity had retail outlets and distributors in more than 15 states of the country. The brand Nity is popular for its quality of products.
\nCompany is using best class of technologies to reuse the waste generated by Nity factories other technologies that specifically focus on creating material that is both user friendly and sustainable. It is using technological solutions to minimize its impact on the environment and continuously improve the quality of its products.
\nGood quality products are manufactured from good quality raw materials. At Nity, quality is a very important focus and therefore, there is an entire procurement team dedicated to this task which analyzes and evaluates the eligible suppliers. It keeps only the ones who can guarantee more than the minimum quality requirements.
\nCompany\u2019s large infrastructure helps to manage its presence well, its infrastructure composed of its offices, retail stores, distribution and logistics centres.
\nNity was recognized for its great HR management and featured as one of the best employers. Nity provides educational programmes and training to their employees. From health to financially well-being, Nity continually invest in their employees to help them achieve greatness.
\nMr. Ramesh Marketing manager recently commented, \u201cFinding out what the customer value isn\u2019t easy. We stay close to the needs of the professional athlete. We put sensors on their bodies and monitor how they perform with our product\u201d.
\nTo build marketing campaigns, companies don\u2019t need to hire a professional athlete or celebrity to blend marketing and customer service effectively. All it takes is creating a strong employee-customer connection, \u201cNity\u2019s Employees interact with customers on an hourly basis; therefore, they are most in tune with what customers want, what they don\u2019t want, and what they would like to see changed. This has resulted in Nity gaining a reputation of excellent customer service and enthusiastic staff. Nity strives to surprise and delight its customers. Company offer their customers full range of Nity products.
\nBrands must combine people, processes and, most importantly, technology, to achieve the scalability they need to reach and connect with consumers globally through e-commerce. Whether it is a direct-to-consumer model or wholesale, technology can enable two-way conversations that generate actionable data, regardless of borders and cultural differences.
\nDuring recent board meeting, one of the director of the company suggested that since online selling of product is on trend, while company\u2019s website contain very basic information like it only gives the location of stores. The director has suggested to develop the website for online selling of product though that would be expensive, the directors has decided to give the suggestion serious consideration.
\nAlso company wants to compete globally. Company believes that a well- managed value chain lead to higher productivity and therefore required strategic focus.
\nRequired:
\n(a) Using Poter\u2019s value chain model, analyse the activities that add value in the Nity organisation, before investment in internet retailing. [10 Marks]
\n(b) Identify and explain those activities in the value chain of Nity that
\nmay be affected i.e. value added by them may increase or decrease by the investment in internet retailing. [10 Marks]
\nAnswer:
\n(a) Value chain activities
\nThe value chain includes all the activities starting from the procurement of raw materials to sales and after sales service. Each stage in the value chain adds value to the entire production process. Activities of value chain which add value to Nity organization before investment in retail internet, using Porter\u2019s models, can be depicted as follows.<\/p>\n (i) Firm infrastructure (Secondary activity) Firm infrastructure consists of activities such as planning, finance, accounting, legal, government affairs and quality management. Company’s large infrastructure helps to manage its presence well. Nity has maintain quality management. Company believes that good quality products are manufactured from good quality raw materials. For this there is an entire procurement team dedicated to this task which analyzes and evaluates the eligible suppliers which qualify as important value activities.<\/p>\n (ii) Human resource management (Secondary activity) Nity provides great HR management and featured as one of the best employers. Nity\u2019s employees has created strong employee- customer connection, they interacted with customers on an hourly basis to understand their wants’and what changes they are expected. The degree of success achieved by company is heavily dependent on the people it employs. Nity provides both educational and training programs to its employees and provides them all possible amenities so that company’s staff are trained to make major contribution to the value it creates through the way that they do their work.<\/p>\n (iii) Procurement (Secondary activity) and Inbound Logistic Nity\u2019s range of products in stock and quality is far better than those of its competitors, since they are manufactured from good quality of raw materials, which provides its customers with a great degree of choice and an improved likelihood that they will be sales will increase results in increase profitability. It should also expect that through online sale company can capture new market or generate some new incremental business. The internet retailing may increase the added value of point-of-sale infrastructure, by enhancing the customers convenience, and generating additional sales revenue at lower administrative cost.<\/p>\n (iv) Technology development (Secondary activity) For company technology and product quality both are important components for production strategy. While the focus is on best quality, sustainability has also become an important focus for Nity. It is using best in class technologies to reuse the waste generated by the Nity factories and other technologies that specifically focus on creating material that is both user friendly and sustainable. It is using technological solutions to minimize its impact on the environment and continuously improve the quality of its products. This system is likely to provide significant enhancement to customer satisfaction and thus to sales. The potential downside to this advantage is the cost of developing the system.<\/p>\n (v) Marketing and sales (Primary activity) Nity has adopted excellent marketing strategy, instead of hiring professional athletes or celebrities it create a strong employee- customer connection, to understand customers needs, they put sensors on the bodies of professional athlete and monitor how they perform with their products. Nity\u2019s employees interact with customers to understand their wants and expectations. This is an important aspect of customer focus: it is important to know what customers think of the company\u2019s market offering.<\/p>\n (b) Nity\u2019s value chain activities that may be effected by the investment in internet retailing.
\n(i) Firm infrastructure (Secondary activity) Company\u2019s present infrastructure remains an important source of value, although with internet retailing company may reduce physical stores give way to online displays and sales, in this way company’s infrastructure moves to both physical and online infrastructure. As the trend of online selling increases sales of some retail stores will decrease, but the costs of operating the stores will substantially remain. However Nity overall sales will increase results in increase profitability. It should also expect that through online sale company can capture new market or generate some new incremental business. The internet retailing may increase the added value of point-of-sale infrastructure, by enhancing the customers convenience, and generating additional sales revenue at lower administrative cost.<\/p>\n (ii) Human resource management (Secondary activity) Nity has created strong employee-customer connection, by personal interaction with customer. Such human service is possible within the offline retail segment, this would be diluted by shift in internet retailing, where customer value is not significantly added by human intervention. However, such interaction is possible through social media, the focus of HR added value may shift to skills in developing relationship with customers through social media like they can create company\u2019s page on facebook, twitter, insta, youtube etc. this will help them to deliver a quality service at lower administrative\/ maintenance cost to the company also customer can leave their feedback and reviews which can be used for improvement of Nity\u2019s products.<\/p>\n (iii) Procurement (Secondary activity) and Inbound Logistic (Primary activity)
\nWill enable the full range of goods stocked to be visible to all customers on Nity\u2019s website regardless of location, maximizing the value of an attribute highly valued by customers.
\nThrough internet retailing, company should provide better quality information- sharing with suppliers, enabling better demand forecasting and delivery performance throughout the supply chain. This may enable Nity’s to add further value through just-in-time supply strategies, thereby reducing the amount of working capital tied up in inventories.<\/p>\n (iv) Technology development (Secondary activity)
\nIntegration of people, processes and technology, to achieve the scalability they need to reach and connect with consumers globally through internet retailing, this system should increase its potential to add value. It will empower customers to access information related to stock availability, generate orders and track orders at lower cost than via off-line selling.<\/p>\n (v) Marketing and sales (Primary activity)
\nThe additional benefits of internet retailing has the potential to add considerable value to the firm\u2019s marketing activities. It replaced data of customer survey reports with data about actual customer browsing, purchase patterns and preferences. It provides cost- efficient opportunities for advertising, offering purchase incentives e.g. online loyalty scheme and sales promotion, relationship marketing e.g. collecting customer data, encouraging feedback & registration, email permission marketing, Site personalisation and so on.<\/p>\n (vi) Services (Primary activity)
\nWith the internet retailing, after sales services in value chain is likely to be minimal and consist of mostly dealing with returned faulty products. So it is necessary for company to include reverse- logistics service which require both to adds value and incurs cost.<\/p>\n (vii) Outbound Logistic activity (Secondary activity)
\nIt should also be consider that internet retailing will create potential for new value adding activity in the area of outbound logistics, which at present operates within the internal supply chain only ie. from warehouse-to-outlets and for this cost is incurred without generating revenue. This is a waste activity, which can be reduced by direct supply from warehouse-to-customer. Further customer satisfaction can be increased by prompt and reliable delivery system, customer can track the delivery, so outbound logistics has potential to provide significant value through internet retailing – although smaller value of deliveries and greater frequency will also incurred new costs.<\/p>\n <\/p>\n Question 8.
\n(Case Scenario: Value Chain Analysis)
\nYou are the Finance Manager of AIR Ltd. which is in the business of manufacturing wire rods. A division in the company manufactures copper j wire rods from a single manufacturing plant in Central India. The division purchases raw material i.e. copper cathodes from various suppliers across the country. The cathodes are melted and transformed to wire rods of various dimensions. Each batch of wire rods produced are tested for quality and strength.
\nThe wire rods are stored in rolls in the warehouse and dispatched in company owned trucks as per the requirement of the customers. The customers are required to pay 50% of invoice value as advance and balance 50% within 30 days of delivery of goods. The company prices its copper wire rods based on the price prevailing on London Metal Exchange after adjusting it with a factor to cover conversion of costs and profits.
\nThe company explores newer markets by advertising in national dailies ; and participating in various industrial events in India as well as abroad. An annual conference of customers is conducted by the company to improve customer relationships and attract newer customers. The customers have 4 right to return the material if quality specifications are not met. There is a separate team to handle such complaints.
\nThe following email was sent by the Chief Financial Officer of the company ^ to you.
\nFrom:
\nChief Financial Officer
\nTo:
\nFinance Manager
\nSubject – Commodity Price Fluctuation
\nThe board is quite aware of foreign exchange fluctuation related risks. However, they are not much aware of risks related to fluctuation in commodity prices. The prices of copper which are used to manufacture copper wire rods have fallen down by over 20% in the last six months owing to global factors.
\nThe procurement team of Copper Wire Division has been waiting for the right time to buy these metals as they expect the prices to fall down further. However, we are at a verge of stock-out of these metals as no purchase was made in the last one month.
\nThe bonus of procurement team largely depends on the annual savings as compared to the budgeted cost of purchase. I am not happy with the approach of speculation and making profits out of price fluctuation in raw materials. Could you highlight the issues related with our performance measurement mechanism and suggest how it could be improved? Regards
\nChief Financial Officer
\nAttachment:
\nCopper Prices Quoted on LME
\n![\"Introduction](\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Introduction-to-Strategic-Cost-Management-\u2013-CA-Final-SCMPE-Study-Material-2.png\")
\nRequired
\nEXPLAIN and IDENTIFY the various primary activities of Copper Division of AIR Ltd, company.
\nAnswer:
\nValue chain is defined as \u201ca chain of value added activities starting from procurement of raw material to sale or after sales services; products pass through the activities in a chain, gaining value at each stage\u201d. Value chain focuses on systems, and how business inputs are transformed into business outputs purchased by customers. The entire set of activities that a business undertakes to transform inputs (Raw material) to outputs (final products) are interlinked to each other.<\/p>\n The primary and secondary activities of porter\u2019s value chain are classified as following:<\/p>\n \n\n\n| Primary Activities<\/td>\n | Primary activities are those activities which are related to transforming a product from a raw material and delivering a product to the end customer\u2019s. Primary activities includes the following activities.<\/td>\n<\/tr>\n | \n| Inbound Logistics<\/td>\n | Inbound logistic involves all the activity from arrangement of inbound movement of materials by suppliers to the manufacturing plants. In case of copper division of AIR Ltd. the activities related to inbound logistics would involve transporting copper cathode from multiple suppliers across the country and storing them in the warehouse, further these cathode would be issued to the production facilities depending on the requirement of the production plants<\/td>\n<\/tr>\n | \n| Opera\u00adtions<\/td>\n | In case of manufacturing companies operations involve all those activities which are concerned with transformation of inputs into outputs. It includes all the activities related to melting of copper cathode and transforming the copper cathodes into wire rods, also quality tests carried out for wire rods.<\/td>\n<\/tr>\n | \n| Outbound Logistics<\/td>\n | Outbound Logistic process includes the activities of warehousing and distribution of finished products i e. copper wire rods to its customers. Outbound Logistics include planning and dispatch, warehousing, distribution management, transportation and order fulfilment. AIR Ltd. uses its own trucks to distribute finished products to its customers, so outbound logistics activity also includes scheduling of trucks and dispatch of materials.<\/td>\n<\/tr>\n | \n| Marketing & Sales<\/td>\n | Marketing and sales process involve all the activities whereby the company made aware its consumers and customers about the products which is ultimately sold to them. Marketing and sales activity also includes selling the products to the end customers covering activities like price management, product management, promotion and marketing management. AIR Ltd. uses advertisement in national dailies and holds conferences as a part of its marketing and sales efforts. The AIR Ltd. company also holds annual customer conference to improve their relationship with customers and attract more new customers.<\/td>\n<\/tr>\n | \n| Service<\/td>\n | For manufacturing industry, service process refers to the after sales service which are required to maintain the value of product and includes activities like installation, repair, guarantee and warrantee etc. It is also expected from the service team of the company to handle customer returns on account of poor quality of copper wire rods.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n Question 9.
\n(Case Study: Value Chain – Competitive Advantage)
\nRitu Fashion Clothing is manufacturer of clothing fabrics to be made up into dresses and suits. RFC established long ago back and presently enjoys the reputation as producer of quality fabric. RFC producing fabrics from high quality synthetic yarns with all standard features which other fabric manufacturer offers. Designs of fabric are old fashioned (traditional in nature) as RFC was established long ago.
\nManagement team at RFC shown believe in integration (vertical and horizontal) and diversification (product range or market reach) as tool of risk reduction and value enhancement (profit too). Ritu Fashion Clothing opts for un-organic forward integration to gain control over value chain by acquiring \u2018SunD Clothing\u2019 (SDC). SDC is operating in designing and weaving of fabric into fashion wears. SDC is targeting the customers who are in age group from 40 to 60 years and belongs to price sensitive income group. RFC in this way is able to reach to end consumer
\nthrough retailers by manufacturing cloth themselves. Acquisition of SDC by RFC remains largely successful as result in relative high increase in sales and profits, both. Problem Point
\nBut the sale & profit are not growing at same old rate now, top and bottom line witness the slowdown, which may be due to exhaust of synergy benefits. Retail stores through which RFC sold its material also find it difficult to make reasonable amount of sale. RFC starts exploring new retailers. But due to presence of large number of supplier (of manufactured cloth), buying power of retailers is high; resultantly RFC has to rest at unacceptable low margins.
\nDown the Line
\nRFC is considering of acquisition of one of cloth retail chain, named \u2018Paridhaan\u2019 in order to deliver fabrics to the customers directly and eliminate retailers in order to boost its profit margins.
\nRequired:
\n(i) DRAW Value Chain and EXPLAIN briefly.
\n(ii) What do you mean by competitive advantage and how it can be attained? EXPLAIN.
\n(iii) IDENTIFY strategy SDC opted to gain competitive advantage.
\n(iv) DISCUSS \u2018value chain effect\u2019 of forward integration (acquisition of SDC) on RFCs \u2018competitive ability and cost competency\u2019.
\n(v) EVALUATE possible acquisition of cloth retailchain \u2018Paridhaan\u2019 by RFC. (Study Digest 2021)
\nAnswer:
\n(i) Value chain (suggested by Michael E Porter*) describe those activities of organisation, those add value to input before it become output. Value Chain can be expressed as way of assessing .and explaining current competitive advantage while identifying cost drivers.
\n\u2018Note – Michael E Porter, in 1980 wrote a book \u2018Competitive Strategy; Techniques for analyzing industries and competitor\u2019 in which he explained value chain. In 1985 he along-with Miller suggested value chain as part of bigger network Le., Value System. It split down com-pany’s activities between those which are \u2018primary (Those result in production of goods\/rendering services)’, and those which \u2018support (assist in such production)\u2019 these primary activities (as shown in figure below)-
\n![\"Introduction](\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Introduction-to-Strategic-Cost-Management-\u2013-CA-Final-SCMPE-Study-Material-3.png\") <\/p>\n Concept of Value
\nSuccessful organisation able to create value for its customer (end user) either by offering differentiation (more utility through customized\/ unique product\/services at same price) or cost competitiveness (same utility at par to competitor, but at lower price).<\/p>\n (ii) Competitive Advantage is ability to generate more economic value than competitor. There are three generic strategies, suggested by Michael E Porter (In another book which he wrote in 1985 on \u2018Competitive Advantage – Creating and Sustaining Super Margin\u2019) through which an organisation could achieve competitive advantage-
\n![\"Introduction](\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Introduction-to-Strategic-Cost-Management-\u2013-CA-Final-SCMPE-Study-Material-4.png\")
\n(a) Cost Leadership, where there is great emphasis on keeping costs down. This opens up the profit margin by lowering costs, ideally more than any competitor can.
\n(b) Differentiation, where a better product or service is sold. This opens up the profit margin by raising selling prices.
\n(c) Additionally, an organisation can choose a focus strategy, where the organisation concentrated on a small segment of the market. Within the focus strategy, the organisation must choose whether or not to become a cost leader or a differentiator.<\/p>\n (iii) Strategy at SDC
\nSince SDC targeting the customers who are in age group from 40 to 60 years, and belongs to price sensitive income group, hence strategy opted to gain competitive advantage can be considered as Cost Focus.<\/p>\n (iv) Value Chain Effect at RFC
\nAcquisition of SDC by RFC can be termed as forward vertical integration. Any forward vertical integration can be justified because it ensures increase in profit, effective control over market as well on pricing and finally brand building by reaching to target group. RFC\u2019s main objective behind SDC acquisition was getting control over value chain and increase in profit. RFC has precluded the possibility of other ways of increasing fabric sales for e.g., exporting.<\/p>\n RFC extends the value chain. Earlier it was restricted up-till sale of fabric to garment manufacturer, but now RFC reach out to retailers to sell the in manufactured garments. Scope of value addition to end user increased but value system become more complex reason being two systems now merged into one value chain.
\nSDC (which is acquired by RFC) is believing in focus strategy by restricted its market to the 40-60 years aged and price sensitive income market. This may be a sensible strategy for a company engaged in designing of cloths, but surely not for a manufacturer of fabric.<\/p>\n Effects of forward integration on competitive ability and cost competency
\n(Importance from cost perspective)
\n(a) Post integration RFC has to operate two production lines (different set of Men – Workforce, Machine and Methods – product and production layout). One being spinning the fabric and being manufacturing of cloths. Resultantly transfer pricing will be cost aspect which need to be decided.
\n(b) Since the operation is sequential in nature, first weaving then stitching; hence any mismatch in capacity, lead\/run time of both the production lines may result into increased cost of either warehousing or idle capacity, (may result in additional working capital required or loss of contribution)
\n(c) Carrying Cost (warehousing cost) will also increase on account of manufacturing of cloth ahead of retail demand, (again, additional working capital may be required)
\n(d) For RFC, it may become difficult to compete with other fabric manufacturer; because due to diversion of management focus in two production line (may lose cost competitiveness) and RFC is now directly impacted by customer\/consumer who has verity of option apart from RFC’s cloths to choose between.
\n(e) Since design of fabric (manufactured by RFC) are fit for traditional wear, but expertise of SDC is in fashion wear; so designer at SDC may resent the lack of freedom, (integration of objective and culture is essential to overcome)<\/p>\n (v) Although, the intention is to earn more of the value in the value system, but possible acquisition of retail chain \u2018Paridhaan\u2019 (forward vertical integration into retail outlets) has its own pros and cons for competitive advantage.<\/p>\n Expected Benefits
\n(a) RFC will have full control over the production, pricing and marketing. So, acquisition of Paridhaan will give strength to RFC for keep relying upon differentiation strategy.
\n(b) Since RFC will reach to end consumer directly, hence will have access to entire customer related data. Such data can help RFC to understand customer specification and do customization in product as per requirement of specific customer group.
\n(c) Since post acquisition of Paridhaan, RFC will have exclusive retail chain; hence reduce the competition from other brands whose products are lying along-with RFC products at selling shelves of retails.<\/p>\n Anticipated Drawbacks
\n(a) Managing retail chain will open another area of operation for RFC (Own retail chain is capital intensive business rather labour intensive – high amount of capital will be invested in properties – even then outcome depends upon location of stores) and increase operating as well as financial risk too.
\n(b) Since RFC manufactures fabric, which is good for traditional clothing only, hence limited range of products may be available for sale at exclusive showroom\/retails shops of RFC (through j acquisition of Paridhaan); so, may not be able to attract requisite J number of clients to cover the fixed cost.
\n(c) In order to complete product range RFC may have to complement its product with product of another manufacturers; this may be not possible in cost effective manner.<\/p>\n Conclusion
\nRFC should acquire retail chain \u2018Paridhaan\u2019, mainly as a response to reduce the competition from other brands whose products are lying along-with RFC products at selling shelves of retails and to reach end consumer directly to understand their needs. However, acquisition would not be so easy due to the high amount of capital investment is required. In addition, cultural changes are also essential to from overcome the traditional shell. Overall, the benefits of acquiring retail chain do, however, need to be compared to the financial cost and other qualitative factors.<\/p>\n <\/p>\n Question 10.
\n(Case Study: Value Chain vs. Value Shop Model)
\nPhoton Urja Co. is a solar domestic water heater company that fulfil the need of domestic customers.
\nThe manager of Photon Urja designers believe that if they provide the solution to the customer that will help the customer to capture the market accordingly Photon Urja\u2019s designers and product developers focus on providing solutions to customers to get rid of everyday hassles g and transform their product into a pleasant experience. Photon Urja also has a wide service network that spans the length and breadth of India to ensure good care of customers and products, by providing a prompt and pleasant service experience. In the past, Photon Urja Co. had a dominant position in the Indian market. However, over the past four years, it has been found that its profits and its share in the market have come down.<\/p>\n Photon Urja Co. has business Model comprising of following steps:<\/p>\n \n- Firstly, Photon Urja\u2019s highly qualified and skilled experts visit customer\u2019s locations to identify and design the appropriate heater as per customer\u2019s requirements. Photon Urja\u2019s experts are recognized as the best in the industry, and customers agree that they produce the most effective solutions to their complaints.<\/li>\n
- At Photon Urja Co., in the laboratories, the heater design goes through intricate, complex, and dynamic process. Prototypes are developed on the basis of discussions in previous step. Thereafter, these prototypes are tested. Once a final design is decided, such design is passed to the manufacturing division for production.<\/li>\n
- Then, Photon Urja Co. manufactures appropriate Solar Water Heater to the desired specification and installs at the customer\u2019s location.<\/li>\n
- After the heater\u2019s installation, Photon Urja renders annual maintenance services for which it is well-known in the industry.<\/li>\n<\/ul>\n
Photon Urja\u2019s customers pay a total price for design, manufacture and initial installation of the Solar Water Heater and an annual maintenance charge after that. Total prices are quoted before design work begins. Although customers appreciate the high quality of the solutions provided by Photon Urja\u2019s team, however, they are complaining that the overall prices are too high. Customers have said that although other suppliers do not solve their problems as Photon Urja does, they do charge less. Consequently, Photon Urja has lower down its prices to compete in the market. There is a doubt that the manufacturing and installation stages of the business model are not contributing sufficiently to the organisation since costs at both stages are going high.
\nPartners of Photon Urja Co. have considered that this situation should no longer continue and have recommended that a value chain analysis to be conducted as to identify the way forward for Photon Urja Co. Although majority of partners are in the agreement with the proposed value chain analysis, however senior partner \u2018W\u2019 has stated that value chain analysis is inappropriate idea. She says that she has heard a number of criticisms * of the value chain model.
\nAssuming yourself as management accountant of Photon Urja Co., answer the following questions:
\nRequired
\n(i) DISCUSS the benefits that may accrue to Photon Urja Co. from conducting a value chain analysis.
\n(ii) DISCUSS the criticisms of Porter\u2019s value chain model in the context of Photon Urja Co.
\n(iii) EXPLAIN other form of Value Chain Analysis that may be more suitable for Photon Urja Co.
\nAnswer:
\n(i) Following are the benefits accruing to Photon Urja Co. through a value chain analysis:
\n1. Value chain analysis is a process of identifying and analyzing various activities that add value to the final product. Also through value chain analysis the organization will identify all those activity which do not add value to final product \/services thereafter eliminating such non-value added activities. If the non-value added activities that is wastage are removed, the resources block on such activities are saved according cost on such activities can be saved, which help the Photon Urja to obtain cost leadership or improve product differentiation by improving the activities in value chain. For Photon Urja analysis of value chain can provide a more clear picture of the value of the manufacturing function as perceived by customers.<\/p>\n 2. This model also helps other organization within the same industry. As Photon Urja observed that other firms in the industry are considered to be more cost effective in terms of manufacturing, it may plan to use the value chain model to examine the reason for the same.<\/p>\n 3. The value chain will assist Photon Urja to determine the manner to get best approach towards developing higher level competitive performance. With the help of value chain analysis the organization will try to find the ways to develop higher level of performance either by cost leadership or product differentiation. At present, Photon Urja is in position wherein it is being defeated on price by some of its competitors, however the company is recognized as the best solutions provider to customer\u2019s problems. Through z detailed value chain analysis, the company may ascertain the reason of falling down and management may take decision R regarding the future vision of the firm.<\/p>\n 4. With value chain analysis, Photon Urja Co. may apply for other relevant management techniques. After conducting value chain analysis, Photon Urja Co. will be in a position to decide whether it is worthwhile to continue the technique of benchmark for processes and performance against its rivals in industry, to develop an information systems strategy, to carry out a business process re-engineering process or to adopt activity-based management.
\nFurther, Photon Urja Co. may decide to outsource manufacturing and keep focus on design and services by following value chain analysis model. This technique may be appropriate for Photon Urja as after outsourcing manufacturing, Photon Urja may be able to focus on its core area for which it is well-known in the industry.<\/p>\n 5. Value Chain analysis will also facilitate the development of performance metrics for Photon Urja. By developing such metrics Photon Urja may be able to identify which aspects of its business model are not contributing to the overall value and profits of the organisation. Although at present Photon Urja has suspicion that manufacturing and installation are the weak parts of its operation, development of transparent and appropriate metrics would enable Photon Urja company to recognize the place where value and profit are being added in the business model.<\/p>\n (ii) Following are the number of criticisms of value chain developed by Michael Porters:
\n1. It is not very easy to apply value chain analysis to an organization belongs to service industries. This criticism is particularly impor-tant in the context of Photon Urja which has upward profits from rendering solutions and services rather than just from manufacturing tangibles products. Many people asserted that the value chain model is more suitable to organizations manufacturing industries, rather than service industries.<\/p>\n 2. Often this value chain analysis model is seen as complicated and perhaps could be a source of resentment for the management of a firm. Although the staff of Photon Ujala includes the best intelligent experts, they may not see the value in-depth which is required for a full value chain analysis.<\/p>\n 3. This value chain analysis has a linear approach while it ignores the concept of value networks. This criticism is specifically relevant to Photon Ujala because its major business resort to the cooperative relationship that the experts have with their customers. If, Photon Ujala decides to outsource some of its activity like manufacturing and focus on design and service, this will become even more relevant where relationships are utmost important.<\/p>\n 4. Often value chain analysis is perceived as expensive and time consuming as a whole. However, if the analysis is to be completed timely, there will be requirement of reliable data such as cost of components in business model. However, in the absence of good cost maintaining system, this model could prove to be a expensive process. After completion of this process, there is still no guarantee that the process lead to have upward trend in profitability and if it does the upward trend, it may take some time in realization.<\/p>\n (iii) Photon Urja requires to acknowledge that the nature of its business is turnout from manufacturing zone to a solutions provider or professional services organisation.<\/p>\n From this point of view, it would be better for Photon Urja to analyze its business using the Professional Services Value Chain\/ Value Shop Model. The concept of Value Shop was first introduced by Charles B. Stabell and Oystein D. Fjeldstad in 1998. The aim of this concept is to serve firms from service sector. It only deals with problems, figure out the main area requiring service and finally come out with the solution. This approach is designed to create value by solving customer\u2019s problems rather than creating value by producing output from an input of raw materials.<\/p>\n A Value Shop model mobilizes the resources of organisation to solve specific problems such as delivering a solution to business problem. This shop model is iterative, it involve performance of generic set of activities until a solution is reached.<\/p>\n Secondary activities in the Value Shop Model have same support activities as those in the porter’s value chain, However the primary activities are described differently to recognize the different nature of a service-oriented, business. In value shop, primary activities are performed in a cycle within an organisation to perform generic set of activities iteratively before reaching a conclusion. Since Photon Ujala team communicate with customers to find a solution before testing of developed prototypes, so they will find the value shop, compatible and effective model to use.<\/p>\n <\/p>\n Question 11.
\n(Case Scenario: Porter’s 5 forces model)
\nThe strategic manager of Stylodesi Co., a well-known manufacturer of Food wrapping aluminium foil, are currently considering whether to enter the disposable food aluminium boxes. These food aluminium boxes is used in food containers for different reasons; it provides a very good barrier to protect food against light and air and preserves food quality; it can be recycled and designed individually according to customers\u2019 requirements; \u2022 it can be produced in different size and shapes. By restaurant and other food industry customers the food aluminium boxes are purchased in a very large quantities, (about – Bargaining power of customer) on average the food aluminium boxes compromise between 1% to 2% of their total cost of finished packed product.<\/p>\n The strategic manager of the company has gathered the following information:
\n(1) All food aluminium boxes are produced to the highest standards and conform to European and FDA regulation. It is prepared with a special formulated material which during recent years has been in short supply. (about – Threat of New Entrant\/Bargaining power of supplier)<\/p>\n (2) The food aluminium boxes are manufactured on machines which vary in shape and size. The machine with lowest cost is prices at $30,000 and only one operator is required for its operation and a one-week training course is required by an unskilled person to enable him to operate efficiently and effectively on such machine. (about – Bargaining power of customer\/rivalry among current industry competitors)<\/p>\n (3) Presently 82% aggregate of the major market are capture by three major manufacturer of food aluminium boxes. OP the current market leader alone has a market share of 39% and the remaining market share are covered by other two manufacturer in ratio 2:1, in which YUMs occupied major share. All the three major manufacturers offered product ranges are similar in terms of size and quality. During recent years the market has grown by 2% per annum. (about – Threat of New Entrant)<\/p>\n (4) A foreign based multinational company has revealed in its recent report that the company is considering expansion of its operations in their packaging division overseas. For manufacturing different size disposable food aluminium boxes the division possesses large- scale automated machinery. (about – threat of substitute product)<\/p>\n (5) Another company, PLC produces disposable plastic boxes a narrow but increasing range of plastic disposable containers the company\u2019s product has ISO9001 certification however at present these products are on an average 30% more expensive than the equivalent sized disposable food aluminium boxes sold in the marketplace.
\nRequired: Assess the attractiveness of the option to enter the market for disposable food aluminium boxes as a performance improvement strategy for Stylodesi Co. [RTP May 2019]
\nAnswer:
\nPorter’s five forces model and assessing the attractiveness of the option to enter the market for disposable food aluminium boxes Market:
\nPorter\u2019s five forces model assessees five competitive forces that affect a company\u2019s positioning in its market and ultimately its profitability. Stylodesi Co. is considering whether it wants to enter the disposable aluminium boxes market which can be done by assessing porter\u2019s five forces model.<\/p>\n Threat of new entrants.<\/p>\n \n- A new entrant such as Stylodesi Co. will bring more competition and extra capacity.<\/li>\n
- The strength of this threat depends on the barriers to entry to the market such as high fixed costs or expertise in technology. It also depends on the response of the existing competition in the market.<\/li>\n
- New machinery to make the food aluminium boxes costs from $30,000 per machine, it only needs one operator and the expertise needed to operate it is fairly low as an operator only needs one day\u2019s training.<\/li>\n
- This appears to be a high threat.<\/li>\n
- Another major threat would be the foreign multinational company which has the large scale automated machinery, through which they might be able to gain economies of scale.<\/li>\n<\/ul>\n
Threat of substitutes.
\nA substitute product is a good or service produced by another industry which satisfies the same customer needs. PLC produces disposable plastic boxes a narrow but increasing range of plastic disposable containers the company’s product has IS09002 certification. It is possible that the uses could extended to satisfy some of the uses made of food aluminium boxes. However plastic boxes produce by PLC are at present an average of 30%<\/p>\n The bargaining power of customers.
\nRestaurant and other food industry customers use food aluminium boxes, in a very large quantity. These customers seem to have high bargaining power in their purchase as they buy in bulk, and also be price sensitive as the food aluminium boxes costs is 1-2 % of the total cost and they may wish it to remain so. Customer can easily switch the supplier, since the supplier is not likely to be specialized also there are three major suppliers with similar ranges.<\/p>\n The bargaining power of suppliers.<\/p>\n \n- A monopoly supplier with a differentiated product will have more influence than a range of small suppliers with a simple product. The food aluminium boxes are made from a specialist paper that can be in short supply. So suppliers do have some influence and this is another high threat.<\/li>\n
- Rivalry amongst current industry competitors.<\/li>\n
- The intensity of competition within an industry will affect overall profitability. The industry has three main manufacturers with 82% share in total. So the industry is fairly concentrated. There has been little market growth recently at 2% pa and the product is undifferentiated. Therefore the competition is likely to be quite strong for a shrinking market and a homogenous product. This therefore poses yet another high threat.<\/li>\n
- In summary, there are some good reasons for entering the market, which include low entry barriers, as the manufacture of the product is unspecialized, though this could be a threat once Stylodesi has established itself in the market and wishes to keep out other competition. There is also a small likelihood of substitution.<\/li>\n
- However the market is likely to be very competitive with a high concentration of entrenched competitors and customers who have considerable buying power.<\/li>\n
- On balance, the option to enter the market for Food aluminium boxes appears to be unattractive and Stylodesi should consider alternative strategies for improving performance.<\/li>\n<\/ul>\n
Question 12.
\n(Case Study: Porter\u2019s 5 forces model)
\nAgile Investment Advisory Ltd. (AIAL) is well established financial planning & risk advisory firm of the country with nation-wide presence. AIAL is engaged in selling third party products be it financial products or insurance products (life assurance only). Financial advisory business of AIAL is doing well and contributing to the half of gross revenue of group and two-third of overall group\u2019s bottom line, but insurance brokerage g business is not performing as per expectation. ‘Independent and impartial gj advice\u2019 to client is unique selling point of AIAL. |
\nAIAL was established by Mr. Kaushal Jaiswal around two decade ago (when life-assurance business goes private), at then it was one division business i.e., assurance brokerage business. Mr. Kaushal Jaiswal is dynamic leader and presently leading the company as CEO, apart from being major shareholder of the company.
\nAIAL is widely acknowledged in market for two distinct features, first being presence wide across the nation, in form of \u2018sub-agency offices\u2019 equipped with professionally trained sale staff headed by financial planner or advisor, where customer can take advise and discuss opinion prior to investing \/ buying any insurance or financial product. AIAL has \u2018sub-agency offices\u2019 in 580 cities, towns and blocks. Locations are semi-commercial in nature but prominent. AIAL has practice to sign 30-year lease, when so ever taking and \u2018sub-agency office\u2019 on lease in order to reduce the lease cost and bring stability.
\nSecondly, AIAL sold product of all third parties, hence provide a range of products to its client to choose from. In 2010, AIAL signed a 15-year agency agreement with all 23 life insurance companies recognised then. AIAL\u2019s tagline is also depicting the same \u2018we are ethically committed to understand and deliver your needs\u2019. AIAL believes in organic growth and listed on stock market 3 years back to float additional capital to fund more \u2018sub-agency offices\u2019.
\n22 out of these 23 life assurance companies are private and registered themselves with regulatory between the year 2000-2009 for a period of 25 years. Considering the default by few insurance firms and increasing customer complaints, regulator of insurance business in country tighten the registration criteria and harden the norms.
\nTypically each of \u2018sub-agency office\u2019 comprises three regular and one contractual employee. One being financial planner\/advisor, 2 sales and relationship officer and contractual worker in role of support staff and vested with miscellaneous clerical responsibilities. The on-roll number of employees engaged in assurance brokerage business has been increased to 1,564 from 720 five year ago (up-till 3 year ago number was 845 but since expansion of \u2018sub-agency\u2019 office division it is around 1,500).
\nMarket trend is changing, since the AIAL commence the business. Each of such insurance company, now has their own network of branch offices to sale their insurance product directly; that too at more prominent locations., AIAL counter this, by highlighting its \u2018independence and impartial advice\u2019 practice, although AIAL managed to retain the revenue at same level, but this result in low profitability of \u2018sub-agency office\u2019 business. Now these \u00a3 insurance companies are not authorising any new agent.
\nBeing in service industry and further in order to ensure wider market reach to compensate the loss of profitability in \u2018sub-agency office\u2019 business, AIAL has established own \u2018E-platform\u2019- \u2018Policy at you click\u2019 to sell the insurance product with total staff of 50 professionals, as a separate division under insurance brokerage business from \u2018sub-agency office\u2019 division. \u2018E- platform\u2019 division is prospering but \u2018sub-agency office\u2019 business is certainly in trouble.
\nSupported by revenue figures given below (in \u2019000 Crores), analysts reach to conclusion that growth in the assurance brokerage business is slowing down both for AIAL and industry overall:
\n![\"Introduction](\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Introduction-to-Strategic-Cost-Management-\u2013-CA-Final-SCMPE-Study-Material-5.png\")
\nRevenue earned by each division of assurance brokerage business (in term of age of the client), is shown in table below for year 2019-20:
\n![\"Introduction](\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Introduction-to-Strategic-Cost-Management-\u2013-CA-Final-SCMPE-Study-Material-6.png\")
\nSince the profitability of \u2018sub-agency office\u2019 division is declining, hence the strategic review committee of board of directors are concerned about the company’s declining profitability due to poor performance of \u2018subagency office’ division and suggest that the \u2018sub-agency office\u2019 division should be sold off and that AIAL shall re-position its assurance business as an online solution.<\/p>\n Extract from financial statement for agency office division only (figures in ‘000 Crores)<\/p>\n \n\n\n| Particulars \/Year<\/td>\n | 2019-20<\/td>\n | 2018-19<\/td>\n | 2017-18<\/td>\n<\/tr>\n | \n| Revenue<\/td>\n | 280<\/td>\n | 272<\/td>\n | 250<\/td>\n<\/tr>\n | \n| Profit before interest and tax<\/td>\n | 18<\/td>\n | 16<\/td>\n | 31<\/td>\n<\/tr>\n | \n| Shareholders\u2019 Equity<\/td>\n | 156<\/td>\n | 150<\/td>\n | 150<\/td>\n<\/tr>\n | \n| 8% Long term debt<\/td>\n | 78<\/td>\n | 64<\/td>\n | 50<\/td>\n<\/tr>\n | \n| Current Liabilities<\/td>\n | 455<\/td>\n | 437<\/td>\n | 395<\/td>\n<\/tr>\n | \n| Current Assets<\/td>\n | 605<\/td>\n | 565<\/td>\n | 540<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Applicable tax rate is 22%. The nature of cost incurred by \u2018sub-agency office\u2019 division is more or less balanced between the variable and fixed, Fixed costs are largely committed in nature.
\nBut the CEO is not agreed to the suggestion made by strategic planning committee, because CEO is of belief that AIAL’s USP or original business model is \u2018sub-agency offices\u2019 through which they ensure \u2018independence and impartial advice\u2019 to their clients.
\nIn next board meeting, board is expected to pass resolution on this agenda item in order to decide either to continue or sale the \u2018sub-agency office\u2019 division.
\nRequired
\n(i) ASSESS the competitive environment of life-assurance business of AIAL (including \u2018sub-agency office\u2019 division).
\n(ii) EVALUATE the case for holding the \u2018sub-agency office\u2019 division, backed by financial viability among other criteria. [RTP May 2021]
\nAnswer:
\n(i) Michael E Porter, in 1980 suggested five force model to assess the competitive environment of an industry.
\nSuggested five force model to assess the competitive environmental an industry. The five forces which are enumerated by this model are the bargaining power of suppliers; the bargaining power of customers (buyers); the threat of new entrants; threat of substitute products; and the level of rivalry among current competitors in the industry.
\nThis model is also named as porter\u2019s five force analysis. Since each of these five forces affect the competitiveness of business, hence can be used to assess the potential of any organisation or entity; life-assurance business of AIAL (including \u2018sub-agency office\u2019 division) is not an exception to this.<\/p>\n The bargaining power of suppliers
\nNumber of suppliers will decide the dominance they possess in term of bargaining power regarding the price of good and service they supply to business. In case of \u2018sub-agency office\u2019 division following factors will affect the suppliers\u2019 power-
\nControl over Value Chain – By adopting the strategy of forward integration the insurance companies themselves getting into the direct sale through own network of branch offices in order to enhance their margin or reducing the margin earned by AIAL\u2019s \u2018sub-agency office\u2019 division. Since number of insurance companies are neither too less nor too much, hence bargaining power of insurance companies; in terms of percentage brokerage they offered to AIAL is moderate.<\/p>\n Importance of product – AIAL is also dealing in financial product\u2019s marketing and advisory, which contribute 5096 of group sales and around 6796 of group\u2019s profit; thus assurance business which is no doubt significant but only choice (business) available to AIAL. Hence, bargaining power of supplier is moderate.
\nSubstitution among the brand – Life assurance product offers similar utility to client; hence easily substitutes among the brands, means if insurance company 1 charge lesser premier then insurance company 2, client will buy assurance of company 1. No doubt switching is less viable once policy subscribed. Since AIAL\u2019s \u2018sub-agency\u2019 division is offering the product from all 23 insurance companies, hence bargaining power of suppliers become low.
\nSupply of other factors – Other factor such \u2018sub-agency offices\u2019, which are largely on lease, has 30-year lease, this will reduce the lease cost as well as bargaining power of land-lord apart from bringing stability.<\/p>\n The bargaining power of customers<\/p>\n \n- Whether seller is price taker or makes, this is outcome of bargaining power of customers (true sense competition). If the bargaining power is high seller will become price taker, else he is price maker. Following factors affect the bargaining power of customers of AIAL\u2019s \u2018sub-agency\u2019 division-Number of buyers – In assurance industry the buyers are large (in comparison to few number of suppliers) and diversified, hence their bargaining power is low.<\/li>\n
- Standardised products – Since the life assurance is the product, which is standard from prospective of core functionality, hence buyers can easily substitute brands and can negotiate to reasonable extent.<\/li>\n
- Switching – Once policy subscribed cannot be easily switched with another, hence due to high switching cost bargaining power reduced to some extent atleast.<\/li>\n<\/ul>\n
The threat of new entrants
\nAlthough entry of a new firm to the industry\/market depends upon j the level of entry barriers, but if new entity enters into the industry; it will surely bring additional capacity which enhance the stiffness of competition; hence become a kind of threat. In case of ‘sub-agency office\u2019 division, there are some major barriers to entry
\nLess number of new life-assurance licenses by regulator due to tough regulations – As mentioned in the case that after considering the default by few insurance firms and increasing customer complaints, regulator of insurance business in country tighten the registration criteria and harden the norms; hence this may act as entry barrier and reduce the threat of new entrants.<\/p>\n Less number of new insurance agent due to no new authorisation by insurance companies-As market is revamping, the agents is becoming competitor to the insurance companies and as mentioned insurance companies stopped authorising new insurance agents, hence this will act an entry barrier for new insurance agents, which is a great positive for AIAL\u2019s \u2018sub-agency office\u2019 division and intact the competitive advantage.
\nLearning curve and economies of scale – Since all the 23 insurance companies dealing in life assurance and AIAL are 10 to 20-year-old organisations; hence learning curve and economies of scale (shared services for the 580 offices – presence in 580 cities) which they are enjoying may become entry barriers for new firm. Since new firms require huge capital to be at par to such learning curve and economies of scale.<\/p>\n Threat of substitution
\nSubstitution means the product from some other industry which can render the same function which life assurance is rending. The threat of substitute product is quiet low.<\/p>\n Competitive rivalry
\nThe level of competition among the players to acquire or retain the market share directly affects the profitability in an industry. Following are the factors affecting the competitive rivalry:
\nNumber of competitors and respective market size – Since there are good number of competitors, hence competition will be intense; may cutthroat rivalry. Presently AIAL\u2019s insurance business represent 14.55% of market share (in 2019-20) in comparison to 14.29% of market share five year ago, without any major variation, hence possibility of gaining new market share is limited that too at high cost (in form of advertisement and more after sale services).<\/p>\n Lack of differentiation – Standardise product results in high rivalry, since the life assurance is standard product hence rivalry may be high on account of easy substitution effect among the different brands.
\nSlow market growth -If market is growing at high rate, rivalry may be stiffer or may be moderate; because everyone has reasonable opportunity to grow. The moment growth stagnated rivalry become stiffer because no one wish to lose market share. The industry life cycle curve is flatter here, because during last four years overall industry wide CAGR (compounded annual growth rate) of life assurance business is 3.39%, whereas year-on-year growth from 2018-19 to 2019-20 is 1.91%. Although potential is limited, but competition is still high.<\/p>\n Exit barriers-It the exit cost for player to move out of industry is high, it will have to be in industry and fight for survival, which may make competition tougher. Since agency agreement and lease agreement is already signed by AIAL hence, it becomes difficult to exit from the business, hence need to participate in competition to retain the share.<\/p>\n (ii) Case for holding the \u2018sub-agency office\u2019division
\nThe strategic review committee suggests that the AIAL\u2019s \u2018sub-agency office\u2019 division should be sold off and that AIAL shall re-position its assurance business as an online solution, but the same suggestion firstly needs to be evaluated in terms of financial perspective among the other criteria.<\/p>\n The growth in life assurance business is stagnated and industry is in maturity stage of industry life cycle. This is evident from industry size and growth in the same. During last four years overall industry wide CAGR (compound annual growth rate) of life assurance business is 3.39%, whereas year-on-year growth from 2018-19 to 2019-20 is 1.91%. The moment growth stagnated rivalry become stiffer because no one wish to lose market share. Hence, there is intense competition in market. In cases where market witnesses intense competition, operating efficiently is essential and reduction in cost become key success factor, in order to offer competitive deals to clients and retain market share, Hence, it becomes need of hour, that we review the operating processes followed at \u2018sub-agency offices\u2019 to check whether they are efficient or not, in order to ensure greater profitability rather thinking to sale off the entire ‘sub-agency office\u2019 division.<\/p>\n Now, move to financial analysis, which suggests it is beneficial to hold back \u2018sub-agency\u2019 division.
\nContribution to the group – Insurance business is contributing 50% of top-line of overall group revenue (and l\/3rd of bottom line), and around 86% (280\/326) of this comes from ‘sub-agency office\u2019 division and \u2018E-platform\u2019 division contribute only remaining 14%.<\/p>\n Profitability: Margins are positive. There are two major parameters to evaluate profitability further on-<\/p>\n \n- Operating profit (EBIT\/Revenue) – No doubt, operating profit shrink from 12.4% to 6.43% in three years\u2019 time frame. But as earlier quoted, margin is positive and secondly, there is sign of recovery as well. EBIT increased in absolute terms (from 16 to 18).<\/li>\n
- Return on capital employed (ROCE)[EBIT\/ (Equity + Long Term Debt)] – No doubt, ROCE shrink from 15.5% to 7.69% in three years\u2019 time frame. But reduction in EBIT is not only a reason, another major reason for decline is change in capital structure. Long term debt is increased in absolute terms (from 50 to 78).<\/li>\n<\/ul>\n
Liquidity – Current ratio (Current Assets\/Current Liabilities) being reasonable measure of liquidity indicates enough liquidity in \u2018sub-agency office\u2019 division to meets it obligation. There is minor decline from 1.367 times to 1.33 times. Component analysis of working capital can be performed for greater insight.
\nGearing (Debt\/Equity) – Gearing ratio depicts the financial leverage, a measure of risk. Gearing ratio no doubt increased as result of introduction of debt, from 1\/2 to 1\/3, but under control.<\/p>\n Some other quasi-finance and significant factors relevant to the decision of sale of \u2018sub-agency office\u2019 division and full focus on \u2018E-platform\u2019 division-
\nClient\u2019s demography – Clients from all age groups from 20 to 60+ are clients of AIAL\u2019s assurance brokerage business. 66.5696 (217\/326) of revenue coming from clients with 50+ years of age, and 9996 (215\/217) out of them are associated through \u2018sub-agency offices’, hence holding of \u2018sub-agency\u2019 division become essential. Secondly, clients from all age group may not find it convenient to shift to \u2018E-platform\u2019 ‘Policy at you click\u2019 and their resistance may result in losing business. Thirdly, they have easily available substitute, because competitors also have branch offices which will give them same feel.<\/p>\n Resistance from employees – Out of 1,564 on-roll employees of assurance brokerage business, only 50 are associated in \u2018E-platform\u2019 division – \u2018Policy at you click\u2019, rest all in \u2018sub-agency office\u2019 division. If AIAL re-structure itself fully as online solution for life assurance then also cannot absorb all the employees, many of them need to be retrenched. Resistance will be there in both the cases because transferred employee may not have requisite skill set, result in poor quality of service and no job satisfaction to employee. Whereas in case of retrenched workers redundancy cost will become additional financial burden. This can be seen as exit barrier.<\/p>\n Legal aspect in term of pre-closure of lease – AIAL has practice to sign 30-year lease, when so ever taking and \u2018sub-agency office’ on lease in order to reduce the lease cost and bring stability. It started the business 2 decades ago and expanded it 3 years ago and many of leases are active right now, in case of pre-closure, it may be possible to bear additional financial burden as per terms of lease agreement.<\/p>\n Loosing USP – \u2018Independence and impartial advice\u2019 with presence wide across the nation, in form of \u2018sub-agency offices\u2019 equipped with professionally trained sale staff headed by financial planner or advisor, where customer can take advise and discuss opinion prior to investing\/ buying any insurance or financial product is USP for AIAL\u2019s assurance brokerage business. By disposing the \u2018sub-agency office\u2019 division this central idea, with which AIAL was established may be washed out.
\nIn nutshell, the life assurance market has matured in recent years, and result in low growth potential and lower profitability but still yielding positive numbers. Hence, sale of \u2018sub-agency\u2019 division will adversely hit the revenue as well as profitability.<\/p>\n Question 13.
\n(Competitive Advantage)
\nKrsna and Raghav are the two firms in Indian Paint Industry, following are there income statement.<\/p>\n \n\n\n| <\/td>\n | Firm Krsna (\u20b9)<\/td>\n | Firm Raghav (\u20b9)<\/td>\n<\/tr>\n | \n| Revenues<\/td>\n | 10,00,000<\/td>\n | 20,00,000<\/td>\n<\/tr>\n | \n| Less: Variable costs<\/td>\n | 4,50,000<\/td>\n | 12,00,000<\/td>\n<\/tr>\n | \n| Contribution margin<\/td>\n | 5,50,000<\/td>\n | 8,00,000<\/td>\n<\/tr>\n | \n| Less: Fixed costs<\/td>\n | 3,50,000<\/td>\n | 6,00,000<\/td>\n<\/tr>\n | \n| Profit before taxes<\/td>\n | 2,00,000<\/td>\n | 2,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Required
\nIDENTIFY the strategy (cost leadership vs. differentiation) followed by Krsna and Raghav two firms in Paint Industry. JUSTIFY your classification. [RTPNov. 2020]
\nAnswer:
\nIt is observe that in case of Krsna firm, higher contribution margin ratio indicates Krsna is following a differentiation Strategy while Raghav firm appears to be more focused on cost leadership. This is also substantiated by higher fixed costs ie. R&D, innovation etc., for sale in Krsna firm. Innovation allows an organisation to command premium prices and earn I more contribution per sales. However, innovation is expensive.<\/p>\n \n\n\n| <\/td>\n | Firm Krsna<\/td>\n | Firm Raghav<\/td>\n<\/tr>\n | \n| Contribution margin\/Sales<\/td>\n | 0.55<\/td>\n | 0.40<\/td>\n<\/tr>\n | \n| Fixed costs\/Sales<\/td>\n | 0.35<\/td>\n | 0.30<\/td>\n<\/tr>\n | \n| Profit margin\/Sales<\/td>\n | 0.20<\/td>\n | 0.10<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Question 14.
\n(Case Scenario: Competitive Advantage)
\nStay Connect is a manufacturer of mobile phones. The organisation operates in a dynamic, extremely competitive and consumer centric market; The market is broadly fragmented into those customers who are price conscious looking only for basic features and those who are technology savvy wanting to try out the latest offering. Stay Connect manufactures phones that cater to both these segments.
\nMobile AX-10 has the very basic features that a customer requires from a phone. It is marketed to attract the price conscious customers. There are many other manufacturers who have similar product offering for this market. Mobile ZU-91 offers the latest technology features and an attractive design. Stay Connect has invested substantial amount in research and development that has resulted in Mobile ZU-91 having many unique features. It is marketed to attract customers willing try out newer products. The research has also yielded results whereby a large section of the design of Mobile AX-10 and ZU-91 can be standardized to have a similar components and engineering. This would enable Stay Connect to enter into agreements with its suppliers to provide components Just in Time based on the production schedule. With this change, the quality of Mobile AX-10 is expected to improve, thereby improving its sales off take manifold.
\nOnline shopping has given customers complete access to the prices of phones offered by different manufacturers. This channel of shopping contributes to almost 70% of the sales. Huge discounts by its rivals has forced Stay Connect to reduce the prices of Mobile AX-10 as well. This has stretched its profit margins. Various cost reduction measures have been initiated to maintain profitability. Mobile ZU-91 on the other hand is currently doing well since it is targeted at a more niche segment of customers. Stay Connect is able to charge premium price for Mobile ZU-91. The latest news in the industry of personal devices like mobiles, laptops etc. is the use of
\nArtificial Intelligence and Augmented Reality to enhance user experience. The technical staff at Stay Connect feel that this could be the next new frontier that could really change the way we use our devices, most of which could even go redundant.
\nRequired
\n(i) IDENTIFY the strategy that Stay Connect is using for Mobile AX-10 and Mobile ZU-91.
\n(ii) DISCUSS the risks involved in each of these strategies.
\n(iii) ADVISE Stay Connect to sustain its current strategy for Mobile AX-10?
\nAnswer:
\n(i) Stay Connect is following the “low cost strategy\u201d for Mobile AX-10 and \u201cdifferentiation strategy\u201d for Mobile ZU-91. Mobile AX is being offered l at discounted rates to meet the prices of its competitors. This is being done in order to gain market share from its competitors. However to maintain its profitability, Stay Connect has to find means to keep its manufacturing, distributing and other costs low.
\nMobile ZU-91 is being perceived by customers as a unique product, with features different from its competitors. This is “differentiation strategy\u201d, which can be achieved from superior product quality innovation and customer responsiveness.<\/p>\n (ii) The risks involved in a “low cost strategy” for Mobile AX-10 is that any price reduction followed by StayConnect will be followed by an equivalent price reduction by its competitors, which will ultimately eliminate players who are unprofitable. This strategy will put margins under pressure. The organisation has to find ways to reduce its costs on a sustained basis. The \u201cadvantage of low cost \u201d will be lost once its competitors also find a way to lower their costs. The other risk would be that lowering the cost could be impact the quality of the product negatively. Also the differentiation strategy would work effectively only when customers are not price sensitive.<\/p>\n The mobile industry in which StayConnect operates is a competitive market. Mobile ZU-91 will have competitive advantage as long as certain customers are will to pay extra for additional features. If these customers also become price sensitive, they fail to see the value for paying extra for the additional features, the sales of Mobile ZU-91 will start falling. The other risk in this strategy would be in the ability of competitors to replicate the features of Mobile ZU-91. Therefore, StayConnect should protect its intellectual property rights in order to prevent its competitors from replicating the design and features of Mobile ZU-91. If these risks are restrain, StayConnect would be able to maintain its premium price for Mobile ZU-91 for its unique features. StayConnect also face external risk factor from the developments in the fields of Artificial Intelligence and Augmented Reality. StayConnect has to constantly monitor and assess how these technological developments can impact its business. The Organisation must be flexible enough to adapt to changes as they take place, in order not to become redundant in business.<\/p>\n (iii) \u201cLow cost advantage or Low cost strategy\u201d can be maintained by j copying designs rather than creating own, getting discounts on bulk purchases, attaining economies of scale by high-volume sales and j gaining learning and experience curve benefits.<\/p>\n \n- Learnings and experience from research for Mobile ZU-91 can be leveraged for Mobile AX-10.<\/li>\n
- Standardization of design for Mobile ZU-91 and AX-10 would improve the quality of the product since the design is based on a product that has premium range of customers. Since these features can improve the sales of Mobile AX-10, costs would benefit from economies of scale due to larger production volumes.
\nBulk purchase of components for Mobile AX-10 and ZU-91 gives StayConnect the advantage of negotiating for discounts on purchases.<\/li>\n - It could also negotiate for favourable delivery terms, like just in time purchasing agreements, which would reduce the inventory holding costs for StayConnect.<\/li>\n
- All this contributes towards lowering the costs of production of Mobile AX-10. This will help StayConnect sustain its low-cost advantage.<\/li>\n<\/ul>\n
Question 15.
\n(Case Scenario: Competitive Advantage)
\nBlue Airways is the second largest airline in the Country \u201cRA\u201d. Aviation industry in the Country \u201cRA\u201d is growing fast. In 2009, 80 million people travelled to\/from\/or within the Country \u201cRA\u201d. By 2018 that doubled to 159 million. This number is expected to treble to 520 million by 2036. Also, by 2026, Country \u201cRA\u201d is expected to be the third largest air transport market in the world, behind the US and China. Government is trying to meet the significant growth potential of aviation Industry. However, it will create challenges also for the airline industry and its industry partners. Government also wants to ensure that broader business and policy environment should not place hurdles which inhibit growth and reduce the level of benefits that aviation can deliver to the nation. The industry, its supply chain partners, and the government and policy makers have a clear \u00a7 mandate to work in collaboration towards the common goal of ensuring |j that aviation\u2019s economic and social benefits are fulfilled, gj Despite of operating in World\u2019s fastest growing market Blue Airways struggles for passengers.<\/p>\n Also, Blue Airways is facing following problems:<\/p>\n \n- Aviation Turbine Fuel (ATF) prices constitute about 40% of operational costs in Country \u201cRA\u201d and are taxed higher here than anywhere else in the World. The Central Government charges 14% duty on ATF. While the State Government pile on their own local tax that can go as high as 29%.<\/li>\n
- The currency depreciation is hitting Airline harder. About 25% to 30% of their costs, excluding ATF are dollar denominated, from aircraft lease rents, maintenance costs to ground handling and parking charges abroad etc.<\/li>\n
- With the entry of Low Budget Carriers, full-service carrier like Blue Airways that have higher overhead costs have been forced to offer discount to passengers looking for great bargain.<\/li>\n
- Continuous improvements in tourism infrastructure, tourism policies, human resources development, airport infrastructure density are among the areas that could further enhance Country \u201cRA\u2019s\u201d competitiveness. Ease of doing business over the last five years has risen.<\/li>\n
- The intense competition among domestic airlines carriers, the need to capture a slice of the ever-expanding market and passenger price sensitivity makes the airlines difficult to raise ticket prices.<\/li>\n<\/ul>\n
Together, these factors have now plunged Country \u201cRA\u2019s\u201d aviation industry to its most precarious phase in the last three years or so* Blue Airways is facing huge competition as a \u201cyear of sharp U-turns\u201d for \u201cRA\u2019s\u201d aviation industry from record profit in Financial Year 2017-18 to mega losses, resulting in direct need of recapitalisation. Blue Airways has been appealing to the government for a decade for a reduction in taxes on fuel, but all in vain. ATF is 35-40% more expensive in Country \u201cRA\u201d than in the rest of the world, because of relatively high tax rates.<\/p>\n Required
\nADVISE the strategy that Blue Airways should follow in order to attain superior performance and competitive advantage over its competitors [RTPNov. 2020]
\nAnswer:
\nIn consideration to Michael Porter\u2019s theory about creating a superior performance and competitive advantage, an organisation\u2019s overall competitive advantage derives from the difference between the value it offers to the customer and cost of creating that customer value.
\nIn order to survive and prosper in industry, an organisation must need to satisfy two criteria- they must supply what customers want to buy and they must survive competition.
\nTo attain superior performance and attain competitive advantage, an organisation must have distinctive competencies. Distinctive competencies can take any of the following two forms:
\nRelative low-Cost advantage – Under which customers gain when an organisation\u2019s total costs undercut those of its average competitor.
\nAn offering or differentiation advantage – If customer find a product or service as superior, they become more willing to pay a premium price relative to the price or competitive products or services.<\/p>\n Low Cost Advantage (Cost Leadership)
\nBlue Airways can enjoy relative cost advantage if its total costs are lower than those of its competitors. This relative cost advantage enables a business to do one of the following:<\/p>\n \n- Charge a lower price than its competitors for its product or services to gain market share and still maintain current profitability; or<\/li>\n
- Match with the price of competing products or services and increase its profitability.<\/li>\n<\/ul>\n
Cost reductions in Blue Airways can be achieved through yield management with variable pricing depending on capacity utilization with careful monitoring; application of communication and computer technology in cost effective way i.e. selling seats of airlines through internet instead of travel agents; trimming overhead costs by using lower cost out-of-town airports, no printed tickets, seat allocations, or free meals and drinks; efficient operations i.e. fast turnaround times for aircraft to improve utilization; and no exceptions policies to reduce the cost of handling exceptions (e.g. no flexibility for passengers who arrive late). Economies of cost can also be realized from large scale operations. However, it is important to note that as soon as more firms strive to become the cost leader, rivalry become so fierce that the consequences for the profitability in the industry are disastrous.<\/p>\n Differentiation Advantage
\nIt occurs when customers perceive that a business services offering is of higher quality, involves fewer risks and\/or outperform services offered by competitors. In other words, customers perceive the service offered by a business to be superior. For example, differentiation may include a firm\u2019s ability to deliver services, and other factors that provide unique customer value. Blue Airways is a multinational passenger airline. It can adopt a differentiation approach by offering passengers a higher-quality experience than many of its rivals. This allows it to charge a premium for its flights compared to many other airlines.<\/p>\n A differentiation advantage can be achieved by offering enhanced features such as prime landing slots can be obtained at major airports around the world; using superior and advance technology; well-maintained, clean, and comfortable aircraft; training in customer care and the recruitment of high-quality staff; providing complementary services such as in-flight entertainment, high-quality food, and drink. Customer value can also be increased by subjective features such as brand image, advertising based on quality of service provided. However, differentiator cannot ignore its cost position. If costs are too high the premium price are nullified.<\/p>\n On successfully differentiated its offering, management of Blue Airways may exploit the advantage in one of two ways viz., either increase price until it just offsets the cost of improvement in customer benefits, thus maintaining current market share; or price below the “full premium” level to build market share.<\/p>\n Alternatively, Blue Airways may focus on geographical region and short point to point flights to reduce costs. Michael Porter enlightens focus as attaining low cost or product differentiation for a particular buyer group, segment of product line, or geographic market rather than for the industry as a whole. The focuser can attain competitive advantage within a niche, [because large firms are either not attracted to niche or have ignored the potential. The narrow focus in itself though is not adequate for a competitive advantage. The firms need to optimize the strategy on two variants: cost focus and differentiation focus. One risk of a \u2018focus strategy’ is that broadly targeted competitors devastate the segment once it becomes economically attractive.<\/p>\n In addition, the currency depreciation is hitting Airlines harder and international overhead costs have risen, the Blue Airways should attempt to increase the number of internal domestic flights. Moreover, ATF cost can also be lowered by investment in fuel saving modern Airbuses, however, the reduction in operating costs may outweigh the capital equipment costs. To gain competitive advantage Blue Airways may also assess Value Shop Model. Value Shop generates value by organizing resources (e.g. people, knowledge, and skills) and deploying them to solve specific problems, for example, delivering airline services to the passengers or delivering a j solution to the business problem. Shops are organized around making executing decisions- identifying and assessing problems or opportunities, developing alternative solutions or approaches, choosing one, executing it U and evaluating results.<\/p>\n In this way, the above discussed strategies may be more appropriate for f helping Blue Airways in achieving superior performance and competitive advantage over its competitors.<\/p>\n Question 16.
\n(Case Scenario: Cost Leadership)
\nYama Ltd. is a manufacturer of bikes and it sells them in India and 1 outside country X. Yama Ltd. has just launched the World\u2019s smallest and j most affordable bike called \u2018Yama Nano\u2019. The bike is mounted with all aluminium, plastic frame, air cooled, single cylinder, 99.2 cc engine etc. The engine makes just over 8 bhp power and 8 Nm of torque, but it stakes claim to be the fuel-efficient bike, with a claimed figure of 88 kmpl. It has been creating competition for two wheelers as none of the country X companies as well as foreign companies, offer a bike for such a competitive price within the reach of middle class family.
\nYama Ltd. has adopted target costing technique in manufacturing this bike. For Yama Ltd., maintaining target- price was difficult. During the designing and production process of bike, input costs increased frequently, However, Yama Ltd. designed various components especially for bike to maintain the target price. Though, there is curiosity, how this can be done in the future when input costs are bound to increase further.
\nMany environmentalists have opposed the manufacture of this bike, because they believe that mass production of small bike (about 2.5 lakh bike every year) will create heavy pollution. Many people believe that this small bike is not up to the safety standards due to lightweight and use of aluminium and plastic frames. The design of this bike is entirely different from that of other bikes. This also causes a doubt that the existing bike mechanics would be able to repair or not.
\nDurability of bike is another issue in the Indian environment as the i performance of \u2018Yama Nano\u2019 more or less depends upon the condition of roads and traffic system.
\nAfter the launch of \u2018Yama Nano\u2019, many other national and international i automobile companies are also planning to manufacture small bike which will create tough competition in near future.
\nRequired
\nNow you being a strategic performance analyst of Yama Ltd., answer the i following questions:
\n(i) IDENTIFY strategy which Yama Ltd. has adopted for \u2018Yama Nano\u2019 bike?
\n(ii) After adopting target costing, IDENTIFY issues and challenges faced 5 by Yama Ltd. and suggest the remedial action to be taken to solve these issues?
\nAnswer:
\n(i) Yama company has adopted Low cost strategy for its product \u201cYama Nano” bike since the main purpose of manufacturing this bike was to make it economical and affordable.
\n(ii) The issues and challenges faced by Yama Ltd. and their remedial action are as follows:<\/p>\n Maintaining of Target Price
\n‘Yama Nano’ bike is one among the world\u2019s cheapest and smallest bike. However maintaining the target price is a great challenge for the Yama Ltd. since input cost of bike are bound to increase further in future.<\/p>\n The initial value engineering might not uncover all possible cost savings. Thus, Kaizen Costing is the best method to be designed to repeat many of the value engineering steps for the production of bike, constantly refining the process and thereby stripping out extra costs.<\/p>\n Environmental Issues
\nIt is believe that mass production of small bike will create heavy pollution so many environmentalist has oppose the manufacture of these bike, since automobile pollution is already a big problem. To manage this issue, \u2018Yama Nano\u2019 bike can be prepared based on BS emission norms, which may help to restrict the pollution created by any motor vehicle.<\/p>\n Safety Issues
\nSince \u2018Yama Nano\u2019 bike is made of aluminium and plastic frames so this may also create safety issues for the customers. For such issues, Yama Ltd. should meet safety standards. Further, Yama Ltd. company should aware the people that \u2018Safety is Primary\u2019\/ ‘Drive Safely\u2019.<\/p>\n Servicing \/Repairing Facilities
\nAlso the design of \u2018Yama Nano\u2019 bike is entirely different from that of other bikes which causes a doubt that the existing bike mechanics would not be able to repair it. For dealing with such problem, creation of a good network of service center can be a solution i.e. repair center for such bike should be established on required places.<\/p>\n Durability
\nDurability of \u2018Yama Nano\u2019 bike is another issue in the country X as the j performance of bike more or less depends upon the condition of roads and j traffic system which is not good in country X. For handling such issues, 13 tyre quality and hydraulic brake system should be compatible to the roads z and traffic system.<\/p>\n Global Competition
\nAfter the launch of \u2018Yama Nano\u2019, many other national and international automobile companies are also planning to manufacture a small bike, which will be a great challenge for the Yama Ltd. company in the near future. To face such competition, it may adopt Kaizen Costing technique. The cost reductions resulting from Kaizen Costing are much smaller than those achieved with Value Engineering but are still worth the effort since competitive pressures are likely to force down the price of \u2018Yama Nano\u2019 over time, and any possible cost savings allow Yama Ltd. to still attain its targeted profit margins while continuing to reduce cost.<\/p>\n Question 17.
\n(Case study)
\n\u201cAroma\u201d is a ‘scented decorative items’ manufacturing company. \u201cAroma\u201d has always traded profitably due to targeting the niche market for high-value, decorative items. Decorative items often use waxes other than beeswax and paraffin. Bayberry wax is derived from the fruit of the bayberry f bush and has a distinctive aroma making it popular for manufacture of scented items. The market for scented decorative items is a saturated one, but the CEO has identified that \u201cAroma\u201d could begin selling online.
\nNone of \u201cAroma’s\u201d competitors have a major online presence and \u201cAroma\u201d itself only has a simple website that lists locations of its stores as well as products information.
\nThe Managing Director is unhappy about this move. He is aware that \u201cAroma\u201d has had issues in implementing IT systems in the past. Most recently, \u201cAroma\u201d planned to implement an online inventory system, which would have allowed stores to check inventory levels in other, nearby, \u201cAroma\u201d stores. The system was discarded due to increasing costs and issues with the operating system and application software, which were I developed in-house by \u201cAroma’s\u201d small IT team.
\nThe CEO feels that the issues with the earlier IT plans were because of lack of control. \u201cAroma” has never employed an IT Director and the CEO has therefore recommended that if \u201cAroma\u201d decides to expand into \u2018online retailing\u2019, this role will require to be filled.
\nCFO who recently joined the \u201cAroma\u201d mentioned that operating across large number of states through \u2018online retailing\u2019 involves cumbersome data-intensive exercise for this \u201cAroma\u201d needs to be integrated through % cloud-based ERP program, in addition to other operational requirements, For this, there will also be need for additional budget.
\nRequired
\n(i) IDENTIFY the issues that \u201cAroma” may face when launching \u2018online retailing\u2019.
\n(ii) EXPLAIN the requirement for IT to be a strategic decision within \u201cAroma\u201d. (Study Digest 2021)
\nAnswer:
\n(i) There will be issues that \u201cAroma\u201d will face with its proposed move into \u2018online retailing\u2019. These may include: *<\/p>\n Lack of in-house IT resources
\n\u201cAroma\u201d is presently short of an IT Director to manage the project. While the \u201cAroma\u201d may be able to hire someone quickly to fill this role, he\/she will lack experience of \u201cAroma\u2019s” business by the time the \u2018online retailing\u2019 is started.<\/p>\n \u201cAroma\u201d is having IT team. They may well lack the time or experience for this online project. This shows further investment will be needed to hire additional resources or to buy the new systems from external agencies.<\/p>\n It is also important to note that an \u2018online retail\u2019 system would also be required to have accurate information about inventory levels in \u201cAroma”. It currently does not have an automated inventory control system as this was abandoned. This problem can be resolved with additional investment in cloud-based ERP program.<\/p>\n Setup and running costs
\nMore than anything, investors want to see a return on their investment, However, the cost of setting up and running an \u2018online retailing\u2019 system 1 in “Aroma\u201d may be high. Therefore, in the short term the setup costs may mean that shareholder returns fall.<\/p>\n \u201cAroma\u201d will need to analyse whether the additional profit it can make by \u2018acquiring\u2019 new customers online will exceed these costs.
\nAny further investment in human resources will also increase the IT costs.<\/p>\n Technophobia
\nStaff at \u201cAroma\u201d may be concerned about not being able to carry out the new jobs required of them or being able to carry out the new jobs required of them but unconvinced of their skills to use new IT system. Therefore, they may resist the introduction of a change that makes j them feel or appear incompetent.<\/p>\n In addition, the MD has expressed concerns about the launch of a new IT system, given the issues \u201cAroma” has faced in the past. \u2018Online S retailing\u2019 will need top management support in order to be successful.<\/p>\n Lack of customer interest
\nIt is likely that “Aroma\u2019s\u201d customers will not be interested in purchasing decorative items online. They may, for instance, wish to try out or physically see it for themselves rather than buying it online. Moreover, these decorative items may require very high shipping and handling costs. This will also encourage the purchase at a physical location. It is not clear from the scenario whether the CEO has undertaken any market research. This would be important before making the decision about beginning \u2018online retailing\u2019, to avoid launching a costly website that fails to catch customers.<\/p>\n Security issues
\nAs \u201cAroma” will be processing transactions through its website, it will require to ensure that customers are protected from credit card fraud or data errors. Their online stores are also likely to face phishing attacks, distributed denial of service attacks, man-in-the-middle attacks etc. This problem can be resolved by taking steps to offer secure connections and internal data protection.<\/p>\n (ii) It is vital that \u201cAroma\u201d has IT systems represented at the strategic or board level for various causes:<\/p>\n Competitive advantage
\nThe market in which \u201cAroma\u201d operates is described as ‘saturated\u2019. It will be hard for \u201cAroma\u201d to capture additional market share unless it identifies a way to differentiate itself.
\nIf the \u2018online retailing\u2019 is a success, it will give \u201cAroma\u201d a competitive advantage over its opponents and as such it should be part of \u201cAroma\u2019s\u201d strategic decision-making process.<\/p>\n Stakeholders
\n\u2018Online retailing\u2019 is looking good from the long-term perspective, as online selling is in trend now. Therefore, expansion of \u201cAroma\u201d is of great interest to \u201cAroma’s\u201d shareholders. As such it is crucial that the directors monitor its progress.
\nIn addition, customers are presently unable to check the inventories within “Aroma\u201d. They may be very concerned in an IT system that would enable them to save needless journeys into \u201cAroma\u2019s\u201d stores for items that are not in inventory.<\/p>\n Cost of IT system
\nSetting up an \u2018online retailing\u2019 will involve high levels of expenditure for “Aroma”. There is the risk of costly mistakes if it is not carefully \u2018controlled\u2019. This is evidenced by the failure of its inventory control system.
\nFailure of such a key project could have a major impact on the “Aroma\u2019s\u201d financial position.<\/p>\n Fast moving
\nTechnology is a fast-moving area and even if “Aroma\u201d becomes a successful first mover in the market by selling online, rivals are likely to follow \u201cAroma\u201d into the \u2018online retailing\u2019. ,
\nIn this environment, “Aroma’s” IT systems will need to be continually monitored and kept up-to-date to ensure it remains competitive.<\/p>\n <\/p>\n Question 18.
\n(Case Scenario)
\nCryon Limited specializes in the manufacture of chemical intermediaries in a very competitive business environment. Cryon is a public listed company, with majority of its shareholders being institutional investors like mutual funds, banks and insurance companies.
\nIt is located in a water scarce zone in Tamil Nadu. There are restrictions on the tapping and usage of groundwater under the relevant laws. Penal provisions of the law will apply in case of violations.
\nThe production process requires water and the amount of water that the company can draw is limited to 19,000 kilo-litres (1 Kilo-litre is 1,000 litres). Purchase of water is not an option as availability is highly erratic and exorbitant on cost.
\nThe company manufactures two types of chemicals \u201cAB\u201d and \u201cXY\u201d and these are sold in kilograms. The company is in the process of making the business plan for the year 2021.
\nBased on the actual operating data for 2020 and taking into consideration the inflation and possible price increases that it can obtain from the market, the following product costing details have been arrived at:<\/p>\n \n\n\n| Product<\/td>\n | AB<\/td>\n | XY<\/td>\n<\/tr>\n | \n| Capacity Volume kg. (not inter-changeable)<\/td>\n | 8,25,000<\/td>\n | 9,30,000<\/td>\n<\/tr>\n | \n| Selling Price per kg.<\/td>\n | \u20b9 2,000<\/td>\n | \u20b9 1,000<\/td>\n<\/tr>\n | \n| Variable Cost per kg.<\/td>\n | ? 1,500<\/td>\n | \u20b9\u20b9 650<\/td>\n<\/tr>\n | \n| Water (litre\/ kg.)<\/td>\n | 12.5<\/td>\n | 10<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Under the relevant Income Tax laws prevalent, companies with 1 a turnover of \u20b9 250 Cr. (Crores) or less are taxed at a lower rate of 25% as against the normal 30%. The company intends to keep its sales for 2021 equal to \u20b9 250 Cr. or slightly lesser to avail this concessional income tax benefit. With capacity constraints, the company has calculated that it would be still beneficial for the company to stick to \u20b9 250 Cr. as only a marginal increase in turnover is possible over \u20b9 250Cr.; after a higher tax @30%, the PAT would be still lower than the PAT arrived at after doing just \u20b9 250 Cr. and availing the lower income tax rate.
\nCFO asked management consultant to work out the volumes in kg. of products \u201cAB\u201d and \u201cXY\u201d which would give an optimal (maximum) contribution given the constraints on capacity, water usage and turnover to avail the concessional income tax benefit.
\nConsultant work out with the following product mix using Linear Programming. She also proposes another mix wh ich does not meet the constrainton water usage where the company could end up drawing excess water than permitted by 113 kilo-litres but would result in an increase of \u20b9 30 lacs in contribution. She says that it is easily possible to do this by managing reporting to the water authorities.<\/p>\n \n\n\n| Product<\/td>\n | <\/td>\n | Optimal<\/td>\n | Suggested<\/td>\n<\/tr>\n | \n| AB (Volume in kg.)<\/td>\n | <\/td>\n | 8,00,000<\/td>\n | 7,85,000<\/td>\n<\/tr>\n | \n| XY (Volume in kg.)<\/td>\n | <\/td>\n | 9,00,000<\/td>\n | 9,30,000<\/td>\n<\/tr>\n | \n| Contribution in t Cr.<\/td>\n | <\/td>\n | 71.5<\/td>\n | 718<\/td>\n<\/tr>\n | \n| <\/td>\n | Constraints<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n| Sales<\/td>\n | <= 250 Cr.<\/td>\n | 250<\/td>\n | 250<\/td>\n<\/tr>\n | \n| Volume of \u201cAB\u201d in kg.<\/td>\n | <= 8,25,000<\/td>\n | 8,00,000<\/td>\n | 7,85,000<\/td>\n<\/tr>\n | \n| Volume of \u201cXY\u201d in fcg. ;<\/td>\n | <= 9,30,000<\/td>\n | 9,00,000<\/td>\n | 9,30,000<\/td>\n<\/tr>\n | \n| Water usage (in KL)<\/td>\n | <= 19,000<\/td>\n | 19,000<\/td>\n | 19,113<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Required
\nThe CFO is not satisfied with the calculations. He wants you (Sr. Finance Manager) to come up with a proper DISCUSSION
\nAnswer:
\nPrimary goal of investor -owned firms is wealth maximisation of shareholder, which translates to stock price maximisation. Management Consultant\u2019s plan is looking attractive for the Cryon Ltd. as there\u2019s a positive x impact on the profitability (\u20b9 30 lacs) of the organisation. Also, Cryon Ltd. operates in a competitive environment so for its survival, it is good to work x on plans like above.
\nThere is second side of coin that can\u2019t even be ignored ie., business ethics, It’s easily possible to manage drawing of excess water, but it\u2019s not an ethical practice because the company has responsibilities towards use of natural resources like water and protecting the environment.<\/p>\n Besides, a whistle-blower complaint to the water authorities can land the organisation into trouble in terms of fines & penalties, a financial impact and also such penalties are disallowed for income tax purposes. It is possible that such a violation could also be reported within the media harming the image and reputation of the company.
\nIt can also induce the investors in the share market to stay away from the company because it has ethical governance issues. The organisation will face challenges in obtaining other government approvals when it\u2019ll plan expansion as this violation may need to be reported on the applications seeking approvals.<\/p>\n Overall
\nMay be Cryon Ltd. would manage to earn profit from this plan in short run, but it will tarnish the image of the Cryon Ltd. which would effect the long term profitability. Therefore, before taking any decision on this plan, Cryon should analyse both quantitative and qualitative factors.<\/p>\n Question 19.
\n(Case Study: Strategic cost management; Value Chain Analysis)
\nGyaan is a famous institute formed by three experts gold medallist which provides service of test series of various commerce courses to facilitate students who are going to appear for such examination. Gyaan provides test series for 11th & 12th standard (Commerce) for CBSE as well as various other state boards; B.Com., M.Com., and M.B.A. of various universities; CA, CS and CMA. Organisation\u2019s Head Office is placed at Delhi NCR with branches and Test Series Centers (TSCs) in various cities of India. Now it is the only organization which provides test series of various courses and guidance of study and has students across India. It has also started online test series facility for students of remote locations who do not have access to travel at any of the Test Series Centers. In addition to Test Series, it provides support in preparing a study plan, providing guidance ; on paper writing and counselling students, if required.<\/p>\n You are appointed as Cost Management Officer (CMO) of the Gyaan. In the Introduction Meeting, CEO, Mr. Parikshak, after brief introduction of organization addressed you, \u201cWe are rapidly growing education empire and having large student base across India. To reach here, we have faced lot of problems, but it has been overcome.
\nI want to share few of them to make you better understand the organization. Recently, at the biggest Test Series Centre, in Delhi, printer was not working and there were almost 450-500 students sitting and waiting for question paper. Outsourcing of print was costly and time-consuming option, so that we had mailed question paper to all of them to save time and cost. Now this approach has been applied at the most of the Test Series Centres i.e. students come at Test Series Centre, we mail them question paper and they appear for test. It saves our printing cost. Irony is that non-maintenance of Printer can also save the cost! It may be little difficult for students to read question papers from their mobile phone or tablet, but they will be comfortable soon as \u201cChange\u201d is the law of life and Business too! Further to reduce advertisement cost, we have dropped the contract with Ms. Takshi Sharma, famous film star. We had contracted with her for advertisement on TV for 3 years. She was brand ambassador of \u2018Gyaan\u2019. Though we got many students due to TV advertisement, we decided to drop the contract as we have enough students and as of now, there is no competition, as such, hence no need to advertise for coming 1-2 years.
\nFurther, we have reduced cost of question paper preparation. Up to last month we had, preciously, 57 members in question paper preparation team. They were drafting new questions for every test, Now we are having, preciously, 22 members in such team, less than half of we had. They are drafting less new questions and preparing paper with questions from past papers and other material of respective course. In our student support and student counselling team we had, preciously, 68 members, 42 for face-to-face counselling and 26 available on phone call. Now there are only 30 members, 12 for face-to-face counselling, and 18 available on phone call at our most profitable Test Series Centres. This may require less infrastructure facility at our few Test Series Centers which is cost beneficial for us. Oh, I forgot to tell one of the reasons behind reducing advertisement cost is that, after analysis of financial statement, our CFO had suggested that our advertisement cost was comparatively higher than other companies working in education field as well as with our previous years.
\nThese are the major problems we faced and changes we made during the year. Hope this set of information will be helpful to yon to commence your work. Till now, we have managed cost management department very well, as you can see from the instances I narrated, however due to heavy workload and growing organization, now we are unable to handle these all alone, so we need your support in success of the organization. Thanks for listening me and you are free to ask anything, anytime. Thanks.\u201d
\nAfter conclusion of his speech, you thanked him back and moved to your office to start work. You were thinking about strategy of paper less question paper, misuse of mobile phone or tablet during test and other matters as told to you.
\nIn that moment, your phone had buzzed, a notification front Newsagram, an application providing news acrQss world. Notifica tion was about the contract between Abhyas Education Ltd., giant educationist of India and Mr. Shamkar Datta, a film star having one of the highest fans following all over India, regarding advertisement of newly introduced test series by it for commerce and science stream across India.
\nAfter proper analysis of new competitor and its products, you informed to the CEO. Discussion and various meetings had been called and after that CEO decided to do more marketing to defeat the competitor. For that the CEO approached new brand ambassador, namely Mr. Prakash Rao, more famous film star than Ms. Takshi Sharma and Mr. Shamkar Datta. This deal was little costlier, still to be in market it was required.
\nNow the CEO is feeling that some blunders have been made by him in handling of cost management department. Hence, he approached j you to analyse various decisions made. Further, he asked you to apply any of the value chain analysis or value shop model to deal with the situation, as he thinks both are the same.
\nRequired
\nIn this regard, you have been asked following questions:
\n(i) Whether approach of the organization to manage the cost is of the Traditional Cost Management system or the Strategic Cost Management System? EXPLAIN.
\n(ii) LIST out the general limitations of cost management system identified in (i) and then correlate them by identifying the problems faced by the organization.
\n(iii) EXPLAIN the differences and similarities of Value Chain Analysis and Value Shop Model to CEO and IDENTIFY which model I can be applied in the organization. DISCUSS importance of I Strategic Cost Management. (Study Digest 2021)
\nAnswer:
\n(i) Traditional cost management system involves allocation of costs and focused more on cost control or cost reduction, the underiving % assumption was that with reduced costs an organisation could earn better profit.
\nStrategic cost management is the application of cost management techniques to improve the strategic position of the business, reduce its costs and maintain the effective control of costs. SCM also covers integration of cost information with the decision-making framework to support the overall organisational strategy. It is not limited to managing costs but using cost information for management decision making. The cost management techniques should be such that they improve the strategic position of a business apart from focusing on managing costs.<\/p>\n In the case of Gyaan, approach is of managing costs by reducing number of employees, switch to paper less question paper, reduction of advertisement expenses etc. It focuses on managing costs only and not on improving strategic position of business. Hence, it can be said that the approach the organization to manage the cost is of the Traditional Cost Management System.<\/p>\n (ii) Following are the limitations of the Traditional Cost Management System:
\n1. The focus is on managing costs approached via responsibility centres or product cost issues. However, a broad cost reduction programme does not work effectively in today\u2019s business environment.
\nThe Gyaan focuses on managing costs by switching to paper less question papers, reduction of employees and reduction of advertisement cost without thinking of requirement of business environment.<\/p>\n 2. Traditional cost management considers the internal factors and does not consider external factor of customer requirement, competition, market growth etc. At the time of dropping conI tract, with Ms. Takshi Sharma of advertisement, was ignorance of competition. \u2018Enough students at the organisation\u2019 was just internal focus which leaded to ignorance on entry of new competitor. Additionally, other cost reduction decisions may not fulfil requirements of students.<\/p>\n 3. A broad cost reduction could lead to inferior quality of products & services which might drive away customers resulting in lower sales and profitability.
\nDue to reduction in members of paper preparation team, quality of question paper may also degrade. Further, reduction in members of student counselling team may lead to heavy workload on employees and due to that quality of service may also degrade.<\/p>\n 4. The expectations of modern customer are different, they focus more on value for money. An excessive focus on cost reduction could impact the quality of product and services and alienate the customers. Degraded quality of question papers and reduced student counselling team may lead to dissatisfaction in students. Further, question papers on mobile phone or tablet may be misused by students who are forced to give test. This may lead that students get higher marks in test series, however actual marks in exam may be lesser; this may lead to dissatisfaction to students \u2019parents, ultimate customers of the organisation.<\/p>\n 5. Traditional cost accounting systems consider accounting data for decision making which can be misleading sometimes. Financial statements can be a great reporting tool but might not be able to assist in strategic decision making. It does not consider dynamics of marketing and economics.
\nOne of the reasons of reduction in advertisement cost was relying on financial statements, as suggested by CFO which might be less helpful in cost management decisions.<\/p>\n 6. There is a limited focus on review and improvisation of existing processes and activities.
\nNon-maintenance of printer was lack of review by the management and to overcome such problem they had mailed question paper to students, sitting at Delhi TSC, was an improvisation of activity.<\/p>\n 7. Traditional cost management is a reactive approach.
\nWhen it got the information of arrival of new competitor, it approached to Mr. Prakash Rao for advertisement, at higher cost which was reactive approach of situation.<\/p>\n 8. It has a short-term outlook e.g., saving costs on an annual basis.<\/p>\n At the time of dropping the advertisement contract, it thought that they did not require advertisement for 1-2 years. Approach was to save cost for short term and that approach leaded to higher cost by approaching new brand ambassador, Mr. Prakash Rao.
\nIn general, Gyaan has been caught in the narrow-minded approach and decided for broad cost cutting. It also compromised on the fundamental business aspects like human capital development, quality, research and development (R&D), operational competitive edge, and other qualitative aspects which are of strategic nature.<\/p>\n (iii) Value Chain Analysis:
\nValue chain analysis is a process of analysing various activities that add value to the final good; identifying all the activities which do not add value and identifying all such non value added activities. This analysis of a value chain helps a firm to achieve cost leadership or improve product differentiation.
\nResources must be deployed and used in all those activities that are capable of producing products valued by customers.
\nThe tools and techniques of value chain analysis apply to all those organisations which produce a product or provide a service.
\nIn an organisation, the various activities undertaken by a firm can be broadly classified into Primary activities and Secondary activities. Primary activities are those activities that are directly involved in transforming of inputs into outputs or in provision of service.
\nSecondary activities are those activities that support the primary activities. Though, secondary activities are not directly involved in creation of product, it doesn\u2019t mean that they are of less importance as compared to primary activities.<\/p>\n Value Shop Model:
\nValue shop model aims to serve organisation from service sector. Value shop models deals with solving the problem. This concept of value shop aims to serve companies from service sector. In value shop model concept, no value addition takes place. It only deals with the problem and to figure-out the main area requires its service and finally comes with the solution. This approach of value chain model is designed to solve customer specific problems rather than creating value by producing output from an input of raw materials. Value shop model mobilizes the resources like people, money, knowledge etc., to solve specific problems such as curing an illness or delivering a solution to an organisation problem. The \u2018problem\u2019 could also be like how to exploit an opportunity.<\/p>\n The Value shop is an iterative process, in which generic set of activities are performed until a solution is reached. This service chain model has the same set secondary activities as Porter\u2019s Value Chain, but the primary activities are described differently.<\/p>\n In the value shop they are:<\/p>\n \n- Problem finding and acquisition<\/li>\n
- Problem solving<\/li>\n
- Choosing among solutions<\/li>\n
- Execution and control\/evaluation<\/li>\n<\/ul>\n
It is advisable to apply Value Shop Model in the Gyaan, as priority should be given to solve problems faced by the students. Satisfaction of students is only way to grow.<\/p>\n Question 20.
\n(Mission Statement)
\nThe ‘PET Care Company\u2019 (PCC) is a for profit organisation having group of reputed professionals working towards creating benchmark in serving pets and providing them a joyous and comfortable environment. PCC provides specialize day care boarding homes and overnight hotels with lodging facilities and dog grooming parlour, specially for the owners who are unable to care for their pet due to holidays, work commitment, illness etc.
\nThe company has experienced team of trainers and handlers extremely dedicated and responsive towards meeting all the requirements of pet. Their backgrounds are thoroughly checked, they have amazing reviews ( from their previous customers. PCC let their clients have the satisfaction that their best buddy being in affectionate and capable hands. Company\u2019s trainers, along with imparting basic pet training also take care of any behavioural issues that pet may face with other pets around.
\nPCC has a mission statement \u2018to satisfy our client with value for money\u2019. The company has also attempted to manage in a socially responsible manner. They are now planning to develop an \u2018Animal Sanctuary\u2019 for domestic pets abandoned by owners, which will involves 25% of the total accommodation. They keep the homeless pet unless a new owner was found for them.
\nRequired:
\n(a) Discuss the purpose, potential benefits and problems of mission statements.
\n(b) Advise the company about the appropriateness of its mission statement.
\n(c) Explain briefly three quantitative non-financial performance measures that could be used to assess the \u2018quality of service provided by PCC\u2019.
\nAnswer:
\n(a) Purpose of mission statements
\nCompany\u2019s mission statement is a statement of the company\u2019s reason to be. It seeks to answer the question \u201cwhy does the company exist?\u201d<\/p>\n It is a statement of organization purpose and helps in addressing the following questions<\/p>\n \n- What kind of product\/services will the company offer?<\/li>\n
- Which is the primary market for its offering?<\/li>\n
- What type of customers does the company seek to target?<\/li>\n
- What is the area of operation (geographies)?<\/li>\n<\/ul>\n
It might also include a statement of organization value and major goals. A company\u2019s mission statement must be customer focused and not product focused, it should be brief, flexible and distinctive. It often refers to key stakeholder groups including employees and shareholders.<\/p>\n Potential benefits of mission statements include:<\/p>\n | | | | | | |
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