20

Thakurs MBA Second Semester (Macro Business Environment) VTU

CASE STUDIES
SOLVED CASE STUDY
Case Study 1: Inflation in India
Inflation is the rise in prices which occurs when the demand for goods and services exceeds their available supply. In simpler terms, inflation is a situation where too much money chases too few goods. In India, the wholesale price index (WPI), which was the main measure of the inflation rate consisted of three main components primary articles, which included food articles, constituting22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted for the remaining 64% of the index. For purposes of analysis and to measure more accurately the price levels for different sections of society and as well for different regions, the RBI also kept track of consumer price indices. The average annual GDP growth in the 2000s was about 6% and during the second quarter (July-September) of fiscal 2006-2007, the growth rate was as high as 9.2%. All this growth was bound to lead to higher demand for goods. However, the growth in the supply of goods, especially food articles such as wheat and pulses, did not keep pace with the growth in demand. As a result, the prices of food articles increased. According to Subir Gokarn, Executive Director and Chief Economist, CRISIL, "The inflationary pressures have been particularly acute this time due to supply side constraints [of food articles] which are a combination of temporary and structural factors. "Measures Taken In late 2006 and early 2007, the RBI announced some measures to control inflation. These measures included increasing repo rates, the Cash Reserve Ratio (CRR) and reducing the rate of interest on cash deposited by banks with the RBI. With the increase in the repo rates and bank rates, banks had to pay a higher interest rate for the money they borrowed from the RBI. Consequently, the banks increased the rate at which they lent to their customers. The increase in the CRR reduced the money supply in the system because banks now had to keep more money as reserves. On December 08,2006, the RBI again increased the CRR by 50 basis points to 5.5%. On January 31, 2007, the RBI increased the repo rate by 25 basis points to 7.5%...Some Perspectives The RBI's and the government's response to the inflation witnessed in 2006-07 was said to be based on 'traditional' anti-inflation measures. However, some economists argued that the steps taken by the government to control inflation were not enough...Outlook Several analysts were of the view that the RBI could have handled the 2006-07 inflation without tinkering with the interest rates, which according to them could slow down economic growth. Others believed that high inflation was often seen by investors as a sign of economic mismanagement and sustained high inflation would affect investor confidence in the economy. However, the inflation rate in emerging economies was usually higher than developed economies Questions: a) Explain the concept of Inflation in Indian context. Ans: Inflation is normally associated with high prices, which causes decline in the purchasing power or the value of money. Inflation refers to the substantial and rapid increase in the general price-level. Inflation is primarily a monetary phenomenon. Prices keep on rising due to excess supply of money and lower production of exchangeable goods. In the Keynesian sense, true inflation begins when the elasticity of supply of output in response to increase in money supply has fallen to zero or when output is unresponsive to changes in money supply. The declining trend in inflation during 1999 to 2005 was the result of structural changes in the macroeconomic framework due to liberalisation. The improved supply response, improved financial and real economy, better monetary policy and emphasis on fiscal consolidation all helped bring down inflation. Post 2004-05, a new phenomenon was observed, i.e., demand conditions (especially non-government) influencing inflation along with the supply side. The Indian economy grew between 2004-05 and 2009-10, fuelled by the growth rate in the services sector. This implied a rise in real per capita income, as inflation was below 6 per cent during those three years (2004-2006). Increase in income raised aggregate demand, which the supply side found difficult to match, at least in the short run. Accompanying this increasing demand were the increases in prices of food and fuel in 2008. India recovered quickly from the financial crisis. However, the drought of 2009 followed by the uneven rainfall in 2010 and increase in aggregate demand have kept food prices inflation in double digits. The recent Middle East political crisis has added to the inflation pressures. These uncertain times have also increased volatility, in CPI and recently in WPI. When the current inflation rates to the 1990s are compared to the current rates, they seem high but compared with

21

Thakurs MBA Second Semester (Macro Business Environment) VTU

four decades of data, the trends are not so worrisome. However, the increased volatility displayed by both the inflation rates is troubling. India has experienced an unusual combination of factors in a short span of time after 2004-05 which have affected inflation volatility, i.e., rise in prices of food and fuel (partly fuelled by increase in global demand), uncertain monsoon, the financial crisis and then domestic rise in demand. Not only does volatility deter private investment, it also affects inflation expectations. Considering that majority of the population in India is relatively poor, double digit food inflation and high inflation in general hits the poorest and weakest sections the hardest. b) Give out the ways of curbing inflation. Ans: The various measures which can be taken to establish a better balance between aggregate supply and demand for money can be studied under the following three main heads: 1) Monetary Measures: Monetary measures aim at reducing money incomes. i) Credit Control: One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. ii) Demonetisation of Currency: However, one of the monetary measures is to demonetise currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country. iii) Issue of New Currency: The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. 2) Fiscal Measures: Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment. The principal fiscal measures are: i) Reduction in Unnecessary Expenditure: The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. ii) Increase in Taxes: To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be raised and even new taxes should be levied, but the rates of taxes should not be as high as to discourage saving, investment and production. iii) Increase in Savings: Another measure is to increase savings on the part of the people. This will tend to reduce disposable income with the people, and hence personal consumption

expenditure.

Case Studies

22

iv) Surplus Budgets: An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. v) Public Debt: At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary pressures are controlled within the economy. Instead, the government should borrow more to reduce money supply with the public. vi) Control over Investment: Controlling investments is also considered necessary because, due to the multiplier effect, the initial investment leads to large increase in income and expenditure and the demand for both the consumer and capital goods goes up speedily. 3) Other Measures: The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly. i) Increasing Production: The following measures should be adopted to increase production: a) One of the foremost measures to control inflation is to increase the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc. b) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities. c) Efforts should also be made to increase productivity. For this purpose, industrial peace should be maintained through agreements with trade unions, binding them not to resort to strikes for some time d) The policy of rationalisation of industries should be adopted as a long-term measure. Rationalisation increase productivity and production of industries through the use of brain, brawn and bullion. e) All possible help in the form of latest technology, raw materials, financial help, subsidies, etc. should be provided to different consumer goods sectors to increase production. ii) Rational Wage Policy: Another important measure is to adopt a rational wage and income policy. Under hyperinflation, there is a wageprice spiral. To control this, the government should freeze wages, incomes, profits, dividends, bonus, etc. iii) Price Control: Price control and rationing is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods. They are the maximum prices fixed by law and anybody charging more than these prices is punished by law.

23

Thakurs MBA Second Semester (Macro Business Environment) VTU

iv) Rationing: Rationing aims at distributing consumption of scarce goods so as to make them available to a large number of consumers. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. It is meant to stabilise the prices of necessaries and assure distributive justice.

The basic problems that the Softcore is facing are as follows:

1) Salary Hike: Because of lack of talent industry is paying more to the employees as they can easily switch the company, if they are not satisfied with the pay. Due to this everyone is trying to more to attract the skilled stuff from the market. 2) Skilled Employees: Changing environment needs that the employees should be up-dated and providing IT education or such employees those are well trained is though as well as an expensive task. All though there is new and fresh stuff in the market but there is lack of experience and skill. 3) Brain Drain: Everyone in the market wants that he should be paid highest for his work and in search of such high pay they move to multinational companys. Young generation has an urge to go abroad for working on a higher pay and as Indian market is filledup with cheap labour people MNCs found it lucrative to hire employees from such sources. This transfer of skilled resources to MNCs lead to brain drain, this costs high to home market. So, the same is suffered by the Softcore. 4) Competition: New captive and third party off-shore facilities being set up in the country have led to a competition for skilled human resources that are already scarce. This is also leading to an everwidening demand-supply gap and rise in the average salary level for all positions, apart from pushing up attrition in existing facilities. This has also lead to the scare human resource at the middle level in Softcore co. Remedies For such problem of decreasing human resource talent in the market and problem in retaining them for longer period, company take these measures: 1) Campus Placement: Company can go for direct hiring of the fresh students from the campus by conducting interviews and tests. The candidate suitable for the job should be hired. 2) Opening College and Training Centre: Many companies are moving for such option because of lack of skill. As it cost much to company to hire and then train them on their own cost. For such a reason companys start such colleges where they can train the students and provide education about the field in which they want and the manner they like to provide education. In the manner Softcore can also get skilled stuff, that too for longer period. 3) Early Hiring: A highly qualified employee wants much to be paid whereas a less qualified person can be hired at a lower cost and can be trained for the job. This type of company provides higher study facility and can retain the employee for a longer period, as employees do not have any choice because of their qualification.

Case Study 2: Globalization

Softcore Consultancy services are in the information technology sector. It is currently facing a shortage of skilled manpower and is fuelling a hike in employee salaries, which have been posting a 10-40 per cent growth during the last couple of years. While there is an abundance of trainable human resources, a dearth in skilled manpower is being felt across the industry and this has resulted in a hike in salaries. Typically, salary jumps happen not only in the conventional manner of being promoted but also because of professionals changing jobs more frequently. The increase in salaries varies from job to job, and ranks highest in the IT sector where employees get a hike of over 40 per cent when they join a new establishment. There is no dearth in entry-level human resources as there is a large supply, but a severe shortage is felt in the middle-level positions. According to Mr. Raj, CEO of Softcore, many new captive and third party off-shore facilities being set up in the country have led to a competition for skilled human resources that are already scarce. This is also leading to an ever-widening demand-supply gap and rise in the average salary level for all positions, apart from pushing up attrition in existing facilities, he said. There is new trend of employees moving to multinational companies abroad for higher salaries and global experience. The salary package and working environment is far better than India in countries like USA. Then returning to India with global experience makes for a higher pay and position. This is also one reason for the shortage of skilled manpower and hike in employee salaries in the IT sector. Questions: 1) What problems is Softcore facing? Suggest some remedies for its problems? Ans: Softcore is an IT company where technology upgradation and trends changes in the most frequent manner. This industry needs highly knowledgeable persons and it is difficult to retain the employee for a longer period because of changing environment and technology upgradation. Because of fast changing technologies, training is required for the employees as it is tough to get new experienced and skilled employee every time.

Case Studies

24

4) Attractive Facilities: Softcore can provide some of the attractive offers to the employee instead of constantly increasing the salary as this increase financial burden on the company. By providing other monetary benefits such as family holiday package, extra facilities to working mother, providing residential facility, company can easily attract employees by providing such basic facilities. So, that their personal and professional problems can be managed easily. 2) Do you support globalization? Ans: Globalisation For developing countries, globalisation means integration with the world economy. In simple economic terms, globalisation refers to the process of integration of the world into one huge market. Such unification calls for the removal of all trade barriers among countries. Even political and geographical barriers become irrelevant. There are many reasons for which globalisation is supported, as due to the globalisation company and country both has many benefits. The various advantages of globalisation for Indian industry are as follows: 1) Huge Amounts of Foreign Investments: It brought in huge amounts of foreign investments into the industry especially in the BPO, pharmaceutical, petroleum, and manufacturing industries. As huge amounts of foreign direct investments were coming to the Indian industry, they boosted the Indian economy quite significantly. 2) Provides Employment: The benefits of the effects of globalisation in the Indian industry are that many foreign companies set-up industries in India, especially in the pharmaceutical, BPO, petroleum, manufacturing, and chemical sectors, and this helped to provide employment to many people in the country. This helped to reduce the level of unemployment and poverty in the country. 3) Updated Technology: Also the benefit of the effects of globalisation on Indian industry are that the foreign companies brought in highly advanced technology with them, and this helped to make the Indian industry more technologically advanced. 4) Goods and Services: As markets become global, more goods and services are made available at lower cost to a wider group of people. More access leads to rising consumer demand and improved standards of living. In addition, global competition and cheap imports keep a lid on prices, so that inflation is less likely to derail economic growth. 5) Free Flow of Capital: Globalisation helps for free the flow of capital from one country to the other. It helps the investors to get a fair interest rate or dividend and the global companies to acquire finance at lower cost of capital. Further, globalisation increases capital

flows from surplus countries to the needy countries, which in turn increases the global investment. 6) Increase in Industrialisation: Free flow of capital, along with the technology enable the developing countries to boost-up industrialisation in their countries. This ultimately increases global industrialisation. 7) Balanced Development of World Economies: With the flow of capital, technology, and locating manufacturing facilities in developing countries, the developing countries industrialise their economies. This in turn leads to the balanced development of all the countries. 8) Lower Prices with High Quality: Indian consumers have already been getting the products of high quality at lower prices. Increased industrialisation, spread up of technology, increased production and consumption level enable the companies to produce and sell the products of high quality at lower prices. 9) Cultural Exchange and Demand for a Variety of Products: Globalisation reduces the physical distance among the countries and enables people of different countries to acquire the culture of other countries. The cultural exchange, in turn, makes the people to demand for a variety of products which are being consumed in other countries. For example, demand for American pizza' in India and demand for Masala dosa and Hyderabadi biryani and Indian styled garments in USA and Europe. 10) Balanced Human Development: Increase in industrialisation on balanced lines in the globe improves the skills of the people of developing countries. Further, the increased economic development of the country enable the government to provide welfare facilities like hospital: educational institutes etc., which in turn contributes for the balanced human development across the globe.

Case Study 3: Foreign Technology Collaboration

A leading Indian Institute collaborated with a leading American Business School to introduce an MBA programme in India. The American school contributed its syllabus and all courses were taught by visiting American Faculty. The students, who were almost Indians, were expected to possess high level of competence in English language before registration. The Indian Institute had well equipped computer rooms, where many students prepared their assignments. Since same programme was being taught in both Institute/Schools, the assignment inputs were identical. In the American school, each student worked alone on a computer, in silence, not talking to his or her neighbours. Any disturbance was resented.

25

Thakurs MBA Second Semester (Macro Business Environment) VTU

In the Indian Institute, students gathered in groups around computers in the Lab, noisely discussing the output with one another and other groups near them. There was no shortage of computers and hence no question of Lab being over crowded. Many computers remained unused. Questions: a) How does American behaviour reflect American culture? Ans: Cultural Attributes of American Behaviour Attitude of students towards work is largely determined by their culture. Education system is largely affected by beliefs, morals, and customs of the society in which they exist. Indeed their very existence depends upon philosophies which conduct and supports their various kinds of actions. The American behaviour reflects the following attributes of their culture i.e. Americans believe more on individual efforts rather than group efforts, American students are more independent in nature; they are not willing to cooperate more each other. Competency level among student is also high, they are very disciplined, they do not focus much on output, they believe more on individual thinking, they make proper use of resources, they work individually thus able to generate more ideas and have good command over English so they are not having any difficulty in solving their assignments as course is expected to possess high level of competence in English language. b) How does Indian students behaviour reflect Indian culture? Ans: Cultural Attributes of Indian Behaviour According to the case the educational culture is absolutely different from American culture. All syllabus and courses were same in American and Indian institutes but the approach of Indian students to solve assignments and problems was different. The behaviour of Indian students shows following characteristics of their culture i.e. Indian students believe more on group efforts rather than individual efforts, Indian culture shows dependent nature of students, the case shows that Indian students are more cooperative in nature, competency level among students is relatively less, level of discipline is low, Indian students discuss more than American students, focus is more on group thinking than or individual thinking, do not make free use of resources, due to group thinking they are able to improve individuals ideas and thinking process thus generate efficient ideas and few people may find any difficultly in solving their assignments as course required high competency in English.

c)

How would American Faculty feel and adjust in Indian Institute?

Ans: Adjustment of American Faculty in Indian Institues As the culture of American and Indian students is different, the foreign faculty feel difficulty in adjustments in Indian culture. The foreign faculty is not familiar to Indian culture thus may not be able to handle such a situation of chaos and may not be able to justify the individual performance of students. Indian students are not as disciplined as American students; therefore faculty would no be able to cope easily with this situation. To adjust in Indian Institute the American faculty must understand the culture of Indian students. American faculty must also understand the benefits of group working so that they can easily get the advantage of positive impacts of group working. Good group work has great potential for the following reasons: 1) Students are encouraged to become active rather than passive learners by developing collaborative and cooperative skills, and lifelong learning skills. 2) It encourages the development of critical thinking skills. 3) It requires the establishment of an environment of support, trust and cooperative learning can be nurtured. 4) It promotes student learning and achievement. 5) Students have the opportunity to learn from and to teach each other. 6) Deep rather than surface approaches to learning are encouraged. 7) It facilitates greater transfer of previous knowledge and learning. 8) The focus is on student centred approach to teaching and learning, and assessment. 9) It enhances social skills and interactions. 10) Large numbers of students can be catered for and work on task simultaneously. d) In what respect new technology and exposure would induct a shift in the two cultures. Ans: Technological Shift due to Technology and Culture Technology has revolutionised the field of education. The importance of technology in educational institutions cannot be ignored. In fact, with the onset of computers in education, it has become easier for teachers to impart knowledge and for students to acquire it. The use of technology has made the process of teaching and learning enjoyable. The technology and exposure would induct a shift in two culture which can be understand with the help of following points: 1) Technology is a Teaching Aid: Computers offer an interactive audio-visual medium. PowerPoint presentations and animation software can be used to present information in an interactive way. Owing to the audio-visual effects, this way of teaching invites greater interest from students. The method is equally helpful for teachers. Projectors and screens facilitate

Case Studies

26

simultaneous viewing of information by a large number of students. 2) Technology has Made Student Life Easy: Technology aids student expression. Students can use much more than just pen and paper to express themselves or present what they have learned. They can use software to make presentations and projects. This makes them more interested in the subject and leads to better retention of information. 3) It is Easier to Store Information: Computers enable better and more robust storage of information. If you weigh chalk, board, books and notebooks against technology, you find that technology can substitute for any and all of these. Computers have replaced chalk and board; they can even do the talking sometimes while the teacher takes a step back and lets the presentations speak. Digital libraries require no physical space and students and teachers sitting in different parts of the world can access the same library at the same time. 4) Information is Easily Accessible: The internet is a huge information base. It can be used an effective tool for acquiring knowledge. All a web user needs to do is to key in queries to search engines. Users are presented with thousands of search results.

5) Technology has Eliminated Space and Time Constraints: Online education and distance learning have given a new dimension to education and higher learning. Even if students are geographically far away from each other, they can be a part of one classroom. Though not physically but virtually, they can. Many educational institutes offer online courses, which eliminates time and space constraints in acquiring education. 6) Teaching is Sharing: Owing to the use of technology, subject experts can come together to formulate courses, design assessments and better the process of teaching. The day when students located in different parts of the world will be able to seek advice from experts spread across the globe, is not far. The education then will be customised. It will cater to different learning needs and varying grasping abilities and interests of students. 7) Mutual Impact: Today, computer education is a part of educational institution and college curricula. Considering the wide range of applications of computer technology, it is necessary for each one of us to computer-friendly. Considering the advantages of internet technology, it is important for each of us to gain basic knowledge of internet access and web research.

Case Study 4: Country Analysis using HDI

Rankings by HDI and GDP per capita can differ, indicating that high levels of human development can be achieved without high incomes. On the other hand, high incomes do not guarantee high levels of human development. Pakistan and Vietnam have similar incomes, but Vietnam has done much more to translate that income into human development. Similarly, Jamaica has achieved a much better HDI than Morocco with about the same income. Human development indicators for India remain much lower than for China (China has been ranked No. 104 and India as No. 127 in Human Development Report 2003 by UNDP). Social investment is required for sustained growth and development. In China, public spending on education is 2.3% of GDP while that on health is 2.1% of GDP. The outcome is clear. Literacy stands at 84%, infant mortality rates at 32 per 1000 live births. India, in contrast, traditionally had lower spending levels. Health spending stands at 1.3% of GDP. Spending on education has increased significantly from 0.8% of GDP in 1950 to 3.2% today. However, literacy stands at 65% and infant mortality at 68 per 1000 live births (Human Development Report, 2003, UNDP). The data given shows the countries that have secured top ranks in terms of Human Development Index of United Nations:
Ranking of Countries (High Human Development) UNDP Ranking 2003 HDI Country GDP Per Capita HDI Value GDP Per Capita Rank (PPP U.S. $) 2001 Rank Minus HDI Rank 1 Norway 29,620 0.944 4 2 Iceland 29,990 0.942 2 3 Sweden 24,180 0.941 15 4 Australia 25,370 0.939 8 5 Netherlands 27,190 0.938 3 6 Belgium 25,520 0.937 5 7 United States 34,320 0.937 5 8 Canada 27,130 0.937 1 9 Japan 25,130 0.932 5 10 Switzerland 28,100 0.932 3 11 Denmark 29,000 0.930 5 12 Ireland 32,410 0.930 9

27

Thakurs MBA Second Semester (Macro Business Environment) VTU

Norway, Sweden and Australia have done extremely well and their HDI ranks are higher than their GDP per Capita rank. It is worth noting that countries like the United States, Switzerland, Ireland and Denmark have been ranked lower on the basis of human development indicators, compared to their high ranks in income level (GDP per capita). For example, despite the fact that Ireland holds third position in terms of per capita income, the country has not been in a position to get a place in the top-10 countries in terms of human development. The selected list of countries falls in the group medium human development and is given below:
Ranking of Countries (Medium Human Development) UNDP Ranking 2003 HDI Country GDP Per Capita HDI Value GDP Per Capita Rank (PPP U.S. $) 2001 Rank Minus HDI Rank 62 Mauritius 9,860 0.779 12 79 Oman 12,040 0.755 36 74 Thailand 6,400 0.768 2 96 Turkey 5,890 0.734 16 85 Philippines 3,840 0.751 19 104 China 4,020 0.721 2 109 Vietnam 2,070 0.688 21 111 South Africa 11,290 0.684 64 125 Botswana 7,820 0.614 65 127 India 2,840 0.590 12 139 Bangladesh 1,610 0.502 7 138 Sudan 1,970 0.503 4

From above, it is evident that South Africa has the No. 47 rank in terms of per capita income. But, the country has been ranked as No. 111 on the basis of Human Development Index, showing that the majority of people in the country do not have equal access to income, health and education facilities. Botswana, Oman and Turkey also fall under this category. India was ranked as No. 127 in terms of HDI and as No. 115 in terms of income, in the Human Development Report 2003. UNDP released its Human Development Report 2005. It is worth noting that Chinas HDI rank has gone up to No. 85 (2005) from No. 104 (2003) and Indias rank remains as No. 127. Norway has been ranked as No. 1, Iceland No. 2, Australia No. 3, Luxembourg No. 4, Canada No. 5, Sweden No. 6 [Swedens Rank was No. 3 in 2003] and Switzerland as No. 7 in the Human Development Report of UNDP in 2005. The list of top 10 countries ranked in terms of Human Development Index in 2005 by UNDP is given below:
Ranks of Countries (High Human Development) UNDP Ranking 2005 Rank in 2005 Country Rank in 2003 1 Norway 1 2 Iceland 2 3 Australia 4 4 Luxemburg was not in the list of top-10 5 Canada 8 6 Sweden 3 7 Switzerland 10 8 Ireland 12 9 Belgium 6 10 United States 7

It is important to mention that the countries with high human development spend more money on health and education and less on military expenditure. (Public expenditure on health and education as % of GDP). Questions: 1) What are the different ways to calculate HDI? Ans: Calculating the HDI Before the HDI itself is calculated, an index needs to be created for each of these dimensions. To calculate these indices the life expectancy, education and GDP indices minimum and maximum values (goalposts) are chosen for each underlying indicator. 1) Calculating the Life Expectancy Index: The life expectancy index measures the relative achievement of a country in life expectancy at birth. 2) Calculating the Education Index: The education index measures a countrys relative achievement in both adult literacy and combined primary, secondary and tertiary gross enrolment. First, an index for adult literacy and one for combined gross enrolment are calculated. Then these two indices are combined to create the education index, with two-thirds weight given to adult literacy and one-third weight to combined gross enrolment.

Case Studies

28

3) Calculating the GDP Index: The GDP index is calculated using adjusted GDP per capita (PPP U.S.$). In the HDI income serves as a surrogate for all the dimensions of human development not reflected in a long and healthy life and in knowledge. Income is adjusted because achieving a respectable level of human development does not require unlimited income. Accordingly, the logarithm of income is used. 4) Calculating the HDI: Once the dimension indices have been calculated, determining the HDI is straightforward. It is a simple average of the three dimension indices. HDI = 1/3(Life Expectancy Index) + 1/3 (Education Index) + 1/3(GDP Index) 2) Analysis the HDI rank of India in comparison with other countries. Discuss. Ans: Analysis of Indias HDI rank in comparison with other countries According to the UNDP, Human Development Report 2003, India remains much lower than for China. China has been ranked No. 104 and India as No. 127; this signifies that India requires social investment for sustained growth and development. The other countries such as Norway, U.N, Sweden, Switzerland and Australia have done really well and their HDI ranks are higher than their GDP per capita. The countries such as U.S, Switzerland, Ireland and Denmark have been ranked lower on the basis of human development indicators, compared to their high ranks in income level. Therefore, India has lowest rank as compared to all other countries.

Between 1997-98 and 2003-04, the company has increased its market share in motorcycles from 15% to over 23%. Bajaj had done very well in three-wheeler market. This market comprises three- and six-seater passenger vehicles and goods carriers. In the three-seater passenger vehicle category, their market share increased to 91.8% in 200304. In the goods carrier category, their sales increased by 154% in 2003-04, with the market share increasing to 26%, from that of 2002-03. Their increased sales volumes, better product mix, better operational efficiency, etc., increased their profit margins. The companys focus on R&D, their target on marketing and advertisement, etc., has contributed a lot to the company growth. Question: Discuss the performance of Bajaj Auto and the factors contributed for the success? Ans: Performance of Bajaj Auto 1) Bajaj Auto is the second largest manufacturer of motorcycles in India. 2) It has recorded 36% increase in profit after tax in 2003-04. 3) They are able to achieve 69% profit hike on exports of two wheelers, and 66% increase in the export of all the vehicles. 4) It has done extremely well in the three wheeler market, as its market share has increased to 91.8% in 2003-04. Ans: Factors contributing for the success of the company are: 1) Change in organisational structure: The company has achieved its profit range by given special stress on changing its organisational structure. 2) Products and Models: It laid immense focus on the planning and launching of new and innovative products. They also changed the look of the product and models to attract customers. 3) Consumer Preferences: The special preference was given to the choice and demand of the consumers. 4) R&D: Bajaj Auto has expanded its R&D department in recent years. More and more innovation and creation have resulted in the profitability of the company. 5) Product Design: The company has decided to change the design of the product every year as possible. To provide a new look for the product. 6) Nationalising of Cost: The cost of the product and models are outlined or framed according to the demand and supply. The region wise and country wise criterion is also considered.

Case Study 5: Bajaj Auto

Bajaj Auto is considered to be the second largest manufacturer of motorcycles in India in 2003-04. The company recorded 36% increase in profit after tax in 2003-04, by `731.5 crore, from `538.42 crore in 2002-03. Sales was shot-up by 14%, from `4,744.34 crore in 200203 to `5,418.49 crore in 2003-04. Their profits were soaring high due to the companys special stress on changing its organisational structure, products and models, its approach to markets and consumer preferences, R&D, engineering, product design and speed to market and nationalising of costs. Thus they could achieve 69% growth in export of two wheelers, and 66% increase in the export of all the vehicles. The companys R&D strategy is a combination of inhouse and collaborative efforts. Their collaboration with Kawasaki, for joint design and development of new vehicles, is notable. Bajaj Auto had spent `26.9 crore and `41.1 crore on R&D in 2003-04 and 2004-05 respectively.

29

Thakurs MBA Second Semester (Macro Business Environment) VTU

UNSOLVED CASE STUDY

Case Study 1: National Income of India
The governments target of reaching GDP growth of 10 per cent in 2011 is achievable if reform continue, said OECD in its first economic survey on India, adding that India is now the worlds third largest economy behind the U.S. and China in terms of real prices and purchasing power. Ironically, it was only some 15 to 20 years back, when India used to look at China and South Korea with great envy, as they were growing at above 9% per year, whereas India was growing at a sluggish 4 to 5%. To add to the woes of the national economy, population was growing at over 2% a year and thus was eating-up the major chunk of the growth in national income. In the history of Indian economy there have been periods of growth as high as 9.5% (1975-76) and 11% (1988-89) but at the same time there have been periods of less than 1% growth and even negative growth rate. To summarise, Indian economy is a saga of checkered growth. However post economic reforms, much has changed. Due to the high inflow of capital from all corners of the world, upsurge in outsourcing by developed nations and other benefits of globalisation. India has set itself on the trajectory of economic growth. She has been able to reach above 9% growth of GDP for two consecutive years. Per capita income has also crossed 8% mark, which is a very significant indicator of real growth. Statements 1 and 2 present a picture of national income of India over a period of three years at constant prices and current prices respectively. These statements show various aspects of national income. As can be seen, the country seems to be growing at a staggering 13.8% and 18.3% in the years 2005-06 and 2006-07, but when we compare the same at constant prices, we are at a moderate 9.6% for both years. Inflation has created the impression of high growth, whereas real growth rate is constant for the two years under consideration.
Statement 1: Estimates of National Income (At 1999-2000 Prices) Item 2004-05 1) Estimates at Aggregate Level i) National Product (` Crore) a) Gross National Product (GNP) b) at Factor Cost Net National Product (NNP)

2005-06 (QE)

2006-07 (QE)

23,67,71 1 21,03,35 0

ii)

at Factor Cost Domestic Product (` Crore) a) Gross Domestic Product (GDP) b) at Factor Cost Gross Domestic Product (GDP) at Market Prices Net Domestic Product (NDP) at Factor Cost Private Final Consumption

25,80,76 1 (9.0) 22,95,24 3 (9.1) 26,04,53 2 (9.0) 28,42,47 8 (9.2) 23,19,01 4 (9.1) 16,75,02 5 3,06,087 7,57,806 78,821 33,992 4,97,683 4,53,922 53,014

28,29,349 (9.6) 25,22,576 (9.9) 28,48,157 (9.4) 31,08,360 (9.4) 25,41,384 (9.6) 17,78,697

23,89,66 0 26,02,23 5 21,25,29 9 15,69,13 0 2,78,757 6,57,317 46,633 33,873 4,69,902 4,11,535 41,842

c) d)

2)

Expenditure (PFCE) Government Final Consumption Expenditure f) Gross Fixed Capital Formation (GFCF) g) Change in Stocks (CIS) h) Valuables i) Exports j) Less: Imports k) Discrepancies Estimates at Per Capita Level e)

3,33,713 8,68,618 86,840 46,921 5,40,721 5,05,871 41,279

Case Studies

30

1,107 20,734 (7.4) Note: The figures in parenthesis show the percentage change over previous year QE: Quick Estimate; RE: Revised Estimate

Population (million ) Per Capita NNP at Factor Cost (`)

1,090 19,297

1,122 22,483 (8.4)

31

Thakurs MBA Second Semester (Macro Business Environment) VTU

Statement 2: Estimates of National Income (At Current Prices) Item 2004-05 2005-06 (QE) 1) Estimates at Aggregate Level i) National Product (` Crore) a) Gross National Product (GNP) 28,33,558 32,25,963 at Factor Cost (13.8) b) Net National Product (NNP) 25,01,067 28,46,762 at Factor Cost (13.8) ii) Domestic Product (` Crore) a) Gross Domestic Product (GDP) 28,55,933 32,50,932 at Factor Cost (13.8) b) Gross Domestic Product (GDP) 31,26,596 35,67,177 at Market Prices (14.1) c) Net Domestic Product (NDP) 25,23,442 28,71,731 at Factor Cost (13.8) d) Gross National Disposable 31,96,192 36,49,038 Income e) Private Final Consumption 18,65,645 20,64,638 Expenditure (PFCE) f) Government Final Consumption 3,42,542 4,04,511 Expenditure g) Gross Fixed Capital Formation 8,22,786 10,00,760 (GFCF) h) Change in Stocks (CIS) 63,789 1,04,036 i) Valuables 41,054 42,457 j) Exports 5,69,051 7,25,124 k) Less: Imports 6,25,945 8,30,678 l) Discrepancies 47,674 56,329 2) Estimates at Per Capita Level Population (million ) 1,090 1,107 Per Capita NNP at Factor Cost (`) 22,946 25,716 (12.1) Note: The figures in parenthesis show the percentage change over previous year QE: Quick Estimate; RE: Revised Estimate

2006-07 (QE) 37,22,669 (15.4) 32,96,639 (15.8) 37,43,472 (15.2) 41,25,725 (15.7) 33,17,442 (15.5) 42,27,311 23,27,331 4,67,702 12,16,552 1,20,620 61,138 9,47,868 10,64,606 49,120 1,122 29,382 (14.3)

For calculating national income, the Indian economy is divided into 14 broad sectors, which are then grouped into three main categories A, B and C. Agriculture, forestry and logging, fishing, mining and quarrying, registered manufacturing and construction are included in category A. Electricity, railways, air transport, water and organised transport, communications, banking and insurance, real estate, public administration and defence are included in category B. In category C, gas and water supply, unorganised roads and water transport, storage, trade, hotels and restaurants, ownership of dwelling and other services are included. The production method is applied to category A. The value added by category A is found by subtracting the value of raw materials and other inputs from the aggregate of commodity-wise output. For category B, the income method is applied and, for this, all the types of factor incomes which are reported in the annual accounts of various organisations are aggregated. For category C, sample surveys are done periodically to find out the average productivity of labour. Estimates of the workforce are interpolated or extrapolated and periodical computations of average productivity are carried forward or backward by using certain indicators. Questions: 1) Using the data given in the case explain the significance of preparing national income data on basis of constant prices. 2) Prove the statement that no method of national income is perfect on the basis of this case. 3) Put values in the following equations on the basis of data given in Statement 2. i) NNP = GNP Depreciation ii) GNP = GDP + Net Income from Abroad iii) Per Capita Income = NNP (at Factor Cost)/Total Population

Case Studies

32

1.0.1. Case Study 2: Gillette, the International Brand

Gillettes vision is of being a world class firm with world class people, products and brands. The firms mission is to be a global leader in products marketed by them. They operate in 200 counties with manufacturing facilities in 56 countries. The firms core businesses are: 1) Blades and Razors: Gillette, 7 Oclock, Wilkinson Sword. 2) Batteries: Duracell. 3) Personal Grooming Products: Braun, Silkepil razors for women. 4) Oral Care Products: Oral-B. 5) Writing Instruments: Parker, Papermate, Waterman. Gillettes strategic marketing plan for success includes making a five-year rolling plan, which is reviewed three times a year and modified as required. Every six months, sales forecast is made. Gillettes philosophy can be summarized as follows: 1) Keep introducing new products and 50 per cent of their business must come from products, which have been introduced less than five years ago. 2) Technical superiority in every product. Gillette considers competition as a spur for customer retention. Gillettes game plan is as given next: 1) Keep the user/customer at the centre of activities. 2) Provide improved products gain increased net sales. 3) Have pricing options by improvement in products. Gillette considers the following as their key growth areas: 1) Value addition in existing products. 2) Speedy launches of new products. 3) Distribution network. 4) Display and merchandising. 5) Advertising and promotion. 6) They keep a close watch on standard direct costs and post-marketing expenses, which can be considered controllable overheads. 7) Synergy for efficiency and effectiveness. 8) Profits through Information Technology (IT) driven Total Quality Management (TQM) and peoples involvement. Gillette has developed a marketing strategy for facing recession in the market. They view the impact of recession on the different segments of the market as follows: 1) Consumers: Their demand reduces for non-essential articles and they switch to value for money products. 2) Trade: They suffer from inventory blockage of nonessential products and they end up with heavy stocks of a variety of products.

33

Thakurs MBA Second Semester (Macro Business Environment) VTU

3) Firm: It loses customers as also trade/distribution channels who show little interest in the products.

Gillettes policy for marketing during recession is that of pause! They believe in operating in the following manner: 1) Basic marketing strategy does not change. 2) They organize better management of resources and plan tactical moves. 3) They provide value addition; when consumers downgrade, Gillette provides added value to the product; they reinforce the advertising messages; improve the product package. 4) They arrange new product launches to increase user share and also upgrade the users. The result so far has been that Gillette has grown even during recession periods. Questions: a) Is the firm justified in upgrading their products and charging more when the customers are finding it hard to pay their existing prices? Discuss their policy for success. b) Do you think that the strategies adopted by Gillette at the time of recession are appropriate. Give some more strategies to improve the condition during recession.

Case Study 3: WTO-Bilateral and Multilateral Trade Laws

In September 2003, member countries of the World Trade Organization (WTO) met at Cancun, Mexico, for a regular ministerial conference. The meeting, which was expected to improve trade between the member countries unfortunately ended in failure. Under the leadership of Brazil and India, both developing and the poorer countries of the world came together and formed a group known as G-22. G-22 aimed to oppose the dominance of the U.S. and the European Union (EU) and prevent them from imposing trade agreements on developing and underdeveloped countries. The member countries of G-22 were Argentina, Bolivia, Chile, Colombia, Costa Rica, Cuba, Ecuador, Egypt, Guatemala, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Peru, the Philippines, South Africa, Thailand, Venezuela, China, India, and Brazil. The G-22 countries were against the agricultural subsidies being granted by some developed countries to their farmers. The WTO came into existence on January 1, 1995, replacing the General Agreement on Trade and Tariffs (GATT) that came into existence in 1948. In fact, WTO was an extension of GATT, which was primarily concerned with international trade in goods whereas WTO guides trade in services and intellectual property along with trade in goods. The headquarters of WTO is located at Geneva, Switzerland. The main objective behind setting-up WTO was trade liberalization between the countries. The main functions of WTO include administering trade agreements between the trading countries of the world, facilitating trade negotiations among the countries, and handling trade disputes as a negotiating forum and to maintain cooperation between international organizations such as the World Bank, International Monetary Fund, etc. By the end of February

Case Studies

34

2005, the WTO had 148 members and regulated about 97 per cent of the world trade. With its membership comprising developed, developing, and under-developed economies, WTO influences the trade relations of the majority of the countries of the world to a large extent. Nations like China, India, and Brazil showed an upsurge in their trade with other nations. Further, by being members of the WTO, the member countries are helped to find new avenues for marketing their products. In fact, the WTO advocates trade liberalization and intends to protect the interests of trading countries without allowing the domination of international trade by any specific country. However, the role of developed and strong economies such as the U.S. in influencing the policies of the WTO is a cause for concern for the developing and underdeveloped countries. These countries have alleged on various platforms and occasions that the rules of international trade framed by the WTO were mainly dictated by the U.S. and its allies. Trade regulations, quotas, and the restriction on import of goods from some countries by the U.S. and other European Union countries were hindering complete trade liberalization, they said. The failure of the Cancun meeting in 2003 and the delay in implementation of the Doha development agenda framed earlier in 2001, raised questions about the influence of the WTO in maintaining cooperation between member countries. In recent WTO negotiations, developing nations have been to some extent successful in preventing the established economies of the world from imposing trade regulations on them. Many analysts across the world opine that if G-22 strengthened its stand, it had the potential to tilt the trade balances of the world. But the differences between India and Brazil, the two main countries of the alliance, on farm trade liberalization appeared to be benefiting the European Union (EU). The EU may not open-up its market for international trade by proclaiming to protect the interests of countries like India, which is also exporting its agricultural products to EU. Thus, EUs domestic farm sector is getting benefited due to partial trade liberalization. The presence of tariffs and quotas in the EU market may prevent Brazil from capturing larger EU market by exporting its agricultural products. Many analysts are therefore of the opinion that this situation requires the attention of the WTO as it can have a strong impact on world trade. Amidst all these issues, to secure its future and achieve the set objectives, the WTO should consider steps like facilitating open panel hearings, improving representation of member countries at WTO meetings, and adopting a new approach for improving environmental and labor standards while concentrating on the main objectives of trade liberalization. All these additional steps will help it to have a positive impact on the world economy. Questions: a) The WTO was set up with the intention of regulating international trade between countries. How successful has the WTO been in attaining its objectives? Justify

your stand. b) The rules and regulations of international trade framed by the WTO have been largely influenced by the developed nations led by the U.S. The failure of the Cancun meet indicates the increasing role played by developing nations in making the policies of WTO. Comment.

Case Study 4: Starbucks International Entry Strategy

Starbucks International has gone beyond the normal philosophy of Starbucks, to create a re-birth of their product line in foreign countries. Typically in the United States, Starbucks owns its entire line of coffee-bar stores outright with no franchise investments or partnerships. However, their international operations are quite the opposite. Starbucks International has adopted a strategy of partnerships to create its line of international coffee-bar stores. These joint ventures create an increased ease of entry into the foreign market. Starbucks International, choose to be involved with partnerships for the benefits these relationships offered over their typical wholly owned subsidiary philosophy. However, choosing the right partner, poses a potential problem for the company. Although Starbucks uses multiple lines of distribution to saturate to US coffee market, its international operations consist only of coffeebar restaurants. Therefore, they only have one channel of distribution internationally. Through this, Starbucks had to choose a partner that would facilitate their creation and expansion of coffee bars in the international arena, specifically Asia and Japan were their primary target. Starbucks developed a series of criteria to which they evaluated different potential partnerships in Japan and other foreign countries. First, they sought to implement the idea of partnership first, county second, as a means of developing partnerships that focuses on the companies goals, and not the countries goals. Second, Starbucks noted five additional criteria they used to narrow and conclude their partnership search: 1) They looked for companies with similar ideas about values and corporate life. 2) They wanted companies that had experience in the multi-restaurant business. 3) Potential partners had to have enough financial resources to help saturate a given market so as to counter the possibility of imitations. 4) Starbucks sought partners that had the ability and experience to locate prime real estate for coffee-bar locations with knowledge of the retail market. 5) Finally, Starbucks looked for partners who had the manpower available to make a full commitment to the project. It was this selection criterion which aided Starbucks in implementing the benefits of partnerships to their international operation expansion. When looking at Starbucks international entry strategy, three main potential benefits arise from the development

35

Thakurs MBA Second Semester (Macro Business Environment) VTU

of the partnership. These benefits had and have the potential to be varying in their degree of usefulness dependent upon the entry strategy Starbucks chooses, in this case Joint Venture (partnership). The three main potential benefits of a joint venture entry strategy are: 1) Protection of the sustainable competitive advantage, 2) Reduction in the financial risk incurred by the firm (Starbucks), and 3) The benefit of knowing how well the US product will do in the foreign market through local adaptation. In a company where coffee is a way of life, Starbucks had to fully deploy the creativity of its originator to develop a sustainable competitive advantage and be a focused differentiator. It could be said, that the quality of the coffee Starbucks serves is a competitive advantage, however, even though the coffee process is valuable to the company, it is not unique. In fact, they have developed their process from other peoples ideas, not their own invention. Actually, it is their people who are their competitive advantage. After all, working at a place you could be called a baristas; you know people are the business. The found of Starbucks agrees with this stating Our only sustainable advantage is the quality of our work force. However, a joint venture offers the lowest possible protection of the Sustainable Competitive Advantage (SCA). Therefore, Starbucks will have to implement strict guidelines to be able to keep their SCA alive and well in the Japanese market. Starbucks partnership with Sazaby, Inc., an upscale retail and restaurant operating company, they did just that, protected their SCA with a company that shares the same type of SCA while being a focused differentiator. Still, a joint venture relationship does offer a moderate reduction in the financial risk Starbucks must incur. When Starbucks developed it 50/50 partnership with Japanese based Sazaby, Inc., they cut their financial risk in half. However, the financial risk for the entire partnership is inflated due to a higher priced product, compared with other coffees available in the market, and because of the possible risk factors associated with local adaptation of their product. Finally, it is that local adaptation which serves as the greatest benefit of the partnership. Local adaptation looks at how well a US product will sell in the foreign market. A partnership allows for the collaboration between foreign and US partners to develop a product that will functionally be similar to the original US product yet also appeals to the consumers of the foreign market. Starbucks coffee bar design seems to have been a good match for the Japanese market. The coffee culture in Japan is that of kissaten coffeehouses with a formal sit down atmosphere. However, the largest and most well known coffee in the Japanese market place is the Doutor Coffee Company, the McDonalds of coffee houses in Japan. These coffeehouses are quite the opposite of the traditional kissaten. At Doutor, seating is scarce, but standing bar room is ample. Starbucks, through their normal structure, struck a common ground. With a more casual atmosphere, Starbucks offer patrons ample seating areas and dine in or

carry out services. However, there was originally some worry about the profitability and future growth of the Italian-style coffees in Japan. Japanese had never been exposed to this type of coffee before, so the taste of espresso drinks was as foreign to them as the name Starbucks. However, Starbucks managers were confident that Japan was ready to indulge in the fine taste of Italian espresso. All in all, the partnership between Sazaby and Starbucks provided a moderately high benefit for local adaptation. Starbucks plan of a partnership is the best choice for an entry strategy into the international market. Their increased insight into the market, and the other benefits provided by this relationship, will propel Starbucks International espressoly in the future. Question 1) What type of strategy Starbucks follow for its international entry and why? Give reasons. 2) If you were strategy maker, what type of strategy would you suggest and why? 3) Why starbucks go for international entry? Give reasons.

Case Study 5: Fiscal Policy

Confronting a Fiscal Crisis Indias problem is not lack of resources; it is the inability and unwillingness to mobilize resources into the public sector. The Indian economy is not facing a resources crisis; it is confronting a fiscal crisis. The reasons for this are the steady decline over the years in the share of direct taxes in spite of the fact that both incomes and savings of the top 10 per cent of the households in the country have been steadily increasing. The government does not appear committed to placing greater reliance on direct taxes to mobilize resources. It is unwilling to tax the rich and therefore has no option except to fall back on indirect taxes and rely more than ever on borrowing from those who expect interest and tax concessions from temporarily parting with their resources to enable the government to continue its development programs. Grave inter-sectoral imbalances also exist in Indias tax structure because agricultural incomes are virtually tax-free. The Raj Committee had recommended the introduction of an agricultural tax to remove this inequity, but the State Governments did nothing to implement the recommendation. The long-term fiscal policy also did nothing to eliminate this inter-sectoral inequity. Public sector enterprises failed to generate the contemplated re-investible surplus and the small surplus that became available from these enterprises was not attributable to improved efficiency. The fiscal deficit reflects the total resource gap, which equals the excess of total government expenditure over government revenue and grants. The fiscal deficit thus fully indicates the indebtedness of the government.

Case Studies

36

Question

Suggest some remedies for the new fiscal policy to combat fiscal crisis.