ikea

Ir1no%at1on at IKEK

Redecorating and renovating have become the international pasttnne In a post 9/11 world facing persistent terrorist alerts, more and more people are opting to stay home and make their homes safe havens This phenomenon coupled with lagging economies worldwide has contributed tremendously to the success of IKEA—the Swedish home furniture giant In the past 10 years sales for IKEA have tnpled, gro ing from o er $4 billion in 1993 to O\ er $12 billion in 2003

Much of IKEA s success can be attributed to its founder, lngvar Kamprad Kam prad us€d graduation money to start IKEA in the small Swedish village where hc was born I started off selling belt buckles, pens, and watches, whattver resi dents in the small local village of A needed Eventually Kamprad moved on to selling furniture One day in 1952 while struggling to fit a large table in a small car, one of Kamprad’s employees came up with the idea that changed the fur niture industry forever—he decided to remove the legs IKEA’s fiat-pock and self- assembly methodology was born. It rocketed the company past the competition. “After that [ followed a whole senes of other self-assembled furniture, and by 1956 the concept was more or less systematized writes Kamprad

Kamprad is dedicated toniamtaining the corporate culture he has helped define over the past 50 years He is a simple man—his idea of a loxury vacation is rid his bike He is fiercely cost-conscious and, es en though his personal wealth has been estimated in the billions, he refuses to fly first class He values hunian inter— action above all and, even though retired, he still isits IKEA stores regularly to keep tabs on what is going on when. the business really happens

The culture at IKEA is a culture closely connecttd with Kamprad s simple, farm-

raised, Swedish roots. It is a culture that strives “to create a better everyday for the

many people.” IKEA supports this culture by

hiring coworkers (IKEA prefers the word coworkers to “employees”) who are

supportive and work well in teams;

expecting coworkers to look for mnovative, better ways of doing things in cx cry

aspect of their work

• respecting coworkers and their views;

• establishing mutual objectives and working tirelessly to realize them;

• n&cing cost part of ever thing they do from improving processes for production to purchasing wisely to tnx cling cost-eftectively,

• avoiding complicated solutions—simplicity is a strong part or the IKEA culture,

• leading by Lxample, so IKEA leaders are expected to pitch m x hen needud and create a good woilcing environment, and

• believing that a diverse work force strengthens the company en erall

•

The IKEA culture is one that resonates for many. The buildings are easy to identify—the giant blue and gold warehouses tk resemble oversized Swedish

flags are hard to miss Millions of customers browse through the Klippan sofa and Palbo footstools (Nbrdic names are given to all IKEA products) in the stark

dimly lit warehouses The surroundings may not be lavish and the service ma be mostly self-service but customers keep going back not just for the bargains but to experience the IKEA culture as well

1 D scuss the three giput components of the Congruence Model as they apply to

the success of IKEA

2 Consider Schein s Four Key Orgamzational Culture Factors as described in

Highlight 11 5 What examples can you identify within the IKEA organization

that contribute to the company s strong corporate culture?

3 Based

leader 2

‘Developing Leaders at UPS’

UPS is the nation fourth largest enipi e with 357,000 employees worldwide and operations in more than 200 countries. UPS is consistently recognized as a “top companies to work for” and was recently recognized by Fortune as one of the 50 best companies for minorities. A major reason for UPS’s success is the company $ commitment to its employees. UPS understands the importance of providing both education and experience f or its ne t generation of leaders—spending $300 million dollar annually on education programs for employees and encouraging promo tion from within All employees are offered equal opportunities to build the skills and knowledge they need to succeed A per t example of thi is Jovita Carranza.

Jovita Carranza joined UPS m 1976 as a part time clerk in Los Angeles Carranza demonstrated a strong work ethic and a commitment to UPS and UPS rewarded her with opportunities—opportunities Carranza was not shy about taking advan tage of. By 1985 Carranza was the workforce planning manager in Metro LA. By 1987 he was district human resources manager based in Central Texas. By 1990 he h d accepted a move to district human resources manager in Illinois. She received her first operations assignment, as division manager for hub, package, and feeder operations, in Illinois in 1991. Two years later, he s id yes to becoming district op erations manager in Miami. In 1996 she accepted the same role in Wisconsin By 1999 Carranza’s progressive uccesses led UPS to promote her to president of the Americas Region. From there she moved into her current position as Vice Pre ident of UPS Air Operations, based in Louisville, Kentucky

disney

Disney and his brother Roy started Disney Brothers Studio in Hollywood in 1923 Artistically the 1930s were D best years Walt Disney embraced new ad vances in color and sound, and pusned his team of entiusiastic young artists to pursue the most sophisticated techniques of the day Disney risked cx erything on his first feature film, Snow White and the Seven Dwarfs, released in 1937 Audiences loved it His focus on the positive and the life-affirming themes he incorporated into all his work provided much-needed smiles and laughter for audiences during the depths of the G Depres

Roy Disney became chairman after Walt died of lung cance’ in 1966 In 1971 Roy cued r his son, Roy F Disney became the company’s orincipal individual share holder In 1984 new CEO Mic Eisner and president Frank Wells ushered in an era of innovation and prosperity. They instituted marathon meetings for generating creative ideas, forcing everyone to work grueling hours The approach worked and for the first 10 years of his tenure, Eisner was considered a gemus He revived Dis ney’s historic animation uni invested m the theme parks, led the expansion into Europe, and breathed new life into the company by partnenng with cutting-edge companies like Pixar and Miramax. Eisner built Disney into a formidable media powerhouse, boosting its profits sixfold and sending its share price soaring almost 6,000 percent.

But more recent years ha cc been challenging for Eisner and the Disney company F snei s initial magical effect has lost its shine and his more recent actions and deci sions have had less-than-desirable effects on the company Roy Visney the last of the founding fan’ ly to work at the company, quit the board in 2003 and cegan a cam paign to try and oust Eisner In his letter of resignation Disney asserted that Eisner has become an ineffectu e leader claiming that Eisner consistently nucro-manages’ everyone -esulung in loss o morale He saw Eisner’s cost-conscience decisions to shut down an Orlando animation studio and cut costs at theme parks as resulting in ‘creative brain drain arid creating the perception that the company is looking for quick buck solu rathtr tnan long-teim value Disney also cited Eisner s in ability to mamtaa-r successful relationships with creatix e partners like P xar and Mi- ran-tax (both Contracts with these studios were not renewed) and his lack of a succession plan as dangerous to the future of the company

Disney has found a lot of support in his plan to ‘SAVE DISNEY In the spring or 2004 stockholders supported Disney by voting against Eisner s re-election as president Eisner str maintains his position as CEO and has expressed his mten tion to holci on tu that position until his contract expires in 2006

1 Considei Walt Disney s effectiveness in terms of the three domains of leadership— the wader, the toilowers, and the situation For each domain name factors that con tributed to Disney’s success.

2. Now think about Michael Eisner’s leadership effectiveness. Name factors within the three domains of leadership that might be responsible for contro versy now surrounding Disney.

leader case 1

Richard Branson Shoots for the Moon’

The Virgin Group is the umbrella for a variety of business ventures ranging from air travel to entertainment With close to 200 companies in over 30 countries it is one of the largest companies in the world At the head of this huge organization is Richard Branson Branson founded Virgin over 30 years ago and has built the organization from a small student magazine to the multibillion-dollar enterprise it is today.

Branson is not your typical CEO Branson's dyslexia made school a -struggie and sabotaged his performance on standard IQ tests His teachers and tests had no way of measuring his greatest strengths—his uncanny knack for uncovering lucrative business ideas and his ability to energize the ambitions ot others so that they, like he, could raise to the level of their dreams

Richard Branson's true talents began to show themselves in his late teens. While a student at Stowe School in England in 1968, Branson decided to start his own magazine, 'Student' Branson was inspired by the student activism on his campus in the sixties and aecided to try something different Student differed from most college newspapers or magazines it focused on the students and their interests Branson sold adsertismg to major corporations to support his magazine He included articles by Ministers of Parliament, rock stars, intellectuals, and celebrities Student grew to become commercial success

In 1970 Branson saw an opportunity for Student to offer records cheaply by running ads for mail-order delvery The subscribers to Student flooded the magazine with so many orders that his spin-off discount music venture proved more lucra tive than the magazine subscriptions Branson reciu the staff of Stvaent for his discount music business He built a small recording studio and signed his first artist Mike Oldfield recorded ‘Tubular Bells at Virgin in 1973—the album sold 5 million copies Virgin records and the Virgm brand name were born Branson has gone on to start his own airline (Virgin Atlantic Airlines was launched in 1984) build hotels (Virgin Hotels started in 1988) get into the personil finance business (Virgin Direct Personal Finance Services was launched in 1995) and even enter the cola wars (Virgm Cola was introduced in 1994) And those are just a few of the

highlights of the virgin Group—all this while Branson has attempted to break world speed records for crossing the Atlantic Ocean by boat and by hot air balloon

As you might guess Branson s approach is nontraditional—he has no giant corporate office or staff and few if any board meetings Instead, he keeps each enterprise small and relies on his skills of empowering people s ideas to fuel success When a flight attendant from Virgin Airlines approached him with her vision of a wedding business Richard told her to go do it He even put on a wedding areas himself to help launch the publicity Virgin Brides was born Branson i dies heav on the creatu ity of his staff—he is more a supporter of new ideas than a creator

of them He encourages searches for new business ideas ci ervwhere he goes and even has a spot on the Virgin Websi te called Got a Big Idea

In December 1999, Richard Branson was awarded a knighthood in the Queen’s Millennium New Year s Honours List for services to entrepreneurship “ What a next on Branson s list’ He recently announced that Virgin was investing money in trying to make sure that, in tne not too distant future peovle from around the world will be anle to go into spacc / Not everyone is convinced that space tourism can become a fully fledged part of tne travel industry but s ith Branson behind the idea it just may fly 1 Would you classify Richard Branson as a manager or a leader’ What qualities distmguish him as one ovei the ther

2 Describe the relationship between Branson and his followers.

3 Identify the myths of leadership development thai Richard Branson s success helps to disprove

case study 13 july

CASE STUDY

Peekay Steels

Pravin Kumar flicked the TV off as he saw, for the nth time that night, the second tower of the World Trade Centre in New York come crashing down. "What kind of people would plot so meticulously to take thousands of innocent lives ?" he wondered, as a chill went down his spine. "lt hasn't been a good day for me and lots of others in the US," Kumar muttered, switching on a lamp next to his king-sized chair, and pulling out a file from his expensive Piene Cardin portfofio.

A few hours earlier, the 48-year-old CEO of Peekay Steels, which had four other subsidiaries dealing in aluminium, power, oil exploration, and telecom, had emerged from a gruelling four-hour session with Dalal Street analysts. It seemed the analysts thought there was nothing right with his diversified group. The hundreds of crores of rupees that the flagship had mised to fund forays into new growth sectors were proving be a mill round Peekay's neck. The bottomline was bleeding not because the steelmaker was inefficient; rather, the culprit was the staggering interest Peekay had to pay month after month.

Kumar flipped a few pages of his file and got to a section titled 'Competitive Analysis'. He put a finger on the column that read production cost and traced it down to the row where Peekay's prices were given : $260 per tonne. Moving his gaze further down, he looked at the global benchmark , $280 per tonne. Feeling bitter, he picked up a pen and circled the number under the financial charges column. "We are paying $81 as interest charge for every tonne of steel that we make," he said it aloud for the words to sink in. "So, by the time my steel leaves the factory it cosls $341 per tonne."

In another few hours, Kumar knew he would be seated in the back of his black Mercedes Benz along with three of his key elecutives, on a four-hour drive outside the city to Peekay's steel plant. But before hitting the sack for a few winks, Kumar decided to call Anirudh Desai, Peekay's director of finance. Desai was watching CNN too when Kumar called him on his mobile. "Do you think our US exports are going to be affected if there's a war ?" Kumar asked Desai wiihout bothering to say hello or expressing his shock over the attacks.

"It could go either way," replied Desai. "lf there's a war, the US may step up imports. But if the business sentiment worsens, purchases may actually fall., "Let's talk about it later today," said Kumar. "But, Ani, the reason I called was to find out something specific. Can we lower our interest costs without losing control of any of our subsidiaries? "

"l think so," replied Desai. "But given the complicated shareholding pattern within the group, individual spin-offs might be tricky. The joint venture route is an option we could look for all our non-steel businesses. Even if we were to forfeit the controlling stake, we could still retain a major holding in each subsidiary. I have done some scenario building, but I don't think I can take you through that over the phone. May be I could do that on our way to the plant tomorrow ?"

"l guess you could," said Kumar, wishing Desai good night, and putting the cordless phone back into its cradle.

Kumar had slept for all of an hour when the electronic clock on the table by his bedside beeped. By quarter to seven, Desai and two other senior execs were at Kumar's house, waiting for Kumar to join them for a quick breakfast before setting out on the ride. "What's the update on the attacks ?" Kumar asked no one in particular, but Desai replied. "No news yet on how many dead, but it seems the fatality could run into a few thousands." Over the next 15 minutes, the terrorist attack dominated the conversation at the breakfast table.

Getting into the car, Kumar switched to the business at hand. "We simply have to get our financial costs down," he said, turning to Desai. "Yes, but the question is how ?" countered Desai. "In the past, we have used the flagship as an investment vehicle for setting up projects in power, oil, aluminium, and telecom. Not only are these businesses capital intensive, but they have been hit by time and cost over-runs. That has sent our interest costs into a spiral."

''But aren't we trying to swap expensive debt with cheaper funds from abroad ? " questioned Kumar.

"Yes, but this may not be the best of time to do that," said Desai. "Besides, let's face it, our track record at repaying loans isn't exactly blemishess. More than once we've had our loans rescheduled."

"But can't we convert our inter corporate borrowings into convertible debentures ?" said Kumar.

"l'm noi confident of this happening," Venkatesh Krishnan, a nominee on Peekay's board, butted in. "For one, your stock price has taken a severe beating on Dalal Street, and investors are aware of the financial problems you are facing. Also, where is the market for IPOs ?"

"So, what is the solution ? Should we, like the analysts want, spin off our low projects into companies and offload the borrowings from our boots ?" Kumar asked. "This would sharpen Peekay's business focus What do our institutional shareholders think about this ?" continued Kumar, looking to Krishnan.

Mulling Over The Break-Up Why it Helps... Sharpens business focus to just steel-making Rids the balance-sheet of expensive borrowings Helps leverage cost leadership in steel manufacture Raises investor interest and, hence, shareholder value ...And Why it Doesn't Lowers the promoters stake precariously Throws the company open to takeovers Reduces asset strength in the balance-sheet Limits growth opportunities for individual managers

"The consortium does not favour a break-up," the nominee-director replied. All your lenders see merit in a large balance sheet that comes with a diversified portfolio. But, frankly, my own view is different. True, your operational efficiency in steel is comparable to the best in the world. But the profitability - and indeed the survival - of the group is at stake because of its conglomerate nature. And the only option is for you to stick to what you are good at and divest areas that are marginal to your core business of steel."

"But a break-up has its flipside," argued Kumar. "A single business company could attract the attention of predators with an eye on synergy and cost savings. Our power unit, for instance, which has a capacity to produce 1,000 MW of power might interest a larger power unit. A pure play is more likely to invite a take-over bid which may be good for shareholders - since such acquisitions occur at a substantial premium to the market price - but bad for the incumbent management, because it reflects poorly on their past performance."

"lf we break up," Desai added, "the group would shrink in size. The growth opportunities for individual managers would be reduced. But the overriding rationale against a break-up is that we need balance in our portfolio. We are good at steel, but the future lies in emerging areas like telecom. So, we should be in telecom".

"And let us not forget," pointed out Kumar, "that our shareholders invested in us because we are a diversified company. I don't think we should be concerned about focus because that is not the reason why investors came to us in the first place." As the sprawling steel plant loomed into sight, Kumar knew that answers would be hard to find. Just the same, he had to find them quickly.

Questlons :

(a) What strategic alternatives, you think, are available to Peekay Steel and which alternative would you recommend and why ?

(b) Is it possible for Peekay to lower interest costs without losing control of any of its subsidiaries? If yes, how ? lf no, why ?

for 11 july 2nd

Mr. Harish Jain, CEO of Energetic Enterprises, has established the firm for the manufacture and marketing of an innovative product. The firm earned a reputation of its product within two years of its inception and enjoyed monopoly position in the market for its product. Now it has a turnover of about Rs. 80 crores.

Three years back, some firms entered the market and offered cheap substitutes which were of better quality. This year, Mr. Harish Jain is worried because about 40% of the marketshare has already been taken away by the new firms and he is not able to check this trend.

Mr. Jain has been looking after both production and marketing functions though finance is being looked after by a finance manager having a professional degree in chartered accountancy Mr. Jain has recently lowered the price of his product to fight competition, but even this has not helped. He has now approached you for advice to stabilise his sales volume.

Questions :

(a) What is the orientation of Mr. Jain in selling his product ?

11 july comprehension cases

re

has gradually

declined to 15%

from earlier

30%. About a

couple of years

ogo, the brand

opened its first

company-owned

retail outlet

called "ABC Ki

Duniya" (World

of ABC). The

outlet reassures

the customer

about the

genuine

material, and

encourages

interaction

besides

displaying a

range of

refractory and

aluminium

based products.

This type of

outlet is also

likely to

enhance the

company's

image.

Question :

Taking into

consideration

the cement

market and the

commoditised

nature of the

product,

comment on

the pros and

cons of an

outlet of this

kind. Would

such outlets

alone enhance

sales? Explain

your answer

CASE STUDY 8 JULY

The case on DHAWAL LIMITED Ltd. is a disguised case on `Budgetary and Cost Control'. Mr. Dhanpat the CFO of DHAWAL LIMITED

is brooding over the ways and means of reducing and controlling expenses of the company. The company

which till last year was increasing the Budgetary allocation for marketing costs by an average of 15% per

year, now wants to freeze the allocation for this year at the last year's level, hence the headache for CFO.

The names of some of the organizations and the data has been altered for purposes of confidentiality.

Students may like to read units 15 and 16 for conceptual clarity, before attempting this case.

6.1 COMPANY BACKGROUND

DHAWAL LIMITED came into being in 1961, when its founder Mr. Suresh Sharma, at that time a non-resident Indian

working in England, nursed a vision. A vision to pioneer the manufacture of superior quality electronic

products in the country. The vision became a reality with the setting up of a factory for the manufacture of

Black & White televisions in an industrially obscure place, Palghat, in Kerala. Thus a tradition of firsts

emerged, along with a commitment of quality.

Today, with over 35 years of experience, DHAWAL LIMITED has solidly established its position in the Consumer

Electronics Industry. Its spectacular growth is reflected in its modem and comprehensive manufacturing

infrastructure that harnesses the power of superior technology to mass-produce quality products.

Today Company is divided into three divisions

1. Color Televisions

2. Home Appliances

3. Refrigeration

Case prepared by Dr. Harish Chaudhry, Associate Professor, School of Management, 1IT, Delhi.,

47

Rs.1300 cr. CTV division deals in different models of CTV's. Rs.200 cr. Home Appliances division deals

in washing machines and Rs.290 cr. Refrigeration division in refrigerators. The company manufactures 16

models of CTV's; 5 models of washing machines and 6 models of Refrigerators (Details of models are

given in Exhibit - 1). Over the years such a large range has been necessitated by the ever-increasing

competition and to cater to the specific needs of different consumer segments.

63 DOMESTIC COMPETITION

The market for both consumer electronics and white goods has become crowded in the past two years

with the launch of several transnational brands such as Samsung, Akahi, Thomson, LG, Panasonic,

Whirlpool, GE and Electrolux, Added to this is the competition from home players like Videocon and

Onida, In such a scenario DHAWAL LIMITED will have to match the financial strengths and marketing clout of it's

domestic and transnational counterparts. Moreover DHAWAL LIMITED has to cut costs as its net profit margins are being

hammered. For instance, RQL's

net margins dropped from 7.33% in 1994-95 to 3.72% in 1996-97 for its color TVs' division (see exhibit -

2 for l last year performance).

EXHIBIT NO.2

RQL'S 1996-97 PERFORMANCE

(Rupees Crores)

Ctv Division Home Appliances Refrigerator Divn.

Total Income 1290.60. 198.21 288.82

Net Profits 48.46 6.21 5.18

Reserves & Surplus 271.34 25.19 89.43

Debt 380.09 75.81 121.1

NET MARGIN 3.72% 3.13 % 1.79%

Not surprisingly, DHAWAL LIMITED spent whole of 1996-97 trying to slash its costs. For starter DHAWAL LIMITED introduces the

Japanese management technique kanban, which enables a company to control inventory levels. Despite

such cost cutting exercises, DHAWAL LIMITED has found it extremely tough to improve its profitability levels: as

exemplified by its falling net margins. Now another area, which the company is looking at with hope, is

the reduction in the costs of its marketing set up. The company thus is trying to tighten the screws on the

budgetary process and wants to strictly control the expenses.

6.4 BUDGETARY PROCESS AT DHAWAL LIMITED

DHAWAL LIMITED works on profit-center basis whereby every division, every region and every branch is a profit center

for the company and has to justify its existence in terms of expenses and earnings.

DHAWAL LIMITED has divided the whole country into four regions. It has 20 branches across the country and nearly

3000 dealers. (exhibit - 3 gives list of branches)

EXHIBIT NO.3

RQL'S Distribution Set-up

REGION CORRESPONDING BRANCHES TOTAL NO OF

DEALERS

Eastern Region (Calcutta.) Calcutta, Patna, Bhubhaneswar, Guwahati 461

Western Region (Mumbai) Mumbai, Pune, Ahmedabad, Nagpur,

Panaji, Indore

992

Northern Region (Delhi) Delhi, Chandigarh, Jaipur, Kamal,

Lucknow, Ghaziabad

857

Southern Region (Bangalore) Chennai, Cochin, Hyderabad, Bangalore 685

The distribution channel, being used by the company typically involves : factory, Central marketing

organization (CMO), regional warehouse, distributors, dealer and customer - in the following order.

Factory -* Central Marketing Organization (C.M.O) -a Regional Office -3 Distributor -4 Dealer -a

Customer

The distribution channels of most of RQL's competitors are slightly different. The distribution channels

typically used by them are shown in Exhibit 4. Most of the RQL's competitors use one of these channels

or a combination of them.

49

Since DHAWAL LIMITED operates on a profit center basis, therefore, each entity in its distribution channel passes the

material onto the next element of the channel, for a price after keeping some margin for itself. These

transfer prices for all the products are enumerated in Exhibit 5.

EXHIBIT NO.5

STOCK TRANSFER PRICES

Amount in Rupees

Products Cost to CMO Cost to

Regional

Office

Cost to

Distributor

Cost to Dealers Selling Price

COLOUR TVs

14" 8450 8765 9230 9670 10125

20" 12500 13290 13886 14215 14798

21" 15517 16140 16787 17315 18077

25" 19500 20075 21090 22712 24224

29" 21815 24215 26112 27897 30989

MASHING_

MACHINE (ALL

MODELS)

6500 7150 7300 7570 8100

REFRIGERATORS

3504/3503 31200 33720 35215 34914 36970-

3102 21716 23215 24846 26117 27825

2503/2502 16987 18795 20053 21817 23678

1852 13987 15053 15917 16817 17985

Now the budgeting at DHAWAL LIMITED starts with preparation of budget proposals in all the branches and regions.

These proposals enumerate the branch-wise/region-wise sales targets, expenditures and expected profits

The budget proposals are then sent to the head office, which is entrusted with the task of preparing overall

budget Thereafter begins the budgeting exercise at the head office, which starts with fixing the sales

targets (in numbers) for all the branches, for the next financial year. These targets may or may not be the

same as projected by the regions, in their budget proposals. This is followed by determining stock transfer

prices among various constituents of the distribution channel. Thus the company arrives at the budgeted

total contribution margins which would be earned by both CMO and the regions.

For example if the company's target for 29" LTV's is 2 lacs sets and contribution from each set is Rs.2,400

for the CMQ. Then,

the budgeted contribution for CMO from the model would be Rs.48 Cr. Similarly

total contribution would be calculated after finding budgeted contribution from each model of CTVs,

Washing machines and Refrigerators. Likewise budgeted contributions for regions are calculated.

The budgeting exercise then is divided into two parts:

1). CMO: Wherein corporate level budgeting for expenses is done

2). Regions: Wherein budgeting for regional expenses is done.

This way the budgets for CMO & regions are prepared at the corporate office. These budgets provide for

fixed as well as variable costs, which can be incurred by the CMO and regions. The constituents of fixed

costs are the normal establishment costs, maintenance, salaries of permanent staff etc. and the prime

variable costs are

1). marketing costs

2). sales and distribution

3). developmental costs

6.5 MARKETING COSTS

These costs are incurred at two levels at DHAWAL LIMITED i.e. corporate and regional levels. At the corporate level, it

is primarily the corporate training, renovation and advertising costs. The advertisements are placed across

the nation on a variety of media (TV, Print., Hoardings etc.). Some other costs incurred by the C.M.O. are

on account of rebates, which are given to the regional offices for promotional purposes.

At the regional level these costs are incurred on account of local advertising, local promotional schemes,

gifts and giveaways etc.. These costs are incurred entirely at the discretion of regional marketing heads

but within the budgets given by the corporate d1fice. Further, the branches have their own marketing costs

which might be used for advertising in vernacular press and other promotional schemes.

6.6 SALES AND DISTRIBUTION COSTS

The costs incurred in this category are primarily trade discounts, transportation, insurance and

merchandising etc.

6.7 DEVELOPMENTAL COSTS

The costs under this head are generally costs towards marketing research, manpower training and new-

markets' development.

Other costs incurred by regional offices4re service expenses and travelling expenses of the staff.

In order to keep track of the expenses, DHAWAL LIMITED has implemented a control mechanism so that actual

expenditure does not go haywire vis-a-vis budgeted provisions.

6.8 COST CONTROL EXERCISE AT RQL:.

DHAWAL LIMITED has put in place a control mechanism to monitor its costs. As per this system the yearly budgets are

broken down to month-wise budgets. And every branch is required to send to the regional office, the reports

on monthly basis Where in the actual expenses are compared to, the budgeted provisions (format of the

report is shown in exhibit - 6). The regional office in turn sends the collated results to the head office.

51

In the whole process, the erring branches or regions are questioned in case of excessive costs are incurred

or if targets are not achieved or any other type of variance is noticed.

The company believes that this control system keeps the marketing team on its toes, which the company

feels is necessary to check the rising competition in the market place.

The company now plans to tighten its cost control system further, because the company believes that key

to the survival in the competitive environment is reduced cost and increased sales-volumes. Although the

sales of the company are increasing but it is showing downward slide on profitability and market share

fronts. Therefore the company has started feeling the heat of the competition.

6.9 THE MARKET SCENARIO

Competition is here to stay, The consumer durable industry is under severe attack from multinational

competition and it is likely that things will get only worse in the coming years. Using their. deep pockets

and strong marketing muscle, new multinational entrants into the market like Akai, Sony, Samsung,

Daewoo & LG etc. have increased their share of color TV market to about 26% in the last two years.

Situation for DHAWAL LIMITED is no better in case of the washing machines and refrigerators markets.

In refrigerators market all the big names of the industry are here: Godrej, Electrolux, Whirlpool, LG,

Samsung, etc. in addition to competing with these giants, DHAWAL LIMITED has further limited its market by choosing

to be only in the frost free segment. The total demand for Refrigerators is 1.8 mm per annum of which

around 6% constitutes the frost free refrigerators' demand.

In the washing machines' market, the main players are Godrej, Whirlpool, Videocon, RQL, LG, Onida

and Voltas. Here DHAWAL LIMITED has products in the semi-automatic segment. Total annual demand for washing

machines is 0.75 mn of which 95% constitutes the semi-automatic machines demand.

Despite all this DHAWAL LIMITED has been able to increase its ales primarily because the demand for consumer

durables is increasing at about 20% per annum and DHAWAL LIMITED is still a strong brand in almost all the products it

has launched. This can be seen from the fact that DHAWAL LIMITED is number one in CTV market with 24% market

share. It has 45% of market share in the frost-free refrigerators and it has 15% share in the semiautomatic

washing machines market. But this is not the time for DHAWAL LIMITED to be complacent as the multinationals are

eating into market shares of all the Indian players including RQL.

Under the onslaught of the multinationals, profit margins of all the Indian companies including DHAWAL LIMITED are

on the decline on account of the extra effort each has had to put in for marketing, while not raising prices.

In case of RQL'S CTV division the profit came down to 3.72% in 1996-97 from 7.33% in 1994-95. This

year is expected

to be worse keeping in view the fact that in order to counter competition from foreign brands in the

domestic market, the company has been incurring higher selling expenses in the form of dealer discounts

and advertising leading to drop in margin. This trend if not arrested will lead to the end of a leader, hence

the emphasis cost cutting in the company.

6.10 ISSUES BEFORE THE COMPANY

Although DHAWAL LIMITED has a strict expenditure control system but the company is unable to understand from its

control exercise, whether or not the system is getting the required results in terms of market share, brand

image, availability of the material in the market, visibility of its products in the market etc. The company

is also unable to figure out whether the budgeted costs are doing justice to all the regions and the brands it

has in its stable.

Mr. Dhanpat, who is now preparing the budget for the year 1997-98, wants his budget to be fair to all

quarters. The issues he has to address are :

Freeing the marketing expenses at the last year's level while increasing the sales by at least 15% in

each region.

Properly distributing the expenditure budget among the four regions and products.

Best possible distribution of costs under various heads viz. marketing costs, sales and distribution

costs, developmental costs, etc.

The helping tools that Mr. Dhanpat has at his disposal are :

Last year's budget (exhibit - 7)

Last year's actual performance - figures (exhibit - 8)

Budget proposals of the four regions (exhibit - 9) for next year.

53

EXHIBIT NO 9

Budget proposals for the year 1996-97

I . Sales

g)CTVs 28800 41000 37600 34100 105450.

h) Washing machines 3250 7200 6050 5000 17100

I) Refrigerators 2400 14100 9550 5500 18950

Total Sales 34450 62300 53200 4460 141500

Transfer Price 23395 43475 36470 31150 113720

Contribution 11055 18825 16730 13450 27780

Marketing Expenses 2350 4650 4150 3140 7370

Sales & Distribution 1895 3290 2950 2450 4475

Developmental costs 595 1800 950 550 3665

Other Costs 1470 2100 1800 1560 4150

Fixed Costs 2150 3750 3310 2820 6977

Net Contribution 2595 3235 3570 2930 1143

6.11 DISCUSSION QUESTIONS

1. How can Mr. Dhanpat design a better budgeting and cost control system that would: -

i) Enable DHAWAL LIMITED to tap market opportunities at the optimal cost.

ii) Empower the marketing and sales teams to function effectively.

iii) Provide timely and adequate information to the top management on the budget and cost

studies on a regular basis.

2. How should such a system be monitored?

case study 6 July

Jitendra and Pravesh are working in an engineering organisation - a reputed one where excellence goes hand-In-hand with every new imperative flexibility. By laying down its clear-cut policies and procedures and corporate plans. this organisation has earned the distinction of being one of the best managed companies. always striving for excellence by keeping itself abreast of the developments in the endlessly changing scenario.

During the recent review of the functioning of one of the departments headed by Pravesh , it was discovered that his department had been continuously showing declining trend in terms of meeting the targets fixed for them and the problems of high rate of turnover/absenteeism came to light. Majority of the subordinates working under Pravesh were dissatisfied with their job and were feeling frustrated and depressed over the way they were being handled by him. There was a breakdown of communication and innumerable complaints about the rude behaviour of Pravesh started pouring in, Pravesh , on the other hand, had been in this department for the last so many years and was In the habit of treating his subordinates in the traditional style. The situation started aggravating day-by day. The workers under Pravesh had to take the shelter of Unions for airing their grievances and the Management was naturally disturbed over the state of affairs and could no longer afford to be a silent spectator. Search for a suitable replacement of Pravesh was accordingly initiated and Jitendra was identified for the purpose.

Jitendra was selected for replacing Pravesh as he possessed the skills of managing different types of people under different situations. His acceptability and credibility have all along been of the highest order.

Initially, of course, this sudden change was a painful surprise for Jitendra and as it always happens any change in status quo affects people and Jitendra was no exception. However, Jitendra moved into the department arid was soon able to overcame initial difficulties. With his concerted efforts and sincerity of purpose, he was soon able to create a strong trust-bond with his subordinates. He gave them a free hand in setting time-bound goals for themselves. The subordinates were by then participating in arriving at the vital decision in regard to their production and productivity. A very cordial and harmonious atmosphere prevailed upon in this department under John. All this naturally resulted in “a blessing in disguise” both for the Management and the workers in as much as that this department paved the way in Improving the climate and culture of the organisation.

Questions :

(a) Identify the Issues Involved in the above case.

(b) Do you agree with the statement that ‘‘a true manager should know the art of managing his people”? Comment.

(c) “Developing an effective team having healthy Interpersonal relationships Is the need of the hour.” Please comment.

Solution :

(a) In the case there is a decline in the working of the organisation. The department had been continuously showing declining trend in terms of meeting the targets fixed for them and the problems of high rate of turnover/absenteeism came to light. Majority of the subordinates working under Pravesh were dissatisfied with their job and were feeling frustrated. Pravesh was not cordial in his treatment, rather, he was rude. He was in the habit of treating his subordinates in the traditional style. The situation started aggravating day-by day. The workers under Pravesh had to take the shelter of Unions for airing their grievances and the Management was naturally disturbed over the state of affairs. Ultimately they had to take a decision. They replaced him with Jitendra, who was participative in his style. He possessed the skills of managing different types of people under different situations. Thus he could handle the troubled situation.

(b) Yes, a true manager should know the art of managing people. Ultimately, a manager has to get the work done from people. He should handle people tactfully. He should focus on goals and also establish good human relations. He should have some characteristics, which can help him in winning confidence of people. A true manager should be a person, who can make people work for the objectives of the organisation and at the same time feel passionate for those goals. If a person is not able to handle people well, the ultimate outcome will be the case similar to Pravesh in this case, who had to be removed (due to continous complaints).

(c) Team building is central in the growth and development of an organisation Effective teams are those which focus on goals, set positive work norms and try to cultivate an environment for development of a positive work culture. A good organisation is one, where people are trained to work in team and a culture for shared responsibility is developed.

Kalyani Electronics Corporation Ltd., recently diversified Its activities and started producing computers. It employed personnel at the lower level and middle level. It has received several applications for the post of Commercial Manager-Computer Division. It could not decide upon the suitability of the candidate to the position, but did find that Mr. Prakash is more qualified for the position than other candidates. The Corporation has created a new post below the cadre of General Manager i.e., Joint General Manager and decided Mr. Prakash to join the Corporation as Joint General Manager. Mr. Prakash agreed to it viewing that he will be considered for General Managers position based on his performance. Mr. Anand, the Deputy General Manager of the Corporation and one of the candidates for General Manager’s position was annoyed with the management’s practice. But, he wanted to show his performance record to the management at the next appraisal meeting. The management of the Corporation asked Mr. Sastry, General Manager of Televisions Division to be the General Manager in-charge of Computer Division for some time, until a new General Manager is appointed. Mr. Sastry wanted to switch over to Computer Division in view of the prospects, prestige and recognition of the position among the top management of the Corporation. He viewed this assignment as a chance to prove his : performance. The Corporation has the system of appraisal of the superiors performance by the subordinates. The performance of the Deputy General Manager, Joint General Manager and General Manager has to be appraised by the same group of the subordinates. Mr. Prakash is a stranger to the system as well as its Modus Operandi. Mr. Sastri and Mr. Anand were competing with each other in convincing their subordinates about their performance and used all sorts of techniques for pleasing them like promising them a wage hike, transfers to the job of their Interest, promotion etc. However, these two officers functioned in collaboration with a view to pull down Mr. Prakash. They openly told their subordinates that a stranger should not occupy the ‘chair’. They created several groups among employees like pro-Anand’s group, pro-Sastry’s group, Anti-Prakash and Sastry Group, Anti-Ariand and Prakash group.

Mr. Prakash has been watching the proceedings calmly and keeping the management In touch with all these developments. However, Mr, Prakash has been quite work-conscious and top management found his performance under such a political atmosphere to be satisfactory. Prakash’s pleasing manners and way of maintaining human relations with different lewels of employees did, however, prevent an anti-Prakash wave in the company. But in view of the politicalisation, there is no strong pro-Prakash’s group either.

Management administered the performance appraisal technique and the subordinates appraised the performance of all these three managers. In the end, surprisingly, the workers assigned the following overall scores - Prakash : 560 points, Sastry: 420 points, and Anand : 260 points

CASE : 3 :

The ABC Manufacturing Company is a metal working plant under the direction of a plant manager who is known as a strict disciplinarian. One day a foreman noticed Bhola, one of the workers, at the time-clock punching out two cards his own and the card of Nathu, a fellow worker. Since it was the rule of the company that each man must punch out his own card, the foreman asked Bhola to accompany him to the Personnel Director, who interpreted the incident as a direct violation of a rule and gave immediate notice of discharge to both workers. The two workers came to see the Personnel Director on the following duy. Nathu claimed innocence on the ground that he had not asked for his card to be punched and did not know at the time that it was being punched. He had been offered a ride by a friend who had already punched out and who could not wait for him to go through the punch-out procedure. Nathu was worried about his wife who was ill at home and was anxious to reach home as quickly as possible. He planned to take his card to the foreman the next morning for reinstatement, a provision sometimes exercised in such cases. These circumstances were verified by Bhola. He claimed that he had punched Nathu's card the same time he punched his own, not being conscious of any wrongdoing.

The Personnel Director was inclined to believe the story of the two men but did not feel he could reverse the action taken. He recognized that these men were good workers and had good records prior to this incident. Nevertheless, they had violated a rule for which the penalty was immediate discharge. He also reminded them that it was the policy of the company to enforce the rules without exception.

A few days later the Personnel Director, the Plant Manager, and the Sales Manager sat together at lunch. The Sales Manager reported that he was faced with the necessity of notifying one of their best customers that his order must be delayed because of the liability of one department to conform to schedule. The department in question was the one from which the two workers had been discharged. Not only had it been impossible to replace these men to date, but disgruntlement over the incident had led to significant decline in the cooperation of the other workers. The Personnel Director and the Sales Manager took the position that the discharge of these two valuable men could have been avoided if there had been provision for onsidering the circumstances of the case. They pointed out that the incident was costly to the company in the possible loss of a customer, in the dissatisfaction within the employee group, and in the time and money that would be involved in recruiting and training replacements. The Plant Manager could not agree with this point of view. "We must have rules if we are to have efficiency; and the rules are no good unless we enforce them. Furthermore, if we start considering all these variations in circumstances, we will find ourselves loaded down with everybody thinking he is an exception." He admitted that the grievances were frequent but countered with the point that they could be of little consequence if the contract agreed to by the union was followed to the letter.

Questions

(a) Identify the core issues in the case

(b) Place yourself in the position of the Personnel Director. Which of the following courses of action would you have chosen and why ?

(i) Would you have discharged both men ?

(ii) Would you have discharged Bhola only ?

(iii) Would you have discharged Nathu only ?

(iv) Would you have discharged neither of them ? Justify your choice of decision.

(c) What policy and procedural changes would you recommend for handling such cases in future ?

.

solution :

this is a case of discipline. Organisations have to maintain discipline and order. They have to enforce their rules and regulations. They have to be very careful in implementing their decisions also. The decisions must be evaluated in terms of their long term consequences to the organisation. In this case, although Personnel director and plant manager are right, yet, it is equally important that considering the commitment and intention of the two workers, they should not be discharged. In the law we say that intentions are very important. In this case, both the workers are excellent, and seem to have no intention to violate the rules.

The manager who takes such decisions must discuss this matter with senior executives and other concerned executives before taking such decision. It would have been better to form a committee to discuss this matter and give the workers a chance to represent their case to the committee. They could have considered other options possible also :

1. discharge but allowing the workers to apply afresh to be considered for fresh appointment (thus loosing the seniority)

2. suspension for 1 month or so, so that a better decision could be taken after 1 month and the workers would have also received punishment

3. monetary penalty

LOSING A GOOD MAN

Sundar Steel Limited was a medium-sized steel company manufacfuring special steels of various types and grades. It employed 5,000 workers and 450 executives.

Under the General Manager operation, maintenance, and headed by a chief. The Chief of and under him Mukherjee Maintenance Engineer. The total was 500 workers, 25 executives, (Production), there were services groups, each Maintenance was Shukla was working as the strength of Maintenance and 50 supervisors.

Chatterjee was working in Maintenance as a worker for three years. He was efficient. He had initiative and drive. He performed his duties in a near perfect manner. He was a man of proven technical ability with utmost drive and dash. He was promoted as Supervisor. Chattejee, now a Supervisor, was one day passing through the Maintenance Shop on his routine inspection. He found a certain worker sitting idle. He pulled him up for this. The worker retaliated by abusing him with filthy words. With a grim face and utter frustration, Chatterjee reported the matter to Mukherjee. The worker who insulted Chatterjee was a "notorious character" , and no supervisor dared to confront him. Mukherjee took a serious view of the incident and served a strong warning letter to the worker. Nothing very particular about Chatterjee or from him came to the knowledge of Mukherjee. Things were moving smoothly. Chatterjee was getting along well with others But after about three years, another serious incident took place. A worker came drunk to duty, began playing cards, and using very filthy language. When Chatterjee strongly objected to this, the worker got up and slapped Chatterjee. Later, the worker went to his union - and reported that Chatterjee had assaulted him while he was performing his duties.

Chatterjee had no idea that the situation would take such a turn. He, therefore, never bothered to report the matter to his boss or collect evidence in support of his case.

The union took the case to Shukla and prevailed over him to take stern action against Chatterjee. Shukla instructed Mukherjee to demote Chatterjee to the rank of a worker. Mukherjee expressed his apprehension that in such a case Chatterjee will be of no use to the department, and.the demotion would adversely affect the morale of all sincere and efficient supervjsors. But Chatterjee was demoted.

Chatterjee continued working in the organisation with all his efficiency, competence, and ability for two months. Then he resigned stating that he had secured better employment elsewh ere. Mukherjee was perturbed at this turn of events. While placing Chatterjee's resignation letter before Shukla, he expressed deep concern at this development.

Shukla called Chief of Personnel for advice on this delicate issue. The Chief of Personnel said, "l think the incident should help us to appreciate the essential qualification required for a successful supervisor. An honest and hardworking man need not necessarily prove to be an elfective supervisor. Something more is required for this as he has to get things done rather than dohimself." Mukherjee said, "l have a high opinion of Chatterjee. He proved his technical compe tence and was sincere at his work. Given some guidance on how to deal ,with the type of persons he had to work with, the sad situation could h.ave been avoided." Shukla said, "l am really sorry to lose Chatterjee, He was very honest and painstaking in his work. But I do not know how I could have helped him; I wonder how he always managed to get into trouble with workers. we know they are illiterates and some of them are tough. But a supervisor must have the ability and presence of mind to deal with such men. I have numerous supervisors, but I never had to teach anybody how to supervise his men."

Questions :

(a) Identify the problems in this case.

(b) Do you think the decision taken by shukla is in keeping with the faith, trust and creating developmental climate in the organisation ? Critically evaluate

(c) How would you help in improving rough and tough behaviour of employees ?