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
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 (
Western Region (Mumbai) Mumbai, Pune, Ahmedabad,
Panaji,
992
Northern Region (
857
Southern Region (
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
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?
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