Managerial economics
 

Managerial economics

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Managerial economics Managerial economics Document Transcript

  • SUBJECT: Managerial Economics Marks: 100 CASE – 1 Indian Stock Market: Does it Explain Perfect Competition? The stock market is one of the most important sources for corporates to raise capital. A stock exchange provides a market place, whether real or virtual, to facilitate the exchange of securities between buyers and sellers. It provides a real time trading information on the listed securities, facilitating price discovery. Participants in the stock market range from small individual investors to large traders, who can be based anywhere in the world. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor. The other type of exchange is of a virtual kind, composed of a network of computers and trades are made electronically via traders. By design a stock exchange resembles perfect competition. Large number of rational profit maximisers actively competing with each other, trying to predict future market value of individual securities comprises the main feature of any stock market. Important current information is almost freely available to all participants. Price of individual security is determined by market forces and reflects the effect of events that have already occurred and are expected to occur. In the short run it is not easy for a market player to either exit or enter; one cannot exit and enter for few days in those stocks which are under no delivery. For example Tata Steel was in no delivery from 29/10/07 to 02/11/07. Similarly one cannot enter or exit on those stocks which are in upper or lower circuit for few regular trading sessions. Therefore a player has to depend wholly on market price for its profit maximizing output (in this case stock of securities). In the long run players may exit the market if they are not able to earn profit, but at the same time new investors are attracted by rise in market price. As on 01/11/07 total market capital at Bombay Stock Exchange (BSE) is $1589.43 billion (source: Business Standard, 1/11/2007); out of this individual investors account for only $100bn. In spite of the fact that individual investors exist in a very large number, their capital base is less than 7% of total market capital; rest of capital is owned by foreign institutional investor and domestic institutional investors (FIIs and DIIs), which are very small in number. Average capital owned by a single large player is huge in comparison to small investor. This situation seems to have prompted Dr Dash of BSE to comment ‘The stock market activity is increasingly becoming more centralized, concentrated and non competitive, serving interest of big players only.” Table 2 shows the impact of change in FII on National Stock Exchange movement during three different time periods. Table 2: Impact of FIIs’ Investment on NSE Wave Date Nifty close Change in Nifty Index FLLS Net Investment (Rs.Cr.) Change in Market Capitalization (Rs.Cr.) Wave 1 From To 17/05/04 26/10/05 1388.75 2408.50 1019.75 59520 5,40,391 Wave 2 From To 27/10/05 11/05/06 2352.90 3701.05 1348.15 38258 6,20,248 Wave 3 From To 12/05/06 13/06/06 3650.05 2663.30 -986.75 -9709 -4,60,149 1
  • SUBJECT: Managerial Economics Marks: 100 By design, an Indian Stock Market resembles perfect competition, not as a complete description (for no markets may satisfy all requirements of the model) but as an approximation. Questions 1. Is stock market a good example of perfect competition? Discuss. 2. Identify the characteristics of perfect competition in the stock market setting. 3. Can you find some basic aspect of perfect competition which is essentially absent in stock market? CASE – 2 The Indian Audio Market The Indian audio market pyramid is featured by the traditional radios forming its lower bulk. Besides this, there are four other distinct segments: mono recorders (ranking second in the pyramid), stereo recorders, midi systems (which offer the sound amplification of a big system, but at a far lower price and expected to grow at 25% per year) and hi-fis (minis and micros, slotted at the top end of the market). Today the Indian audio market is abound with energy and action as both national and international majors are trying to excel themselves and elbow the others, ushering in new concepts, like CD sound, digital tuners, full logic tape deck, etc. The main players in the Indian audio market are Philips, BPL and Videocon. Of these, Philips is one of the oldest and is considered at the leading national brands. In fact it was the first company to introduce a range of international products such as CD radio cassette recorder, stand alone CD players and CD mini hi-fi systems. With the easing of the entry barriers, a number of new international players like Panasonic, Akai, Sansui, Sony, Sharp, Goldstar, Samsung and Aiwa have also entered the arena. This has led to a sea of changes in the industry and resulted in an expanded market and a happier customer, who has access to the latest international products at competitive prices. The rise in the disposable income of the average Indian, especially the upper- income section, has opened up new vistas for premium products and has provided a boost to companies to launch audio systems priced as high as Rs. 50,000 and beyond. Pricing across Segments Super Premium Segment: This segment of the market is largely price-insensitive, as consumers are willing to pay a premium in order to obtain products of high quality. Sonodyne has positioned itself in this segment by concentrating on products that are too small for large players to operate in profitably. It has launched a range of systems priced between Rs. 30,000 to Rs. 60,000. National Panasonic has launched its super premium range of systems by the name of Techniques. Premium Segment: Much of the price game is taking place in this segment, in which systems are priced around Rs. 25,000. Even the foreign players ensure that the pricing is competitive. Entry 2
  • SUBJECT: Managerial Economics Marks: 100 barriers of yester years compelled the demand by this segment to be partially met by the grey market. With the opening up of the market, the premium segment is witnessing a rapid growth and is currently estimated to be worth Rs. 30 crores. Growth of this segment is also being driven by consumers who want to upgrade their old music systems. Another major stimulating factor is the plethora of financing options available, bringing more and more consumers to the market. Philips has understood the Indian listener well enough to dictate the basic principles of segmentation. It projects its products as high quality at medium price. In fact, Philips had successfully spotted an opportunity in the wide price gap between portable cassette players and hi-fi systems and pioneered the concept of a midi system (a three-in-one containing radio, tape deck and amplifier in one unit). Philips has also realized that there is a section of the rich consumer which values not just power but also clarity and is willing to pay for it. The pricing strategy of Philips was to make the most of its image as a technology leader. To this end, it used non-price variables by launching of a range of state of art machines like the FW series, and CD players. Moreover, it came up with the punch line in its advertisements as, “We Invent For You”. BPL stands second only to Philips in the audio market and focuses on technology as its USP. Its kingpin in the marketing mix is its high technology superior quality product. It is thus at being the product-quality leader. BPL’s proposition of fidelity is translated in its punchline for its audio systems as, ‘e-fi your imagination’ (d-fi stands for digital fidelity). The company follows a market skimming strategy. When a new product was launched, it was placed in the top end of the market, and priced accordingly. The company offers a range of products in all price segments in the market without discounting the brand. Another major player, Videocon, has managed to price its products lower even in the premium segment. The success of the Powerhouse (a 160 watt midi launched by Philips in 1990) had prompted Videocon to launch the Select Sound range of midi stereo systems at a slightly lower price. At the premium end, Videocon is making efforts to upgrade its image to being “quality-driven” by associating itself with the internationally reputed brand name of Sansui from Japan, and following a perceived value pricing method. Sony is another brand which is positioning itself as a premium product and charges a higher price for the superior quality of sound it offers. Unlike indulging into price wars, Sony’s ad-campaigns project the message that nothing can beat Sony in the quality and intensity of sound. National Panasonic is another player that has three products in the top end of the market, priced in the Rs. 21,000 to Rs. 32,000 range. Monos and Stereos: Videocon has 21% share I the overall audio market, but has been a major player only in personal stereos and two-in-ones. Its history is written with instances where it has offered products of similar quality, but at much lower prices than its competitors. In fact, Videocon launched the Sansui brand of products with a view to transform its image from that of being a manufacturer of cheap products to that of being a company that primes quality, and also to obtain a share of the hi-fi segment. Sansui is being positioned as a premium brand, targeting the higher middle, upper income groups and also the sensitive middle class Indian consumer. The objective of Philips in this segment is to achieve higher sales volumes and hence its strategy is to expand its range and have a product in every segment of the market. The pricing method used by Philips in this segment is providing value for money. National Panasonic offers products in the lower end of the market, apart from the top of the range. In fact, it reduced the price of one of its small two-in-ones from Rs. 3,500 to Rs. 2,400, with the logic that a forte in the lower end of the market would help in building brand reliability across a wider customer base. The company is also guided by the logic that operating in the price sensitive region of 3
  • SUBJECT: Managerial Economics Marks: 100 the market will help it reach optimum levels of efficiency. Panasonic has also entered the market for midis. These apart, there also exists a sector in the Indian audio industry, with powerful regional brands in mono and stereo segments, having a market share of 59% in mono recorders and 36% in stereo recorders. This sector has a strong influence on price performance. Questions 1. What major pricing strategies have been discussed in the case? How effective these strategies have been in ensuring success of the company? 2. Is perceived value pricing the dominant strategy of major players? 3. Which products have reached maturity stage in audio industry? Do you think that product bundling can be effectively used for promoting sale of these products? CASE – 3 Automobile Industry in India: New Production Paradigm The Industry The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective of the economic resilience of the country. The automobile industry witnessed a growth of 19.35 percent in April-July 2006 when compared to April-July 2005. As per Davos Report 2006, India is largest three wheeler market in the world; 2nd largest two wheeler market; 4th largest tractor market; 5th largest commercial vehicle market and 11th largest passenger car market in the world and expected to be the seventh largest by 2016. India is among few countries that are showing a growth rate of 30 per cent in demand for passenger cars. The industry currently accounts for nearly 4% of the GNP and 17% of the indirect tax revenue. The well developed Indian automotive industry produces a wide variety of vehicles including passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles, scooters, motorcycles, mopeds, three wheelers, tractors etc. Economic liberalization over the years has made India as one of the prime business destination for many global automotive players, including international giants like Ford, Toyota, GM and Hyundai have also made their presence with a mark. As per another report, every commercial vehicle manufactured, creates 13.31 jobs, while every passenger car creates 5.31 jobs and every two-wheeler creates 0.49 jobs in the country. Besides, the automobile industry has an output multiplier of 2.24, i.e., for every additional rupee of output in the auto industry, the overall output of the Indian economy increases by Rs. 2.24. The India automotive sector has a presence across all vehicle segment and key components. In terms of volume, two wheelers dominate the sector, with nearly 80 per cent share, followed by passenger vehicles with 13 per cent. At present, there are 12 manufacturers of passenger cars, 5 manufacturers of multi utility vehicles (MUVs), 9 manufacturers of commercial vehicles (CVs), 12 of two wheelers and 4 of three wheelers, besides 5 manufacturers of engines. Table: Vehicle Segment-wise Market Share (2005-06) 4
  • SUBJECT: Managerial Economics Marks: 100 Item Percent Share Commercial vehicles 3.94 Passenger vehicles 12.83 Two Wheelers 79.19 Three Wheelers 4.04 Total 100.00 Source: Report of Society of Indian Automobile Manufacturers (SIAM), 2006. Although the automotive industry in India is nearly six decades old, until 1982, there were only three manufacturers – M/s Hindustan Motors, M/s Premier Automobiles and M/s Standard Motors in the motorcar sector. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models. The Company Maruti Udyog Ltd. (MUL) has become Suzuki Motor Corporation’s R&D hub for Asia outside Japan. Maruti introduced upgraded versions of the Esteem, Maruti 800 and Omni, completely designed and styled inhouse. This followed the up gradation of WagonR and Zen models, done inhouse only a year before. Maruti engineers also worked with their counterparts in Suzuki Motor Corporation in the design and development of its new model, Swift. The company launched superior Bharat Stage III versions of most of its models, well before the Government deadline. Maruti also set up a Centre for Excellence with a corpus or Rs. 100 million. This was done in collaboration with suppliers, who contributed an additional Rs. 50 million. The Centre provides consultancy and training support to Maruti’s Suppliers and Sales Network to enable them to achieve standards in Quality, Cost, Service and Technology Orientation. Maruti has embarked upon this new project in collaboration with SMC for the manufacture of diesel engines, petrol engines and transmission assemblies for four wheeled vehicles. The project is being implemented in the existing Joint Venture Company viz. Suzuki Metal India Limited (renamed Suzuki Powertrain India Limited). Questions 1. Identify the most important factors of production in case of automobile industry. Also attempt to explain the relative significance of each of these factors. 2. What more information would you like to obtain in order to draw a production function for Maruti Udyog? Explain with logic. 3. Automobile industry is a good example of capital augmenting technical progress. Discuss. 5
  • SUBJECT: Managerial Economics Marks: 100 CASE – 4 From Wages to Packages: the Journey of Software Organizations across all industries are undergoing a shift in emphasis from tangible resources to valuable, rare and inimitable human resource in order to attain competitive advantage. Many leading organizations have started adopting an investment perspective towards their employees by moving from a traditional wage and salary system to compensation “packages”. The underlying reasons behind such a change include ensuring a motivational climate, encouraging efficiency and productivity for attainment of strategic goals, and gaining control over labour costs. Wage and salary system bears a strong relationship with the performance, satisfaction and attainment of goals of the employees of a firm. This has prompted companies to start offering full packages of monetary and non monetary rewards as compensation or wage/salary to their employees. Dimensions of Compensation Compensation affects a person economically, sociologically and psychologically. It also compensates for the opportunity cost and real cost occurring to the specific type of human resource in being in the present context. Proper management of compensation helps a firm procure, maintain and retain a productive workforce. A sound compensation package should encompass factors like adequacy of wages, social balance, supply and demand, fair comparison, equal pay for equal work and work measurement. The concept of adequacy can be disintegrated into two components: internal and external. The internal component can be linked with the concept of fair wages; it is the money wage adequate for an employee to maintain a decent standard of living. External adequacy, on the contrary, is in relation to comparable jobs in the same industry(s) with the same skill-set required. Besides the element of adequacy, compensation is instrumental in motivation. An equitable compensation package may increase employee motivation. Inequity, on the contrary, may motivate employees to take corrective actions, which may be harmful to the firm. Firms thus link compensation to performance appraisal to enhance motivation, and hence productivity. Compensation may also be looked upon as a controlling device to ensure that employees behave in particular manner. An organisation may choose to offer a higher package to a particular employee in order to allure another employee to perform better. Compensation in Software Let us now take you to the software industry, known in corporate history for adding new facets to realms of wage and salary administration. It is software that has introduced compensation as a multi- dimensional tool. Differentials in compensation packages among various levels of software 6
  • SUBJECT: Managerial Economics Marks: 100 professionals, focus on skill-based compensation, rewards essentially linked to performance and negotiability have all added new facades to compensation. In a recently conducted countrywide comprehensive survey of salary, Businessworld covered aspects like costs, compensation and benefits across 12 sectors of the Indian economy. The survey had revealed an arbitrage between high employee salaries overseas, with the low cost workforce in India. It has also found human resource contributing the largest component, namely 44 percent of the industry’s total cost. The annual entry-level salary has been revealed to range from Rs. 3.21 lakhs in the western part of the country to Rs. 5.23 lakhs in the north. The Businessworld survey has found that the weakening dollar has hit the margins of the Indian software industry, thus compelling software firms to rationalize on employee costs. As competition is intensifying, software organizations must focus on ‘added value’ of their employees, by encouraging them to increase their efforts and performance on a continuous basis. This can be achieved by an overhauling of the entire compensation packages, including basic salary, along with incentive systems (including increase in salary, performance bonuses, stock options and retirement packages). Apart from such core components, emphasis must also be given to redesigning non-monetary incentives like words of praise, special recognition, job security and autonomy in decision making. On the whole, all such parameters of compensation strategies should be directed towards providing the ability to reinforce desired behaviors, and also serve the traditional functions of attracting and maintaining a qualified workforce. Questions 1. Which factors, according to you, are prompting organizations to adopt a package instead of traditional salary? 2. Do you think package compensation is more suitable in modern globalised business? Can you draw some lessons from marginal productivity theory? 3. Do you think that the case supports the efficiency wage theory or bargaining theory? Give arguments in support of your logic. 7