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Managerial Economics
Case Study 1: Economic Analysis of Organization ABC
Organization ABC
was one of the leading organizations in manufacturing soaps. After a certain
point of time, the organization found that there was an increase in its cost
and reduction in profits. However, the economy of the nation was at boom. Apart
from this, the manufacturing industry was also enjoying high profits.
Therefore, Chief Executive Officer (CEO) of the organization decided to take
suggestions from economists regarding the deteriorating condition of the
organization. The economists first analyzed the problem and collected relevant
data. They found that the price of the organization’s product was quite high as
compared to the market price. Moreover, substitute products were easily
available in the market. Therefore, consumers were not willing to purchase
ABC’s product due to the availability of similar products at cheap prices. To
overcome the problem, economists suggested the organization to lower down its
prices and observe the effect on demand. In addition, economists recommended
the organization to organize promotional campaigns. Based on suggestions, the
organization reduced the prices by 5% and organized various promotional
campaigns, As a result, the demand for the organization’s product increased by
3%. This helped the organization to come back to its previous position.
Questions:
Q1. Which
economic theory is used to solve the problem in the case study?
Q2. Which
economics concept is used in this case study?
Case Study 2: Kingfisher Airlines Pricing Strategies
Kingfisher
Airlines (KFA), India-based airline group, is a wholly owned subsidiary of
United Breweries (UB) Group. The parent organization is India’s largest
producer of beer and established its operations in India in 2005. KFA is
positioned as a budget airline rather than a low cost carrier airline. The
reason is that the low cost carrier airline is treated as low quality and
delayed flight service provider. The passengers of KFA are treated as honored
guests and the flight is not referred as a journey but an experience of a
lifetime. During the launch, Vijay Mallya, chairman and Chief Executive Officer
(CEO) of KFA, said “Kingfisher Airlines will have a ‘Fly the Good Times’
approach and this will reflect in the experience what we will offer to
passengers. With costs lower than economy class travel on full service airlines
and marginally more than the bus services type low cost competition, Kingfisher
Airlines offers a far better value proposition. The aircraft and service will
reflect the Kingfisher lifeline imagery and credibility that has been built
over the years.” KFA’s strategy is to differentiate itself from other airlines
by providing value-added air travel services at reasonable fares. KFA offers
three kinds of services for different types of customers namely Kingfisher
First for business-class customers, Kingfisher Class for upper-class customers,
and Kingfisher Red for middle-class and lower-class customers. It provides a
fun-filled experience with in–flight entertainment systems and well-designed
interiors. KFA provides quality services, screens and headphones, specialized
meals and beverages, and free gifts to guests. In the year of its launch, KFA
was voted as the best new airline of the year. KFA has an advantage of
familiarity of brand with the customers. Thus, it does not conduct marketing
and promotional activities. The pricing strategy of the aviation industry is
also affected by the environment-related factors, such as crude oil prices,
dollar rates, and competition. When KFA was launched, it was called as the
budget airline as the ticket prices charged, were lower than its competitors,
such as Indian Airlines, Jet, and Sahara. The ticket prices were 25% lower than
Jet Airways and around `20% more than Air Deccan. Jet Airways brought down its
fares to compete with KFA when it took over Sahara Airlines. These competitive
price pressures lead KFA to provide more value-added services, including mobile
updates and home delivery of air tickets. According to Mallya, “We are offering
our passengers’ more than just value-based fares; we will offer a complete
lifestyle experience.” In this high competition, KFA has positioned itself as a
successful airline in a shorter period of time. The targeted segments of KFA
are high and middle income customers. It also targeted the youth and high
lifestyle segments. Mostly, the targeted population is modern and trendy that
is looking for a great flying experience. It has been termed as a true value
carrier and awarded as the prestigious 5- Star Airline Status by Skytrax, which
is the world’s leading independent research and quality evaluation body for
airlines.
Questions:
Q1. What pricing
strategy was followed by Kingfisher to complete in the aviation industry? Was
it competition or cost-based strategy?
Q2. Do you think
that pricing acts as a differentiating factor in the aviation industry?
Case Study 3: The Business Cycle of ABC
Country
ABC country was
facing a downturn in its economy. All the economic factors, such as production,
prices, savings, and investment, of the country started decreasing. In the
initial phases of downturn, businessmen were not able to recognize it. They
considered it minor fluctuations in the economy, which could be easily handled
by market forces. Therefore, they continued to produce goods and services at
the same rate as they were doing earlier. As a result, the supply of goods and
services exceeded the demand. Gradually, businessmen realized that they had
overinvested. This problem of one industry spread in other industries, due to
interlink among different industries. At this time, businessmen stopped any
type of further investment in consumer and capital goods. Consequently, they
started reducing the cost on labor, machinery, furniture and other factors of
production. As a result, various economic factors, such as consumption,
savings, and employment, started decreasing. In addition, debtors were not able
to repay their debts and creditors were not ready to lend more money. Apart
from this, individuals and businesses were not ready to invest in stock
markets. Many weak organizations left industries or dissolved. At this point of
time, the economy had reached its bottom level and from this point, individuals
and organizations tried to become optimistic. Therefore, organizations started
hiring employees at low wages. Employees accepted the amount of salary provided
to them by organizations because they wanted to fulfill their basic needs. In
addition, consumers also had an opinion that the price of products and services
would not fall now. Therefore, they started increasing their consumption rate.
This consumption rate stimulated the demand and consequently the production. As
a result, the investment and bank credit also increased. The economy started
running back on the growth path.
Questions:
Q1. What are the
phases of business cycle explained in the case study?
Q2. What are the
main causes of recession in ABC country?
Case Study 4: Russian Economy from 1990 to
2007
The Russian
Federation (Russia) faced several economic problems when it was formed after
the dissolution of Union of Soviet Socialist Republic (USSR) or the Soviet
Union. Therefore, Boris Yeltsin the first President of Russia implemented
various measures for the economic growth of Russia, such as stabilization
policies and economic restructuring. These measures helped the Russian economy
to become market-focused economy from a centrally planned economy. These
measures are briefly discussed in the present case study. In addition, the case
study also analyzes the policy measures presented by Vladimir Putin, Russia’s
second President. It also focuses on the economic conditions of Russia in the
Presidency of Boris Yeltsin and Vladimir Putin and the impact of their policies
on the economy. Towards the end, the case study highlights the challenges faced
by the Russian economy. Several Russian officials and economists have described
the economic conditions of Russia in different time period as follows:
According to Mark Spelmen, Accenture Energy Analyst, in July 2007, “Everyone is
focusing on the fact that there are more billionaires in Moscow than there are
in London, but what we’re actually also seeing is that the disposable income of
skilled people in Russia is going up. You see a lot of infrastructure a lot of
housing, shopping malls. The commodity boom is now percolating beyond Moscow.”
According to prominent Russian intellectuals in the late 1990s, “The
catastrophe has run its course. The economic policy of Yeltsin’s and Chernomyrdin’s
aides has made a small section of the farmer communist nomenclature and of the
“new Russians” unbelievably rich, plunged most of the nation’s industry into
paralysis, and reduced the majority of the population to poverty. As far as
property ownership is concerned, the gap between the rich and poor is much
deeper now than that which led to the [1917] October [Bolshevik] Revolution.”
Earlier to 1991, Russia was considered as the biggest republic with the name
Russian Soviet Federative Socialist Republic (RSFSR) in Soviet Union. In
1990-1991, the inflation rate in Russia was very high and there was a shortage
of supply in every industry. At the time, the GDP of Russia shows a decline of
17% and retail prices reached to 140%. The political conditions of Russia were
also not good at this time. As a result, the Soviet Union was dissolved in
1991. After that, Boris Yeltsin was elected as the President of Russia. Boris
Yeltsin took several measures to transform the Russian economy in the
market-based economy. In 1991, Boris Yeltsin along with his advisors and an
economist, Yegor Gaidar implemented certain measures for bringing up the
Russian economy form inflation. The measures taken by him were stabilization
measures and economic restructuring. The stabilization measures involved
decreasing the government budget deficit, increasing government revenues, and
controlling the supply of money by subsidizing credit provided to business
persons. In addition, he enforced price control policies, made several
amendments in tax policies, and increased privatization. In the initial stages,
the policies made by Boris Yeltsin were not able to achieve its goals. However,
with the introduction of monetary and fiscal policies, the government was able
to implement such measures and achieved its goals and objectives. In 1996,
Boris Yeltsin was again elected as the President of Russia. After that, Russia
faced a situation of decrease in the foreign exchange reserves and the economy
started showing another decline. In 1998, Russian economy experienced a
financial crisis in which its currency, ruble, showed a decline of 75%. The
financial crisis in Russia made people against Boris Yeltsin; as a result, he
faced high opposition in the parliament. The State Duma elections of 1999 and
Presidential elections of 2000 brought a major change in the Russian politics.
Vladimir Putin was elected as the President of Russia on 2000. The Parliament
of Russia started supporting policies introduced by Vladimir Pultin, the
President of Russia and Mikhail Kasyanov, the Prime Minister of Russia. Both of
them look various legislative initiatives and measures to transform the Russian
economy in the market-based economy. In 2007, the Gross Domestic Product (GDP)
of Russia was above $1 trillion. In the mid of 2000s, the growth of Russian
economy was very fast that is mostly contributed by the growth in domestic
energy industry of Russia. According to various Russian analysts, the major
source of income for the Russian economy was oil exports. Therefore, the Russian
economy showed a drastic change with the change in the prices of oil.
Therefore, the decline in oil prices was considered as a risk factor for the
sustainability of the Russian economy. According to the report of World Bank in
2007, Russia should have taken measures to control inflation as the global
economy was going to face an inflationary condition, which might affect the
Russian economy. However, Russia was the least affected country in the global
economic slowdown of 2007. It is because of the fact that the major
contribution in GDP of Russia came from its fossil fuels and natural resources
that were hardly affected by recession. In addition, Russian trade with United
States, which is the source of financial crisis of 2007, was very limited.
Questions:
Q1. What are the
measures adopted by Boris Yeltsin to overcome inflation?
Q2. What are the
measures used by a government for controlling inflation?
Case Study 5: Competition in Magazine
Industry
Earlier, there
were only few organizations operating in the magazine publication industry. At
that time, it became a trend to provide free gifts, audio and video CDs, DVDs,
and scented candles, to customers along with magazines. The concept of free
gifts was introduced to increase customer base. However, after some time, it
became a problem for the entire industry as he cost of production was
increasing. In such a situation, some organizations stopped providing free
gifts, so that the cost of production could be reduced. Consequently, these
organizations lost their customers. This is because at this point, customers
preferred free gifts with magazines. On the other hand, some organizations
increased the prices of magazines to overcome the cost of production. However,
these organizations did not succeed in their strategy, as the customers were
not willing to buy magazines at higher prices. Even some of the organizations
reduced the prices of magazines to increase the number of customers, generate
revenue, and overcome the production cost. As a result, rest of the
organizations in the industry also reduced their prices to earn profit and
minimize cost of production. This led to heavy losses for organizations that
initially reduced the prices. Therefore, organizations were bound to provide
magazines at fixed rate along with free gifts.
Questions:
Q1. What type of
market structure is prevailing in the magazine industry? Why?
Q2. What are the
problems faced by organizations in the magazine industry due to oligopoly?
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Business Ethics
Case 1: KFC
(Marks 20)
Abstract
The case
highlights the ethical issues involved in Kentucky Fried Chicken's (KFC)
business operations in India. KFC entered India in 1995 and has been in midst
of controversies since then. The regulatory authorities found that KFC's
chickens did not adhere to the Prevention of Food Adulteration Act, 1954.
Chickens contained nearly three times more monosodium glutamate (popularly
known as MSG, a flavor enhancing ingredient) as allowed by the Act. Since the
late 1990s, KFC faced severe protests by People for Ethical Treatment of
Animals (PETA), an animal rights protection organization. PETA accused KFC of
cruelty towards chickens and released a video tape showing the ill-treatment of
birds in KFC's poultry farms. However, undeterred by the protests by PETA and
other animal rights organizations, KFC planned a massive expansion program in
India.
BACKGROUND OF
KENTUCKY FRIED CHICKEN
KFC is based in
Louisville, Kentucky, and is the world’s most popular chicken restaurant chain.
Founded by Colonel Harland Sanders in the early 1930s by cooking & serving
food for hungry travelers. In 1952 Sanders started franchising his chicken
business & named it as Kentucky Fried Chicken. KFC is part of Yum! Brands,
Inc., the world's largest restaurant company in terms of system restaurants,
with more than 36,000 locations around the world. Yum! Brands is run by David
Novak, Chairman & CEO. KFC operates more than 5,200 restaurants in the
United States and more than15,000 units around the world.109 countries and
territories around the world. Every day, more than 12 million customers are
served at KFC restaurants. KFC Division is run by Cheryl Bach elder, President
and Chief Concept Officer.
KFC’s Entry in
INDIA
KFC was the
first fast food multinational to enter INDIA, after the economic liberalization
policy of the Indian Govt. in early 1990s. KFC received permission to open 30
new outlets across the country & Opened first fast food outlet in Bangalore
in June 1995 by targeting upper middle class population. PepsiCo planned to
open 60 KFC and Pizza Hut outlets in next 7 yrs in the country.
Issues:
Understand the
significance of cultural, economic, regulatory and ecological issues while
establishing business in a foreign country. Appreciate the need for protecting
animal rights in developed and developing countries like India. Understand the
importance of ethics in doing business. Examine the reasons for protests of
PETA (People for Ethical Treatment of Animals). Identify solutions for KFC's
problems in India
Problems for KFC
·
Protests by
farmers led by the Karnataka Rajya Ryote Sangha (KRRS) & the farmer’s
leader was Nanjundaswamy who used the term “junk food” against KFC.
· Protests by
cultural & Economic activists.
· Protests by
PETA in the late 1990s.
· Support of
celebrities in against of KFC.
SWOT ANALYSIS
Strengths
· Understand the
Culture, Regulatory & Ecological issues.
· Understand the
importance of Ethics in doing business
· Examine the
reason for protests of PETA
· Identify
Solutions for KFC‟S Problems in
India.
Weaknesses
· Non Ethical
business practice.
· PETA Protest.
· KRRS Protest.
· MSG flavour in
chicken.
Opportunity
· Retail boom in
India.
· Indians youth
are adopting western culture.
· Indian
Economy.
· Cosmopolitan
Rapid Development.
Threats
· MSG chicken
flavour.
· PETA like
organizations.
· Political
parties Protesting for junk foods.
· Protest
support from famous Personalities like Anil Kumble, Aditi Govithrikar, John
Abraham etc.
Questions:
1. Since its
entry in India in 1995, KFC has been facing protests by cultural & Economic
activists and farmers. What are the reasons for these protests?
2. Do you think
in the light of fierce competition, it is justified for business organizations
not to give importance to ethical values at the cost of making profits? Why or
Why not?
CASE 2: THE NEW
MARKET OPPORTUNITY (Marks 20)
FACTS OF THE
CASE China was eager to enter joint ventures with foreign companies to
construct and operate automobile manufacturing plants inside China. The plants
would not only manufacture cars to supply China’s new internal market, but
could also make cars that could be exported for sale abroad and would be sure
to generate thousands of new jobs. The Chinese government specified that the
new car had to be priced at less than $5000, be small enough to suit families
with a single child (couples in China are prohibited from having more than one
child), rugged enough to endure the poorly maintained roads that criss-crossed
the nation, generate a minimum of pollution, be composed of parts that were
predominantly made within China, and be manufactured through joint – venture
agreements between Chinese and foreign companies. Experts anticipated that the
plants manufacturing the new cars would use a minimum of automation and would
instead rely on labor – intensive technologies that could capitalize on China’s
cheap labor. China saw the development of a new auto industry as a key step in
its drive to industrialize its economy. The Chinese market was an irresistible
opportunity for General Motors, Ford and Chrysler, as well as for the leading
Japanese, European and Korean automobile companies. With a population of 1.2
billion people and almost double digit annual economic growth rates, China
estimated that in the next 40 years between 200 and 300 million of the new
vehicles would be purchased by Chinese citizens. Already cars had become a
symbol of affluence for China’s new rising middle class, and a craze for cars
had led more than 30 million Chinese to take driving lessons despite that the
nation had only 10 million vehicles, most of them government – owned trucks.
Environmentalists, however, were opposed to the auto manufactures’ eager rush
to respond to the call of the Chinese government. The world market for energy,
particularly oil, they pointed out, was based in part on the fact that China,
with its large population, was using relatively low levels of energy. Critics
pointed out that if China were to eventually have as many cars on the road per
person as Germany does, the world would contain twice as many cars as it
currently does. No matter how “ pollution – free” the new car design was, the
cumulative environmental effects of that many more automobiles in the world
would be formidable. Even clean cars would have to generate large amounts of
carbon dioxide as they burned fuel, thus significantly worsening the greenhouse
effect. Engineers pointed out that it would be difficult, if not impossible, to
build a clean car for under $5000. Catalytic converters, which diminished
pollution, alone cost over $200 per car to manufacture. In addition, China’s
oil refineries were designed to produce only gasoline with high levels of lead.
Upgrading all its refineries so they could make low-lead gasoline would require
an investment China seemed unwilling to make.
IDENTIFICATION
OF ISSUES / PROBLEMS IN THE CASE
China was eager
to enter joint ventures with foreign companies to construct and operate
automobile manufacturing plants inside China. The Chinese government had
specified that the new car had to be priced at less than $5000, be small enough
to suit families with a single child (couples in China are prohibited from
having more than one child), rugged enough to endure the poorly maintained
roads that criss-crossed the nation, generate a minimum of pollution, be
composed of parts that were predominantly made within China, and be
manufactured through joint – venture agreements between Chinese and foreign
companies. Environmentalists, however, were opposed to the auto manufactures.
Engineers pointed out that it would be difficult, if not impossible, to build a
clean car for under $5000 because Catalytic converters, which diminished
pollution, alone cost over $200 per car to manufacture. In addition, China’s
oil refineries were designed to produce only gasoline with high levels of lead.
Upgrading all its refineries so they could make low-lead gasoline would require
an investment China seemed unwilling to make. Many government officials were
also worried by the political implications of having China become a major
consumer of oil. If China were to increase its oil consumption, would have to
import all its oil from the same countries that other nations relied on, this
would create large political, economic and military risks.
INDIVIDUAL
OPINION
I think China
should enter joint ventures with foreign companies to construct and operate
automobile manufacturing plants. This would not only generate the Chinese
economy to boost up but will also generate a lot of employment opportunities to
the Chinese population. Also having a car which is priced at less than $5000,
will suit families with a single child. So the requirement will also not
fulfill only the middle class but also the poor class in some time to come.
Also looking from the point of view that the arrangement for making new cars
will not only cater to the Chinese internal market but also be exported to
other countries. This will get foreign exchange for China which will enhance
the economy.
Questions:
1. In your
judgment, is it wrong, from an ethical point of view, for the auto companies to
submit plans for an automobile to China? Explain your answer?
2. Of the
various approaches to environmental ethics outlined in this chapter, which
approach sheds most light on the ethical issues raised by this case? Explain
your answer.
3. Should the US
government intervene in any way in the negotiations between US auto companies
and the Chinese government? Explain.
SECTION B (Marks
40)
Attempt any 04
questions:
1. Distinguish
ethical decision making from other practical decision situations.
2. Discuss the
role of mission statements and codes in creating an ethical corporate culture.
3. Describe the
three key concerns of ethical analysis of marketing issues.
4. Explain why
ethics is important in the business environment.
5. Discuss the
need for ethics in performance appraisal.
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