JBIMS ConVoyage August 2011

JAMNALAL BAJAJ

Institute of Management Studies

ConVoyage Issue – August 2011

CONVOYAGE Aug ‘11

c o n s u l t i n g c l u b @ j b i m s . e d u

Contents:

1. Derivatives Market in inDia: an analysis …. 03

2. Marketing in PharMaCeutiCal inDustry …. 08

3. organizational strategy:

Centralization v/s DeCentralization …. 11

4. Case stuDy on Collins fooDs …. 14

5. WorD Puzzle – finanCe …. 20

6. Consulting fun …. 21

CONVOYAGE Aug ‘11


Derivatives Market in India: An Analysis

By

Abhijeet Gaikwad

MMS II, Finance, JBIMS

Background Derivatives in India are not new. Farmers used

to enter into Forward contracts to hedge risk

against their crops since long. However, there

was always a risk of the counter-party

defaulting on the contract (which remains even

today in case of OTC markets). India is a

conservative country and Indians are very

careful and cautious when it comes to matters

related to money. It has been traditionally

observed that Indians tend to resort to safe

ways of making money. For ex: keeping money

in bank deposits, PPF, NSC etc. However, that

outlook is slowly changing now. With the

knowledge base of the people increasing by the

day and owing to higher return on the money

in the capital markets, people have started

investing money in it. Derivatives market is no

different. As was discussed earlier, derivatives

are primarily used for hedging. With the

commencement of options, it is now possible to

limit one’s losses to a certain amount. Given

below is a snapshot of the evolution of

derivatives market in India.

Date Progress 14 December 1995 NSE asked SEBI for permission to trade index futures 18 November 1996 SEBI sets up L. C. Gupta Committee to draft a policy framework for index futures 11 May 1998 L. C. Gupta Committee submitted report 7 July 1999 RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps 24 May 2000 SIMEX hose Nifty for trading futures and options on an Indian index 25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading 9 June 2000 Trading of BSE Sensex futures commenced at BSE 12 June 2000 Trading of Nifty futures commenced at NSE 31 August 2000 Trading of futures and options on Nifty to commence at SIMEX June 2001 Trading of Equity index options at NSE July 2001 Trading of stock options at NSE 9 November 2002 Trading of single stock futures at BSE June 2003 Trading of Interest Rate futures at NSE 13 September 2004 Weekly options at BSE 1 January 2008 Trading of chhota(Mini) Sensex at BSE 1 January 2008 Trading of Mini Index futures & options at NSE 29 August 2008 Trading of currency futures at NSE 2 October 2008 Trading of currency futures at BSE 7 August 2009 BSE-USE form alliance to develop currency and interest rate derivatives markets February 2010 Launch of Currency futures on additional currency pairs 29 October 2010 Introduction of Currency options on USD INR Source: Compiled from BSE and NSE website

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As seen from the above snapshot, deliberations

for trading in derivatives have been going on

for quite long and that the derivative products

have been introduced in India in a phased

manner. However, derivative market in India is

still at its nascent stage and has a lot of

potential to expand. BSE and NSE are two

main exchanges on which derivatives are traded

(USE is the recent exchange which has formed

alliance with BSE to develop currency and

interest rates derivatives markets)but NSE has

more than 96% of the volumes of the

derivatives which are traded in India. Let us

now have a look at the products traded in the

derivatives segment in BSE and NSE separately.

Products traded in Derivatives segment of BSE S. No. Product Traded with underlying asset Introduction Date 1 Index Futures – Sensex June 9 2000 2 Index Options – Sensex June 1 2000 3 Stock Options on 109 Stocks July 9 2001 4 Stock futures on 109 Stocks November 9 2002 5 Weekly Option on 4 Stocks September 13 2004 6 Chhota (mini) Sensex January 1 2008 7 Futures & Options on sectoral indices namely BSE TECK, BSE FMCG, BSE

Metal, BSE Bankex and BSE Oil & Gas N.A.

8 Currency Futures on US Dollar Rupee October 1 2008 9 Currency Options on US Dollar Rupee (launched on USE) October 29 2010 Source: Compiled from BSE website

Products traded in Derivatives (F&O) segment of NSE S. No. Product Traded with underlying asset Introduction Date 1 Index Futures – S&P CNX Nifty June 12 2000 2 Index Options – S&P CNX Nifty June 4 2001 3 Stock Options on 233 Stocks July 2 2001 4 Stock futures on 233 Stocks November 9 2001 5 Interest Rate Futures – T- Bills and 10 Years Bond June 23 2003 6 CNX IT Futures & Options August 29 2003 7 Bank Nifty Futures & Options June 13 2005 8 CNX Nifty Junior Futures & Options June 1 2007 9 CNX 100 Futures & Options June 1 2007 10 Nifty Midcap 50 Futures & Options October 5 2007 11 Mini index Futures & Options – S&P CNX Nifty index January 1 2008 12 Long term Option contracts on S&P CNX Nifty index March 3 2008 13 Currency Futures on US Dollar Rupee August 29 2008 14 S&P CNX Defty Futures & Options December 10 2008 15 Currency Options on US Dollar Rupee October 29 2010 Source: Compiled from NSE website NSE has been very active in the derivatives segment and number of products traded on NSE is more

than that traded on BSE. A number of derivative products have been introduced in India as can be

seen from the above tables. Index and stock futures and options were the first products to be traded

and recently the RBI allowed the trading of currency derivatives in India.

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Business growth of Derivatives Source: Compiled from NSE & BSE websites

The derivative market has grown quite

substantially during the last decade. The table

above shows the turnover of the derivatives

segment of the market since its inception. The

growth is almost exponential and the market

has grown leaps and bounds from 2000 to

2012(an increase of 2, 67, 115 % in the total

turnover over the specified period). The

average daily turnover has increased by 10, 44,

469 %. Both the total and average daily

turnovers have shown a slight dip from 2007-

08 to 2008-09 when the sub-prime crisis had

hit the US markets and consequently all the

markets world over. A chapter on ‘Analysis of

Derivatives turnover’ towards the end has been

devoted to carry out the mathematical analysis

of the derivatives market.

Product wise turnover of F&O at NSE

Year

Index Futures Stock Futures Index Options Stock Options Total

Average Daily

Turnover ( cr.)

No. of contracts

Turnover ( cr.)

No. of contracts

Turnover ( cr.)

No. of contracts

Notional Turnover ( cr.)

No. of contracts

Notional Turnover ( cr.)

No. of contracts

Turnover ( cr.)

2011-12 28335422 745169.96 33363538 862171.65 160090747 4531302.96 6653288 180998.38 228442995 6319642.87 114902.60

2010-11 165023653 4356754.53 186041459 5495756.70 650638557 18365365.76 32508393 1030344.21 1034212062 29248221.09 115150.48

2009-10 178306889 3934388.67 145591240 5195246.64 341379523 8027964.20 14016270 506065.18 679293922 17663664.57 72392.07

2008-09 210428103 3570111.40 221577980 3479642.12 212088444 3731501.84 13295970 229226.81 657390497 11010482.20 45310.63

2007-08 156598579 3820667.27 203587952 7548563.23 55366038 1362110.88 9460631 359136.55 425013200 13090477.75 52153.30

2006-07 81487424 2539574 104955401 3830967 25157438 791906 5283310 193795 216883573 7356242 29543

2005-06 58537886 1513755 80905493 2791697 12935116 338469 5240776 180253 157619271 4824174 19220

2004-05 21635449 772147 47043066 1484056 3293558 121943 5045112 168836 77017185 2546982 10107

2003-04 17191668 554446 32368842 1305939 1732414 52816 5583071 217207 56886776 2130610 8388

2002-03 2126763 43952 10676843 286533 442241 9246 3523062 100131 16768909 439862 1752

2001-02 1025588 21483 1957856 51515 175900 3765 1037529 25163 4196873 101926 410

2000-01 90580 2365 - - - - - - 90580 2365 11

http://www.nse-india.com/content/fo/fo_busgrow2011-12.htm












CONVOYAGE Aug ‘11


Most of the derivatives market in F&O is

dominated by Index options. This is followed

up by stock futures, index futures and stock

options. Index options are the clear leader in

the product-wise turnover of futures and

options segment in NSE during 2009-10. The

turnover in the index options category was

45.45% of the total turnover in the F&O

segment of NSE, followed by stock futures and

index futures which saw a y-o-y growth of

29.41% and 22.27% respectively (in 2009-10

compared to the previous year). This trend

continued in the first-half of 2010-11 with

Index options constituting around 58% of the

total turnover in this segment. The turnover of

index options zoomed by 111% during the

first-half of 2010-11 compared to the

corresponding period in the previous fiscal.

NSE Cash & Derivatives Segment Turnover (In Rs. Cr) Year Cash Segment Derivatives Segment 2009-10 41, 38, 023 1, 76, 63, 666 2008-09 27, 52, 023 1, 10, 10, 483 2007-08 35, 51, 038 1, 30, 90, 477.75 2006-07 19, 45, 285 73, 56, 242 2005-06 15, 69, 556 48, 24, 174 2004-05 11, 40, 071 25, 46, 982 2003-04 10, 99, 535 21, 30, 610 2002-03 6, 17, 989 4, 39, 862 2001-02 5, 13, 167 1, 01, 926 2000-01 13, 39, 510 2, 365 Source: Compiled from NSE website From the above table, it is pretty clear that derivatives segment has grown at a much faster pace than

the cash segment. While the increase in the derivatives segment from 2000-01 to 2009-10 is an

astonishing 7, 46, 778 % (Yes, it is seven lakh forty six thousand seven hundred and seventy eight

percent!!) it is only 209 % for the cash segment. This is a clear indication of the dominance of the

derivatives segment over the cash segment.

Product wise Derivatives Turnover at NSE and BSE (In Rs. Cr) Year Index Future Index Option Stock Option Stock Future NSE BSE NSE BSE NSE BSE NSE BSE 2009-10 39, 34, 389 96 80, 27, 964 138 1, 40, 16,

270 0 51, 95, 247 0

2008-09 35, 70, 111 11, 257 37, 31, 502 9 1, 32, 95, 970

0 34, 79, 642 9

2007-08 38, 20, 667 2, 34, 660 13, 62, 111 39 94, 60, 631 15 75, 48, 563 7, 609 2006-07 25, 39, 575 55, 491 7, 91, 913 0.06 52, 83, 310 6 38, 30, 972 3, 516 Source: Compiled from SEBI Annual reports

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The product wise Derivatives turnover shown above re-iterates the fact that turnover of Derivatives at

BSE is far less than the turnover of Derivatives at NSE. A closer examination of the table reveals that

Index option has grown the most over the given years: be it on NSE or on BSE. Also, BSE is becoming

less and less inactive in the derivatives segment.

Number of Contracts traded at NSE & BSE Derivatives Segment Year Number of Contracts NSE BSE 2009-10 67, 92, 93, 922 9, 028 2008-09 65, 73, 90, 497 5, 15, 588 2007-08 42, 50, 13, 200 74, 53, 371 2006-07 21, 68, 83, 573 15, 45, 169 2005-06 15, 76, 19, 271 103 2004-05 77, 017, 185 5, 31, 719 2003-04 5, 68, 86, 776 3, 82, 258 Source: Compiled from SEBI Annual reports BSE Cash & Derivatives Segment Turnover (In Rs. Cr) Year Cash Segment Derivatives Segment 2009-10 1, 37, 881 234.13 2008-09 1, 10, 008 12, 266 2007-08 15, 78, 857 2, 42, 309 2006-07 9, 56, 185 59, 006 2005-06 8, 16, 074 9 2004-05 5, 18, 715 16, 112 2003-04 5, 03, 053 12, 452 2002-03 3, 14, 073 2, 478 2001-02 3, 07, 292 1, 922 2000-01 10, 00, 032 1, 673 Source: Compiled from SEBI Annual reports

As is mentioned earlier, the Derivatives

segment is more pronounced on the NSE than

on BSE. From the tables above, it is seen that

the Derivatives segment of BSE has grown by

14, 383 % (till 2007-08) whereas it is in lakhs

of percentage increase for the Derivatives

segment on the NSE. In fact, from 2007-08

onward, the Derivatives segment on BSE has

actually declined in value terms. However, it is

very clear that the Derivatives market has a

huge potential in India.

CONVOYAGE Aug ‘11


Marketing in Pharmaceutical Industry

By

Sunil Singh Choudhary

MMS II, Marketing, JBIMS

Before I tell you about Pharma marketing you

need to understand that this is a completely

different field when we compare it with other

types of markets. Here product is highly

specialized and makes a lot of difference in

consumers’ life. Customer (Doctor) cannot be

fooled as he is highly knowledgeable and active

in finding out what’s new in medical field.

Only need which works here is ‘rational need’

in case of a doctor and ‘physical need’ case of a

patient. You cannot exaggerate about

performance of your product because

everything comes in medical journals and in

public domain because of many regulatory

bodies.

Oh, then how do you market a drug and how

do you differentiate between your drug and

competitors’ drug? If your drug is a generic

drug and market works on rationales then what

makes your drug sell more than other drugs?

We never see any advertisement of drug on TV

then how these doctors come to know about

these drugs? All these questions used to pop up

in my mind also till I worked on a project in a

Pharma co. (say HTL). I will tell you my story

of summer internship and in that flow I will tell

how I learned pharma marketing so you also

learn in same way as I did.

First day of internship, I was told I will have to

work with Oncology division with another

intern Rahul. I was allotted a guide and a

mentor. Project was to find out how big is

market for molecule Zozzu (It was a

confidential project so I cannot reveal much)

and my co-intern was given project to make a

database for Drug X, Y and Z and had to do

segmentation of oncologists. Why the hell do

you need to segment oncologists and on what

basis you will do this segmentation considering

the fact that they are already a rare species?

These questions came to my mind but then I

started working on my project of finding out

market potential of Zozzu.

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Week 1 I was given a lot of literature to read and had to

give presentation on it. So,Lesson 1: one need

to be through in science before showing face to

a doctor. Let’s find out what Rahul was doing

all this time. Hmmm! He was studying

different type of markets that’s Lesson 2: one

need to understand whether one is working in

Mass market (M.B.B.S.), Mass specializations

(Pediatrics, Gynac etc), Specialized market

(medicine, surgery, dermat, psychiatry etc) or

highly specialized market (neuro, onco etc).

For those who are not with pharma

background will it difficult to understand these

terms ( so please google them).

Week 2 I started working on questionnaire and found

myself in a big trouble because it was difficult

to decide which question to ask and which

question not to. Later I understood that first I

should design whole research and I should

know clearly how I am going to estimate

market potential of Zozzu. So, Lesson 3: One

should clearly know and should plan out

everything about the market research before

designing questionnaire. Then I went to Rahul

and found out that he was busy dividing

doctors according to their influence over other

doctors or whether they are ‘thought leader’ or

‘follower’, years of practice and how loyal they

were to HTL and no. of patients they see in a

year of a particular disease. Here comes Lesson

4- Doctors can be divided according to their

influence over their peers, no. of years of

practice, no. of patients they see and their

loyalty to a company. This information may

look useless but this information is in mind of

everybody in sales team about a doctor because

it helps in easy profiling and strategizing before

approaching a doctor.

Week 3 I was ready with my questionnaire, which was

best according to me. But then I was sent to a

scientific advisor of HTL in a renowned

hospital of Mumbai and there after interacting

with the scientific advisor I realized that how

ignorant I was. Here comes Lesson 5: Always be

receptive because you never know what you

don’t know. Now I met Rahul in lunch hall and

we discussed our progress as usual. We also met

other interns working in various divisions and

came to know a lot about mass marketing,

specialized marketing, and new trends in other

marketing. While interacting with them I came

to know that how sales force confidence in their

company can be a game changer. Lesson 6:

Sales force should believe in the company and

the product more than anybody else. Their

confidence gets reflected in sales. Eg: Ranbaxy

medical representatives (MR) used to say,

“Prescribe our product because we are from

Ranbaxy”. This may look stupid or innocuous

to other companies but in sales it got reflected

as the best strategy.

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Week 4,5,6,7 I did data collection from Mumbai, Pune,

Ahmedabad, New Delhi and Kolkata. I started

empathizing with MRs because it is really

difficult to break the ice with many doctors and

to start building up repo with them. Lesson 7:

Every doctor is different and different tricks of

selling are to be applied with different doctors.

After finishing my data collection part I came

back to Mumbai for data analysis. In Mumbai

again we all interns used to meet for lunch and

used to share our experiences in various cities

with various doctors but Divya never said

anything. She must be a haughty female…huh

who cares. One day when I had to go to her

cubicle to discuss one matter related to, my

batch mate, Mukul’s ITC issue and I came to

know one more important entity in pharma its

‘Stockist’. Lesson 8: In pharma, stockists are

very powerful part of supply chain and they can

make or break any brand by playing with

distribution of the drug in question.

Week 8 Finally my presentation was ready but then my

guide wasn’t there in India and here comes

another shocker; Lesson 9: Sales stint never

ends in pharma. One has to go in field and talk

to doctors even when one has reached highest

echelon of a company. I looked at my

presentation and started mulling over my

recommendations. It was divided into various

part like providing literature, putting articles in

most read medical journals, skills upgradation

and motivation of MRs, better distribution

(keeping in mind Jagdeep Kapoor sir’s line-‘Jo

dikhta hai, woh bikta hai’) but nowhere came

recommendation of giving free Bangkok trip or

other freebies because that’s against my

companies policies. Then how come this

company is one of the world top 5 pharma co.

and still growing. Lesson 10- One need not give

freebies to doctors to sell drugs because this

market works on rational and if you are smart

enough to make doctors realize that they will

also gain if they prescribe your drug then your

drug will be taken readily. But for that you

have to put your own rationale in line.

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Organizational Strategy: Centralization v/s Decentralization

By

Saurabh Kumar

MMS II, Finance, JBIMS

One of the most strategy issues which

organizations work on, is their organizational

structure. Whether organization distributes

governance among various groups and make it

closer to people (Decentralization) or keep it

confined to a particular group (Centralization)

is an important aspect to be looked from

strategy point of view. The article tries to focus

on understanding what should be taken care by

organizations before taking this decision

regarding structure. There are basically 3

questions which need to be answered by each

and every organization which is considering

centralizing the structure. At least one of the

questions needs to be yes for making

organization a centralized one. Well these

questions are not the only ones to be answered,

but these can form a base for discussion

between centralization and decentralization.

Q1. Is centralization mandated? First check is to be done if there are some other

ways to avoid centralization from coming into

play. If there are other ways, explore all of them

one by one having a proper discussion over

each. For e.g. - The job of accounts and

financial reports can be given to each of the

business divisions. But this division of work

will be a huge cumbersome task. Since we need

to prepare a consolidated report to be signed by

CEO and to be presented to shareholders, it is

always better to centralize this division of the

organization. Now taking example of health

and safety division, it is better to decentralize

this as each and every division will have

different rules of safety which it follows.

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Q2. Does centralization add significant value—10 percent? If first question turns out to be no, we should

adopt it after checking that it adds significant

value to the organization. The bigger problem

here is how to find out if value is being added

to the organization or not as corporate

strategies don’t reveal anything about the

additional synergies which might come into

play when different business activities are

brought together in a group. One way to solve

this issue is checking the benefits of

centralization with respect to a benchmark set

very high which will prove that the risks which

are being taken are worth it. For e.g. – It is

suggested to have a 10% hurdle rate as the

additional improvement in profits of

organization. This benchmark being high, will

avoid unnecessary discussions on small matters

and will bring focus directly on activities which

have the ability to create significant impact on

the decision thus improving efficiency of

management.

Q3. Are the risks low? Most of the organizations will not be able to

qualify the above 2 questions. For those

organizations, we need to work to find out if

the risks with the new organization structure

are low or not. If the negative effects of risks

(business rigidity, reduced motivation,

bureaucracy, distraction) are greater than the

additional value being generated, this method

should not be chosen. For e.g. – An initiative to

centralize payroll might get an approval for this

question. The risks of bureaucratic inefficiency

and distraction turn out to be a minimum in

this division if it is led by a competent expert

instead of sub-division.

The case studies where the above framework of

3-Questions has been applied are discussed in

further pages. The first one is European

Automation and second is Extreme Logistics.

European Automation European Automation is a manufacturer of

automated cutting and welding-equipments.

Q1. It failed the first test as centralized product

management was not mandated.

Q2. There was no scope of cost reductions

leading to savings and thus improving profit

margins. So, the options left included

increasing sales or higher prices or a

combination of both. It was estimated that after

choosing the integrated product range, it might

result in additional sales volume to customers

thus boosting profit margins. It was felt that

hurdle rate of 10% will be crossed easily.

Company passed the test.

Q3. The organization failed this test also as the

negative side effects of risks were found out not

to be low. The risks of delays, additional costs

and uncompetitive products outweighed the

synergies. Also the commercial flexibility was

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being lost and it could have de-motivated

managers in the businesses on losing their

existing authority over activities.

After 2 years, analysis of European Automation

says that they are doing as what they expected.

Their market share is up and products are

better aligned with market serving large

number of customers. But the results don’t

only point to above 3 questions, it also throws

light on hard-work and real risks involved.

Extreme Logistics Extreme Logistics has business as a global

provider of food services to drilling, mining,

and other operations in out-of-the-way

locations.

Q1. The initiative did not turn out to be a

mandated one. So this test failed.

Q2. The additional values being added seen

were like encouraging entrepreneurial

initiative, coordinating global customers,

managing local governments, and centralizing

common operating activities. But these values

did not seem to add more than 10% and thus

failing to pass this test. They could only cross

this hurdle rate of 10% if they followed 5%

cost reduction and 10% improvement in

quality of managers which was not possible

with centralization.

Q3. The proposal failed this hurdle also. Some

of the business presidents thought it would de-

motivate managers. Also, the head of HR, the

CEO, and the CFO all lacked experience

running a centralized system. Hence, they

feared that the new system will adopt

bureaucracy and will distract the corporate

centre from the earlier identified areas of value

addition.

In this case, the 3 questions framework led to

meaningful conversations that took managers

in unexpected and beneficial directions. They

went to work on second question and

demanded setting up business improvements

targets for each division or changing of bottom

20% of management talent.

By seeing the above cases and analyzing the

ideologies both put in favour and against of

centralization, we can say that these questions

help companies strike the right balance

between centralization and decentralization

today and to evolve their organizations

successfully as conditions change over time.

References

www.mckinsey.com

www.epa.gov/records/tools/central.htm

http://www.mckinsey.com/

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CASE STUDY ON COLLINS FOODS

Collins Foods is a company that sells hot dogs and other packaged meat products, such as salami

and lunch meats, in the United States. Collins Foods’ products are primarily sold through grocery

stores. While not a very large company, it has strong brand recognition in the packaged meat

market and a reputation for high quality products.

Collins Foods’ customers are large grocery store chains or grocery distributors, who sell to smaller

chains or independent grocery stores across the US. The prices, which Collins Foods presents to

these chains or distributors, are negotiated individually and depend on many factors. Some of

these factors include the volume to be purchased, whether the customer is a new customer or an

existing one, and any promotional or marketing arrangements that have been agreed upon with

the customer. The stores then sell the products to consumers at a higher price in order to make a

profit.

Table 1 shows Collins Foods’ data on this year’s sales revenue and the average annual revenue

growth over the last 5 years. The data in Table 1 is broken down by major product category.

Table 1

Recent Revenue and Revenue Growth Data for Collins Foods

Revenue this year Average annual revenue

growth over last 5 years All beef hot dogs

$366.7m

4.2%

Other packaged meat

$65.3m

1.5%

Sliced meat

$55.3m

1.2%

Other products (e.g., pickles, sauces)

$15.1m

-7.0%

Collins Foods manufactures all of its own products and invests significantly more resources than

its competitors to ensure superior quality. This is especially valuable to them because this type of

product has a poor overall reputation for quality in the United States.

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Collins Foods was founded almost 100 years ago, and until recently, was run as a family business.

However, after almost a decade of poor sales growth, the company was acquired last year by a

major conglomerate, FoodInc, with the goal of increasing sales.

The CEO of Collins Foods has asked a McKinsey team to help him identify ways to improve sales

growth while maintaining good levels of profitability. He states that a 10% annual sales growth

should be the target. In five years time, he wants to be able to look back and see an annual sales

growth of 10% or more for each of the previous 2 years, or Collins Foods will no longer be part of

FoodInc. Exhibit 1 represents four potential scenarios for Collins Foods’ future sales growth, with

Year 0 representing this year.

Questions continued from previous edition

The team decides to focus more on the all beef hot dog product category, as it is by far Collins Foods’

largest percentage of sales. As part of the work, the team decides it is worthwhile to investigate Collins

Foods’ current consumer base for this category. This consumer base is thought to consist mainly of

Jewish households because the product satisfies their Collins food requirement.

The team decides to investigate the potential impact of different types of marketing efforts on sales

of Collins Foods’ hot dogs. In particular, the idea of a 5% retail price reduction coupled with mass

CONVOYAGE Aug ‘11


media advertising of the reduction is suggested, especially for cities known to be more price-

sensitive. Los Angeles is an example of one of these cities and the team decides to estimate the

potential of this strategy in Los Angeles. The head of sales for Collins Foods gives you the

following information:

• The advertising campaign would cost $2.1 million

• Collins Foods has 1 million hot dog purchasers in Los Angeles, who buy one pack of

six hot dogs per month on average

• The average price to grocery chains and distributors of a pack of six hot dogs is $10

• The retail price of a pack of six hot dogs is $11

• Collins Foods makes a 20% profit margin on hot dogs • This campaign will not impact the profit in dollars made by the store per pack of six hot

dogs sold 5. Which of the following statements, if true, would best support an argument AGAINST

implementing this price reduction campaign in Los Angeles?

A) Consumers purchase Collins Foods’ hot dogs because they believe they taste better than other hot dogs and are made from fresher ingredients

B) Collins Foods has never used a price reduction marketing strategy on hot dogs in the

100 years of its existence and many of the senior management would feel that such a move would not suit the brand values

C) All large grocery chains stock one premium, one mid-range, and one economy hot dog

product and the 5% reduction would move Collins Foods’ hot dogs from premium to mid- range

D) A similar strategy was attempted for one of Collins Foods’ pickles products recently and

only resulted in a 2% growth in sales volume, which translated to a 3% reduction in sales revenue

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6. What is the average profit, in dollars per hot dog, made by Collins Foods before implementing this campaign?

A) $0.33

B) $0.67

C) $1.67

D) $2.00

7. FoodInc requires all marketing campaigns to pay back the initial investment within the first year. What percentage increase in the number of hot dogs sold would be required in the first year of the Los Angeles price reduction campaign in order to pay back the advertising investment?

A) 20% B) 30% C) 40% D) 50%

The marketing manager of Collins Foods expresses concern about the impact of this price reduction campaign on consumer perceptions of the brand. He states that a price reduction of 5% is pretty significant and may in itself be detrimental to the premium brand image, which drives a lot of sales. 8. Which of the following statements, if true, would best support the marketing manager’s assertion?

A) In a recent survey, Collins Foods’ consumers quoted “price” as the second most important indicator of quality in a list of ten factors

B) In a recent survey, Collins Foods’ consumers quoted “price” as the eighth most

important factor out of ten in their decision to buy a product

C) In a recent survey, 78% of Collins Foods’ consumers said they would still buy Collins Franks’ hot dogs even with a 10% price increase

D) In a recent survey, 34% of Collins Foods’ customers said they would never consider buying another brand of hot dog

CONVOYAGE Aug ‘11


Solution to July 2011 Convoyage 1. According to the CEO of Collins Foods, which of the scenarios presented in Exhibit 1

would satisfy FoodInc’s requirements?

A.) Scenario A B.) Scenario B C.) Scenario C D.) Scenario D

Ans.) B – Observation of Exhibit 1 shows that Scenario B is the only scenario involving a 10% or greater sales growth for each of the previous two years (Year 3-4 growth is approximately 12 points on a base of approximately 104 = 11.5% growth, while Year 4-5 growth is approximately 14 points on a base of 117 = 11.9% growth).

2. Which of the following measures, if done alone, would definitely NOT help address the objectives of the CEO of Collins Foods?

A) Lowering the price of select Collins Foods’ products

B)Introducing new products into the Collins Foods’ range

C) Removing a category of products from the existing Collins Foods’ range D) Increasing the advertising of Collins Foods’ products in the mass media

Ans.) C – From Table 1, there is no single product category that, if removed, would improve annual sales growth to the level of 10% required by the CEO. Options A, B and D all have the possibility of generating additional sales growth.

3. Which of the following statements is valid based on the data in Table 1?

A)Revenue for “Other products” was more than $20 million five years ago

B)Hot dog revenue was more than $350 million five years ago

C)Sales of sliced meats grew by no less than 1.2% in each of the last five years

D)Total sales for Collins Foods did not grow at all in the last five years

Ans.) A – Using the information on current revenues and growth rates in Table 1, it can be calculated that this response is the only one that is valid. Since the average revenue grew - 7.0% every year, the revenue five years ago was approximately $21.71 million, which is more than $20 million.

CONVOYAGE Aug ‘11


4. Which of the following values is the best estimate of Collins Foods’ revenue in Year 4 under Scenario C

A) $441m

B) $495m

C) $549m

D) $603m

Ans.) 4. D – From Table 1, total revenue this year is $502.4m. According to Scenario C in Exhibit 1, Year 4 revenue will represent 120% of this year’s revenue. The closest figure to this is $603m.

CONVOYAGE Aug ‘11


WORD PUZZLE

Theme: Finance

Find the words below in the grid. All words are related to Finance.

Words can go horizontally, vertically and diagonally, backwards or forwards

G F Y R E K O R B K M H N Z C

M D N E T F P S R O Y A L T Y

T G N T Z T R K P H M M T S D

P Z L U X R O C N G P S E D N

U D J R F B F O V K E R E T E

R R A N T P I T G R A L X C D

K B T G M Y T S E H Z C C N I

N M X P E M T T S W D M H G V

A H Y N M N N T N E M Y A P I

B Q Y I E I T Y K T P W N Z D

H I N V E S T M E N T B G D D

H H L J X L M N L L L N E E Y

J O X M K D D L B P G D B C L

S M C K R V Z Q B Q M T L N J

K W M V I A B L E X T K Y Z B

CONVOYAGE Aug ‘11


CONSULTING FUN

CONVOYAGE Aug ‘11


The Consulting Club -Enhancing Quality… Contact us- [email protected] Web Site: https://sites.google.com/a/jbims.edu/consultingclub/ Members Mayank Goel Parinita Jatkar Cell - +91 9920018159 Cell - +91 9867798948

Email id - [email protected] Email id - [email protected]

Pramod Kanojia Kush Tandon Cell - +91 9867393620 Cell - +91 9987442845

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JBIMS ConVoyage August 2011

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Transcript of JBIMS ConVoyage August 2011