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PGDBA Semester II

MB0044 Production & Operations Management

Q1. Explain in brief the origins of Just In Time. Explain the different types of wastesthat can be eliminated using JIT

Ans. Just in Time (JIT) is a management philosophy aimed at eliminating waste and continuouslyimproving quality. Credit for developing JIT as a management strategy goes to Toyota. Toyota JITmanufacturing started in the aftermath of World War II.

Although the history of JIT traces back to Henry Ford who applied Just in Time principles to manageinventory in the Ford Automobile Company during the early part of the 20th Century, the origins of

the JIT as a management strategy traces to Taiichi Onho of the Toyota Manufacturing Company. Hedeveloped Just in Time strategy as a means of competitive advantage during the post World War IIperiod in Japan.

The post-World War II Japanese automobile industry faced a crisis of existence, and companies suchas Toyota looked to benchmark their thriving American counterparts. The productivity of an

American car worker was nine times that of a Japanese car worker at that time, and Taiichi Onhosought ways to reach such levels.

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Two pressing challenges however prevented Toyota from adopting the American way:

1. Americancar manufacturersmade lots or a batch of a model or a component beforeswitching over to a new model or component. This system was not suited to the Japaneseconditions where a small market required manufacturing in small quantities.

2. The car pricing policy of US manufacturers was to charge a mark-up on the cost price. The lowdemand in Japan led to price resistance. The need of the hour was thus to reducemanufacturing costs to increase profits.

To overcome these two challenges, Taiichi Onho identified waste as the primary evil. The categoriesof waste identified included

overproduction inventory or waste associated with keeping dead stock time spent by workers waiting for materials to appear in the assembly line time spend on transportation or movement workers spending more time than necessary processing an item

waste associated with defective items

Taiichi Onho then sought to eliminate waste through thejust-in-timephilosophy, where itemsmoved through the production system only as and when needed.

Q2. What is Value Engineering or Value Analysis? Elucidate five companies whichhave incorporated VE with brief explanation.

Ans. Value Engineering(VE), also known as Value Analysis, is a systematic and function-basedapproach to improving the value of products, projects, or processes.VE involves a team of peoplefollowing a structured process. The process helps team members communicate across boundaries,understand different perspectives, innovate, and analyze.

When to use it

Use Value Analysis to analyze and understand the detail of specific situations.

Use it to find a focus on key areas for innovation.

Use it in reverse (called Value Engineering) to identify specific solutions to detail problems.

It is particularly suited to physical and mechanical problems, but can also be used in other areas.

Quick XLong

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Logical XPsychological

Individual XGroup

How it works

Value Analysis (and its design partner, Value Engineering) is used to increase the value of productsor services to all concerned by considering the function of individual items and the benefit of thisfunction and balancing this against the costs incurred in delivering it. The task then becomes toincrease the value or decrease the cost.

Q3. Explain different types of Quantitative models. Differentiate between work studyand motion study.

Ans. Quantitative models are needed for a variety of management tasks, including

(a) identication of critical variables to use for health monitoring,

(b) antici- pating service level violations by using predictive models, and

(c) on-going op- timization of congurations.

Unfortunately, constructing quantitative models requires specialized skills that are in short supply.Even worse, rapid changes in provider congurations and the evolution of business demands meanthat quantitative models must be updated on an on-going basis. This paper de-scribes anarchitecture and algorithms for on-line discovery of quantitativemodels without prior knowledge ofthe managed elements. The architecture makes use of an element schema that describes managedelements using the common information model (CIM). Algorithms are presented for selecting asubset of the element metrics to use as explanatory variables in a quantitative model and forconstructing the quantitative model itself. We further describe a prototype system based on thisarchitecture that incorporates these algo-rithms. We apply the prototype to on-line estimation ofresponse times for

DB2 Universal Database under a TPC-W workload. Of the approximately 500 metrics available fromthe DB2 performance monitor, our system chooses 3 to construct a model that explains 72% of the

variability of response time.

In production and operations management, models refer to any simple representation of reality indifferent forms such as mathematical equations, graphical representation, pictorial representation,

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and physical models. Thus a model could be the well known economic order quantity (EOQ) formula,a PERT network chart, a motion picture of an operation, or pieces of strings stretched on a drawingof a plant layout to study the movement of material. The models help us to analyze and understandthe reality. These also help us to work determine optimal conditions to for decision making. Forexample, the EOQ formula helps us to determine the optimum replenishment quantities thatminimize the cost of storing plus replenishing.The number of different models we use in production

and operations management run into hundreds, or even more than a thousand. These are really toomany to enumerate in a place like these. I am listing below a random list of broad categories ofmodels used in production and operations model.

Operations research models. This is actually a very broad classification and covers many of the othercategories in the list given here.

o Inventory models

o Forecasting models

o Network models

o Linear programming models

o Queuing models

o Production planning and control models

o Engineering drawings

o Photographs and motion pictures used in time and motion studies.

o Material movement charts

o Process flow diagrams

o Systems charts

o Statistical process control charts.

o Variance analysis

o Regression analysis

o Organization chart

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o Fishbone chart

Work study and motion study

Work study includes a wide field of measurement tools and techniques. Motion study or methodstudy is concerned with analyzing individual human motions (like get object, put object) with a viewto improving motion economy.Q4. What is Rapid Prototyping? Explain the difference between Automated flow lineand Automated assembly line with examples.

Ans. Rapid prototyping is the automatic construction of physical objects usingadditivemanufacturingtechnology. The first techniques for rapid prototyping became available in the late1980s and were used to producemodelsandprototypeparts. Today, they are used for a much widerrange of applications and are even used tomanufactureproduction-quality parts in relatively small

numbers. Somesculptorsuse the technology to produce complex shapes forfine artsexhibitions.

Automated flow lines : When several automated machines are linked by a transfer system whichmoves the parts by using handling machines which are also automated, we have an automated flowline. After completing an operation on a machine, the semi finished parts are moved to the nextmachine in the sequence determined by the process requirements a flow line is established. Theparts at various stages from raw material to ready for fitment or assembly are processedcontinuously to attain the required shapes or acquire special properties to enable them to performdesired functions. The materials need to be moved, held, rotated, lifted, positioned etc. forcompleting different operations.Sometimes, a few of the operations can be done on a single machine with a number of attachments.They are moved further to other machines for performing further operations. Human intervention

may be needed to verify that the operations are taking place according to standards. When these canbe achieved with the help of automation and the processes are conducted with self regulation, we willhave automated flow lines established. One important consideration is to balance times that differentmachines take to complete the operations assigned to them. It is necessary to design the machines insuch a way that the operation times are the same throughout the sequence in the flow of the martial.In fixed automation or hard automation, where one component is manufactured using severaloperations and machines it is possible to achieve this condition or very nearly. We assume thatproduct life cycles are sufficiently stable to invest heavily on the automated flow lines to achievereduced cost per unit. The global trends are favouring flexibility in the manufacturing systems. Thecosts involved in changing the set up of automated flow lines are high. So, automated flow lines areconsidered only when the product is required to be made in high volumes over a relatively longperiod. Designers now incorporate flexibility in the machines which will take care of small changes indimensions by making adjustments or minor changes in the existing machine or layout. The changein movements needed can be achieved by programming the machines. Provision for extra pallets ortool holders or conveyors are made in the original design to accommodate anticipated changes. Thelogic to be followed is to find out whether the reduction in cost per piece justifies the costs ofdesigning, manufacturing and setting up automated flow lines. Group Technology, CellularManufacturing along with conventional Product and Process Layouts are still resorted to as theyallow flexibility for the production system. With methodologies of JIT and Lean Manufacturingfinding importance and relevance in the competitive field of manufacturing, many companies havefound that well designed flow lines suit their purpose well. Flow lines compel engineers to put in

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place equipments that balance their production rates. It is not possible to think of inventories (WorkIn Process) in a flow line. Bottlenecks cannot be permitted. By necessity, every bottleneck getsfocused upon and solutions found to ease them. Production managers see every bottleneck as anopportunity to hasten the flow and reduce inventories. However, it is important to note that settingup automated flow lines will not be suitable for many industries

Automated Assembly Lines : All equipments needed to make a finished product are laid out insuch a way as to follow the sequence in which the parts or subassemblies are put together and fitted.Usually, a frame, body, base will be the starting point of an assembly. The frame itself consists of aconstruction made up of several components and would have been assembled or fabricated in aseparate bay or plant and brought to the assembly line. All parts or subassemblies are fitted to enablethe product to be in readiness to perform the function it was designed to. This process is calledassembly.Methodologies of achieving the final result may vary, but the basic principle is to fit all parts togetherand ensure linkages so that their functions are integrated and give out the desired output. ProductLayouts are designed so that the assembly tasks are performed in the sequence they are designed.

You will note that the same task gets repeated at each station continuously. The finished item comesout at the end of the line

The material goes from station 1 to 5 sequentially. Operation 2 takes longer time, say twice as long.To see that the flow is kept at the same pace we provide two locations 2a and 2b so that operations 3,4 an 5 need not wait. At 5, we may provide more personnel to complete operations. The time taken atany of the locations should be the same. Otherwise the flow is interrupted. In automated assemblylines the moving pallets move the materials from station to station and moving arms pick up parts,place them at specified places and fasten them by pressing, riveting, screwing or even welding.Sensors will keep track of these activities and move the assemblies to the next stage. An operator willoversee that the assemblies are happening and there are no stoppages. The main consideration forusing automated assembly lines is that the volumes justify the huge expenses involved in setting

Up the system.

Q5.Explain Break Even Analysis and Centre of Gravity methods. Explain Product layouand process layout with examples.

Ans. Break Even Analysis refers to the calculation to determine how much product a company mustsell in order to break even on that product. It is an effective analysis to measure the impact ofdifferent marketing decisions. It can focus on the product, or incremental changes to the product todetermine the potential outcomes of marketing tactics. The formula for a break even analysis is:

Break even point ($) = (Total Fixed Costs + Total Variable Costs).Total Variable Costs = Variable cost per unit x units soldUnit contribution (contribution margin) = Price per unit Variable cost per unit.

When looking at making a change to the marketing program, one can calculate the incremental breakeven volume, to determine the merits of the change. This determines the required volume neededsuch

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that there is no effect to the company due to the change.If making changes to fixed costs (changing advertising expenditure etc.):Incremental break even volume = change in expenditure / unit contribution.Thus if a company increased its advertising expenditure by $1 million, and its unit contribution forthe specific product is $20, then the company would need to sell an additional 50,000 units to breakeven on the decision.

If making changes to the unit contribution (change in price, or variable costs):Incremental break even volume = (Old Unit Volume x (Old Unit Contribution New UnitContribution)) / New Unit ContributionThus if a company increased its price from $15 to $20, and had variable costs of $10, it is increasingits unit contribution from $5 to $10, assume also an old unit volume of 1 million. It could thereforereduce its volume by 500,000 to break even on the decision.

When making changes to a specific product, cannibalization of other products may occur. Tocalculate the effect of cannibalization, the Break Even Cannibalization rate for a change in a productis:New Product Unit Contribution / Old Product Unit Contribution.New Product is the planned addition to a product line (or change to a product within a product line),Old Product is the product that loses sales to the new product (or the product line that loses sales).The cannibalization rate refers to the percentage of new product that would have gone to the oldproduct, this must be lower than the break even cannibalization rate in order for the change to beprofitable.

In manufacturing, facility layout consists of configuring the plant site with lines, buildings, majorfacilities, work areas, aisles, and other pertinent features such as department boundaries. Whilefacility layout for services may be similar to that for manufacturing, it also may be somewhatdifferentas is the case with offices, retailers, and warehouses. Because of its relative permanence,facility layout probably is one of the most crucial elements affecting efficiency. An efficient layout canreduce unnecessary material handling, help to keep costs low, and maintain product flow throughthe facility.

Firms in the upper left-hand corner of the product-process matrix have a process structure known asa jumbled flow or a disconnected or intermittent line flow. Upper-left firms generally have a processlayout. Firms in the lower right-hand corner of the product-process matrix can have a line orcontinuous flow. Firms in the lower-right part of the matrix generally have a product layout. Othertypes of layouts include fixed-position, combination, cellular, and certain types of service layouts.

PROCESS LAYOUT

Process layouts are found primarily in job shops, or firms that produce customized, low-volumeproducts that may require different processing requirements and sequences of operations. Processlayouts are facility configurations in which operations of a similar nature or function are grouped

together. As such, they occasionally are referred to as functional layouts. Their purpose is to processgoods or provide services that involve a variety of processing requirements. A manufacturingexample would be a machine shop. A machine shop generally has separate departments wheregeneral-purpose machines are grouped together by function (e.g., milling, grinding, drilling,hydraulic presses, and lathes). Therefore, facilities that are configured according to individualfunctions or processes have a process layout. This type of layout gives the firm the flexibility neededto handle a variety of routes and process requirements. Services that utilize process layouts includehospitals, banks, auto repair, libraries, and universities.

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Improving process layouts involves the minimization of transportation cost, distance, or time. Toaccomplish this some firms use what is known as a Muther grid, where subjective information issummarized on a grid displaying various combinations of department, work group, or machine pairs.Each combination (pair), represented by an intersection on the grid, is assigned a letter indicatingthe importance of the closeness of the two (A = absolutely necessary; E = very important; I =important; O = ordinary importance; U = unimportant; X = undesirable). Importance generally is

based on the shared use of facilities, equipment, workers or records, work flow, communicationrequirements, or safety requirements. The departments and other elements are then assigned toclusters in order of importance.

Advantages of process layouts include:

Flexibility. The firm has the ability to handle a variety of processing requirements. Cost. Sometimes, the general-purpose equipment utilized may be less costly to purchase and

less costly and easier to maintain than specialized equipment. Motivation. Employees in this type of layout will probably be able to perform a variety of tasks

on multiple machines, as opposed to the boredom of performing a repetitive task on an

assembly line. A process layout also allows the employer to use some type of individualincentive system. System protection. Since there are multiple machines available, process layouts are not

particularly vulnerable to equipment failures.

Disadvantages of process layouts include:

Utilization. Equipment utilization rates in process layout are frequently very low, becausemachine usage is dependent upon a variety of output requirements.

Cost. If batch processing is used, in-process inventory costs could be high. Lower volumemeans higher per-unit costs. More specialized attention is necessary for both products andcustomers. Setups are more frequent, hence higher setup costs. Material handling is slower

and more inefficient. The span of supervision is small due to job complexities (routing, setups,etc.), so supervisory costs are higher. Additionally, in this type of layout accounting, inventorycontrol, and purchasing usually are highly involved.

Confusion. Constantly changing schedules and routings make juggling process requirementsmore difficult.

PRODUCT LAYOUT

Product layouts are found in flow shops (repetitive assembly and process or continuous flowindustries). Flow shops produce high-volume, highly standardized products that require highlystandardized, repetitive processes. In a product layout, resources are arranged sequentially, based on

the routing of the products. In theory, this sequential layout allows the entire process to be laid out ina straight line, which at times may be totally dedicated to the production of only one product orproduct version. The flow of the line can then be subdivided so that labor and equipment are utilizedsmoothly throughout the operation.

Two types of lines are used in product layouts: paced and unpaced. Paced lines can use some sort ofconveyor that moves output along at a continuous rate so that workers can perform operations onthe product as it goes by. For longer operating times, the worker may have to walk alongside the

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work as it moves until he or she is finished and can walk back to the workstation to begin working onanother part (this essentially is how automobile manufacturing works).

On an unpaced line, workers build up queues between workstations to allow a variable work pace.However, this type of line does not work well with large, bulky products because too much storage

space may be required. Also, it is difficult to balance an extreme variety of output rates withoutsignificant idle time. A technique known as assembly-line balancing can be used to group theindividual tasks performed into workstations so that there will be a reasonable balance of workamong the workstations.

Product layout efficiency is often enhanced through the use of line balancing. Line balancing is theassignment of tasks to workstations in such a way that workstations have approximately equal timerequirements. This minimizes the amount of time that some workstations are idle, due to waiting onparts from an upstream process or to avoid building up an inventory queue in front of a downstreamprocess.

Advantages of product layouts include:

Output. Product layouts can generate a large volume of products in a short time. Cost. Unit cost is low as a result of the high volume. Labor specialization results in reduced

training time and cost. A wider span of supervision also reduces labor costs. Accounting,purchasing, and inventory control are routine. Because routing is fixed, less attention isrequired.

Utilization. There is a high degree of labor and equipment utilization.

Disadvantages of product layouts include:

Motivation. The systems inherent division of labor can result in dull, repetitive jobs that can

prove to be quite stressful. Also, assembly-line layouts make it very hard to administerindividual incentive plans.

Flexibility. Product layouts are inflexible and cannot easily respond to required systemchangesespecially changes in product or process design.

System protection. The system is at risk from equipment breakdown, absenteeism, anddowntime due to preventive maintenance.

PGDBA Semester II

MB0045 Financial Management

Q1. What are the 4 finance decisions taken by a finance manager.

Ans. A firm performs finance functions simultaneously and continuously in the normalcourse of the business. They do not necessarily occur in a sequence. Financefunctions call for skilful planning, control and execution of a firms activities.Let us note at the outset hat shareholders are made better off by a financialdecision that increases the value of their shares, Thus while performing thefinance function, the financial manager should strive to maximize the market

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value of shares. Whatever decision does a manger takes need to result inwealth maximization of a shareholder.

Investment Decision

Investment decision or capital budgeting involves the decision of allocation ofcapital or commitment of funds to long-term assets that would yield benefits inthe future. Two important aspects of the investment decision are:(a) the evaluation of the prospective profitability of new investments, and(b) the measurement of a cut-off rate against that the prospective return of newinvestments could be compared. Future benefits of investments are difficult tomeasure and cannot be predicted with certainty. Because of the uncertain future,investment decisions involve risk. Investment proposals should, therefore, beevaluated in terms of both expected return and risk. Besides the decision forinvestment managers do see where to commit funds when an asset becomes lessproductive or non-profitable.

There is a broad agreement that the correct cut-off rate is the required rate ofreturn or the opportunity cost of capital. However, there are problems incomputing the opportunity cost of capital in practice from the available data andinformation. A decision maker should be aware of capital in practice from theavailable data and information. A decision maker should be aware of theseproblems.

Financing Decision

Financing decision is the second important function to be performed by thefinancial manager. Broadly, her or she must decide when, where and how to

acquire funds to meet the firms investment needs. The central issue before himor her is to determine the proportion of equity and debt. The mix of debt andequity is known as the firms capital structure. The financial manager must striveto obtain the best financing mix or the optimum capital structure for his or herfirm. The firms capital structure is considered to be optimum when the market

value of shares is maximized. The use of debt affects the return and risk ofshareholders; it may increase the return on equity funds but it always increasesrisk. A proper balance will have to be struck between return and risk. When theshareholders return is maximized with minimum risk, the market value per share

will be maximized and the firms capital structure would be considered optimum.Once the financial manager is able to determine the best combination of debt andequity, he or she must raise the appropriate amount through the best availablesources. In practice, a firm considers many other factors such as control, flexibilityloan convenience, legal aspects etc. in deciding its capital structure.

Dividend Decision

Dividend decision is the third major financial decision. The financial manager mustdecide whether the firm should distribute all profits, or retain them, or distributea portion and retain the balance. Like the debt policy, the dividend policy should

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be determined in terms of its impact on the shareholders value. The optimumdividend policy is one that maximizes the market value of the firms shares. Thusif shareholders are not indifferent to the firms dividend policy, the financialmanager must determine the optimum dividend payout ratio. The payout ratio isequal to the percentage of dividends to earnings available to shareholders. Thefinancial manager should also consider the questions of dividend stability, bonus

shares and cash dividends in practice. Most profitable companies pay cashdividends regularly. Periodically, additional shares, called bonus share (or stockdividend), are also issued to the existing shareholders in addition to the cashdividend.

Liquidity Decision

Current assets management that affects a firms liquidityis yet another importantfinances function, in addition to the management of long-term assets. Current assetsshould be managed efficiently for safeguarding the firm against the dangers ofilliquidity and insolvency. Investment in current assets affects the firms profitability.

Liquidity and risk. A conflict exists between profitability and liquidity while managingcurrent assets. If the firm does not invest sufficient funds in current assets, it maybecome illiquid. But it would lose profitability, as idle current assets would not earnanything. Thus, a proper trade-off must be achieved between profitability andliquidity. In order to ensure that neither insufficient nor unnecessary funds areinvested in current assets, the financial manager should develop sound techniques ofmanaging current assets. He or she should estimate firms needs for current assets andmake sure that funds would be made available when needed.It would thus be clear that financial decisions directly concern the firms decision toacquire or dispose off assets and require commitment or recommitment of funds on acontinuous basis. It is in this context that finance functions are said to influenceproduction, marketing and other functions of the firm. This, in consequence, financefunctions may affect the size, growth, profitability and risk of the firm, and

ultimately, the value of the firm. To quote Ezra SolomonThe function of financial management is to review and control decisions to commit orrecommit funds to new or ongoing uses. Thus, in addition to raising funds, financialmanagement is directly concerned with production, marketing and other functions,

within an enterprise whenever decisions are about the acquisition or distribution ofassets.

Various financial functions are intimately connected with each other. For instance,decision pertaining to the proportion in which fixed assets and current assets aremixed determines the risk complexion of the firm. Costs of various methods offinancing are affected by this risk. Likewise, dividend decisions influence financingdecisions and are themselves influenced by investment decisions.

In view of this, finance manager is expected to call upon the expertise of otherfunctional managers of the firm particularly in regard to investment of funds.Decisions pertaining to kinds of fixed assets to be acquired for the firm, level ofinventories to be kept in hand, type of customers to be granted credit facilities,terms of credit should be made after consulting production and marketingexecutives.However, in the management of income finance manager has to act on his own.The determination of dividend policies is almost exclusively a finance function. Afinance manager has a final say in decisions on dividends than in asset

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management decisions.

Financial management is looked on as cutting across functional even disciplinaryboundaries. It is in such an environment that finance manager works as a part oftotal management. In principle, a finance manager is held responsible to handle all

such problem: that involve money matters. But in actual practice, as noted above,he has to call on the expertise of those in other functional areas to discharge hisresponsibilities effectively.

Q.2 What are the factors that affect the financial plan of a company?

Ans. To help your organization succeed, you should develop a plan that needs to be followed. Thisapplies to starting the company, developing new product, creating a new department or anyundertaking that affects the companys future. There are several factors that affect planning in anorganization. To create an efficient plan, you need to understand the factors involved in the planningprocess.

Priorities

In most companies, the priority is generating revenue, and this priority can sometimes interfere withthe planning process of any project. For example, if you are in the process of planning a largeexpansion project and your largest customer suddenly threatens to take their business to yourcompetitor, then you might have to shelve the expansion planning until the customer issue isresolved. When you start the planning process for any project, you need to assign each of the issuesfacing the company a priority rating. That priority rating will determine what issues will sidetrack

you from the planning of your project, and which issues can wait until the process is complete.

Company Resources

Having an idea and developing a plan for your company can help your company to grow and succeed,but if the company does not have the resources to make the plan come together, it can stall progress.One of the first steps to any planning process should be an evaluation of the resources necessary tocomplete the project, compared to the resources the company has available. Some of the resources toconsider are finances, personnel, space requirements, access to materials and vendor relationships.

Forecasting

A company constantly should be forecasting to help prepare for changes in the marketplace.

Forecasting sales revenues, materials costs, personnel costs and overhead costs can help a companyplan for upcoming projects. Without accurate forecasting, it can be difficult to tell if the plan has anychance of success, if the company has the capabilities to pull off the plan and if the plan will help tostrengthen the companys standing within the industry. For example, if your forecasting for the costof goods has changed due to a sudden increase in material costs, then that can affect elements of

your product roll-out plan, including projected profit and the long-term commitment you might needto make to a supplier to try to get the lowest price possible.

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Contingency Planning

To successfully plan, an organization needs to have a contingency plan in place. If the company hasdecided to pursue a new product line, there needs to be a part of the plan that addresses thepossibility that the product line will fail. The reallocation of company resources, the acceptable

financial losses and the potential public relations problems that a failed product can cause all need tobe part of the organizational planning process from the beginning

Photo Credits

Q.3 Show the relationship between required rate of return and coupon rate on thevalue of a bond.

Ans. It is important for prospective bond buyers to know how to determine the price of a bondbecause it will indicate theyieldreceived should the bond be purchased. In this section, we will runthrough some bond price calculations for various types of bond instruments.

Bonds can be priced at apremium,discount, or atpar. If the bonds price is higher than its par value,it will sell at a premium because its interest rate is higher than current prevailing rates. If the bondsprice is lower than its par value, the bond will sell at a discount because its interest rate is lower thancurrent prevailing interest rates. When you calculate the price of a bond, you are calculating themaximum price you would want to pay for the bond, given the bonds coupon rate in comparison tothe average rate most investors are currently receiving in the bond market. Required yield orrequired rate of return is the interest rate that a security needs to offer in order to encourageinvestors to purchase it. Usually the required yield on a bond is equal to or greater than the currentprevailing interest rates.

Fundamentally, however, the price of a bond is the sum of thepresent valuesof all expectedcouponpayments plus the present value of the par value atmaturity. Calculating bond price is simple: all weare doing is discounting the known future cash flows. Remember that to calculate present value (PV) which is based on the assumption that each payment is re-invested at some interest rate once it isreceivedwe have to know the interest rate that would earn us a known future value. For bondpricing, this interest rate is the required yield. (If the concepts of present and future value are new to

you or you are unfamiliar with the calculations, refer toUnderstanding the Time Value of Money.)

Here is the formula for calculating a bonds price, which uses the basic present value (PV) formula:

C = coupon paymentn = number of paymentsi = interest rate, or required yieldM = value at maturity, or par value

The succession of coupon payments to be received in the future is referred to as anordinary annuity,

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which is a series of fixed payments at set intervals over a fixed period of time. (Coupons on a straightbond are paid at ordinary annuity.) The first payment of an ordinary annuity occurs one intervalfrom the time at which the debt security is acquired. The calculation assumes this time is the present.

You may have guessed that the bond pricing formula shown above may be tedious to calculate, as it

requires adding the present value of each future coupon payment. Because these payments are paidat an ordinary annuity, however, we can use the shorter PV-of-ordinary-annuity formula that ismathematically equivalent to the summation of all the PVs of future cash flows. This PV-of-ordinary-annuity formula replaces the need to add all the present values of the future coupon. The followingdiagram illustrates how present value is calculated for an ordinary annuity:

Each full moneybag on the top right represents the fixed coupon payments (future value) received inperiods one, two and three. Notice how the present value decreases for those coupon payments thatare further into the future the present value of the second coupon payment is worth less than the firstcoupon and the third coupon is worth the lowest amount today. The farther into the future a

payment is to be received, the less it is worth today is the fundamental concept for which the PV-of-ordinary-annuity formula accounts. It calculates the sum of the present values of all future cashflows, but unlike the bond-pricing formula we saw earlier, it doesnt require that we add the value ofeach coupon payment. (For more on calculating the time value of annuities, seeAnything butOrdinary: Calculating the Present and Future Value of AnnuitiesandUnderstanding the TimeValue of Money. )

By incorporating the annuity model into the bond pricing formula, which requires us to also includethe present value of the par value received at maturity, we arrive at the following formula:

Lets go through a basic example to find the price of a plain vanilla bond.

Example 1: Calculate the price of a bond with a par value of $1,000 to be paid in ten years, acoupon rate of 10%, and a required yield of 12%. In our example well assume that coupon paymentsare made semi-annually to bond holders and that the next coupon payment is expected in sixmonths. Here are the steps we have to take to calculate the price:

1. Determine the Number of Coupon Payments: Because two coupon payments will be madeeach year for ten years, we will have a total of 20 coupon payments.

2. Determine the Value of Each Coupon Payment: Because the coupon payments are semi-annual, divide the coupon rate in half. The coupon rate is the percentage off the bonds par value. Asa result, each semi-annual coupon payment will be $50 ($1,000 X 0.05).

3. Determine the Semi-Annual Yield: Like the coupon rate, the required yield of 12% must bedivided by two because the number of periods used in the calculation has doubled. If we left therequired yield at 12%, our bond price would be very low and inaccurate. Therefore, the requiredsemi-annual yield is 6% (0.12/2).

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4. Plug the Amounts Into the Formula:

From the above calculation, we have determined that the bond is selling at a discount; the bond price

is less than its par value because the required yield of the bond is greater than the coupon rate. Thebond must sell at a discount to attract investors, who could find higher interest elsewhere in theprevailing rates. In other words, because investors can make a larger return in the market, they needan extra incentive to invest in the bonds.

Accounting for Different Payment FrequenciesIn the example above coupons were paid semi-annually, so we divided the interest rate and couponpayments in half to represent the two payments per year. You may be now wondering whether thereis a formula that does not require steps two and three outlined above, which are required if thecoupon payments occur more than once a year. A simple modification of the above formula will allow

you to adjust interest rates and coupon payments to calculate a bond price for any paymentfrequency:

Notice that the only modification to the original formula is the addition of F, which represents thefrequency of coupon payments, or the number of times a year the coupon is paid. Therefore, for

bonds paying annual coupons, F would have a value of one. Should a bond pay quarterly payments, Fwould equal four, and if the bond paid semi-annual coupons, F would be two.

Q.4 Discuss the implication of financial leverage for a firm.

Ans. The financial leverage implies the employment of source of funds, involving fixed return so asto cause more than a proportionate change in earnings per share (EPS) due to change in operatingprofits. Like the operating leverage, financial leverage can be positive when operating profits areincreasing and can be negative in the situation of decrease in such profits. In view of these, financialleverage will affect the financial risk of the firm. An important analytical tool for financial leverage isthe indifference point at which the EPS/market price is the same for different financial plans underconsideration.

The objective of this study was to provide additional evidence on the relationship between financialleverage and the market value of common stock. Numerous empirical studies have been done in thisarea, and, concurrently, many theories have been developed to explain the relationship betweenfinancial leverage and the market value of common stock. Because of the methodological weaknessesof past studies, however, no conclusions can be drawn as to the validity of the theories. Theories onfinancial leverage may be classified into three categories: irrelevance theorem, rising from valueindefinitely with increase in financial leverage, and optimal financial leverage. Empiricalimplications of these categories along with the consequences of serious confounding effects areanalyzed. The implications are then compared with evidence from actual events involving financialleverage changes, and distinguished from each other as finely as possible, using simple and multipleregression analyses, normal Z-test, and a simulation technique. The evidence shows that changes inthe market value of common stock are positively related to changes in financial leverage for somefirms and negatively related for other firms. This evidence is consistent with the existence of an

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optimal financial leverage for each firm, assuming that financial leverages of firms with a positiverelationship are below the optimum and those of firms with a negative relationship are above theoptimum. The results of the study do not depend upon the definition of the market portfolio, thedefinition of the event period, or the choice of financial leverage measure. Betas estimated fromequally weighted market portfolios were generally higher than those estimated from value weightedmarket portfolios during 1981-1982. However, the results of the study were the same for both

portfolios. Abnormal returns were computed for seven and two day event periods, and the resultswere the same for both periods. Seven different definitions of financial leverage were tested, and theresults were the same for all measures.

PGDBA -Semester II

MB0046 Marketing Management

Q.1 What is Marketing Information System? Explain its characteristics, benefits andinformation types.

Ans. A Marketing Information System can be defined as a system in which marketing information isformally gathered, stored, analysed and distributed to managers in accord with their informationalneeds on a regular basis.

Set ofproceduresandpracticesemployedin analyzing and assessingmarketinginformation,gathered continuously fromsourcesinsideandoutsideof afirm. Timely marketing informationprovidesbasis fordecisionssuch asproduct developmentorimprovement,pricing,packaging,distribution,mediaselection, andpromotion.

Characteristics of MIS

Philip Kotler defines MIS as a system that consists of people, equipment and procedures to gather,

sort, analyze, evaluate and distribute needed, timely and accurate information to marketing decision

makers.

Its characteristics are as follows:

1. It is a planned system developed to facilitate smooth and continuous flow of information.

2. It provides pertinent information, collected from sources both internal and external to thecompany, for use as the basis of marketing decision making.

http://www.businessdictionary.com/definition/procedure.htmlhttp://www.businessdictionary.com/definition/procedure.htmlhttp://www.businessdictionary.com/definition/procedure.htmlhttp://www.businessdictionary.com/definition/practice.htmlhttp://www.businessdictionary.com/definition/practice.htmlhttp://www.businessdictionary.com/definition/employed.htmlhttp://www.businessdictionary.com/definition/employed.htmlhttp://www.businessdictionary.com/definition/employed.htmlhttp://www.businessdictionary.com/definition/marketing.htmlhttp://www.businessdictionary.com/definition/marketing.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/source.htmlhttp://www.businessdictionary.com/definition/source.htmlhttp://www.investorwords.com/10049/inside.htmlhttp://www.investorwords.com/10049/inside.htmlhttp://www.investorwords.com/10049/inside.htmlhttp://www.investorwords.com/10504/outside.htmlhttp://www.investorwords.com/10504/outside.htmlhttp://www.investorwords.com/10504/outside.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.businessdictionary.com/definition/provide.htmlhttp://www.businessdictionary.com/definition/provide.htmlhttp://www.businessdictionary.com/definition/decision.htmlhttp://www.businessdictionary.com/definition/decision.htmlhttp://www.businessdictionary.com/definition/decision.htmlhttp://www.businessdictionary.com/definition/product-development.htmlhttp://www.businessdictionary.com/definition/product-development.htmlhttp://www.businessdictionary.com/definition/product-development.htmlhttp://www.businessdictionary.com/definition/improvement.htmlhttp://www.businessdictionary.com/definition/improvement.htmlhttp://www.businessdictionary.com/definition/improvement.htmlhttp://www.businessdictionary.com/definition/pricing.htmlhttp://www.businessdictionary.com/definition/pricing.htmlhttp://www.businessdictionary.com/definition/pricing.htmlhttp://www.businessdictionary.com/definition/packaging.htmlhttp://www.businessdictionary.com/definition/packaging.htmlhttp://www.businessdictionary.com/definition/packaging.htmlhttp://www.businessdictionary.com/definition/distribution.htmlhttp://www.businessdictionary.com/definition/distribution.htmlhttp://www.businessdictionary.com/definition/media.htmlhttp://www.businessdictionary.com/definition/media.htmlhttp://www.businessdictionary.com/definition/selection.htmlhttp://www.businessdictionary.com/definition/selection.htmlhttp://www.businessdictionary.com/definition/selection.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/promotion.htmlhttp://www.businessdictionary.com/definition/selection.htmlhttp://www.businessdictionary.com/definition/media.htmlhttp://www.businessdictionary.com/definition/distribution.htmlhttp://www.businessdictionary.com/definition/packaging.htmlhttp://www.businessdictionary.com/definition/pricing.htmlhttp://www.businessdictionary.com/definition/improvement.htmlhttp://www.businessdictionary.com/definition/product-development.htmlhttp://www.businessdictionary.com/definition/decision.htmlhttp://www.businessdictionary.com/definition/provide.htmlhttp://www.investorwords.com/1967/firm.htmlhttp://www.investorwords.com/10504/outside.htmlhttp://www.investorwords.com/10049/inside.htmlhttp://www.businessdictionary.com/definition/source.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/marketing.htmlhttp://www.businessdictionary.com/definition/employed.htmlhttp://www.businessdictionary.com/definition/practice.htmlhttp://www.businessdictionary.com/definition/procedure.html

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3. It provides right information at the right time to the right person.

A well designed MIS serves as a companys nerve centre, continuously monitoring the market

environment both inside and outside the organization. In the process, it collects lot of data andstores

in the form of a database which is maintained in an organized manner. Marketers classify and

analyze this data from the database as needed.

Benefits of MIS(Marketing Information System)

Various benefits of having a MIS and resultant flow of marketing information are given below:

1. It allows marketing managers to carry out their analysis, planning implementation and control

responsibilities more effectively.

2. It ensures effective tapping of marketing opportunities and enables the company to develop

effective safeguard against emerging marketing threats.

3. It provides marketing intelligence to the firm and helps in early spotting of changing trends.

4. It helps the firm adapt its products and services to the needs and tastes of the customers.

5. By providing quality marketing information to the decision maker, MIS helps in improving the

quality of decision making.

Types of Marketing Information

A Marketing Information System supplies three types of information.

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1. Recurrent Information is the data that MIS supplies periodically at a weekly, monthly,quarterly,

or annual interval. This includes data such as sales, Market Share, sales call reports, inventory levels,payables, and receivables etc. which are made available regularly. Information on customer

awareness of companys brands, advertising campaigns and similar data on close competitors canalso be provided.

2. Monitoring Information is the data obtained from regular scanning of certain sources such astrade journals and other publications. Here relevant data from external environment is captured tomonitor changes and trends related to marketing situation. Data about competitors can also be partof this category. Some of these data can be purchased at a price from commercial sources such asMarket Research agencies or from Government sources.

3. Problem related or customized information is developed in response to some specificrequirement related to a marketing problem or any particular data requested by a manager. Primary

Data or Secondary Data (or both) are collected through survey Research in response to specific need.For example, if the company has developed a new product, the marketing manager may want to findout the opinion of the target customers before launching the product in the market. Such data isgenerated by conducting a market research study with adequate sample size, and the findingsobtained are used to help decide whether the product is accepted and can be launched.

Q.2 a. Examine how a firms macro environment operates.

b. Mention the key points in Psychoanalytic model of consumer behaviour.

Ans. The term micro-environment denotes those elements over which the marketing firm hascontrol or which it can use in order to gain information that will better help it in its marketingoperations. In other words, these are elements that can be manipulated, or used to gleaninformation, in order to provide fuller satisfaction to the companys customers. The objective ofmarketing philosophy is to make profits through satisfying customers. This is accomplished throughthe manipulation of the variables over which a company has control in such a way as to optimise thisobjective. The variables are what Neil Borden has termed the marketing mix which is a combinationof all the ingredients in a recipe that is designed to prove most attractive to customers. In this casethe ingredients are individual elements that marketing can manipulate into the most appropriatemix. E Jerome McCarthy further dubbed the variables that the company can control in order to reachits target market the four Ps. Each of these is discussed in detail in later chapters, but a brief

discussion now follows upon each of these elements of the marketing mix together with anexplanation of how they fit into the overall notion of marketing.

A scan of the external macro-environment in which the firm operates can be expressed in terms ofthe following factors:

Political

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Economic Social Technological

The acronym PEST(or sometimes rearranged as STEP) is used to describe a framework for theanalysis of these macroenvironmental factors. A PEST analysis fits into an overall environmentalscan as shown in the following diagram:

Environmental Scan

/\

External AnalysisInternal

Analysis

/ \

Macroenvironment Microenvironment

|

P.E.S.T.

Political Factors

Political factors include government regulations and legal issues and define both formal andinformal rules under which the firm must operate. Some examples include:

tax policy employment laws environmental regulations trade restrictions and tariffs political stability

Economic Factors

Economic factors affect the purchasing power of potential customers and the firms cost of capital.The following are examples of factors in the macroeconomy:

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economic growth interest rates exchange rates inflation rate

Social Factors

Social factors include the demographic and cultural aspects of the external macro environment.These factors affect customer needs and the size of potential markets. Some social factors include:

health consciousness population growth rate age distribution career attitudes emphasis on safety

Technological Factors

Technological factors can lower barriers to entry, reduce minimum efficient production levels, andinfluence outsourcing decisions. Some technological factors include:

R&D activity automation technology incentives rate of technological change

External Opportunities and Threats

The PEST factors combined with external micro environmental factors can be classified asopportunities and threats in aSWOT analysis.

The Psychoanalytical Model: The psychoanalytical model draws from Freudian Psychology.

According to this model, the individual consumer has a complex set of deep-seated motives whichdrive him towards certain buying decisions. The buyer has a private world with all his hidden fears,suppressed desires and totally subjective longings. His buying action can be influenced by appealingto these desires and longings. The psychoanalytical theory is attributed to the work of eminentpsychologist Sigmund Freud. Freud introduced personality as a motivating force in human behavior.

According to this theory, the mental framework of a human being is composed of three elements,namely,

1. The idor the instinctive, pleasure seeking element. It is the reservoir of the instinctive impulsesthat a man is born with and whose processes are entirely subconscious. It includes the aggressive,destructive and sexual impulses of man.

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2. The superego or the internal filter that presents to the individual the behavioral expectations ofsociety. It develops out of the id, dominates the ego and represents the inhibitions of instinct whichis characteristic of man. It represents the moral and ethical elements, the conscience.

3. The ego or the control device that maintains a balance between the id and the superego. It is the

most superficial portion of the id. It is modified by the influence of the outside world. Its processesare entirely conscious because it is concerned with the perception of the outside world.

The basic theme of the theory is the belief that a person is unable to satisfy all his needs within thebounds of society. Consequently, such unsatisfied needs create tension within an individual whichhave to be repressed. Such repressed tension is always said to exist in the subconscious andcontinues to influence consumer behavior.

4. The Sociological Model:According to the sociological model, the individual buyer is influencedby society or intimate groups as well as social classes. His buying decisions are not totally governedby utility He has a desire to emulate, follow and fit in with his immediate environment.

5. The Nicosia Model: In recent years, some efforts have been made by marketing scholars tobuild buyer behavior models totally from the marketing mans standpoint. The Nicosia model andthe Howard and Sheth model are two important models in this category. Both of them belong to thecategory called the systems model, where the human being is analyzed as a system with stimuli as theinput to the system and behavior as the output of the system. Francesco Nicosia, an expert inconsumer motivation and behavior put forward his model of buyer behavior in 1966.

The model tries to establish the linkages between a firm and its consumer how the activities of thefirm influence the consumer and result in his decision to buy. The messages from the firm firstinfluence the predisposition of the consumer towards the product. Depending on the situation, hedevelops a certain attitude towards the product. It may lead to a search for the product or an

evaluation of the product. If these steps have a positive impact on him, it may result in a decision tobuy. This is the sum and substance of the activity explanations in the Nicosia Model. The

Nicosia Model groups these activities into four basic fields. Field one has two subfields the firmsattributes and the consumers attributes. An advertising message from the firm reaches theconsumers attributes. Depending on the way the message is received by the consumer, a certainattribute may develop, and this becomes the input for Field Two. Field Two is the area of search andevaluation of the advertised product and other alternatives. If this process results in a motivation to

buy, it becomes the input for Field Three. Field Three consists of the act of purchase. And Field Fourconsists of the use of the purchased item.

Q.3 Explain the key roles played and various steps involved in organizational buying.

Ans.

Point 1 Introduction.

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The need for an understanding of the organizational buying process has grown in recent years due tothe many competitive challenges presented in business-to-business markets. Since 1980 there have

been a number ofkey changes in this area, including the growth of outsourcing, the increasing powerenjoyed by purchasing departments and the importance given to developing partnerships withsuppliers.

Point 2 The organizational buying behaviour process.

The organizational buying behaviour process is well documented with many models depicting thevarious phases, the members involved, and the decisions made in each phase. The basic five phasemodel can be extended to eight; purchase initiation; evaluations criteria formation; informationsearch; supplier definition for RFQ; evaluation of quotations; negotiations; suppliers choice; andchoice implementation (Matbuy, 1986).

Point 3 The buying centre. The buying centre consists of those people in the organizational whoare involved directly or indirectly in the buying process, i.e. the user, buyer influencer, decider and

gatekeeper to who the role of initiator has also been added. The buyers in the process are subject toa wide variety and complexity of buying motives and rules of selection. The Matbuy modelencourages marketers to focus their efforts on who is making what decisionsbased on whichcriteria.

Point 4 Risk and uncertainty

The driving forces of organizational buying behaviour. This is concerned with the role of risk oruncertainty on buying behaviour. The level of risk depends upon the characteristics of the buyingsituation faced. The supplier can influence the degree of perceived uncertainty by the buyer andcause certain desired behavioural reactions by the use of information and the implementation ofcertain

actions. The risks perceived by the customer can result from a combination of the characteristics ofvarious factors: the transaction involved, the relationship with the supplier, and his position vis-a-visthe supply market.

Point 5 Factors influencing organizational buying behaviour.

Three key factors are shown to influence organizational buying behaviour, these are, types of buyingsituations and situational factors, geographical and cultural factors and time factors.

Point 6 Purchasing Strategy.

The purchasing function is of great importance because its actions will impact directly on theorganizations profitability. Purchasing strategy aims to evaluate and classify the various itemspurchased in order to be able to choose and manage suppliers accordingly. Classification is along twodimensions: importance of items purchased and characteristics of the supply market. Actions can betaken to influence the supply market. Based on the type of items purchased and on its position in the

buying matrix, a company will develop different relationships with suppliers depending upon the

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number of suppliers, the suppliers share, characteristics of selected suppliers, and the nature ofcustomer-supplier relationships. The degree of centralization of buying activities and the missionsand status of the buying function can help support purchasing strategy. The company will adapt itsprocedures to the type of items purchased which in turn will influence relationships with suppliers.

Point 7 The future.

Two activities which will be crucial to the future development of organizational buying behaviour willbe information technology and production technologies.

Point 8 Conclusion.

Organizational buying behaviour is a very complex area, however, an understanding of the keyfactors are fundamental to marketing strategy and thus an organizations ability to competeeffectively in the market place.

Q.4 Explain the different marketing philosophies and its approach.

Ans. Marketing is a societal process by which individuals and groups obtain what they need and wantthrough creating, offering and freely exchanging products and services of value with others.

According to the American Marketing Association, Marketing is the process of planning andexecuting the conception, pricing, promotion and distribution of ideas, goods and services to createexchanges that satisfy individual and organizational goods

There are six competing philosophies under which organizations conduct marketing activities theproduction concept, product concept, selling concept, marketing concept, customer concept; andsocietal concept.

1) The Production Concept: The production concept is one of the oldest concepts in business. Theproduction concept holds that consumers will prefer products that are widely available andinexpensive. Managers of production-oriented businesses concentrate on achieving high productionefficiency, low costs and mass distribution.

They assume that consumers are primarily interested in products availability and low prices. Thisphilosophy makes sense in developing countries, where consumers are more interested in obtainingthe product than its features. It is also used when a company wants to expand the market.

2. The product Concept Product concept holds that consumer will favour these products thatoffer the most quality, performance and innovative features. Managers in these organizations focuson making superior products and improving them over time. They assume that buyers admire well-made products and can evaluate quality and performance product oriented companies often trust

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that their engineers can design exceptional products. They get little or no customer input, and veryoften they will not even examine competitors products.

3. The Selling Concept: The selling concept holds that consumers and businesses, if left alone, willordinarily not buy enough of the organizations products. The organization most, therefore,

undertakes an aggressive selling and promotion effort. This concept assumes that consumerstypically show buying inertia or resistance and must be coaxed into buying. It also assumes that thecompany has a whole battery of effective selling and promotion tools to stimulate more buying. Theselling concept is epitomized by the thinking that The purpose of marketing is to sell more stuff tomore people for more money in order to make more profit

Most firms practice the selling concept when they have over capacity. Their aim is to sell what theymake rather then make what market wants.

4. The Marketing Concept: The marketing concepts hold that the key to achieving itsorganizational goals consists of the company being more effective then competitors in creating,

delivering and communicating superior customer value to its chosen target markets.

The marketing concept rests on four pillars: target market, customer needs, integrated marketingand profitability. There is a contrast between selling and marketing concepts:

Selling focuses on the needs of the seller marketing on the needs of the buyer.

Selling is preoccupied with the sellers need to convert his product into cash marketing with theideas of satisfying the needs of the customers by means of the product and the whole cluster of thingsassociated with creating, delivering and finally consuming it.

5. The customer Concept: Under customer concept, companies shape separate offers, servicesand messages to individual customers. These companies collect information on each customers pasttransactions, demographics, psychographics and media and distribution preferences. They hope toachieve profitable growth through capturing a larger share of each customers expenditures by

building high customer loyalty and focusing on customer lifetime value.

The ability of a company to deal with customers are at a time become practical as a result of advancesin factory customization, computers, the internet and database marketing software.

6. The Societal Marketing Concept: The societal marketing concept holds that the organizationsgoal is to determine the needs, wants and interests of target markets and to deliver the desired

satisfactions more effectively and efficiently than competitors in a way that preserves or enhancesthe consumers and the societys well being.

The societal marketing concept calls upon marketers to build social and ethical considerations intotheir marketing practices. They must balance and juggle the often-conflicting criteria of companyprofits, consumer want satisfaction and public interest.

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Companies see cause-related marketing as an opportunity to enhance their corporate reputation,raise brand awareness, increase customer loyalty, build sales and increase press coverage. They

believe that consumers will increasingly look for signs of good corporate citizenship that go beyondsupplying rational and emotional benefits.

Q. 5 What are the various stages involved in decision process when a consumer isbuying new product? Also, explain the adoption process.

Ans. Stages of the Consumer Buying Process

Six Stages to the Consumer Buying Decision Process (For complex decisions). Actual purchasing isonly one stage of the process. Not all decision processes lead to a purchase. All consumer decisionsdo not always include all 6 stages, determined by the degree of complexitydiscussed next.

The 6 stages are:

1. Problem Recognition(awareness of need)difference between the desired state and the actualcondition. Deficit in assortment of products. HungerFood. Hunger stimulates your need toeat.Can be stimulated by the marketer through product informationdid not know you weredeficient? I.E., see a commercial for a new pair of shoes, stimulates your recognition that youneed a new pair of shoes.

2. Information search Internal search, memory. External search if you need more information. Friends and relatives (word of mouth).

Marketer dominated sources; comparison shopping; public sources etc.

A successful information search leaves a buyer with possible alternatives, the evoked set.

Hungry, want to go out and eat, evoked set is

chinese food indian food burger king klondike kates etc

3. Evaluation of Alternativesneed to establish criteria for evaluation, features the buyer wants

or does not want. Rank/weight alternatives or resume search. May decide that you want to eatsomething spicy, indian gets highest rank etc.

If not satisfied with your choice then return to the search phase. Can you think of anotherrestaurant? Look in the yellow pages etc. Information from different sources may be treateddifferently. Marketers try to influence by framing alternatives.

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4. Purchase decisionChoose buying alternative, includes product, package, store, method ofpurchase etc.

5. PurchaseMay differ from decision, time lapse between 4 & 5, product availability.6. Post-Purchase Evaluationoutcome: Satisfaction or Dissatisfaction. Cognitive

Dissonance, have you made the right decision. This can be reduced by warranties, after salescommunication etc.

After eating an indian meal, may think that really you wanted a chinese meal instead.

Adoption Process

Adoption is an individuals decision to become a regular user of a product. How do potentialcustomers learn about new products, try them, and adopt or reject them? The consumer adoptionprocess is later followed by the consumer loyalty process, which is the concern of the establishedproducer. Years ago, new product marketers used a mass market approach to launch products. Thisapproach had two main drawbacks: It called for heavy marketing expenditures, and it involved many

wasted exposures. These drawbacks led to a second approach, heavy user target marketing. Thisapproach makes sense, provided that heavy users are identifiable and are early adopters. However,even within the heavy user group, many heavy users are loyal to existing brands. New productmarketers now aim at consumers who are early adopters.

The theory of innovation diffusion and consumer adoption helps marketers identify early adopters.

An innovation is any good, service, or idea that is perceived by someone as new. The idea may have along History, but it is an innovation to the person who sees it as new. Innovations take time to spreadthrough the social system. The Innovation diffusion process is defined as the spread of a newidea from its source of invention or creation to its ultimate users or adopters. The consumer adoptionprocess is the mental process through which an individual passes from first hearing about aninnovation to final adoption.

Adopters of new products have been observed to move through five stages:

1. Awareness : The consumer becomes aware of the innovation but lacks information about it.2. Interest : The consumer is stimulated to seek information about the innovation.3. Evaluation: The consumer considers whether to try the innovation4. Trial: The consumer tries the innovation to improve his or her estimate of its value.5. Adoption : The consumer decides to make full and regular use of the innovation.

Q. 6 Explain briefly the marketing mix elements for an automobile company givingsufficient examples.

Ans. Marketing mix is the combination of elements that you will use to market your product. Thereare four elements: Product, Place, Price and Promotion. They are called the four Ps of the marketingmix.

The objectives of this lesson about marketing mix is to give you:

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-The tools you need for establishing your detailed marketing plan and forecasting your sales.

1. Challenge2. Product3.Place4. Price5.Promotion6. Sales strategy7. Do it yourself8.Coaching

1-CHALLENGE

You have gotten a rough idea about the market situation and the possible positioningof your product.Of course, its far to be sufficient. Now, you must write your detailed planning. Itmeans that brainstorming is ended and that you have to go to the specifics in examining andchecking all the hypothesis you had made in the preceding chapters. You will use the marketingmix.

Some people think that the four Ps are old fashionable and propose a new paradigm: The four Cs!Product becomes customer needs; Place becomes convenience, price is replaced by cost to the user,promotion becomes communication. It looks like a joke but the Cs is more customer-oriented.

2-PRODUCT

A good product makes its marketing by itself because it gives benefits to the customer.We can expect that you have right now a clear idea about the benefits your product can offer.

Suppose now that the competitors products offer the same benefits, same quality, same price. Youhave then to differentiate your product with design, features, packaging, services, warranties,return and so on. In general, differentiation is mainly related to:

-The design: it can be a decisive advantage but it changes with fads. For example, a fun board mustoffer a good and fashionable design adapted to young people.

-The packaging: It must provides a better appearance and a convenient use. In food business,products often differ only by packaging.

-The safety: It does not concern fun board but it matters very much for products used by kids.

-The green: A friendly product to environment gets an advantage among some segments.

Inbusiness to business and for expensive items, the best mean of differentiation arewarranties, return policy, maintenance service, time payments and financial andinsurance services linked to the product

3-PLACE-DISTRIBUTION

A crucial decision in any marketing mix is to correctly identify the distribution channels. Thequestion how to reach the customer must always be in your mind.

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-Definition: The place is where you can expect to find your customer and consequently,where the sale is realized. Knowing this place, you have to look for a distributionchannel in order to reach your customer.

In fact, instead of place it would be better to use the word distribution but the MBA lingo uses

place to memorize the 4 Ps of the marketing mix!

4-PRICE

Price means the pricing strategy you will use. You have already fixed, as an hypothesis acustomer price fitted to your customer profile but you will have now to bargain it with the

wholesalers and retailers. Do not be foolish: They know better the market than you andyou have to listen their advices.

5-PROMOTION

Advertising, public relations and so on are included in promotion and consequently in the 4Ps.Sometimes, packaging becomes a fifth P. As promotion is closely linked to the sales, I will mentionhere the most common features about the sale strategy.

-Definition: The function of promotion is to affect the customer behavior in order toclose a sale.

Of course, it must be consistent with thebuying process described in the consumer analysis.

Promotion includes mainly three topics: advertisement, public relations, and sales promotions.

-Advertisement:

It takes many forms: TV, radio, internet, newspapers, yellow pages, and so on. You have to takenotice about three important notions:

Reach is the percentage of the target market which is affected by your advertisement. For example,if you advertise on radio you must know how many people belonging to your segment can beaffected.

Frequencyis the number of time a person is exposed to your message. It is said that a person mustbe exposed seven times to the message before to be aware of it. Reach*frequency gives the grossrating point. You have to evaluate it before any advertisement campaign.

Message: Sometimes, it is called a creative. Anyway, the message must: get attraction, captureinterest, create desire and finally require action that is to say close the sale.

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Down-earth-advice:

There are some magical words that you can use in any message:

-Your-YouI-Me-MyNow-Today

-Fast-Easy-Cool-New-Fun-Updated-Free-Exciting-Astonishing

-Success-Love-Money-Comfort-Protection-Freedom-Luck.

-Public relations:

Public relations are more subtle and rely mainly on your own personality. For example, you candeliver public speeches on subjects such as economics, geo-economics, futurology to several

organizations (civic groups, political groups, fraternal organizations, professional associations)

6-SALES STRATEGY

Sales bring in the money. Salesmen are directly exposed to the pressure of finding prospects, makingdeals, beating competition and bringing money.

PGDBA Semester II

MB0047 Management Information Systems

Q1. What is MIS? Define the characteristics of MIS? What are the basic Functions ofMIS? Give some Disadvantage of MIS?

Ans. Definition :

Organizedapproach to thestudyofinformationneedsof amanagementat everylevelin making

operational,tactical, andstrategic decisions. Itsobjectiveis todesignandimplementman-machineprocedures, processes, androutinesthatprovidesuitablydetailedreportsin anaccurate,consistent,and timely manner. Modern, computerizedsystemscontinuously gatherrelevantdata, both frominsideandoutsidetheorganization. This data is then processed, integrated, and stored in acentralizeddatabase(ordata warehouse) where it is constantly updated and madeavailableto all

who have theauthoritytoaccessit, in aformthat suits their purpose.

Characteristics of MIS:

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