The Reflection of Management FINANCE | GENERAL MANAGEMENT | HUMAN RESOURCE | HEALTHCARE | MARKETING | OPERATIONS | SYSTEMS
Pratibimb | October 2011 | 1
Volume II, Issue IV
A Students’ Initiative
A Monthly Magazine
About TAPMI T.A. Pai Management Institute (TAPMI) is a premier management institute situated in Manipal and is well known for its academic rigour & faculty-student interaction. The Institute has been ranked amongst top 1 per cent of B-schools in India. It is ranked 4th in the South Zone by The Week Magazine. Founded by the visionary, Late Shri. T. A. Pai, TAPMIâ€™s mission is to provide much needed impetus to the task of building professional management capability in the country. In the process, it has also played a role in strengthening the existing educational and health infrastructure of Manipal.
Mission We are committed to excellence in post-graduate management education, research, and practice by nurturing and developing global wealth creators and leaders. We shall continually benchmark ourselves against the best in class institutions. We shall foster continuous learning and reflection, achievementorientation, creative interdependence and respect for diversity with a holistic concern for ethics, environment, and society.
Recent Update TAPMI received AIMS-WE School Innovation Award at 23rd AIMS Annual Management Education Convention 2011, organised by Association of Indian Management Schools, at Bhubaneswar on 26 â€“ 27th August 2011. Pratibimb | October 2011 | 2
About Pratibimb Pratibimb – The TAPMI’s e-Magazine - is the conglomeration of the various specializations in MBA (Marketing, Finance, HR, Systems and Operations). It is primarily intended to provide insights into the plethora of knowledge that relate to the various departments of Management and to give an opportunity to the students of TAPMI and the best brains across country to exhibit their creative cells. The magazine also strives to bring expert inputs from industries, thereby bringing the academia and industry together. Pratibimb the e-Magazine of TAPMI had its first issue in December 2010. The issue comprised of an interview of denoted writer Ms. Rashmi Bansal along with a series of articles by students and industry experts like MadhuSudan Rao (AVPDelivery, Mahindra Satyam) & Ed Cohen who is a global leader and chief learning officer who led Booz Allen Hamilton & Satyam Computer Services to the first rank globally for learning & development . It also included a hugely successful and engrossing game for finance geeks called “Beat the Market” to bring out the application based knowledge of students by providing them the platform where they were expected to predict the stock prices of two selected stocks on a future date. The magazine is primarily intended for the development of all around management knowledge by providing unbiased critical insights into the modern developments. TAPMI believes that learning is a continuous process and is not limited to the four walls of the classroom. This viewpoint is further enhanced through Pratibimb wherein students manage and contribute to create a refreshing learning environment outside the classrooms which eventually leads to a holistic development process. The magazine provides a competitive platform and opportunity to the students where they can compete with the best brains of the country. The magazine also provides a platform for prominent industry stalwarts to communicate their views and learning about and from the recent developments from their respective fields of business which in turn helps to create a collaborative learning base for its readers. Pratibimb is committed in continuing this initiative by bringing in continuous improvement in the magazine by including quality articles related to various management issues and eventually creating a more engaging relationship with its readers by providing them a platform to showcase their talent. We invite all the best brains across country to be part of this initiative and help us take this to the next level. Pratibimb | October 2011 | 3
I am pleased to state that the team members of PRATIBIMB have continued their sincere efforts to bring out this sixth issue in October 2011. The previous five issues had a number of management articles written by our students and faculty. This student magazine is also accessed and appreciated by our alumni and industry and business readers. The magazine provides a platform for our students to use their creativity, imagination and language skills to reflect upon various management areas i.e. operations, marketing, system, HR, finance and entrepreneurship as well as in areas of their interest. It also fosters research culture among students. Research orientation and sharpening analytical mind are crucial for their academic orientation. Generally literary work, research article writing and publication should become part of students’ learning goals while they are in the campus. This would perhaps sow seeds for pursuit for academic career by a few management students after their initial experience in industry and business. It has been observed that on comparison with fast developing country i.e., China in Asia, the focus on research and publishing from Indian students and faculty in management journals and pursuit of Ph.D. programme in leading universities has been moderate in recent past. This situation needs to be improved. To this extent our students and faculty can best express themselves about their creative thoughts, opinions, knowledge and interests by contributing to PRATIBIMB. Let PRATIBIMB grow in content and variety with thoughtful articles in months to come. I congratulate the persistence and continued efforts put in by the team members of PRATIBIMB for timely publishing this volume. I wish them higher performance, joy and success in their endeavor. Dr. A. S. Vasudev Rao Pratibimb | October 2011 | 4
Rohit Kumar, Chief-Editor Ramanuj Vidyanta, Editor-Branding Sarvesh Joshi, Editor-Creative Designer
Dear Readers, With this edition, Pratibimb is now a monthly magazine !! We thank all the participants and readers for making it possible for us. By making it monthly, we present you a platform that will provide more opportunities to share knowledge and showcase your talent by competing with best minds in the country. The highlight of this issue is the interview with Dr. H Harish Hande, Co-Founder & Managing Director, SELCO India who shared his views on social entrepreneurship and Indian energy sector with us. In the midst of uncertainties prevailing in west, Indian issues that impacts or will impact aam aadmi in future are being undermined . One of these is the implementation of DTC. This edition analyses the effects of new Direct-Tax-Code which is to be implemented in April next year and CEO compensation in India. There are other interesting articles on various areas of management that will definitely draw your attention. From this edition, we are including a new section on Alumnus of the Month by Alumni Affairs Committee, TAPMI. We are extremely thankful to AAC for putting in efforts and providing us the details. We are thankful to all the students from various colleges who put in great efforts in writing articles on various issues/topics and worked hard to send entries for “Beat The Market” and “Route To Market”. The articles have been selected by the Editorial Team whereas “Beat The Market” has been judged by Mr. Mitesh Thacker, Head Research & Trading Analyst, www.miteshthacker.com and “Route To Market” has been judged by Mr. Anirban Bhattacharya, Business Analyst, Cognizant Technology Solutions. We thank judges for their precious time. We also thank all those who helped us in improving Pratibimb through their feedbacks. We would like to take this opportunity to extend our gratitude to all faculties and students at TAPMI for their continued support, guidance, motivation and inspiration to take Pratibimb to the next level. Please continue to send in your valuable suggestions/feedbacks at email@example.com so that we can make improvements in the coming issues. Happy Reading!! Rohit Kumar
Pratibimb | October 2011 | 5
Abhishek Anupam Abhishek Dubey Bijoy Alokkan Kapil Saraswat Manish Mishra Nandini Singh Naveen N Pranaynehru T Shivesh Sinha Sriparna Neogi Sushmit Sinha
Prof. Chowdari Prasad, Dean (Planning & Development), TAPMI Dr. Jaba M. Gupta, Associate Professor and Chairperson—eGPX, TAPMI
Special Thanks Dr. H Harish Hande Co-Founder & Managing Director, SELCO India
Mr. Mitesh Thacker, Head Research & Trading Analyst , www.miteshthacker.com
Mr. Anirban Bhattacharya Business Analyst, Cognizant Technology Solutions
HR-Forum, TAPMI Alumni Affairs Committee, TAPMI
contents CEO compensation in India: Trends and effect of Global Recession
Avanitka Tomar, IIM Calcutta
Reverse, Reverse, Reverse….
Prof. Chowdari Prasad, Dean (Planning & Development), TAPMI
Diwali Anomaly—Excess Return in the Indian Stock Market
Umesh Kumar, IIFT Delhi
Effect of New Tax Code on Common People
Nandhakumar B, TAPMI
Apple’s iPad-2 Marketing Strategy In India
Nikhil Kapoor, IIFT Delhi
Interview with Dr. H Harish Hande
Co-Founder & Managing Director, SELCO Indiai
Japanification of US - Is there a lost decade looming on US?
P Prudhvinath Reddy & Shyam S, NMIMS
What makes an employer of choice?
Diksha Srivastava, TAPMI
Sumedha Sobti, IIM Kozhikode
Stratedge Rural - LIVE LIFE LTD.
Ayush Karnani, IIFT Delhi
Online Reputation Management Rakesh Tanwani, IIT Bombay
Pratibimb | October 2011 | 6
CEO Compensation in India Trends and Effect of Global Recession
by Avantika Tomar, IIM Calcutta
The level of compensation and the extent of pay -for-performance for chief executive officers (CEOs) has become a topic of considerable interest in the academic and business communities. It involves issues ranging from labor economics and industrial organization, to accounting, finance, law, organization behavior and strategic management. Compensation packages can play an important role in motivating top managers. Therefore, it is important to understand how corporations set CEO compensation packages and to study the link between compensation and performance (Parthsarathy, Menon & Bhattacherjee, 2006). In comparison to the US, empirical literature on CEO compensation in India is rather limited. There is no literature available on the CEO compensation with recent data and more specifically, no study that investigates the effect of stock price changes on executive compensation. In addition, there are no studies to establish the effect of recession on CEO compensation. This paper studies the effect of stock prices on CEO compensation across six years. Data has been analyzed for four years (2004-07) before the 2008 recession, and 2 years after the recession â€“ 2009, 2010. Pratibimb | October 2011 | 7
Additionally, in this empirical analysis, a comprehensive set of corporate governance variables, foreign ownership, proportion of independent directors on board, board size and firm level risk have been used as controls. The paper attempts to uncover a pattern that the CEO compensation has shown in the Indian context, especially post the global financial recession of 2008. India's integration into the world economy over the last decade has been remarkably rapid. Going by the common measure of globalization, Indiaâ€™s two-way trade (merchandize exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the Asian crisis, to 34.7 per cent in 2007-08 (Subbarao, 2009). If we take an expanded measure of globalization, that is the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08 (Subbarao, 2009). The economic boom in India that preceded the 2008 downturn was dependent upon greater global integration in three ways: greater reliance on exports particularly of services; increased dependence on capital inflows,
especially of the short-term variety; and the role these played in underpinning a domestic credit-fuelled consumption and investment boom. These in turn made the growth process more vulnerable to internally and externally generated crises, as is now becoming clear. Ghosh & Chandrasekhar, 2009 The paper examines the determinants of CEO compensation in large listed Indian companies. The context of the research is the economic recession and therefore, there is a comparison of the impact of different determinants before and after the recession. This paper examines the determinants of CEO compensation using six years data on firm performance, corporate governance and top executive compensation from a large sample of 132 listed Indian firms. A linear regression model is used to develop explanations for total CEO cash compensation. The variables used in this study can be clubbed into the following five categories: sector/ industry, corporate governance, firm size, firm performance, data year. Each of the variables has been explained in this section. There are five sectors, namely IT (10), real estate (19), telecom (6), energy (10) and manufacturing (87), included in the study. The performance variables, compensation strategies and stock market movements for financial firms are completely different and hence, they were left out of the sample.
board size, percentage of independent directors and CEO also serving as the board chair. Two variables - PSU and Foreign - have been used to capture the effect of public or private undertaking and presence of foreign shareholding, respectively, on the total compensation of the firmsâ€™ CEO. Age of the firm has also been used as a variable in the study. Firm size has been captured using the natural log of the total assets of the firm. In order to measure the performance of the firm, two variables namely, Return on Assets (ROA = operating profits by total assets) and Percentage Increase in Stock (refers to the percentage increase in current yearâ€™s stock price relative to last year (data being noted as on 31st December each year)) have been used.
One industry specific variable used in the study
Finally, Log of total CEO Compensation has been used as the dependent variable. The total CEO compensation is the sum of total cash compensation that includes salaries, bonuses, and perquisites. Executive pay is disaggregated into salary, bonus pay, and perquisites although Jaiswall (2005) suggests that the division of total compensation into the three categories is often arbitrary. Stock options are not used because the reporting of stock options is very mixed (for the few firms that have options), so consistent measures across firms cannot be developed. The complete regression equation used for the purpose of this article is:
is beta which essentially is the systematic risk that a firm is prone to. It usually displays the dependence of a firm on stock market fluctuations and the external environment, in general. Three variables have been included in the study to represent corporate governance â€“
The sample covers a 6-year period from 200407 and 2009-10 for 132 non-financial companies from the CMIE - Prowess Database. BSE 200-Index companies have been used as the source database. These are the two hundred largest listed firms on the Bombay Stock
Pratibimb | October 2011 | 8
Exchange. These firms disclose the CEOâ€™s pay whereas the pay of top executives at small companies often falls below the threshold required for disclosure. Data are collected for the two periods termed pre- and post-recession. Four years data, from 2004 to 2007 has been collected for the first period and two years data, 2009 and 2010 has been collected for the latter. After data cleaning, the total number of relevant and usable observations for the two periods has been 251 (pre-recession) and 203 (postrecession) respectively. Studies in western countries reveal that the CEO is also board chair in about 76% of the companies and an average board consists of 13 directors (Core, Holthausen & Larcker, 1999) and that usually, 60% of the directors are independent directors. The average Board Size across the five sectors is 14.03 and 13.85 which is nearly the same as that in the advanced economies. The average percentage of independent directors in the two sets of observations is 74% and 76% respectively. One interesting result is that the Total CEO Compensation in the Energy Sector is substantially lower than that in other sectors in both periods (Rs. 9,283,566 and Rs. 18,900,000 respectively). The energy sector has the highest aggregate assets in comparison to other firms, Rs. 31790 and Rs. 33234 crores respectively. On the other hand, ROA of IT sector is the highest (0.22 for years 2004-07 ad 0.23 for 2009-10) owing to least total assets (in crores). Real estate sector is the most risky sector with high beta values of 1.41 and 1.69, in pre and post-recession periods respectively. The beta values have gone up for all sectors between the two time periods i.e. the sectorsâ€™ assets have become more susceptible to market changes. Another interesting finding is the percentage of foreign shareholding in the IT and Telecom sectors. The respective Pratibimb | October 2011 | 9
percentages over the two time periods in the IT industry increased from 16% to 47% and that in the Telecom industry, increased from 17% to 29%. These results cannot be relied upon because the number of firms across the time periods is not same for both sectors and the sample size is also small. However, one valid finding that emerges from these descriptive statistics is that in both the sectors, as foreign shareholding increases, the percentage of firms whose CEO is also the chairperson of the board, comes down drastically. Theoretically, this is a valid finding because as the foreign intervention increases in any firm, its corporate governance practices improve and hence, the probability of CEO also being the chair is less. Thus, this negative relationship between foreign shareholding and CEO also being the Chairperson is an important finding of the study. Age of the firm is positively correlated with board size, size of the firm (Total assets) and ROA. In fact there is relatively higher correlation between age of the firm and its size (0.34 in 2004-07 period and 0.30 in period 2009 -10). Similarly, and not surprisingly, there is relatively high correlation between size of the firm (in total assets) and the size of the board of directors (0.45 in 2004-07 period and 0.31 in period 2009-10). There are several key findings from the data during 2004-07 periods. Consistent with existing literature, the percentage of independent directors on the board is negatively associated with the total CEO compensation. Dual leadership leads to higher CEO compensation is also confirmed by results with a positive coefficient value as expected. PSUs pay less to their CEOs than their private counterparts. In addition, there is a negative influence of PSUs on total CEO compensation. Larger firms (with more total assets) pay higher compensation to their CEOs.
Finally, percentage increase in stock price in two consecutive years leads to higher CEO compensation. There are several key findings from the data during 2009-10 periods. Consistent with existing literature, dual leadership leads to higher CEO compensation is confirmed by results with a positive coefficient value of 0.637492 (p-value of 0.00). PSUs pay less to their CEOs than their private counterparts. As per the results also, there is a negative influence of PSUs on total CEO compensation, with a high coefficient value of 2.6543 (p-value of 0.00). Larger firms (with more total assets) pay higher compensation to their CEOs (coefficient value of 0.287748 and p-value of 0.00). The increase in stock price variable is, however, negatively associated with total CEO compensation in the period 2009-10 and can be seen as an effect of recession. This paper empirically analyses the effect of corporate governance, firm size and firm performance and increase in stock price on the compensation of the CEO in an emerging economy, India. Finally, the hypothesis that the percentage increase in the current year’s stock price relative to previous year should have a positive influence on the total CEO compensation is strongly in the pre-recession period (2004-07) but fails during the 2009-10 period, where there is a negative association between increase in stock price and total CEO compensation. This can be seen as an impact of the 2008 economic recession. Overall, this study documents that board and ownership structure are associated with the level of CEO compensation, after controlling for the standard economic determinants of compensation (the firm’s demand for a highquality CEO, prior firm performance, and risk). With respect to board-of-director structure, it is found that CEO compensation is negatively Pratibimb | October 2011 | 10
associated to higher percentage of independent directors and positively associated to CEO also being the chairperson of the board. The empirical results indicate that there is a positive and significant relationship between firm size and the level of CEO compensation. Finally, stock price increase is positively associated to the total CEO compensation in the prerecession years. References
Core, J.E., Holthausen, R.W. and Larcker, D. F., 1999 "Corporate governance, chief executive officer compensation, and firm performance” Journal of Financial Economics 51 (1999) 371-406
Ghosh, J., Chandrasekhar, C.P. (2009). The costs of ‘coupling’: the global crisis and the Indian economy. Cambridge Journal of Economics, 33, 725–739
Jaiswall, M., (2005), Key Determinants of Top Management Pay in Indian Companies, Ph.D. Thesis. Indian Institute of Management, Bangalore
Parthasarathy, A., Menon, K. and Bhattacherjee, D. 2006 Executive Compensation, Firm Performance and Governance: An Empirical Analysis. Economic and Political Weekly September Issue
Subbarao, D. 2009 “Impact of the Global Financial Crisis on India Collateral Damage and Response” Speech at RBI Symposium, 2009
Reverse, Reverse, Reverse….. by Prof. Chowdari Prasad, Dean (Planning & Development), TAPMI, Manipal
You might have known a few friends who do not venture to drive a car although they can afford one, only because they are afraid of using “reverse” gear! Usually, reverse means going backwards. The word ‘reverse’ primarily sounds negative as if we are doing something against the normal and are acting retrograde. But in recent years, it got prominence when used as a prefix to ‘Engineering’, ‘Osmosis’ or ‘Transcriptase’. In Lawn Tennis, one of the styles is ‘Reverse Singles’. In Cricket, a novel technique adopted by confident batsmen is “Reverse sweep” besides several other strokes like on-drive, straight drive, off-drive, coverdrive, square drive, square cut, late cut, leg glance, etc. All of us felt very happy when we heard that there was a tendency of ‘Reverse Brain Drain’ to India, when our intellectual citizens and professionals considered to come back home to work for the prosperity of native land instead of contributing to the outside world. I got a jerk once when in an examination hall, one of my students of “Management of Banking & Financial Institutions” course raised a genuine (or mischievous?) doubt on a question pertaining to ‘Reverse Bank of India’; later it was found to be a typographic error for Reserve Bank of India. We do ‘Reverse Procession” during our annual convocations too as a closing Pratibimb | October 2011 | 11
formality. The following paragraphs dealing with certain aspects of ‘Reverse’ have been extracted from Wikipedia:Reverse Telephone Directory: A reverse telephone directory (also known as a gray pages directory, criss-cross directory or reverse phone lookup) is a collection of telephone numbers and associated customer details. However, unlike a standard telephone directory, where the user uses customer's details (such as name and address) in order to retrieve the telephone number of that person or business, a reverse telephone directory allows users to search by a telephone service number in order to retrieve the customer details for that service. Reverse telephone directories are used by law enforcement and other emergency services in order to determine the origin of any request for assistance, however these systems include both publicly accessible (listed) and private (unlisted) services. As such, these directories are restricted to internal use only. Publicly accessible reverse telephone directories may be provided as part of the standard directory services from the telecommunications carrier in some countries. In other countries these directories are often created by phone phreakers by collecting the information available via the publicly
accessible directories and then providing a search function which allows users to search by the telephone service details. Reverse Engineering is the process of discovering the technological principles of a device, object, or system through analysis of its structure, function, and operation. It often involves taking something (e.g., a mechanical device, electronic component, software program, or biological, chemical or organic matter) apart and analyzing its workings in detail to be used in maintenance, or to try to make a new device or program that does the same thing without using or simply duplicating (without understanding) the original. Reverse engineering has its origins in the analysis of hardware for commercial or military advantage. The purpose is to deduce design decisions from end products with little or no additional knowledge about the procedures involved in the original production. The same techniques are subsequently being researched for application to legacy software systems, not for industrial or defence ends, but rather to replace incorrect, incomplete or otherwise unavailable documentation. Business process re-engineering is the analysis and design of workflows and processes within an organization. According to Davenport (1990) a business process is a set of logically related tasks performed to achieve a defined business outcome. Re-engineering is the basis for many recent developments in management. The cross-functional team, for example, has become popular because of the desire to reengineer separate functional tasks into complete cross-functional processes. Also, many Pratibimb | October 2011 | 12
recent management information systems developments aim to integrate a wide number of business functions. Enterprise Resource Planning, Supply Chain Management, Knowledge Management systems, groupware and collaborative systems, Human Resource Management Systems and Customer Relationship Management.
Business process re-engineering is also known as business process redesign, business transformation, or business process change management. The aspect of â€œreformsâ€? in our country initiated in early nineties during last century is a testimony. First, it was a political turmoil for internal or external reasons during the eighties with the assassination of then Prime Minister, Smt Indira Gandhi in 1984. But when her son, the young charismatic leader Mr Rajiv Gandhi who had no knowledge of economy, politics or administrative experience took charge of the position and lead the country towards modernization and globalization during his four
year tenure, we had a sigh of relief. Unfortunately, the next two years ie., 1989 and 1990 witnessed uncertainty, chaos and dismal socio-political conditions. India’s Foreign Exchange Reserves depleted to such low levels that we were not in a position to meet a week’s import obligations in 1991. Then followed another disaster in the killing of Rajiv Gandhi during the General Elections in 1991 and the resultant emergence of a typical minority government led by late Mr P V Narasimha Rao, supported by Dr Manmohan Singh as Finance Minister embarking on the ‘Economic Reforms’. Two decades later, we are definitely tasting the partial outcomes of the radical steps taken towards LPG aiming at double digit growth rate and better quality of life for all. There have been reforms in land laws, labour laws, taxation laws, banking and financial sector, electoral laws, agricultural, educational and industrial sectors, and so on. Interesting aspect of the reforms is that they have been accepted and consistently maintained by successive governments headed by differing political parties or allies like NDA or UPA under the five Prime Ministers viz., Narasimha Rao, Deve Gowda, IK Gujral, Atal Behari Vajpayee and Dr. Manmohan Singh. Moving away from reversals in general life and political or economic reforms, the finance world witnessed introduction of several ‘reverses’. We come across concepts like Reverse Takeover or Mergers, Reverse Repo Rate, Reverse Book-building, Reverse Mortgage, Reverse Taxation or Reverse Stocksplit, each of which is a topic in itself for our learning. May be, in course of deliberating them in-depth, the original concepts like Mergers & Acquisitions, Repo Rate, Book Building, Mortgage, etc are given to be well known. Presuming that the original terminology is very clearly understood, let us Pratibimb | October 2011 | 13
discuss the “Reverses” one by one to take stock of their relevance in the finance world. Reverse Takeover or Mergers: According to Wikipedia, a reverse takeover or reverse merger (reverse IPO) is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company. In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The process is well laid down by the Securities Exchange Commission (SEC) in USA. There are both benefits and drawbacks in this process of reverse mergers. The greater number of financing options available to publicly held companies is a primary reason to undergo a reverse takeover. America has witnessed several such reverse takeovers. In India, the two classic mergers of ICICI Ltd., with its own subsidiary ICICI Bank and IDBI Ltd., with IDBI Bank are referred to as reverse mergers by some under the concept of Universal Banking during last decade. Reverse Repo Rate: A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate ofinterest. A repo is equivalent to a cash transaction combined with a forward contract. The cash
transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the interest on the loan while one of the settlement date of the forward contract is the maturity date of the loan. A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints. The term "reverse repo and sale" is commonly used to describe the creation of a short position in a debt instrument where the buyer in the repo transaction immediately sells the security provided by the seller on the open market. On the settlement date of the repo, the buyer acquires the relevant security on the open market and delivers it to the seller. In such a short transaction the seller is wagering that the relevant security will decline in value between the date of the repo and the settlement date. Reverse Book-Building: Delisting of shares under SEBI (delisting of Securities) Guidelines 2003 Securities and Exchange Board of India has issued the SEBI (Delisting of Securities) Guidelines 2003â€™ for delisting of shares from stock exchanges. The guidelines inter alia provide the overall framework for voluntary delisting by a promoter. In accordance with the guidelines for the first time in India by any Exchange, National Stock Exchange now Pratibimb | October 2011 | 14
provides online reverse book building for promoter/acquirer through its trading network which spans various cities and towns across India. NSE operates a fully automated screen based bidding system that enables trading members to enter offers directly from their offices through a sophisticated telecommunication network. What is Reverse Book Building (Delisting of shares)? The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the share holders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. In the Reverse Book Building scenario, the Acquirer/Company offers to buy back shares from the share holders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the share holders at various prices, which are above or equal to the floor price. The buy back price is determined after the offer closing date Reverse Mortgage: A remortgage is a form of equity release (or lifetime mortgage) available in the United States. It is a loan available to seniors aged 62 or older, under a Federal program administered by HUD. It enables eligible homeowners to access a portion of their equity. The homeowners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof. The homeowners' obligation to repay the loan is deferred until owner (or survivor of two) dies, the home is sold, they cease to live in the property, or they breach the provisions of the mortgage (such as failure to maintain the
property in good repair, pay property taxes, and keep the property insured against fire etc). The owner can be out of the home for up to 364 consecutive days (i.e., into aged care). In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit, increases the available credit by the same amount. Interest that accrues is added to the mortgage balance. Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage. If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home in some areas. However most lenders do not like to take a second or third lien position behind a reverse mortgage because its balance increases with time. It is rare to find reverse mortgages with subordinate liens behind them as a result. A reverse mortgage may be refinanced if enough equity is present in the home, and in some cases may qualify for a streamline refinance if the interest rate is reduced. A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar Pratibimb | October 2011 | 15
fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing. Reverse Taxation: In economics, a negative income tax (abbreviated NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented. It was developed by British politician Juliet RhysWilliams in the 1940s and later United States economist Milton Friedman combined NIT with his flat tax proposals. Negative income taxes can implement a basic income or supplement a guaranteed minimum income system. In a negative income tax system, people earning a certain income level would owe no taxes; those earning more than that would pay a proportion of their income above that level; and those below that level would receive a payment of a proportion of their shortfall, which is the amount their income falls below that level. Reverse Stock-split: On a stock exchange, a reverse stock split or reverse split is a process by a company of issuing to each shareholder in that company a smaller number of new shares in proportion to that shareholder's original shares that are subsequently canceled. A reverse stock split is also called a stock merge. The reduction in the number of issued shares is accompanied by a proportional increase in the share price. New shares are typically issued in a simple ratio, e.g. 1 new share for 2 old shares, 3 for 4, etc. A reverse split is the opposite of a stock split. Typically, the stock will temporarily add a "D"
to the end of its ticker during a reverse stock split. Sometimes a company may concurrently change its name. This is known as a name change and consolidation (i.e. using a different ticker for the new shares). A detailed reading of all such ‘reverse’ products
or concepts would facilitate a serious management student with Finance elective specialization to become an expert in handling his or her task with ease. Similarly, we can advise all our friends who are apprehensive to drive a car, to be confident after mastering ‘reverse’ gear first in an open ground and go on a busy road safely.
Alumnus of the Month – October 2011 The Alumni Affairs Committee (AAC) is pleased to announce Mr. Rajesh Narayanan (PGDM 1990-92) as the Alumnus of the Month (AoM) for October 2011. Mr. Rajesh is currently the Senior Director – Global Support Business Operations at Oracle. He has been with Oracle for more than 7 years now and heads the operations of software support business for Oracle. Mr. Rajesh is a Mechanical Engineer from the batch of 1989 of TKM College of Engineering, Kerala University. He specialized in HR during his PGDM at TAPMI from 1990-1992. Prior to his role at Oracle, he has worked in various positions in San Engineering and Locomotive, Kirloskar Systems, Dharma Systems and CrossDomain Solutions. On a personal front, he is an autoenthusiast and loves to spend his free time off-roading and exploring the countryside. The Alumni Affairs Committee wishes Mr. Rajesh Narayanan all the very best for his future endeavors. - by Alumni Affairs Committee (AAC), TAPMI
Pratibimb | October 2011 | 16
Excess Returns in Indian Stock Market by Umesh Kumar, IIFT Delhi
Introduction `Does the stock market overreact?' De Bondt and Thaler in 1985 gave start to a new wave of thinking known as behavioural finance. Weak form inefficiency of the stock market was discovered by them after analysing how people were systematically overreacting to unexpected and dramatic news events which were surprising and profound. The Efficient Market Hypothesis as proposed by Fama (1970) asserts that the stock prices reflect the relevant information. The asset prices follow a random walk path i.e. they are merely random numbers. The study conducted by Caginalp G. and H. Laurent (1998) in “The predictive power of price patterns” paper finds patterns and confirms that they are statistically significant even in out-of-sample testing and report. The pattern of the stock index might help in predicting some of the effects of the various events. The calendar anomalies tends to exist which goes against the efficient market hypothesis. The researchers have used Gregorian calendar to investigate the calendar anomalies. There are various countries and Pratibimb | October 2011 | 17
societies which follow their own calendar on the basis of their religion. For example, the Hebrew calendar is followed by the Jewish society which is strictly based on luni-solar, the Christian society follows the Gregorian which is based on solar, and similarly Hindu and Chinese follow their own. The Hindu calendar is called “Panchanga” and it is based on both movements of the sun and the moon. The festival of “Diwali” typically occurs at the end of October and beginning of November. The special ritual called “Mahurat Trading” can be observed on major stock exchanges like NSE, BSE, NCDEX to name a few and it lasts for about an hour. It is being performed as a symbolic ritual since many years. It marks a link with the rich past and brokers look at it on a positive note. It marks an auspicious beginning to the Hindu New Year. The investors place token orders and buy stocks for their children, which are sometimes never sold and intraday profits are booked, however small they may be. Thus, it is widely believed that
trading on this day will bring wealth and prosperity throughout the year. It is interesting to observe the behaviour of trading activities during the period preceding and succeeding Mahurat Trading. The purpose of this study is to know the effect of Diwali prior and post the festival on the returns. Econometric methodology I have measured stock return as the continuously compounded daily percentage change in the share price index (S&P CNX NIFTY) as shown below: Rt = (lnPt – lnPt-1) x 100 …………………… (1) Where, Rt = return at time t Pt, Pt-1 = closing value of the stock price index at time t & t-1.
I have used S&P CNX Nifty as it has got the most liquid stocks in its portfolio. Further, the National Stock Exchange is largest in terms of Market capitalisation and Volume. I have used the data of returns of 8 trading days (inclusive of Mahurat trading day) and 7 trading days after Mahurat trading (excluding Mahurat trading day). Further, I have used Paired t-test in order to check whether there is an existence of positive returns post Mahurat Trading days. Empirical findings and interpretation The Paired t-test was applied to the data relating the period as specified earlier. The preliminary findings from the below data suggests that the mean returns are greater as compared to the mean returns prior to Mahurat Trading days.
Paired t test Variable w2 avgw1mh diff
Std. Err. Std. Dev.
[90% Conf. Interval]
15 .882058 15 -.2314575
1.926368 .006007 1.041122 -.7049269
mean(diff) = mean(w2 - avgw1mh) Ho: mean(diff) = 0 Ha: mean(diff) < 0 Pr(T < t) = 0.9424
t= degrees of freedom =
Ha: mean(diff) != 0 Pr(|T| > |t|) = 0.1151
Ha: mean(diff) > 0 Pr(T > t) = 0.0576
Table 1: Results of the test Pre and Post Diwali (7days periods) Ho: Mean (W2-avgw1mh) = 0 Ha: Mean (W2-avgw1mh) ≠ 0 Pratibimb | October 2011 | 18
At 90 % confidence interval, we reject the null hypothesis that mean difference between average returns of pre Mahurat Trading 8 days including Diwali is statistically significant as compared logarithms average of the post 7 days after Mahurat Trading. Thus, we can say that the returns post Mahurat Trading is higher as compared to 8 days prior to it. In order to avoid the existence of sample bias and data mining I have checked for out of sample data for 15 and 20 days and came out with the same results with 90% confidence interval.
Diwali as their expenditure rises drastically during this period. We know that one person’s expenses are another’s income. The money goes into the hands of various sellers of goods in the market. They have excess cash post this period which is reflected in the trading activity (volume). These people invest in the stock market driving the volume and returns on the exchange. References
De Bondt, Werner F. M., and Richard THALER, 1985. Does the Stock Market Overreact? The Journal of Finance, 40(3), 793-805.
Fama, E. F. (1970), "Efficient Capital Markets: A review of Theory and Empirical Work." Journal of Finance 25, 383-417.
Bachelier, L. (1900), Theory of Speculation. Reprinted in English (1964). "The random character of stock market prices." Cambridge: MIT Press.
Caginalp, G. and H. Laurent (1998). The predictive power of price patterns.
Applied Mathematical Finance 5, 181205. 4, 67
Chan, M. W. L., A. Khanthavit, and H. Thomas. 1996. Seasonality and cultural influences on four Asian stock markets. Asia Pacific Journal of Management, 13:1 -24.
Shukavak N. Dasa, A Hindu Primer, http://www.sanskrit.org/www/Hindu% 20Primer/hinducalendar.html
Volume Change I have checked the mean of volume post trading which is higher as compared to pre Mahurat Trading days. There is a surge in the trading activity during this period. Conclusion We can infer from the above data that there is an existence of excess returns post Mahurat period. The findings are similar to that of CNY effect (Chan et al, 1996). In India also we have a trend of distribution of bonuses to the employees. The enterprise might have liquidated their investment portfolios which results in the decline of their stock prices which is reflected in the index. The investors have excess cash bonuses would flock the market taking various positions driving up the volatility in the market. Secondly, newspaper gets flooded with the various buy recommendation by the brokers which may lure some of the investor during the period as they have excess cash balances. Thirdly, there are various brokers which tend to buy in token amount of shares which not severely affect the index during the period prior to Diwali. Fourthly, the people are cash strapped pre Pratibimb | October 2011 | 19
Effect of New Tax Code on Common People by Nandhakumar B, PGDM, TAPMI
Introduction From the next financial year the highly anticipated Direct Tax Code Bill that raises the basic exemption limit for individual tax payers from Rs. 1.6 lakh to Rs. 2 lakh will be implemented. According to the new code, there will be no tax on income below Rs. 2 lakh. The exemption for senior citizens has been raised to Rs. 2.5 lakh, up from Rs. 1.4 lakh at present. There is no change in corporate tax, which is kept at 30%. This bill will be effective from the next financial year. The new tax code will also change the tax brackets as described below
Tax for income between Rs. 2 lakh – Rs. 5 lakh: 10%
Tax for income between Rs. 5 lakh – Rs. 10 lakh: 20%
Tax for income over Rs. 10 lakh: 30%
Tax Savings The different tax payments for new tax code and the old slab for various income brackets are calculated and shown in Table 1.1. We can observe from the table that the new tax slabs will give rise to a substantial amount of savings. Pratibimb | October 2011 | 20
The total amount that can be saved by individual person is calculated as a difference between the old and new tax payments and the aggregate is calculated using the estimated total number of people in that bracket. From the consolidated summary of the net savings as
given in Table 1.2, we can see the total savings is almost Rs. 168bn. Effect on GDP The velocity of money in India, for the past financial year is 4.8. Assuming the velocity of money to be constant, which is the ratio of Normal GDP and money supply, the expected increase in GDP due to this increase in money supply is Rs. 807bn, thus the new tax code will result in 1.3% increase in Nominal GDP. This estimate is based on the official Government GDP Calculation of US$ 1.48 Trillion. As we can see the new tax code results in increase in GDP, which in turn increases the net income and further fuels the savings from direct taxes. Effect on Prices When money supply increases, there will be a proportionate Aggregate Demand (AD), i.e. when money supply increases by X%, it will give rise to X% increase in AD. When increase in AD is matched by Aggregate Supply (AS), there will be no change in price level; when AS or productive capacity is constant there would be no increase in Real Output, but inflation. Since the country is totally out of recession, there is negligible or no spare capacity, so the increase in demand will only give rise to inflation. Though there is 3-4% nominal increase in AS, it is normally absorbed by increase in AD, caused by other monetary measures. This case can be explained as shown in Fig 1.1.
Pratibimb | October 2011 | 21
Fig 1.1 Change in Prices in constant Output situation The total excess money supply is Rs. 806bn which represents 1.3% increase on Rs. 60.5 Trillion, which is the average money supply during last three months. This shows that the increase in tax savings will result in 1.3% increase in price levels and the net increase in real GDP will be around 2.6%. As we can see, increase in money supply will not really create the jobs, but will fuel inflation. Fig 1.2 shows the food inflation details for the past 3 months.
Fig 1.2 Food Inflation in India It can also be noted that the food inflation is constantly high and it is expected to reach double digits if the central bank does not take actions to contain it. So we can note that the new tax slab can increase inflation rate once it is implemented.
This is one more episode where the central bank and the Government of India are repeatedly making corrections and struggling to strike a balance between inflation and GDP growth rate. When the country is preparing to march in a double digit GDP (Real) growth rate, it should prepare itself to be proactive in controlling on the inflation, as too much concentration on GDP growth may lead the economy into PriceWage Spiral, and spoil the system as a whole.
The Great Indian Market, ncaer.org, August 2005, http://www.ncaer.org/ downloads/PPT/ TheGreatIndianMarket.pdf
New Direct Tax Code: Pay less in taxes from April 2011, ndtv.com, August 2010, http://www.ndtv.com/article/business/new -direct-tax-code-major-relief-for-salariedclass-47396&cp
Beat the Market As Jim Cramer, a former hedge fund manager, and a best-selling author put it, “As long as you enjoy investing, you'll be willing to do the homework and stay in the game… I mean I'm not smarter than the market, but I can recognize a good tape and a bad tape. I recognize when it's right and when it's wrong and that's what my strength is.” Stock markets have never been predictable, you may apply the best of logic and reasoning, but there could be a possibility that you may falter if the emotions of the investors take control. The entries or this contest have been judged by Mr. Mitesh Thacker, Head Research & Trading Analyst, www.miteshthacker.com. The winning entry of ‘Beat the Market’, August 2011 edition is of Team “Market Makers” whose members are Mr. Rahul Agarwal and Mr. Sourav Mishra from TAPMI, Manipal !! Congratulations!! We thank all the participants for their effort. Beat the Market is a game designed to prove your mettle in stock market analysis. This time onwards, we will provide you the name of one listed company from NSE. You need to analyze stock movements of this company till 7th Oct, 2011. On the basis of fundamental and technical analysis you need to give us your share price estimate of this stock as on 21 st Oct, 2011. Fundamental & Technical analysis will carry 70% weight while 30 % weight will be given to Accuracy of the estimated prices in the final score. The winning entry will receive a letter of appreciation and prize money of Rs. 1000 /Rules:
Company to be analyzed is GTL Ltd. (GTL)
You may analyze in a team of not more than 2 members
The file should not be more than 7 pages long including cover page, the cover page should contain the team name, team members name, Institute name, contact number
File name should be BTM_<TEAM_NAME>_<INSTITUTE_NAME>
Upload entries at http://www.tapmi.edu.in/student-life/pratibimb/participants-submission by 8:59 am, 10th Oct, 2011
Pratibimb | October 2011 | 22
Apple’s Strategy In India
by Nikhil Kapoor, IIFT Delhi
Apple is very notorious for launching all of its products extremely late in its product life cycle in India. They have never considered India as an attractive enough market to launch its latest products. The highly successful iPhone 4 was launched in India nearly one year after it was launched in the American and the European markets. The same was the case with the first iPad. Recently Apple launched its iPad 2 in India almost at the same time it launched it in the American and the European markets. It is a fact that apple still does not consider India as an attractive enough market to launch its products. In a market like India, where the demand for Pratibimb | October 2011 | 23
such product would be a few million, Apple has launched only a few thousand. There is hardly any stock available of the iPad 2 in the Indian markets. The main question that arises is why has apple suddenly taken a ‘U Turn’ with its launch strategy and launched the iPad 2 in India so early and that to in limited quantity? In the recent times Samsung’s success has given apple sleepless nights. Samsung is the only company in the mobile segment, which has posed a real threat to Apple’s iPhones by matching its sales and growth.
The threat is predominantly from the fact that Samsung launches its products globally in about 120 countries with a span of one month. Rather than launching its products in different countries in a phased manner, Samsung aims at flooding the global market with its products at the same time. This gives Samsung a wide reach and the ability to gain market share in all countries before its competitors can react.
The recently launched Galaxy Tab 10.1 and 8.9 by Samsung are pegged to be the most powerful tablets in the market. Apple fears that when Samsung launches these tablets in the Indian market, it will capture the whole market leaving almost nothing for Apple’s iPad 2. Apple very well understands that its products have a cult following. As social status values, iPads are unmatched. A galaxy tab cannot match iPad’s social status. The statement “I have an iPad 2” has a totally different feel attached to it. As Apple had never aimed at launching the iPad 2 in India so fast, it had not produced enough iPad’s for the Indian market. So by launching the iPad 2 in limited quantities it is providing a Pratibimb | October 2011 | 24
hope to the customers that iPad 2 is available, and they need not take up the galaxy tab. The customer’s rationale is that iPad2 is there in the market, though currently in limited quantity. They believe that it won’t be long before they get their hands on one. This keeps them from buying the galaxy tab. No matter how Bizarre this strategy adopted by Apple may sound, it is doing wonders for the company. People are holding out just to get their hands on an iPad 2. With such an excellent response, it is high time Apple treats the Indian market at par with the American and the European markets
as Samsung has. With the growing numbers of high end electronics customers, it is essential that manufacturers consider India as a market to reckon with.
An Interview with Dr. H Harish Hande
Co-Founder & Managing Director, SELCO India India is among the fastest growing country in the world. But, the electricity production in India is not enough to fulfil its demand and to make it autonomous. The situation is worse than it looks to be. There are more than 80000 villages in India which are yet to be electrified. We need new systems to supply electricity to rural part of the country which has a major contribution in Indiaâ€™s GDP growth. For this, we need more social entrepreneurs who can make this happen.
Technology (IIT), Kharagpur. Dr. Hande serves on the boards of many organizations, both national and international. Dr. Hande has recently bagged Ramon Magsaysay award' for "his passionate and pragmatic efforts to put solar power technology in the hands of the poor, through his social enterprise SELCO India that brings customized, affordable, and sustainable electricity to India's vast rural populace encouraging the poor to become asset creators."
In this issue, we talk to Dr. H Harish Hande, Co -Founder & Managing Director, SELCO India. He founded SELCO in 1995. Dr. Hande earned his Doctorate in energy engineering (solar specialty) at the University of Massachusetts (Lowell). He has an undergraduate degree in Energy Engineering from the Indian Institute of
During his interaction with Pratibimb, he shared his views and experiences on Social Entrepreneurship and Indian energy sector with us. We are extremely thankful to him for his precious time. Dr. H Harish Hande in conversation with Pratibimb:
Pratibimb | October 2011 | 25
Pratibimb: How can we build interest among people in India on the subject of solar power generation and its usage? Dr. Hande: I think in the post graduate level there is much more awareness. The younger generation of USA and Europe has much more respect for the issues like why they should be doing a particular thing. The younger generation of India do not think about solar power generation and on other similar issues. I mean typically we do under graduation because we get a certain rank in IIT and not because we are very serious about it. I think people at abroad are much more serious about it. In India, this factor is not prevailing. Pratibimb: Coming back on the work you do, there are some 80,000 villages in India without electricity. There is very little chance of them being connected to the power grid convincingly and the government seems to be more inclined towards setting up of nuclear plants. They are not very concerned about solar energy generation. Why is it so? Dr. Hande: Many policy making committees do not have practitioners in the policy making team. Would you go for an IT policy without asking Mr. Nandan Nilekani or Mr. Narayana Murthy? You will not. But in solar energy sector, everybody thinks that energy is something that they know what do with it and for that the policy is made in committees. Basically what I mean to say is that committees from Delhi runs all the policy making in the country and that needs a break as they always think in terms of large goals, but they don’t realize that utilization of energy is very different in rural area. So, there has to be push back from the states, panchayats and the districts towards the energy policy. They should not take whatever comes in front of them Pratibimb | October 2011 | 26
without realizing the ground level facts. More than 80,000 villages of India do not have electricity at all. There are many other villages which are suffering from under liability of electricity. Hence, it’s a push back from the states and the panchayats that needs to come down. Pratibimb: Solar energy is going to be expensive as far as the installation and infrastructure is concerned because of which the poor farmers cannot afford such kind of energy. What are your views on this? Dr. Hande: No. it’s not true because if you look at a poor farmer’s expenditure on existing energy infrastructure and services, it’s much higher on incremental day term basis. S/he spends so much on kerosene and candles and there is an emotional cost of not providing better facilities for the kids’ education. The emotional cost is much higher in terms of the cost to a household and if you calculate these costs in economic terms and make a financing mechanism available for the poor to buy it, it makes sense today. I am not only talking about solar, but also about micro, hydro and small gas based energy. Pratibimb: Has it been difficult in rationalizing the spread of Solar Energy in India? Dr. Hande: It’s a question of why do you buy a car. You would buy a car only if you see somebody else driving a car. Same way people would go for a system or anything if they see somebody else having that system. That takes time. The rural people have already been taken on a ride by many organizations as far as solar energy is concerned. This needs to break as people should realize that it actually works. That’s the biggest thing that we need to do.
Pratibimb: Tell us more about SELCO’s initiatives in this country and in future do you intend to take SELCO to an extremely new field? Dr. Hande: Especially after this award, SELCO would definitely go deeper into the economic order. But the major thing is how do we inculcate and inspire the youngsters from other parts of the country and the world to actually replicate this in their own domain. We are an open source company. We are actually giving away whatever we learn. Our own aim is to inspire 20-30 such people who do not need to spend 15-20 years to reach there and can do it in 5 years and so. Pratibimb: At the end of the day, its social entrepreneurship. The pace of growth of this industry is not same as that of the corporate world. How do you think it will lure people into this sector? Dr. Hande: I don’t believe that the corporate salaries are real salaries. That’s an unsustainingly high salary which is not correct. Luring is …I don’t know. The people would believe that there are many other factors that lure them to this industry. I have colleagues who have been working for this concern. Anand Narayan, who works in Hijre in Gujarat is a classic character. He is from IIT Madras and Ph.D. from University of Colarado. His wife is also Ph.D. and she teaches in University of Colarado from Hijre Village in the night thorough internet. Anand is a guy who has refused Rs. 26 lakhs package and joined us for Rs. 6 lakhs. It’s about how can you live on a lower salary. But, below the management everybody gets the same salary. Pratibimb: How do we encourage youngsters and motivate them to join such social causes? Pratibimb | October 2011 | 27
How should young MBA graduates look at this opportunity? Dr. Hande: We need to build a similar system here in India like the one in Yale and Cologne. There young MBA graduates start a social entrepreneurship supported by the University who help these initiative by providing funding for around 2 years. Many students take loan and get burdened to repay it. In these Universities, this burden is borne by the college. There is a need for the large MNCs in India to support such causes. But is the help from MNCs enough? I feel in our organization, people have been well paid and their needs and aspiration are being met. Pratibimb: How is social entrepreneurship different from work done by NGOs? Dr. Hande: In NGOs there is very little transparency about their operations whereas social entrepreneurs maintain all financial aspects much more openly. In Social entrepreneurship, financial documents and balance sheets need to be maintained. Pratibimb: How do you balance social responsibilities and economic factors related to company development? Dr. Hande: We have a team of experts who have been encouraged to debate and argue so that the best solution comes out.
Japanification of US Is there a lost decade looming on US?
by P Prudhvinath Reddy & Shyam S, NMIMS
The world economy has just emerged from one of the worst economic crises after the Great Depression. As the world slowly comes to grip with the situation and makes an effort to recover from this, one tends to look for similar experiences in the past. The nation worst affected from the downturn i.e. the US is still unable to come out of it . The current economic scenario in US resembles, in many aspects, the state of the Japanese economy in the 1990s, when a combined effect of liquidity trap and deflation resulted in the LOST DECADE for Japan. Would US face the same situation? Is a “Japanification” of US happening? If so, how should the US counter this and avoid getting into a Liquidity Trap? Analysis of the Japanese Economy After the Second World Pratibimb | October 2011 | 28
government encouraged a culture of savings. People in Japan went and saved all their money in banks. Due to this, the banks had a large availability of money and they invested in corporations with both low and high credit ratings. These corporations, in turn invested in technology and in the secondary sector i.e. manufacturing . This made Japanese Products cheaper, which led to increase in exports. This gave birth to the Japanese economic miracle. During the 1980’s, most Japanese corporations started raising money through the bond market. So, once again the banks had a lot of money available with them. The Japanese banks, flush with cash, started giving loans to customers with lower credit ratings; these customers in turn invested this money in stock markets and real estate. This lead to the formation of a
speculative bubble in real estate and the Nikkei.
There was a huge increase in stock prices during 1985-1990, but this was not reciprocated
Policy responses from 1990-1995 Fiscal expansion The government of Japan responded to the crisis with an expansionary Fiscal policy. There was a reduction in taxes as well as an increase in government spending . The government debt to GDP ratio increased from 12% of GDP in 1991 to 85% of GDP in
by an increase in dividends, clearly indicating that the rise in prices was due to speculation. Bank of Japan, realizing that a speculative bubble was being created in the real estate market and stock exchanges, raised the interest rates from 3.5% to 8%. The bubble burst and stock market crashed. Confidence in the Japanese economy went down, which resulted in fall of consumption as well as a reduction in investments. As shown in the table below, the fall in consumption was limited, but there was a drastic reduction in
2004. But the fiscal stimulus was not enough to pull the economy out of the slowdown phase. A more expansionary policy would have lead the economy to even higher levels of debt, something which the Japanese government became increasingly reluctant to do as the slump continued. Monetary Policy Changes in Monetary policy were used, but they were used too late .When it was eventually used, it faced twin problems of deflation and Liquidity trap
investments. Since Japanese economy was an investment-driven economy, the reduction in investments affected the outputs adversely. The output growth rate started falling gradually and by 1998 the growth rate had become negative. This reduction in growth rate lead to an increase in unemployment, which in turn lead to a reduction in prices and by 1995 Japanese economy entered into a state of Pratibimb | October 2011 | 29
Bank of Japan responded with an expansionary monetary policy to deal with the slow down. They increased the money supply in the economy which led to a reduction in interest rates, this led to an increase in investments which in turn led to an increase in output.
Real Interest Rate At zero nominal interest rate and higher deflation the real interest rate goes up. Japan, by 1995, had fallen into a state of deflation, so From 1990-1995 increase in money supply, lead to shifting of LM curve from LM to LM’. The interest reached near zero levels and output increased from Y to Y’. After 1995 increase in money supply shifted the LM curve from LM’ to LM’’. But no further reduction in interest rate was possible and so there was no increase in output .Output remained at point Y’
At zero interest rate the money which is being pumped into the economy falls into the hands of financial investors who willingly hold on to the
even at zero nominal interest rate the real rates of interest were positive. From 1995 onwards there was an increase in deflation. This led to a situation where even at zero nominal interest rate, real interest rate With increase in real interest rate because of higher deflation at zero nominal interest rate, investment fell and output decreased from Y-Y’
was increasing. money without investing it, such a situation where the additional liquidity falls into a black hole and does not stimulate investments is known as LIQUIDITY TRAP.
This twin problems of Liquidity Trap and deflation were the primary reason for the Japanese LOST DECADE, 10 years of slow growth of less than 1%.
Deflation The Bank of Japan used monetary policy to reduce nominal interest rates to stimulate investments, but investment decisions in an economy depend on the real rate of interest and not the nominal rate of interest. Nominal Interest Rate - Expected Inflation = Pratibimb | October 2011 | 30
Relevance to the US economy The conditions discussed above, more or less represent the current scenario in the US economy. Interest rate in US economy is at an all time low of 0.25% for the past 1 year. As shown in the graph below, Inflation is
continuously following a downward trend. With inflation decreasing from 2.6% in Feb
promoting deflation once again. Price level targeting:
Fig : Inflation Rate Trend in US 2010 to below 1% in July 2010, it is hovering around 1% since then and similar downward trend is seen in inflationary expectations as well. The trend has slightly improved in 2011 with inflation touching 3%, but with the recent debt crisis and the tax cuts, the spending spree may reduce. Also, the inflation is not mainly demand driven, but is due to the weakening of the dollar, which is a cause of concern in the long run. So with interest rates near zero and rate of inflation falling, US economy might have to face the twin problems of liquidity trap and deflation, as in the case of Japan during the â€˜lost decadeâ€™. If this happens, it could seriously hamper the growth of US economy for the next 10 -15 years.
In price level targeting, the Central Government announces a price level target for the next 4-6 years. For example, it may announce that it will target to achieve an increase in the Consumer Price Index of about 10% in next 4 years. Hence, even if the rate does not increase by a significant amount (say 2.5%) in the first year, people in general would not doubt the credibility of the US Central Bank. This is because people would hold the belief that the rate of increase would be higher in the next few years. This model was successfully used in Sweden during the great depression. Fiscal Expansion:
Another measure that the US Government needs to consider is fiscal expansion. But the bottleneck here is the expansionary fiscal policy, it should not lead to high fiscal deficits, which may lead the economy into a debt trap
Inflation level targeting:
In Inflation level targeting, the Central Bank aims at maintaining the inflation level at say 4% per annum in order to increase interest rates and boost investments. But if the Central Bank fails to achieve this level in an year, it would result in loss of credibility, affecting negatively, the price expectation level of the people,
Using quantitative easing the central bank can supply money to commercial banks, as opposed to open market operations wherein money is pumped directly into the economy. This will ensure a higher probability of rise in investments and subsequently, a rise in outputs.
Pratibimb | October 2011 | 31
October 2010, http:// www.businessweek.com/news/2010-1016/evans-says-u-s-in-liquidity-trap-needsfed-action.html
Paul Krugman, Japan’s Trap, mit.edu, May 1998, http://web.mit.edu/krugman/ www/japtrap.html
It’s Baaack! Japan’s Slump and the Return of the Liquidity Trap , web.mit.edu/krugman/www/bpea_jp.pdf
Vivien Lou Chen and Joshua Zumbrun, Evans Says U.S. in ‘Liquidity Trap,’ Needs Fed Action, businessweek.com,
Lars E.O. Svensson, The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap, nber.org, October 2000, http://www.nber.org/ papers/w7957
Route to Market Winning Entry of August Edition: Team Athena And Nike, Members - Prachi Gupta | Mrinalini Deshpande, TAPMI, Manipal. Congratulations !! We thank all the participants for their effort. The entries for this contest have been judged by Mr. Anirban Bhattacharya, Business Analyst, Cognizant Technologies Solutions. The market has always been unpredictable for the companies. This holds more significance in the case of international brands trying to enter new emerging markets. Every brand wants to be recognized globally so that they can tap the new markets easily. The role of marketing managers in this age of globalization becomes more important in providing the companies with correct strategy to enter new market. We give our readers a platform to experience this challenge through “Route To Market”. The primary objective that the participant is expected to fulfill is to provide a “Market entry strategy” for an international brand/product into the Indian market. The overall strategy would be divided into three stages: 1st Stage - Market Assessment (Weightage -35%)
2nd Stage – Communication strategy (Weightage -30%)
3rd Stage – Implementation & Go Live (Weightage -35%)
Customer Assessment (Segmentation, Targeting)
Test market geography selection.
Market Competitive Assessment
Prom ot ion Str at egy (Creative is not required)
Launch Price (Exact price to be mentioned)
Perfor manc e mea sure m ent metric selection
Brand for which entry strategy needs to be crafted is “Costco”
Document size should not exceed 4 pages & a maximum of 2 members are allowed in a team
The participant is expected to justify his stand – point in each deliverable
Each stage should be clearly mentioned under sub – heading
Upload entries with file name as “RTM_<TEAM NAME>_<INSTITUTE NAME>” at http:// www.tapmi.edu.in/student-life/pratibimb/participants-submission by 11:59 pm, 10th Oct, 2011
The winner will receive a cash prize of Rs.1000 /-
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What makes an employer of choice?
by Diksha Srivastava, TAPMI
With fatter pay packets and better perks your competitors are ready to lure the best out of your talent pool. Employee retention has become a major problem with this growing war for talent. Therefore, it is necessary for an organization to attract the best talents and in turn retain them and motivate them. This calls for the organization to have that extra edge over competitors and thus be the employer of choice. What a man desires is unfailing love; better to be poor than a liar Like any other relationship the proverb stands true for the employee-employer relationship too. ‘Unfailing love’ happens only when there is undying trust and care. There is this constant need to make an employee feel important. This calls for the employer to stand true to his Pratibimb | October 2011 | 33
promises. Both the employee and the employer need to trust each other. Employees constantly assess the organization. The actions of who’s who in the organization need to constantly reinforce the employee’s belief that they are being cared for. An organization and its policies might go on to say “We care” to its employees but its sanity becomes questionable if the employee’s supervisor is impatient while listening to his/her problems or turns a deaf ear towards him/her. The psychological contract gets severed. As long as the give and take relationship remains equitable employees remain satisfied. Till the time an employee’s professional and personal needs mesh with that of the employer, a win-win situation exists and everything
functions smoothly. But unfortunately it is not easy to strike this balance all the time. Just like the conscious, unconscious and subliminal levels in a human being, there are various layers in an organization too. To add to this are the variety of people of varied psychologies. It is probably not possible that all the grooves fit in very well every time. It is then that there is a need for easing and customizing solutions for some employees. Some retro fitting is needed. Thus being the employer of choice is also about being flexible and yet be equitable in dealing with its employees Some may like to be in their comfort zone and do very little productive work each day while challenging work might be the stimulating factor for the others. Pay may be a motivator for one employee while recognition for another.
Just like a product needs to be aligned to the basic needs of the customer for it to have a pull, so does the employer branding strategies. It is therefore natural that organization might have a different mantra for different employees. It is about identifying the need for affinity of an employee. In an interview with an employee as a part of my summer internship project, it emerged that it is a “Family feeling” towards the organization which helped employee stick to his workplace. On further probing and analysis, it was found that the factors that contributed to this ‘Family feeling’ were as following:
Being an employer of choice is all about employer branding strategies and value proposition for employees. It is about differentiating the organization from the competitors in the industry, about nurturing the employees as well as the psychological contract.
Though some people complained about the work life balance being hit and the compensation not being equitable, the ‘Family feeling’ pulled them together. Despite these complaints, the employees stuck to the organization.
Relationship with the supervisor
Best friends at workplace
Say in the work allotted to him
When we talk of ‘An employer of choice’ the first things that come to our mind are – A good work environment, an open door organization where people are easily accessible, a strong feedback mechanism, open links of communication, work-life balance, appreciation and recognition, good career progression and a promising future. We can go on to list quite a few factors that would determine being ‘the employer of choice’. But I think the solution might be on the intangible side of the spectrum. It is more to do with the bonding that the employee forms with the organization via his manager; the satisfaction that s/he derives out of it. It is the feeling of oneness with the organization, when the organization becomes a part of his/ her personal sphere. I had the privilege to work
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with one ‘employer of choice’ and I realized that apart from the above listed factors it was also about mixing up the ease of a small company with the sophistication and complexity of a large organization. I believe employee satisfaction is the hygiene factor for an organization to become the employer of choice. The motivating factors are far more intrinsic. It is like the subtle music playing in the background whose presence goes unnoticed but its absence pinches. It is the feeling that the employees carry with them. This called for delving deep into understanding the day to day actions of the managers because that held the secret behind their ‘success mantra’. Though these were small thoughtful actions, they created a huge impact on the psychologies of the employees. The city of survey fell in the tier–II category and hence the measures taken were relative to the culture existent there. There was “Samosa day”, “Jalebi day”, a day set aside for a closed group get together of the employees and their families in a luxurious club, a day in the week called the “Lights off day” when the office would close at 5 pm so that the employees could go home and enjoy their time with their family showing they cared about the employees work life balance, a yearly meet of the ‘techies’ in the organization at a central place where they could discuss the relevant developments, learn from each other and form a personal bond which is a very rare thing given the boon of IT. They went a step further and connected with the families of the employees and it was this gesture that mattered to the employees. On special occasions such as birthday or anniversary of the employee, the manager would send out a personal invitation to accompany the employee to office on his/her special day. With a small gathering of the employees, a customized note of thank would Pratibimb | October 2011 | 35
be given to his/her spouse for being a constant support, making them realize their silent but magnanimous role, their silent contribution in the firm’s success. In a surrounding of people who matter the most to an employee, it helped to build that bond. Such a practice in tier-II cities gets directly to the heart of people and makes a huge impact. The decisions of leaving an organization are discussed at home before a final call is taken. How about making a positive impact there? They had caught the pulse of what was driving their subordinates and that is how most of the talent retention was taking place. Therefore, if an organization wishes to be an employer of choice then it is equally important that they be vigilant about its middle management. They have greater impact on the company’s performance than almost any other part. They play a crucial role in redefining and representing the organization to the employee. For an employee: Manager = Organization.
The values a manager exhibit, the way he communicates, the work and team dynamics all determine the engagement levels of employees in the team. They become the strategic relations manager. It is only through them that an organization can build in the feel good factor and leap a step ahead in etching a mark in the employee’s heart and mind.
INSURANCE TECH! by Sumedha Sobti, IIM Kozhikode
Kimberly Harris – Ferrante rightly points out, “Using a combination of new technologies, process improvements and organizational
perspective. The following would perhaps brisk walk you through the latest tech trends in the Insurance industry, life cycle of which is
transformation, insurers can reinvent themselves, shift business models and align with emerging customer demands.” As per Gartner Research study, by 2013 the total investment in Social CRM space would exponentially increase to around $1bn, about 8% of the total CRM spending.
While dads and moms still talk of Insurance agents, Gen Xers and Gen Yers have a different Pratibimb | October 2011 | 36
Social CRM & Predictive Analytics— Try tweeting your life/property policy requirement and you’d get a friend request instantly from a rather progressive insurance company on your Twitter/ Facebook account. Within minutes you can log on to the online site and look for required policy, bypassing the traditional
phone and middle layer agent. Imagine if customer insights are taken from social blogs and integrated with the core systems analyzing future policy purchasing trends, attritions and lapsations and thus, showing ONLY the policy coverage which you’re likely to purchase. Further life changing events like marriage, child birth etc. would automatically be updated reminding you for coverage changes. Simple and swift! Isn’t it!
Cloud Insurance—Approximately 85% of every IT dollar goes for maintaining legacy systems leaving little room for innovation. That’s where cloud shifts the equation! Redundant data centers dispersed geographically would be replaced. Instead of outsourcing people and machines, entire workflows and applications can be sent to cloud to keep business running in case of catastrophic events like epidemics, hurricanes, terrorist attacks. Unified interface would create ‘Visual Earth’ experience for underwriting thereby aiding futuristic conditions. Thus, IT would integrate Cloud and SaaS business into legacy systems. No wonder Tim O’Reilly, one of the brains behind Web 2.0, has called cloud computing “the platform for all computing“. Mobile Technology—Now envisage your mobile device, smartphones and tablet platforms quoting illustration with the help of disaster management apps (GIS surveys) tapping the cataclysmic events and thus helping in customization of your policy coverage and claims processing! Outsourcing to customers would be well achieved with such Mobile application smack down techniques.
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Thus, customer segmentation based on predictive scoring model on reinsurance is trend in queue. Sales force automation, new business and illustration applications via handheld devices aren’t far away! Let us visualize the key customer requirements with changing “Tech Trends”:
Presentation: With technology becoming the face to the customer, intuitive dashboards and GUIs providing a panoramic view of customer portfolio via a single click would be the future adage.
Product diversity: Integration of diverse policies would be a norm. No longer will traditional policies of life, health and property be managed in silos.
Risk management: Technology handling nuances specific to regulatory landscape need to be in tandem with insurance portfolio diversification. Better enterprise risk management (ERM) framework for better management of capital assets and liabilities would be the norm.
Well, now imagine this! The concept of Green Insurance would have a large record storage database, automated processing, reduction in paper processing and thus reduction in carbon footprint and annual savings of millions of USD! I’m sure the Tech trends in Insurance would become so real time that your next step in life would be automatically catered to, by real time predictions. That would leave you gaping and reciting ‘What an !dea Sirji’ :)
Stratedge Rural by Ayush Karnani, IIFT Delhi Executive Summary We have extended the existing distribution model of Live Life Ltd. to leverage more on the distributors and wholesalers working in tandem. We have put a larger volume of SKU distribution responsibility on the distributors rather than the wholesalers. Also, the wholesalers shall be taking up the responsibility of exploring far away areas untapped by the Company. Besides this we need to embark on a major drive to encourage first time usage of our products, through Hoshiarwaala, Post office Garma garam, Petrol Jaandaar, and such other initiatives. We have also proposed new selling points for the 90gms SKU. Why Rural?
2/3rds of the country’s 1 bn population is rural
Rural consumers spend around 13% of their income, the second highest after food (35%), FMCGs
The FMCG industry in India was worth around US$ 16.03 bn in August 2008 and the rural market accounted for a robust 57% share of the total FMCG market in India
The FMCG sector saw rural markets post 20% growth, ahead of the 17-18% growth from urban India
The rural market still are largely virgin and urban markets are getting crowded
Better exposure due to media proliferation
Disposable income on the rise due to various govt. policies like JRY, NREGA, etc.
LIVE LIFE LTD. A leading marketer of Food and Over the Counter Products in India, it is either the number one or number two in most of the categories that it operates in. Although the recently adopted “go to market” model has provided immense benefits by extending the reach and penetration of the company products, a stronger distribution strategy is needed for the rural sector. Objective Demand for Live Life Ltd. products exists in the rural market and currently this market Pratibimb | October 2011 | 38
contributes 22% of foods sales and 30% OTC sales. Currently, because of its fragmented nature, the rural market is being covered by vans of identified distributors, which is unscalable in the long run. We believe that there should be greater focus on the food segment considering the issue of licenses for OTC and untapped markets of food items. We aim to ensure that revenue from rural areas as a percentage of total revenue to increase to 50% over a period of 5 years. We have tried to explore a new distribution and marketing strategy, short term and long term, for the same.
Go Rural – Changing times and trends The Buzzword in current times is ‘Go Rural’. With the changing landscape of the Indian markets, no longer can a firm choose to ignore the rural markets! Rural markets have become extremely vital because they are no longer ancillary to the urban markets but are contributing significantly to the growth of the overall sales of the organizations.
the same segment and then with respect to other Industries like Telecom and Pesticides and Agro, both having a great presence in the rural segment. Next, we have proposed a new distribution system for Life Line and some short to medium term measures to encourage first time trials and visibility for different products. Benchmarking against successful players In the same sector with greater focus in the rural sector:
Overall rural markets account for almost half of the domestic rural population Product and this market is valued over Parle - G US$ 300 billion. Rural India is Britannia Tiger set to witness an economic Sunfeast Milky Magic boom, with per capita income Nestle Milo having grown by 50 per cent Cadbury’s Bournvita over the last 10 years, mainly Horlicks Boost on account of rising commodity Heinz Complan prices and improved Amul Chocolate productivity. Rural market is Nestle Munch projected to dominate the retail Nestle Milkybar industry landscape in India by Cadbury Dairy Milk 2012 with total market share of Cadbury Five Star above 50 per cent.
Price Points (Rs)
1, 2, 4, 10, 50
1, 2, 4, 10, 50
SKU sizes (in gms) -
5, 10, 50, 100, 150
20, 66, 138, 250
90, 200, 500, 1000
2, 5, 10
2, 5, 10
2, 5, 10, 20, 50, 90
2, 5, 10
2, 5, 10
Strategy used First, we have tried to analyze the distribution system of Life Line vis-à-vis other players in FMCGs have achieved these price points and have got distinction for their brands through the following measures without compromising on the quality of the products: No frills packaging: Using plastics, poly packs for the sachets. Looks: Since, the TG in Rural marketing are not much literate and recognize brands by colors many a times, hence it is utmost important that the brands use bold and distinguishable colors Size & Convenience: By not playing on the fact that the products are low priced as by that ‘Small is beautiful and convenient ’. Pratibimb | October 2011 | 39
Conclusion: Rural areas have favored the power price points at Re 1, Rs 2, Rs 5, Rs 10, Pesticides and Agro categories: Factors affecting Purchase decision
and Rs 20. Against other Industries: Promotional activities undertaken
Price points Farmer Meeting Brand Name Field demonstration Experience after first use Video on wheels Retailer’s recommenda Kisan Mela tion Product on credit to the retailers for 6-70 days Word of mouth of the Gram Sevaks or village representatives Telecom (Handsets and service providers):
Factors affecting Purchase decision Brand Loyalty Price Points Availability of various service (recharge vouchers, handset service)
Promotional activities undertaken
Mass media campaigning (doesn’t have far reaching effects because of illiteracy, reach and low population density ) Celebrity endorsement campaigns (Regionalization and localization) Sending trained personnel to the field to interact and spread awareness about the brand Monthly lucky draws
Features of a good rural distribution channel
Should be capable of being scaled up or scaled down as per the demand
Should be profitable at even at small volumes
Should be generic enough to support various product categories using the same channel
Should be capable of replete intermittent and irregular demands
Should be capable of reaching deep pockets with small volumes while keeping the cost under check
Should be capable of simplifying communication among members of the distribution channel
Factors governing the Pricing Strategy
Customers Suppliers Competitors
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Recommendations The different price points like 128, 67, 59, 46, etc. is very confusing. It is better to ensure consumer prices in lines of 130, 65, 60 and 45 and landing prices can be played about with.
Best Practices & mantras for success 1. Consumer Segmentation, innovation, profitability:
Rural product/services will have to be customized based on extensive consumer segmentation, depending on varied parameters of occupation, literacy, income and noticeable service needs. Detailed segmentation of this kind will allow the preservation of profit margins in sectors which can afford premium costs while allowing subsidized rates in the rural markets. Rural consumers will thus be served strategically with a good service at effective price points. 2. Integrated Rural marketing strategies: The firms need to identify successful partners in sectors like agriculture, health, banking, retail, and post and telegraph. Identifying as many different partners as possible will help organizations reach out to a maximum variety of the rural population. The purpose of such partnership will be to leverage the existent marketing network that has already been created by these partnering companies. Both partners stand to benefit through extended knowledge sharing as well as profit division.
conditions. Such strategies are also considerably inexpensive as opposed to nationwide mass media campaigns which also fail to reach the whole population. 4. Rural Enablement: Providing quality products at lowest possible price points is the best way in which firms can assist rural enablement. Educating rural consumers about the various products, contributing to welfare of rural areas could be a way to ensure greater acceptance amongst the rural folks. Price Points & Pricing Strategies for Rural Markets In the context of rural markets the most important factors have been analyzed and explained in the table below: Suppliers
Must have the capacity to reach the deep pockets
Must have the capacity to carry small SKUs and still make margins
3. Local Strategies: Adopting local strategies will position the brand as well informed and interested in rural
Rural sector has proved to be the hot bed for FMCGs and the market players have realised it
Aggressive marketing strategies needed
Problems with the current distribution channel
The current distribution strategy is not scalable
Cannot be profitable in areas with low and intermittent demand
Cannot explore very deep pockets
Cannot optimize costs
Changes Proposed We have extended the existing distribution model of Live Life Ltd. to leverage more on the distributor and wholesalers working in tandem. In the model proposed above, we have put a larger volume of SKU distribution responsibility on the distributors rather than the wholesalers. Also, the wholesalers shall be taking up the responsibility of exploring far away areas untapped Pratibimb | October 2011 | 41
Pricing Objective Deeper penetration of the market
Customers Category: Climbers
returns on the product
consumer habituated to the product
The proposed solution is shown in the diagram below. We will have 3 primary contact points for product distribution – Direct Distributor distribution, distribution by the local agents (elaborated later), and the wholesalers.
Highly price conscious and have annual income between 22000 and 45000 INR
Direct Distributor Region of coverage
A radius of 40-50 kms. In the form of Milk van delivery model. Located slightly out of the Rural Region. A tier II or III city which can generate substantial business. The Distributor will be intensively involved in SKU distribution.
Beyond 50 kms & upto 70-80 kms
Beyond 80 kms
Agents will be selected from an area which has sparse demand. And the agent will be collecting the SKUs from the Distributor may be on a fortnightly basis
Wholesalers will cater the retailers as well as the agents who will have an option of picking up SKUs either from the distributor or the wholesaler
Live Life Ltd C&FA
Super Distributor Sub Distributor
Retailer (Urban + Rural)
Run by the Distributors vehicle for closer areas
Wholesalers for far away areas which are extremely tough to be operated by the company
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Village representatives/ retail sellers for intermediate distances
Besides the change in overall distribution strategy, we believe that we need to focus on encouraging first time consumers to try our product and make it easily available. Some short term and long term steps that can be undertaken to encourage this are as follows: Hoshiar Waala These individuals shall be on the direct payrolls of the wholesalers and act like the traditional “chai-waalas”. The idea is to make “Hoshiar” and “Badshah” easily available to the common public and encourage first trials. Post Office Garma Garam The 1,38,000 Post offices across the country command a sizeable share in the Savings Accounts and Insurance products amongst the people, and are very popular in the rural areas. They are on a revamp drive and have been tying up with corporate to provide more services. If Post offices offer “Hoshiar” and “Badshah”, we would be available to multiply the reach manifolds. Petrol Jaandaar We could also rope in petrol pumps along high ways to provide “Hoshiar” and “Badshah”. Cinema van operations These are typically funded by the Redistribution Stockists. Cinema Van Operations have films and audio cassettes with song and dance sequences from popular films, also comprising advertisements of Live Life products. Collaborate with Govt. schools and hospitals Major chunk of the TG are regular visitors to schools and hospitals. Partnerships with these would provide us an additional channel to serve the customers.
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Rationale for the extended model Direct Distributor: Direct distributors have typically got wide reach and have got good storage facility. The sSending of vans to remote areas for delivering SKUs through using the distributor is not feasible because the population in villages could be as small as 200 people and equivalently the demand will be even smaller. Village Representative: These Local agents will be the ones who will collect the smaller quantities on the behalf of their villages. The ideal ratio will be 1 representative for a population of 150-200 people implying that we might have one or more representatives from a single village. These agents should be picked up by the company on the recommendation of the village head in typical scenario because the local leaders are good influencers and as well as they will have credibility for representative selectioned. The Village representative will be granted extended credit lines by Life Line Ltd. which would imply that he will be offered SKUs on credit & he can make the payment when he comes down for collecting supplied next time. Wholesaler: Wholesalers would be responsible for serving a cluster of villages. The Village representative will have the option of collecting his SKUs either from Wholesaler or the Distributor. They will get their SKUs in bulk from the distributors either once or twice a month depending on the requirements.
Hoshiar and Badshah Kiosks In the long run, we will have to move to the model of coffee and tea followed by likes of Nescafe and Lipton by providing the option of self service. Life Line can easily imitate the concept as they already have the powder concentrate and the base is warm water. This can be easily expanded to other areas as well, if the pilot takes off. Garma garam Melaas and Haats
We recommend pilot implements across different population and markets across the rural areas to gauge the effectiveness before scaling it up. On implementation of the new distribution strategy we expect rural earnings as a percentage of total earnings to increase to 30% in 3 years and 50% in 5 years, in lines of other major FMCGs. Population*
>5000 >10,000 >5000
High High Low
3 3 3
Life Line needs to tap the numerous “haats” and fairs organized over the years in form sponsorship or events etc. to gain visibility and encourage first trials. Implementation and expected outcome
Inviting Articles “Best Article”: Avantika Tomar, IIM Calcutta Congratulations!! The winner will receive a cash prize of Rs. 1000 & a letter of appreciation. We are inviting articles from all the B-schools of India. The articles can be on any field of business from Marketing, Finance, Operations, HR to Systems. You can send us articles on: Recent developments or trends in any of these fields Articles covering latest trends, innovative practices, strategies, etc. in the global perspective We also invite articles on management thinker similar to the current section Apart from above, creative works in relation to any of the fields will be equally appreciated The best entry will receive a letter of appreciation and a cash prize of Rs 1000/-. The format of the file should be MS Word doc/docx. Articles should not be more than 2500 words. The last date of receiving all entries is 10th October, 2011. Please upload entries at http://www.tapmi.edu.in/student-life/pratibimb/participants-submission with file name as BAC_<ARTICLE NAME>_<INSTITUTE> by 10th October, 2011. Pratibimb | October 2011 | 44
Controlling your looks on internet
ONLINE REPUTATION MANAGEMENT by Rakesh Tanwani, IIT Bombay
What possibly could make a company’s stock price fall? A below-par quarterly result? A negative investor perception? A macroeconomic factor or something which makes investors lose their confidence in the firm? In all likelihood, you would not have even imagined that a video on YouTube could influence investors so much that it could plunge a firm’s stock price, but that is exactly what happened on July 6th, 2009. A video song titled “United Breaks Guitars” was posted on YouTube and within 4 days of the launch, stock price of United Airline, which is one the world’s largest airlines based in United States, fell by 10%, resulting in a loss of $180 million as reported by Daily Mirror.
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Viral Media Wildfire In March 2008, a musician Dave Carroll was flying for a tour with United Airlines when he witnessed his guitar being thrown by United Airlines baggage handlers in Chicago. Dave alerted the airlines employees but was subjected to complete indifference from them. He later discovered that his $3500 guitar was severally damaged. Dave filed a claim for damages and the complete process lasted nine frustrating months with the airline which ultimately refused to pay for damages. Dave resolved to write three songs about his United Airlines experience and share them on YouTube. He posted the song on July 6th, 2009 and within a day it touched 150,000 views. Three days later the viewership increased to 1.5 million, 5
million within a month and 10 million by February 2011. It became the number one song on iTunes Music Store within a week and later that year Time magazine named "United Breaks Guitars" #7 on its list of the Top 10 Viral Videos of 2009. The lyrics of the song include verses such as “I should have flown with someone else, or gone by car, 'cause United breaks guitars.” “so began a year cycle of pass the buck and don’t ask me and I am sorry sir your claim can go nowhere” and “I wouldn't bring my luggage' Cause you'd just go and break it, Into a thousand pieces, Just like you broke my heart”. The video was ranked third in a Google Query for United Airlines, was debated on popular shows like CNN and Oprah, publications such as Newsweek, The Wall Street Journal and popular blogs like Consumerist. And all this while no one from United Airlines made a public appearance. United airlines endured a lot on their reputation because of this social media wildfire, negatively affecting its brand as they were completely unprepared to handle such a phenomenon. This is not just an isolated incident; P&G was subject to a similar attack when they did not take the complaint of a mother about Pampers
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causing rashes to her baby, very seriously. In a matter of weeks, the mother’s anti-Pampers Facebook campaign had close to 10,000 members. Pepsi also had to bear the brunt of boycotts and complaints when they changed the look and label of their Tropicana Premium Orange Juice. There have been numerous other cases where a brand was punk by Social Media - DKNY was stripped by PETA Anti-Fur Protestors on Facebook, Gap fell into its own redesign revolt on Twitter, Nestle was punk by Greenpeace members on Facebook etc. The challenge for these organizations is how quickly they react to such situations and how quickly they control and limit the damage done to their brand. This has lead to an altogether new management practice known as Online Reputation Management (ORM). (ORM) References
Eddie Wrenn, The sweet music of revenge: Singer pens YouTube hit after United Airlines breaks his guitar...and shares plunge 10%, dailymail.co.uk, July 2009, http://www.dailymail.co.uk/news/article1201671/Singer-Dave-Carroll-pensYouTube-hit-United-Airlines-breaks-guitar-shares-plunge-10.html
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