JAMNALAL BAJAJ Institute of Management Studies
ConVoyage
Issue – August 2011
CONVOYAGE
Aug ‘11
Contents: 1. Derivatives Market in India: An Analysis
…. 03
2. Marketing in Pharmaceutical Industry
…. 08
3. Organizational Strategy: Centralization v/s Decentralization
…. 11
4. Case Study on Collins foods
…. 14
5. Word Puzzle – Finance
…. 20
6. Consulting fun
…. 21
consultingclub@jbims.edu
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CONVOYAGE
Aug ‘11
Derivatives Market in India: An Analysis conservative country and Indians are very
By
careful and cautious when it comes to matters related to money. It has been traditionally observed that Indians tend to resort to safe ways of making money. For ex: keeping money in bank deposits, PPF, NSC etc. However, that outlook is slowly changing now. With the knowledge base of the people increasing by the day and owing to higher return on the money Abhijeet Gaikwad
in the capital markets, people have started
MMS II, Finance, JBIMS
investing money in it. Derivatives market is no different. As was discussed earlier, derivatives
Background
Derivatives in India are not new. Farmers used to enter into Forward contracts to hedge risk
are primarily used for hedging. With the commencement of options, it is now possible to
against their crops since long. However, there
limit one’s losses to a certain amount. Given
was always a risk of the counter-party
below is a snapshot of the evolution of
defaulting on the contract (which remains even
derivatives market in India.
today in case of OTC markets). India is a Date 14 December 1995 18 November 1996 11 May 1998 7 July 1999 24 May 2000 25 May 2000 9 June 2000 12 June 2000 31 August 2000 June 2001 July 2001 9 November 2002 June 2003 13 September 2004 1 January 2008 1 January 2008 29 August 2008 2 October 2008 7 August 2009 February 2010 29 October 2010
Progress NSE asked SEBI for permission to trade index futures SEBI sets up L. C. Gupta Committee to draft a policy framework for index futures L. C. Gupta Committee submitted report RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps SIMEX hose Nifty for trading futures and options on an Indian index SEBI gave permission to NSE and BSE to do index futures trading Trading of BSE Sensex futures commenced at BSE Trading of Nifty futures commenced at NSE Trading of futures and options on Nifty to commence at SIMEX Trading of Equity index options at NSE Trading of stock options at NSE Trading of single stock futures at BSE Trading of Interest Rate futures at NSE Weekly options at BSE Trading of chhota(Mini) Sensex at BSE Trading of Mini Index futures & options at NSE Trading of currency futures at NSE Trading of currency futures at BSE BSE-USE form alliance to develop currency and interest rate derivatives markets Launch of Currency futures on additional currency pairs Introduction of Currency options on USD INR
Source: Compiled from BSE and NSE website
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Aug ‘11
As seen from the above snapshot, deliberations
(USE is the recent exchange which has formed
for trading in derivatives have been going on
alliance with BSE to develop currency and
for quite long and that the derivative products
interest rates derivatives markets)but NSE has
have been introduced in India in a phased
more than 96% of the volumes of the
manner. However, derivative market in India is
derivatives which are traded in India. Let us
still at its nascent stage and has a lot of
now have a look at the products traded in the
potential to expand. BSE and NSE are two
derivatives segment in BSE and NSE separately.
main exchanges on which derivatives are traded
Products traded in Derivatives segment of BSE S. No. 1 2 3 4 5 6 7 8 9
Product Traded with underlying asset Index Futures – Sensex Index Options – Sensex Stock Options on 109 Stocks Stock futures on 109 Stocks Weekly Option on 4 Stocks Chhota (mini) Sensex Futures & Options on sectoral indices namely BSE TECK, BSE FMCG, BSE Metal, BSE Bankex and BSE Oil & Gas Currency Futures on US Dollar Rupee Currency Options on US Dollar Rupee (launched on USE)
Introduction Date June 9 2000 June 1 2000 July 9 2001 November 9 2002 September 13 2004 January 1 2008 N.A. October 1 2008 October 29 2010
Source: Compiled from BSE website
Products traded in Derivatives (F&O) segment of NSE S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Product Traded with underlying asset Index Futures – S&P CNX Nifty Index Options – S&P CNX Nifty Stock Options on 233 Stocks Stock futures on 233 Stocks Interest Rate Futures – T- Bills and 10 Years Bond CNX IT Futures & Options Bank Nifty Futures & Options CNX Nifty Junior Futures & Options CNX 100 Futures & Options Nifty Midcap 50 Futures & Options Mini index Futures & Options – S&P CNX Nifty index Long term Option contracts on S&P CNX Nifty index Currency Futures on US Dollar Rupee S&P CNX Defty Futures & Options Currency Options on US Dollar Rupee
Introduction Date June 12 2000 June 4 2001 July 2 2001 November 9 2001 June 23 2003 August 29 2003 June 13 2005 June 1 2007 June 1 2007 October 5 2007 January 1 2008 March 3 2008 August 29 2008 December 10 2008 October 29 2010
Source: Compiled from NSE website
NSE has been very active in the derivatives segment and number of products traded on NSE is more than that traded on BSE. A number of derivative products have been introduced in India as can be seen from the above tables. Index and stock futures and options were the first products to be traded and recently the RBI allowed the trading of currency derivatives in India. consultingclub@jbims.edu
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Index Futures Year
No. of contracts
2011-12
28335422
Stock Futures
Turnover ( cr.) 745169.96
No. of contracts 33363538
Index Options
Turnover ( cr.)
Stock Options
Notional Turnover ( cr.)
No. of contracts
862171.65 160090747
No. of contracts
4531302.96
6653288
Aug ‘11
Total
Notional Turnover ( cr.)
No. of contracts
180998.38
Turnover ( cr.)
Average Daily Turnover ( cr.)
228442995
6319642.87
114902.60
2010-11 165023653
4356754.53 186041459
5495756.70 650638557 18365365.76
32508393 1030344.21 1034212062
29248221.09
115150.48
2009-10 178306889
3934388.67 145591240
5195246.64 341379523
8027964.20
14016270
506065.18
679293922
17663664.57
72392.07
2008-09 210428103
3570111.40 221577980
3479642.12 212088444
3731501.84
13295970
229226.81
657390497
11010482.20
45310.63
2007-08 156598579
3820667.27 203587952
7548563.23
55366038
1362110.88
9460631
359136.55
425013200
13090477.75
52153.30
2006-07
81487424
2539574 104955401
3830967
25157438
791906
5283310
193795
216883573
7356242
29543
2005-06
58537886
1513755
80905493
2791697
12935116
338469
5240776
180253
157619271
4824174
19220
2004-05
21635449
772147
47043066
1484056
3293558
121943
5045112
168836
77017185
2546982
10107
2003-04
17191668
554446
32368842
1305939
1732414
52816
5583071
217207
56886776
2130610
8388
2002-03
2126763
43952
10676843
286533
442241
9246
3523062
100131
16768909
439862
1752
2001-02
1025588
21483
1957856
51515
175900
3765
1037529
25163
4196873
101926
410
2000-01
90580
2365
-
-
-
-
-
-
90580
2365
11
Business growth of Derivatives Source: Compiled from NSE & BSE websites
average daily turnover has increased by 10, 44,
The derivative market has grown quite
469 %. Both the total and average daily
substantially during the last decade. The table
turnovers have shown a slight dip from 2007-
above shows the turnover of the derivatives
08 to 2008-09 when the sub-prime crisis had
segment of the market since its inception. The
hit the US markets and consequently all the
growth is almost exponential and the market
markets world over. A chapter on ‘Analysis of
has grown leaps and bounds from 2000 to
Derivatives turnover’ towards the end has been
2012(an increase of 2, 67, 115 % in the total
devoted to carry out the mathematical analysis
turnover over the specified period). The
of the derivatives market.
Product wise turnover of F&O at NSE
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Most of the derivatives market in F&O is
index futures which saw a y-o-y growth of
dominated by Index options. This is followed
29.41% and 22.27% respectively (in 2009-10
up by stock futures, index futures and stock
compared to the previous year). This trend
options. Index options are the clear leader in
continued in the first-half of 2010-11 with
the product-wise turnover of futures and
Index options constituting around 58% of the
options segment in NSE during 2009-10. The
total turnover in this segment. The turnover of
turnover in the index options category was
index options zoomed by 111% during the
45.45% of the total turnover in the F&O
first-half
segment of NSE, followed by stock futures and
corresponding period in the previous fiscal.
of
2010-11
compared
to
the
NSE Cash & Derivatives Segment Turnover (In Rs. Cr)
Year
Cash Segment
Derivatives Segment
2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01
41, 38, 023 27, 52, 023 35, 51, 038 19, 45, 285 15, 69, 556 11, 40, 071 10, 99, 535 6, 17, 989 5, 13, 167 13, 39, 510
1, 76, 63, 666 1, 10, 10, 483 1, 30, 90, 477.75 73, 56, 242 48, 24, 174 25, 46, 982 21, 30, 610 4, 39, 862 1, 01, 926 2, 365
Source: Compiled from NSE website
From the above table, it is pretty clear that derivatives segment has grown at a much faster pace than the cash segment. While the increase in the derivatives segment from 2000-01 to 2009-10 is an astonishing 7, 46, 778 % (Yes, it is seven lakh forty six thousand seven hundred and seventy eight percent!!) it is only 209 % for the cash segment. This is a clear indication of the dominance of the derivatives segment over the cash segment.
Product wise Derivatives Turnover at NSE and BSE (In Rs. Cr)
Year
Index Future NSE BSE
Index Option NSE BSE
Stock Option NSE BSE
Stock Future NSE BSE
2009-10
39, 34, 389
96
80, 27, 964
138
0
51, 95, 247
0
2008-09
35, 70, 111
11, 257
37, 31, 502
9
1, 40, 16, 270 1, 32, 95, 970 94, 60, 631 52, 83, 310
0
34, 79, 642
9
15 6
75, 48, 563 38, 30, 972
7, 609 3, 516
38, 20, 667 2, 34, 660 13, 62, 111 25, 39, 575 55, 491 7, 91, 913 Source: Compiled from SEBI Annual reports
2007-08 2006-07
39 0.06
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The product wise Derivatives turnover shown above re-iterates the fact that turnover of Derivatives at BSE is far less than the turnover of Derivatives at NSE. A closer examination of the table reveals that Index option has grown the most over the given years: be it on NSE or on BSE. Also, BSE is becoming less and less inactive in the derivatives segment.
Number of Contracts traded at NSE & BSE Derivatives Segment Year
Number of Contracts BSE
NSE 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04
67, 92, 93, 922 65, 73, 90, 497 42, 50, 13, 200 21, 68, 83, 573 15, 76, 19, 271 77, 017, 185 5, 68, 86, 776
9, 028 5, 15, 588 74, 53, 371 15, 45, 169 103 5, 31, 719 3, 82, 258
Source: Compiled from SEBI Annual reports
BSE Cash & Derivatives Segment Turnover (In Rs. Cr)
Year
Cash Segment
Derivatives Segment
2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01
1, 37, 881 1, 10, 008 15, 78, 857 9, 56, 185 8, 16, 074 5, 18, 715 5, 03, 053 3, 14, 073 3, 07, 292 10, 00, 032
234.13 12, 266 2, 42, 309 59, 006 9 16, 112 12, 452 2, 478 1, 922 1, 673
Source: Compiled from SEBI Annual reports
As is mentioned earlier, the Derivatives segment is more pronounced on the NSE than on BSE. From the tables above, it is seen that the Derivatives segment of BSE has grown by 14, 383 % (till 2007-08) whereas it is in lakhs of percentage increase for the Derivatives segment on the NSE. In fact, from 2007-08 onward, the Derivatives segment on BSE has actually declined in value terms. However, it is very clear that the Derivatives market has a huge potential in India. consultingclub@jbims.edu
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Marketing in Pharmaceutical Industry makes your drug sell more than other drugs?
By
We never see any advertisement of drug on TV then how these doctors come to know about these drugs? All these questions used to pop up in my mind also till I worked on a project in a Pharma co. (say HTL). I will tell you my story of summer internship and in that flow I will tell how I learned pharma marketing so you also learn in same way as I did. Sunil Singh Choudhary MMS II, Marketing, JBIMS Before I tell you about Pharma marketing you need to understand that this is a completely different field when we compare it with other types of markets. Here product is highly specialized and makes a lot of difference in
First day of internship, I was told I will have to
consumers’ life. Customer (Doctor) cannot be
work with Oncology division with another
fooled as he is highly knowledgeable and active
intern Rahul. I was allotted a guide and a
in finding out what’s new in medical field.
mentor. Project was to find out how big is
Only need which works here is ‘rational need’
market
in case of a doctor and ‘physical need’ case of a
confidential project so I cannot reveal much)
patient.
about
and my co-intern was given project to make a
because
database for Drug X, Y and Z and had to do
everything comes in medical journals and in
segmentation of oncologists. Why the hell do
public domain because of many regulatory
you need to segment oncologists and on what
bodies.
basis you will do this segmentation considering
You
performance
cannot of
your
exaggerate product
Oh, then how do you market a drug and how do you differentiate between your drug and competitors’ drug? If your drug is a generic drug and market works on rationales then what
for
molecule
Zozzu
(It
was
a
the fact that they are already a rare species? These questions came to my mind but then I started working on my project of finding out market potential of Zozzu.
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Week 1
4- Doctors can be divided according to their
I was given a lot of literature to read and had to
influence over their peers, no. of years of
give presentation on it. So,Lesson 1: one need
practice, no. of patients they see and their
to be through in science before showing face to
loyalty to a company. This information may
a doctor. Let’s find out what Rahul was doing
look useless but this information is in mind of
all this time. Hmmm! He was studying
everybody in sales team about a doctor because
different type of markets that’s Lesson 2: one
it helps in easy profiling and strategizing before
need to understand whether one is working in
approaching a doctor.
Mass market (M.B.B.S.), Mass specializations (Pediatrics, Gynac etc), Specialized market (medicine, surgery, dermat, psychiatry etc) or
Week 3 I was ready with my questionnaire, which was
highly specialized market (neuro, onco etc).
best according to me. But then I was sent to a
For
pharma
scientific advisor of HTL in a renowned
background will it difficult to understand these
hospital of Mumbai and there after interacting
terms ( so please google them).
with the scientific advisor I realized that how
those
who
are
not
with
ignorant I was. Here comes Lesson 5: Always be
Week 2
receptive because you never know what you
I started working on questionnaire and found
don’t know. Now I met Rahul in lunch hall and
myself in a big trouble because it was difficult
we discussed our progress as usual. We also met
to decide which question to ask and which
other interns working in various divisions and
question not to. Later I understood that first I
came to know a lot about mass marketing,
should design whole research and I should
specialized marketing, and new trends in other
know clearly how I am going to estimate
marketing. While interacting with them I came
market potential of Zozzu. So, Lesson 3: One
to know that how sales force confidence in their
should clearly know and should plan out
company can be a game changer. Lesson 6:
everything about the market research before
Sales force should believe in the company and
designing questionnaire. Then I went to Rahul
the product more than anybody else. Their
and found out that he was busy dividing
confidence gets reflected in sales. Eg: Ranbaxy
doctors according to their influence over other
medical representatives (MR) used to say,
doctors or whether they are ‘thought leader’ or
“Prescribe our product because we are from
‘follower’, years of practice and how loyal they
Ranbaxy”. This may look stupid or innocuous
were to HTL and no. of patients they see in a
to other companies but in sales it got reflected
year of a particular disease. Here comes Lesson
as the best strategy.
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Week 4,5,6,7
most read medical journals, skills upgradation
I did data collection from Mumbai, Pune,
and motivation of MRs, better distribution
Ahmedabad, New Delhi and Kolkata. I started
(keeping in mind Jagdeep Kapoor sir’s line-‘Jo
empathizing with MRs because it is really
dikhta hai, woh bikta hai’) but nowhere came
difficult to break the ice with many doctors and
recommendation of giving free Bangkok trip or
to start building up repo with them. Lesson 7:
other freebies because that’s against my
Every doctor is different and different tricks of
companies policies. Then how come this
selling are to be applied with different doctors.
company is one of the world top 5 pharma co.
After finishing my data collection part I came
and still growing. Lesson 10- One need not give
back to Mumbai for data analysis. In Mumbai
freebies to doctors to sell drugs because this
again we all interns used to meet for lunch and
market works on rational and if you are smart
used to share our experiences in various cities
enough to make doctors realize that they will
with various doctors but Divya never said
also gain if they prescribe your drug then your
anything. She must be a haughty female…huh
drug will be taken readily. But for that you
who cares. One day when I had to go to her
have to put your own rationale in line.
cubicle to discuss one matter related to, my batch mate, Mukul’s ITC issue and I came to know one more important entity in pharma its ‘Stockist’. Lesson 8: In pharma, stockists are very powerful part of supply chain and they can make or break any brand by playing with distribution of the drug in question.
Week 8 Finally my presentation was ready but then my guide wasn’t there in India and here comes another shocker; Lesson 9: Sales stint never ends in pharma. One has to go in field and talk to doctors even when one has reached highest echelon of a company. I looked at my presentation and started mulling over my recommendations. It was divided into various part like providing literature, putting articles in consultingclub@jbims.edu
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Organizational Strategy: Centralization v/s Decentralization but these can form a base for discussion
By
between centralization and decentralization.
Saurabh Kumar MMS II, Finance, JBIMS One of the most strategy issues which organizations work on, is their organizational structure. Whether organization distributes governance among various groups and make it closer to people (Decentralization) or keep it confined to a particular group (Centralization) is an important aspect to be looked from strategy point of view. The article tries to focus on understanding what should be taken care by organizations before taking this decision regarding structure. There are basically 3 questions which need to be answered by each and every organization which is considering centralizing the structure. At least one of the questions
needs
to
be
yes
for
making
organization a centralized one. Well these questions are not the only ones to be answered,
Q1. Is centralization mandated? First check is to be done if there are some other ways to avoid centralization from coming into play. If there are other ways, explore all of them one by one having a proper discussion over each. For e.g. - The job of accounts and financial reports can be given to each of the business divisions. But this division of work will be a huge cumbersome task. Since we need to prepare a consolidated report to be signed by CEO and to be presented to shareholders, it is always better to centralize this division of the organization. Now taking example of health and safety division, it is better to decentralize this as each and every division will have different rules of safety which it follows.
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Q2. Does centralization add significant value—10 percent?
should not be chosen. For e.g. – An initiative to
If first question turns out to be no, we should
question. The risks of bureaucratic inefficiency
adopt it after checking that it adds significant
and distraction turn out to be a minimum in
value to the organization. The bigger problem
this division if it is led by a competent expert
here is how to find out if value is being added
instead of sub-division.
centralize payroll might get an approval for this
to the organization or not as corporate strategies don’t reveal anything about the additional synergies which might come into play when different business activities are brought together in a group. One way to solve this
issue
is
checking
the
benefits
The case studies where the above framework of 3-Questions has been applied are discussed in further pages. The first one is European Automation and second is Extreme Logistics.
of
centralization with respect to a benchmark set very high which will prove that the risks which are being taken are worth it. For e.g. – It is
European Automation European Automation is a manufacturer of automated cutting and welding-equipments.
suggested to have a 10% hurdle rate as the
Q1. It failed the first test as centralized product
additional
management was not mandated.
improvement
in
profits
of
organization. This benchmark being high, will avoid unnecessary discussions on small matters and will bring focus directly on activities which have the ability to create significant impact on the decision thus improving efficiency of management.
Q2. There was no scope of cost reductions leading to savings and thus improving profit margins. increasing
So,
the
sales
or
options higher
left
included
prices
or
a
combination of both. It was estimated that after choosing the integrated product range, it might result in additional sales volume to customers
Q3. Are the risks low? Most of the organizations will not be able to qualify the above 2 questions. For those organizations, we need to work to find out if
thus boosting profit margins. It was felt that hurdle rate of 10% will be crossed easily. Company passed the test.
the risks with the new organization structure
Q3. The organization failed this test also as the
are low or not. If the negative effects of risks
negative side effects of risks were found out not
(business
motivation,
to be low. The risks of delays, additional costs
bureaucracy, distraction) are greater than the
and uncompetitive products outweighed the
additional value being generated, this method
synergies. Also the commercial flexibility was
rigidity,
reduced
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being lost and it could have de-motivated
motivate managers. Also, the head of HR, the
managers in the businesses on losing their
CEO, and the CFO all lacked experience
existing authority over activities.
running a centralized system. Hence, they
After 2 years, analysis of European Automation says that they are doing as what they expected. Their market share is up and products are better aligned with market serving large number of customers. But the results don’t only point to above 3 questions, it also throws light on hard-work and real risks involved.
provider of food services to drilling, mining, operations
centre from the earlier identified areas of value addition. In this case, the 3 questions framework led to meaningful conversations that took managers in unexpected and beneficial directions. They demanded setting up business improvements
Extreme Logistics has business as a global other
bureaucracy and will distract the corporate
went to work on second question and
Extreme Logistics
and
feared that the new system will adopt
in
out-of-the-way
locations.
targets for each division or changing of bottom 20% of management talent. By seeing the above cases and analyzing the ideologies both put in favour and against of
Q1. The initiative did not turn out to be a mandated one. So this test failed.
centralization, we can say that these questions help companies strike the right balance between centralization and decentralization
Q2. The additional values being added seen
today and to evolve their organizations
were
successfully as conditions change over time.
like
initiative,
encouraging coordinating
entrepreneurial
global
customers,
managing local governments, and centralizing common operating activities. But these values did not seem to add more than 10% and thus failing to pass this test. They could only cross this hurdle rate of 10% if they followed 5% cost reduction and 10% improvement in quality of managers which was not possible with centralization.
References www.mckinsey.com
Q3. The proposal failed this hurdle also. Some
www.epa.gov/records/tools/central.htm
of the business presidents thought it would deconsultingclub@jbims.edu
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CASE STUDY ON COLLINS FOODS Collins Foods is a company that sells hot dogs and other packaged meat products, such as salami and lunch meats, in the United States. Collins Foods’ products are primarily sold through grocery stores. While not a very large company, it has strong brand recognition in the packaged meat market and a reputation for high quality products. Collins Foods’ customers are large grocery store chains or grocery distributors, who sell to smaller chains or independent grocery stores across the US. The prices, which Collins Foods presents to these chains or distributors, are negotiated individually and depend on many factors. Some of these factors include the volume to be purchased, whether the customer is a new customer or an existing one, and any promotional or marketing arrangements that have been agreed upon with the customer. The stores then sell the products to consumers at a higher price in order to make a profit. Table 1 shows Collins Foods’ data on this year’s sales revenue and the average annual revenue growth over the last 5 years. The data in Table 1 is broken down by major product category.
Table 1 Recent Revenue and Revenue Growth Data for Collins Foods Revenue this year
Average annual revenue growth over last 5 years
All beef hot dogs
$366.7m
4.2%
Other packaged meat
$65.3m
1.5%
Sliced meat
$55.3m
1.2%
Other products (e.g., pickles, sauces)
$15.1m
-7.0%
Collins Foods manufactures all of its own products and invests significantly more resources than its competitors to ensure superior quality. This is especially valuable to them because this type of product has a poor overall reputation for quality in the United States.
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Collins Foods was founded almost 100 years ago, and until recently, was run as a family business. However, after almost a decade of poor sales growth, the company was acquired last year by a major conglomerate, FoodInc, with the goal of increasing sales. The CEO of Collins Foods has asked a McKinsey team to help him identify ways to improve sales growth while maintaining good levels of profitability. He states that a 10% annual sales growth should be the target. In five years time, he wants to be able to look back and see an annual sales growth of 10% or more for each of the previous 2 years, or Collins Foods will no longer be part of FoodInc. Exhibit 1 represents four potential scenarios for Collins Foods’ future sales growth, with Year 0 representing this year.
Questions continued from previous edition The team decides to focus more on the all beef hot dog product category, as it is by far Collins Foods’ largest percentage of sales. As part of the work, the team decides it is worthwhile to investigate Collins Foods’ current consumer base for this category. This consumer base is thought to consist mainly of Jewish households because the product satisfies their Collins food requirement.
The team decides to investigate the potential impact of different types of marketing efforts on sales of Collins Foods’ hot dogs. In particular, the idea of a 5% retail price reduction coupled with mass consultingclub@jbims.edu
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Aug ‘11
media advertising of the reduction is suggested, especially for cities known to be more pricesensitive. Los Angeles is an example of one of these cities and the team decides to estimate the potential of this strategy in Los Angeles. The head of sales for Collins Foods gives you the following information: •
The advertising campaign would cost $2.1 million
•
Collins Foods has 1 million hot dog purchasers in Los Angeles, who buy one pack of six hot dogs per month on average
•
The average price to grocery chains and distributors of a pack of six hot dogs is $10
•
The retail price of a pack of six hot dogs is $11
•
Collins Foods makes a 20% profit margin on hot dogs
•
This campaign will not impact the profit in dollars made by the store per pack of six hot dogs sold
5. Which of the following statements, if true, would best support an argument AGAINST implementing this price reduction campaign in Los Angeles? A) Consumers purchase Collins Foods’ hot dogs because they believe they taste better than other hot dogs and are made from fresher ingredients B) Collins Foods has never used a price reduction marketing strategy on hot dogs in the 100 years of its existence and many of the senior management would feel that such a move would not suit the brand values C) All large grocery chains stock one premium, one mid-range, and one economy hot dog product and the 5% reduction would move Collins Foods’ hot dogs from premium to mid- range D) A similar strategy was attempted for one of Collins Foods’ pickles products recently and only resulted in a 2% growth in sales volume, which translated to a 3% reduction in sales revenue
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6. What is the average profit, in dollars per hot dog, made by Collins Foods before implementing this campaign? A) $0.33 B) $0.67 C) $1.67 D) $2.00 7. FoodInc requires all marketing campaigns to pay back the initial investment within the first year. What percentage increase in the number of hot dogs sold would be required in the first year of the Los Angeles price reduction campaign in order to pay back the advertising investment? A) 20% B) 30% C) 40% D) 50%
The marketing manager of Collins Foods expresses concern about the impact of this price reduction campaign on consumer perceptions of the brand. He states that a price reduction of 5% is pretty significant and may in itself be detrimental to the premium brand image, which drives a lot of sales.
8. Which of the following statements, if true, would best support the marketing manager’s assertion? A) In a recent survey, Collins Foods’ consumers quoted “price” as the second most important indicator of quality in a list of ten factors B)
In a recent survey, Collins Foods’ consumers quoted “price” as the eighth most important factor out of ten in their decision to buy a product
C) In a recent survey, 78% of Collins Foods’ consumers said they would still buy Collins Franks’ hot dogs even with a 10% price increase D) In a recent survey, 34% of Collins Foods’ customers said they would never consider buying another brand of hot dog
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Solution to July 2011 Convoyage 1. According to the CEO of Collins Foods, which of the scenarios presented in Exhibit 1 would satisfy FoodInc’s requirements?
A.) Scenario A B.) Scenario B C.) Scenario C D.) Scenario D Ans.) B – Observation of Exhibit 1 shows that Scenario B is the only scenario involving a 10% or greater sales growth for each of the previous two years (Year 3-4 growth is approximately 12 points on a base of approximately 104 = 11.5% growth, while Year 4-5 growth is approximately 14 points on a base of 117 = 11.9% growth). 2. Which of the following measures, if done alone, would definitely NOT help address the objectives of the CEO of Collins Foods? A) Lowering the price of select Collins Foods’ products B)Introducing new products into the Collins Foods’ range C) Removing a category of products from the existing Collins Foods’ range D) Increasing the advertising of Collins Foods’ products in the mass media Ans.) C – From Table 1, there is no single product category that, if removed, would improve annual sales growth to the level of 10% required by the CEO. Options A, B and D all have the possibility of generating additional sales growth. 3. Which of the following statements is valid based on the data in Table 1? A)Revenue for “Other products” was more than $20 million five years ago B)Hot dog revenue was more than $350 million five years ago C)Sales of sliced meats grew by no less than 1.2% in each of the last five years D)Total sales for Collins Foods did not grow at all in the last five years Ans.) A – Using the information on current revenues and growth rates in Table 1, it can be calculated that this response is the only one that is valid. Since the average revenue grew - 7.0% every year, the revenue five years ago was approximately $21.71 million, which is more than $20 million.
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4. Which of the following values is the best estimate of Collins Foods’ revenue in Year 4 under Scenario C A) $441m B) $495m C) $549m D) $603m Ans.) 4. D – From Table 1, total revenue this year is $502.4m. According to Scenario C in Exhibit 1, Year 4 revenue will represent 120% of this year’s revenue. The closest figure to this is $603m.
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WORD PUZZLE Theme: Finance Find the words below in the grid. All words are related to Finance. Words can go horizontally, vertically and diagonally, backwards or forwards
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CONSULTING FUN
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The Consulting Club -Enhancing Quality… Contact us- consultingclub@jbims.edu Web Site: https://sites.google.com/a/jbims.edu/consultingclub/ Members
Mayank Goel
Parinita Jatkar
Cell - +91 9920018159
Cell - +91 9867798948
Email id - mayankgoel12@jbims.edu
Email id - parinitajatkar12@jbims.edu
Pramod Kanojia
Kush Tandon
Cell - +91 9867393620
Cell - +91 9987442845
Email id - pramodkanojia12@jbims.edu
Email id – kushtandon12@jbims.edu
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