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Master of Business Administration-MBA Semester II MB0044–Production & Operations Management– 4 Credits (Book ID: B1133) Assignment Set- 2 Q1. Explain Logical process and Physical process modeling. What are the ingredients of Business Process? Ans Business Process Modeling A process is a coordinated set of activities designed to produce a specific outcome. There are processes for saving a file, constructing a building, and cooking a meal. In fact, there is a process for almost everything we do. A business process is a type of process designed to achieve a particular business objective. Business processes consist of many components, including: The data needed to accomplish the desired business objective Individual work tasks that manipulate, review, or act upon the data in some way Decisions that affect the data in the process or the manner in which the process is conducted The movement of data between tasks in the process Individuals and groups which perform tasks Processes can be manual or automated, fully documented or simply knowledge in the minds of one or more people. They can be simple or complex. They can be formal, requiring exact adherence to all details; or flexible, provided the desired outcome is achieved. Logical Process Modeling Logical Process Modeling is the representation of a business process, detailing all the activities in the process from

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Master of Business Administration-MBA Semester IIMB0044–Production & Operations Management– 4 Credits

(Book ID: B1133)Assignment Set- 2

Q1. Explain Logical process and Physical process modeling. What are the ingredients of Business Process?

Ans

Business Process Modeling

A process is a coordinated set of activities designed to produce a specific outcome. There are processes for saving a file, constructing a building, and cooking a meal. In fact, there is a process for almost everything we do. A business process is a type of process designed to achieve a particular business objective.

Business processes consist of many components, including:

The data needed to accomplish the desired business objective Individual work tasks that manipulate, review, or act upon the data in some way Decisions that affect the data in the process or the manner in which the process is

conducted The movement of data between tasks in the process Individuals and groups which perform tasks

Processes can be manual or automated, fully documented or simply knowledge in the minds of one or more people. They can be simple or complex. They can be formal, requiring exact adherence to all details; or flexible, provided the desired outcome is achieved.

Logical Process Modeling

Logical Process Modeling is the representation of a business process, detailing all the activities in the process from gathering the initial data to reaching the desired outcome. These are the kinds of activities described in a logical process model:

Gathering the data to be acted upon Controlling access to the data during the process execution Determining which work task in the process should be accomplished next Delivering the appropriate subset of the data to the corresponding work task Assuring that all necessary data exists and all required actions have been performed at

each task Providing a mechanism to indicate acceptance of the results of the process, such as,

electronic “signatures”

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All business processes are made up of these actions. The most complex of processes can be broken down into these concepts. The complexity comes in the manner in which the process activities are connected together. Some activities may occur in sequential order, while some may be performed in parallel. There may be circular paths in the process (a re-work loop, for example). It is likely there will be some combination of these.

The movement of data and the decisions made determining the paths the data follow during the process comprise the process model. The contains only business activities, uses business terminology (not software acronyms, technical jargon, etc.…), completely describes the activities of the business area being modeled, and is independent of any individual or position working in the organization. Like its sibling, Logical Data Modeling, Logical Process Modeling does not include redundant activities, technology dependent activities, physical limitations or requirements or current systems limitations or requirements. The process model is a representation of the business view of the set of activities under analysis.

Heretofore, many applications and systems were built without a logical process model or a rigorous examination of the processes needed to accomplish the business goals. This resulted in applications that did not meet the needs of the users and / or were difficult to maintain and enhance.

Problems with an unmodeled system include the following:

Not knowing who is in possession of the data at any point in time Lack of control over access to the data at any point in the process Inability to determine quickly where in the process the data resides and how long it has

been there Difficulties in making adjustments to a specific execution of a business process Inconsistent process execution

. Ingredients of Business Process

1) Time: You must understand that time is money. In business, our objective is to make money. Period. But the question is how productively you convert your time into money. Are you making full use of your time or you just let the time pass by you?

How much you make depends on how good you are at converting time to money. If you are already productive, then you may want to ask what are the things you can do toimprove further the ratio of dollar/second? If you are making $0.01/second, what you can do to make it $0.02/second? Or even more. Remember time is the most valuable asset and once it’s gone, it’s gone. Also time is also the fairest distribution of resources every human being receives.

2) People: To be successful in business, you must have people connections. I mean the right people. People consist of customers, suppliers, partners, staff, and associates.

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One thing that you must not leave out is your mentor or coach. Having genuine mentors or coaches is very important and it can make a very big difference in your business.

To make sure that you have more profits, you must serve people well. Organize your database of people connections. By simply knowing who does what, who supplies what, who needs what, where to get what make you miles ahead of other people. To organize your connections, you can either use a paper folder or computer spreadsheet.

3) Knowledge and Skills: When I talk about knowledge and skills, I am not referring to academic knowledge that you find in schools or colleges. What’s more important to youis knowledge and skills that can bring you results you want.

How many MBA holders that you know of have become business owners and have made tones of money? That shows getting the right knowledge and skills is important. Don’t blindly go after knowledge that could drown you. Go for knowledge and skills that are universally tested and proven.

Examples of right knowledge and skills are where to get what from who, money making trends, marketing strategies, art of dealing with people, negotiation skills, selling skills, skills of managing and growing money, investment skills, universal laws of success, and more. Don’t waste time on unnecessary knowledge as I went through that before. There’s only so much that you need to know and learn. Be sharp and focus when you acquire knowledge and skills. Don’t follow what normal people do.

4) Personal Health: In fact, this is the most important ingredient of all. How can you run a business without a healthy body? In order to maintain an optimum health, you have to provide your body with proper nutrients and sufficient exercise. And also don’t forget about emotional well being. Don’t let anger and other negative emotions control you.

This is where positive and empowering attitudes come into play. Maintaining your body is just like maintaining your car. If you send your car to workshop for regular service and pump petrol regularly, why don’t you do the same for your body? It’s something for you to think about. Don’t be stingy over spending money for your own health because physical and mental health can cause you a lot of money in the long run if your body is not taken care of properly.

5) Money: Let’s face it. It does take money to make money even you need a little. But you might not need a lot of money to start a business because there are many ways tostart one with low capital.

I meet a lot of people who want to be rich but are not willing to invest the money. You must invest in something in order to for you to get something. The law of sowing andreaping is at work. Don’t expect something without investing anything. Money is one of the investments you need to make.

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Even though you don’t need to have a capital for your business, but at least you must be able to cover your expenses while building your business. You also need money to buy products to stock up and other stuff. So, you must at least come up with whatever amount that you have to start a business.

These are the five basic ingredients of business success. Do your best to acquire or grow or invest in these ingredients. But the good thing is you don’t need to have a perfect combination of ingredients to get started. You can still perfect the ingredients along the way. Somehow, get it started with what you’ve got.Article Source: http://EzineArticles.com/24925

Q2. Explain Project Management knowledge areas. With an example explain work Breakdown Structure.

Ans.

The Project management knowledge areas are described in the following.

Project integration management describes the processes and activities needed to identify, define, combine, unify and coordinate the various project management elements within the project management process groups. The project management processes are develop project charter, develop preliminary project scope statement, develop project management plan, direct and manage project execution, monitor and control project work, integrated change control and close project.

Project scope management describes the processes needed to ensure that the project includes all the work required – and only the work required – to complete the project successfully. The project management processes are plan scope, define scope, create work breakdown structure, verify scope and control scope.

Project time management describes the processes required to ensure on-time project completion. The project management processes are define project activities, sequence activities, estimate activity resources, estimate activity duration and develop and control project schedule.

Project cost management describes the processes involved in planning, estimating, budgeting and controlling costs to ensure that the project is completed within the approved budget. The project management processes are cost estimating, cost budgeting and cost control.

Project quality management describes the processes involved in assuring that the project will satisfy the objectives for which it was undertaken. The project management processes are quality planning, perform quality assurance and perform quality control.

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Project human resource management describes the processes that organise and manage the project team. The project management processes are human resource planning, acquire project team, develop project team and manage project team.

Project communications management describes the processes concerning the timely and appropriate generation, collection, dissemination, storage and ultimate disposition of project information. The project management processes are communications planning, information distribution, performance reporting and manage stakeholders.

Project risk management describes the processes concerned with conducting risk management on a project. The project management processes are risk management planning, risk identification, qualitative risk analysis, quantitative risk analysis, risk response planning and risk monitoring and control.

Project procurement management describes the processes that purchase or acquire products, services or results as well as contract management processes. The project management processes are plan purchases and acquisitions, plan contracting, request seller responses, select sellers, contract administration and contract closure.

Work Breakdown Structure

A work breakdown structure (WBS) in project management and systems engineering, is a tool used to define and group a project‘s discrete work elements in a way that helps organize and define the total work scope of the project.[1]

A work breakdown structure element may be a product, data, a service, or any combination. A WBS also provides the necessary framework for detailed cost estimating and control along with providing guidance for schedule development and control. Additionally the WBS is a dynamic tool and can be revised and updated as needed by the project manager.

Example of a product oriented work breakdown structure of an aircraft system

Q3.Take an example of any product or project and explain Project Management Life Cycle.

In industry, product lifecycle management (PLM) is the process of managing the entire lifecycle of a product from its conception, through design and manufacture, to service and disposal.[1] PLM integrates people, data, processes and business systems and provides a product information backbone for companies and their extended enterprise.[2]

‘Product lifecycle management’ (PLM) should be distinguished from ‘Product life cycle management (marketing)‘ (PLCM). PLM describes the engineering aspect of a product, from managing descriptions and properties of a product through its development and useful life;

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whereas, PLCM refers to the commercial management of life of a product in the business market with respect to costs and sales measures.

Product lifecycle management is one of the four cornerstones of a corporation’s information technology structure.[3] All companies need to manage communications and information with their customers (CRM-Customer Relationship Management), their suppliers (SCM-Supply Chain Management), their resources within the enterprise (ERP-Enterprise Resource Planning) and their planning (SDLC-Systems Development Life Cycle). In addition, manufacturing engineering companies must also develop, describe, manage and communicate information about their products.

One form of PLM is called people-centric PLM. While traditional PLM tools have been deployed only on release or during the release phase, people-centric PLM targets the design phase.

Example

Recent (as of 2009) ICT development (EU funded PROMISE project 2004-2008) has allowed PLM to extend beyond traditional PLM and integrate sensor data and real time ‘lifecycle event data’ into PLM, as well as allowing this information to be made available to different players in the total lifecycle of an individual product (closing the information loop). This has resulted in the extension of PLM into Closed Loop Lifecycle Management

Benefits

Documented benefits of product lifecycle management include:[4][5]

Reduced time to market Improved product quality Reduced prototyping costs More accurate and timely Request For Quote generation Ability to quickly identify potential sales opportunities and revenue contributions Savings through the re-use of original data A framework for product optimization Reduced waste Savings through the complete integration of engineering workflows Documentation that can assist in proving Compliance for RoHS or Title 21 CFR Part

11 Ability to provide Contract Manufacturers with access to a centralized product record

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Q4. Explain PIMS. What is the difference between key Success Factor (KSF) and Knowledge (K) Factor? Explain with example.

Ans. Project Management Information System (PMIS) are system tools and techniques used in project management to deliver information. Project managers use the techniques and tools to collect, combine and distribute information through electronic and manual means. Project Management Information System (PMIS) is used by upper and lower management to communicate with each other.Project Management Information System (PMIS) help plan, execute and close project management goals. During the planning process, project managers use PMIS for budget framework such as estimating costs. The Project Management Information System is also used to create a specific schedule and define the scope baseline. At the execution of the project management goals, the project management team collects information into one database. The PMIS is used to compare the baseline with the actual accomplishment of each activity, manage materials, collect financial data, and keep a record for reporting purposes. During the close of the project, the Project Management Information System is used to review the goals to check if the tasks were accomplished. Then, it is used to create a final report of the project close.To conclude, the project management information system (PMIS) is used to plan schedules, budget and execute work to be accomplished in project management

Key Success   Factors

Definition: The factors that are a necessary condition for success in a given market.

When writing a business plan, it’s crucial to identify what will make your business a success. Think of key success factors as the small towns you must pass through to reach your destination. If you don’t consult a map to found out where those towns are, you may miss a turnoff and your destination. Key success factors, also known as critical success factors, keep you and your employees on track to make your business a success.

Increasing the sales of a product or service is a common key success factor, but it should be linked to a measurable goal, such as “sales of product X will increase by 30 percent in the fourth quarter.” Measuring the outcome of the goals related to your key success factors is essential to keeping your business on target.

Almost all businesses can benefit from having the key success factor “attract new customers.” Decide how many new customers your business needs to succeed, and set a related goal, such as “increase walk-in traffic by 25 percent by offering samples at the door.” Other examples of common key success factors are, “retain quality employees,” “increase profit margin” and “increase customer satisfaction.”

Some businesses are subject to more regulation than others. Manufacturing facilities must comply with OSHA regulations, and they may want to develop a key success factor that addresses the company’s compliance. For example, “Provide all employees with hazardous material training.”

Key success factors should always be relevant to the business you are in. An example of an industry specific key success factor is “increase load factor relative to the industry average.” This key success factor is specific to the airline industry, as

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referenced in “Airline Industry Key Success Factors” in the Graziadio Business Report. Fleet management is essential to airlines, limousine companies and taxi services, but it’s not relevant to the development of computer games.

The key success factor “Build a manufacturing facility to produce 80 percent of inventory” is an example of what RapidBi.com calls temporal factors. According to the web site, temporal factors “relate to short-term situations, often crises. These CSF’s may be important, but are usually short-lived.” In this example, once the manufacturing facility is constructed and operational, the key success factor is no longer needed and can be replaced by a currently relevant one.

Measurable Key Success Factors

General Key Success Factors

Regulatory Key Success Factors

Industry Specific Key Success Factors

Temporal Key Success Factors

Knowledge factor

India may be a brain bank to the world. but it doesn’t help if other countries cash in on this more frequently than india itself. The state of Indian higher education is the weak link in this chain it’s the reason why Indians spend $3 billion annually seeking education abroad.

Those who study abroad tend to stay on abroad, while according to a NASSCOM-Mckinsey estimate only 10-25 per cent of those earning a college degree in India are employable.

Now the National Knowledge Commission (NKC) has written to the prime minister stating that raising the number of indian universities from 350 to 1,500 is critical if India’s growth is to be sustained.

As NKC Chairman Sam Pitroda notes, only 7 per cent of India’s population aged 18-24 enters higher education, which is half the Asian average. China has created 1,250 new universities within just the last three years.

India’s percentage of youth enrolled in college has to be brought up to at least asian levels while at the same time enhancing academic standards.

The only way such a sweeping revamp can be carried out is if today’s centrally managed education mono-polies are dismantled, and education is depoliticised and debureaucratised.

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Q5. Explain the seven principles of supply chain management. Take an example of any product in the market and explain the scenario of Bullwhip effect.

Ans. There is many steps which involved in SCM implementation are- Business Process, sales and marketing. Logistics, costing, demand planning, trade- off analysis, environmental requirement, process stability, integrated supply, supplier management, product design, suppiers, customers, material specifications, etc.Some important aspect of SCM-The level of competition existing in the market and the impact of competitive forces on the product development.

Designing and working on a strategic logic for better growth through value invention. Working out new value curve in the product development along with necessary break point.Using it to analyses markets and the economies in product design. Tine, customer, quality of product and the concept of survival of fittest.

Steps of SCM principals:

Group customer by need: Effective SCM groups, customer by tietinct service meeds those particular segment.

Customize the logistics networks: In designing their logistics network, companies need to focus on the service requirement and profit potential of the customer segments identified.

Listen to signals of market demand and plan accordingly- sales and operations planners must monitor the entire supply chain to detect early warning signals of changing customer demand and needs.

Differentiate the product closer to the customer-companies today no longer can afford to stock pile inventory to compensate for possible forecasting errors, instead, they need to postpone product differentiation in the manufacturing. Process closer to actual customer demand.

Strategically manage the source of supply-by working closely with their key suppliers to reduce the overall casts of owning materials and services; SCM maximizes profit margins both for themselves, and their supplies.

Develop a supply chain wide technology strategy- as one of the cornerstones of successful SCM information technology must be able to support multiple levels of decision making.

Adopt channel spanning performance measures- Excellent supply performance measurement systems do more than just monitor internal functions. They apply performance criteria that embrace bathe service and financial metrics, including as such as each accounts true profitability.

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Q.6 Time taken by three machines on five jobs in a factory is tabulated below in table below. Find out the optimal sequence to be followed to minimize the idle time taken by the jobs on the machines.

Job Machine 1 (M1)

Machine 2 (M2)

Machine 3 (M3)

A 6 8 7

B 4 5 3

C 5 5 7

D 3 4 6

E 4 3 4

Answer:

Consider MI and M3

Job Machine 1(M1)

Machine 3(M3)

A 6 7B 4 3C 5 7D 3 6E 4 4

JOB = DECAB

MB0045, Assignment 2, set -2

Quest.1: Discuss the objective of profit maximization vs wealth maximization.

Ans.: The financial management come a long way by shifting its focus from traditional approach to modern approach. The modern approach focuses on wealth maximization rather than profit maximization. This gives a longer term horizon for assessment, making way for sustainable performance by businesses.

A myopic person or business is mostly concerned about short term benefits. A short term horizon can fulfill objective of earning profit but may not help in creating wealth. It is because wealth creation needs a longer term horizon Therefore, Finance Management or Financial Management emphasizes on wealth maximization rather than profit maximization. For a business, it is not necessary that profit should be the only objective; it may concentrate on various other aspects like increasing sales, capturing more market share etc, which will take care of profitability. So, we can say that profit

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maximization is a subset of wealth and being a subset, it will facilitate wealth creation

Giving priority to value creation, managers have now shifted from traditional approach to modern approach of financial management that focuses on wealth maximization. This leads to better and true evaluation of business. For e.g., under wealth maximization, more importance is given to cash flows rather than profitability. As it is said that profit is a relative term, it can be a figure in some currency, it can be in percentage etc. For e.g. a profit of say $10,000 cannot be judged as good or bad for a business, till it is compared with investment, sales etc. Similarly, duration of earning the profit is also important i.e. whether it is earned in short term or long term.

In wealth maximization, major emphasizes is on cash flows rather than profit. So, to evaluate various alternatives for decision making, cash flows are taken under consideration. For e.g. to measure the worth

of a project, criteria like: ― present value of its cash inflow – present value of cash outflows (net present value) is taken. This approach considers cash flows rather than profits into consideration and also use discounting technique to find out worth of a project. Thus, maximization of wealth approach believes that money has time value.

An obvious question that arises now is that how can we measure wealth. Well, a basic principle is that ultimately wealth maximization should be discovered in increased net worth or value of business. So, to measure the same, value of business is said to be a function of two factors - earnings per share and capitalization rate. And it can be measured by adopting following relation:

Value of business = EPS / Capitalization rate

At times, wealth maximization may create conflict, known as agency problem. This describes conflict between the owners and managers of firm. As, managers are the agents appointed by owners, a strategic investor or the owner of the firm would be majorly concerned about the longer term performance of the business that can lead to maximization of shareholder‘s wealth. Whereas, a manager might focus on taking such decisions that can bring quick result, so that he/she can get credit for good performance.

Roll No : 521026396

However, in course of fulfilling the same, a manager might opt for risky decisions which can put on stake the owner‘s objectives.

Hence, a manager should align his/her objective to broad objective of organization and achieve a tradeoff between risk and return while making decision; keeping in mind the ultimate goal of financial management i.e. to maximize the wealth of its current shareholdershe objections are:-

(i) Profit cannot be ascertained well in advance to express the probability of return as future is uncertain. It is not at possible to maximize what cannot be known. 

(ii) The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt future to maximize. It is argued that firm's goal cannot be to maximize profits but to attain a certain level or rate of profit holding certain share of the market or certain level of sales. Firms should try to 'satisfy' rather than to 'maximize' 

(iii) There must be a balance between expected return and risk. The possibility of higher expected yields are associated with greater risk to recognise such a balance and

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wealth Maximization is brought in to the analysis. In such cases, higher capitalisation rate involves. Such combination of expected returns with risk variations and related capitalisation rate cannot be considered in the concept of profit maximization. 

(iv) The goal of Maximization of profits is considered to be a narrow outlook. Evidently when profit maximization becomes the basis of financial decisions of the concern, it ignores the interests of the community on the one hand and that of the government, workers and other concerned persons in the enterprise on the other hand. 

Keeping the above objections in view, most of the thinkers on the subject have come to the conclusion that the aim of an enterprise should be wealth Maximization and not the profit Maximization. Prof. Soloman of Stanford University has handled the issued very logically. He argues that it is useful to make a distinction between profit and 'profitability'. Maximization of profits with a vie to maximising the wealth of shareholders is clearly an unreal motive. On the other hand, profitability Maximization with a view to using resources to yield economic values higher than the joint values of inputs required is a useful goal. Thus the proper goal of financial management is wealth

maximization

Quest.2: Explain the Net Operating approach to capital structure.

Ans.: The second approach as propounded by David Durand the net operating income approach examines the

effects of changes in capital structure in terms of net operating income. In the net income approach discussed above net income available to shareholders is obtained by deducting interest on debentures form net operating income. Then overall value of the firm is calculated through capitalization rate of equities obtained on the basis of net operating income, it is called net income approach. In the second approach, on the other hand overall value of the firm is assessed on the basis of net operating income not on the basis of net income. Hence this second approach is known as net operating income approach.

The NOI approach implies that (i) whatever may be the change in capital structure the overall value of the firm is not affected. Thus the overall value of the firm is independent of the degree of leverage in capital structure. (ii) Similarly the overall cost of capital is not affected by any change in the degree of leverage in capital structure. The overall cost of capital is independent of leverage.

If the cost of debt is less than that of equity capital the overall cost of capital must decrease with the increase in debts whereas it is assumed under this method that overall cost of capital is unaffected and hence it remains constant irrespective of the change in the ratio of debts to equity capital. How can this assumption be justified? The advocates of this method are of the opinion that the degree of risk of business increases with the increase in the amount of debts. Consequently the rate of equity over investment in equity shares thus on the one hand cost of capital decreases with the increase in the volume of debts; on the other hand cost of equity capital increases to the same extent. Hence the benefit of leverage is wiped out and overall cost of capital remains at the same level as before. Let us illustrate this point.

If follows that with the increase in debts rate of equity capitalization also increases and consequently the overall cost of capital remains constant; it does not decline.

To put the same in other words there are two parts of the cost of capital. One is the explicit cost which is expressed in terms of interest charges on debentures. The other is implicit cost which refers to the increase in the rate of equity capitalization resulting from the increase in risk of business due to higher level of debts.

Optimum capital structureThis approach suggests that whatever may be the degree of leverage the market value of the firm remains constant. In spite of the change in the ratio of debts to equity the market value of its equity shares remains constant. This means there does not exist a optimum capital structure. Every capital structure is optimum according to net operating income approach.

Quest 3.: What do you understand by operating cycle.

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Ans.: Working capital is also known as revolving capital and a circular path of conversion/reconversion takes place. This revolution of cycle is called as the operating cycle. Let us consider an example to better understand operating cycle. A person starts a business with an initial investment. With credit extended by expense creditors, he starts production process. Goods of varying levels of finish results, and thus called as work-in-progress. Once complete processing is done, it is called as finished goods. Until these goods are sold, they remain in stock. Sales may be for cash and/or credit basis. The business person needs to wait a little to realize cash from credit customers. The realized cash is used to pay creditors. But he needs to maintain cash balance for day-to-day operations as well as for meeting sudden spurt in payment obligations accompanied by sluggish cash collections from debtors. Thus a revolution or cycle from cash to raw materials to Work-in-Progress, to finished goods, to debtors, and back to cash takes place. This revolution is called as operating cycle.

Thus, we can say that the term operating cycle, otherwise called as cash cycle refers to the length of time necessary to complete the following cycle of events:

1. Conversion of cash into inventory2. Conversion of inventory into debtors3. Conversion of debtors into cash

 

Stage 1: Cash to Inventory – In this stage, cash first gets converted into raw materials, then work-in-progress and then finished goods in a typical manufacturing concern. As regards non-manufacturing concerns, when the goods are purchased, cash gets converted into inventory.

Stage 2: Inventory to Debtors – The inventory thus produced or purchased, gets converted into debtors or receivables upon credit sales. 

Stage 3: The debtors or accounts receivables get in turn converted back into cash when they make payment.

Length of operating cycle: When raw materials remain in store pending issue for production for a less duration, when raw materials gets converted into WIP in a short duration, when finished goods remain in warehouse pending for sales for a short duration only, and when cash realizations out of sales are made quickly and finally when payment to creditors is made slowly, the operating cycle would be smaller and consequently the working capital will also be reasonable. Thus shorter duration of operating cycle indicates an efficient working capital management.

Example: 

Computation of length of operating cycle: 

Period covered 1 year of 365 days

Average credit period allowed by creditors

16 days

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Average total of debtors outstanding $480,000

Total consumption of raw materials per annum

$4,400,000

Total production cost per annum $10,000,000

Total cost of sales $10,500,000

Sales during the year $16,000,000

Value of stock maintained:

Raw materials

Work in progress

Finished goods stock

 

$320,000

$350,000

$260,000

Calculate the operating cycle. 

Solution: 

Age of Raw materials

=    $320,000 x 365  =      $4,400,000

27 days

Age of WIP =   $350,000 x 365  =    $10,000,000

13 days

Age of finished goods

=   $260,000 x 365  =    $10,500,000

9 days

Age of debtors =   $480,000   x 365  =     $16,000,000

11 days 60 days

Less: Age of creditors (given) 16 days

Length of Operating cycle 44 days

Computation of Working capital need through Operating cycle 

The length of operating cycle can be used to estimate total working capital required. First, we have to calculate the number of operating cycles in the period under study, normally a year.

Therefore, number of operating cycles =       Number of days in a year                                                                    Length of operating cycle in days In the above example, the number of cycles per annum would be 365 / 44 = 8.3 times. 

Amount of working capital =   Total Operating cost 

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                                              No. of Operating cycles 

If the operating cost per annum is $10,500,000, the amount of working capital would thus come to $10,500,000 ÷ 8.3 = $1,265,060 per operating cycle. Hence the significance of operating cycle concept in the efficient management of working capital.

Online Operating Cycle Help: 

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We have the best tutors in finance in the industry. Our tutors can break down a complex Operating Cycle problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Operating Cycle concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Operating Cycle tutoring and experience the quality yourself.

Other topics under Working Capital Management:

Aim of Working Capital Management Bank Credit Commercial Paper Current Assets & Liabilities Debt Vs Equity Financing Working Capital Management Determinants of Working Capital Factoring Modes of Working Capital Financing Permanent & Temporary Working Capital

Quest.4.: What is the implication of operating leverage for a firm.

Ans.: Leverage in business is derived from the word ‘lever’. A lever is a simple tool by which a large weight can be moved with a small force.

The study of Leverage starts with our understanding of break-even or the point at which a firm covers both fixed and variable costs.

OPERATING LEVERAGE

Operating leverage is a measure of the extent to which, fixed operating costs are being used in an organization.

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It is greatest (largest) in companies that have a high proportion of fixed operating costs in relation (proportion) to variable operating costs. This type of company is using more fixed assets in the operation of the company.

Conversely, operating leverage is lowest in companies that have a low proportion of fixed operating costs in relation to variable operating costs.

Firms with large amounts of fixed operating costs have high break-even points and high operating leverage. Variable cost in these firms tends to be low and both the contribution (CM) and unit contribution (UC) margin is high.

Formula(s) for calculating Operating leverage :

Degree of Operating Leverage =

or

Degree of Operating Leverage =

or

Degree of Operating Leverage =

or

Degree of Operating Leverage =

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Example :

Company A and Company B are competitors in the market for a special machine part. The cost structure and price details are given below:

Company A Company B

Selling price AED 30 AED 30

Variable cost per unit AED 10 AED 20

Fixed costs AED 60,000 AED 20,000

MB0046 Assignment set -2

Quest1.: What is product mix? What are the strategies of product mix & product line?

Ans.: The product mix of a business includes product lines and individual products. A product line is a set of products in the product mix that are closely interrelated either because they serve in a similar way, sold to the similar client groups or have same price range. A product is a unique component in the product line that is different in size, cost, look, or some other attribute. Product choices at these levels are normally of 2 sorts: Those that have variety and range of the product line and those that are modified in the product mix occur over time.Product Mix is the total number of product choices a company offers their customer. If you make muffins, and you offer Blueberry and Cranberry, your product mix has 2 choices. The product mix grows as the number of features on the product grows. A true evaluation of the mix can ONLY be done with a feature/option level analysis. That is because customers buy features and options. The strength of the mix is based on how well the feature choices are capturing sales and market demand.Strategies involved in Product Mix and Product LineWhen the product is a part of product-mix, there are five kinds of strategies involved:I. Product Line Pricing In product line pricing, management must decide on the price

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steps to set between various products in a line. This should take into account the differences in products features, customer evaluations, competitor’s prices etc.II. Optional-Product Pricing The pricing of optional or accessory products along with the main product. For example, a car buyer may choose to order a CD changer as an optional product.III. Captive-Product Pricing Setting a price for products which must be used along with the main product. For example, HP makes printers and cartridges. It makes very low margins on its printer (the main product) but very high margins on cartridges .IV. By-Product Pricing Setting a price for the by-products. Like in processing meats, petroleum products, chemicals etc. Using by-product pricing, the manufacturer will find a market for the by-products and should accept any price that covers more than the cost of storing and delivering them. For example, at Alba, water is obtained as a by-product while manufacturing aluminum. This water can now be sold to the market.V. Product Bundle Pricing Combining several products and offering the bundle at a reduced price. For example, fast food restaurants bundle a burger, French fires and soft drink at a combo price.

Quest.2: What is distribution channel? Explain the factors to be considered while setting up a distribution channel.

Ans.: A channel of distribution or trade channel is defined as the path or route along which goods move from producers or manufacturers to ultimate consumers or industrial users. In other words, it is a distribution network through which producer puts his products in the market and passes it to the actual users. This channel consists of :- producers, consumers or users and the various middlemen like wholesalers,selling agents and retailers(dealers) who intervene between the producers and consumers. Therefore,the channel serves to bridge the gap between the point of production and the point of consumption thereby creating time, place and possession utilities. A channel of distribution consists of three types of flows:-

Downward flow of goods from producers to consumers

Upward flow of cash payments for goods from consumers to producers

Flow of marketing information in both downward and upward direction i.e. Flow of information on new products, new uses of existing products,etc from producers to consumers. And flow of information in the form of feedback on the wants,suggestions,complaints,etc from consumers/users to producers.

An entrepreneur has a number of alternative channels available to him for distributing his products. These channels vary in the number and types of middlemen involved. Some channels are short and directly link producers with customers. Whereas other channels are long and indirectly link the two through one or more middlemen. 

These channels of distribution are broadly divided into four types:-

Producer-Customer:- This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities himself and has full control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers.

Producer-Retailer-Customer:- This channel of distribution involves only one middlemen called 'retailer'. Under it, the producer sells his product to big retailers (or retailers who buy goods in

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large quantities) who in turn sell to the ultimate consumers.This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value.

Producer-Wholesaler-Retailer-Customer:- This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate consumers. This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support of wholesalers. This is mostly used for the products with widely scattered market.

Producer-Agent-Wholesaler-Retailer-Customer:- This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents. The agents distribute the product among a few wholesalers. Each wholesaler distribute the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.

An entrepreneur has to choose a suitable channel of distribution for his product such that the channel chosen is flexible,effective and consistent with the declared marketing policies and programmes of the firm. While selecting a distribution channel, the entrepreneur should compare the costs,sales volume and profits expected from alternative channels of distribution and take into account the following factors:-

Product Consideration:- The type and the nature of products manufactured is one of the important elements in choosing the distribution channel. The major product related factors are:- 

Products of low unit value and of common use are generally sold through middlemen. Whereas,expensive consumer goods and industrial products are sold directly by the producer himself.

Perishable products; products subjected to frequent changes in fashion or style as well as heavy and bulky products follow relatively shorter routes and are generally distributed directly to minimise costs.

Industrial products requiring demonstration, installation and aftersale service are often sold directly to the consumers. While the consumer products of technical nature are generally sold through retailers.

An entrepreneur producing a wide range of products may find it economical to set up his own retail outlets and sell directly to the consumers. On the other hand, firms producing a narrow range of products may their products distribute through wholesalers and retailers.

A new product needs greater promotional efforts in the initial stages and hence few middlemen may be required. 

Market Consideration:- Another important factor influencing the choice of distribution channel is the nature of the target market. Some of the important features in this respect are:- 

If the market for the product is meant for industrial users, the channel of distribution will not need any middlemen because they buy the product in large quantities. short one and may as they buy in a large quantity. While in the case of the goods meant for domestic consumers, middlemen may have to be involved.

If the number of prospective customers is small or the market for the product is geographically located in a limited area, direct selling is more suitable. While in case of a large number of potential customers, use of middlemen becomes necessary.

If the customers place order for the product in big lots, direct selling is preferred. But,if the product is sold in small quantities, middlemen are used to distribute such products. 

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Other Considerations:- There are several other factors that an entrepreneur must take into account while choosing a distribution channel. Some of these are as follows:- 

A new business firm may need to involve one or more middlemen in order to promote its product, while a well established firm with a good market standing may sell its product directly to the consumers.

A small firm which cannot invest in setting up its own distribution network has to depend on middlemen for selling its product. On the other hand, a large firm can establish its own retail outlets.

The distribution costs of each channel is also an important factor because it affects the price of the final product. Generally,a less expensive channel is preferred. But sometimes, a channel which is more convenient to the customers is preferred even if it is more expensive.

If the demand for the product is high,more number of channels may be used to profitably distribute the product to maximum number of customers. But, if the demand is low only a few channels would be sufficient.

The nature and the type of the middlemen required by the firm and its availability also affects the choice of the distribution channel. A company prefers a middlemen who can maximise the volume of sales of their product and also offers other services like storage, promotion as well as aftersale services. When the desired type of middlemen are not available, the manufacturer will have to establish his own distribution network.

All these factors or considerations affecting the choice of a distribution channel are inter-related and interdependent. Hence, an entrepreneur must choose the most efficient and cost effective channel of distribution by taking into account all these factors as a whole in the light of the prevailing economic conditions. Such a decision is very important for a business to sustain long term profitability.

Quest3.: Discuss the communication development process with examples.

Ans.: Development Communication, has been alternatively defined as a type of marketing and

public opinion research that is used specifically to develop effective communication or as the use

of communication to promote social development. Defined as the former, it often includes

computerized linguistics analysis of verbatim responses to qualitative survey interviews and may, at

times also involved consumer psychological "right brain" (emotional) research techniques. Defined at

the latter, it refers to the practice of systematically applying the processes, strategies, and principles

of communication to bring about positive social change. As most providers of "communication

development" research use proprietary approaches that cannot be elaborated upon without revealing

proprietary trade secrets, the remainder of this article describes the latter definition. [1] The practice of

development communication can be traced back to efforts undertaken in various parts of the world

during the 1940s, but the widespread application of the concept came about because of the problems

that arose in the aftermath of World War II . The rise of the communication sciences in the 1950s saw

a recognition of the field as an academic discipline, with Daniel Lerner, Wilbur Schramm, and Everett

Rogersbeing the earliest influential advocates. The term "Development Communication" was first

coined in 1972 by Nora C. Quebral, who defines the field as

"the art and science of human communication linked to a society's planned transformation from a

state of poverty to one of dynamic socio-economic growth that makes for greater equity and the larger

unfolding of individual potential."[2]

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The theory and practice of development communication continues to evolve today, with different

approaches and perspectives unique to the varied development contexts the field has grown in.[3]

Development communication is characterized by conceptual flexibility and diversity of communication

techniques used to address the problem. Some approaches in the “tool kit” of the field include:

information dissemination and education, behavior change, social marketing, social mobilization,

media advocacy, communication for social change, and participatory development communication

Examles:

One of the first examples of development communication was Farm Radio Forums in Canada. From

1941 to 1965 farmers met in groups each week to listen to special radio programs. There were also

printed materials and prepared questions to encourage group discussion. At first this was a response

to the Great Depression and the need for increased food production in World War II. But the Forums

also dealt with social and economic issues. This model of adult educationor distance education was

later adopted in India and Ghana.

Instructional television was used in El Salvador during the 1970s to improve primary education. One

of the problems was a lack of trained teachers. Teaching materials were also improved to make them

more relevant. More children attended school and graduation rates increased. In this sense the

project was a success. However, there were few jobs available in El Salvador for better-educated

young people.

In the 1970s in Korea the Planned Parenthood Federation had succeed in lowering birth rates and

improving life in villages such as Oryu Li. It mainly usedinterpersonal communication in women's

clubs. The success in Oryu Li was not found in all villages. It had the advantage of several factors

including a remarkable local woman leader and visits from the provincial governor.

A project of social marketing in Bolivia in the 1980s tried to get women in the Cochabamba Valley to

use soybean recipes in their cooking. This was an attempt to deal with chronic malnurishment among

children. The project used cooking demonstrations, posters and broadcasts on local commercial radio

stations. Some people did try soybeans but the outcome of the project is unclear.

In 1999 the U.S. Government and D.C. Comics planned to distribute 600,000 comic books to children

affected by the Kosovo War. The comic books are in Albanian and feature Superman and Wonder

Woman. The aim is to teach children what to do when they find an unexploded land mine left over

from Kosovo's civil war. The comic books instruct children not to touch the anti-personnel mines and

not to move, but instead to call an adult for help. In spite of the 1997 Ottawa Treaty which attempts to

ban land mines they continue to kill or injure 20,000 civilians each year around the world.

Since 2002, Journalists for Human Rights, a Canadian based NGO, has operated long term projects

in Ghana, Sierra Leone, Liberia, and the DR Congo. jhr works directly with journalists, providing

monthly workshops, student sessions, on the job training, and additional programs on a country by

country basis.

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Quest.4: Select any mobile handset & mobile company & then evaluate its positioning strengths or

weakness in terms of attributes, benefits, values, brand name & brand equity.

Ans.: HTC is one of the leading manufacturers of PDAs and smart phones around the world. It is one of

the fastest growing companies in the world and maximizing its market share rapidly. 

SWOT Analysis 

SWOT is the tool to see that where organization stands, which areas required improvement, which areas

required serious consideration, which would be the source of growth, which things need avoidance and

so on. The SWOT of HTC will help to understand the position of HTC in the market. 

Strengths 

It is the leading maker of PDAs smart phones in the world. It is establishing in the world rapidly and

attracting more and more customers from all around the world. 

It has successfully recognized its brand name and has got the good image about the product quality. Its

products are considered as reliable products and its gaining more and more success rapidly. 

The research and development in HTC has been given more importance as it is the way to know what

customers want. 

There is the strong set up of research and development in HTC. 

The portfolio of HTC is quite wide it has made 42 smart phones product up till now. 

The customer base of HTC is also very wide as it caters the customer national and international both and

the no. of customers also increasing as the time passes. 

Weaknesses 

As its weakness, HTC is not a very much recognized brand in the market. Its competitors, which are

Nokia, Blackberry, Apple etc. are way much popular and have acquired a big share of market. 

Another weakness is that, they got a very small range of cell phones models as compared to their

competitor, Nokia, which has got a huge variety of smart phones, from cheapest to most expensive one. 

Opportunities 

HTC is providing Touch Screen Cell Phones, which are very much in demand these days, most of the

people, who use expensive cell phones, goes for Touch Screen. On the other side, Since HTC collaborated

with Google and launched their cell phones with Google Android OS install in it, their market also got

increased. It is also said that, because of the name of Google, HTC got popularity. Google popularity

plays a huge role in the success of HTC. 

3G technology has been launched all over the world, and is getting launched in other countries as well.

Since HTC cell phones have got 3G technology support, so it is an opportunity for HTC company that

where ever the 3G technology launches, HTC’s cell phones demands would raise their. 

Threats 

The major threat to HTC, or any other Smartphone company, is a very much popular and highly in-

demand brand, Apple iPhone. It is a big hindrance in the demand of HTC cell phones. 

Apart from that, the financial crunch could also be the threat for the company. That’s because HTC smart

phones are expensive and are not affordable for many of the smart phones users. On the other side

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Nokia’s smart phones are way cheaper, and are providing the same characteristics, which a Smartphone

should have. So lot of people prefers Nokia on HTC. 

Quest.5: What is retailing? Explain the functions & different types of retailing with its key features.

Ans.: All businesses that sell goods and services to consumers fall under the umbrella of retailing, but there are several directions we can take from here. For starters, there are department stores, discount stores, specialty stores and even seasonal retailers. Each of these might have their own little quirks; however, for the most part the analysis overlaps to all areas of retailing. This section of the industry handbook will try to focus more on general retailers and department stores.

Over the past couple decades, there have been sweeping changes in the general retailing business. What was once strictly a made-to-order market for clothing has changed to a ready-to-wear market. Flipping through a catalog, picking the color, size and type of clothing a person wanted to purchase and then waiting to have it sewn and shipped was standard practice. At the turn of the century some retailers would have a storefront where people could browse. Meanwhile, new pieces were being sewn or customized in the back rooms. 

In some parts of the world, the retail business is dominated by smaller family-run or regionally-targeted stores, but this market is increasingly being taken over by billion-dollar multinational conglomerates like Wal-Mart and Sears. The larger retailers have managed to set up huge supply/distribution chains, inventory management systems, financing pacts and wide scale marketing plans.

Without getting into specific product categories within the retailing industry, the overall segments can be divided into two categories:

Hard - These types of goods include appliances, electronics, furniture, sporting goods, etc. Sometimes

referred to as "hardline retailers."

Soft - This category includes clothing, apparel, and other fabrics.

Each retailer tries to differentiate itself from the competition, but the strategy that the company uses to sell its products is the most important factor. Here are some different types of retailers:

Department Stores - Very large stores offering a huge assortment of goods and services.

Discounters - These also tend to offer a wide array of products and services, but they compete mainly

on price.

Demographic - These are retailers that aim at one particular segment. High-end retailers focusing on

wealthy individuals would be a good example.

Each of these has its own distinct advantages, but it's important to know how these advantages play out. For example, during tough economic times, the discount retailers tend to outperform the others. The opposite is true when the economy is thriving. The more successful retailers attempt to combine the characteristics of more than one type of retailer to differentiate themselves from the competition. 

Key Ratios/Terms

Same Store Sales:  Used when analyzing individual retailers. It compares sales in stores that have been open for a year or more. This allows investors to compare what proportion of new sales have come from sales growth compared to the opening of new stores. This is important because although new stores are good, there eventually comes a saturation point at which future sales growth comes at the expense of losses at other locations. Same store sales are also commonly referred to as "comps."

Sales per Square Foot:                       Sales                                                              Square Footage                                                   

Store space is considered to be a productive asset and the key to profitability. Successful companies generate as much sales volume as possible out of each square foot of store space. More recently, analysts have created modifications of this concept by looking at a retailers' gross margin per square foot. 

Inventory Turnover:  This ratio shows how many times the inventory of a firm is sold and replaced over a

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specific period.

Generally calculated as:           Sales                                                     Inventory

But, may also be calculated as:     Cost of Goods Sold                                                            Average Inventory

Although the first calculation is more frequently used, COGS may be substituted because sales are recorded at market value while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory to help minimize seasonal factors. This ratio should be compared against similar retail companies or the industry average. A low turnover might imply poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying from suppliers. (For related reading, see 

Consumer Confidence: The Consumer Confidence Index (CCI) is put out by the Consumer Confidence Board around the middle of each month. The Consumer Confidence Survey is based on a sample of 5,000 U.S. households and is considered to be one of the most accurate indicators of confidence. Increasing confidence means more spending and borrowing for consumers - a positive for retailers. (To learn more about this measure, see Economic Indicators To Know: Consumer Confidence Index.)

Personal Income & Disposable Income:  Every quarter, the Bureau of Economic Analysis releases the latest income data for U.S. citizens. There is a high correlation between retail sales data and the changes in personal income. (For more insight, see Economic Indicators: Personal Income and Outlays.)

Analyst InsightAs we mentioned earlier, the store type and the strategy that retailers use plays a big role in how well the company performs. The first thing to take a look at is what segment of the retail industry the company is situated in. Is the company a discounter? Department store? Specialty retailer? The retail category to which the company belongs also helps determine the following details about the company:

Competitors - The number and size of direct competitors is important. Ideally, you want the company to

have as little competition as possible, but this rarely happens. Determine who the direct competitors are

and how they are all positioned in the market. A smaller regional discount store might find it tough to

compete with new Wal-mart stores opening up every month. Take a look at the big picture, find out what

differentiates the company from its competitors. Do they have better prices, service, or offer higher

quality goods than their competition? Grocery stores might find it hard to differentiate themselves from

competitors: after all, an apple is an apple. Higher-end retailers, however, may have an easier time as

they try to compete on service or quality.

Size of the Market - Determining the overall size of the market gives us an indication of the potential for

the market. If you had the choice between a company with a 25% share of a $10 million market or a

25% share of a $1 billion market, which one would you chose?

Other Factors - Some analysts even go as far as evaluating the retail strategy that the companies use.

For example, does the company have a fresh look? Are their stores clean, bright and fun to shop in?

Swedish retailer Ikea has done an excellent job of designing their stores for visual appeal, and quite

possibly it has equated to very strong sales.Also, what are the store demographics? Does the retailer appeal more to younger people (who don't have the money), or does it appeal to the parents (who do have the money). 

The performance of the economy as a whole obviously has a great impact on the retailing industry. Retailer profits have a close correlation with the overall performance of the economy. Looking at the trends for growth in gross domestic product (GDP), inflation, consumer confidence, personal income and interest rates are extremely important when thinking about investing in the retail industry. You might not think that your shopping habits are sensitive to interest rate fluctuations, but they are. While a 50-basis-point drop in interest rates might not give you the sudden inkling to go drop $1,000 at Macy's, for the economy as a whole, it has a big effect on spending patterns. (For more insight on this effect, see How Interest Rates Affect The Stock Market.)

After looking at the macroeconomic factors and the industry as a whole, it is time to delve into the financial statements. The biggest problem for analyzing these companies is the lack of consistency between accounting procedures. It takes a careful eye when comparing performance ratios and figures from one company to the next. For example, some companies tend to include shipping and storage in their cost of goods sold, while others list it as a separate expense. This is why you must read all the notes to the financial statements and gain a better understanding of what is and isn't included in the various figures. (To learn more, read Footnotes: Start Reading

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The Fine Print.)

Aside from earnings and revenue growth, one important thing to look at is the markup percentage for the retailer. This is also known as the gross profit margin (sales minus cost of goods sold). Unfortunately, there is not one margin that every retailer should use: discount stores generally have lower margins compared to other general merchandisers. When comparing these numbers, higher margins are usually better because it means the company has more room to work with during price wars, intensified competition or when demand slows.

Inventory is also a key figure to pay close attention to as without it, retailers don't have anything to sell. A company's inventory situation depends on what type of products it offers. For example, the inventory turnover for a grocery store (with perishable goods) will be higher than that of a department store. Compare the turnover rates of direct competitors: those with higher rates tend to have fresh new products that sell more frequently. Keep in mind that an increase in inventory is not always a cause for alarm. Sometimes inventory will increase as a result of new stores opening or the expansion of existing stores. Therefore, compare the increase in inventory to the growth of new stores to see if there is more to the story. (For more on inventory evaluation, read Measuring Company Efficiency.)

As one final caveat (beware) when looking at performance data and financial statements for retailers is to compare them against the same period for the previous year. Holiday spending and other seasonal factors can mean wild swings in financial results from one quarter to the next. Compare the Christmas season results for the company over the same season from previous years. There isn't one store out there that doesn't see an increase in sales during the month of December, so don't be fooled by comparisons to preceding months. This is why year-over-year same store sales figures are so widely followed by investors and analysts. When retailers release their same store sales figures on the first or second Thursday of every month, they are usually compared to the same time period from previous years. To take this one step further, compare sales data for more than just one month. Aggressive marketing or discounts can skew data for one particular month; therefore, you need to look at the overall trend in same store sales over several months. 

Porter's 5 Forces Analysis

1. Threat of New Entrants.  One trend that started over a decade ago has been a decreasing number of

independent retailers. Walk through any mall and you'll notice that a majority of them are chain stores.

While the barriers to start up a store are not impossible to overcome, the ability to establish favorable

supply contracts, leases and be competitive is becoming virtually impossible. Their vertical structure and

centralized buying gives chain stores a competitive advantage over independent retailers.

2. Power of Suppliers.  Historically, retailers have tried to exploit relationships with suppliers. A great

example was in the 1970s, when Sears sought to dominate the household appliance market. Sears set

very high standards for quality; suppliers that didn't meet these standards were dropped from the Sears

line. You could also liken this to the strict control that Wal-Mart places on its suppliers. A contract with a

large retailer such as Wal-Mart can make or break a small supplier. In the retail industry, suppliers tend

to have very little power.

3. Power of Buyers.  Individually, customers have very little bargaining power with retail stores. It is very

difficult to bargain with the clerk at Safeway for a better price on grapes. But as a whole, if customers

demand high-quality products at bargain prices, it helps keep retailers honest.

4. Availability of Substitutes. The tendency in retail is not to specialize in one good or service, but to

deal in a wide range of products and services. This means that what one store offers you will likely find

at another store. Retailers offering products that are unique have a distinct or absolute advantage over

their competitors.

5. Competitive Rivalry.  Retailers always face stiff competition. The slow market growth for the retail

market means that firms must fight each other for market share. More recently, they have tried to reduce

the cutthroat pricing competition by offering frequent flier points, memberships and other special

services to try and gain the customer's loyalty.

Quest.6. a) What is CRM? What are its objectives?

b) Write a short note on Brand Development.

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